<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ____
Commission File No. 0-15445
THE BOX WORLDWIDE, INC
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2605267
- --------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
1221 Collins Avenue, Miami Beach, Florida 33139
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(305) 674-5000
- --------------------------------------------------------------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No
--- ---
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Class Number of Shares Outstanding
on November 12, 1997
Common Stock, par value $.001 Per Share 24,892,623
Transitional Small Business Disclosure Format Yes No X
--- ----
<PAGE> 2
THE BOX WORLDWIDE, INC.
<TABLE>
<CAPTION>
INDEX
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheet at September 30,
1997 (Unaudited) 3
Consolidated Statements of Operations for the
Three Months and Nine Months ended September 30,
1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows for the
Nine Months ended September 30, 1997 and 1996
(Unaudited) 5
Notes to Financial Statements 6
Item 2 Management's Discussion and Analysis or
Plan of Operation 10
PART II OTHER INFORMATION
Item 5 Other Information 29
Item 6 Exhibits 30
SIGNATURES 31
</TABLE>
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<PAGE> 3
THE BOX WORLDWIDE, INC.
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,118,437
Accounts receivable, less allowances for
doubtful accounts of $319,000 3,509,928
Receivable from officer 13,500
Prepaid expenses and other current assets 612,424
------------
TOTAL CURRENT ASSETS 5,254,289
------------
RECEIVABLE FROM OFFICER - LONG TERM 106,161
PROPERTY AND EQUIPMENT, NET 8,817,501
DEFERRED COSTS AND OTHER ASSETS, NET 2,160,032
INVESTMENT IN AND ADVANCES TO
UNCONSOLIDATED COMPANY 333,276
------------
TOTAL ASSETS $ 16,671,259
============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,447,782
Accrued expenses 3,611,720
------------
TOTAL CURRENT LIABILITIES 5,059,502
------------
COMMITMENTS AND CONTINGENCIES
6% CONVERTIBLE REDEEMABLE PREFERRED STOCK
$0.15 par value, $1.50 stated value, 1,800,000 shares
authorized, 1,666,667 issued and outstanding
including $120,822 of cumulative dividend payable 2,410,950
------------
STOCKHOLDERS' EQUITY
8% Cumulative convertible preferred
stock, $1.00 par value, 200,000 shares
authorized, none issued --
Common stock, $.001 par value
40,000,000 shares authorized, 24,772,623
shares issued and outstanding at September 30, 1997 24,773
Additional paid in capital - Common Stock 31,008,832
Accumulated deficit (21,796,014)
Cumulative foreign currency translation (36,784)
------------
TOTAL STOCKHOLDERS' EQUITY 9,200,807
------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 16,671,259
============
</TABLE>
See Notes to Financial Statements
-3-
<PAGE> 4
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
==============================================================================
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 3,204,157 $ 2,543,302 $ 8,173,092 $ 7,394,121
Net viewer revenues 2,472,252 2,332,352 6,840,460 7,788,713
Other revenues 138,090 69,310 420,022 213,897
------------ ------------ ------------ ------------
5,814,499 4,944,964 15,433,574 15,396,731
Interest income 51,262 58,095 288,890 252,252
------------ ------------ ------------ ------------
5,865,761 5,003,059 15,722,464 15,648,983
------------ ------------ ------------ ------------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 1,689,011 1,721,268 4,548,616 4,754,438
Distribution, general and
administrative 4,580,565 3,827,125 12,656,503 12,012,866
Satellite transponder and rent
paid to related parties 118,020 125,190 354,060 620,570
Depreciation and amortization 623,317 379,913 1,726,135 944,282
------------ ------------ ------------ ------------
7,010,913 6,053,496 19,285,314 18,332,156
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES AND INTEREST
IN LOSSES OF UNCONSOLIDATED COMPANIES (1,145,152) (1,050,437) (3,562,850) (2,683,173)
INCOME TAXES (17,904) (15,424) (17,904) (15,424)
------------ ------------ ------------ ------------
INCOME BEFORE INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (1,127,248) (1,035,013) (3,544,946) (2,667,749)
INTEREST IN LOSSES OF UNCONSOLIDATED
COMPANIES (140,742) (41,033) (457,479) (495,368)
------------ ------------ ------------ ------------
NET LOSS (1,267,990) (1,076,046) (4,002,425) (3,163,117)
Deduct required dividend on 6% convertible
redeemable preferred stock (37,192) 0 (112,192) 0
------------ ------------ ------------ ------------
Net loss attributable to common stock $ (1,305,182) $ (1,076,046) $ (4,114,617) $ (3,163,117)
============ ============ ============ ============
Net loss per common share after deduction for
required dividend on 6% convertible redeemable
preferred stock $ (0.05) $ (0.04) $ (0.17) $ (0.13)
============ ============ ============ ============
Weighted average number of common shares
outstanding 24,060,432 24,001,129 24,021,546 23,967,566
============ ============ ============ ============
</TABLE>
See Notes to Financial Statements
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<PAGE> 5
THE BOX WORLDWIDE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
===============================================================================
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
--------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(4,002,425) $(3,163,117)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 1,726,135 944,282
Interest in losses of unconsolidated companies 457,479 495,368
Provision for bad debts and estimated chargebacks 0 45,037
Change in assets and liabilities:
(Increase) decrease in accounts receivable (1,013,384) 1,085,842
Increase in prepaid expenses and other current assets (297,965) (615,693)
Increase in accounts payable and accrued expenses 455,414 448,708
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (2,674,746) (759,573)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (3,812,814) (3,654,392)
Increase in deferred costs (401,757) 0
Disposal of equipment 83,798 99,177
Increase in investment in and advances to unconsolidated companies (492,897) (479,937)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (4,623,670) (4,035,152)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock, net 0 7,500
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 0 7,500
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (34,551) (36,607)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (7,332,967) (4,823,832)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 8,451,404 6,712,402
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,118,437 $ 1,888,570
=========== ===========
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Stock issued for affiliate launch incentive fees $ 770,842 $ 0
=========== ===========
</TABLE>
See Notes to Financial Statements
- 5 -
<PAGE> 6
THE BOX WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS
1. The financial information included herein is submitted pursuant to the
requirements of Form 10-QSB and does not include all disclosures
required by generally accepted accounting principles. It is suggested
that these unaudited financial statements be read in conjunction with
the financial statements and notes thereto included in the Company's
Annual Report on Form 10-KSB for the fiscal year ended December 31,
1996. The accompanying interim financial statements reflect all normal
recurring adjustments which are, in the opinion of management,
necessary for a fair statement of the results for the interim periods
presented. The results of operations for interim periods are not
necessarily indicative of the results to be obtained for the entire
year.
2. Net loss per share computations are based on the weighted average
shares of common stock outstanding during the quarter. Common stock
equivalents were not considered in the computation of net loss per
share as their effect would be to decrease net loss per share.
3. The consolidated financial statements include the balance sheet and
operating results of the Company's wholly-owned subsidiaries, VJN LPTV
Corp. (incorporated in February, 1994), The Box Worldwide Europe, B.V.,
(incorporated in August, 1995), Video Jukebox Network Europe,
Ltd.(incorporated in January, 1996), The Box Worldwide-Latin America,
Inc. (incorporated in January, 1996), The Box Argentina (incorporated
in December 1996), and The Box Italy, srl (incorporated in January
1997); and include on the equity method the operating results of Video
Jukebox Network International, Limited ("VJNIL") for the first nine
months of 1996. The Company also accounts for its 50% owned subsidiary,
The Box Holland (incorporated in October, 1995), on the equity method
of accounting. All significant consolidating and eliminating entries
have been included.
Unconsolidated Subsidiaries:
The Box Holland --- The following is a summary of the balance sheet as
of September 30, 1997 and operating results for the three months and
nine months ended September 30, 1997 and 1996, respectively, of The Box
Holland:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept 30,1996
------------- -------------- --------------- ------------
<S> <C> <C> <C> <C>
Current assets $ 328,090 $ 179,405
Non-current assets 819,595 775,448
------------ -----------
$ 1,147,685 $ 954,853
============ ===========
Current liabilities $ 398,253 $ 135,330
Equity, advances and notes
payable to shareholders 749,432 819,523
------------ -----------
$ 1,147,685 $ 954,853
============ ===========
Net revenues $ 157,220 $ 87,298 $ 369,505 $ 178,722
============ =========== ============ ===========
Net operating loss $ (281,481) $ (112,307) $ (914,953) $ (480,505)
============ =========== ============ ===========
</TABLE>
-6-
<PAGE> 7
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. (CONTINUED)
The Company recorded interest income of approximately $30,000 and
$142,000 during the quarter and nine months ended September 30, 1997,
related to a $1,076,000 loan outstanding with The Box Holland, Inc.
during these periods. Interest from inception of the loan in 1995 to
the end of 1996 had not been previously recognized, and was included in
the first quarter of 1997.
VJNIL --- In September 1991, VJNIL, which began operations in 1992, was
organized in the United Kingdom to develop and launch a United Kingdom
version of the Company's music video television programming. The
Company had beneficially owned 91% of the outstanding common stock of
VJNIL from inception. On June 30, 1995, the Company purchased the
remaining nine percent of VJNIL from its minority shareholder in
exchange for 225,000 shares of the Company's common stock, which were
valued at $267,187 on that day. Also on June 30, 1995, the Company
completed the sale of a 50 percent equity interest in VJNIL to a
wholly-owned subsidiary of Ticketmaster Corporation ("Ticketmaster")
for $2,225,000 in cash. The Company's remaining investment in VJNIL had
been accounted for on the equity method of accounting effective June
30, 1995. Prior to June 30, 1995, the subsidiary's assets, liabilities
and operations had been consolidated with the Company.
On October 30, 1996, the Company completed the sale of its remaining
50% equity interest in VJNIL to EMAP plc, a United Kingdom media and
entertainment company. EMAP paid VJN $4,550,000 in cash for VJN's 50%
remaining investment, plus reimbursed VJN $1,500,000 for the Company's
outstanding loan to VJNIL plus approximately $200,000 in accrued
interest related to the loan. The Company also received a one-time
$100,000 licensing payment for trademark and other intellectual
property rights in the United Kingdom and Ireland. The Company paid
approximately $400,000 in investment fees and legal fees related to
this transaction.
The following is a summary of VJNIL's balance sheet as of September 30,
1996 and operating results for the quarter and nine months ended
September 30, 1996, respectively, during which period the Company's
share of these results were accounted for on the equity method by the
Company:
-7-
<PAGE> 8
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. (CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sept. 30,1996 Sept. 30, 1996
------------------ ------------------
<S> <C> <S>
Current assets $2,024,435
Noncurrent assets 972,072
----------
$2,996,507
==========
Current liabilities $1,055,940
Non-current liabilities 0
Equity, advances and notes
payable to shareholders 1,940,567
----------
$2,996,507
==========
Net revenues $ 842,287 $1,910,200
========== ==========
Net operating loss $ (70,759) $ (565,216)
========== ==========
</TABLE>
The difference between the Company's recorded net investment in and
advances to VJNIL at September 30, 1996 and the underlying equity in
VJNIL's net assets relates primarily to previously recognized net
losses prior to the sale of 50% of its interest in VJNIL. The Company
recorded interest income of approximately $38,000 and $113,000 during
the three and nine months ended September 30, 1996, respectively,
related to a $1,500,000 loan outstanding with VJNIL during the period.
4. Subsequent Events:
As of August 12, 1997, the Company entered into an Agreement and Plan
of Merger (the "Merger Agreement") with TCI Music, Inc. ("TCI Music")
and TCI Music Acquisition Sub, Inc. ("Acquisition Sub"), a wholly-owned
subsidiary of TCI Music, pursuant to which Acquisition Sub will be
merged (the "Merger") with and into the Company, with the Company as
the surviving corporation. The completion of the Merger is subject to
the satisfaction of certain conditions, including the approval of the
Merger Agreement and the transactions contemplated by the Merger
Agreement by the shareholders of the Company. A special meeting of the
shareholders of the Company for such purpose is scheduled to be held on
December 16, 1997.
On November 13, 1997, the Company mailed to the shareholders of record
on November 10, 1997 a proxy statement/prospectus (the "Proxy
Statement") containing, among other things, a description of the terms
of the Merger Agreement. A summary of the terms of the Merger
Agreement is set forth in the Proxy Statement on pages 40 through 47
under the section entitled "The Merger Agreement," which section is
incorporated herein by reference.
-8-
<PAGE> 9
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. On August 7, 1997, the Federal Communications Commission (the "FCC")
adopted order FCC 97-279 (the "Order"). The Order establishes rules to
implement the closed captioning requirements of the Telecommunications
Act of 1996 (the "1996 Act"). The 1996 Act required the FCC to adopt,
by August 8, 1997, rules and implementation schedules for the
captioning of video programming ensuring access to video programming by
persons with hearing disabilities. The Company estimates that it may
cost approximately $110,000 to retrofit boxes that are currently in
operation, in order to comply with the Order.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1996.
OVERVIEW:
Due to the wide brand recognition of THE BOX, the Company changed its corporate
name to The Box Worldwide, Inc. effective February 20, 1997. A corporate
restructuring has segregated domestic operations from the international
operations and from the purely corporate functions. This restructuring allows
the Company to organize its investments, operating structures and branding of
its trademarks and technology in a more efficient and economical manner.
Domestic operations are reflected through a new wholly-owned subsidiary, The Box
Worldwide - USA, Inc., formed as a Delaware corporation in March 1997.
Previously established subsidiaries, The Box Worldwide - Europe, B.V. and The
Box Worldwide - Latin America, Inc., contain the operating results and
development costs (through allocation from the parent company) for those
respective regions. Results from these two subsidiaries, along with all other
international regions and the general international development costs together
constitute "international operations and development", as referred to throughout
this document.
Costs of international development and general corporate charges, to the extent
they are not allocable to a reporting unit, are reported through the corporate
division of the Company. For the results for the quarter ended September 30,
1996, however, no such expense allocations from the parent company to domestic
and international operations were made. For comparability with the current
period's results, all direct international and corporate expenses for the prior
year period have been segregated.
For the quarter ended September 30, 1997, the Company realized a consolidated
net loss of $1,267,990 as compared to a consolidated net loss of $1,076,046 for
the quarter ended September 30, 1996. This consolidated loss is composed of the
following items:
<TABLE>
<CAPTION>
Three Months Ended
------------------
Sept 30, 1997 Sept 30, 1996
------------- --------------
<S> <C> <C>
Income (loss) from domestic operations $ 171,184 $ (245,006)
Loss from international operations
and development (1,160,670) (490,465)
Net corporate expenses (278,504) (340,575)
------------ -----------
Consolidated net loss $ (1,267,990) $(1,076,046)
============ ===========
</TABLE>
As noted above, the 1997 results reflect allocations of certain corporate
charges to
-10-
<PAGE> 11
RESULTS OF OPERATIONS (CONT'D)
domestic and international operations, whereas no such allocations were made in
1996. Management believes that these allocations more accurately reflect the
true cost to the domestic and international operating units for services
provided by the parent company, as these items generally represent costs which
these divisions would incur directly had such services not been provided by the
parent. Prior to giving effect to these allocations, the third quarter 1997
income from domestic operations would have been $290,983 higher, and the same
period loss from international development and operations would have been
$113,455 lower.
Please refer to the following Supplemental Schedule of Revenue and Expenses by
Segment for further detail:
THE BOX WORLDWIDE, INC.
SUPPLEMENTAL SCHEDULE OF REVENUE AND EXPENSES BY SEGMENT
FOR QUARTERS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
CONSOLIDATED CORPORATE DOMESTIC
------------------------- ------------------------- --------------------------
1997 1996 1997 1996 1997 1996
------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 3,204,157 $ 2,543,302 $ 0 $ 0 $3,122,839 $ 2,543,302
Net viewer revenues 2,472,252 2,332,352 0 0 2,077,705 2,242,103
Other revenues 138,090 69,310 6,668 2,496 19,004 53,614
----------- ----------- --------- ----------- ---------- -----------
5,814,499 4,944,964 6,668 2,496 5,219,548 4,839,019
Interest income 51,262 58,095 51,262 58,095 0 0
----------- ----------- --------- ----------- ---------- -----------
5,865,761 5,003,059 57,930 60,591 5,219,548 4,839,019
----------- ----------- --------- ----------- ---------- -----------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 1,689,011 1,721,268 0 0 1,426,937 1,638,177
Distribution, general and
administrative 4,580,565 3,827,125 291,474 416,590 3,028,202 2,968,870
Satellite transponder and rent
paid to related parties 118,020 125,190 0 0 118,020 125,190
Depreciation and amortization 623,317 379,913 62,864 0 475,205 351,788
----------- ----------- --------- ----------- ---------- -----------
7,010,913 6,053,496 354,338 416,590 5,048,364 5,084,025
----------- ----------- --------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (1,145,152) (1,050,437) (296,408) (355,999) 171,184 (245,006)
INCOME TAXES (17,904) (15,424) (17,904) (15,424) 0 0
----------- ----------- --------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INTEREST IN
LOSS OF UNCONSOLIDATED COMPANIES (1,127,248) (1,035,013) (278,504) (340,575) 171,184 (245,006)
----------- ----------- --------- ----------- ---------- -----------
INTEREST IN LOSS OF UNCONSOLIDATED
COMPANIES (140,742) (41,033) 0 0 0 0
----------- ----------- --------- ----------- ---------- -----------
NET INCOME (LOSS) $(1,267,990) $(1,076,046) $(278,504) $ (340,575) $ 171,184 $ (245,006)
=========== =========== ========= =========== ========== ===========
<CAPTION>
INTERNATIONAL
DEVELOPMENT &
OPERATIONS
----------------------------
1997 1998
----------------------------
<S> <C> <C>
REVENUES
Advertising revenues $ 81,318 $ 0
Net viewer revenues 394,547 90,249
Other revenues 112,418 13,200
----------- ---------
588,283 103,449
Interest income 0 0
----------- ---------
588,283 103,449
----------- ---------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 262,074 83,091
Distribution, general and
administrative 1,260,889 441,665
Satellite transponder and rent
paid to related parties 0 0
Depreciation and amortization 85,248 28,125
----------- ---------
1,608,211 552,881
----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (1,019,928) (449,432)
INCOME TAXES 0 0
----------- ---------
INCOME (LOSS) BEFORE INTEREST IN
LOSS OF UNCONSOLIDATED COMPANIES (1,019,928) (449,432)
----------- ---------
INTEREST IN LOSS OF UNCONSOLIDATED
COMPANIES (140,742) (41,033)
----------- ---------
NET INCOME (LOSS) $(1,160,670) $(490,465)
=========== =========
</TABLE>
-11-
<PAGE> 12
RESULTS OF OPERATIONS (CONT'D)
REVENUES:
Advertising Revenues:
Consolidated advertising revenue increased by approximately $661,000 for the
quarter ended September 30, 1997 as compared with the same 1996 period. Domestic
advertising revenues increased by approximately $580,000 for the quarter ended
September 30, 1997 as compared with the same 1996 period. National advertising
increased 28.2%, or approximately $535,000, for the quarter ended September 30,
1997 from the comparable period in 1996. Proctor and Gamble, Coca Cola, MCI,
Nike, Nordic Trak, Reebok, Jordache, Gatorade, Nutrament and various other
national consumer goods and services all advertised on THE BOX during the third
quarter of 1997.
Record advertising increased approximately $45,000 in the third quarter of 1997
as compared to the same quarter of 1996. International advertising revenue was
$81,000 for the third quarter of 1997, with no comparable amount in the third
quarter of 1996.
Nearly $10.6 million in domestic advertising has already been booked for the
year. International advertising is anticipated to contribute positively to
consolidated operations in 1997, due to subscriber increases in existing
international operations, the March 1997 broadcast launch of The Box Italy, and
the attainment of critical mass levels of subscriber households now reached in
Holland and Argentina. However, there can be no assurance that all booked
revenue will actually be aired and earned or that the international growth will
result in increased advertising.
Net Viewer Revenues:
The increase in net viewer revenues of $140,000 results from (1) the net effect
of reduced domestic gross viewer revenues (negative effect of $325,000) offset
by the related reduction in the telephone service provider's billing and
collection charges (positive effect of $80,000) and the reduction in chargebacks
experienced when consumers failed to pay for their requested videos (positive
effect of $81,000), and (2) increased international viewer revenues (positive
effect of $304,000).
Gross domestic viewer revenues, which resulted from the interactive telephone
calls to THE BOX for video selections, decreased from $2,853,000 to $2,528,000,
a difference of approximately $325,000 or 11.4% from the third quarter of 1996
to the third quarter of 1997. The decrease resulted from a lower average
performance per box during the third quarter of 1997. This decrease in average
performance may be attributed to factors involving both the Company and the
music industry. THE BOX removed certain violent or sexually explicit videos from
its playlists, which historically
-12-
<PAGE> 13
RESULTS OF OPERATIONS (CONT'D)
generated a significant number of viewer requests. The Company also has
introduced request emulation when no viewer requests were in the queue in order
to improve the on-air look of its programming. Finally, the transactional
revenue has been negatively affected by airtime required for increased
advertising and for additional programming elements such as Box Big Break
(on-air spots featuring local artists) and other elements designed to strengthen
viewing of THE BOX.
As the Company moves forward to improve its product, the interests of various
constituencies must be balanced. This involves attracting and maintaining
viewers while remaining cognizant of the concerns of cable operators and
advertisers. While many requests on THE BOX were directed towards controversial
videos, their frequent play resulted in the loss of cable distribution. To
address this issue, THE BOX has implemented a more stringent standard for video
content while at the same time maintaining its reputation for innovative
programming.
THE BOX also is taking additional steps to balance its appeal to both the
passive and the transacting audiences. Request emulation and pre-programmed
segments are increasing the attractiveness of the service to non-transacting
viewers which make up the bulk of THE BOX audience. These viewers are looking
for engaging and continuous programming, prefer less emphasis on a static
request menu and want fewer repetitive plays of the same music video selection.
The needs of advertisers and cable operators are generally more closely aligned
with these non-transacting viewers. However, some form of available video menu
with a call to action is important to prompt requests from transactional
viewers. The Company continues to make enhancements to serve both audience
groups.
In addition to taking viewer requests via 900 service, the Company introduced a
new program in 1996 to allow customers who would like to exceed the Company's
900 service credit limit to establish a prepaid account for the selection of
videos. In addition to generating additional viewer revenue, this program has
been designed to eliminate customer chargebacks and billing charges from service
providers, as well as reduce transport costs. Initiated as a test, this program
slowly expanded during 1996 so that, by the end of that year, it was available
to all customers. This new prepaid video program provided 32.1% of consolidated
gross viewer revenue in the current period, as compared with 11.6% in the third
quarter of 1996. Revenue from this program is recognized only as videos are
selected, while prepaid account balances are included in current liabilities.
With lower domestic viewer revenues, the billing and collection charges imposed
by the Company's telephone service providers were reduced proportionately.
Therefore, an offset to the decrease in domestic gross revenue is the reduction
in billing charges of approximately $80,000. Besides the lower revenue level,
the Company has been successful in renegotiating with the telco providers to
reduce billing and collection charges from 7.7% during the third quarter of 1996
to 7.0% during the third quarter of 1997. Further, revenue from the prepaid
video program is not subject to billing and collection charges, and therefore
the increase in revenue from this program as a percentage of total gross viewer
revenue has also contributed to the reduction in
-13-
<PAGE> 14
RESULTS OF OPERATIONS (CONT'D)
these charges relative to gross viewer revenue.
An additional component of net viewer revenues relates to the adverse effect of
domestic customers who deny having made music video requests on THE BOX. In the
Company's current international markets, consumers are not allowed to refute
these charges, so the chargebacks are only occurring domestically. In an effort
to reduce chargebacks from telephone companies, the Company is in its third year
of call blocking for previous non-paying customers and applying credit
limitations for all its interactive viewers. After nearly three years of these
procedures, the Company has seen the chargeback rate reduced from over 16.7% in
1994, to approximately 14.9% currently. Chargebacks for the quarter ended
September 30, 1997 totaled approximately $329,000 as compared to $410,000 for
the same prior year period. Revenue from the prepaid video program is not
subject to customer chargebacks since all money is collected before the videos
air, and therefore the increase in revenue from this program as a percentage of
total gross viewer revenue has also contributed to the reduction in these
charges relative to gross viewer revenue.
Net viewer revenue from international boxes increased by a net of $304,000 due
to the late 1996 international launches in Chile and Peru, none of which were in
operation during third quarter 1996, and the 1997 launches in New Zealand and
Italy.
Other Revenue:
Miscellaneous revenues of $138,000 for the third quarter 1997 included $111,000
in domestic and international cable carriage fees, $6,000 for production
services provided to our unconsolidated Holland affiliate, $10,000 from the
music compilations marketed under the Company's BOXTunes label, and
miscellaneous other revenue of approximately $16,000, offset by $5,000 in losses
on the sale of some minor equipment. Interest income totaled approximately
$51,000 in the third quarter of 1997, which included $30,000 related to an
outstanding loan to the Company's Holland affiliate.
COSTS AND EXPENSES:
Affiliate Fees, Site Costs and Telephone Services:
Expenses for affiliate fees, site costs and telephone services were 68.3% and
73.8% of net viewer revenues for the quarters ended September 30, 1997 and 1996,
respectively. Most expenses in this category as a percentage of net viewer
revenues are up significantly for 1997 since a large portion of the affiliation
fees, site costs and telecommunications charges are fixed per location. With the
reduced level of domestic viewer transactional revenues, these expenses as a
percentage of revenues increased in the third quarter of 1997. Offsetting the
increase in these fixed expenses was a
-14-
<PAGE> 15
RESULTS OF OPERATIONS (CONT'D)
decrease in low power television affiliation fees as discussed below.
Overall expenses for affiliate fees, site costs and telephone services totaled
$32,000 less for third quarter 1997 as compared with the same prior year period.
This decrease resulted from lower net expenditures for domestic operations of
$211,000 offset by increased expenditures for international operations of
$179,000.
The domestic decrease in expenses of approximately $211,000 between the quarters
ended September 30, 1997 and 1996 was due to the net effect of the following:
- - A decrease of $279,000 in domestic transport resulted from a
combination of reduced levels of viewer transactional revenues and
rerouting of certain viewer calls in-house that were previously handled
by outside service bureaus. In the future, the Company expects to
continue to realize savings from the movement of these calls to an
in-house operation.
- - A decrease in low power television affiliation fees of approximately
$183,000. Of this decrease, $107,000 relates to the discontinued
affiliation with a New York City low power station broadcasting from
Queens. This affiliation was terminated on January 31, 1997 to reduce
affiliation fee expenditures since the other two low power affiliates
in New York City had improved their signals and were covering a
majority of the market at lower affiliation fees. The remainder of the
decrease is due primarily to lower viewer revenue.
- - An increase in the cable affiliation fees of approximately $213,000
resulted from an increase in the number of systems having guaranteed
affiliate fees, and the amortization of incentive fees associated with
new launches.
- - An increase in satellite transponder and uplink fees of $38,000 paid
for satellite service of THE BOX. In prior years and through the end of
March 1996, the fees for satellite transponder and uplink services were
paid to a related party and were included in the related party
expenditure category in the financial statements. Beginning in April
1996, the Company entered into an agreement for such service with an
unrelated third party. The rates for the transponder uplink increased
from $42,500 per month to $55,300 per month beginning in January 1997.
The Company is negotiating a long-term agreement with WTCI for these
services, which are now provided on a month-to-month basis.
International expenses for affiliate fees, site costs and telephone services
increased by $179,000 due to the start-up of new international operations in the
second half of 1996 and the first quarter of 1997 that were not in existence
during the third quarter of 1996.
-15-
<PAGE> 16
RESULTS OF OPERATIONS (CONT'D)
Distribution, General and Administrative:
Consolidated distribution, general and administrative expenses for the quarter
ended September 30, 1997 increased by approximately $753,000, from $3,827,000 in
1996 to $4,580,000 in 1997. This increase can be divided into the net effect of
the following components: an increase in domestic expenditures of approximately
$59,000; an increase of approximately $819,000 related to international
development and operating expenses; and a decrease in corporate expenses of
$125,000 (after allocation to domestic and international units).
As part of the Company's corporate restructuring, corporate expenses have been
segregated from expenses relating to domestic and international development and
operations. These corporate costs primarily consist of parent company personnel,
administrative expenses, legal fees and the continuing development cost of the
digital box and related technology. All charges which relate to domestic and
international expenditures, which are essentially all charges except for the
corporate costs of a public company, have been allocated to the operating units
beginning with the first quarter of 1997. For the three month periods ended
September 30, 1997 and 1996, the net corporate charges were as follows:
<TABLE>
<CAPTION>
Three Months Ended
Sept 30,1997 Sept 30, 1996
------------ --------------
<S> <C> <C>
Total corporate charges $ 695,910 $ 416,590
Allocated to The Box Worldwide-USA, Inc. (290,983) --
Allocated to international development and operations (113,455) --
---------- ----------
Net corporate charges $ 291,472 $ 416,590
========== ==========
</TABLE>
The increase in total corporate charges from $417,000 in 1996 to $696,000 for
third quarter 1997 ($279,000) consisted of the following items:
- - An increase in compensation of $81,000 relating mostly to the transfer
of certain digital box development and engineering functions to the
parent company in 1997.
- - An increase of $197,000 in legal and consulting expenses associated
with the pending merger with TCI Music, Inc.
- - A decrease of $18,000 because the costs of the 1996 Annual Report were
incurred in the third quarter of 1996, while the cost of producing the
1997 Corporate Annual Report occurred in the second quarter of 1997.
- - A net increase in various administrative expenses of $19,000.
-16-
<PAGE> 17
RESULTS OF OPERATIONS (CONT'D)
Distribution, general and administrative expenses for domestic operations
increased by $59,000 for the third quarter of 1997 as compared with the same
prior year period, as follows:
- - Increases were experienced in trade advertising, consumer marketing,
research, industry events and travel and entertainment expenses of
approximately $93,000 as a result of the Company beginning a new
marketing campaign.
- - Increased national and direct response advertising sales revenues in the
third quarter of 1997, as compared with the same period in 1996,
resulted in higher agency commissions of approximately $69,000. Legal
expenses increased $33,000 in the current quarter.
- - Offsetting these increases, savings were realized in various areas. The
majority of the savings ($196,000) related to lower salaries and
benefits realized primarily due to three factors: (i) the departure of
the Executive Vice President, Programming in 1996 ($115,000); (ii) the
transfer of certain staff from domestic operations to corporate and
international operations ($20,000); and (iii) a general reduction of
domestic staff due to the elimination of a number of positions
($61,000).
- - A decrease of $127,000 in production, discs and shipping costs resulted
from more in-house production and the use of VSAT technology to update
the Digital Box programming and advertising.
- - Cost of sales associated with merchandise sold through the Company's
retail operation was approximately $32,000 lower for the quarter ended
September 30, 1997, as compared with the same prior year period. The
Company closed the store at the end of the first quarter of 1997,
because it was unprofitable. This termination of operations is expected
to save the Company over $100,000 in operating expenditures for 1997.
- - Operational costs decreased $51,000 as a result of the full
implementation of the digital box rollout. The savings were related to
lower telecommunication costs ($18,000) and repair and maintenance costs
($33,000).
- - The Company also expended approximately $21,000 less in office and
administrative costs during the quarter ended September 30, 1997 than
the same prior year period. This decrease in office and administrative
costs occurred due to lower insurance premiums of $29,000 and a decrease
in provision for bad debt of $45,000 as no additional provision is
required this quarter as compared to the third quarter of 1996. These
reductions are offset by increased use of consultants for internet
development, marketing and public relations ($41,000), and higher costs
of office administration ($12,000).
As discussed above, corporate overhead of approximately $291,000 was allocated
to domestic operations in the third quarter of 1997, with no comparable amount
allocated in the third quarter of 1996. These expenses included, for example,
charges for management salaries, office space, telecommunications, travel and
related expenses.
-17-
<PAGE> 18
RESULTS OF OPERATIONS (CONT'D)
Distribution, general and administrative expenses for our international
development and consolidated operations increased by approximately $819,000 for
the quarter ended September 30, 1997, as compared to the same prior year period.
These expenses related to operations in Argentina, Chile, Peru and Venezuela,
which launched in 1996 and incurred minimal expenses in 1996, and start-up
operations in New Zealand and Italy in 1997. The increased expenditures involved
were: operations, office and administration ($143,000); salaries and benefits
($79,000); legal ($57,000); corporate allocations ($113,000); and marketing,
research, trade advertising, travel and events ($301,000); and production and
related costs ($126,000).
Rent Paid to a Related Party:
Related party expenditures attributable to rental expense payable to Island
Trading Company, Inc. for the Company's corporate headquarters location
decreased from $125,000 for the third quarter of 1996 to $118,000 for the same
current year period.
Depreciation and Amortization:
Depreciation and amortization expenses for the quarter ended September 30, 1997,
increased by approximately $243,000 due to capital expenditures for the
development, equipment and installation costs associated with the new digital
boxes launched in 1996 and 1997, as well as certain capital expenditures
relating to international operations.
-18-
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1996.
OVERVIEW:
Due to the wide brand recognition of THE BOX, the Company changed its corporate
name to The Box Worldwide, Inc. effective February 20, 1997. A corporate
restructuring has segregated domestic operations from the international
operations and from the purely corporate functions.
Costs of international development and general corporate charges, to the extent
they are not allocable to a reporting unit, are reported through the corporate
division of the Company. For the results for the nine months ended September 30,
1996, however, no such expense allocations from the parent company to domestic
and international operations were made. For comparability with the current
period's results, all direct international and corporate expenses for the prior
year period have been segregated.
For the nine months ended September 30, 1997, the Company realized a
consolidated net loss of $4,002,425 as compared to a consolidated net loss of
$3,163,117 for the nine months ended September 30, 1996. This consolidated loss
is composed of the following items:
<TABLE>
<CAPTION>
Nine Months Ended
-----------------
Sept 30, 1997 Sept 30, 1996
------------- -------------
<S> <C> <C>
Loss from domestic operations $ (189,751) $ (261,656)
Loss from international operations
and development (3,298,026) (1,908,695)
Net corporate expenses (514,648) (992,766)
----------- ------------
Consolidated net loss $(4,002,425) $ (3,163,117)
=========== ============
</TABLE>
As noted above, the 1997 results reflect allocations of certain corporate
charges to domestic and international operations, whereas no such allocations
were made in 1996.
Management believes that these allocations more accurately reflect the true cost
to the domestic and international operating units for services provided by the
parent company, as these items generally represent costs which these divisions
would incur directly had such services not been provided by the parent. Prior to
giving effect to these allocations, the losses for the first nine months of 1997
from domestic operations and international development and operations would have
been lower by $934,935 and $340,173, respectively.
-19-
<PAGE> 20
RESULTS OF OPERATIONS (CONT'D)
Please refer to the following Supplemental Schedule of Revenue and Expenses by
Segment for further detail:
THE BOX WORLDWIDE, INC.
SUPPLEMENTAL SCHEDULE OF REVENUE AND EXPENSES BY SEGMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
<TABLE>
<CAPTION>
CONSOLIDATED CORPORATE DOMESTIC
-----------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Advertising revenues $ 8,173,092 $ 7,394,121 $ 0 $ 0 $ 8,076,926 $ 7,394,121
Net viewer revenues 6,840,460 7,788,713 0 0 6,085,674 7,672,918
Other revenues 420,022 213,897 33,728 31,939 78,392 154,458
------------ ------------ ----------- ------------ ------------ ------------
15,433,574 15,396,731 33,728 31,939 14,240,992 15,221,497
Interest income 288,890 252,252 288,890 252,252 0 0
------------ ------------ ----------- ------------ ------------ ------------
15,722,464 15,648,983 322,618 284,191 14,240,992 15,221,497
------------ ------------ ----------- ------------ ------------ ------------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 4,548,616 4,754,438 0 0 3,996,396 4,643,819
Distribution, general and
administrative 12,656,503 12,012,866 682,799 1,292,381 8,729,507 9,336,734
Satellite transponder and rent
paid to related parties 354,060 620,570 0 0 354,060 620,570
Depreciation and amortization 1,726,135 944,282 172,371 0 1,350,780 882,030
------------ ------------ ----------- ------------ ------------ ------------
19,285,314 18,332,156 855,170 1,292,381 14,430,743 15,483,153
------------ ------------ ----------- ------------ ------------ ------------
LOSS BEFORE INCOME TAXES
AND INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (3,562,850) (2,683,173) (532,552) (1,008,190) (189,751) (261,656)
INCOME TAXES (17,904) (15,424) (17,904) (15,424) 0 0
------------ ------------ ----------- ------------ ------------ ------------
LOSS BEFORE INTEREST IN
LOSS OF UNCONSOLIDATED COMPANIES (3,544,946) (2,667,749) (514,648) (992,766) (189,751) (261,656)
------------ ------------ ----------- ------------ ------------ ------------
INTEREST IN LOSS OF UNCONSOLIDATED
COMPANIES (457,479) (495,368) 0 0 0 0
------------ ------------ ----------- ------------ ------------ ------------
NET LOSS $ (4,002,425) $ (3,163,117) $ (514,648) $ (992,766) $ (189,751) $ (261,656)
============ ============ =========== ============ ============ ============
<CAPTION>
INTERNATIONAL
DEVELOPMENT &
OPERATIONS
----------------------------
1997 1998
----------------------------
<S> <C> <C>
REVENUES
Advertising revenues $ 96,166 $ 0
Net viewer revenues 754,786 115,795
Other revenues 307,902 27,500
----------- -----------
1,158,854 143,295
Interest income 0 0
----------- -----------
1,158,854 143,295
----------- -----------
COSTS AND EXPENSES
Affiliate fees, site costs and
telephone service 552,220 110,619
Distribution, general and
administrative 3,244,197 1,383,751
Satellite transponder and rent
paid to related parties 0 0
Depreciation and amortization 202,984 62,252
----------- -----------
3,999,401 1,556,622
----------- -----------
LOSS BEFORE INCOME TAXES
AND INTEREST IN LOSSES OF
UNCONSOLIDATED COMPANIES (2,840,547) (1,413,327)
INCOME TAXES 0 0
----------- -----------
LOSS BEFORE INTEREST IN
LOSS OF UNCONSOLIDATED COMPANIES (2,840,547) (1,413,327)
----------- -----------
INTEREST IN LOSS OF UNCONSOLIDATED
COMPANIES (457,479) (495,368)
----------- -----------
NET LOSS $(3,298,026) $(1,908,695)
=========== ===========
</TABLE>
-20-
<PAGE> 21
RESULTS OF OPERATIONS (CONT'D)
REVENUES:
Advertising Revenues:
Consolidated advertising revenue increased by approximately $779,000 for the
nine months ended September 30, 1997 as compared with the same 1996 period.
Domestic advertising revenues increased by approximately $683,000 for the nine
months ended September 30, 1997 as compared with the same 1996 period. National
advertising improved 18%, or approximately $961,000, for the nine months ended
September 30, 1997 from the comparable period in 1996. Proctor and Gamble, Coca
Cola, MCI, Nintendo, Nike, Nordic Trak, AT&T, Reebok and various other national
consumer goods and services all advertised on THE BOX during the first nine
months of 1997.
Record advertising decreased approximately $278,000 in the first nine months of
1997 as compared to the same period of 1996. Part of this decrease occurred due
to the change in music mixes throughout the Company's localized interactive
boxes. In the past, the Company had relied almost exclusively on record
advertising of urban and rap artists which is no longer compatible with the
programming offered on all boxes. Minimal new music product was released during
the first half of 1997, also resulting in lower advertising levels. Management
believes that the presentations made by the Company's top management and record
label advertising sales team were well received and, while it cannot be assured,
record label advertising is expected to improve throughout the remainder of
1997. International advertising was $96,000 for the first nine months of 1997,
with no comparable amount for the same period in 1996.
Net Viewer Revenues:
The decrease in net viewer revenues of $948,000 results from (1) the net effect
of reduced domestic gross viewer revenues (negative effect of $2,240,000) offset
by the related reduction in the telephone service provider's billing and
collection charges (positive effect of $335,000) and the reduction in
chargebacks experienced when consumers failed to pay for their requested videos
(positive effect of $318,000), and (2) increased international viewer revenues
(positive effect of $639,000).
Gross domestic viewer revenues, which resulted from the interactive telephone
calls to THE BOX for video selections, decreased from $9,630,000 to $7,390,000,
a difference of approximately $2,240,000 or 23.3% from the first nine months of
1996 to the first nine months of 1997. Approximately $403,000 related to the
loss of carriage on a Detroit cable system in June 1996. The remaining decrease
resulted from a lower average performance per box during the first nine months
of 1997. This decrease in average performance may be attributed to factors
involving both the Company and the music industry. THE BOX removed certain
violent or sexually explicit videos from its playlists, which historically
generated a significant number of viewer requests. The Company also has
introduced request emulation when no viewer requests were in the queue. Finally,
the transactional revenue has been negatively affected by airtime
-21-
<PAGE> 22
RESULTS OF OPERATIONS (CONT'D)
required for increased advertising and for additional programming elements such
as Box Big Break (on-air spots featuring local artists) and other elements
designed to strengthen viewing of THE BOX.
In addition to taking viewer requests via 900 service, the Company introduced a
new program in 1996 to allow customers who would like to exceed the Company's
900 service credit limit to establish a prepaid account for the selection of
videos. In addition to generating additional viewer revenue, this program has
been designed to eliminate customer chargebacks and billing charges from service
providers, as well as reduce transport costs. Initiated as a test, this program
slowly expanded during 1996 so that, by the end of that year, it was available
to all customers. This new prepaid video program provided 35.6% of consolidated
gross viewer revenue in the current period, as compared with 9.6% in the first
nine months of 1996. Revenue from this program is recognized only as videos are
selected, while prepaid account balances are included in current liabilities.
With lower domestic viewer revenues, the billing and collection charges imposed
by the Company's telephone service providers were reduced proportionately.
Therefore, an offset to the decrease in domestic gross revenue is the reduction
in billing charges of approximately $335,000. Besides the lower revenue level,
the Company has been successful in renegotiating with the telco providers to
reduce billing and collection charges from approximately eight percent during
the first nine months of 1996 to seven percent during the first nine months of
1997. Further, revenue from the prepaid video program is not subject to billing
and collection charges, and therefore the increase in revenue from this program
as a percentage of total gross viewer revenue has also contributed to the
reduction in these charges relative to gross viewer revenue.
An additional component of net viewer revenues relates to the adverse effect of
domestic customers who deny having made music video requests on THE BOX. In the
Company's current international markets, consumers are not allowed to refute
these charges, so the chargebacks are only occurring domestically. In an effort
to reduce chargebacks from telephone companies, the Company is in its third year
of call blocking for previous non-paying customers and applying credit
limitations for all its interactive viewers. After nearly three years of these
procedures, the Company has seen the chargeback rate reduced from over 16.7% in
1994, to approximately 14.9% currently. Chargebacks for the nine months ended
September 30, 1997 totaled approximately $943,000 as compared to $1,261,000 for
the same prior year period. Revenue from the prepaid video program is not
subject to customer chargebacks since all money is collected before the videos
air, and therefore the increase in revenue from this program as a percentage of
total gross viewer revenue has also contributed to the reduction in these
charges relative to gross viewer revenue.
Net viewer revenue from international boxes increased by a net of $639,000 due
to the late 1996 international launches in Chile, Peru and Venezuela, none of
which were in operation during first half of 1996, and the 1997 launches in New
Zealand and Italy.
-22-
<PAGE> 23
RESULTS OF OPERATIONS (CONT'D)
Other Revenue:
Miscellaneous revenues of $420,000 for the first nine months of 1997 included
$265,000 in domestic and international cable carriage fees, $60,000 for
production services provided to the Company's unconsolidated Holland affiliate,
$23,000 in gains on the sale of some minor equipment, $23,000 for the sale of a
low power television station, revenue totaling $15,000 from the music
compilations marketed under the Company's BOXtunes label and miscellaneous other
revenue of approximately $34,000. Interest income totaled approximately $289,000
in the first nine months of 1997, which included $142,000 related to an
outstanding loan to the Company's Holland affiliate. Interest from inception of
the loan in 1995 to the end of 1996 had not been previously recognized, and
$60,000 was included in the first quarter of 1997 for interest prior to 1997.
COSTS AND EXPENSES:
Affiliate Fees, Site Costs and Telephone Services:
Expenses were 66.5% and 61.0% of net viewer revenues for the nine months ended
September 30, 1997 and 1996, respectively. The percentage for the first nine
months of 1997 increased to 69.7% after adjusting for a non-recurring credit of
$218,000 due to a reversal of a reserve for affiliate fees related to
discontinued systems. Recurring expenses in this category as a percentage of net
viewer revenues are up significantly for 1997 since a large portion of the
affiliation fees, site costs and telecommunications charges are fixed per
location. With the reduced level of domestic viewer transactional revenues,
these expenses as a percentage of revenues increased in the first nine months of
1997. Due mostly to this lower level of viewer revenue, expenses for affiliate
fees, site costs and telephone services totaled $206,000 less for the first nine
months 1997 as compared with the same prior year period. The total decrease
resulted from decreased expenditures for domestic operations of $647,000, offset
by increased expenditures in international operations of $441,000.
The domestic decrease in expenses of approximately $647,000 for the nine months
ended September 30, 1997 as compared to 1996 was due to the net effect of the
following:
- - A decrease of $829,000 in domestic transport resulted from a
combination of reduced levels of viewer transactional revenues and
rerouting of certain viewer calls in-house that were previously handled
by outside service bureaus. In the future, the Company expects to
continue to realize savings from the movement of these calls to an
in-house operation.
-23-
<PAGE> 24
RESULTS OF OPERATIONS (CONT'D)
- - An increase in the cable affiliation fees of approximately $98,000
resulted from an increase in the number of systems having guaranteed
affiliate fees and the amortization of incentive fees associated with
new launches.
- - A decrease in low power television affiliation fees of approximately
$303,000. Of this decrease, $250,000 relates to the discontinued
affiliation with a New York City low power station broadcasting from
Queens. This affiliation was terminated on January 31, 1997 to reduce
affiliation fee expenditures since the other two low power affiliates
in New York City had improved their signals and were covering a
majority of the market at lower affiliation fees. The remainder of this
decrease is due primarily to lower viewer revenue.
- - An increase in telecommunications expense of $144,000 due mainly to the
fixed VSAT transmission charges associated with the new digital box
operations. While these expenses will provide for higher
telecommunications expenses in 1997, the net cost savings of updating
each Box location by VSAT satellite as opposed to the development,
production and distribution of 3/4-inch tapes and laser discs required
under the old analog technology are expected to total a minimum of
$70,000 per month.
- - An increase in satellite transponder and uplink fees of $243,000 paid
for satellite service of THE BOX. Beginning in April 1996, the Company
entered into an agreement for such service with an unrelated third
party. In prior years and through the end of March 1996, the fees for
satellite transponder and uplink services were paid to a related party
and were included in the related party expenditure category in the
financial statements.
International expenses for affiliate fees, site costs and telephone services
increased by $441,000 due to the start-up of new international operations in the
second half of 1996 and the first nine months of 1997 that were not in existence
during the first nine months of 1996.
Distribution, General and Administrative:
Consolidated distribution, general and administrative expenses for the nine
months ended September 30, 1997 increased by approximately $644,000, from
$12,013,000 in 1996 to $12,657,000 in 1997. This increase can be divided into
the net effect of the following components: a decrease in domestic expenditures
of approximately $607,000; an increase of approximately $1,861,000 related to
international development and operating expenses; and a decrease in corporate
expenses of $610,000 (after allocation to domestic and international units).
-24-
<PAGE> 25
RESULTS OF OPERATIONS (CONT'D)
As part of the Company's corporate restructuring, corporate expenses have been
segregated from expenses relating to domestic and international development and
operations. These corporate costs primarily consist of parent company personnel,
administrative expenses, legal fees and the continuing development cost of the
digital box and related technology. All charges which relate to domestic and
international expenditures, which are essentially all charges except for the
corporate costs of a public company, have been allocated to the operating units
beginning with the first quarter of 1997. For the nine month periods ended
September 30, 1997 and 1996, the net corporate charges were as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Sept 30,1997 Sept 30, 1996
------------ -------------
<S> <C> <C>
Total corporate charges $ 1,957,905 $ 1,292,381
Allocated to The Box Worldwide-USA, Inc. (934,935) --
Allocated to international development and operations (340,173) --
----------- ------------
Net corporate charges $ 682,797 $ 1,292,381
=========== ============
</TABLE>
The increase in total corporate charges from $1,292,000 in 1996 to $1,958,000
for first nine months 1997 ($666,000) consisted of the following items:
- - The Company decided to settle a long standing claim for the amount of
$160,000 in cash, $5,000 in surrender of a replevin bond (previously
written off to expense) plus related legal costs of $19,000. While the
Company felt that the claims asserted were without merit, costs
associated with going to trial would be greater than the agreed
settlement amount, therefore the claim was settled.
- - An increase in compensation of $172,000 relating mostly to the transfer
of certain digital box development and engineering functions to the
parent company in 1997.
- - Higher legal costs of $65,000 relating to the corporate legal expense
for regular SEC filings, a business controls study and costs associated
with the corporate reorganization.
- - An increase of $197,000 in legal and consulting expenses related to the
pending merger with TCI Music, Inc.
- - Increased travel and industry event participation of $36,000.
- - Increased telecommunications cost of $25,000.
- - A decrease in various administrative expenses of $8,000.
Distribution, general and administrative expenses for domestic operations
decreased by $607,000 for the first nine months of 1997 as compared with the
same prior year period, as follows:
- - The majority of the savings ($627,000) related to lower
salaries and benefits
-25-
<PAGE> 26
RESULTS OF OPERATIONS (CONT'D)
realized primarily due to three factors: (i) the departure of the
Executive Vice President, Programming in 1996 ($285,000); (ii) the
transfer of certain staff from domestic operations to corporate and
international operations ($60,000); and (iii) a general reduction of
domestic staff due to the elimination of a number of positions
($282,000).
- - Further decreases were experienced in trade advertising, consumer
marketing, research, industry events and travel and entertainment
expenses of approximately $521,000 as a result of the Company
deferring the development of its new marketing campaign until the
third quarter of 1997. Participation in several industry trade events
also were reduced in order to control costs. While trade advertising
will increase in the last half of 1997, the costs for trade events
should remain low and possibly even decrease given the reduction of
cable industry state association shows.
- - A decrease of $385,000 in production, discs and shipping costs
resulted from more in-house production and the use of VSAT technology
to update the Digital Box programming and advertising. Music costs
associated with the Company's revenues decreased approximately $32,000
for the first nine months of 1997 as compared with the first nine
months of 1996 due to the lower overall revenue levels.
- - Cost of sales associated with merchandise sold through the Company's
retail operation was approximately $67,000 lower for the nine months
ended September 30, 1997, as compared with the same prior year period.
The Company closed the store at the end of the first quarter of 1997,
because it was unprofitable. This deletion of operations is expected
to save the Company over $100,000 in operating expenditures for 1997.
- - Operational costs decreased $143,000 as a result of the full
implementation of the digital box rollout. The savings were related to
lower telecommunications costs of $61,000 and lower repair and
maintenance costs of $82,000.
- - Offsetting these domestic decreases, increased national and direct
response advertising sales revenues in the first nine months of 1997,
as compared with the same period in 1996, resulted in higher agency
commissions of approximately $131,000. Domestic legal expenses
increased by approximately $25,000 in the first nine months of 1997 as
compared with 1996. The Company also expended approximately $77,000
more in office and administrative costs during the nine months ended
September 30, 1997 than to the same prior year period. These increased
office and administrative costs related to increased use of
consultants for internet development, marketing and public relations
($138,000), and higher property taxes relating to new digital box
equipment ($64,000) offset by lower insurance premiums ($50,000) and
lower costs of office administration ($75,000).
As discussed above, corporate overhead of approximately $935,000 was allocated
to domestic operations in the first nine months of 1997, with no comparable
amount allocated in the first nine months of 1996. These expenses included, for
example, charges for management salaries, office space, telecommunications,
travel and related
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<PAGE> 27
RESULTS OF OPERATIONS (CONT'D)
expenses.
Distribution, general and administrative expenses for our international
development and consolidated operations increased by approximately $1,861,000
for the nine months ended September 30, 1997, as compared to the same prior year
period. These expenses related to operations in Argentina, Chile, Peru and
Venezuela, which launched in late 1996 and incurred minimal expenses in 1996,
and start-up operations in New Zealand and Italy in 1997. The increased
expenditures involved were: operations, office and administration ($430,000) ;
salaries and benefits ($218,000); legal ($130,000); production, discs, tapes and
shipping ($272,000); corporate allocations ($340,000); and marketing, research,
trade advertising, travel and events ($471,000).
Satellite Transponder and Rent Paid to Related Parties:
Related party expenditures decreased from $621,000 for the first nine months of
1996 to $354,000 for the same current year period. Satellite transponder and
service fees for the Company's satellite distributed programming resulted in
related party expenditures of $245,000 for the nine months ended September 30,
1996 with no comparable expense in 1997. WTCI, a subsidiary of
Tele-Communications, Inc., is now providing the satellite transponder and uplink
services via the Hughes' satellite Galaxy 7, transponder 13. Beginning in
January 1997, the fee charged by WTCI was $55,300 per month and such expense was
included in the financial statements under "Affiliate fees, site costs and
telephone service." The Company is negotiating a long-term agreement with WTCI
for these services, which are now provided on a month-to-month basis.
In 1997 and 1996, the Company incurred rental expense of approximately $354,000
and $376,000, respectively, payable to Island Trading Company, Inc. for its
corporate headquarters location.
Depreciation and Amortization:
Depreciation and amortization expenses for the nine months ended September 30,
1997, increased by approximately $782,000 due to capital expenditures for the
development, equipment and installation costs associated with the new digital
boxes launched in 1996 and 1997, as well as certain capital expenditures
relating to international operations.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's current ratio (current assets to current liabilities) was 1.04 to
1.00 at September 30, 1997 as compared to 1.10 to 1.00 at September 30, 1996. At
September 30, 1997, the Company's current assets exceeded its current
liabilities by approximately $195,000.
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<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
The Company has used funds received from the 1995 and 1996 sales of its former
United Kingdom subsidiary to: (i) fully implement the Digital Box, replacing all
domestic analog boxes in the field with a Digital Box or a conversion to
satellite service; (ii) expand the distribution of the Company's programming by
constructing and installing additional box units with the new digital
technology; (iii) advertise, market and promote the Company's programming
including the staffing of a larger marketing and sales effort; (iv) research,
develop, maintain and improve the Company's software and equipment including the
continued development of the Digital Box; (v) fund working capital; and (vi)
fund certain international programming ventures.
The Company utilized approximately $8.8 million in cash during 1996 and first
nine months of 1997 for digital box equipment and related support equipment,
software development, production equipment and leasehold improvements. These
expenditures related mainly to the initial wave of development and installation
of the Company's digital box technology, including base digital support
equipment and enhancement to its in-house computer system during the past
twenty-one months, plus costs associated with expanding the Company's office
space in New York and Miami Beach. The Company believes that the newly developed
technology, known as the Digital Box, is a critical element of the Company's
future. The marketing advantages provided by the Digital Box will allow enhanced
localized programming and advertising plus programming improvements through
enhanced audio and video quality, superior graphic quality, consumer friendly
responsiveness (such as nearly immediate video play), and operational
efficiencies, such as reduction of expenses associated with the manual process
of tapes, discs, weekly change outs of music product and limited availability
for advertising. The Company now has replaced all domestic analog boxes in the
field with the Digital Box except for certain low performing boxes, which were
switched to the Company's satellite box feed. There can be no assurance that
this new technology will result in additional distribution, additional
advertising sales or higher viewership. Analog box equipment taken out of
domestic service has been or will be deployed internationally, reducing the
Company's cash requirements for expansion in new and existing international
markets.
Approximately $3,162,000 was spent during first nine months 1997 in advances of
operating expenses for the Company's international operations, specifically
Holland, Argentina, Venezuela, Chile, Peru, New Zealand and Italy. Another
$649,000 was spent for corporate international development expenses. No
expansion into new international markets will be possible unless the Company is
able to obtain the necessary financing.
In February 1996, the Company entered into a five-year agreement with an
unaffiliated party to purchase satellite receiving equipment and satellite
transponder time for sending digitized video segments from the Company's
headquarters to the various box unit locations at cable head end and broadcast
station sites. The minimum cash
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<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES (CONT'D)
commitment of the Company under this agreement is approximately $1.9 million, of
which approximately $1,422,000 has already been paid through October 1997. The
remaining minimum commitment relates mainly to the monthly VSAT satellite
transponder and uplink fees for the current period through February, 1999.
Management has and will continue to undertake several operational measures in an
effort to continue to improve the Company's liquidity and cash flow position.
With full implementation of the Digital Box, the Company will save approximately
$70,000 in operating costs per month, or annual savings of $840,000. In 1995,
the Company completed the renegotiation of affiliation agreements with the two
largest multiple system operators. While considerable savings have resulted from
the renegotiation of these agreements and all new agreements are signed at these
similar reduced monthly guaranteed affiliation payments, it is not known if the
Company may be required to incur additional costs in order to gain distribution
in certain key markets.
On August 7, 1997, the Federal Communications Commission (the "FCC") adopted
order FCC 97-279 (the "Order"). The Order establishes rules to implement the
closed captioning requirements of the Telecommunications Act of 1996 (the "1996
Act"). The 1996 Act required the FCC to adopt, by August 8, 1997, rules and
implementation schedules for the captioning of video programming ensuring access
to video programming by persons with hearing disabilities. The Company estimates
that it may cost approximately $110,000 to retrofit boxes that are currently in
operation, in order to comply with the Order.
While domestically, the Company has been in a positive cash flow position,
additional funding will be required to expand upon domestic and international
distribution. The cost of a digital box installation totals $40,000 per box and
launch incentive payments are also often required to gain cable carriage
domestically. Internationally, the start-up costs of entering new countries is
prohibited by the Company's financial position at this time. The Company
anticipates that the closing of the merger transaction as discussed in Item 5
below, "Other Information", will provide the Company with the ability to gain
financing for distribution. There is however, no assurance that this transaction
will be completed, nor that such completion would result in the profitability of
the Company.
PART II: OTHER INFORMATION
ITEM 5. OTHER INFORMATION:
As of August 12, 1997, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with TCI Music, Inc. ("TCI Music") and TCI Music
Acquisition Sub, Inc. ("Acquisition Sub"), a wholly-owned subsidiary of TCI
Music, pursuant to which Acquisition Sub will be merged (the "Merger") with and
into the Company, with the Company as the surviving corporation. The completion
of the Merger is subject to the satisfaction of certain conditions, including
the approval of the Merger Agreement and the transactions
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<PAGE> 30
ITEM 5. OTHER INFORMATION (CONT'D)
contemplated by the Merger Agreement by the shareholders of the Company. A
special meeting of the shareholders of the Company for such purpose is scheduled
to be held on December 16, 1997.
On November 13, 1997, the Company mailed to the shareholders of record on
November 10, 1997 a proxy statement/prospectus (the "Proxy Statement")
containing, among other things, a description of the terms of the Merger
Agreement. A summary of the terms of the Merger is set forth in the Proxy
Statement on pages 40 through 47 under the section entitled "The Merger
Agreement," which section is incorporated herein by reference.
ITEM 6. EXHIBITS
2.1. Agreement and Plan of Merger, dated as of August 12, 1997,
among TCI Music, Inc., TCI Music Acquisition Sub, Inc. and The
Box Worldwide, Inc. (Incorporated by reference to Exhibit 2.1
to The Box Worldwide, Inc. Report on Form 10-QSB for the
quarterly period ended June 30, 1997, filed with the
Securities and Exchange Commission (the "SEC") on August 14,
1997 (the "Form 10-QSB")).
2.2. Form of Certificate of Designations of TCI Music, Inc. Series
A Convertible Preferred Stocks (Incorporated by reference to
Exhibit 2.2 to the Form 10- QSB).
10.1. Service Affiliation Agreement, dated August 4, 1997, between
The Box Worldwide, Inc. and Suburban Cable TV Co., Inc.
27. Financial Data Schedule (for SEC use only).
99.1. The section of the Proxy Statement/Prospectus of TCI Music,
Inc. and The Box Worldwide, Inc. entitled "The Merger
Agreement." Such Proxy Statement/Prospectus was filed with the
SEC on November 12, 1997.
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<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BOX WORLDWIDE, INC.
(REGISTRANT)
Date: November 14, 1997 By: /s/Alan McGlade
-----------------------------------
Alan McGlade
President and Chief Executive Officer
Date: November 14, 1997 By: /s/Luann M. Hoffman
------------------------------------
Luann M. Hoffman
Chief Financial and
Administrative Officer
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<PAGE> 1
Exhibit 10.1
THE BOX WORLDWIDE, INC.
SERVICE AFFILIATION AGREEMENT
THIS AGREEMENT made this 4th day of August 1997 between THE BOX
WORLDWIDE, INC. ("THE BOX"), a Florida corporation whose principal place of
business is 1221 Collins Avenue, Miami Beach, Florida 33139 and Suburban Cable
TV Co. Inc. ("AFFILIATE"), a Pennsylvania corporation, whose principal place of
business is located at 200 Cresson Boulevard, Box 989, Oaks, PA 19456-0989.
IN CONSIDERATION of the mutual covenants hereinafter set forth, and
other good and valuable consideration, the sufficiency and receipt of which is
hereby acknowledged, THE BOX and AFFILIATE agree as follows:
1. DEFINITIONS
(a) "Full-time" means 24-hours a day, 7 days a week on a single
channel.
(b) "Net Collected Telephone Revenue" means gross revenue from THE BOX
Primary Service on the System, less discounts, chargebacks, bad debt, billing,
processing and transport fees (as invoiced by THE BOX's telephone provider), and
applicable taxes.
(c) "Service(s)" means: (a) individually, either "THE BOX Primary
Service" or "THE BOX Satellite Service"; or (b) collectively, "THE BOX Primary
Service" and "THE BOX Satellite Service."
(d) "Service Subscriber" means a cable household or other entity
receiving the Service(s) distributed by a System.
<PAGE> 2
(e) "System(s)" means the cable television systems under common control
with, controlling or controlled by AFFILIATE and listed on Schedule 1.
(f) "THE BOX Primary Service" means the Full-time, head-end based
interactive video music service consisting of music programming and the
merchandising of music- related products and/or services.
(g) "THE BOX Satellite Service" means the satellite-delivered video
music service consisting of music programming and the merchandising of
music-related products and/or services.
2. GRANT OF RIGHTS
(a) Subject to the terms and conditions of this Agreement, THE BOX
hereby grants to AFFILIATE, and AFFILIATE hereby accepts, the non-exclusive
right to exhibit and distribute the Service(s), for which THE BOX shall have the
option to charge viewers who order music videos through a "900 Telephone
Service" (or any other billing method used by THE BOX), over the Systems set
forth on Schedule 1 hereof, as such Schedule 1 may be added to or deleted from,
from time to time, pursuant to the terms of this Agreement.
(b) Notwithstanding any other provision of this Agreement, AFFILIATE
shall have the exclusive right to distribute the Service(s) in each area (each,
an "Exclusive Area") covered by a System where such System's cable television
subscribers in the Exclusive Area constitute fifty percent (50%) of all cable
television subscribers in the Exclusive Area. No other person or entity may
distribute the Service(s) in an Exclusive Area except for any generic national
service provided by THE BOX via satellite. THE BOX shall actively defend
AFFILIATE's right to the above exclusivity. In the event that THE BOX or
AFFILIATE is legally prevented by judicial, legislative or FCC action from
maintaining the above exclusivity, (a) AFFILIATE shall have no further
obligation to make
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<PAGE> 3
any further payments to THE BOX under this Agreement with regard to the
System(s) that has lost exclusivity and (b) AFFILIATE may terminate this
Agreement with regard to the System(s) that has lost exclusivity.
(c) AFFILIATE shall complete Schedule 1 by listing: (i) each System
which shall have the right to exhibit and distribute the Service, (ii) the
communities to which the Service is available in a System's operating area,
(iii) the number of Service Subscribers of each such System, (iv) the channel
number the Service is to be initially cablecast on by each such System, (v) the
estimated launch date of the Service on each such System, and (vi) the
compensation arrangement, as set forth in Section 5 hereof, for each such
System. Schedule 1 shall be subject to the written approval of THE BOX.
(d) AFFILIATE may, at its option, add Systems to Schedule 1 hereto at
any time and shall promptly provide THE BOX with written notification thereof.
(e) Notwithstanding the above, the AFFILIATE may change the channel on
which the Service is cablecast due to a general channel realignment; provided,
however, that THE BOX is given sixty (60) days prior written notice so that THE
BOX may make the marketing changes.
3. DELIVERY AND DISTRIBUTION OF THE SERVICE
(a) AFFILIATE shall cablecast the Service(s) commencing on or about the
dates shown on Schedule 1, as such Schedule 1 may be amended from time to time.
AFFILIATE shall distribute the Service(s) without any editing, delay, additions,
alterations or deletions. However, with respect to each System that has at least
forty thousand (40,000) Service Subscribers, AFFILIATE may select either THE BOX
Primary Service or THE BOX Satellite Service.
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<PAGE> 4
(b) If AFFILIATE exhibits and distributes THE BOX Primary Service, THE
BOX shall own, deliver, install and maintain the necessary programming insertion
equipment (collectively, the "Unit") and AFFILIATE shall make available
sufficient space and power for housing the Unit. For each Unit, AFFILIATE shall
provide sufficient space for the one meter satellite dish required to receive
THE BOX Primary Service. Each Unit shall provide THE BOX signal which AFFILIATE
shall receive, process and cablecast throughout its System(s). THE BOX and
AFFILIATE shall each use their respective commercially reasonable efforts to
maintain a high quality of signal transmission of THE BOX Primary Service.
AFFILIATE shall permit an authorized representative of THE BOX 24 hour access to
the Unit, for inspection, repairs and maintenance.
(c) AFFILIATE understands and acknowledges that reliable performance of
THE BOX Primary Service requires adequate and appropriate satellite receiving
equipment. Accordingly, at THE BOX's option, THE BOX may: (i) use the satellite
receiving equipment of AFFILIATE; or (ii) at THE BOX's sole cost and expense,
install and maintain its own antenna and satellite receiving equipment (the
"Receiving Equipment") at the head-end of each of the System(s). THE BOX shall
retain all right, title and interest in, and ownership of, the Receiving
Equipment. AFFILIATE shall permit an authorized representative of THE BOX 24
hour access to the Receiving Equipment for inspection, repairs and maintenance.
(d) If AFFILIATE exhibits and distributes THE BOX Satellite Service,
THE BOX Satellite Service shall be transmitted, at THE BOX's sole cost and
expense, via a domestic communications satellite used principally for
transmission of cable televised programs. THE BOX and AFFILIATE shall each use
their respective commercially reasonable efforts to maintain a high quality of
signal transmission of THE BOX Satellite Service. THE BOX shall give AFFILIATE
no less than sixty (60) days written notice of any proposed change of signal
transmission or of a change of satellite on which THE BOX Satellite Service is
transmitted.
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<PAGE> 5
4. TERM OF AGREEMENT
(a) Subject to Paragraph 4(b) hereof, the initial term of this
Agreement shall be seven (7) years commencing on the date first above written,
and shall be automatically renewed for successive one (1) year terms, unless
either party provides the other party with written notice of its intention not
to renew this Agreement, at least ninety (90) days prior to the expiration of
the term then in effect.
(b) This Agreement may be terminated with respect to each individual
System under the following conditions:
(i) by THE BOX upon ninety (90) days prior written notice to
AFFILIATE, if: (A) the "900 Telephone Service" (or any similar telephone service
then being used by THE BOX) in the area in which a System operates is
discontinued by the applicable telephone company; (B) access to such service
becomes materially restrictive; (C) costs for such service become excessive; or
(D) for any other reason, continued operation of the service is not, in the
opinion of THE BOX, economically feasible; and/or
(ii) by either party in the event of a material breach of the
provisions of this Agreement by the other party and the failure of the breaching
party to reasonably cure such breach within thirty (30) business days from the
date it receives written notice of such breach.
(c) If this Agreement is terminated under Section 4(b) hereof,
AFFILIATE shall allow THE BOX to immediately remove the Unit and the Receiving
Equipment. AFFILIATE shall provide THE BOX with access to its facilities during
normal business hours in order for THE BOX to remove the Unit and the Receiving
Equipment, and AFFILIATE shall cooperate with THE BOX with respect to the
removal of the such equipment. Each Unit and the Receiving Equipment returned to
THE BOX shall be in good condition, subject to normal wear and tear.
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<PAGE> 6
5. SERVICE PLANS
In consideration of the terms and conditions set forth herein, for each
calendar quarter during the term of this Agreement, the parties hereto shall
accrue and thereafter pay to the applicable party the following amounts for each
Service described hereinafter, with respect to the Systems. The applicable
amount shall be calculated on a system-by- system basis as follows:
(a) CARRIAGE OF THE BOX PRIMARY SERVICE. AFFILIATE shall pay no license
fee for THE BOX Primary Service. THE BOX shall pay AFFILIATE a monthly amount
equal to the greater of (i) twenty percent (20%) of the Net Collected Telephone
Revenue plus five percent (5%) of net sales of all products sold over the
Services ("Product Sales") (defined as the dollar amount of the gross sales of
all products offered by THE BOX on its Services, which are ordered, paid for,
delivered and accepted by Service Subscribers, less discounts, returns,
chargebacks, bad debts, taxes, shipping and handling charges), or (ii) the
amount obtained by multiplying $.05 times the number of Full-Time Service
Subscribers served by such System. However, if THE BOX is able to reach an
agreement with Satellite Services, Inc. ("SSI") at any time subsequent to the
date of this Agreement, whereby the affiliate fee consideration under Section 5
of the Affiliation Agreement dated February 27, 1997 between THE BOX and SSI
(the "SSI Agreement") is modified, then Section 5 of this Agreement shall be
amended to contain the same affiliate fee terms as set forth in the SSI
Agreement.
(b) CARRIAGE OF THE BOX SATELLITE SERVICE. AFFILIATE shall pay a
monthly license fee to THE BOX of $.05 multiplied by the number of Service
Subscribers receiving such Service.
(c) BULK BILLING. To the extent a System, which carries THE BOX
Satellite Service, provides television programming on a bulk-rate basis to
Service Subscribers (E.G., multiple unit residential buildings, hotels or
hospitals), the number of Service
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<PAGE> 7
Subscribers per bulk customer shall be determined by dividing (x) the total
monthly bulk- rate charged by a System to a particular bulk customer, by (y) the
monthly rate charged by the System to such System's non-bulk-rate Subscribers
for the same level of television programming services received by the particular
bulk customer.
(d) GRATIS ACCOUNTS. Solely with respect to Systems that carry THE BOX
Satellite Service, AFFILIATE shall not owe license fees for Service Subscribers
receiving complimentary cable service. AFFILIATE shall report all complimentary
cable service subscribers to THE BOX, as part of its monthly reporting
requirements.
6. REPORTS AND PAYMENTS
(a) Within thirty (30) days after each calendar month during the term
of this Agreement, AFFILIATE shall report on each System to THE BOX for such
month: (i) the total number of Service Subscribers; and (ii) the postal zip
codes served by the Service. Such report shall be certified by AFFILIATE's Chief
Financial Officer or such other financial designee. Upon reasonable prior notice
THE BOX may conduct an audit of the subscriber count submitted by THE BOX, at
THE BOX's sole cost and expense.
(b) Within sixty (60) days after the end of each calendar month during
the term of this Agreement, THE BOX shall report to AFFILIATE actual Net
Collected Telephone Revenue and Product Sales for such calendar month. Such
report shall be certified by THE BOX's Chief Financial Officer or such other
financial designee.
(c) The amounts to be paid to AFFILIATE in accordance with Section 5(a)
hereof shall be payable within sixty (60) days after the end of each calendar
month. If an AFFILIATE System and a third party affiliate of THE BOX have
subscribers in the same zip code area, THE BOX will use reasonable efforts to
equitably allocate the payments to be made to the Systems in proportion to the
number of subscribers to the Service that the third party systems have in that
zip code area. The amounts to be paid
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<PAGE> 8
to THE BOX in accordance with Section 5(b) shall be invoiced monthly by THE BOX
and payable by AFFILIATE within thirty (30) days thereafter.
(d) Any undisputed amounts due and payable to a party hereto shall
accrue interest at the rate of one (1%) percent per month (or, if lower, the
maximum rate permitted by law) from the date on which such amount was due
through the date on which payment of such amount is made.
(e) In the event of a good faith dispute regarding the amounts provided
for in Section 5(a) hereof, no such disputed amounts shall be due and payable by
a party hereto to the other party hereto nor subject to the interest charge
referred to in Section 6(d) hereof, unless and until such dispute has been
resolved to the mutual satisfaction of AFFILIATE and THE BOX. If such dispute is
not resolved within ninety (90) days after the dispute first arises, either
party may submit such dispute to binding arbitration pursuant to the rules of
the American Arbitration Association.
(f) Each party shall pay its respective share of any taxes or fees
which are imposed upon or assessed against such party. In particular, AFFILIATE
shall be responsible for any taxes or fees imposed upon or assessed against it
or any of the Systems which are based upon or measured by revenues of AFFILIATE
resulting from this Agreement. THE BOX shall be solely responsible for any sales
or use taxes imposed on the provider for revenue derived from the 900 telephone
service (or any other billing method used by THE BOX).
(g) During the term of this Agreement and for one year thereafter, THE
BOX shall maintain accurate and complete books and records in accordance with
generally accepted accounting principles and practices which, at a minimum,
shall contain sufficient information to enable an auditor to verify compliance
with or determine whether full effect has been given to Sections 5(a), 5(b),
6(a) and 6(b) hereof. During the Term and for one (1) year thereafter and upon
sixty (60) business days prior written notice,
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<PAGE> 9
AFFILIATE may audit the books and records of THE BOX that pertain to the Service
(for the current and preceding calendar year only), during normal business
hours. AFFILIATE may only conduct one (1) audit of THE BOX's books per calendar
year. If AFFILIATE conducts an audit pursuant to this Section, AFFILIATE must
make any claim against THE BOX within three (3) months after the completion of
the audit (the "Affiliate Claim Period"). If AFFILIATE fails to make a claim
within the Affiliate Claim Period, AFFILIATE shall be deemed to have waived its
right to collect any amounts due hereunder, for the period(s) audited.
7. PROMOTION OF THE SERVICE AFFILIATE shall, subject to availability,
make available the following promotions and services:
(a) Up to two times per calendar year, AFFILIATE shall, upon request of
THE BOX, make reasonable efforts to include, within the monthly billing
statement sent to each subscriber of the Systems, material supplied by THE BOX
to AFFILIATE with respect to the Service. THE BOX shall submit all such material
to AFFILIATE, for AFFILIATE's prior approval. The cost of material supplied by
THE BOX and any special handling costs incurred by AFFILIATE shall be borne by
THE BOX. However, AFFILIATE shall pay for all postage expenses unless such
material increases AFFILIATE's normal postage, in which case such additional
expense shall be borne by THE BOX.
(b) Each month in each of the Systems, subject to availability and
equivalent support of THE BOX by THE BOX's radio partners, AFFILIATE shall
cablecast a minimum of sixty (60) sixty (60) second or one hundred twenty (120)
thirty (30) second THE BOX cross-promotional announcements and/or THE BOX radio
affiliate announcements (supplied to AFFILIATE by THE BOX), where technical
capability exists, during other cable network programming. THE BOX shall submit
all cross-promotional and radio partner announcements to AFFILIATE for
AFFILIATES's prior approval. Wherever possible, such cross-promotional
announcements shall be cablecast between
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the hours of 8:00 a.m. and 12:00 a.m. on channels with viewer demographics
similar, in THE BOX's opinion, to the demographics of viewers of the Service.
(c) AFFILIATE shall, if requested by THE BOX, insert a one-half page ad
supplied by THE BOX in the subscriber guide for each of the Systems once a
quarter, provided that the System: (i) publishes its own guide or has free space
or credit available from the publisher; and (ii) has approved such ad.
(d) AFFILIATE may use the current promotional material supplied by THE
BOX without the prior written consent of THE BOX.
8. MARKETING SUPPORT THE BOX's marketing and radio affiliations departments will
extend its best efforts to work closely with local media to secure the highest
amount of visibility possible, promoting AFFILIATE and the Programming. THE
BOX's marketing and radio affiliations departments will create a series of
promotions on an ongoing basis to continue supporting the launch of the
Programming and the Systems. THE BOX will extend its best efforts to provide
AFFILIATE with an ongoing schedule of :30 and :60 second commercial avails on
the Company's radio partners in (a) the Philadelphia DMA; and (b)
Harrisburg/Lancaster/York, to the extent THE BOX is able to secure radio
partners in such areas. In exchange, AFFILIATE will air :30 and :60 second
commercials promoting the Programming and THE BOX's radio affiliates on an
ongoing basis, pursuant to Section 7(b) hereof.
9. LAUNCH INCENTIVE
(a) THE BOX shall, within sixty (60) days of the signing of this
Agreement, issue to AFFILIATE a launch incentive of one (1) share of THE BOX's
common stock, par value $0.001 per share (the "Common Stock"), for each Service
Subscriber (a "Committed Subscriber") on a System which has committed to launch
THE BOX as of the date hereof, and as set forth on Schedule 1 hereof. However,
no shares of Common
10
<PAGE> 11
Stock shall be issued to AFFILIATE until AFFILIATE has paid to the Company the
amount indicated in the invoice attached hereto as Schedule 2.
(b) Notwithstanding the foregoing, AFFILIATE shall, by no later than
January 31, 1999, return one (1) share of Common Stock to THE BOX for each
Committed Subscriber who, on December 31, 1998, was a Service Subscriber of a
System which does not exhibit the Service(s) on a Full-time basis on December
31, 1998.
(c) If the number of Service Subscribers on Systems that are exhibiting
the Service(s) on a Full-time basis (the "Full Time Subscribers") is less than
the Net Number of Committed Subscribers (as hereinafter defined) as of any of
the following dates (each, a Determination Date), then AFFILIATE shall, within
thirty (30) days of such Determination Date, return an amount of shares of the
Net Received Common Stock (as hereinafter defined) to THE BOX, equal to:
<TABLE>
<S> <C>
(Net Number of Committed Subscribers
minus No. of Full Time Subscribers on Determination Date x Determination
minus No. of shares of Common Stock previously returned Date Percentage
to The Box pursuant to this Section 9(c))
</TABLE>
For purposes hereof, the "Determination Date Percentage" means the following
percentage for each of the following Determination Dates:
DETERMINATION
DETERMINATION DATE DATE PERCENTAGE
------------------ ---------------
December 31, 1999 70%
December 31, 2000 50%
December 31, 2001 30%
December 31, 2002 10%
For purposes hereof: (i) "Net Number of Committed Subscribers" means the total
number of Committed Subscribers who, on December 31, 1998, are Full Time
Subscribers Service Subscribers on December 31, 1998; and (ii) "Net Received
Common Stock"
11
<PAGE> 12
means the total number of shares of Common Stock received by AFFILIATE pursuant
to Section 9(a) hereof, minus the number of shares of Common Stock returned by
AFFILIATE pursuant to Section 9(b) hereof.
(d) If, prior to the issuance of the Common Stock to AFFILIATE pursuant
to Section 9(a) hereof, either of the following events (each, an "Adjustment
Event") occurs: (i) the number of outstanding shares of Common Stock is
increased by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, or (ii) the number of
outstanding shares of Common Stock is decreased by a combination of shares of
Common Stock, then, following the record date fixed for the determination of
holders of Common Stock entitled to receive the benefits of such Adjustment
Event, AFFILIATE shall thereafter have the right to receive, pursuant to Section
9(a) hereof, a number of shares of Common Stock equal to:
<TABLE>
<S> <C>
No. of shares of Common Stock No. of shares of Common Stock
to which AFFILIATE is entitled x OUTSTANDING AFTER ADJUSTMENT EVENT
prior to Adjustment Event No. of shares of Common Stock
outstanding prior to Adjustment Event
</TABLE>
(e) If, after the issuance of the Common Stock to AFFILIATE, under
Section 9(a) hereof, and prior to any return of Common Stock to THE BOX by
AFFILIATE, pursuant to Section 9(b) or 9(c) hereof, an Adjustment Event occurs
then, the amount of Common Stock to be returned by AFFILIATE pursuant to Section
9(b) or (c) shall be adjusted for each Adjustment Event that occurred during
such period according to the following formula:
<TABLE>
<S> <C>
No. of shares of Common Stock No. of shares of Common Stock
to which THE BOX is entitled x OUTSTANDING AFTER ADJUSTMENT EVENT
prior to Adjustment Event No. of shares of Common Stock
outstanding prior to Adjustment Event
</TABLE>
12
<PAGE> 13
(f) Notwithstanding the above, after December 31, 1998, if this
Agreement is terminated with respect to any individual System due to Section
4(b)(i) or AFFILIATE's termination of this Agreement pursuant to Section
4(b)(ii), then the Common Stock associated with that System's launch incentive
shall be considered earned and no return of Common Stock will be required.
(g) Any reference to Common Stock in this Section 9 shall be deemed to
include any securities into which the Common Stock are converted as a result of
any merger or other reorganization. In such event, the number of securities to
which AFFILIATE or THE BOX are entitled under Sections 9(a), (b) or (c) shall be
correspondingly adjusted (in addition to any adjustment pursuant to Sections
9(d) and 9(e)) in accordance with the conversion ratio used in such merger or
other reorganization.
10. TRADEMARKS
(a) AFFILIATE acknowledges THE BOX's claim of exclusive right, title
and interest in and to the trademarks "THE BOX", "THE BOX" (with design), "Music
Television You Control", and all marks used in its various programming as well
as THE BOX's additional trade names, trademarks, marks, slogans and titles
("Marks"), and AFFILIATE agrees that all uses of the Marks now and hereafter
developed or used by THE BOX shall be owned by and shall inure to the sole and
exclusive benefit of THE BOX. Whenever AFFILIATE uses the trademark "THE BOX",
"THE BOX" (with design), "Music Television You Control", or any other Marks in
any promotional materials distributed by AFFILIATE or any of the Systems,
AFFILIATE or the System(s) shall clearly indicate THE BOX's ownership of such
Marks through the use of the symbol (R) or its legal equivalent and language
identifying THE BOX as the owner thereof.
13
<PAGE> 14
(b) AFFILIATE may use the Marks in advertisements and promotional
material that promote the Service and/or programming contained therein, so long
as such use is in good taste and does not disparage the good will associated
with the Marks.
11. REPRESENTATIONS
(a) THE BOX represents and warrants to AFFILIATE that: (i) it is a
corporation duly organized and validly existing under the laws of the State of
Florida; and (ii) it has the power and authority to enter into this Agreement
and to perform all of its obligations hereunder.
(b) AFFILIATE represents and warrants to THE BOX that: (i) it is a
corporation duly organized and validly existing under the laws of the state of
its incorporation; and (ii) it has the power and authority to enter into this
Agreement and to perform all of its obligations hereunder.
12. INDEMNIFICATION
(a) THE BOX shall defend, indemnify and hold AFFILIATE and its
respective related companies and their respective present and former officers,
shareholders, directors, employees, partners and agents harmless from and
against all losses, liabilities, claims, costs, damages and expenses, including
reasonable attorney's fees and costs, at both the trial and appellate levels,
arising out of: (i) the content of the programming provided by THE BOX including
but not limited to, claims of libel, defamation, copyright (except music
performance fees directly assessed against an indemnified party under this
paragraph 12(a) as a result of transmission of the Service under this Agreement)
or trademark infringement; (ii) the use of the Marks in accordance with this
Agreement; or (iii) any breach on the part of THE BOX with respect to any of its
representations or obligations under this Agreement.
14
<PAGE> 15
(b) AFFILIATE shall defend, indemnify and hold THE BOX and its
respective related companies and their respective present and former officers,
shareholders, directors, employees, partners and agents harmless from and
against all losses, liabilities, claims, costs, damages and expenses, including
reasonable attorneys' fees and costs, at both the trial and appellate levels,
arising out of any breach on the part of AFFILIATE with respect to any of its
representations or obligations under this Agreement.
(c) Except as provided expressly herein to the contrary, neither party
shall have any rights against the other party hereto for claims by third parties
for the non-operation of facilities or the non-furnishing of the Service, if
such non-operation or non-furnishing is due to acts of God, inevitable accident,
fire, lockout, strike, or other labor dispute, riot or civil commotion, act of
government or government instrumentality (whether federal, state or local), act
of terrorism, illness or incapacity of any important performer, failure in whole
or in part of transmission facilities or other cause beyond the reasonable
control of the affected party.
13. GENERAL
(a) THE BOX shall provide to AFFILIATE, on a quarterly basis and
otherwise upon reasonable request, all certifications necessary or appropriate
as to compliance by the Service with the Children's Television Act of 1990, as
amended, and any regulations promulgated thereunder.
(b) This Agreement contains the entire understanding of the parties
hereto relating to the subject matter hereof and can be amended only by written
amendments signed by both parties. If a provision of this Agreement is held
invalid, the remainder of this Agreement shall remain in full force and effect.
15
<PAGE> 16
(c) The obligations of the parties under this Agreement are subject to
all applicable federal, state and local laws, rules and regulations, and this
Agreement shall be governed by, and construed in accordance with, the laws of
the State of Florida. Except as otherwise provided herein, the parties shall
submit any dispute arising from this Agreement for resolution by the Florida
state courts sitting in Dade County, Florida and/or the federal courts of the
Southern District of Florida.
(d) This Agreement shall be binding on and inure to the benefit of the
respective assigns, transferees and successors of the parties.
(e) Nothing contained herein shall be deemed to create, and the parties
do not intend to create, any relationship or partners or joint ventures as
between AFFILIATE and THE BOX, and neither party is authorized to or shall act
toward third parties in a manner which would indicate any such relationship with
the other party. Neither THE BOX nor AFFILIATE shall be or hold itself out as
the agent of the other party under this Agreement.
(f) All notices and payments required to be given hereunder shall be in
writing and sent by certified mail, return receipt requested, to the appropriate
party at its address set forth below or at such other address as may be given by
notice hereunder, or by delivering it to an officer of such party in person at
such address. Where notice is sent by mail, it shall be deemed given on the
third day following the date of the mailing and, if delivered in person, such
notice shall be effective when so delivered.
If to THE BOX: The Box Worldwide, Inc.
1221 Collins Avenue
Miami Beach, Florida 33139
Attention: Luann M. Hoffman, Chief Financial Officer
16
<PAGE> 17
If to AFFILIATE: Suburban Cable TV Co. Inc.
200 Cresson Blvd., Box 989
Oaks, PA 19456-0989
Attention: Debra Krzywicki, Executive Vice President
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
date first set forth hereinabove.
THE BOX WORLDWIDE, INC. SUBURBAN CABLE TV CO. INC.
By: /s/ ALAN MCGLADE By: /s/ H. F. LENFEST
- ------------------------------ ----------------------------------
Name: Alan McGlade Name: H.F. Lenfest
Title: Chief Executive Officer Title: President
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 1,118,437
<SECURITIES> 0
<RECEIVABLES> 3,826,928
<ALLOWANCES> 319,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,254,289
<PP&E> 17,878,709
<DEPRECIATION> 9,061,208
<TOTAL-ASSETS> 16,671,259
<CURRENT-LIABILITIES> 5,059,502
<BONDS> 0
2,410,950
0
<COMMON> 24,773
<OTHER-SE> 9,176,034
<TOTAL-LIABILITY-AND-EQUITY> 16,671,259
<SALES> 0
<TOTAL-REVENUES> 15,722,464
<CGS> 4,548,616
<TOTAL-COSTS> 14,736,698
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,020,329)
<INCOME-TAX> (17,904)
<INCOME-CONTINUING> (4,002,425)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,002,425)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> 0
</TABLE>
<PAGE> 1
Exhibit 99.1
THE MERGER AGREEMENT
GENERAL; EFFECTIVE TIME
The Merger Agreement provides for the merger of Acquisition Sub with and
into the BOX. As a result of the Merger, the separate corporate existence of
Acquisition Sub will cease and the BOX will be the Surviving Corporation. In the
Merger, shareholders of BOX Common Stock will receive the consideration
described below and shareholders of BOX Preferred Stock will retain such shares.
The Merger will become effective upon the filing of Articles of Merger with the
Secretary of State of the State of Florida. Such filing is anticipated to take
place as soon as practicable after the last of the conditions precedent to the
Merger set forth in the Merger Agreement have been satisfied or, where
permissible, waived. The following description of the Merger Agreement is
qualified in its entirety by reference to the complete text of the Merger
Agreement which is incorporated by reference herein and a copy of which
(exclusive of exhibits and schedules) is included in this Proxy
Statement/Prospectus as Appendix I.
CONSIDERATION TO BE RECEIVED IN THE MERGER
General. Upon consummation of the Merger, (a) each share of BOX Common
Stock outstanding immediately prior to the Merger (other than shares held
directly or indirectly by the BOX and shares held by holders who elect appraisal
rights with respect to their shares in accordance with applicable law) will be
converted into the right to receive (i) a fraction of a share of Music Series A
Preferred Stock equal to the quotient (rounded to the nearest hundredth) of
$1.50 divided by three times the average of the average daily closing bid and
asked prices of one share of Series A Common Stock for a period of 20
consecutive trading days ending on the third trading day prior to the Closing as
reported on the Nasdaq SmallCap Market and (ii) cash in lieu of fractional
shares of Music Series A Preferred Stock and (b) each share of Box Preferred
Stock outstanding immediately prior to the Merger (other than shares used by
holders who elect appraisal rights with respect to their shares in accordance
with applicable law) will remain an outstanding share of the Surviving
Corporation with all of the rights, privileges and preferences set forth in the
BOX Charter and the FBCA. TCI Music has entered into discussions with the holder
of all of the outstanding shares of BOX Preferred Stock to purchase such shares
prior to the consummation of the Merger for cash in the amount of $2,500,000
(the equivalent of $1.50 per share), plus accrued but unpaid dividends. If the
Merger had been consummated on November 10, 1997, based on a calculation of the
average of the average daily closing bid and asked prices of one share of Series
A Common Stock for a period of 20 consecutive trading days ending November 5,
1997 ($7.58), the Merger Conversion Ratio would be .07 of a share of Music
Series A Preferred Stock for one share of BOX Common Stock. The foregoing
example is for illustrative purposes only. The actual number of shares of TCI
Music Preferred Stock into which the BOX Common Stock will be calculated will be
based on the market price of the TCI Music Common Stock prior to the Merger and
accordingly, the actual conversion ratio may be higher or lower than that
presented in the example. See "The Merger Agreement -- Consideration to be
Received in the Merger." Each share of Music Series A Preferred Stock will be
convertible at the option of the holder initially into three shares of Series A
Common Stock. Each share of Music Series A Preferred Stock will be entitled to
vote on all matters submitted to a vote of the holders of the Series A Common
Stock and to the number of votes equal to the number of shares of Series A
Common Stock into which such share is convertible as of the Record Date for the
matter to be voted upon. Each share of Series A Common Stock currently
outstanding trades together with a TCI Right, which entitles the holder to
require TCI to purchase from such holder one share of Series A Common Stock for
$8.00, if prior to July 11, 1998, the price of one share of Series A Common
Stock does not equal or exceed $8.00 per share for at least 20 consecutive
trading days. If the TCI Rights have not terminated prior to July 11, 1997, they
will become exercisable for a 30-day period following such date and will expire
on the last day of such 30-day period unless extended by their terms. The market
price of one share of Series A Common Stock, with reference to which the number
of shares of Music Series A Preferred Stock to be issued in the Merger will be
determined, includes the value, if any, ascribed by the market to a TCI Right.
The shares of Series A Common Stock into which the shares of Music Series A
Preferred Stock issuable in the Merger will be convertible will not have any
such associated TCI Rights, and if conversion occurs prior to the termination or
expiration of the TCI Rights, the Series A Common Stock without the TCI Rights
received upon conversion will not be tradable
1
<PAGE> 2
on the Nasdaq SmallCap Market under the symbol "TUNE" with the Series A Common
Stock including the TCI Rights until the TCI Rights terminate or expire. See
"THE MERGER -- Interests of Certain Persons in the Merger," "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- TCI Rights," "THE MERGER -- Opinion of
Financial Advisor Retained by the BOX Board," "RISK FACTORS -- Termination of
TCI Rights; Potential Decrease in Price of Series A Common Stock" and "-- Nasdaq
Listing and Maintenance Requirements; Absence of Trading Market." For a
description of the Music Series A Preferred Stock, see "DESCRIPTION OF TCI MUSIC
CAPITAL STOCK -- Music Series A Preferred Stock" and the Certificate of
Designations included as Appendix II to this Proxy Statement/Prospectus. For a
summary of differences between the rights of holders of Music Series A Preferred
Stock, BOX Common Stock and BOX Preferred Stock, see "COMPARISON OF
SHAREHOLDERS' RIGHTS."
Fractional shares of Music Series A Preferred Stock will not be issued in
the Merger. Holders of BOX Common Stock otherwise entitled to a fractional share
of Music Series A Preferred Stock will be paid cash in an appropriate amount
based upon the value of Series A Common Stock as described above.
As a condition to the Merger, the number of shares of BOX Common Stock
authorized under the BOX Charter will be increased prior to the Merger from
40,000,000 shares to 100,000,000 shares pursuant to the Capitalization
Amendment. Each share of common stock, par value $0.01 per share, of Acquisition
Sub outstanding immediately prior to the Merger will be converted into and will
thereafter evidence a number of shares of common stock of the Surviving
Corporation equal to the quotient (rounded down to the nearest whole number) of
the number of shares of BOX Common Stock outstanding immediately prior to the
Merger divided by the number of shares of common stock of Acquisition Sub
outstanding immediately prior to the Merger.
Consideration to be Received by TCI Affiliates. As a holder of shares of
BOX Common Stock, Liberty VJN, Inc., an indirect wholly-owned subsidiary of TCI,
will receive Music Series A Preferred Stock in exchange for its shares of BOX
Common Stock owned at the Effective Time, which will represent approximately
4.8% of the outstanding shares of TCI Music Series A Preferred Stock. Following
the Merger, TCI will beneficially own approximately 4.8% of the outstanding
shares of Music Series A Preferred Stock, 45.7% of the outstanding shares of
Series A Common Stock and 100% of the outstanding shares of Series B Common
Stock, which will collectively represent approximately 98.0% of the voting power
of the outstanding shares of TCI Music Voting Stock. Following the Merger, TCI
Music will also own all of the issued and outstanding shares of common stock of
the Surviving Corporation, which will represent approximately 93.7% of the
voting power of the outstanding shares of voting stock of the Surviving
Corporation. TCI has entered into discussions with the holder of all of the
outstanding shares of BOX Preferred Stock to purchase such shares prior to the
Effective Time for cash in the aggregate amount of $2,500,000 (the equivalent of
$1.50 per share), plus accrued but unpaid dividends. If such purchase is
consummated prior to the Effective Time, the BOX will be a wholly-owned
subsidiary of TCI Music immediately after the Effective Time. See "SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF TCI MUSIC AND THE BOX."
Exchange of Shares. As soon as practicable after the Effective Time,
transmittal forms will be mailed to each holder of record of shares of BOX
Common Stock to be used in forwarding his or her certificates evidencing such
shares for surrender and exchange for certificates evidencing the shares of
Music Series A Preferred Stock represented thereby to which he or she has become
entitled and, if applicable, cash in lieu of fractional shares of such Music
Series A Preferred Stock. After receipt of such transmittal form, each holder of
certificates formerly representing BOX Common Stock should surrender such
certificates to The Bank of New York, as exchange agent (the "Exchange Agent"),
and each such holder will receive in exchange therefor certificates evidencing
the whole number of shares of Music Series A Preferred Stock represented thereby
to which he or she is entitled and a check for any cash that may be payable in
lieu of a fractional share of such Music Series A Preferred Stock. Such
transmittal forms will be accompanied by instructions specifying other details
of the exchange.
SHAREHOLDERS OF BOX COMMON STOCK SHOULD NOT SEND IN THEIR CERTIFICATES
UNTIL THEY RECEIVE A TRANSMITTAL FORM.
2
<PAGE> 3
SHAREHOLDERS OF BOX PREFERRED STOCK WILL NOT RECEIVE A TRANSMITTAL FORM AND
SHOULD NOT SEND IN THEIR CERTIFICATES BECAUSE THEIR SHARES WILL NOT BE EXCHANGED
PURSUANT TO THE MERGER.
After the Effective Time, each certificate evidencing shares of BOX Common
Stock (other than certificates evidencing shares held directly or indirectly by
the BOX (which will be canceled)), until so surrendered and exchanged, will be
deemed, for all purposes, to evidence only the right to receive the number of
shares of Music Series A Preferred Stock that the holder of such certificate is
entitled to receive and the right to receive any cash payment in lieu of
fractional shares of Music Series A Preferred Stock. The holder of such
unexchanged certificate will not be entitled to receive any dividends or other
distributions, if any, payable by TCI Music until the certificate is
surrendered. Subject to applicable laws, such dividends and distributions, if
any, will be accumulated and, at the time of such surrender, all such unpaid
dividends and distributions, together with any cash payment in lieu of a
fractional share will be paid, without interest.
For a discussion of the procedures that will be followed with respect to
holders of BOX Common Stock who may be subject to the notification and reporting
requirements of the HSR Act, see "-- Governmental Approvals" below.
CONDITIONS TO THE MERGER
The respective obligations of the BOX, TCI Music and Acquisition Sub to
effect the Merger are subject to the satisfaction of certain conditions,
including (i) the Merger Agreement and the transactions contemplated by the
Merger Agreement shall have been duly approved by the holders of BOX Voting
Stock; (ii) no governmental entity shall have enacted, issued, promulgated,
enforced or entered any legal requirement that remains in effect and has the
effect of making the transactions contemplated by the Merger Agreement illegal
or otherwise prohibiting the transactions contemplated by the Merger Agreement
and that could reasonably be expected to materially and adversely affect the
value of the BOX; and (iii) the Registration Statement shall have become
effective in accordance with the provisions of the Act and any necessary state
securities law approvals shall have been obtained and no stop order suspending
the effectiveness of the Registration Statement shall have been issued by the
Commission and remain in effect.
The obligations of the BOX to consummate the transactions contemplated by
the Merger Agreement are subject to the satisfaction or waiver of the following
conditions: (i) the execution by TCI and TCI Music of the Amended Contribution
Agreement and the execution by DMX and the TCI Affiliate of the Affiliation
Agreement, providing, among other things, for the payment of the Annual TCI
Payments to TCI Music or DMX in the aggregate amount of approximately $26.5
million; (ii) the Extension of TCI Music Note pursuant to which the maturity
date of the TCI Music Note will be extended for a period not to exceed 18
months; (iii) the performance by TCI Music and Acquisition Sub, in all material
respects, of their respective agreements in the Merger Agreement to be performed
prior to the Effective Time and the accuracy of the representations and
warranties of each of them in all material respects; (iv) the receipt by the BOX
of an opinion of counsel to the effect that the Merger, when completed in
accordance with the Merger Agreement, will be treated for federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code or
other evidence reasonably satisfactory to the BOX that the Merger will qualify
for such treatment; and (v) no material adverse change in the financial
condition, results of operations, assets, liabilities or business of TCI Music
occurred since the date of the Merger Agreement. See "CONTROL BY TCI;
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC -- Amended Contribution Agreement,"
"-- Affiliation Agreement" and "-- Extension of TCI Music Note."
The respective obligations of TCI Music and Acquisition Sub to consummate
the transactions contemplated by the Merger Agreement are also subject to the
satisfaction or waiver of the following conditions: (i) the performance by the
BOX, in all material respects, of its agreements in the Merger Agreement to be
performed by the Effective Time and the accuracy of the BOX's representations
and warranties in all material respects; (ii) the BOX shareholders have not
demanded appraisal rights in accordance with Sections 607.1301, 607.1302 and
607.1320 of the FBCA with respect to more than 15% of the issued and outstanding
shares of BOX Voting Stock; (iii) receipt of all consents, orders or approvals
of governmental
3
<PAGE> 4
entities and third parties, to the extent required to be obtained under the
Merger Agreement; and (iv) no material adverse change in the financial
condition, results of operations, assets, liabilities or business of the BOX has
occurred since the date of the Merger Agreement.
GOVERNMENTAL APPROVALS
The consent of the Federal Communications Commission to the acquisition by
TCI Music of an indirect interest in VJN LPTV Corp., a wholly-owned subsidiary
of the BOX, which engages in the operation of low power television stations in
the United States, must be obtained in connection with the consummation of the
Merger. TCI Music and the BOX are not aware of any other governmental consents
and governmental filings that must be obtained or made in connection with the
consummation of the Merger (other than in connection with compliance with
federal and state securities laws).
Certain shareholders of the BOX may be individually subject to the
notification and waiting-period requirements of the HSR Act if as a result of
the Merger they will hold Music Series A Preferred Stock (or a combination of
Music Series A Preferred Stock and other voting securities of TCI) having a
value of more than $15 million. Determination of whether notification is
required in a particular case will necessitate, among other things,
consideration of potentially applicable exemptions and application of a
jurisdictional test relating to such holder's revenue and assets. Persons whom
the BOX and TCI Music expect to hold as a result of the Merger shares of Music
Series A Preferred Stock (or a combination of Music Series A Preferred Stock and
other voting securities of TCI Music or any of its affiliates) having a value in
excess of $15 million will be required, as a precondition to receiving such
shares, to provide TCI Music with evidence of compliance with the HSR Act,
satisfactory in form and substance to TCI Music and its counsel. If necessary,
TCI Music will deposit into escrow the shares of Music Series A Preferred Stock
issuable to any shareholder obligated to file a pre-merger notification and
report form under the HSR Act and will instruct the Exchange Agent to hold such
shares pending the expiration or termination of the applicable waiting period.
COVENANTS
The BOX has agreed to conduct, and to cause each of its subsidiaries to
conduct, its business in the ordinary course and to use, and to cause each of
its subsidiaries to use, its reasonable best efforts to preserve intact its
present business organization, and to preserve its relationships with customers,
suppliers and others having business dealings with it. The BOX has agreed that,
except as required or permitted by the Merger Agreement or consented to in
writing by TCI Music, it will not, and it will not permit any of its
subsidiaries to, prior to the Effective Time, (i) sell or pledge or agree to
sell or pledge any capital stock or other ownership interest in any of its
subsidiaries, (ii) amend or propose to amend the BOX Charter or BOX Bylaws or
the charter or bylaws of any of its subsidiaries, (iii) split, combine or
reclassify its outstanding capital stock or issue or authorize or propose the
issuance of any other securities in respect of, in lieu of or in substitution
for shares of capital stock of, or other ownership interests in, the BOX or any
of its subsidiaries, or declare, set aside or pay any dividend or other
distribution to shareholders of the BOX or any of its subsidiaries, (iv)
directly or indirectly redeem, purchase or otherwise acquire any shares of
capital stock of, or other ownership interests in, the BOX or any of its
subsidiaries; (v) (a) issue, deliver or sell any shares of capital stock of, or
other ownership interests in, the BOX or any of its subsidiaries, or any option,
warrant or other right to acquire, or any security convertible into shares of
capital stock of, or other ownership interests in, the BOX or any of its
subsidiaries except as required or permitted by the Merger Agreement, (b)
acquire, lease or dispose of any assets, other than in the ordinary course of
business consistent with past practice, (c) create, assume or incur any
indebtedness for borrowed money exceeding $200,000, other than indebtedness
incurred to refinance outstanding indebtedness in an amount not exceeding the
principal amount of the indebtedness being refinanced and indebtedness owed by
the BOX to any of its subsidiaries or by way of such subsidiaries to the BOX or
any other subsidiary of the BOX, (d) mortgage, pledge or subject to any lien any
of its assets except to secure indebtedness permitted by the foregoing clause
(c) and certain other permitted liens described in the Merger Agreement or (e)
enter into any other material transaction, in each case other than in the
ordinary course of business consistent with past practice, (vi) make any
payments with respect to any indebtedness of the BOX or any of its subsidiaries
except for such payments that are scheduled to come due
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prior to the Effective Time, (vii) acquire any business or business organization
or division thereof that is material, individually or in the aggregate to the
BOX taken as a whole or (viii) agree to do any of the foregoing.
The BOX further agreed that except as consented to in writing by TCI Music
or required to comply with applicable law or existing company benefit plans it
will not permit any of its subsidiaries to (i) adopt, terminate or amend any
bonus, profit sharing, compensation, severance, termination, stock option,
pension, retirement, deferred compensation, employment or other benefit plan,
agreement, trust, fund or other arrangement for the benefit or welfare of any
director, officer or current or former employee, (ii) increase in any manner the
compensation or benefits of any director, officer or employee (except for normal
increases in the ordinary course of business consistent with past practice),
(iii) grant any awards under any bonus, incentive, performance or other
compensation plan or arrangement or benefit plan, (iv) take any action to fund
or in any other way secure the payment of compensation or benefits under any
employee plan, agreement, contract or arrangement or benefit plan (except for
such actions made in the ordinary course of business consistent with past
practice) or (v) agree to do any of the foregoing.
The BOX has further agreed that it will not take, or agree to take, and
will cause its subsidiaries not to take or agree to take, any actions that would
(i) make any representation or warranty of the BOX contained in the Merger
Agreement untrue or incorrect so as to cause the condition with respect to the
BOX's representations and warranties not to be fulfilled as of the Effective
Time or (ii) result in any of the other conditions to the obligations of TCI,
TCI Music and Acquisition Sub in the Merger Agreement not being satisfied as of
the Effective Time.
NO SOLICITATION OF TRANSACTIONS
The Merger Agreement provides that, subject to the fiduciary duties of the
BOX Board, none of the BOX or any of its subsidiaries or any of their respective
officers, directors, representatives or agents will take any action to initiate
the submission of any Acquisition Proposal (defined below), enter into any
agreement with respect to any Acquisition Proposal or participate in
negotiations with, or provide information concerning, the BOX or its assets,
liabilities or business to, any person in connection with any Acquisition
Proposal.
The BOX will promptly communicate to TCI Music any solicitation or inquiry
received by the BOX and the terms of any proposal or inquiry that it may receive
in respect of any Acquisition Proposal, or of any such information requested
from it or of any such negotiations or discussions being sought to be initiated
with it. The BOX Board is not prohibited from (i) making any disclosure to the
BOX's shareholders or (ii) responding to any unsolicited proposal or inquiry by
advising the person making such proposal or inquiry of the terms of its
obligations regarding an Acquisition Proposal. "Acquisition Proposal" is defined
in the Merger Agreement to mean any proposed (i) merger, consolidation or
similar transaction involving the BOX, (ii) sale, lease or other disposition
directly or indirectly by merger, consolidation, share exchange or otherwise of
all or any substantial part of the assets of the BOX or its subsidiaries, (iii)
issue, sale or other disposition of securities representing 25% or more of the
voting power of BOX Voting Stock or (iv) transaction in which any person
proposes to acquire beneficial ownership (within the meaning of Rule 13d-3 under
the Exchange Act) of, or the right to acquire beneficial ownership of, or any
"group" (as such term is defined under the Exchange Act) shall have been formed
which beneficially owns or has the right to acquire beneficial ownership of, 25%
or more of the outstanding BOX Voting Stock.
Pursuant to the Voting Agreement, the Voting Shareholders, who collectively
own approximately 56.4% of BOX Voting Stock, have agreed to vote all of their
beneficially owned shares against any proposal that would in any way inhibit the
timely consummation of the Merger and the other transactions contemplated by the
Merger Agreement; thus any Acquisition Proposal described above (other than the
Merger) could not be approved by a majority of the BOX shareholders.
CERTAIN PERSONNEL MATTERS
The terms of the BOX Plan do not address the rights of option holders in
the case of a merger such as the Merger. However, the BOX Stock Option
Agreements provide, in most cases, that, in the case of a merger
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such as the Merger, all outstanding options automatically vest and are
exercisable on the closing date of the merger and are exercisable in accordance
with their terms. The terms of the BOX Director Option Agreements provide that
the options must be exercised by the Effective Time or they will be canceled.
Pursuant to the Merger Agreement, the BOX agreed to take all actions
necessary to cause any outstanding stock options, warrants or other right to
acquire any capital stock of the BOX to be canceled if not exercised prior to
the Effective Time, except for shares of BOX Preferred Stock; provided, however,
that the BOX will not pay or agree to pay or deliver any cash or other
consideration to the holder of any such option, warrant or other right in
consideration of the cancellation or termination thereof except as follows:
- Offer to former employees of the BOX who hold options for an aggregate of
201,334 shares of BOX Common Stock and a former director who holds
options for 45,000 shares of BOX Common Stock that, to the extent such
employees and director exercise such options prior to the Effective Time,
the shares of BOX Common Stock will be converted into Music Series A
Preferred Stock at the Effective Time on the same basis as all other BOX
Common Stock, but to the extent those options are not exercised prior to
the Effective Time, they will expire at the Effective Time.
- Offer to enter into agreements with current employees and one former
employee of the BOX who hold an aggregate of 381,666 vested options
exercisable for shares of BOX Common Stock at $2.00 per share and current
directors of the BOX who hold an aggregate of 90,000 vested options
exercisable at $1.75 per share which provide, at the Effective Time,
their options will be canceled in exchange for options to purchase Series
A Common Stock. Pursuant to such agreements, for each share of BOX Common
Stock subject to options held by such option holders, the holders will
receive options entitling them to purchase 0.214 shares of Series A
Common Stock at the exercise price per share of $6.25. The new options
will be issued under, and subject to, the provisions of the TCI Music,
Inc. 1997 Stock Incentive Plan (the "1997 TCI Music Plan"). The new
options will have the same vesting schedules as the existing BOX options
(and credit toward vesting will be given for past service), but the new
options will not be exercisable until expiration of the TCI Rights unless
TCI Music is successful in having its Series A Common Stock, without the
TCI Rights, quoted on Nasdaq. If any of those BOX options are exercised
prior to the Effective Time, the shares of BOX Common Stock issued upon
such exercise will be converted into Music Series A Preferred Stock on
the same basis as all other BOX Common Stock.
- Offer to pay to current employees at the Effective Time, in cancellation
of 211,668 vested options exercisable for shares of BOX Common Stock at
$1.00 per share, the sum of $0.50 cash per option share.
- Offer to the BOX's current outside directors who hold vested options for
an aggregate of 30,000 shares of BOX Common Stock, exercisable at $1.00
per share that such directors exercise those options prior to the
Effective Time or they will expire at the Effective Time in accordance
with their terms. Any shares of BOX Common Stock issued upon such
exercise will be converted to Music Series A Preferred Stock at the
Effective Time on the same basis as all other BOX Common Stock.
- Offer to current employees of the BOX who hold non-vested options for
303,334 shares of BOX Common Stock that such employees exercise those
options before the Effective Time or such options will be canceled.
Pursuant to the Merger Agreement, each employee of the Surviving
Corporation who was an employee of the BOX immediately prior to the Effective
Time, to the extent permitted by TCI Music's employee benefit plans (as defined
in Section 3(b) of ERISA) (i) will receive credit for past service with the BOX
for purposes of eligibility and vesting under the Surviving Corporation's
employee benefit plans (as defined in Section 3(3) of ERISA) to the extent such
service was credited under the BOX benefit plans on the date of the Closing,
(ii) will not be subject to any waiting periods or limitations on benefits for
pre-existing conditions under the Surviving Corporation's employee benefit
plans, including any group health and disability plans, except to the extent
such employees were subject to such limitations under the BOX benefit plans and
(iii) will receive credit for past service with the BOX for purposes of
eligibility and vesting under the Surviving Corporation's
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plans and policies with respect to seniority benefits, including vacation and
sick leave. Current employees of the BOX who continue as employees of TCI Music
will be considered for the grant of options under the 1997 TCI Music Plan on the
same basis as employees of TCI Music and its subsidiaries.
INDEMNIFICATION
The Merger Agreement provides that after the Effective Time TCI Music will
cause the Surviving Corporation to indemnify, defend and hold harmless, and,
should the Surviving Corporation fail or be unable to do so, TCI Music will
indemnify, defend and hold harmless the officers and directors of the BOX to the
fullest extent permitted by applicable law, the BOX Charter, the BOX Bylaws and
the BOX Indemnification Agreements. See "THE MERGER--Interests of Certain
Persons in the Merger."
TERMINATION; AMENDMENT AND WAIVER
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, whether before or after approval by the BOX's
shareholders, (i) by mutual consent of the BOX Board and the TCI Music Board,
(ii) by either the BOX or TCI Music (A) if the Merger has not been consummated
on or before July 11, 1998, so long as the party seeking to terminate the Merger
Agreement has not breached its obligations under the Merger Agreement in any
material respect as of the time such party gives notice of its election to
terminate the Merger Agreement and, if the BOX is the terminating party, so long
as none of the Voting Shareholders is in breach of any obligations under the
Voting Agreement as of the time the BOX gives notice of its election to
terminate the Merger Agreement, or (B) if the shareholders of the BOX shall not
have approved and adopted the Merger Agreement, the Merger and the transactions
contemplated by the Merger Agreement at the Special Meeting, (iii) by the BOX,
provided the BOX is not in breach of any of its obligations thereunder in any
material respect and none of the Voting Shareholders is in breach of any
obligations under the Voting Agreement, in each case as of the time that the BOX
gives notice of its election to terminate the Merger Agreement, if any of the
conditions to its obligations to consummate the Merger have not been satisfied
or waived at such time as such condition is no longer capable of satisfaction,
(iv) by the BOX, provided the BOX is not, in any material respect, in breach of
any of its obligations not to solicit any Acquisition Proposal or any other
provision of the Merger Agreement and none of the Voting Shareholders is in
breach of any obligations under the Voting Agreement, in each case as of the
time that the BOX gives notice of its election to terminate the Merger
Agreement, if the BOX is presented with an unsolicited Acquisition Proposal
that, taking into account all relevant factors (including the nature and amount
of consideration to the BOX shareholders and the certainty of, and time
requirement for, completion of the transactions proposed in such Acquisition
Proposal), is more favorable to the BOX's shareholders from a financial point of
view than the transactions contemplated by the Merger Agreement, or (v) by TCI
Music, provided TCI Music and Acquisition Sub have not breached any of their
obligations thereunder in any material respect, if any of the conditions to
their obligations to consummate the Merger have not been satisfied or waived at
such time as such condition is no longer capable of satisfaction. See
"-- Conditions to the Merger."
In the event of termination of the Merger Agreement by either the BOX or
TCI Music as provided above, the Merger Agreement will become void and (except
for the willful breach of the Merger Agreement by any party to the Merger
Agreement) there will be no liability or obligation on the part of any of the
BOX, TCI Music or Acquisition Sub, other than as provided by the BOX Services
Agreement. See "THE MERGER -- Background of the Merger."
The BOX, TCI Music and Acquisition Sub may amend the Merger Agreement in
writing by or pursuant to action taken by all of their respective boards of
directors, at any time before or after approval by the shareholders of the BOX
of the Merger Agreement and prior to the Effective Time, but after such approval
by the shareholders of the BOX, no amendment may be made that alters the
indemnification provisions of the Merger Agreement, changes the ratio at which
BOX Common Stock is to be converted into Music Series A
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Preferred Stock, or changes, in any way adverse to such shareholders, the terms
of the Music Series A Preferred Stock, or that in any other way materially
adversely affects the rights of such shareholders, without the further approval
of such shareholders. At any time prior to the Effective Time, the BOX, TCI
Music and Acquisition Sub, by or pursuant to action taken by their respective
boards of directors, may agree to extend the time specified in the Merger
Agreement for performance of any of the obligations or other acts of the other
parties to the Merger Agreement, waive any inaccuracies in the representations
and warranties contained in the Merger Agreement or in any document delivered
pursuant to the Merger Agreement or waive compliance with any of the agreements
or conditions contained in the Merger Agreement.
CERTAIN RESTRICTIONS ON RESALE OF MUSIC SERIES A PREFERRED STOCK
The issuance of all shares of Music Series A Preferred Stock issuable in
the Merger will be registered under the Act and such shares will be freely
transferable, except that any such shares received by persons who are deemed
"affiliates" (as such term is defined for purposes of Rule 145 under the Act) of
the BOX prior to the Merger may be resold by them only in transactions permitted
by the resale provisions of Rule 145 under the Act (or Rule 144 in the case of
such persons who become affiliates of TCI) or as otherwise permitted under the
Act. Persons who may be deemed to be affiliates of the BOX generally include
individuals or entities that control, are controlled by, or are under common
control with, the BOX and may include certain officers and directors of the BOX
as well as principal shareholders of the BOX.
EXPENSES
The Merger Agreement provides that each party will pay its own costs and
expenses in connection with the transactions contemplated by the Merger
Agreement.
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