<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
DMX Inc.
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
(1) Title of each class of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- - --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- - --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- - --------------------------------------------------------------------------------
(5) Total fee paid:
- - --------------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- - --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- - --------------------------------------------------------------------------------
(3) Filing Party:
- - --------------------------------------------------------------------------------
(4) Date Filed:
- - --------------------------------------------------------------------------------
<PAGE> 2
June 12, 1997
Dear Stockholder:
You are cordially invited to attend a special meeting of stockholders of
DMX Inc. (the "Company"), which will be held at the Company's executive offices,
located at 11400 West Olympic Boulevard, Suite 1100, Los Angeles, California
90064 on Friday, July 11, 1997, starting at 10:00 a.m., local time. A notice of
the special meeting, a proxy card and a Proxy Statement/Prospectus containing
important information about the matters to be acted upon at the special meeting
are enclosed.
At the special meeting, you will be asked to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29,
1997 (the "Merger Agreement"), among the Company, Tele-Communications, Inc.
("TCI"), TCI Music, Inc., a wholly owned subsidiary of TCI ("TCI Music"), and
TCI Merger Sub, Inc. ("Merger Sub"), a wholly owned subsidiary of TCI Music,
pursuant to which Merger Sub will be merged with and into the Company (the
"Merger") with the Company as the surviving corporation (the "Surviving
Corporation").
In connection with the Merger, TCI and TCI Music will enter into a
Contribution Agreement. Pursuant to the Contribution Agreement, effective as of
the closing of the Merger: (i) TCI Music will issue to TCI (as designee of
certain of its indirect subsidiaries), 62,500,000 shares of Series B Common
Stock, par value $.01 per share, of TCI Music and a promissory note in the
amount of $40 million; (ii) until December 31, 2006 certain subsidiaries of TCI
will transfer to TCI Music the right to receive all revenues from sales of DMX
music services to their residential and commercial subscribers, net of an amount
equal to the 10% of revenues from such sales to residential subscribers and net
of the revenues otherwise payable to DMX (which will be a wholly owned
subsidiary of TCI Music) as license fees for DMX music services under
affiliation agreements currently in effect; (iii) TCI will contribute to TCI
Music the digital commercial tuners that are not in service as of the effective
date of the Merger; and (iv) TCI will grant to each stockholder who becomes a
stockholder of TCI Music pursuant to the Merger, one right (a "Right") with
respect to each whole share of Series A Common Stock, $.01 par value per share,
of TCI Music ("TCI Music Series A Common Stock") acquired by such stockholder in
the Merger pursuant to the terms of a Rights Agreement among TCI, TCI Music and
the rights agent. Each Right will entitle the holder to require TCI to purchase
from such holder one share of TCI Music Series A Common Stock for $8.00 per
share (the equivalent of $2.00 per share of DMX Common Stock), payable at the
election of TCI, in cash, a number of shares of Tele-Communications, Inc. Series
A TCI Group Common Stock ("Series A TCI Group Common Stock") having an
equivalent value or a combination thereof, if during the one-year period
beginning on the effective date of the Merger, the price of TCI Music Series A
Common Stock does not equal or exceed $8.00 per share for a period of at least
20 consecutive trading days.
<PAGE> 3
Upon consummation of the Merger, each outstanding share of Common Stock,
$.01 par value per share, of the Company ("DMX Common Stock") will be converted
into the right to receive (i) one-quarter share of TCI Music Series A Common
Stock, (ii) one Right with respect to each whole share of TCI Music Series A
Common Stock and (iii) cash in lieu of fractional shares of TCI Music Series A
Common Stock and Rights. Until the Rights expire or are exercised, the Rights
will be evidenced by a legend on the certificates for shares of TCI Music Series
A Common Stock issued in the Merger. Accordingly, the Rights associated with the
shares of TCI Music Series A Common Stock will be represented solely by, and
will not be separable from, such shares of TCI Music Series A Common Stock, and
the surrender or transfer of any such certificate for shares of TCI Music Series
A Common Stock will also constitute the surrender or transfer of the Rights
associated with the TCI Music Series A Common Stock represented by such
certificate. Upon exercise of the Rights, the shares of TCI Music Series A
Common Stock associated with the Rights will be transferred to TCI in exchange
for cash and/or shares of Series A TCI Group Common Stock as described above.
The accompanying Proxy Statement/Prospectus provides you with detailed
information concerning the Merger Agreement (a copy of which (exclusive of
Exhibits and Schedules) is included therein as Appendix I thereto), the TCI
Music Series A Common Stock and the Rights to be issued in connection with the
Merger and other information. Please give all of this information your careful
attention.
The Board of Directors has carefully reviewed and considered the terms and
conditions of the Merger Agreement. In addition, the Board retained Houlihan
Lokey Howard & Zukin, which has delivered to the Board a written opinion, dated
February 6, 1997, to the effect that, as of the date of such opinion and based
upon and subject to certain matters stated therein, the consideration to be
received by the public stockholders of the Company in connection with the
proposed Merger is fair to such stockholders, from a financial point of view. A
copy of Houlihan Lokey's opinion, which sets forth the assumptions made, matters
considered and the scope of review undertaken in connection therewith, is set
forth as Appendix II to the accompanying Proxy Statement/Prospectus and should
be read carefully in its entirety. The Board of Directors has determined that
the terms of the Merger Agreement are fair to, and that the Merger is in the
best interests of, the Company and its stockholders and recommends that you vote
FOR the proposal to approve and adopt the Merger Agreement. For a further
discussion of the Board's consideration and evaluation of the Merger Agreement
as well as a discussion of the interests of certain directors and executive
officers of the Company in the proposed Merger, see "THE
MERGER -- Recommendation of the DMX Board; DMX's Reasons for the Merger" and
"-- Interests of Certain Persons in the Merger" in the accompanying Proxy
Statement/Prospectus.
Holders of shares of DMX Common Stock who comply with the applicable
procedural requirements of the Delaware General Corporation Law are entitled to
appraisal rights with respect to their shares. See "APPRAISAL RIGHTS" in, and
Appendix III to, the accompanying Proxy Statement/Prospectus.
Whether or not you are personally able to attend the special meeting,
please complete, sign and date the enclosed proxy card and return it in the
enclosed postage prepaid envelope as soon as possible. This action will not
limit your right to vote in person if you wish to attend the special meeting and
vote personally.
Sincerely yours,
LOGO
Jerold H. Rubinstein
Chairman of the Board and Chief
Executive Officer
PLEASE DO NOT SEND IN ANY CERTIFICATES FOR YOUR COMMON
STOCK AT THIS TIME.
2
<PAGE> 4
DMX INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 11, 1997
TO THE STOCKHOLDERS OF DMX INC.:
NOTICE IS HEREBY GIVEN that a special meeting of stockholders (together
with any adjournment or postponement thereof, the "Special Meeting") of DMX
Inc., a Delaware corporation (the "Company"), will be held at the Company's
executive offices located at 11400 West Olympic Boulevard, Suite 1100, Los
Angeles, California, starting at 10:00 a.m., local time, on Friday, July 11,
1997, for the following purposes:
1. To consider and vote upon a proposal to approve and adopt an
Agreement and Plan of Merger, dated as of February 6, 1997, as amended by
Amendment One to Merger Agreement dated May 29, 1997 (the "Merger
Agreement"), among the Company, Tele-Communications, Inc., a Delaware
corporation ("TCI"), TCI Music, Inc., a Delaware corporation and a wholly
owned subsidiary of TCI ("TCI"), and TCI Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of TCI Music ("Merger Sub").
Pursuant to the Merger Agreement, among other things, (a) Merger Sub will
be merged (the "Merger") with and into the Company, with the Company as the
surviving corporation and (b) each outstanding share (other than shares
held directly by the Company or any of its subsidiaries) of Common Stock,
par value $.01 per share, of the Company (the "DMX Common Stock"), will be
converted into the right to receive (i) one-quarter share of Series A
Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series A
Common Stock"), (ii) one right (a "Right") with respect to each whole share
of TCI Music Series A Common Stock and (iii) cash in lieu of fractional
shares of TCI Music Series A Common Stock and Rights. Each Right will
entitle the holder to require TCI to purchase from such holder one share of
TCI Music Series A Common Stock for $8.00 per share (the equivalent of
$2.00 per share of DMX Common Stock), payable at the election of TCI, in
cash, a number of shares of Tele-Communications, Inc. Series A TCI Group
Common Stock ("Series A TCI Group Common Stock") having an equivalent value
or a combination thereof, if during the one-year period beginning on the
effective date of the Merger, the price of TCI Music Series A Common Stock
does not equal or exceed $8.00 per share for a period of at least 20
consecutive trading days. The terms of the Merger Agreement, the Series
Common Stock and the Rights are described in detail in the accompanying
Proxy Statement/Prospectus, and the full text of the Merger Agreement
(exclusive of Exhibits and Schedules) is included as Appendix I thereto.
Until the Rights expire or are exercised, the Rights will be evidenced by a
legend on the certificates for shares of TCI Music Series A Common Stock
issued in the Merger. Accordingly, the Rights associated with the shares of
TCI Music Series A Common Stock will be represented solely by, and will not
be separable from, such shares of TCI Music Series A Common Stock, and the
surrender or transfer of any such certificate for shares of TCI Music
Series A Common Stock will also constitute the surrender or transfer of the
Rights associated with the TCI Music Series A Common Stock represented by
such certificate. Upon exercise of the Rights, the shares of TCI Music
Series A Common Stock associated with the Rights will be transferred to TCI
in exchange for cash and/or shares of Series A TCI Group Common Stock as
described above.
2. To transact such other business as may properly come before the
Special Meeting.
Holders of record of shares of Common Stock at the close of business on May 26,
1997, the record date for the Special Meeting, are entitled to notice of and to
vote at the Special Meeting.
To assure that your interests will be represented at the Special Meeting,
regardless of whether you plan to attend in person, please complete, date and
sign the enclosed proxy card and return it promptly in the enclosed
<PAGE> 5
return envelope, which requires no postage if mailed in the United States. This
action will not limit your right to vote in person if you wish to attend the
Special Meeting and vote personally.
By Order of the Board of Directors
LOGO
Jerold H. Rubinstein
Chairman of the Board
and Chief Executive Officer
Los Angeles, California
June 12, 1997
PLEASE EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY, WHETHER OR NOT YOU INTEND
TO BE PRESENT IN PERSON AT THE SPECIAL MEETING.
2
<PAGE> 6
PROSPECTUS
TELE-COMMUNICATIONS, INC.
PROSPECTUS
14,896,648 RIGHTS TO SELL TCI MUSIC, INC.
SERIES A COMMON STOCK TO TELE-COMMUNICATIONS, INC.
AND
7,000,000 SHARES OF SERIES A TCI GROUP COMMON STOCK
ISSUABLE UPON EXERCISE OF RIGHTS
---------------------
TCI MUSIC, INC.
PROSPECTUS
14,896,648 SHARES OF SERIES A COMMON STOCK
---------------------
THIS PROSPECTUS INCLUDES THE PROXY STATEMENT OF
DMX INC.
FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 11, 1997
---------------------
This Proxy Statement/Prospectus is being furnished to holders of common
stock of DMX Inc., a Delaware corporation ("DMX") in connection with the
solicitation of proxies by the Board of Directors of DMX (the "DMX Board") for
use at a special meeting of the stockholders of DMX, or any adjournment or
postponement thereof (the "Special Meeting"), called to consider and vote upon a
proposal to approve and adopt an Agreement and Plan of Merger, dated as of
February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29,
1997 (the "Merger Agreement"), by and among Tele-Communications, Inc., a
Delaware corporation ("TCI"), TCI Music, Inc., a Delaware corporation and wholly
owned subsidiary of TCI ("TCI Music"), TCI Merger Sub, a Delaware corporation
and wholly owned subsidiary of TCI Music ("Merger Sub"), and DMX.
The Merger Agreement provides, among other things, for the merger of Merger
Sub with and into DMX (the "Merger"). As a result of the Merger, stockholders of
DMX will become stockholders of TCI Music on the terms described in this Proxy
Statement/Prospectus. The Merger will become effective at the time of the filing
of a Certificate of Merger with the Secretary of State of the State of Delaware
(the "Effective Time"), which is currently expected to occur as soon as
practicable after the last of the conditions precedent to the Merger set forth
in the Merger Agreement has been satisfied, or where permissible, waived. See
"THE MERGER AGREEMENT."
In connection with the Merger, TCI and TCI Music will enter into a
Contribution Agreement (the "Contribution Agreement"). Pursuant to the
Contribution Agreement, as of the Effective Time of the Merger: (i) TCI Music
will issue to TCI (as designee of certain of its indirect subsidiaries)
62,500,000 shares of Series B Common Stock, par value $.01 per share, of TCI
Music ("TCI Music Series B Common Stock") and a promissory note in the amount of
$40 million (the "TCI Music Note"); (ii) until December 31, 2006 certain
subsidiaries of TCI will transfer to TCI Music the right to receive all revenues
from sales of DMX music services to their residential and commercial
subscribers, net of an amount equal to 10% of the revenues from such sales to
residential subscribers and net of the license fees otherwise payable to DMX
(which will be a wholly owned subsidiary of TCI Music) for DMX music services
under affiliation agreements currently in effect ("Contributed Net DMX
Revenues"); (iii) TCI will cause all of the commercial tuners used for satellite
distribution of DMX music services then indirectly owned by it that are not in
service as of the Effective Time (the "Contributed Tuners") to be contributed to
TCI Music; and (iv) TCI will grant to each stockholder who becomes a stockholder
of TCI Music pursuant to the Merger, one right (a "Right") with respect to each
whole share of Series A Common Stock, $.01 par value per share, of TCI Music
("TCI Music Series A Common Stock") acquired by such stockholder in the Merger
pursuant to the terms of a Rights Agreement to be entered into among TCI, TCI
Music and The Bank of New York as Rights Agent (the "Rights Agreement"). Each
Right will entitle the holder to require TCI to purchase from such holder one
share of TCI Music Series A Common Stock for $8.00 per share (the equivalent of
$2.00 per share of DMX Common Stock), payable at the election of TCI, in cash, a
number of shares of Tele-Communications, Inc. Series A TCI Group Common Stock,
par value $1.00 per share ("Series A TCI Group Common Stock"), having an
equivalent value or a combination thereof, if during the one-year period
beginning on the effective date of the Merger, the price of TCI Music Series A
Common Stock does not equal or exceed $8.00 per share for a period of at least
20 consecutive trading days.
Upon consummation of the Merger, each outstanding share of common stock,
$.01 par value per share, of DMX ("DMX Common Stock") will be converted into the
right to receive (i) one-quarter share of TCI Music Series A Common Stock, (ii)
one Right with respect to each whole share of TCI Music Series A Common Stock
and (iii) cash in lieu of fractional shares of TCI Music Series A Common Stock
and Rights. Until the Rights expire or are exercised, the Rights will be
evidenced by a legend on the certificates for shares of TCI Music Series A
Common Stock issued in the Merger. Accordingly, the Rights associated with the
shares of TCI Music Series A Common Stock will be represented solely by, and
will not be separable from, such shares of TCI Music Series A Common Stock, and
the surrender or transfer of any such certificate for shares of TCI Music Series
A Common Stock will also constitute the surrender or transfer of the Rights
associated with the TCI Music Series A Common Stock represented by such
certificate. Upon exercise of the Rights, the shares of TCI Music Series A
Common Stock associated with the Rights will be transferred to TCI in exchange
for cash and/or shares of Series A TCI Group Common Stock as described above.
The accompanying Proxy Statement/Prospectus provides you with detailed
information concerning the Merger Agreement (a copy of which (exclusive of
Exhibits and Schedules) is included herein as Appendix I), the TCI Music Series
A Common Stock and the Rights to be issued in connection with the Merger and
other information. Please give all of this information your careful attention.
See "THE MERGER AGREEMENT -- Consideration to be Received in the Merger."
Immediately following the Merger (i) the outstanding shares of TCI Music
Series A Common Stock will represent approximately 19.25% of, and 2.3% of the
voting power related to, the total outstanding shares of TCI Music Series A
Common Stock and TCI Music Series B Common Stock (together, the "TCI Music
Common Stock"); and (ii) the outstanding shares of TCI Music Series B Common
Stock will represent approximately 80.75% of, and 97.7% of the voting power
related to, the total outstanding shares of TCI Music Common Stock. TCI
beneficially owns approximately 45.7% of the outstanding shares of DMX Common
Stock. Immediately following the Merger, TCI will beneficially own approximately
45.7% of the outstanding shares of TCI Music Series A Common Stock and 100% of
the outstanding TCI Music Series B Common Stock, which will collectively
represent approximately 89.6% of the outstanding shares of TCI Music Common
Stock and 98.7% of the voting power of the outstanding shares of TCI Music
Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH CONSIDERATION OF THE MERGER AND THE
ISSUANCE OF THE TCI MUSIC SERIES A COMMON STOCK.
This Proxy Statement/Prospectus and the accompanying form of proxy are first
being mailed to the stockholders of DMX on or about June 12, 1997.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE NOT
BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is June 12, 1997.
<PAGE> 7
AVAILABLE INFORMATION
TCI and TCI Music have filed a registration statement on Form S-4 (together
with all amendments, exhibits and schedules thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Act"), relating
to 14,896,648 shares of TCI Music Series A Common Stock and Rights that are
proposed to be issued in connection with the Merger to holders of outstanding
shares of DMX Common Stock. This Proxy Statement/Prospectus also constitutes the
Prospectuses of TCI and TCI Music filed as part of the Registration Statement.
This Proxy Statement/Prospectus does not include all of the information set
forth in the Registration Statement filed by TCI and TCI Music with the
Commission under the Act, as permitted by the rules and regulations of the
Commission. The Registration Statement, including any amendments, schedules and
exhibits filed or incorporated by reference as a part thereof, is available for
inspection and copying as set forth below. Statements contained in this Proxy
Statement/Prospectus or in any document incorporated herein by reference as to
the contents of any contract or other document referred to herein or therein are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement or such other document, and each such statement shall be deemed
qualified in its entirety by such reference.
TCI and DMX are each subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information filed with the Commission can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549 and at the
following Regional Offices of the Commission: 500 West Madison Street, Suite
1400, Chicago, Illinois 60661; and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, D.C. 20549. The Commission also maintains a Web
site on the Internet that contains information regarding registrants (including
TCI and DMX) that file electronically with the Commission (http://www.sec.gov).
In addition, material filed by TCI and DMX should be available at the offices of
the National Association of Securities Dealers, Inc., Reports Section, 1735 K
Street, N.W., Washington, D.C. 20006.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROXY STATEMENT/PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/ PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY THE SECURITIES COVERED BY THIS PROXY STATEMENT/PROSPECTUS OR A
SOLICITATION OF A PROXY IN ANY JURISDICTION WHERE, OR TO OR FROM ANY PERSON TO
WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER, SOLICITATION OF AN OFFER OR PROXY
SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROXY
STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF SECURITIES MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCE, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF TCI OR TCI MUSIC SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED OR INCORPORATED BY REFERENCE HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE. ALL INFORMATION HEREIN WITH RESPECT TO DMX HAS BEEN
PROVIDED BY DMX; ALL INFORMATION HEREIN WITH RESPECT TO TCI HAS BEEN PROVIDED BY
TCI; AND ALL INFORMATION HEREIN WITH RESPECT TO TCI MUSIC HAS BEEN PROVIDED BY
TCI MUSIC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents previously filed by TCI with the Commission under
the Exchange Act are incorporated herein by reference and made a part hereof
(Commission File No. 0-20421):
(a) TCI's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996, as amended by Form 10-K/A (Amendment No. 1);
(b) TCI's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997;
ii
<PAGE> 8
(c) TCI's Current Report on Form 8-K dated January 22, 1997;
(d) The financial statements and notes thereto of VII Cable as of
December 31, 1994 and 1995 and for the years ended December 31, 1993, 1994
and 1995, which appear in TCI's Current Report on Form 8-K dated June 19,
1996; and
(e) Description of Capital Stock of TCI set forth in Item 1 of a
Registration Statement on Form 8-A filed by TCI on July 11, 1995 as amended
by Form 8-A/A (Amendment No. 1), dated September 29, 1995, Form 8-A/A
(Amendment No. 2) dated October 25, 1995 and in Item 4 of a Registration
Statement on Form 8-B filed by TCI on July 13, 1994 as amended by Form
8-B/A (Amendment No. 1) dated April 4, 1995, Form 8-B/A (Amendment No. 2)
dated August 11, 1995, Form 8B/A (Amendment No. 3) dated September 29, 1995
and Form 8-B/A (Amendment No. 4) dated October 25, 1995.
The following documents previously filed by DMX with the Commission under
the Exchange Act are incorporated herein by reference and made a part hereof
(Commission File No. 0-18806):
(a) DMX's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, as amended by Form 10-K/A (Amendment No. 1) and Form
10-K/A (Amendment No. 2);
(b) DMX's Quarterly Report on Form 10-Q for the quarter ended December
31, 1996; and
(c) DMX's Quarterly Report on Form 10-Q for the quarter ended March
31, 1997.
All documents filed by TCI and DMX pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus and
prior to the Special Meeting shall be deemed to be incorporated by reference
into this Proxy Statement/Prospectus and to be a part hereof from the date of
filing of such documents. Any statement contained in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes hereof to the extent that a statement contained herein
(or in any other subsequently filed document that is or is deemed to be
incorporated by reference herein) modifies or supersedes such previous
statement. Any statement so modified or superseded shall not be deemed to
constitute a part hereof except as so modified or superseded.
All information appearing in this Proxy Statement/Prospectus is qualified
in its entirety by the information and financial statements (including notes
thereto) appearing in the documents incorporated herein by reference.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. TCI WILL PROVIDE COPIES OF THESE
DOCUMENTS (OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE
SPECIFICALLY INCORPORATED BY REFERENCE HEREIN) RELATING TO TCI WITHOUT CHARGE,
TO ANY PERSON TO WHOM THIS PROXY STATEMENT/PROSPECTUS HAS BEEN DELIVERED UPON
WRITTEN OR ORAL REQUEST. SUCH REQUESTS SHOULD BE DIRECTED TO STEPHEN M. BRETT,
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL, TELECOMMUNICATIONS, INC., TERRACE
TOWER II, 5619 DTC PARKWAY, ENGLEWOOD, COLORADO 80111 (TELEPHONE (303)
267-5500). DMX WILL PROVIDE COPIES OF THESE DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE
HEREIN) RELATING TO DMX WITHOUT CHARGE, TO ANY PERSON TO WHOM THIS PROXY
STATEMENT/PROSPECTUS HAS BEEN DELIVERED UPON WRITTEN OR ORAL REQUEST. SUCH
REQUESTS SHOULD BE DIRECTED TO J. WENDY KIM, CHIEF FINANCIAL OFFICER AND
CORPORATE SECRETARY, 11400 WEST OLYMPIC BOULEVARD, SUITE 1100, LOS ANGELES,
CALIFORNIA 90064. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY SUCH
REQUESTS SHOULD BE MADE BY JULY 3, 1997.
iii
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION....................................... ii
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............. ii
SUMMARY..................................................... 1
The Companies............................................. 1
The Special Meeting....................................... 1
The Merger................................................ 2
Accounting Treatment...................................... 4
Interests of Certain Persons in the Merger................ 4
Appraisal Rights.......................................... 5
Certain Federal Income Tax Consequences................... 5
Comparative Market Price Data............................. 5
Relationship Between TCI and TCI Music After the Merger... 6
Dividend Policy........................................... 7
Transfer Agent............................................ 7
Risk Factors and Forward-Looking Statements............... 7
SUMMARY SELECTED FINANCIAL AND OTHER DATA................... 8
RISK FACTORS................................................ 12
THE SPECIAL MEETING......................................... 19
Time and Place; Purpose................................... 19
Voting Rights; Votes Required for Approval................ 19
Proxies................................................... 19
THE MERGER.................................................. 21
Background of the Merger.................................. 21
Recommendation of DMX Board; DMX's Reasons for the
Merger................................................. 25
TCI's Reasons for the Merger.............................. 27
Opinion of Financial Advisor Retained by the DMX Board.... 27
Interests of Certain Persons in the Merger................ 33
CERTAIN CONSEQUENCES OF THE MERGER.......................... 36
General................................................... 36
Certain Federal Income Tax Consequences................... 36
Accounting Treatment...................................... 39
THE MERGER AGREEMENT........................................ 39
General; Effective Time................................... 39
Consideration to be Received in the Merger................ 40
Conditions to the Merger.................................. 45
Governmental Approvals.................................... 46
Covenants................................................. 46
No Solicitation of Transactions........................... 47
Certain Personnel Matters................................. 47
Indemnification........................................... 49
Termination; Amendment and Waiver......................... 49
Certain Restrictions on Resale of TCI Music Series A
Common Stock........................................... 49
Expenses.................................................. 49
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER..... 50
Contribution Agreement.................................... 50
TCI Loan............................................... 52
Services Agreement........................................ 52
Tax Sharing Agreement..................................... 53
BUSINESS OF TCI............................................. 54
</TABLE>
iv
<PAGE> 10
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
BUSINESS OF DMX............................................. 55
General................................................... 55
CERTAIN INFORMATION CONCERNING TCI MUSIC.................... 55
General................................................... 55
Current DMX Distribution.................................. 56
Effect of Launch of Digital Compression Technology........ 56
CERTAIN LITIGATION.......................................... 58
DESCRIPTION OF TCI MUSIC CAPITAL STOCK...................... 58
TCI Music Common Stock.................................... 58
TCI Music Preferred Stock................................. 60
COMPARISON OF STOCKHOLDERS' RIGHTS.......................... 61
Authorized Capital Stock.................................. 61
Voting.................................................... 61
Special Meeting of Stockholders........................... 61
Directors................................................. 61
Removal of Directors...................................... 62
Vacancies on the Board of Directors....................... 62
Anti-Takeover Statute; Mergers, Consolidations and Sales
of Assets.............................................. 62
Amendments to Certificate of Incorporation................ 66
Amendments to Bylaws...................................... 66
Limitation of Liability of Directors and Officers......... 66
Preferred Stock........................................... 66
APPRAISAL RIGHTS............................................ 67
MANAGEMENT OF TCI MUSIC..................................... 69
Directors and Executive Officers.......................... 69
Board Composition......................................... 70
Committees of the Board................................... 70
Compensation of Directors................................. 70
Compensation of Executive Officers........................ 70
The TCI Music, Inc. 1997 Stock Incentive Plan............. 71
Other Arrangements........................................ 75
SECURITY OWNERSHIP OF TCI MUSIC AND DMX..................... 75
Security Ownership of TCI and TCI Music................... 75
Security Ownership of DMX................................. 79
CERTAIN TRANSACTIONS........................................ 82
LEGAL MATTERS............................................... 83
EXPERTS..................................................... 83
</TABLE>
INDEX TO FINANCIAL STATEMENTS
APPENDICES
Appendix I: Merger Agreement and Amendment One to Merger Agreement
Appendix II: Opinion of Houlihan Lokey Howard & Zukin
Appendix III: Section 262 of the Delaware General Corporation Act
Appendix IV: DMX Annual Report on Form 10-K and Quarterly Report on Form 10-Q
v
<PAGE> 11
INDEX OF CERTAIN DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
1995 Act.................................................... 14
Act......................................................... (ii)
Applicable Entity........................................... 41
ASCAP....................................................... 13
BMI......................................................... 13
Code........................................................ 5
Commission.................................................. (ii)
Company..................................................... 67
Component................................................... 41
Contributed Net DMX Revenues................................ (i)
Contributed Tuners.......................................... (i)
Contribution................................................ 2
Contribution Agreement...................................... (i)
DBS......................................................... 12
DGCL........................................................ 2
Digital Distribution........................................ 12
DMX......................................................... (i)
DMX Board................................................... (i)
DMX Bylaws.................................................. 4
DMX Charter................................................. 1,2
DMX Common Stock............................................ (i)
DMX Voting Stock............................................ 61
Effective Time.............................................. (i)
Exchange Act................................................ (ii)
Exchange Agent.............................................. 45
Exercise Period............................................. 41
Hart-Scott-Rodino Act....................................... 4
Houlihan Lokey.............................................. 3
Liberty..................................................... 15
Merger...................................................... (i)
Merger Agreement............................................ (i)
Merger Sub.................................................. (i)
Person...................................................... 59
Put......................................................... 22
Record Date................................................. 1
Registration Statement...................................... (ii)
Right....................................................... (i)
Rights Agreement............................................ (i)
SARs........................................................ 71
Satellite Distribution...................................... 56
SESAC....................................................... 13
Section 262................................................. 67
Series A TCI Group Common Stock............................. (i)
Services Agreement.......................................... 16
Shaw........................................................ 82
Special Committee........................................... 3
Special Meeting............................................. (i)
Surviving Corporation....................................... 2
</TABLE>
vi
<PAGE> 12
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Tax Sharing Agreement....................................... 16
TCI......................................................... (i)
TCIC........................................................ 21
TCI Board................................................... 4
TCI Loan.................................................... 6
TCI Music................................................... (i)
TCI Music Bylaws............................................ 18
TCI Music Charter........................................... 18
TCI Music Component......................................... 40
TCI Music Note.............................................. (i)
TCI Music Preferred Stock................................... 60
TCI Music Series A Common Stock............................. (i)
TCI Music Series B Common Stock............................. (i)
TCI Music Voting Stock...................................... 61
TCI-E....................................................... 21
TCI-E Merger................................................ 21
Termination Date............................................ 51
Tuner Distribution.......................................... 12
UAPI........................................................ 3
WTCI........................................................ 13
</TABLE>
vii
<PAGE> 13
SUMMARY
The following summary is intended only to highlight certain information
contained elsewhere in this Proxy Statement/Prospectus. This summary is not
intended to be complete and is qualified in its entirety by the more detailed
information contained elsewhere in this Proxy Statement/Prospectus, the
Appendices hereto and the documents incorporated by reference or otherwise
referred to herein. Stockholders are urged to review this entire Proxy
Statement/Prospectus carefully, including the Appendices hereto.
THE COMPANIES
TCI. TCI, through its subsidiaries and affiliates, is principally engaged
in the construction, acquisition, ownership and operation of cable television
systems and the provision of satellite-delivered video entertainment,
information and home shopping programming services to various distribution
media, principally cable television systems. TCI also has interests in cable and
telecommunications operations and television programming in certain
international markets, as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies. TCI believes that, measured by the number of
basic subscribers, it is the largest provider of cable television services in
the United States. TCI is a Delaware corporation and was incorporated in 1994.
Its executive offices are located at Terrace Tower II, 5619 DTC Parkway,
Englewood, Colorado 80111-3000; telephone (303) 267-5500. See "BUSINESS OF TCI."
DMX. DMX (formerly International Cablecasting Technologies Inc.) is
primarily engaged in programming, distributing and marketing a premium digital
music service, Digital Music Express(R) (DMX(R)), which provides continuous
24-hours-per-day commercial free, CD quality music programming. DMX is a
Delaware corporation and its executive offices are located at 11400 West Olympic
Boulevard, Suite 1100, Los Angeles, California 90064; telephone (310) 444-1744.
See "BUSINESS OF DMX."
TCI Music. TCI Music was incorporated in Delaware in January 1997 and is
currently a wholly owned subsidiary of TCI. Since its formation, TCI Music has
not conducted any significant activities other than those incident to its
formation, the Contribution Agreement, the Merger Agreement and the preparation
of this Proxy Statement/Prospectus. Following consummation of the Merger, TCI
Music's business will consist principally of the business of DMX prior to the
Merger. See "BUSINESS OF DMX." Immediately following the Merger (i) the
outstanding shares of TCI Music Series A Common Stock will represent
approximately 19.25% of, and 2.3% of the voting power related to, the total
outstanding shares of the TCI Music Series A Common Stock; and (ii) the
outstanding shares of TCI Music Series B Common Stock will represent
approximately 80.75% of, and 97.7% of the voting power related to, the total
outstanding shares of the TCI Music Common Stock. TCI will beneficially own
approximately 45.7% of the outstanding shares of TCI Music Series A Common Stock
and all of the outstanding shares of TCI Music Series B Common Stock, which will
collectively represent approximately 89.6% of the outstanding shares of TCI
Music Common Stock and 98.7% of the voting power of the outstanding shares of
TCI Music Common Stock. The executive offices of TCI Music are located at
Terrace Tower II, 5619 DTC Parkway, Englewood, Colorado 80111-3000; telephone
(303) 267-5500. See "CERTAIN INFORMATION CONCERNING TCI MUSIC."
THE SPECIAL MEETING
The Special Meeting will be held at DMX's executive offices located at
11400 West Olympic Boulevard, Suite 1100, Los Angeles, California, on Friday,
July 11, 1997, starting at 10:00 a.m., local time. At the Special Meeting,
holders of DMX Common Stock will be asked to approve and adopt the Merger
Agreement, which is summarized below and described in more detail elsewhere in
this Proxy Statement/Prospectus. See "THE MERGER AGREEMENT."
Holders of record of DMX Common Stock at the close of business on May 26,
1997 (the "Record Date") have the right to receive notice of and to vote at the
Special Meeting. Each share of DMX Common Stock is entitled to one vote on each
matter that is properly presented to stockholders for a vote at the Special
Meeting under the Amended and Restated Certificate of Incorporation of DMX, as
amended (the "DMX
<PAGE> 14
Charter"), and the Delaware General Corporation Law ("DGCL"). Pursuant to the
DGCL, the affirmative vote, in person or by proxy, of the holders of record of a
majority of the outstanding shares of DMX Common Stock entitled to vote at the
Special Meeting is required to approve and adopt the Merger Agreement. As of the
Record Date, (i) DMX's directors and executive officers beneficially owned
9,607,561 outstanding shares of DMX Common Stock (exclusive of any shares
issuable upon exercise of stock options exercisable on such date), representing
approximately 16.6% of the outstanding shares of DMX Common Stock on such date
and (ii) affiliates of TCI owned 27,249,575 outstanding shares of DMX Common
Stock, representing approximately 45.7% of the outstanding shares of DMX Common
Stock. Such persons, who together beneficially owned as of the Record Date
approximately 62.3% of the outstanding shares of DMX Common Stock, have
indicated they intend to vote all of their shares of DMX Common Stock in favor
of the Merger Agreement and the Merger. See "THE SPECIAL MEETING -- Voting
Rights; Votes Required for Approval."
If DMX's directors, executive officers and TCI's affiliates vote their
shares as they have indicated, the Merger Agreement will be approved and adopted
at the Special Meeting irrespective of the vote of any other stockholder of DMX.
Holders of shares of DMX Common Stock who comply with the applicable
procedural requirements of the DGCL are entitled to appraisal rights with
respect to their shares. A vote in favor of the Merger Agreement by a DMX
stockholder will preclude such stockholder from any right to exercise appraisal
rights under the DGCL, and may, under applicable law, estop such stockholder
from later challenging the Merger on fairness grounds. See "APPRAISAL RIGHTS"
in, and Appendix III to, the accompanying Proxy Statement/Prospectus.
THE MERGER
General; Consideration to be Received by DMX Stockholders. Pursuant to the
Merger Agreement, Merger Sub, an indirect wholly owned subsidiary of TCI Music,
will be merged with and into DMX with DMX as the surviving corporation of the
Merger (DMX or the "Surviving Corporation").
In connection with the Merger, TCI and TCI Music will enter into the
Contribution Agreement. Pursuant to the Contribution Agreement, effective as of
the closing of the Merger: (i) TCI Music will issue to TCI (as designee of
certain of its indirect subsidiaries) 62,500,000 shares of TCI Music Series B
Common Stock and a promissory note in the amount of $40,000,000, bearing
interest in the amount of 10% per annum, which interest will be waived by TCI if
the principal is paid in full at or before maturity, which will be 180 days
after the closing of the Merger (the "TCI Music Note"); (ii) until December 31,
2006 certain subsidiaries of TCI will transfer to TCI Music the Contributed Net
DMX Revenues; (iii) TCI will contribute the Contributed Tuners; and (iv) TCI
will grant to each stockholder who becomes a stockholder of TCI Music pursuant
to the Merger, one Right with respect to each whole share of TCI Music Series A
Common Stock acquired by such stockholder in the Merger pursuant to the terms of
the Rights Agreement. Each Right will entitle the holder to require TCI to
purchase from such holder one share of TCI Music Series A Common Stock for $8.00
per share (the equivalent of $2.00 per share of DMX Common Stock), subject to
reduction by the aggregate amount per share of any dividend and certain other
distributions, if any, made by TCI Music to its stockholders, and payable at the
election of TCI, in cash, a number of shares of Series A TCI Group Common Stock
having an equivalent value or a combination thereof, if during the one-year
period beginning on the effective date of the Merger, the price of TCI Music
Series A Common Stock does not equal or exceed $8.00 per share for a period of
at least 20 consecutive trading days. The foregoing transactions by TCI and
certain of its subsidiaries pursuant to the Contribution Agreement are referred
to as the "Contribution." Upon the occurrence of certain events, each Right will
also represent the additional right to require TCI to purchase equity interests
of another entity or entities. If the Rights become exercisable, they will be
exercisable only during the 30-day period commencing on the date of the first
anniversary of the closing of the Merger and, unless exercised, will expire and
cease to exist at the end of such period. See "ARRANGEMENTS BETWEEN TCI AND TCI
MUSIC AFTER THE MERGER -- Contribution Agreement" and "THE MERGER
AGREEMENT -- Summary of Rights Agreement."
2
<PAGE> 15
Upon consummation of the Merger, each outstanding share of DMX Common Stock
will be converted into the right to receive (i) one-quarter share of TCI Music
Series A Common Stock, (ii) one Right with respect to each whole share of TCI
Music Series A Common Stock and (iii) cash in lieu of fractional shares of TCI
Music Series A Common Stock and Rights. Until the Rights expire or are
exercised, the Rights will be evidenced by a legend on the certificates for
shares of TCI Music Series A Common Stock issued in the Merger. Accordingly, the
Rights associated with the shares of TCI Music Series A Common Stock will be
represented solely by, and will not be separable from, such shares of TCI Music
Series A Common Stock, and the surrender or transfer of any such certificate for
shares of TCI Music Series A Common Stock will also constitute the surrender or
transfer of the Rights associated with the TCI Music Series A Common Stock
represented by such certificate. Upon exercise of the Rights, the shares of TCI
Music Series A Common Stock associated with the Rights will be transferred to
TCI in exchange for cash and/or shares of Series A TCI Group Common Stock as
described above. See "THE MERGER AGREEMENT -- Consideration to be Received in
the Merger -- General" and "-- Summary of Rights Agreement." For a description
of the TCI Music Series A Common Stock, see "DESCRIPTION OF TCI MUSIC CAPITAL
STOCK." For a summary of differences between the rights of holders of TCI Music
Series A Common Stock and the rights of holders of DMX Common Stock, see
"COMPARISON OF STOCKHOLDERS' RIGHTS."
As holders of shares of DMX Common Stock, Liberty DMX, Inc., an indirect
wholly owned subsidiary of TCI, United Artists Programming International, Inc.,
an indirect majority-owned subsidiary of TCI ("UAPI"), TCI Pacific
Communications, Inc., an indirect wholly owned subsidiary of TCI, and TCI Music
Holdings, Inc., a wholly owned subsidiary of TCI, will each receive one-quarter
share of TCI Music Series A Common Stock and one Right with respect to each
whole share of TCI Music Series A Common Stock in exchange for each share of DMX
Common Stock they own at the Effective Time. If the Merger had occurred as of
March 31, 1997 an aggregate of 6,812,393 shares of TCI Music Series A Common
Stock and 6,812,393 Rights would have been issued to entities controlled by TCI
in exchange for shares of DMX Common Stock held by such entities. In addition,
certain subsidiaries of TCI will be issued 62,500,000 shares of TCI Music Series
B Common Stock, and TCI Music, as obligor, will issue TCI, as obligee, the TCI
Music Note. TCI Music expects to refinance the TCI Music Note with proceeds of a
new long-term debt financing. No assurance can be given that TCI Music will be
able to obtain such financing on terms acceptable to TCI Music. See
"ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER -- Contribution
Agreement."
Opinion of Financial Advisor. Houlihan Lokey Howard & Zukin ("Houlihan
Lokey") was retained by a special committee of independent directors of the DMX
Board (the "Special Committee") to act as its financial advisor and to render an
opinion as to the fairness to DMX's public stockholders of the consideration to
be received by such stockholders in connection with the Merger. On January 20,
1997, prior to the execution of the Merger Agreement, Houlihan Lokey rendered to
the DMX Board an oral opinion, subsequently confirmed in writing on February 6,
1997, to the effect that, as of the date of such opinion and based upon and
subject to certain matters, the consideration to be received in the Merger by
holders of DMX Common Stock was fair, from a financial point of view, to such
holders.
DMX stockholders are urged to read carefully the opinion of Houlihan Lokey,
which is set forth in its entirety as Appendix II to this Proxy
Statement/Prospectus, for a description of the procedures followed, the factors
considered and the assumptions made by Houlihan Lokey in rendering its opinion.
See "THE MERGER -- Opinion of Financial Advisor."
Recommendation of the DMX Board; DMX's Reasons for the Merger. On January
20, 1997, the Special Committee unanimously recommended and the DMX Board (other
than Messrs. Hindery and Fisher, who did not vote on the Merger, and Mr.
Sparkman, who did not attend the meeting (each of whom have been recommended to
the DMX Board by TCI)) approved the Merger Agreement and the Merger, and
determined that the terms of the Merger Agreement are fair to, and that the
Merger is in the best interests of, DMX and its stockholders and therefore
recommends that the holders of DMX Common Stock vote FOR approval of the Merger
Agreement. The primary factors considered and relied upon by the DMX Board in
reaching its recommendation are described in "THE MERGER -- Recommendation of
the DMX Board;
3
<PAGE> 16
DMX's Reasons for the Merger." For a discussion of the interests of certain
members of DMX's management and the DMX Board in the Merger, see "THE
MERGER -- Interests of Certain Persons in the Merger."
TCI's Reasons for the Merger. The Board of Directors of TCI ("TCI Board")
has unanimously approved the Merger Agreement. The primary factors considered
and relied upon by the TCI Board in reaching its decision to approve the Merger
are described in "THE MERGER -- TCI's Reasons for the Merger."
Conditions to the Merger. The respective obligations of DMX and TCI and
TCI Music 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 DMX
Common Stock; (ii) no more than 5% of the number of DMX stockholders of record
have demanded appraisal rights in accordance with Section 262 of the Delaware
General Corporation Law, attached as Appendix III to this Proxy
Statement/Prospectus; (iii) the waiting period applicable to the consummation of
the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "Hart-Scott-Rodino Act") shall have expired, or been earlier
terminated and any other notices or approvals or consents required by or of
governmental entities, to the extent required to be obtained under the Merger
Agreement, shall have been either filed or obtained; and (iv) 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. In addition, the
obligations of DMX, TCI and TCI Music to effect the Merger are subject to the
satisfaction of certain other conditions. See "THE MERGER
AGREEMENT -- Conditions to the Merger," and "Governmental Approvals" and
"APPRAISAL RIGHTS."
Termination of the Merger Agreement. The Merger Agreement is subject to
termination at the option of either DMX or TCI (i) if the Merger has not been
consummated on or before July 31, 1997, so long as the party seeking to
terminate the Merger Agreement has not breached its obligations under the Merger
Agreement in any material respect or (ii) if the stockholders of DMX shall not
have approved the Merger by such date. The Merger Agreement also is subject to
termination by either TCI or DMX prior to such time upon the occurrence of
certain events. See "THE MERGER AGREEMENT -- Termination; Amendment and Waiver."
Indemnification. The Merger Agreement provides that TCI Music will cause
the Surviving Corporation to indemnify, and should the Surviving Corporation
fail to or be unable to do so, TCI Music will indemnify, the directors and
officers of DMX for a period after the Effective Time to the fullest extent
permitted by the DGCL, the DMX Charter and the bylaws of DMX (the "DMX Bylaws")
in effect on the date of the Merger Agreement. See "THE MERGER
AGREEMENT -- Indemnification."
ACCOUNTING TREATMENT
The Merger and Contribution will be accounted for using the purchase method
of accounting except that any TCI Music Common Stock and any Rights issued to
entities controlled by TCI will be recorded at carryover basis. See the
condensed pro forma combined financial statements and notes thereto of TCI Music
appearing under the heading "INDEX TO FINANCIAL STATEMENTS."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the DMX Board with respect to the
Merger, stockholders should be aware that certain members of the DMX Board and
of DMX management have certain interests in the Merger that are in addition to
or different from the interests of the stockholders of DMX generally. See "THE
MERGER -- Interests of Certain Persons in the Merger." The DMX Board was aware
of these interests and considered them, among other matters, in approving the
Merger Agreement.
4
<PAGE> 17
APPRAISAL RIGHTS
Holders of shares of DMX Common Stock who comply with the applicable
procedural requirements of the DGCL are entitled to appraisal rights with
respect to their shares. A vote in favor of the Merger Agreement by a DMX
stockholder will preclude such stockholder from any right to exercise appraisal
rights under the DGCL, and may, under applicable law, estop such stockholder
from later challenging the Merger on fairness grounds. See "APPRAISAL RIGHTS"
in, and Appendix III to, the accompanying Proxy Statement/Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The Contribution and Merger are intended to qualify as transactions
described in Section 351 of the Internal Revenue Code of 1986, as amended (the
"Code"). See "CERTAIN CONSEQUENCES OF THE MERGER -- Certain Federal Income Tax
Consequences."
COMPARATIVE MARKET PRICE DATA
DMX. The DMX Common Stock is quoted on the OTC Bulletin Board. From May
28, 1996 to April 8, 1997, the DMX Common Stock was quoted in the NASDAQ
SmallCap Market under the symbol "TUNE." Until May 28, 1996, the DMX Common
Stock was traded on the NASDAQ National Market System.
The following table sets forth the range of the high and low sales prices
of DMX Common Stock for the periods indicated. DMX's fiscal year ends on
September 30.
<TABLE>
<CAPTION>
COMMON STOCK HIGH LOW
- - ------------ ---- ---
<S> <C> <C>
Year ended September 30, 1995
First Quarter............................................. 3 1 1/2
Second Quarter............................................ 4 2 7/16
Third Quarter............................................. 3 3/8 2
Fourth Quarter............................................ 3 5/16 2 1/8
Year ended September 30, 1996
First Quarter............................................. 3 2 1/8
Second Quarter............................................ 2 7/8 1 3/4
Third Quarter............................................. 2 1/4 13/16
Fourth Quarter............................................ 1 15/16 9/16
Year ending September 30, 1997
First Quarter............................................. 15/16 13/16
Second Quarter............................................ 1 13/16 31/32
Third Quarter (to June 11, 1997).......................... 2 1 13/20
</TABLE>
TCI Music. There is no established public trading market for TCI Music
Common Stock. Only one share of capital stock of TCI Music is issued and
outstanding, which has been issued to TCI. The TCI Music Series A Common Stock
has been approved by NASDAQ for inclusion for trading on its SmallCap Market
upon consummation of the Merger, subject to the condition that the TCI Music
Series A Common Stock trade at a price of $3.00 or more for the first five
trading days after the Merger. See "CERTAIN INFORMATION CONCERNING TCI MUSIC."
On August 30, 1996, the last full trading day prior to the public
announcement of TCI's Merger proposal, the high and low sales prices on the
NASDAQ SmallCap Market for the DMX Common Stock were $1 1/8 and $1 1/16,
respectively. On January 21, 1997, the last full trading day before DMX publicly
announced that the DMX Board had approved the Merger, the high and low sales
prices on the NASDAQ SmallCap Market for shares of DMX Common Stock were
$1 17/64 and $1 13/32, respectively. On February 6, 1997, the last full trading
day before TCI and DMX publicly announced that they had entered into the Merger
Agreement, the high and low sales prices on the NASDAQ SmallCap Market for
shares of DMX Common Stock were $1 11/16. On June 11, 1997, the last full
trading day before the date of this Proxy Statement/Prospectus, the high and
5
<PAGE> 18
low sales prices on the OTC Bulletin Board for shares of DMX Common Stock were
$1.73 and $1.71, respectively. Stockholders are urged to obtain current market
quotations for the DMX Common Stock.
RELATIONSHIP BETWEEN TCI AND TCI MUSIC AFTER THE MERGER
TCI Music is currently a wholly owned subsidiary of TCI. Immediately
following the Merger (i) the outstanding shares of TCI Music Series A Common
Stock will represent approximately 19.25% of, and 2.3% of the voting power
related to, the total outstanding shares of the TCI Music Common Stock; and (ii)
the outstanding shares of TCI Music Series B Common Stock will represent
approximately 80.75% of, and 97.7% of the voting power related to, the total
outstanding shares of the TCI Music Common Stock. TCI will beneficially hold
approximately 45.7% of the outstanding shares of TCI Music Series A Common Stock
and all of the outstanding shares of TCI Music Series B Common Stock, which will
collectively represent approximately 89.6% of the outstanding shares of TCI
Music Common Stock and 98.7% of the voting power of the outstanding shares of
TCI Music Common Stock. Under agreements with TCI Music, TCI will provide
certain administrative, legal, financial, treasury, accounting, tax and other
services to TCI Music and will make available certain of its employee benefit
plans to TCI Music's employees. In addition, TCI and TCI Music will enter into a
number of intercompany agreements covering such matters as the use of services
and allocation of income tax liabilities.
In addition, in connection with the Merger, TCI and TCI Music will enter
into the Contribution Agreement. Pursuant to the Contribution Agreement, certain
subsidiaries of TCI will transfer to TCI Music, effective as of the Effective
Time and until December 31, 2006, the right to receive the Contributed Net DMX
Revenues and TCI will contribute to TCI Music the Contributed Tuners.
If the Contribution had been effective as of January 1, 1996, the total
amount of Contributed Net DMX Revenues for the three months ended March 31, 1997
and the year ended December 31, 1996 would have been approximately $4.4 million
and $16.4 million, respectively. Additionally, the book value of the Contributed
Tuners at March 31, 1997 was approximately $4.5 million. The launch by TCI and
other cable operators of video and audio programming using digital compression
technology may materially reduce the Contributed Net DMX Revenues and subscriber
fee revenues of TCI Music. See "RISK FACTORS -- Effect of Launch of Digital
Compression Technology on Contributed Net DMX Revenues and Other Revenues" and
"CERTAIN INFORMATION CONCERNING TCI MUSIC -- Effect of Launch of Digital
Compression Technology."
Pursuant to the Contribution Agreement, effective as of the closing of the
Merger, TCI Music, as obligor, will issue to TCI the TCI Music Note in the
principal amount of $40,000,000 payable to the order of TCI, as obligee, bearing
interest at 10% per annum, which interest will be waived by TCI if the principal
is paid in full at or before maturity, which will be 180 days after the closing
of the Merger. TCI Music expects to refinance the TCI Music Note with proceeds
of a new long-term debt financing. No assurance can be given that TCI Music will
be able to obtain such financing on terms acceptable to TCI Music.
In addition, TCI and DMX have entered into a Loan and Security Agreement,
as amended (the "TCI Loan"), pursuant to which TCI has agreed to make loans to
DMX from time to time until August 31, 1997 up to an aggregate outstanding
principal amount of $3,500,000. Such loans are due on or before June 1, 2000 and
accrue interest at a rate of 12.5% per annum. As of June 4, 1997, TCI had made
approximately $2,420,000 in loans to DMX under the TCI Loan.
See "RISK FACTORS -- Relationship with TCI," "RISK FACTORS -- Disparate
Voting Rights; Control by TCI," "RISK FACTORS -- Potential Conflicts of
Interest" and "ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER."
DIVIDEND POLICY
TCI Music does not anticipate declaring and paying cash dividends on the
TCI Music Common Stock in the foreseeable future. The decision whether to apply
any legally available funds to the payment of dividends
6
<PAGE> 19
on TCI Music Common Stock will be made by the Board of Directors of TCI Music
from time to time in the exercise of its business judgment, taking into account
TCI Music's financial conditions, results of operations, existing and proposed
commitments for use of TCI Music's funds and other relevant factors. See
"DESCRIPTION OF TCI MUSIC CAPITAL STOCK -- Common Stock -- Dividends."
TRANSFER AGENT
The transfer agent for the TCI Music Common Stock will be The Bank of New
York.
RISK FACTORS AND FORWARD-LOOKING STATEMENTS
In reviewing this Proxy Statement/Prospectus, stockholders should carefully
consider the matters described under the heading "Risk Factors" beginning on
page 12.
This Proxy Statement/Prospectus contains statements relating to future
results of DMX and TCI Music that are "forward-looking statements" as defined in
the Private Securities Litigation Reform Act of 1995. When used in this Proxy
Statement/Prospectus, the words "estimate," "project," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those contemplated in such forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Such risks
and uncertainties include those detailed from time to time in the filings of DMX
with the Commission and those risks and uncertainties described under the
heading "Risk Factors" appearing on page 12. The "safe harbor" for
forward-looking statements provided by the Private Securities Litigation Reform
Act of 1995 will not be available to TCI Music with respect to the offering of
TCI Music Series A Common Stock made hereby.
7
<PAGE> 20
SUMMARY SELECTED FINANCIAL AND OTHER DATA
CERTAIN COMPARATIVE PER SHARE DATA
The following table sets forth certain comparative data related to book
value (deficit) and loss per common share (i) on a historical basis for TCI
Music and DMX, (ii) on a pro forma basis for TCI Music and (iii) on a pro forma
equivalent basis for DMX. The pro forma information shown is derived from the
condensed pro forma combined financial statements of TCI Music presented
elsewhere herein, which give effect to the Merger and Contribution as if such
events had occurred as of March 31, 1997 with respect to the pro forma balance
sheet data. The pro forma operating data give effect to the Merger and
Contribution as if such events had occurred as of January 1, 1996. The
information shown below should be read in conjunction with the historical
financial statements and notes thereto of DMX, which are included in Appendix IV
of this Proxy Statement/Prospectus, and the condensed pro forma financial
statements and notes thereto of TCI Music appearing elsewhere herein. See
"INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and "INDEX TO FINANCIAL
STATEMENTS." DMX did not pay any cash dividends on its common stock during the
three months ended March 31, 1997 and the year ended December 31, 1996. See
"DESCRIPTION OF TCI MUSIC CAPITAL STOCK -- Dividends."
<TABLE>
<CAPTION>
DMX
TCI MUSIC DMX TCI MUSIC PRO FORMA
HISTORICAL(1) HISTORICAL PRO FORMA EQUIVALENTS(4)
------------- ---------- --------- --------------
<S> <C> <C> <C> <C>
Book value (deficit) per common share as of
March 31, 1997............................. $1.00 $ (.15) $ .53(2) $ .13
Primary and fully diluted loss attributable
to common stockholders per common and
common equivalent share:
Three months ended March 31, 1997.......... -- (.06) (.08)(3) (.02)
Year ended December 31, 1996............... -- (.57) (.54)(3) (.14)
</TABLE>
- - ---------------
(1) TCI Music was formed on January 21, 1997. Since its formation TCI Music has
not conducted any significant activities other than those incident to its
formation, the Contribution Agreement and the Merger Agreement.
(2) The pro forma book value per common share is based upon 14,896,648 shares of
TCI Music Series A Common Stock and 62,500,000 shares of TCI Music Series B
Common Stock. Such amounts represent the number of shares that would have
been issued by TCI Music if the Merger and Contribution had occurred on
March 31, 1997.
(3) The pro forma net loss per share calculation is based upon 77,396,648 and
75,923,829 weighted average shares outstanding for the three months ended
March 31, 1997 and the year ended December 31, 1996, respectively. Such
amounts represent the number of weighted average shares of TCI Music that
would have been outstanding if the Merger and Contribution had occurred on
January 1, 1996.
(4) DMX pro forma equivalents are determined by multiplying TCI Music pro forma
book value and pro forma loss per share times the 0.25 conversion ratio. See
"THE MERGER AGREEMENT -- Consideration to be Received in the
Merger -- General."
SELECTED HISTORICAL FINANCIAL DATA
DMX. The following table sets forth selected historical financial data for
DMX and subsidiaries (i) as of March 31, 1997 and for each of the six-month
periods ended March 31, 1997 and 1996 and (ii) as of and for each of the years
in the five-year period ended September 30, 1996. The selected financial data as
of March 31, 1997 and for the six-month periods ended March 31, 1997 and 1996
are derived from the unaudited financial statements appearing in Appendix IV
which have been prepared on the same basis as the audited financial information,
and in the opinion of management, contain all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
position and results of operations of DMX as of March 31, 1997 and for the
six-month periods ended March 31, 1997 and 1996. The following information is
qualified in its entirety by, and should be read in conjunction with, the
consolidated financial statements and notes thereto of DMX, included as Appendix
IV to this Proxy Statement/Prospectus and with the condensed pro forma combined
financial statements and notes thereto of TCI Music and TCI appearing elsewhere
in this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "INDEX TO FINANCIAL STATEMENTS."
8
<PAGE> 21
DMX INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31, FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------- -------------------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue...................... $ 10,801,467 7,632,763 17,326,603 12,773,384 9,377,059 4,792,527 773,861
Operating, selling, general
and administrative
expenses................... (17,390,149) (12,672,247) (30,460,622) (22,166,898) (20,558,849) (17,726,103) (27,306,904)
Depreciation and
amortization............... (1,193,713) (805,762) (1,883,415) (1,341,775) (1,065,666) (790,229) (565,694)
Loss on disposal of
DMX-Europe N.V............. -- -- (7,153,278) -- -- -- --
------------ ----------- ----------- ----------- ----------- ----------- -----------
Net operating loss........... (7,782,395) (5,845,246) (22,170,712) (10,735,289) (12,247,456) (13,723,805) (27,098,737)
Equity earnings in
Galactic/TEMPO............. 172,003 31,241 197,227 306,640 223,852 143,622 283,889
Equity loss in DMX-Europe
N.V........................ -- (9,486,767) (11,852,650) (13,271,599) (4,746,239) (3,553,932) --
Interest income (expense),
net........................ (220,004) (25,409) (188,507) 73,540 38,168 85,943 482,974
Other income (expense),
net........................ (601) 137,080 159,865 547,179 226,461 640,197 (108,530)
------------ ----------- ----------- ----------- ----------- ----------- -----------
Net loss............. $ (7,830,997) (15,189,101) (33,854,777) (23,079,529) (16,505,214) (16,407,975) (26,440,404)
============ =========== =========== =========== =========== =========== ===========
Loss per share....... $ (.13) (.35) (0.68) (0.60) (0.48) (0.52) (0.90)
============ =========== =========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF SEPTEMBER 30,
MARCH 31, ------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Current assets...................... $ 8,144,450 7,719,069 12,122,658 9,650,493 3,102,741 10,972,178
Investments in Galactic/TEMPO Sound
Partnership....................... 526,159 504,156 456,929 450,289 476,448 332,826
Property and equipment, net of
accumulated depreciation.......... 5,193,212 5,893,988 4,336,378 4,443,995 3,225,093 2,388,227
Goodwill, net of accumulated
amortization...................... 4,275,264 4,535,658 -- -- 15,459 41,960
Other assets, net of accumulated
depreciation...................... 108,271 99,148 166,419 55,169 54,000 219,141
------------ ------------ ------------ ------------ ------------ ------------
Total assets................ $ 18,247,356 18,752,019 17,082,384 14,599,946 6,873,741 13,954,332
============ ============ ============ ============ ============ ============
Current liabilities................. $ 22,228,834 16,636,107 3,250,042 3,405,082 3,714,835 3,198,719
Royalty payable..................... 1,773,275 1,773,275 1,251,983 713,421 267,770 37,162
Deferred revenue.................... 258,531 295,461 376,395 418,540 -- --
Capital lease obligation............ 1,170,242 1,401,426 1,446,085 1,502,990 -- --
Notes payable....................... 1,867,791 -- -- 201,090 382,545 --
Investment in DMX-Europe N.V........ -- -- 15,886,116 8,175,171 3,428,932 --
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities........... 27,298,673 20,106,269 22,210,621 14,416,294 7,794,082 3,235,881
Net stockholders' (deficit)
equity............................ (9,051,317) (1,354,250) (5,128,237) 183,652 (920,341) 10,718,451
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity
(deficit)................. $ 18,247,356 18,752,019 17,082,384 14,599,946 6,873,741 13,954,332
============ ============ ============ ============ ============ ============
</TABLE>
9
<PAGE> 22
TCI. The following table sets forth (i) selected historical data for TCI
as of March 31, 1997 and for the three-month periods ended March 31, 1997 and
1996, and as of and for each of the five fiscal years in the period ended
December 31, 1996 and (ii) selected pro forma data as of March 31, 1997 and for
the three months ended March 31, 1997 and the year ended December 31, 1996. The
pro forma summary balance sheet data assumes the Merger and Contribution had
occurred as of March 31, 1997. The pro forma summary of operations data for the
three months ended March 31, 1997 assumes that the Merger and Contribution had
occurred as of January 1, 1996 and the pro forma summary of operations data for
the year ended December 31, 1996 assumes that the Merger and Contribution, the
distribution of all of the outstanding common stock of TCI Satellite
Entertainment, Inc. and the acquisition of all of the common stock of a
subsidiary of Viacom, Inc. had occurred as of July 1, 1996. The pro forma data
does not purport to be indicative of the results of operations or financial
position that would have been obtained had such transactions occurred on such
dates. The following information is qualified in its entirety by, and should be
read in conjunction with, the consolidated financial statements and notes
thereto of TCI incorporated by reference into this Proxy Statement/Prospectus
and the Condensed Pro Forma Combined Financial Statements and notes thereto of
TCI, appearing elsewhere herein. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "INDEX TO FINANCIAL STATEMENTS."
<TABLE>
<CAPTION>
PRO PRO
FORMA HISTORICAL FORMA HISTORICAL
------ ------------- ------ -----------------------------------------
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
---------------------- --------------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ----- ----- ------ ------ ------ ----- ----- -----
AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS DATA:
Revenue......................................... $1,833 1,827 1,861 7,943 8,022 6,506 4,682 3,977 3,463
Operating income................................ $ 343 349 172 794 632 542 788 916 864
Interest expense................................ $ (289) (289) (261) (1,171) (1,096) (1,010) (785) (731) (718)
Share of losses of affiliates, other than
Liberty Media Corporation, net................ $ (154) (156) (115) (459) (473) (193) (112) (76) (105)
Gain (loss) on disposition of assets............ $ 19 19 10 1,593 1,593 49 (10) 42 9
Earnings (loss) from continuing operations...... $ (62) (58) (121) 306 278 (171) 62 (5) 8
Net earnings (loss) attributable to common
stockholders:
TCI Class A and Class B common stock.......... $ -- -- -- -- -- (71)(b) 54 (7) (22)
TCI Group Stock(a)............................ (88) (84) (145) (793) (813) (107)(c) -- -- --
Liberty Group Stock(a)........................ 16 16 15 1,064 1,056 (27)(c) -- -- --
------ ----- ----- ------ ------ ------ ----- ----- -----
$ (72) (68) (130) 271 243 (205) 54 (7) (22)
====== ===== ===== ====== ====== ====== ===== ===== =====
Primary earnings (loss) from continuing
operations attributable to common stockholders
per common and common equivalent share:
TCI Class A and Class B common stock.......... $ -- -- -- -- -- (.11)(b) .10 (.02) (.01)
TCI Group Stock............................... (.13) (.12) (.22) (1.19) (1.22) (.16)(c) -- -- --
Liberty Group Stock........................... .06 .06 .06 4.00 3.97(d) (.11)(c)(d) -- -- --
Fully diluted earnings (loss) from continuing
operations attributable to common stockholders
per common and common equivalent share:
TCI Class A and Class B common stock.......... -- -- -- -- -- (.11)(b) .10 (.02) (.01)
TCI Group Stock............................... (.13) (.12) (.22) (1.19) (1.22) (.16)(c) -- -- --
Liberty Group Stock........................... .06 .06 .06 3.91 3.88(d) (.11)(c)(d) -- -- --
</TABLE>
10
<PAGE> 23
<TABLE>
<CAPTION>
PRO
FORMA HISTORICAL
------- ---------------------------------------------------
MARCH 31, DECEMBER 31,
---------------- ------------------------------------------
1997 1997 1996 1995 1994 1993 1992
------- ------ ------ ------ ------ ------ ------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Property and equipment, net..................... $ 7,693 7,688 7,528 7,409 5,876 4,935 4,562
Franchise costs, net............................ $17,004 15,911 15,436 12,230 9,444 9,197 9,300
Total assets.................................... $30,815 30,676 30,244 25,577 19,276 16,527 16,315
Debt............................................ $15,052 15,049 14,926 13,211 11,162 9,900 10,285
Minority interests in equity of consolidated
subsidiaries.................................. $ 1,409 1,349 1,493 651 429 285 280
Redeemable preferred stock...................... $ 655 655 658 478 170 18 110
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely subordinated debt securities of
TCI Communications, Inc....................... $ 1,502 1,502 1,000 -- -- -- --
Stockholders' equity............................ $ 4,422 4,422 4,253 4,550 2,655 2,116 1,728
Shares outstanding (net of shares held by
subsidiaries):
Class A common stock.......................... -- -- -- -- 491 403 382
Class B common stock.......................... -- -- -- -- 85 47 48
Series A TCI Group Stock...................... 598 598 579 572 -- -- --
Series B TCI Group Stock...................... 85 85 85 85 -- -- --
Series A Liberty Group Stock.................. 229 229 228(e) 225(e) -- -- --
Series B Liberty Group Stock.................. 21 21 21 21 -- -- --
</TABLE>
- - ---------------
(a) On August 3, 1995, the stockholders of TCI authorized the TCI Board to issue
two new series of stock ("Liberty Group Stock") which reflect the separate
performance of TCI's business which produces and distributes cable
television programming services ("Liberty Media Group"). Additionally, the
stockholders of TCI approved the redesignation of the previously authorized
TCI Class A and Class B common stock into Series A TCI Group and Series B
TCI Group common stock ("TCI Group Stock"). On August 10, 1995, TCI
distributed, in the form of a dividend, one share of Liberty Group Stock for
each four shares of TCI Group Stock owned. Such distribution (the
"Distribution") represented one hundred percent of the equity value
attributable to Liberty Media Group. The TCI Group Stock reflects the
performance of those businesses of the Company not attributed to Liberty
Media Group.
(b) From January 1, 1995 through the date of the Distribution.
(c) From the date of the Distribution through December 31, 1995.
(d) Effective January 13, 1997, TCI issued a stock dividend to holders of
Liberty Group Stock consisting of one share of Series A Liberty Group Stock
for every two shares of Series A Liberty Group Stock owned and one share of
Series A Liberty Group Stock for every two shares of Series B Liberty Group
Stock owned (the "Liberty Group Stock Dividend"). Amount has been adjusted
to give effect to the Liberty Group Stock Dividend.
(e) Adjusted to give effect to the Liberty Group Stock Dividend.
11
<PAGE> 24
PROXY STATEMENT/ PROSPECTUS
RISK FACTORS
In deciding how to vote their shares at the Special Meeting, holders of
shares of DMX Common Stock should carefully consider all of the information
contained in this Proxy Statement/Prospectus and, in particular, the following
factors:
UNPROFITABLE HISTORY OF DMX; GOING CONCERN CONSIDERATIONS
Following consummation of the Merger, TCI Music's business will consist
primarily of the business operations conducted by DMX prior to the Merger. DMX's
predecessor began its basic audio operations in 1990 and, since its formation,
DMX has experienced significant losses. Net operating losses were $7.8 million
for the six months ended March 31, 1997 and were $22.2 million, $10.7 million
and $12.2 million for the fiscal years ended September 30, 1996, 1995 and 1994,
respectively. In addition, in connection with its audit of the financial
statements for the fiscal year ended September 30, 1996, KPMG Peat Marwick LLP
stated that DMX's recurring losses from operations and its net capital
deficiency raised substantial doubt about its ability to continue as a going
concern. See "SUMMARY SELECTED FINANCIAL AND OTHER DATA," "CERTAIN INFORMATION
CONCERNING TCI MUSIC", "INDEX TO FINANCIAL STATEMENTS," and APPENDIX IV.
LIMITED LIQUIDITY AND CAPITAL RESOURCES
DMX has limited capital resources and has been operating under severe cash
flow constraints. DMX's historical operations have been funded primarily by
sales of DMX Common Stock. DMX generally has not generated cash from operating
activities and accordingly, TCI Music will require additional sources of working
capital. TCI Music expects that the Contributed Net DMX Revenues will be a
source of funds that is not currently available to DMX. However, the
Contribution Agreement does not require that any specified or minimum amount be
contributed to TCI Music. Accordingly, there can be no assurance that the
Contributed Net DMX Revenues will continue at current historical levels or that
TCI Music will be able to successfully address DMX's potential short and long
term cash needs. See "-- Unprofitable History of DMX" and "-- Effect of Launch
of Digital Compression Technology on Contributed Net DMX Revenues and License
Fees."
EFFECT OF LAUNCH OF DIGITAL COMPRESSION TECHNOLOGY ON CONTRIBUTED NET DMX
REVENUES AND LICENSE FEES
Cable operators have recently begun to launch a new method of distributing
video and other programming using digital compression technology. Digital
compression technology digitizes hundreds of television channels, compressing,
on average, as many as 14 of the current analog video signals into the space
normally occupied by one. Such technology improves picture quality and allows
for carriage of significantly more video product offerings and channels
("Digital Distribution"). The technology permits subscribers to receive video
and music signals through a single standard set-top tuner or "box" without the
use of a separate tuner for music, as is the case with the current distribution
system whereby DMX music signals are delivered directly to cable operators by
C-band for distribution to residential and commercial cable subscribers ("Tuner
Distribution").
The launch of digital compression technology has the potential to provide
an additional distribution market for DMX music services if cable operators
utilizing Digital Distribution, such as TCI, elect to offer DMX music services
as part of one or more digital video programming packages, thereby capturing as
subscribers customers who might not otherwise elect to subscribe to DMX music
services on an a la carte basis. However, the launch of and the transition to
Digital Distribution may also have the effect of materially reducing TCI Music's
residential subscriber fee revenues and Contributed Net DMX Revenues as a result
of the expected change from the a la carte fee structure currently in effect for
Tuner Distribution to a fee structure similar to that in effect for distribution
of DMX music services via direct broadcast satellite ("DBS") dishes directly or
as part of a package delivered by DBS distributors. See "CERTAIN INFORMA-
12
<PAGE> 25
TION CONCERNING TCI MUSIC -- Effect of Launch of Digital Compression
Technology -- Potential Effects on DMX and TCI Music Residential Subscriber Fee
Revenues."
In addition, TCI Music expects that Tuner Distribution will continue to be
available in markets where Digital Distribution has not been introduced.
However, because Tuner Distribution currently utilizes more of the cable
spectrum than is now used to deliver one video channel, it is likely that some
of such cable operators may determine to eliminate Tuner Distribution of DMX
music services in certain markets to recover or maintain channel capacity for
Digital Distribution. If TCI or any cable operator terminates Tuner Distribution
in any system, all revenues from residential and commercial subscribers
receiving Tuner Distribution DMX music services in such system would terminate,
unless such residential subscribers elect to purchase a video and music
programming package through Digital Distribution, and Digital Distribution and
other distribution means were made available to commercial subscribers.
Accordingly, DMX's and TCI Music's revenues could be materially adversely
affected if Tuner Distribution were terminated by cable operators. See "CERTAIN
INFORMATION CONCERNING TCI MUSIC -- Effect of Launch of Digital Compression
Technology -- Potential Elimination of Current Distribution Outlet."
DEPENDENCE ON SATELLITE DELIVERY CAPABILITIES
There are a limited number of satellites with orbital positions suitable
for transmission of DMX's signals and a limited number of available transponders
on those satellites. Satellite transponders receive signals, translate signal
frequencies and transmit signals to receiving satellite dish antennas. DMX
subleases transponder capacity from Western Tele-Communications, Inc., a
subsidiary of TCI ("WTCI"), which also provides facilities for uplink
transmission of DMX's signals to the transponders. WTCI, in turn, leases the
satellite transponder capacity on the Satellite known as Satcom C-3, Transponder
24 from GE American Communications, Inc., and the satellite known as AT&T
Telstar 402R from AT&T Skynet. The term of DMX's principal transponder sublease
with WTCI for the Satcom satellite runs through the end of the life of that
satellite or April 2005, whichever is earlier. The term of DMX's transponder
sublease with WTCI for the AT&T Telstar 402R runs through February 2000.
Although there has never been sustained interruption of DMX's signals due to
transponder failure or satellite unavailability, failure or loss, no assurance
can be given that any such event will not occur in the future. If such an event
were to occur or if WTCI were unable to provide transponder services to DMX, DMX
would have to seek alternative transponder or satellite facilities. However,
alternative facilities may not be available on a timely or cost-effective basis
and may require the expense of repositioning each DBS subscriber's satellite
dish in order to receive signals from another satellite. Any one or more of
these events would require DMX to incur additional expenditures and could
degrade DMX's ability to serve its customer base and have a material adverse
effect on DMX's financial condition and results of operations. If DMX is
required to enter into new transponder lease agreements, no assurance can be
given that it will be able to do so on terms as favorable as those in its
current agreements with WTCI.
DEPENDENCE ON LICENSED RIGHTS; RISK OF INCREASED FEES
DMX licenses rights to rerecord and distribute music from a variety of
sources and pays royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and
the Society of European Stage Authors and Composers ("SESAC"). DMX has separate
agreements with ASCAP, BMI and SESAC for residential and commercial
distribution. DMX's agreement with ASCAP for commercial music distribution is
currently governed by an industry-wide agreement that runs through 1999. Its
agreement with SESAC for commercial distribution expires in June 1997 and is
subject to automatic renewal, unless terminated, for a three-year period. DMX's
agreement with BMI dated October 11, 1991 for commercial distribution has been
extended on an interim basis until the resolution of a new industrywide
commercial agreement with BMI that is currently being negotiated.
The agreement with ASCAP with respect to residential music distribution is
governed by an industry-wide agreement dated December 20, 1991. The parties are
operating under the terms of an interim agreement until the resolution of
pending proceedings in rate court. Although DMX cannot predict the outcome of
such proceedings, the rate determination when made, may require retroactive rate
increases. In 1995, DMX entered
13
<PAGE> 26
into a new agreement with BMI for residential distribution with a term extending
to 1999. The term of DMX's agreement with SESAC for residential distribution is
the same as the commercial agreement. In 1996, the fees expensed by DMX for
ASCAP, BMI and SESAC license fees were approximately $2.3 million, in the
aggregate. Although DMX has been accruing for potential increases in the BMI
commercial and ASCAP residential rates, if the fees to be paid by DMX to these
licensors increase in excess of such accruals, DMX's results of operations could
be materially adversely affected by the increase.
DIGITAL PERFORMANCE RIGHTS
On November 1, 1995, the Digital Performance Right in Sound Recordings Act
of 1995 was signed into law ("1995 Act"). The 1995 Act establishes the right of
owners of the performance rights, such as the performers and record companies,
to control digital transmission of sound recordings by means of subscription
service digital transmissions. The 1995 Act provides a compulsory license for
noninteractive subscription services. An arbitration proceeding relating to
residential digital music distribution is pending before the United States
Copyright Office. The purpose of the proceeding is to determine the statutory
license royalty rate to be paid under the 1995 Act by DMX (and other digital
music residential subscription services) on services transmitted to non-business
subscribers. The proceeding commenced August 2, 1996. The royalty rate would be
retroactive to February 1996, and accordingly, DMX has been accruing 3% of
residential subscriber fee revenue since such date. The results of the
arbitration could have an adverse effect on DMX if DMX is required to pay a
higher royalty rate pursuant to the provisions of the 1995 Act.
INTEGRATION OF OPERATIONS
The integration of DMX and TCI Music's operations following the Merger will
initially require certain management resources, which may temporarily detract
attention from the day-to-day business of the combined company. The difficulties
of assimilation may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. The process of combining
the organizations may cause a temporary interruption of, or a loss of momentum
in, the activities of DMX and TCI Music's business, which could have an adverse
effect on the revenues and operating results of the combined company, at least
in the near term. There can be no assurance that the combined entity will be
able to retain its key technical and management personnel or that the combined
entity will realize any of the other anticipated benefits of the Merger. See
"CERTAIN INFORMATION CONCERNING TCI MUSIC."
FIXED EXCHANGE RATIO
Under the terms of the Merger Agreement, each share of DMX Common Stock
issued and outstanding at the Effective Time (other than shares held by
stockholders of DMX who perfect their appraisal rights in the manner described
in this Proxy Statement/Prospectus) will be converted into the right to receive
(i) one-quarter share of TCI Music Series A Common Stock, (ii) one Right with
respect to each whole share of TCI Music Series A Common Stock and (iii) cash in
lieu of fractional shares of TCI Music Series A Common Stock and Rights. Each
Right will entitle the holder to require TCI to purchase from such holder one
share of TCI Music Series A Common Stock for $8.00 per share (the equivalent of
$2.00 per share of DMX Common Stock), subject to reduction by the aggregate
amount per share of any dividend and certain other distributions, if any, made
by TCI Music to its stockholders, payable at the election of TCI, in cash, a
number of shares of Series A TCI Group Common Stock having an equivalent value
or a combination thereof, if during the one-year period beginning on the
effective date of the Merger, the price of TCI Music Series A Common Stock does
not equal or exceed $8.00 per share for a period of at least 20 consecutive
trading days. If the Rights become exercisable, they will be exercisable only
during the 30-day period commencing on the date of the first anniversary of the
closing of the Merger and, unless exercised, will expire and cease to exist at
the end of such period. Until the Rights expire or are exercised, the Rights
will be evidenced by a legend on the certificates for shares of TCI Music Series
A Common Stock issued in the Merger. Accordingly, the Rights associated with the
shares of TCI Music Series A Common Stock will be represented solely by, and
will not be separable from, such shares of TCI Music Series A Common Stock, and
the surrender or transfer of any
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such certificate for shares of TCI Music Series A Common Stock will also
constitute the surrender or transfer of the Rights associated with the TCI Music
Series A Common Stock represented by such certificate. Upon exercise of the
Rights, the shares of TCI Music Series A Common Stock associated with the Rights
will be transferred to TCI in exchange for cash and/or shares of Series A TCI
Group Common Stock as described above. See "The Merger
Agreement -- Consideration to be Received in the Merger." The Merger Agreement
does not contain any provisions for adjustment of the values based on
fluctuations in the price of DMX Common Stock that may occur after the execution
of the Merger Agreement and prior to the Closing Date. On February 6, 1997, the
date on which the Merger Agreement was executed, the closing sale price of DMX
Common Stock was $1 11/16. There can be no assurance that the market price of
TCI Music Series A Common Stock on and after the Effective Time will not be
higher or lower than such price. See "THE MERGER AGREEMENT -- Consideration to
be Received in the Merger."
CONFLICTS OF INTEREST
Potential Conflicts of Interest of DMX Management. Certain members of
DMX's management and Board of Directors have interests in the Merger that are in
addition to and potentially in conflict with the interests of stockholders of
DMX generally. Messrs. Hindery, Fisher and Sparkman, directors of DMX, also
serve as directors and/or executive officers of TCI and TCI Music. Mr. Troxel,
Chief Operating Officer of DMX, also serves as a director of TCI Music and will
be President and Chief Executive Officer of DMX following the Merger. Certain
key employees of DMX have been offered retention bonuses and have stock options
that will carry over after the Merger and be exercisable for TCI Music Series A
Common Stock and Rights. The Board of Directors of DMX was aware of these
interests and considered them, among other things, in approving the Merger
Agreement and the transactions contemplated by the Merger Agreement. See "THE
MERGER -- Interests of Certain Persons in the Merger."
Relationship with TCI; Potential Conflicts of Interest. Certain members of
TCI Music's management and Board of Directors are also members of the management
and Board of Directors of TCI or Liberty Media Corporation, a wholly owned
subsidiary of TCI engaged in the provision of programming services ("Liberty").
Stephen M. Brett, Vice President and General Counsel of TCI Music, is Executive
Vice President and General Counsel of TCI. J.C. Sparkman and Donne F. Fisher,
directors of TCI Music, are directors of TCI. Leo J. Hindrey, Jr., Chairman of
the Board of TCI Music, is a director and President and Chief Operating Officer
of TCI. Robert R. Bennett, a director and acting Chief Financial Officer of TCI
Music, is an Executive Vice President of TCI. David B. Koff, a director,
President, and Chief Executive Officer of TCI Music, is Vice
President -- Corporate Development of Liberty. Robert R. Bennett, a director of
TCI Music, is Executive Vice President of TCI and a director, President and
Chief Executive Officer of Liberty. No formal policies or guidelines have been
adopted by TCI Music with respect to board actions that may involve actual or
potential conflicts of interest between TCI Music and TCI or Liberty. The
directors of TCI Music, however, have fiduciary obligations under Delaware law
to TCI Music and all of its stockholders. Mr. Fisher and Mr. Sparkman will also
have fiduciary obligations, when acting as TCI directors, to TCI and its
stockholders. Mr. Bennett will also have fiduciary obligations, when acting as a
Liberty director, to Liberty and TCI as the sole stockholder of Liberty. See
"MANAGEMENT OF TCI MUSIC."
TCI is principally engaged in the construction, acquisition, ownership and
operation of cable television systems and the provision of satellite-delivered
video services to various distribution media, principally cable television
systems. DMX is primarily engaged in programming, distributing and marketing a
digital audio music service. TCI, through certain of its affiliates, sells and
provides DMX audio music services to its cable television subscribers in
conjunction with the delivery of video programming. Such audio music services
are provided pursuant to affiliation agreements between DMX and certain TCI
affiliates that provide for such TCI affiliates to pay license fees to DMX.
Ordinarily, these arrangements may give rise to conflicts between TCI and TCI
Music because of TCI Music's desire to maximize the fees DMX receives for its
audio music programming and TCI's and its affiliates' desire to minimize the
fees paid; however, TCI believes that its obligation under the Contribution
Agreement to contribute the Contributed Net DMX Revenues received from sales of
DMX audio music services to TCI Music (in addition to license fees already paid
to DMX) minimizes this potential conflict for the term of the Contribution
Agreement, which expires in 2006.
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Liberty is principally engaged in the provision of video programming
services, including video music services. TCI does not own any interests in any
other entity providing audio music services, and TCI has no current plans or
intentions to engage in the direct programming and distribution of audio music
services in the future other than through TCI Music. However, under the
Contribution Agreement, TCI and its affiliates have the right to engage in or
possess interests in businesses or ventures of any nature or description,
without regard to whether any of such businesses or ventures are or may be
deemed to be competitive in any way with any of the businesses of TCI Music or
DMX; therefore there can be no assurance that TCI or its affiliates will not
engage in the provision of competitive audio or video music services in the
future.
See "ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE
MERGER -- Contribution Agreement."
Under agreements with TCI Music, TCI will provide certain administrative,
legal, financial, treasury, accounting, tax and other services to TCI Music and
will make available certain of its employee benefit plans to TCI Music's
employees. In addition, TCI and TCI Music will enter into a number of
intercompany agreements covering such matters as the use of services and tax
sharing. After the Merger, pursuant to a services agreement between TCI and TCI
Music (the "Services Agreement"), TCI will provide to TCI Music certain
administrative and other services. On or before the Effective Time, TCI Music
will also become a party to the existing tax sharing agreement among TCI and
certain of its subsidiaries (the "Tax Sharing Agreement"), which will provide,
among other things, for the allocation among TCI Music and the other members of
the TCI consolidated tax group of tax liabilities attributable to periods after
the Merger.
In addition, in connection with the Merger, TCI and TCI Music will enter
into the Contribution Agreement. Pursuant to the Contribution Agreement, certain
subsidiaries of TCI will transfer to TCI Music, effective as of the Effective
Time and until December 31, 2006, the right to receive the Contributed Net DMX
Revenues and TCI will contribute to TCI Music the Contributed Tuners. If the
Contribution had been effective as of January 1, 1996, the total amount of
Contributed Net DMX Revenues for the three months ended March 31, 1997 and the
year ended December 31, 1996 would have been approximately $4.4 million and
$16.4 million, respectively. Additionally, the book value of the Contributed
Tuners at March 31, 1997 was approximately $4.5 million. The launch by TCI and
other cable operators of video and audio programming using digital compression
technology may materially reduce the Contributed Net DMX Revenues and subscriber
fee revenues of TCI Music. See "-- Effect of Launch of Digital Compression
Technology on Contributed Net DMX Revenues and Other Revenues" and "CERTAIN
INFORMATION CONCERNING TCI MUSIC -- Effect of Launch of Digital Compression
Technology."
Pursuant to the Contribution Agreement, effective as of the closing of the
Merger, TCI Music, as obligor, will issue to TCI the TCI Music Note in the
principal amount of $40,000,000 payable to the order of TCI, as obligee, bearing
interest at 10% per annum, which interest will be waived by TCI if the principal
is paid in full at or before maturity which will be 180 days after the closing
of the Merger. TCI Music expects to refinance the TCI Music Note with proceeds
of a new long-term debt financing. No assurance can be given that TCI Music will
be able to obtain such financing on terms acceptable to TCI Music.
TCI and DMX have entered into the TCI Loan pursuant to which TCI has agreed
to make loans to DMX from time to time until August 31, 1997, up to an aggregate
outstanding principal amount of $3,500,000. Such loans are due on or before June
1, 2000 and accrue interest at a rate of 12.5% per annum. As of June 4, 1997,
TCI had made approximately $2,420,000 in loans under the TCI Loan.
The terms of the agreements that will govern the relationship between TCI
Music and TCI were established by TCI in consultation with TCI Music's
management prior to the Merger and are not the result of arm's-length
negotiations. Accordingly, although TCI Music believes that the terms and
conditions of these arrangements taken as a whole are reasonable, there can be
no assurance that the terms and conditions of these agreements are not more or
less favorable to TCI Music than those that might have been obtained from
unaffiliated third parties. In addition, there can be no assurance that
comparable services could be obtained from third parties if the Services
Agreement were to be terminated. Although TCI Music believes that its
relationship with TCI is excellent, adverse developments or material disputes
with TCI following the Merger could have a material adverse effect on TCI Music.
See "ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER."
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DISPARATE VOTING RIGHTS; CONTROL BY TCI
TCI Music is currently a wholly owned subsidiary of TCI. Following
consummation of the Merger (i) the outstanding shares of TCI Music Series A
Common Stock will represent approximately 19.25% of, and 2.3% of the voting
power related to, the total outstanding shares of the TCI Music Common Stock;
and (ii) the outstanding shares of TCI Music Series B Common Stock will
represent approximately 80.75% of, and 97.7% of the voting power related to, the
total outstanding shares of the TCI Music Common Stock. TCI will beneficially
own approximately 45.7% of the outstanding shares of TCI Music Series A Common
Stock and all of the outstanding shares of TCI Music Series B Common Stock,
which will collectively represent approximately 89.6% of the outstanding shares
of TCI Music Common Stock. Since holders of shares of TCI Music Series A Common
Stock are entitled to one vote per share, and holders of shares of TCI Music
Series B Common Stock are entitled to ten votes per share, on each matter
presented to a vote of the holders of TCI Music Common Stock, TCI will control
approximately 98.7% of the voting power of the outstanding shares of TCI Music
Common Stock. See "DESCRIPTION OF CAPITAL STOCK." Thus, immediately after the
Merger, TCI will have the voting power to control all matters requiring approval
of TCI Music's stockholders voting as a single class, including the ability to
elect all of the members of the TCI Music Board of Directors. See "ARRANGEMENTS
BETWEEN TCI AND TCI MUSIC AFTER THE MERGER" and "CERTAIN TRANSACTIONS."
DIVIDENDS AND DIVIDEND POLICY
TCI Music does not anticipate declaring and paying cash dividends on the
TCI Music Common Stock at any time in the foreseeable future. The decision
whether to apply legally available funds to the payment of dividends on TCI
Music Common Stock will be made by the TCI Music Board from time to time in the
exercise of its business judgment, taking into account, among other things, TCI
Music's results of operations and financial condition, any then existing or
proposed commitments by TCI Music for the use of available funds, and TCI
Music's obligations with respect to the holders of any then outstanding
indebtedness or preferred stock. In addition, TCI Music may in the future issue
debt securities or preferred stock or enter into loan agreements or other
agreements that restrict the payment of dividends on, and repurchases of, TCI
Music's Common Stock. See "DESCRIPTION OF TCI MUSIC CAPITAL STOCK -- Common
Stock -- Dividends."
ABSENCE OF PRIOR TRADING MARKET
The DMX Common Stock is currently traded on the OTC Bulletin Board. From
May 28, 1996 to April 8, 1997 the DMX Common Stock was traded on the NASDAQ
SmallCap Market. Until May 28, 1996, the DMX Common Stock was traded on the
NASDAQ National Market System. There is no public market for TCI Music Series A
Common Stock. Although the TCI Music Series A Common Stock has been approved by
NASDAQ for inclusion for trading in the NASDAQ SmallCap Market following the
Merger, such approval is conditioned on the trading of TCI Music Series A Common
Stock at or above a price of $3.00 per share for the first five trading days
following the Merger. There can be no assurance that such trading price will be
achieved or, if achieved, that an active trading market will develop for the TCI
Music Series A Common Stock or, if developed, that such market will be
maintained. The market price for the shares of TCI Music Series A Common Stock
may be highly volatile depending on news announcements or changes in general
market conditions. See "Comparative Market Data."
POTENTIAL ADVERSE EFFECTS OF FUTURE SALES OF TCI MUSIC COMMON STOCK
There currently is no market for the TCI Music Series A Common Stock. The
sale of large amounts of TCI Music Series A Common Stock in the public market
following the Merger could adversely affect the market price of TCI Music Series
A Common Stock.
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POTENTIAL EFFECTS OF CERTAIN TCI MUSIC ANTI-TAKEOVER PROVISIONS
Certain provisions of Delaware law and the Certificate of Incorporation of
TCI Music (the "TCI Music Charter") and the Bylaws of TCI Music (the "TCI Music
Bylaws") may have the effect of making more difficult an acquisition of control
of TCI Music in a transaction that is not approved by the TCI Music Board. These
provisions include the disparate voting rights of the TCI Music Series A Common
Stock and TCI Music Series B Common Stock; provisions giving the TCI Music Board
the power to issue up to 5,000,000 shares of preferred stock, and to fix the
rights and preferences thereof, without further authorization of TCI Music's
common stockholders; the requirement of a supermajority vote to approve
specified actions; and the other provisions described under "COMPARISON OF
STOCKHOLDERS RIGHTS." In addition, the TCI Music Board is divided into three
classes, each of which serves for a staggered three-year term, which may make it
more difficult for a third party to gain control of the TCI Music Board. Many of
these provisions generally are designed to permit TCI Music to develop its
businesses and foster its long-term growth without the disruption caused by the
threat of a takeover not deemed by the TCI Music Board to be in the best
interests of TCI Music and its stockholders. These provisions may also have the
effect of discouraging a third party from making a tender offer or otherwise
attempting to obtain control of TCI Music even though such an attempt might be
economically beneficial to TCI Music and its stockholders. See "COMPARISON OF
STOCKHOLDERS RIGHTS."
CERTAIN LITIGATION
In September 1996, after announcement of TCI's proposal to DMX, certain DMX
stockholders filed a putative class action lawsuit in the Delaware Court of
Chancery on behalf of a purported class consisting of all public stockholders of
DMX (other than the directors of DMX and TCI) captioned Brickell Partners v.
Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr.,
Kent Burkhart, J. C. Sparkman, Bhaskar Menon, DMX Inc. and Tele-Communications,
Inc. (Civil Action No. 15206). See "CERTAIN LITIGATION." The complaint seeks as
relief, among other things, an injunction preventing consummation of the Merger
as well as unspecified compensatory damages. Neither TCI nor DMX can estimate,
based on facts available as of the date of this Proxy Statement/Prospectus, the
possible adverse effects if such plaintiffs are successful, which could include
the inability to consummate the Merger, rescission of the Merger and monetary
damages.
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THE SPECIAL MEETING
TIME AND PLACE; PURPOSE
The Special Meeting will be held at DMX's executive offices, located at
11400 West Olympic Boulevard, Suite 1100, Los Angeles, California 90064 on
Friday, July 11, 1997, starting at 10:00 a.m., local time. At the Special
Meeting, the stockholders of DMX will be asked to consider and vote upon (i) a
proposal to approve and adopt the Merger Agreement and (ii) such other matters
as may properly come before the Special Meeting. A copy of the Merger Agreement
is included as Appendix I to this Proxy Statement/Prospectus.
VOTING RIGHTS; VOTES REQUIRED FOR APPROVAL
The DMX Board has fixed the close of business on May 26, 1997, as the date
for the determination of holders of DMX Common Stock entitled to notice of and
to vote at the Special Meeting. Only holders of record of shares of DMX Common
Stock at the close of business on the Record Date are entitled to notice of and
to vote at the Special Meeting. At the close of business on the Record Date,
there were 59,586,594 shares of DMX Common Stock outstanding and entitled to
vote at the Special Meeting held by 418 stockholders of record.
Each holder of record, as of the Record Date, of DMX Common Stock is
entitled to cast one vote per share, in person or by proxy, on approval of the
Merger. The presence, in person or by proxy, of the holders of a majority of the
outstanding shares of Company Common Stock entitled to vote is necessary to
constitute a quorum at the Special Meeting. The affirmative vote, in person or
by proxy, of the holders of record of a majority of the outstanding shares of
DMX Common Stock entitled to vote at the Special Meeting is required to approve
and adopt the Merger Agreement.
As of the Record Date, (i) DMX's directors and executive officers
beneficially owned 9,607,561 outstanding shares of DMX Common Stock (exclusive
of any shares issuable upon exercise of stock options exercisable on such date),
representing approximately 16.6% of the outstanding shares of DMX Common Stock
on such date and (ii) affiliates of TCI owned 27,249,575 outstanding shares of
DMX Common Stock, representing approximately 45.7% of the outstanding shares of
DMX Common Stock. Such persons and entities, who together beneficially owned as
of the Record Date approximately 62.3% of the outstanding shares of DMX Common
Stock, have indicated they intend to vote all of their shares of DMX Common
Stock in favor of the Merger Agreement and the Merger. If such persons vote
their shares as they have indicated, the Merger Agreement will be approved and
adopted at the Special Meeting irrespective of the vote of any other stockholder
of the Company.
PROXIES
All shares of DMX Common Stock represented by properly executed proxies
received prior to or at the Special Meeting, and not revoked, will be voted in
accordance with the instructions indicated in such proxies. If no instructions
are indicated, such proxies will be voted FOR approval and adoption of the
Merger Agreement and, at the discretion of the proxy holder, on any other matter
that may properly come before the Special Meeting. A properly executed proxy
marked "ABSTAIN" will not be voted, although it will be counted for purposes of
determining whether there is a quorum and for purposes of determining the
aggregate number of outstanding shares entitled to vote at the Special Meeting
and will have the effect of a "NO" vote on the Merger. If a broker indicates on
the proxy that it does not have discretionary authority to vote certain shares
on the Merger, those shares will be considered for purposes of determining
whether there is a quorum and for purposes of determining the aggregate number
of outstanding shares entitled to vote at the Special Meeting and will have the
effect of a "NO" vote on the Merger. Such a non-vote occurs when a nominee
holding shares for a beneficial owner votes on one proposal, but does not vote
on a proposal because the nominee does not have discretionary voting power and
has not received instructions from the beneficial owner.
A stockholder may revoke his or her proxy at any time prior to its use by
delivering to the Secretary of DMX a signed notice of revocation or a later
dated signed proxy or by attending the Special Meeting and voting in person.
Attendance at the Special Meeting will not in itself constitute the revocation
of a proxy.
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The cost of solicitation of proxies will be paid by DMX. In addition to
solicitation by mail, officers and regular employees of DMX may solicit proxies
by telephone, telegram, letter, facsimile or by personal interviews. Such
persons will receive no additional compensation for such services. Nominees,
fiduciaries and other custodians will be requested to forward soliciting
material to the beneficial owners of shares held of record by them and will be
reimbursed for their reasonable expenses.
STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
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THE MERGER
BACKGROUND OF THE MERGER
TCI currently beneficially owns, directly and through certain of its
subsidiaries, 27,249,575 shares representing approximately 45.7% of the
outstanding shares of DMX Common Stock. TCI acquired the DMX Common Stock in
several transactions over the period from August 1994 to May 1996 as follows:
On August 4, 1994, in connection with a business combination of TCI
Communications, Inc., a direct wholly owned subsidiary of TCI ("TCIC") and
Liberty, resulting in the companies becoming wholly owned subsidiaries of TCI
(the "TCI Business Combination"), TCI acquired indirect beneficial ownership of
3,409,063 shares of the DMX Common Stock beneficially owned by Liberty.
In August 1995, TCI acquired beneficial ownership of 2,000,000 shares of
DMX Common Stock from DMX for a total cash purchase price of $5,000,000, or
$2.50 per share.
TCI acquired 650,000 shares of DMX Common Stock on January 2, 1996 and
January 8, 1996 in three open market transactions for a total cash purchase
price of $1,520,918. On January 2, 1996, TCI purchased 340,000 shares of DMX
Common Stock for $2.31 per share for a total purchase price of $786,250. On
January 8, 1996, TCI purchased 140,000 shares of DMX Common Stock for $2.4062
per share for a total purchase price of $336,868. On January 8, 1996, TCI
purchased 170,000 shares of DMX Common Stock for $2.34 per share for a total
purchase price of $397,800.
On May 17, 1996, TCI acquired 5,700,000 shares of DMX Common Stock from
Stephen A. Wynn, a former director of DMX, pursuant to a Stock Purchase
Agreement, dated as of May 13, 1996, between Mr. Wynn and TCI. Such shares were
purchased for $2.00 per share for a total cash purchase price of $11,400,000.
On May 17, 1996, TCI acquired 4,500,000 shares of DMX Common Stock from DMX
for $2.00 per share for a total cash purchase price of $9,000,000, pursuant to a
Stock Purchase Agreement, dated as of May 14, 1996, between DMX and TCI. On the
same date, UAPI, an indirect majority-owned subsidiary of TCI, received
10,841,624 shares of DMX Common Stock from DMX in connection with a merger
pursuant to the terms of an Agreement and Plan of Merger, dated as of August 28,
1995, as amended, among DMX, TCI-Euromusic, Inc. ("TCI-E"), and UAPI (the "TCI-E
Merger"). In connection with the TCI-E Merger, TCI-E was merged with and into
DMX and DMX was the surviving corporation. The TCI-E Merger was effective as of
May 17, 1996. Prior to the TCI-E Merger, UAPI owned all of the outstanding
shares of common stock of TCI-E.
Effective July 31, 1996, TCI acquired beneficial ownership of 148,888
shares of DMX Common Stock in connection with the acquisition by TCI of all of
the common stock of Viacom International, Inc.
In connection with the TCI-E Merger, Tele-Communications International,
Inc., a majority-owned subsidiary of TCI, received the right to appoint two
directors to the DMX Board. Donne F. Fisher and Leo J. Hindery, Jr. were
appointed to the board of DMX to satisfy this requirement and to fill immediate
vacancies created by resignations of Stephen A. Wynn and W. Thomas Oliver. Mr.
Fisher currently serves as a director of TCI and serves as a consultant to TCI.
Mr. Fisher served as an officer of TCI until January 1996. Additionally, Mr.
Hindery is the managing general partner of the general partner of InterMedia
Partners and certain affiliated entities. InterMedia Partners is a multi-system
cable television operator. TCI has various investments in InterMedia Partners
and its related entities. Mr. Hindery was appointed a director of TCI in May
1997 and President and Chief Operating Officer of TCI in February 1997 and
President and Chief Operating Officer of TCIC in March 1997. In addition, there
is an informal, non-binding understanding between TCI and a majority of the
existing directors of DMX that TCI may recommend the appointment of two
additional candidates for election to the board of directors of DMX. TCI has not
made any appointments to the DMX Board pursuant to this arrangement.
The DMX Board viewed the investments as a strategic investment by TCI that
would provide necessary capital for DMX's operations. No formal relationship
between DMX and TCI was contemplated (other than
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those described above regarding directors), although the DMX Board did
anticipate that DMX should benefit from the experience of TCI's nominees to the
DMX Board, as well as from having TCI as its largest stockholder. The DMX Board
also believed that there might be the potential to form certain distribution
alliances with TCI and that TCI would be more likely to form such alliances if
it was DMX's largest stockholder. The prices paid by TCI to DMX in the
above-described transactions in which TCI acquired DMX Common Stock directly
from DMX were based upon the then-current trading prices for DMX Common Stock at
the time the transactions were agreed to and were not intended to reflect a
premium to or discount from such prices.
On August 30, 1996, TCI delivered an unsolicited written proposal to the
DMX Board with respect to a merger of an indirect wholly owned subsidiary of a
corporation to be formed by TCI with and into DMX. The proposal provided, among
other things, that (a) the outstanding shares of DMX Common Stock (including
shares held by TCI affiliates) would be converted into shares of TCI Music
Series A Common Stock representing in the aggregate 19.25% of the total number
of shares of TCI Music Common Stock outstanding immediately after the Merger,
(b) all shares of TCI Music Series B Common Stock would be held by TCI
Affiliates, and (c) TCI Music Series A Common Stock and TCI Music Series B
Common Stock would be identical, except that each share of TCI Music Series B
Common Stock would represent the right to cast ten votes per share compared to
one vote per share of TCI Music Series A Common Stock. TCI also agreed that if,
during the one-year period beginning on the date of the closing of the Merger,
the market price of the TCI Music Series A Common Stock had not equaled or
exceeded $2.00 per share (the proposal assumed that DMX Common Stock would be
exchanged for TCI Music Series A Common Stock in a one-for-one ratio) for any
period of at least 20 consecutive trading days, holders of TCI Music Series A
Common Stock issued in the Merger would have the right (a "Put") exercisable
during the 30-day period beginning on the first anniversary of the closing of
the Merger, to require TCI to purchase such stock at a price of $2.00 per share,
payable, at TCI's election, in cash, shares of Series A TCI Group Common Stock
having an equivalent value, or a combination thereof. The proposal also provided
that if the proposal were accepted by DMX, TCI would provide a loan to DMX of
$3.5 million payable with interest at 12.5% per annum in 36 equal installments
of principal and interest, the proceeds of which would be used by DMX to
purchase tuners for use by residential and commercial customers. Such loan would
be secured by a security interest in the tuners and DMX's commercial
subscription agreements. The proposal also contemplated that DMX would grant TCI
and its affiliates rights to distribute DMX services on the terms and conditions
set forth in the form of an affiliation agreement to be submitted to DMX
separately.
TCI's proposal was discussed at a special meeting of the DMX Board held on
September 3, 1996, at which all directors participated in person or by
conference telephone. The DMX Board determined that a special committee should
be appointed to evaluate TCI's proposal and to engage in discussions with
representatives of TCI regarding the proposal. The directors appointed to serve
on the Special Committee were Messrs. Burkhart, Menon and Shaw. Shortly after
its formation, the Special Committee retained Houlihan Lokey to act as financial
advisor with respect to TCI's proposal. See "-- Opinion of Financial Advisor."
On September 3, 1996, certain DMX stockholders filed a putative class
action lawsuit in the Delaware Court of Chancery on behalf of a purported class
consisting of all public stockholders of DMX (other than the directors of DMX
and TCI). See "CERTAIN LITIGATION." The complaint seeks as relief, among other
things, an injunction preventing consummation of the Merger as well as
unspecified compensatory damages.
On September 17, 1996, Irell & Manella LLP, counsel to DMX, delivered a
letter in response to TCI's proposal (the "September 17 Letter"). The September
17 Letter advised TCI that the DMX Board had formed a Special Committee of
independent directors to evaluate the TCI proposal and that the Special
Committee had retained Houlihan Lokey as its financial advisors. The letter
sought to confirm certain assumptions concerning the proposal and identified
various issues that the Special Committee determined should be discussed with
TCI, including among other things: (i) the percentage ownership in TCI Music
proposed by TCI, and the Put amount and the period during which the Put could be
exercised; (ii) the necessity for the TCI Music Common Stock to consist of two
classes given TCI's proposed greater than 80% interest in TCI Music; (iii) a
proposal that TCI contribute the proposed tuner loan and any other DMX
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indebtedness to the capital of TCI Music if the Merger were consummated; (iv) a
proposed additional loan to be mutually agreed upon to provide working capital
to DMX pending completion of the transaction; (v) additional terms to be
included in the definitive agreement with respect to information access and
confidentiality limitations and standstill provisions; (vi) terms of the
proposed form of affiliation agreement referred to in TCI's letter; (vii) plans
for DMX's European operations; and (viii) a requirement that any transaction be
subjected to approval by a majority of the non-TCI affiliated stockholders.
On September 18, 1996, Mr. J.R. Shaw, on behalf of the Special Committee,
and a representative of Irell & Manella LLP met with Stephen M. Brett, Executive
Vice President and General Counsel of TCI, and a representative of Sherman &
Howard L.L.C., counsel to TCI, to discuss TCI's proposal. No conclusions as to
the issues raised by the Special Committee in the September 17 Letter were
reached at that meeting, although TCI indicated that it would consider such
requests and would provide, to the extent available, information pertaining to
the assets to be contributed by TCI to TCI Music and TCI's plans for the
development of TCI Music's business.
During the period from September 19, 1996 until February 6, 1997 when the
Merger Agreement was executed, representatives of Irell & Manella LLP had
numerous conversations with representatives of Sherman & Howard L.L.C. with
respect to the various issues raised in the September 17 Letter. TCI, through
its counsel, initially advised the Special Committee, through its counsel, that
TCI was unwilling to agree to any of the changes proposed by the Special
Committee with the possible exception of the committee's request that the Put be
exercisable for a full year even if the trading price of TCI Music Common Stock
trades at more than the equivalent of $2.00 per share of DMX Common Stock for
twenty consecutive days during that year. Thereafter, TCI's counsel advised the
Special Committee's counsel that TCI was not willing to revise the Put to
provide this feature. However, as part of the negotiations the parties did agree
to change the exchange ratio of DMX Common Stock for TCI Music Series A Common
Stock from 1:1 to 1:one-half share, which increased the purchase price of TCI
Music Series A Common Stock to be paid by TCI in the Put to $4.00. In addition,
TCI, through its counsel, also advised DMX that it was not prepared to
contractually commit that TCI Music would be the exclusive vehicle through which
TCI and its affiliates would conduct their residential and commercial music
operations.
During this time period, the members of the Special Committee had numerous
conversations among themselves and with representatives of Irell & Manella LLP
and Houlihan Lokey and with the Company's Chief Executive Officer as to various
aspects of the proposed Merger, including the proposed exchange ratio and the
Put, and as to whether there were other alternatives, such as a merger or
strategic combination with another party other than TCI, which might produce a
more favorable result to the Company's stockholders.
The Special Committee had formal committee meetings on September 3, 1996,
September 5, 1996, September 17, 1996 and November 5, 1996 at which they
discussed the status of negotiations, reviewed DMX's operations, cash flow and
ongoing financing needs and reviewed with Houlihan Lokey at the committee
meeting on November 5, 1996 its preliminary views as to the adequacy and
fairness of the TCI proposal. The Special Committee also concluded at such
meeting that it was not appropriate to engage Houlihan Lokey to solicit or seek
out another merger or strategic combination partner for a variety of reasons,
including the fact that Houlihan Lokey's preliminary view was that the TCI
proposal was an attractive one, that the TCI proposal might be withdrawn if TCI
learned that DMX was actively seeking alternatives, that the TCI proposal had
been publicly announced and any interested bidder could readily contact the
Company or Houlihan Lokey if it wished to discuss a possible alternative
transaction, that the 45.7% ownership interest of TCI's affiliates in DMX made
it unlikely that any competing proposal would be successful and the significant
incremental cost which such an engagement would entail. As of the date of this
Proxy Statement/Prospectus, no such contact or offer has been made by any third
party. Accordingly, although DMX considered the feasibility of soliciting a
business combination with other companies besides TCI, it did not do so for the
foregoing reasons.
During this period, representatives of DMX's outside counsel and
representatives of TCI's outside counsel negotiated the terms of the Merger
Agreement, the Rights Agreement, the Contribution Agreement and the TCI Loan. On
January 20, 1997 the Special Committee met and received the written report and
oral
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opinion (which was later confirmed in writing) of Houlihan Lokey to the effect
that the Merger was fair to DMX's stockholders from a financial point of view.
The Special Committee unanimously recommended that the Board of Directors
approve the Merger. Thereafter, the DMX Board approved the merger and authorized
the execution of each of the foregoing agreements at a meeting on January 20,
1997. The Merger Agreement was executed by the parties as of February 6, 1997.
Effective May 29, 1997, the parties entered into Amendment One to the
Merger Agreement (attached as Appendix I), changing the exchange ratio of DMX
Common Stock for TCI Music Series A Common Stock from 1: one-half share to 1:
one-quarter share, which increased the purchase price of TCI Music Series A
Common Stock to be paid by TCI pursuant to the exercise of the Rights to $8.00
per share.
DMX's Board of Directors had decided in August 1996, unrelated to TCI's
merger proposal, that it would discontinue further funding the operations of
DMX's European subsidiaries, DMX-Europe N.V. ("DMX-E") and its wholly-owned
subsidiary DMX-Europe (UK) Limited ("DMX-UK" and, together with DMX-E, the
"European Companies"). In May 1993, TCI-Euromusic, Inc., which subsequently
became an indirect subsidiary of TCI, acquired a 49% equity position in DMX-E.
DMX agreed to acquire this interest in August 1995 and did acquire it in May
1996. Among other things, as a result of that acquisition, DMX received a
release of its guarantee obligations with respect to $24,436,000 of DMX-E's
indebtedness to a TCI subsidiary and obtained 100% control of DMX-E. However,
the operations of the European Companies have sustained substantial ongoing
operating losses. For example, for the fiscal years ending September 30, 1996
and September 30, 1995, DMX's net losses were approximately $33.9 million and
$23.1 million, respectively, of which approximately $16.8 million and $13.3
million, respectively, were attributable to the operations of DMX-E. In
addition, in fiscal 1996, DMX funded $9.4 million of the cash requirements of
the European Companies. Of this amount, $6.4 million was funded prior to the
acquisition by DMX of TCI's indirect 49% equity position in DMX-E, with the
remaining $3.0 million funded subsequent thereto. Although DMX-E's capital
structure became considerably less leveraged as a result of the transactions
associated with DMX's acquisition of a 100% interest in DMX-E, the DMX Board
concluded that it was necessary to focus the Company's limited financial
resources on making its domestic operations profitable. Accordingly, the DMX
Board concluded that DMX would cease to fund the operations of the European
Companies and the boards of directors of the European Companies would either
have to seek financing on their own or place the companies in receivership.
On October 3, 1996, Jerold H. Rubinstein, Chairman of the Board and Chief
Executive Officer of DMX, made a proposal to the Board of Directors to acquire
DMX's interest in the European Companies. The DMX Board of Directors appointed
J.C. Sparkman as a committee of the Board to negotiate with Mr. Rubinstein with
respect to his proposal. Thereafter, on December 3, 1996, the DMX Board of
Directors approved the disposition of the European Companies to Mr. Rubinstein
and on December 18, 1996, DMX and Mr. Rubinstein entered into two alternative
agreements providing for such disposition. Under the first alternative
agreement, DMX will retain a ten percent equity interest in the European
Companies, which will have an exclusive, five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union and the
Middle East and will have the right to use DMX's trademarks for two years. In
addition, Mr. Rubinstein has agreed to guarantee certain obligations of the
operations of the European Companies for satellite-uplink capacity (which
guarantee would be secured by a pledge of the DMX Common Stock owned by Mr.
Rubinstein). Mr. Rubinstein will seek to reorganize the operations of the
European Companies by obtaining creditor concessions and will seek new equity
investors. If the European Companies cannot be reorganized, then DMX and Mr.
Rubinstein will proceed under the second alternative agreement, under which the
European Companies would be placed in receivership and Mr. Rubinstein would
organize the operations of the European Companies under a new company to
distribute the DMX music service on essentially the same terms as provided for
in the first alternative agreement and DMX will subscribe for a ten percent
equity interest in the new venture.
The DMX Board did not seek offers for DMX-E from other parties, because the
DMX Board believed that DMX-E's financial condition made it highly unlikely that
any other offers would be forthcoming. In addition, because the DMX Board had
been advised that, due to deterioration of the orbit of the satellite which
carries the signal for the DMX music service provided by DMX-E, it might be
necessary for DMX-E
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to enter into a new, long-term contract regarding new satellite capacity, which
would entail a significant new financial commitment by DMX, the DMX Board
believed that it was necessary to proceed as expeditiously as possible with the
disposition of the European Companies.
RECOMMENDATION OF DMX BOARD; DMX'S REASONS FOR THE MERGER
On January 20, 1997, the Special Committee recommended that the DMX Board
approve the Merger. Based on this recommendation and certain other factors, the
DMX Board (other than Messrs. Hindery and Fisher, who did not vote on the
Merger, and Mr. Sparkman, who did not attend the meeting (each of whom has been
recommended to the DMX Board by TCI)) has approved the Merger Agreement and the
Merger, has determined unanimously that the terms of the Merger Agreement are
fair to, and that the Merger Agreement is in the best interests of, DMX and its
stockholders and therefore recommends that the holders of DMX Common Stock vote
FOR approval of the Merger Agreement.
Reasons for the Merger. In reaching their determination to approve the
Merger Agreement and the transactions contemplated thereby, the Special
Committee and the DMX Board concluded that the proposed Merger was the best way
to deliver value to DMX's stockholders given DMX's limited financial resources
and on-going significant operating losses. In addition, they have identified the
following potential benefits of the Merger that they believe will contribute to
the success of the Surviving Corporation and benefit DMX stockholders:
(i) The Merger provides DMX stockholders with an opportunity to
participate in the potential benefits of the Merger while still giving them
the right to sell their TCI Music Series A Common Stock to TCI after one
year at $8.00 per share or the equivalent of $2.00 per share of DMX Common
Stock (a premium of approximately fifty percent, assuming a fifteen percent
discount rate, over the closing price of DMX's Common Stock of $1.125 on
August 30, 1996, the last full trading day prior to the public announcement
of TCI's Merger proposal) if TCI Music's stock has not traded at that level
for at least 20 consecutive trading days before such time.
(ii) DMX believes that its future success is highly dependent upon its
ability to increase substantially the number of subscribers it has in both
commercial and residential markets. Inasmuch as DMX's offerings to
residential cable subscribers are increasingly "bundled" as part of a
package of services made available by cable operators to subscribers for a
single price rather than paid for separately by subscribers, DMX believes
that the revenue it derives from each residential cable subscriber will be
reduced and that its future profitability will increasingly be based on its
ability to substantially increase the number of such subscribers. DMX
believes that its existing financial constraints severely limit its ability
to effectuate such an increase on a stand-alone basis and that it is very
unlikely that DMX will have access to adequate capital to implement its
business plan if it does not complete the Merger. DMX's primary source of
operating funds has been private placements of DMX Common Stock and, given
DMX's results of operations and financial condition, the DMX Board believes
that it is unlikely that DMX will be able to raise sufficient funds through
private placements in order to meet its capital needs, although TCI's
Merger proposal included a commitment by TCI to provide DMX with up to a
$3.5 million loan in order to meet certain of DMX's liquidity needs. See
"ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER -- TCI Loan."
Subsequent to entering into the Merger Agreement, DMX asked TCI if it would
be willing to make an additional equity investment in DMX; TCI declined to
do so.
Further, DMX believes that the combined company may have access to
greater financial resources than DMX on a stand-alone basis and that any
such improved financial strength will enhance the Surviving Corporation's
flexibility in developing and expanding its existing products, services and
subscriber base (which it currently lacks the financial resources to do),
as well as in exploring and capitalizing on new expansion opportunities.
(iii) DMX believes that the Surviving Corporation will be able to
achieve synergistic benefits through the complement of projects and
services of DMX, TCI and TCI Music. Additionally, DMX believes that the
Merger should result in financial and administrative synergies, including
increased
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availability and reduced cost of capital for DMX, cost efficiencies in
restructuring DMX's contractual commitments and overhead reductions.
(iv) DMX believes that the management of TCI Music and TCI Music's
close association with TCI would give DMX increased personnel depth and
expertise in marketing.
In the course of its deliberations, the Special Committee and the DMX Board
reviewed and considered a number of other factors relevant to the Merger,
including, among other things, the following:
(i) The information concerning DMX's and TCI's respective businesses,
financial position, results of operations and properties, including that
DMX has sustained significant operating losses and has not generated
positive cash flow from operations for several years and that DMX requires
substantial additional capital and debt financing in order to exploit its
business opportunities which DMX was unlikely to secure on acceptable terms
due to its financial condition;
(ii) The views of DMX's management and the Special Committee's
recommendations, in the case of the DMX Board, and DMX's financial advisor,
Houlihan Lokey, including the due diligence review which had been conducted
regarding TCI Music's business plans and possible synergistic and expansion
opportunities for the two companies;
(iii) With the assistance of its financial advisor, the consideration
paid in other comparable merger and acquisition transactions (and the fact
that the Merger is a strategic combination), and the terms of the Rights
Agreement providing DMX stockholders with the right to sell their TCI Music
Series A Common Stock to TCI at $8.00 per share (the equivalent of $2.00
per share of DMX Common Stock) after one year if the stock has not
previously traded at that level for 20 consecutive trading days;
(iv) The opinion of Houlihan Lokey that, as of the date of the Merger
Agreement, the Merger Consideration to be received by the DMX stockholders
is fair to DMX's stockholders from a financial point of view (see
"-- Opinion of Financial Advisor");
(v) An evaluation of the prospects of DMX on a stand-alone basis
(which the DMX Board concluded were unfavorable), including financing
alternatives for DMX, taking into consideration its efforts during the 18
months prior to execution of the Merger Agreement, including DMX's
unsuccessful efforts during that time period to secure equity or debt
financing either through investment bankers or strategic alliances or
corporate partnering arrangements with other companies engaged in the music
and entertainment business;
(vi) TCI Music's rights and obligations under the Contribution
Agreement, including the fact that TCI Music's obligations with respect to
the TCI Music Note would not affect TCI's purchase obligations under the
Rights;
(vii) The changing nature of the cable and music delivery industries
and the need for substantial capital to compete effectively;
(viii) The potential to reduce DMX's guarantee and other contractual
commitments relating to its European operations which the restructuring of
those operations in anticipation of the Merger provided (although the
Merger is not conditioned upon, and is not subject to, consummation of the
disposition of the European Companies by DMX);
(ix) With the assistance of DMX's legal counsel, the terms of the
Merger Agreement, including the obligation of DMX following the date of
execution of the Merger Agreement (February 6, 1997) not to solicit or
encourage other acquisition proposals (and the fact that no other
expressions of acquisition interest were forthcoming in the five months
following announcement of TCI's acquisition proposal), the circumstances
under which DMX can terminate the Merger Agreement and the closing
conditions to the Merger; and
(x) That the Merger requires approval by the holders of a majority of
the outstanding voting power of the DMX Common Stock and that TCI owns
approximately 45.7% of such outstanding shares and will be entitled to vote
with respect to the Merger.
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The DMX Board also considered a variety of potentially negative factors in
its deliberations concerning the Merger, including the following factors: (i)
the substantial charges expected to be incurred in connection with the Merger,
including the transaction expenses arising from the Merger; (ii) the risk that,
despite the intentions and the efforts of the parties, the benefits sought to be
achieved in the Merger will not be achieved; (iii) the fact that TCI was not
willing to contractually commit that TCI Music would be the exclusive vehicle
through which it and its affiliates would conduct their residential and
commercial audio music activities; (iv) the risk that DMX might be required to
perform its obligations under various guarantees or contractual obligations
relating to its European operations notwithstanding the effort to restructure
those obligations to avoid such commitments; and (v) the other risks described
above under "Risk Factors." The DMX Board also considered the fact that,
although a substantial portion of the business of TCI Music after the Merger
would be the business of DMX, TCI would be the beneficial owner of 80.75% of,
and 97.7% of the voting power related to, the shares of TCI Music Common Stock
outstanding immediately after the Merger. The allocation of ownership of TCI
Music Common Stock was determined by negotiation between DMX and TCI, during
which there was no attempt to value the tangible assets and potential revenue
stream represented by the Contributed Net DMX Revenues to be contributed by TCI
pursuant to the Contribution Agreement in exchange for TCI Music Series B Common
Stock and the TCI Music Note. Nevertheless, as described above, various factors,
including DMX's financial condition and the value to be provided to DMX
stockholders through TCI's issuance of the Rights, influenced the DMX Board's
determination that it should accept TCI's proposal as to the share of economic
and voting power to be held by TCI after the Merger, notwithstanding the
uncertainty as to the value of the Contribution to be made by TCI to TCI Music
pursuant to the Contribution Agreement.
The foregoing discussion of the information and factors considered by the
DMX Board is not intended to be exhaustive but is believed to include all
material factors considered by the DMX Board. In view of the variety of factors
considered in connection with its evaluation of the Merger, the DMX Board did
not find it practicable to and did not quantify or otherwise assign relative
weights to the specific factors considered in reaching its determination. In
addition, individual members of the DMX Board may have given different weights
to different factors.
Board Recommendation. THE DMX BOARD HAS APPROVED THE MERGER AGREEMENT AND
THE MERGER AND BELIEVES THAT THE TERMS OF THE MERGER AGREEMENT ARE FAIR TO, AND
THAT THE MERGER IS IN THE BEST INTERESTS OF, DMX AND ITS STOCKHOLDERS AND
THEREFORE RECOMMENDS THAT THE HOLDERS OF DMX COMMON STOCK VOTE FOR APPROVAL AND
ADOPTION OF THE MERGER AGREEMENT.
For a discussion of the interests of certain members of DMX's management
and the DMX Board in the Merger, see "-- Interests of Certain Persons in the
Merger."
TCI'S REASONS FOR THE MERGER
The TCI Board has unanimously approved the Merger Agreement. The TCI Board
believes that the Merger represents an opportunity for TCI to increase its
ownership interest in DMX to approximately 89.6% in a manner that does not
initially require expenditure of its cash resources or the borrowing of funds.
In making its determination, the TCI Board considered a number of factors,
including among other things, the terms and conditions of the transactions
contemplated by the Merger Agreement; information with respect to the business,
operations and prospects of DMX; and the views and opinions of the management of
TCI. The foregoing discussion is believed to include all material factors
considered by the TCI Board.
OPINION OF FINANCIAL ADVISOR RETAINED BY THE DMX BOARD
The Special Committee engaged Houlihan Lokey to render an opinion on behalf
of the public stockholders of DMX that the Merger Consideration to be received
by the public stockholders of DMX in connection with the Merger is fair to them
from a financial point of view.
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Representatives of the Special Committee interviewed various investment
bankers to assist it in its evaluation of TCI's merger proposal. In selecting a
firm, the Special Committee considered a variety of factors, including the
firm's reputation, experience, expertise in the relevant industries, cost and
ability to assist the Special Committee in a timely fashion. Based on the
foregoing, the Special Committee selected Houlihan Lokey as its financial
advisor.
As compensation to Houlihan Lokey for its services in connection with the
Merger, the Special Committee agreed to pay Houlihan Lokey a fee of $115,000. No
portion of Houlihan Lokey's fees are contingent upon the successful completion
of the merger. The Special Committee and DMX have also agreed to indemnify
Houlihan Lokey and related persons against certain liabilities, including
liabilities under Federal securities laws, arising out of the engagement of
Houlihan Lokey, and reimburse Houlihan Lokey for certain expenses.
Houlihan Lokey is a nationally recognized investment banking firm that is
continually engaged in providing financial advisory services in connection with
mergers and acquisitions, leveraged buyouts, business valuations for a variety
of regulatory and planning purposes, recapitalizations, financial
restructurings, and private placements of debt and equity securities. Houlihan
Lokey has no prior relationship with DMX or its affiliates or TCI or its
affiliates.
Houlihan Lokey did not, and was not requested by the Special Committee to,
make any recommendations as to the form or amount of consideration to be paid to
the stockholders in connection with the Merger. The Special Committee did not
impose any restrictions or limitations upon Houlihan Lokey with respect to its
investigation made or the procedures it followed in rendering its opinion.
In arriving at its opinion, Houlihan Lokey has made such analyses and
inquiries as it deemed necessary and appropriate under the circumstances,
including:
(i) reviewed DMX's annual report on Form 10-K for the fiscal year
ended September 30, 1996, which DMX's management has identified as being
the most current financial statements available;
(ii) reviewed copies of the following agreements:
The Merger Agreement;
The Rights Agreement;
The Contribution Agreement;
The TCI Loan; and
The Agreements respecting DMX's European operations between DMX and
Mr. Rubinstein;
(iii) met with, or held discussions with, certain members of the
senior managements of DMX and TCI Music to discuss the operations,
financial condition, future prospects and projected operations and
performance of DMX and TCI Music, and met with representatives of DMX's
counsel to discuss certain matters;
(iv) visited certain facilities and business offices of DMX;
(v) reviewed forecasts and projections prepared by DMX's management
with respect to DMX for the fiscal years ended September 30, 1997 through
2000;
(vi) reviewed the historical market prices and trading volume for the
DMX Common Stock for the two-year period prior to announcement of the TCI
Merger proposal, which Houlihan Lokey believed was sufficient to evaluate
the short and long-term trends in the trading price of DMX Common Stock;
(vii) reviewed certain other publicly available financial data for
certain companies that Houlihan Lokey deemed comparable to DMX, and
publicly available prices and premiums paid in other transactions that
Houlihan Lokey considered similar to the Merger; and
(viii) conducted such other studies, analyses and inquiries as they
deemed appropriate.
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In order to render its opinion, Houlihan Lokey estimated the value of the
DMX Common Stock and compared it to the value of the Merger Consideration to be
paid in connection with the Merger. When determining the value of a business
enterprise, there are three general approaches available to the valuation
professional: the market approach, the income approach and the asset approach.
These are also commonly referred to as the market multiple, discounted cash flow
and adjusted book value approaches, respectively. The choice of which approach
to use in a particular situation will depend upon the specific facts and
circumstances associated with the company, as well as the purpose for which the
valuation analysis is being conducted. Houlihan Lokey did not utilize the
adjusted book value approach because, in the exercise of its professional
judgment, Houlihan Lokey concluded that such approach was not appropriate for
determining the value of the DMX Common Stock, including because DMX did not
have a significant investment in tangible assets. The comparable market multiple
analysis estimated the per share value by calculating market multiples for the
latest twelve month's revenues of a peer group of companies and then applying a
selected multiple based on a comparative financial analysis of DMX to the peer
group of companies. The discounted cash flow analysis estimated the per share
value by discounting to the present, at a risk-adjusted discount rate, the
projected cash flows to be generated by DMX's business. The per share value
generated by each methodology was lower than the Merger Consideration to be paid
in connection with the Merger, leading Houlihan Lokey to conclude that the
Merger Consideration to be paid to the public stockholders of DMX in connection
with the Merger was fair to them from a financial point of view. No other
conclusions of value were reached by Houlihan Lokey.
Houlihan Lokey relied upon and assumed, without independent verification,
that the financial forecasts and projections provided to it have been reasonably
prepared and reflect the best currently available estimates of the future
financial results and condition of DMX, and that there has been no material
change in the assets, financial condition, business or prospects of DMX since
the date of the most recent financial statements made available to it.
Houlihan Lokey did not independently verify the accuracy and completeness
of the information supplied to it with respect to DMX and did not assume any
responsibility with respect to it. Houlihan Lokey has not made any physical
inspection or independent appraisal of any of the properties or assets of DMX.
Houlihan Lokey's opinion is necessarily based on business, economic, market and
other conditions as they exist and can be evaluated by it at the date of its
letter.
In reaching its conclusions, Houlihan Lokey utilized two primary valuation
methodologies, as described below:
The Market Multiple Approach. The market multiple approach is one of
determining a level of earnings or revenues that is considered to be
representative of the future performance of the business, and multiplying this
figure by an appropriate risk-adjusted market multiple.
The market multiple is an expression of what investors believe to be a fair
and reasonable rate of return for the particular security, given the inherent
risks of ownership. It incorporates expectations of growth and rests on the
implicit assumption that some level of earnings or revenues will be generated by
the enterprise into perpetuity. The market multiple employed was selected
through the market comparison method, whereby companies having their stock
traded in the public market were selected for comparison purposes and used as a
basis for choosing a reasonable market multiple for DMX.
In employing the market multiple approach, a representative list of
publicly owned companies that are similar to DMX in those respects carrying the
greatest weight with the investing public were selected for comparison purposes.
Houlihan Lokey conducted a search for companies which were comparable to DMX in
terms of its operating and financial characteristics. Key search criteria
included:
- The company's primary business had to be supplying content to cable
systems and networks.
- The company's common stock had to be outstanding in the hands of the
public.
- The trading market of the company had to be relatively active to obtain
true investor sentiment.
- The company had to make its financial information public.
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The results of this search indicated that the following three companies met
this search criteria and were most comparable to DMX: BET Holdings Inc., Gaylord
Entertainment and International Family Entertainment. In some cases, companies
may be quite similar from an investment standpoint, even though they appear to
be engaged in somewhat different lines of business. Primarily, they offered
operational and economic comparability in the areas of major importance to the
investing public. Accordingly, Houlihan Lokey relied upon the entire peer group,
taken as a whole, for comparison purposes.
Houlihan Lokey noted that the selected comparable companies are
significantly larger than DMX, have more liquidity and are more profitable.
Moreover, several of the comparable companies operate more diversified
activities than DMX. However, DMX exhibits above average revenue growth relative
to the comparable companies.
Total invested capital to revenue multiples for the comparable companies
were derived by dividing the value of each company's total invested capital by
the latest twelve months' revenues. Total invested capital ("TIC") is defined as
the book value of a company's debt and preferred equity (where book value
approximates fair market value), plus the enterprise value of the company's
common equity. The enterprise value of the common equity is computed by
multiplying the number of shares outstanding and the most recent 20-day average
price per share as of the valuation date. These resulting multiples of
TIC/Revenue ranged from 2.74 to 3.90.
It was Houlihan Lokey's opinion that an investor considering an investment
in DMX would select a TIC/Revenue multiple at the high end of the comparables'
range to reflect the expected growth of DMX's operations. Based on all the
evidence analyzed, a TIC/Revenue multiple of 3.5 times DMX's trailing twelve
months' revenue is considered reasonable for DMX. The selected multiple was
multiplied by DMX's last twelve months' revenue. DMX's debt was subtracted from
the result to arrive at an estimate of its equity value.
The Discounted Cash Flow Approach. Forecasts for the four-year period
ended September 30, 2000 were provided by Company management. The key
determinants to value once the forecasted cash flows are established is the rate
used to discount the cash flows to present value and the expected annual growth
rate or market multiple to be applied to the last year's cash flow in estimating
the terminal value of the enterprise.
SELECTING DISCOUNT RATES. Houlihan Lokey utilizes several approaches in
the determination of relevant discount rates (costs of capital) by which
projected cash streams may be discounted. Generally, Houlihan Lokey utilizes
different discount rates for different corporate assets (i.e., receivables, real
estate, library receipts, future production receipts and so on). When
discounting the cash stream of the combined operations of a company, Houlihan
Lokey will utilize a weighted average discount rate of the various assets.
Houlihan Lokey utilizes two general approaches in developing discount rates
that are risk-adjusted for the assets (or company) being valued. The first
approach consists of comparing the subject company (or subject company's assets)
with companies that have publicly traded debt and/or equity. By contrasting the
subject company with the public company information, Houlihan Lokey is able to
determine whether rates of return for the subject company should be
risk-adjusted as compared to those of the public companies. In the selection of
discount rates appropriate for DMX, consideration was given to the growth
expectations and the risk characteristics of an investment in DMX relative to
those of the public companies used in the analysis. While no one public company
is perfectly comparable to DMX, information regarding how investors would view
DMX can be gained by a comparative analysis of the three public companies
included in this analysis as listed in the market multiple approach section.
The second approach, a market-based approach, consists of Houlihan Lokey's
continual required return information updates arising from conversations with
debt and equity providers.
Depending upon whether the cash flows being discounted are before the
payment of interest expense or after, the appropriate discount rate is either
the cost of equity ("K(e)") or a weighted average cost of capital ("WACC"). The
cash flows throughout this analysis do not consider the payment of interest,
they are debt-free cash flows, and therefore WACC was selected as the
appropriate discount rate. The WACC represents the combined average cost of debt
and equity. The cost of debt is determined, in this analysis, from the median
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cost of debt of the comparable public companies as well as from consideration of
information gathered from debt providers in the market. The Capital Asset
Pricing Model ("CAPM"), which states that the return on any risky asset must be
greater than the risk-free rate, is used to calculate the cost of equity K(e),
as indicated in the following table.
<TABLE>
<S> <C> <C> <C> <C>
- - -------------------------------------------------------------------------------------------
K(e) = R(F)+(R(M)-R(F))(B(L))
R(F) = Risk-free rate of return
Where R(M) = Return on market portfolio
B(L) = Leveraged beta*
* Beta is a standardized measure of nondiversifiable risk and is defined as the covariance
of the subject company return with the market divided by the variance of the market
returns.
- - -------------------------------------------------------------------------------------------
</TABLE>
Houlihan Lokey's application of the CAPM to compute a reasonable cost of
equity for DMX, and selection of the additional variables used in the WACC
equation were based on the comparative analysis summarized in the "Market
Multiple" section, above. In addition, Houlihan Lokey's selection of an
appropriate discount rate incorporated Houlihan Lokey's assessment of DMX's
ability to achieve the results projected by its management. In summary, Houlihan
Lokey's analysis yielded an estimated WACC ranging from 14.5 percent to 16.5
percent.
DETERMINATION OF TERMINAL VALUE. The terminal value used in the discounted
cash flow approach is essentially an estimate of the value of the enterprise as
of the end of the final period for which cash flow projections have been made.
It is necessary to compute this value because, although the expectation is that
the company will remain a viable going-concern beyond the final period, one
cannot project with enough certainty the cash flows to be generated in any given
period.
There are two basic methods of computing the terminal value for a
going-concern. One is the "multiple method," which uses a projected market
multiple as in the market multiple approach.
Typically, the earnings before interest, taxes, depreciation and
amortization ("EBITDA") for the final projection period is adjusted to arrive at
a "normalized" EBITDA level, and then multiplied by a reasonable Price/EBITDA
multiple to yield an indication of value for the TIC of the company. The other
common method of computing the terminal value is referred to as the "perpetuity
method," and it uses the projected free operating cash flow as its basis, rather
than EBITDA. The free operating cash flow projected in the final period is
adjusted to arrive at a level of cash flow for the first year beyond the
projection period which is representative of the future cash-generating
capability of the company. This "normalized" cash flow figure incorporates
expectations of the level of investment required to maintain the business into
the future, as well as the return on investment that the business can be
expected to sustain. The normalized cash flow figure is then capitalized as a
perpetuity by the previously determined discount rate, adjusted for some level
of growth which can be expected into perpetuity. The following is a
representation of the perpetuity method formula:
<TABLE>
<S> <C> <C> <C>
- - ---------------------------------------------------------------------------------------
T = CF(n)/(WACC-G)
Where T = Terminal value
CF(n) = Normalized cash flow
WACC = Weighted-average cost of capital
G = Growth rate in perpetuity
- - ---------------------------------------------------------------------------------------
</TABLE>
The terminal value is then discounted back to the present using the
previously selected discount rate.
In Houlihan Lokey's analysis of DMX, Houlihan Lokey chose to use the
perpetuity method to compute the terminal value. The analysis indicates that an
appropriate terminal growth rate would range from 6.0 to 8.0 percent.
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<PAGE> 44
In analyzing the value of the Merger Consideration, Houlihan Lokey utilized
two methodologies. The first discounted to present value the $2.00 equivalent
per share of DMX Common Stock potentially available at the end of a one-year
period upon exercising a Right and putting a share of TCI Music Series A Common
Stock to TCI pursuant thereto, resulting in a valuation of the Merger
Consideration of $1.85. The second methodology was to utilize sophisticated
financial models which value put options and to add the value of the Right to
the estimated value of a share of TCI Music Series A Common Stock immediately
after the close of the Merger. The value of the Right (regardless of whether TCI
paid cash, stock or a combination of both) derived by use of these models was
$0.49. The 20-day average market value as of February 5, 1997 of a share of DMX
Common Stock of $1.47 was used as a proxy for the value of a share of TCI Music
Series A Common Stock immediately after the close of the Merger. The value of
the Right of $0.49 added to the value of a share of DMX Common Stock of $1.47
resulted in a value indication for the Merger Consideration of $1.96.
The only circumstance in which the Rights will have "no value" is if the
price of a share of TCI Music Series A Common Stock exceeds $8.00 per share (the
equivalent of $2.00 per share of DMX Common Stock) for a period of twenty
consecutive trading days prior to the first anniversary of the Effective Date;
that is, the Rights are meant to provide DMX's stockholders with a guarantee of
a particular trading value for their shares of TCI Music Series A Common Stock
during the one year period immediately following the Effective Date of the
Merger.
Because the value of the Merger Consideration in the Merger was higher than
each of the implied values of DMX's stock price generated by each of the above
analyses, Houlihan Lokey concluded that the Merger Consideration to be received
by the public stockholders of DMX was fair to them from a financial point of
view.
The aforementioned analyses required studies of the overall market,
economic and industry conditions in which DMX operates, and DMX's operating
results. Research into, and consideration of, these conditions were incorporated
into the analyses.
Houlihan Lokey's opinion is based on the business, economic, market and
other conditions as they existed as of February 6, 1997. In rendering its
opinion, Houlihan Lokey has relied upon and assumed, without independent
verification, that the financial results provided to Houlihan Lokey by DMX's
management have been reasonably prepared and reflect the best current available
estimates of the financial results and condition of DMX. Houlihan Lokey did not
independently verify the accuracy or completeness of the information supplied to
it with respect to DMX and does not assume responsibility for it. Except as set
forth above, Houlihan Lokey did not make any physical inspection or independent
appraisal of the specific properties or assets of DMX.
The preparation of a fairness opinion is a complex analytical process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and application of those methods to the particular
circumstances and is therefore not readily susceptible to summary description.
In arriving at its opinion, Houlihan Lokey did not attribute any particular
weight to any analysis or factor considered by it, but rather made the
qualitative judgements as to the significance and relevance of each analysis and
factor. Accordingly, Houlihan Lokey believes that its analyses and the summary
set forth herein must be considered as a whole and that selecting portions of
its analyses without considering all factors and analyses could create an
incomplete view of the processes underlying the analyses set forth in the
Houlihan Lokey opinion. In its analysis, Houlihan Lokey made numerous
assumptions with respect to DMX, industry performance, general business,
economic, market and financial conditions and other matters, many of which are
beyond the control of DMX. The estimates contained in such analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be more or less favorable than suggested by such analyses.
Additionally, analyses relating to the value of businesses or securities are not
appraisals. Accordingly, such analyses and estimates are inherently subject to
substantial uncertainty.
Houlihan Lokey's analysis described above resulted in indications of the
value of DMX's operations ranging from $83 million to $86 million. Based on
Houlihan Lokey's analyses using the market multiple approach and discounted cash
flow approach described above and considerations which it deems appropriate
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<PAGE> 45
under the circumstances, and after subtracting off debt from the total value of
DMX, Houlihan Lokey concluded that the relevant range of value for DMX's
aggregate equity is $77 million to $80 million and on a per share basis ranged
from $1.30 to $1.33.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the DMX Board with respect to the
Merger, stockholders should be aware that certain members of DMX's management
and the DMX Board have certain interests in the Merger that are in addition to
or different from the interests of stockholders of DMX generally. The DMX Board
was aware of these interests and considered them, among other matters, in
approving the Merger and the Merger Agreement.
Relationship of DMX Directors to TCI. Messrs. Hindery, Fisher and
Sparkman, directors of DMX, also serve as directors or executive officers of
TCI. Mr. Sparkman currently serves as a director of TCI. Mr. Sparkman was
Executive Vice President of TCI until March 1995. Mr. Fisher currently serves as
a director of TCI and serves as a consultant to TCI. Mr. Fisher served as an
officer of TCI until January 1996. Additionally, Mr. Hindery is the managing
general partner of the general partner of InterMedia Partners and its affiliated
entities. InterMedia Partners is a multi-system cable television operator. TCI
has various investments in InterMedia Partners and its related entities. Mr.
Hindery was appointed a director of TCI in May 1997, President and Chief
Operating Officer of TCI effective March 1, 1997 and Director, President and
Chief Operating Officer of TCIC in March 1997. In addition, there is an
informal, non-binding understanding between TCI and a majority of the existing
directors of DMX that TCI may recommend the appointment of two additional
candidates for election to the DMX Board. TCI has not made any appointments to
the DMX Board pursuant to this arrangement.
Retention Bonus Arrangements. The DMX Board has authorized retention
bonuses for four key employees, including DMX's Chief Financial Officer. Each
such employee will be paid an amount equal to six months' base salary (nine
months in the case of DMX's Chief Financial Officer), payable upon consummation
of the Merger. The aggregate amount of such payments will be approximately
$206,000.
Stock Options. Under the terms of DMX's 1991 Incentive Stock Option Plan,
1991 NonQualified Stock Option Plan and 1991 Non-Qualified Stock Option Plan for
Non-Employee Directors (collectively, the "1991 Plans"), in the case of a merger
such as the Merger, option holders have the right to continue to hold their
options, which become exercisable for the "acquisition consideration."
Accordingly, options granted under the 1991 Plans will carry over after the
Merger and be exercisable for TCI Music Series A Common Stock and Rights (if the
Rights are not then terminated). However, all such options terminate and are not
exercisable three months after the holder is no longer employed or serving as a
director of DMX. By the terms of DMX's 1993 Stock Option Plan and certain option
agreements relating to options granted outside any plans, all outstanding
options may be accelerated, regardless of vesting effective 30 days prior to the
date of the Merger upon written notice to option holders, and, unless exercised,
such options will terminate upon consummation of the Merger. DMX has agreed in
the Merger Agreement to take all action necessary to cause the options that can
be terminated upon consummation of the Merger to be canceled if not otherwise
exercised, and to use its best efforts to cause each other option that is
outstanding that is not terminable upon consummation of the Merger to be
canceled prior to the Effective Time of the Merger. As of the date of this Proxy
Statement/Prospectus, DMX has taken all action necessary to accelerate the
options granted under the 1993 Stock Option Plan and certain option agreements;
no action has been taken by DMX to cancel any options that will carryover in the
Merger. Messrs. Sparkman and Troxel have agreed to the cancellation of options
granted by DMX under the 1991 Plans that would otherwise carryover in the
Merger, in exchange for options to purchase TCI Music Series A Common Stock to
be granted by TCI Music at the Effective Time. See "MANAGEMENT OF TCI
MUSIC -- Other Arrangements."
As of May 26, 1997, employees of DMX held options to purchase an aggregate
of 600,000 shares of DMX Common Stock under the 1991 Plans, 2,934,583 shares of
DMX Common Stock under the 1993 Stock Option Plan and 50,000 shares of DMX
Common Stock pursuant to grants made outside any plan. The options granted under
the 1993 Stock Option Plans and outside any plans, are exercisable at a weighted
average exercise price of $3.69 (at exercise prices ranging from $2.00 to
$6.25); the options granted under the
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<PAGE> 46
1991 Plans are exercisable at a weighted average exercise price of $4.32 (at
exercise prices ranging from $4.18 to $5.75). See "THE MERGER
AGREEMENT -- Certain Personnel Matters."
Indemnification. After the Effective Time, TCI Music will cause the
Surviving Corporation to, and, should the Surviving Corporation fail or be
unable to do so, TCI Music will (i) indemnify, defend and hold harmless each
person who is or has been at any time prior to the Effective Time, an officer or
director of DMX, in connection with any claim based on or arising out of, any
actions or omissions of such person as an officer or director of DMX on or prior
to the Effective Time until the expiration of the applicable statutes of
limitation to the fullest extent permitted under the DGCL and the DMX Charter
and DMX Bylaws in effect on the date of the Merger Agreement and (ii) pay
expenses in advance of the final disposition of any such claim to the fullest
extent permitted by and pursuant to applicable law. See "THE MERGER
AGREEMENT -- Indemnification."
Disposition of European Companies. DMX's Board of Directors had decided in
August 1996, unrelated to TCI's Merger proposal, that it would discontinue
further funding of the operations of the European Companies. On October 3, 1996,
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer of DMX,
made a proposal to the DMX Board to acquire DMX's interest in the European
Companies. The DMX Board appointed J.C. Sparkman as a committee of the Board to
negotiate with Mr. Rubinstein with respect to his proposal. Thereafter, on
December 3, 1996, the DMX Board of Directors approved the disposition of the
European Companies to Mr. Rubinstein and on December 18, 1996, DMX and Mr.
Rubinstein entered into two alternative agreements providing for such
disposition. Under the first alternative agreement (the "Reorganization
Agreement"), DMX would retain a ten percent equity interest in the European
Companies, which would have an exclusive, five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union and the
Middle East and would have the right to use DMX's trademarks for two years. In
addition, Mr. Rubinstein has agreed to guarantee certain obligations of the
European Companies for satellite-uplink capacity (which guaranty will be secured
by a pledge of the DMX Common Stock owned by Mr. Rubinstein). Mr. Rubinstein
will seek to reorganize the operations of the European Companies and will seek
new equity investors. If the European Companies cannot be reorganized, then DMX
and Mr. Rubinstein will proceed under the second alternative agreement (the
"Newco Agreement"), under which the European Companies would be placed in
receivership and Mr. Rubinstein would organize the operations of the European
Companies under a new company to distribute the DMX music service on
substantially the same terms as provided for in the Reorganization Agreement and
DMX will subscribe for a ten percent equity interest in the new venture.
Under the Reorganization Agreement, DMX would retain (a) ten percent of the
common stock of DMX-NV; (b) ten percent of the preference shares of DMX-UK now
owned by DMX, or to be issued to DMX after the articles of organization of
DMX-UK have been amended; (c) a ten percent interest in the $24,436,000
principal amount note acquired from TCI-Euromusic, Inc. that is owed by DMX-NV
to DMX; and (d) a ten percent interest in any other indebtedness of DMX-UK or
DMX-NV to DMX. Mr. Rubinstein would obtain a ninety percent interest in each of
the foregoing. Under the Reorganization Agreement, Mr. Rubinstein would use his
ninety percent interest in the equity of the European Companies to provide
equity to creditors or new investors in the reorganization of the European
Companies until he has obtained $15,000,000 in debt forgiveness, new investment,
or property or services provided without charge. Thereafter, Mr. Rubinstein
would not be obligated to use only his equity interest in the European Companies
to provide such equity, and DMX's interest in the European Companies would be
diluted by any further equity issuances required to effect the reorganization of
the European Companies. In addition, DMX would be required to participate pro
rata, as a continuing owner of ten percent of the intercompany debt of DMX-UK
and DMX-NV, in any arrangement that Mr. Rubinstein makes for his ninety percent
interest in such debt (such as exchanging the debt for equity or forgiving all
or part of the debt) in connection with reorganizing DMX-UK and DMX-NV.
If necessary creditor concessions cannot be obtained, DMX and Mr.
Rubinstein will proceed with the Newco Agreement, pursuant to which DMX would
receive ten percent of the common stock of the new company ("Newco") that would
be organized by Mr. Rubinstein to conduct the operations of the European
Companies. Initially, Mr. Rubinstein would hold the other ninety percent of the
common stock of Newco, but
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<PAGE> 47
he would be obligated to raise the first $15,000,000 of Newco's capital
requirements (whether as cash or as services and property provided without
charge) by providing investors or vendors with common stock interests from his
ninety percent interest in Newco.
DMX does not believe that its ten percent equity ownership interest, either
in the European Companies or Newco, will expose it to any material risks, other
than the risk that the value of such interest may decrease. DMX agreed to Mr.
Rubinstein's request for a five-year, royalty-free license because DMX believed
that any amounts it might be able to receive from a license that provided for a
royalty would be offset by the resulting decrease in the value of its interest
in the entity. Furthermore, the DMX Board believed that the royalty-free license
would significantly increase Mr. Rubinstein's ability to successfully negotiate
with the creditors of the European Companies in order to reorganize their
operations, which the DMX Board believed would be more beneficial to DMX than
placing the European Companies in receivership. Reorganization would likely
result in the release of DMX from certain of its guarantees of contractual
obligations of the European Companies, and would also help maintain DMX's
relationships with major European cable companies that would likely be adversely
affected if the European Companies were placed in receivership. In addition,
although DMX did not establish a value for either the distribution or trademark
license, because DMX does not anticipate that in the near future it will
recommence business operations in the territories covered by the distribution
license, the DMX Board did not believe that there was a significant opportunity
cost to DMX from providing the license on a royalty-free basis.
The respective interests of the members of DMX's management and the DMX
Board described above constitute all of the material interests of those persons
in the Merger that are known to DMX to be different from, or that constitute an
extra or special benefit not shared on a pro rata basis with, the stockholders
of DMX.
Security Ownership. For information regarding the security ownership of
DMX Common Stock by DMX's directors, five highest paid executive officers and
directors and executive officers as a group, see "OWNERSHIP OF TCI MUSIC AND DMX
STOCK -- Security Ownership of DMX."
Interests of TCI under the Contribution Agreement. Pursuant to the
Contribution Agreement, at the Effective Time TCI will cause each TCI System
Owner to contribute to TCI Music the right to receive the Contributed Net DMX
Revenues of such TCI System Owner until the earlier of the date on which the
contributing entity ceases to be a TCI System Owner and December 31, 2006. TCI
also will cause the Contributed Tuners, which had a book value of approximately
$4.5 million as of March 31, 1997, to be contributed to TCI Music and will issue
the Rights with respect to the TCI Music Series A Common Stock to be issued to
DMX stockholders in the Merger. In exchange for the consideration provided by
TCI and its subsidiaries pursuant to the Contribution Agreement, TCI, as
designee of the TCI System Owners, will receive 62,500,000 shares of TCI Music
Series B Common Stock and the TCI Music Note in the principal amount of $40
million. See "ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE
MERGER -- Contribution Agreement."
No attempt was made by DMX or TCI to determine the value of the Contributed
Net DMX Contributed Revenues which, had the Merger been completed as of January
1, 1996, would have totaled approximately $4.4 million and $16.4 million for the
three months ended March 31, 1997 and the year ended December 31, 1996,
respectively. There is substantial uncertainty as to whether Contributed Net DMX
Revenues can be sustained at such levels because of the possible effects of
various factors, including the launch of digital compression technology. See
"CERTAIN INFORMATION CONCERNING TCI MUSIC -- Effect of Launch of Digital
Compression Technology." See "INDEX TO FINANCIAL STATEMENTS."
The amount of the TCI Music Note was fixed at $40 million to provide some
compensation to TCI for the reduction in its and its subsidiaries' borrowing
capacity that would result from the loss of cash flow represented by the
transfer of Contributed Net DMX Revenues to TCI Music. Under covenants in
various financing agreements, the amount of debt that TCI (or one or more of its
subsidiaries treated as separate borrowing entities) may incur is limited by
various financial tests, including covenants that limit debt as a multiple of
cash flow. Accordingly, TCI determined that TCI Music should compensate it for a
portion of this lost borrowing capacity. In light of the uncertainty as to the
amount of Contributed Net DMX Revenues that
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<PAGE> 48
would be paid to TCI Music in the future and the desire to provide TCI Music
with additional revenues, TCI determined that $40 million represented a
reasonable offset against such lost borrowing capacity and agreed to accept
payment in the form of the TCI Music Note, which will mature 180 days after the
Effective Time, to permit TCI Music sufficient time to obtain long-term debt
financing, proceeds of which would be used to retire the TCI Music Note.
However, there can be no assurance that such long-term debt financing will be
available on terms acceptable to TCI Music.
After the Merger, TCI will provide certain administrative and other
services and benefits to TCI Music, in exchange for which TCI will receive
reimbursement of all direct expenses and an allocated share of all indirect
expenses incurred by TCI in providing those services and benefits. See
"ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER -- Services Agreement."
TCI and TCI Music do not anticipate that payments made by TCI Music to TCI under
the Services Agreement will be material in amount.
CERTAIN CONSEQUENCES OF THE MERGER
GENERAL
Upon consummation of the Merger (i) Merger Sub will cease to exist as a
separate corporation and DMX as the Surviving Corporation will become a wholly
owned subsidiary of TCI Music and (ii) holders of DMX Common Stock will be
entitled to receive shares of TCI Music Series A Common Stock, the Rights and
cash in lieu of the issuance of fractional shares of TCI Music Series A Common
Stock and Rights. Until the Rights expire or are exercised, the Rights will be
evidenced by a legend on the certificates for shares of TCI Music Series A
Common Stock issued in the Merger. Accordingly, the Rights associated with the
shares of TCI Music Series A Common Stock will be represented solely by, and
will not be separable from, such shares of TCI Music Series A Common Stock, and
the surrender or transfer of any such certificate for shares of TCI Music Series
A Common Stock will also constitute the surrender or transfer of the Rights
associated with the TCI Music Series A Common Stock represented by such
certificate. Upon exercise of the Rights, the shares of TCI Music Series A
Common Stock associated with the Rights will be transferred to TCI in exchange
for cash and/or shares of Series A TCI Group Common Stock as described above.
See "THE MERGER AGREEMENT -- Consideration to be Received in the Merger." As
described under the caption "APPRAISAL RIGHTS," stockholders of DMX have the
right to pursue appraisal rights in lieu of receiving the TCI Music Series A
Common Stock and the Rights pursuant to the Merger. DMX stockholders who receive
TCI Music Series A Common Stock pursuant to the Merger will continue to be
stockholders of a Delaware corporation. See "COMPARISON OF STOCKHOLDERS'
RIGHTS."
Following the consummation of the Merger, the officers and directors of
Merger Sub will be the officers and directors of the Surviving Corporation.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
TCI and TCI Music have not requested a ruling from the IRS with respect to
the federal income tax consequences of the Contribution or the Merger. It is not
a condition to the Merger that the parties receive such a ruling or an opinion
of tax counsel with respect to the intended tax consequences of the Contribution
or the Merger. The following is a summary of the anticipated material federal
income tax consequences of the Merger to a holder of DMX Common Stock who
exchanges DMX Common Stock for TCI Music Series A Common Stock and Rights
pursuant to the Merger. Sherman & Howard L.L.C., counsel to TCI Music, is of the
opinion that the following summary, to the extent it represents matters of law
or legal conclusions, accurately summarizes the anticipated material federal
income tax consequences of the Merger to holders of DMX Common Stock.
The following discussion does not address all aspects of federal income
taxation that may be important to particular stockholders and may not be
relevant or applicable to stockholders who are subject to special tax rules,
including the tax consequences to DMX stockholders who acquired their shares of
DMX Common Stock pursuant to the exercise of stock options or otherwise as
compensation, or who are not citizens or
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<PAGE> 49
residents of the United States or are subject to the alternative minimum tax.
Finally, the discussion does not address the federal income tax consequences to
stockholders who exercise and perfect appraisal rights with respect to the
Merger. This discussion is based upon laws, regulations and rulings and judicial
authorities now in effect, all of which are subject to change.
For federal income tax purposes, the Contribution and the Merger should
qualify as transactions described in Section 351 of the Code.
Contribution and Merger. Assuming the Contribution and the Merger qualify
as transactions described in Section 351 of the Code, the following tax
consequences will result:
(i) Except for possible gain equal to the fair market value of the
Rights that could be recognized by TCI Music on the issuance of the Rights,
no gain or loss will be recognized by TCI Music solely as a result of the
Contribution and the Merger. The Contribution and the Merger will result in
deferred intercompany gain in the amount of $40 million to TCI and its
subsidiaries.
(ii) No gain or loss will be recognized by or includable in the income
of a holder of DMX Common Stock solely as a result of the receipt of TCI
Music Series A Common Stock pursuant to the Merger. A holder of DMX Common
Stock will recognize gain upon the receipt of cash in lieu of fractional
shares of TCI Music Series A Common Stock and upon receipt of the Rights as
described in (iii) and (iv) below. No loss will be recognized as a result
of the receipt of the Rights.
(iii) Any cash received by a holder of DMX Common Stock in lieu of a
fractional share of TCI Music Series A Common Stock will be treated as
having been received in exchange for such fractional share of TCI Music
Series A Common Stock and not as a dividend, and any gain or loss
recognized as a result of the receipt of such cash will be capital gain or
loss (assuming that the shares of DMX Common Stock are held as capital
assets) equal to the difference between the amount of cash received and the
portion of the stockholder's basis in DMX Common Stock allocable to such
fractional share. The capital gain or loss will be long term capital gain
or loss if the DMX Common Stock allocable to such fractional share was held
for more than 12 months.
(iv) If subsequent to the Merger after applying the constructive
ownership rules of Sections 318 and 304(c)(3) of the Code, the percentage
of DMX Common Stock constructively owned by a holder of DMX Common Stock is
less than 80% of the percentage of DMX Common Stock constructively and
actually owned by such holder of DMX Common Stock before the Merger or if
the Merger otherwise results in a "meaningful reduction" in such holder's
actual and constructive ownership of DMX Common Stock, any gain realized by
such holder as a result of the Merger will be recognized as capital gain to
the extent of the fair market value of the Rights (assuming that the shares
of DMX Common Stock are held as capital assets by such holder). The capital
gain or loss will be long term capital gain if the DMX Common Stock
allocable to the Rights was held for more than 12 months. If neither of
these tests is satisfied, a holder of DMX Common Stock will be treated as
having received a distribution equal to the fair market value of the
Rights, which distribution may be partially or wholly taxable as a
dividend. DMX stockholders should consult their own tax advisors concerning
the application of these tests.
(v) The tax basis for the shares of TCI Music Series A Common Stock
received by each holder of DMX Common Stock will equal the tax basis of
such holder's shares of DMX Common Stock (reduced by any amount allocable
to fractional share interests for which cash is received and the fair
market value of the Rights and increased by any gain recognized on the
receipt of the Rights). The tax basis for the Rights received by each
holder of DMX Common Stock will equal the fair market value of the Rights
as of the Effective Time.
(vi) Assuming that the shares of DMX Common Stock are held as capital
assets, a stockholder's holding period for the shares of TCI Music Series A
Common Stock received in the Merger will include the period during which
the shares of DMX Common Stock were held. A DMX stockholder's holding
period for the Rights will begin as of the Effective Time.
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If the Contribution and Merger do not qualify under Section 351 of the Code
then:
(i) TCI will realize deferred intercompany gain equal to the
difference between (x) the sum of the fair market value of the TCI Music
Series B Common Stock and $40 million and (y) TCI and its subsidiaries' tax
basis in the property contributed pursuant to the Contribution and Merger;
(ii) Assuming that the shares of DMX Common Stock are held as capital
assets, each DMX stockholder who receives shares of TCI Music Series A
Common Stock and Rights would recognize capital gain or loss equal to the
difference between the fair market value of the TCI Music Series A Common
Stock and Rights received (and cash received in lieu of fractional shares)
and such stockholder's tax basis in the shares of DMX Common Stock
surrendered and the capital gain or loss would be long-term capital gain or
loss if the shares of DMX Common Stock were held for longer than 12 months;
(iii) The holding period for TCI Music Series A Common Stock and
Rights received in the Merger would commence as of the day after the
Effective Time; and
(iv) Each former DMX stockholder would have a tax basis in the shares
of TCI Music Series A Common Stock and Rights received in the Merger equal
to the fair market value of such shares of TCI Music Series A Common Stock
and Rights.
Exercise of the Rights. The exercise of the Rights may be taxable or
non-taxable to the exercising holders of the Rights depending upon whether at
the time the Rights are exercised, the exercise of the Rights satisfies the
requirements of a reorganization within the meaning of Section 368(a)(1)(B) of
the Code. Because Section 368(a)(1)(B) requires that stock of TCI Music be
acquired solely for TCI voting stock, the exercise of the Rights will satisfy
the requirements of Section 368(a)(1)(B) of the Code only if TCI elects to pay
all of the purchase price for shares of TCI Music Series A Common Stock upon
exercise of the Rights in shares of Series A TCI Group Common Stock. If TCI
elects to pay any part of such purchase price in cash, the exercise of the
Rights will be a taxable transaction. Pursuant to the Rights Agreement TCI has
the right, in its sole discretion, to elect the form of consideration payable
upon exercise of the Rights and therefore, whether the exercise of the Rights
will be taxable or non-taxable will depend in part on the form of consideration
elected to be paid by TCI. See "THE MERGER -- Consideration to be Received in
the Merger -- Summary of Rights Agreement -- Exercise of Rights Generally;
Consideration Payable." In addition, even if TCI elects to pay the purchase
price on exercise of the Rights solely in shares of Series A TCI Group Common
Stock, the exercise of the Rights must satisfy the additional requirements of
Section 368(a)(1)(B) of the Code, including the requirement that TCI must own
80% of the voting stock and 80% of each class of nonvoting stock of TCI Music at
the time the Rights are exercised (the "80% Test") in order for the exercise of
the Rights to be non-taxable. TCI Music Series A Common Stock acquired by TCI in
connection with the exercise of the Rights will be included in determining
whether the 80% test is satisfied. Neither TCI nor any of its affiliates is
required to take or to omit any action to cause the exercise of the Rights to
qualify as a reorganization within the meaning of Section 368(a)(1)(B) of the
Code, so there is no assurance that the 80% Test will be satisfied when the
Rights are exercised or that TCI's ownership of TCI Music will not be reduced
below 80% in an integrated transaction occurring subsequent to the exercise of
the Rights. Finally, if the exercise of the Rights by the DMX stockholders is
integrated with the acquisition of TCI Music Series B Common Stock pursuant to
the Contribution and Merger, the solely for voting stock requirement of Section
368(a)(1)(B) will not be satisfied. If the 80% Test or the solely for voting
stock requirement of Section 368(a)(1)(B) is not satisfied or if TCI elects to
acquire any shares of TCI Music Series A Common Stock for consideration other
than Series A TCI Group Common Stock, the exercise of the Rights by all TCI
Music stockholders will be taxable.
If the exercise of the Rights is taxable, a TCI Music stockholder will
recognize gain or loss equal to the difference between the fair market value of
the cash and any Series A TCI Group Common Stock acquired pursuant to the
exercise of the Rights (which will be decreased by such TCI Music stockholder's
tax basis in the Rights) and such TCI Music stockholder's tax basis in the TCI
Music Series A Common Stock. Assuming that such shares of TCI Music Series A
Common Stock are held as capital assets, the gain or loss will be capital gain
or loss and the capital gain or loss will be long-term capital gain or loss if
the shares of
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TCI Music Series A Common Stock were held for longer than 12 months. The holding
period for any Series A TCI Group Common Stock acquired pursuant to the exercise
of the Rights will begin on the day the Rights are exercised.
If the exercise of the Rights does qualify as a reorganization within the
meaning of Section 368(a)(1)(B) of the Code, each TCI Music stockholder who
exercises the Rights will not recognize gain on the receipt of shares of Series
A TCI Group Common Stock exchanged for TCI Music Series A Common Stock pursuant
to the exercise of the Rights. Such TCI Music stockholder's tax basis for the
shares of Series A TCI Group Common Stock acquired pursuant to the exercise of
the Rights will equal the sum of (i) the tax basis of such TCI Music
stockholder's shares of TCI Music Series A Common Stock exchanged for such
shares of Series A TCI Group Common Stock and (ii) the tax basis of such TCI
Music stockholder's Rights. Assuming that the shares of TCI Music Series A
Common Stock are held as capital assets, the holding period for the shares of
Series A TCI Group Common Stock acquired upon the exercise of the Rights will
include the period during which the shares of TCI Music Series A Common Stock
were held.
Assuming that the shares of Series A TCI Group Common Stock are held as
capital assets, if the Rights are not exercised and therefore expire, such
expiration of the non-exercised Rights will result in a capital loss to the
holders of DMX Common Stock other than TCI and its subsidiaries.
Because qualification of the exercise of the Rights as a reorganization
within the meaning of Section 368(a)(1)(B) is dependent upon conditions that may
or may not exist when the Rights are exercised and neither TCI nor any of its
affiliates is required to take or to omit any action to cause the exercise of
the Rights to qualify as a reorganization within the meaning of Section
368(a)(1)(B) of the Code, TCI Music stockholders should consult their own tax
advisors at the time the Rights are exercised to determine the tax effects of
the exercise of the Rights.
THE FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR
GENERAL INFORMATION ONLY. DMX STOCKHOLDERS ARE ADVISED TO CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICATION
AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS, IF ANY.
ACCOUNTING TREATMENT
The Merger and Contribution will be accounted for using the purchase method
of accounting except that any TCI Music Common Stock and any Rights issued to
entities controlled by TCI will be recorded at carryover basis. See the
condensed pro forma combined financial statements and notes thereto of TCI Music
appearing under the heading "INDEX TO FINANCIAL STATEMENTS."
THE MERGER AGREEMENT
GENERAL; EFFECTIVE TIME
The Merger Agreement provides for the merger of Merger Sub with and into
DMX. As a result of the Merger, the separate corporate existence of Merger Sub
will cease and DMX will be the Surviving Corporation. In the Merger,
stockholders of DMX will receive the consideration described below. The Merger
will become effective upon the filing of a Certificate of Merger with the
Secretary of State of the State of Delaware. 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, as
amended, is qualified in its entirety by reference to the complete text of the
Merger Agreement and Amendment One to Merger Agreement, which are incorporated
by reference herein and copies of which (exclusive of exhibits and schedules)
are annexed to this Proxy Statement/Prospectus as Appendix I.
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CONSIDERATION TO BE RECEIVED IN THE MERGER
General. Upon consummation of the Merger, each outstanding share
(including shares held directly by TCI or any of its subsidiaries) of DMX Common
Stock will be converted into the right to receive (i) one-quarter share of TCI
Music Series A Common Stock, (ii) one Right with respect to each whole share of
TCI Music Series A Common Stock and (iii) cash in lieu of fractional shares of
TCI Music Series A Common Stock and Rights. Each Right gives the holder the
right, under certain conditions, to require TCI to purchase one share of TCI
Music Series A Common Stock issued in the Merger at a price equal to $8.00 (or
the equivalent of $2.00 per share of DMX Stock), if during the one-year period
beginning at the Effective Time of the Merger, the price of TCI Music Series A
Common Stock does not equal or exceed $8.00 per share for a period of at least
20 consecutive trading days. Such purchase price may be paid, at the election of
TCI, in cash or shares of Series A TCI Group Common Stock having an equivalent
value or a combination thereof. Upon the occurrence of certain events, each
Right will also represent the additional right to require TCI to purchase equity
interests of another entity or entities. Until the Rights expire or are
exercised, the Rights will be evidenced by a legend on the certificates for
shares of TCI Music Series A Common Stock issued in the Merger. Accordingly, the
Rights associated with the shares of TCI Music Series A Common Stock will be
represented solely by, and will not be separable from, such shares of TCI Music
Series A Common Stock, and the surrender or transfer of any such certificate for
shares of TCI Music Series A Common Stock will also constitute the surrender or
transfer of the Rights associated with the TCI Music Series A Common Stock
represented by such certificate. Upon exercise of the Rights, the shares of TCI
Music Series A Common Stock associated with the Rights will be transferred to
TCI in exchange for cash and/or shares of Series A TCI Group Common Stock as
described above. See "-- Summary of Rights Agreement." For a description of the
TCI Music Series A Common Stock, see "DESCRIPTION OF TCI MUSIC CAPITAL STOCK"
and for a description of the Rights, see "-- Summary of Rights Agreement." For a
summary of differences between the rights of holders of TCI Music Series A
Common Stock and the rights of holders of DMX Common Stock, see "COMPARISON OF
STOCKHOLDERS' RIGHTS."
Fractional shares of TCI Music Series A Common Stock will not be issued in
the Merger. Holders of DMX Common Stock otherwise entitled to a fractional share
of TCI Music Series A Stock will be paid cash in an appropriate amount based
upon the value of TCI Music Series A Common Stock of $8.00 per share.
Summary of Rights Agreement. The Rights will be issued pursuant to the
Rights Agreement. The Rights will be evidenced by certificates for shares of TCI
Music Series A Common Stock and will not be transferable separately from the TCI
Music Series A Common Stock. Accordingly, the Rights will be transferable only
in connection with the transfer of the associated TCI Music Series A Common
Stock. One Right will be issued for each whole share of TCI Music Series A
Common Stock that is issued in connection with the Merger. The following summary
of the Rights Agreement does not purport to be complete and is subject to and
qualified in its entirety by reference to all provisions of the Rights
Agreement, including the definitions of certain terms. Whenever particular
provisions or defined terms of the Rights Agreement are referred to, such
provisions or defined terms are incorporated herein by reference. Section
references below are to Sections of the Rights Agreement. The complete text of
the Rights Agreement has been filed as an exhibit to the Registration Statement.
See "AVAILABLE INFORMATION."
Rights Components. Each Right will initially entitle its holder to require
TCI to purchase one share of TCI Music Series A Common Stock from such holder at
the time specified in, for the consideration and subject to the terms and
conditions of the Rights Agreement (such right being referred to as the "TCI
Music Component" of a Right). If TCI Music makes a distribution to all holders
of shares of TCI Music Series A Common Stock of shares of the Capital Stock of
any entity or of rights or warrants entitling such holders (for a period
expiring within 45 days after the effective date of such distribution) to
purchase shares of the Capital Stock of any entity, and if such distribution is
of the magnitude described below (a "Subject Distribution"), then each Right
will also entitle its holder to require TCI to purchase shares of the class of
Capital Stock ("Distributed Entity Stock") of the entity ("Distributed Entity")
distributed or sold in such distribution, at the time specified in, for the
consideration and subject to the terms and conditions of the Rights Agreement
(such right being referred to as the "Distributed Entity Component" of a Right).
(Section 6.04). Similarly, if a Distributed Entity makes a Subject Distribution,
each Right will entitle its holder to require TCI to purchase
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shares of the Capital Stock (also referred to as Distributed Entity Stock) of
the entity (also referred to as a Distributed Entity) distributed or sold in
such distribution, at the time specified in, for the consideration and subject
to the terms and conditions of the Rights Agreement. (Section 6.07). A new
Distributed Entity Component of a Right will be created with respect to the
Distributed Entity Stock distributed in each Subject Distribution by TCI Music
or a Distributed Entity. (Section 6.04). The number of shares of Distributed
Entity Stock that a holder of Rights will be entitled to require TCI to purchase
upon the valid exercise of the related Distributed Entity Component of a Right
(the "Underlying Number") will initially equal the number of shares of Capital
Stock of such entity distributed or sold in the Subject Distribution divided by
(i) the number of shares of TCI Music Series A Common Stock or (ii) in the case
of a Subject Distribution by a Distributed Entity, the number of shares of
Distributed Entity Stock of the Distributed Entity making the Subject
Distribution, outstanding on the record date for such distribution. (Sections
6.04 and 6.07).
A distribution of the type described above will be a Subject Distribution
for purposes of the Rights Agreement if the positive difference between (x) the
Fair Market Value of such entity (or, if less than 100% of the Capital Stock of
such entity is distributed or sold, that portion of the Fair Market Value of
such entity that is represented by the shares distributed or sold), minus (y)
the aggregate consideration paid for the shares sold pursuant to such
distributed rights and warrants (such difference being referred to as the
"Distribution Value" (Section 1.01)), represents 10% or more of the sum of the
respective Fair Market Values immediately prior to such distribution of TCI
Music and, if any Subject Distributions had previously been made, of each
Distributed Entity (the aggregate of such Fair Market Values being referred to
as the "Undistributed Value of TCI Music" (Section 1.01). (Sections 6.03 and
6.07). The determination of whether a distribution meets each of the criteria
referred to above and is therefore a Subject Distribution will be made by the
Board of Directors of TCI Music (whose good faith determination will be
conclusive). If TCI Music or any Distributed Entity makes a distribution that
individually is not a Subject Distribution, but that would be a Subject
Distribution if aggregated with any other distribution or distributions
previously made by TCI Music or any Distributed Entity that also were not
Subject Distributions when made (and were not thereafter deemed to be Subject
Distributions by virtue of this sentence), then upon the making of the later of
such distributions each of such distributions will be deemed to be a single
Subject Distribution for the purpose of any Right exercised thereafter. (Section
6.07). The determination of whether any combination of distributions would
constitute a Subject Distribution pursuant to the Rights Agreement will be made
by the Board of Directors of TCI Music (whose good faith determination will be
conclusive) on the basis of the Distribution Values of such distributions and
the Undistributed Value of TCI Music calculated in each case immediately prior
to the time the first of such distributions was made. (Section 6.07).
Each of the TCI Music Component and each Distributed Entity Component of a
Right is sometimes referred to below as a "Component" and each of TCI Music and
each Distributed Entity is sometimes referred to below as an "Applicable
Entity." No Component of a Right will be separable from any of the other
Components of such Right.
Exercise of Rights Generally; Consideration Payable. During the period
commencing at the opening of business on the first anniversary of the date of
the closing of the Merger and ending at the close of business, New York time, on
the 30th day after such date (or the next business day thereafter if such date
is not a business day) (the "Exercise Period"), the holders of Rights may
irrevocably exercise all or any number of their Rights. (Section 4.01). The
Exercise Period for each Right is subject to acceleration upon the occurrence of
the events described below.
If the Rights have one or more Distributed Entity Components at the time
such Rights are exercisable, the holder may irrevocably exercise such Right as
to its TCI Music Component, any or all of its Distributed Entity Components, or
any combination thereof (Section 4.01). Upon the valid exercise of Rights in any
Exercise Period (subject, in the case of an accelerated Exercise Period, to the
rescission of such acceleration under the circumstances described below), the
holder will be entitled to sell to TCI (i) if the TCI Music Component of any or
all of such exercised Rights has been exercised, a number of whole shares of TCI
Music Series A Common Stock equal to the number of whole Rights of which the TCI
Music Component has been so exercised and honored and (ii) if any Distributed
Entity Component of any or all of such exercised Rights have been exercised, a
number of whole shares of the Distributed Entity Stock to which such Distributed
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Entity Component relates not in excess of the product of the number of whole
Rights of which such Distributed Entity Component has been exercised and
honored, multiplied by the Underlying Number for such Distributed Entity
Component of a whole Right. (Section 4.04).
The amount to be paid by TCI for each share of TCI Music Series A Common
Stock and Distributed Entity Stock upon the valid exercise of a Right will equal
(i) in the case of TCI Music Series A Common Stock (x) $8.00 minus (y) the sum
of the aggregate per share amount of any TCI Music Dividends and (z) the sum of
the Per Share Value of each Distributed Entity, which will be determined on the
basis of the Fair Market Value of each Applicable Entity as of the last day of
the most recent quarter ended prior to the Exercise Period (or, in the case of
an accelerated Exercise Period, prior to the date of a Triggering Event) divided
by the number of shares of Capital Stock of the Applicable Entity (determined on
a fully-diluted basis) then outstanding. (Sections 1.01, 4.05 and 4.16); and
(ii) in the case of Distributed Entity Stock, the Per Share Value of the
Distributed Entity. The Fair Market Value of the Applicable Entity will be
determined on a going concern or liquidation basis, whichever is greater, taking
into account the considerations described in the Rights Agreement. (Section
1.01). In no event will the amount paid for a share of TCI Music Series A Common
Stock exceed $8.00.
TCI may choose to pay the purchase price upon exercise of Rights in cash,
in shares of Series A TCI Group Common Stock having an equivalent value (based
upon the Current Market Price of such shares, determined in accordance with the
Rights Agreement), or in a combination of cash and shares of Series A TCI Group
Common Stock. (Sections 4.04 and 4.05). However, TCI must pay cash unless (i)
the Series A TCI Group Common Stock is then quoted on the NASDAQ National Market
System or listed for trading on a national securities exchange and (ii) the
issuance of shares of Series A TCI Group Common Stock upon the exercise of
Rights is registered under the Act or such shares are otherwise freely tradable
by TCI Music stockholders receiving such shares other than stockholders who were
deemed to be affiliates of TCI. (Sections 4.04 and 4.06). If TCI elects to offer
a combination of cash and shares of Series A TCI Group Common Stock in
consideration for the sale of TCI Music Series A Common Stock and/or Distributed
Entity Stock in any Exercise Period, each holder of a Right exercised during the
applicable Exercise Period will receive his or her total consideration for the
shares of TCI Music Series A Common Stock sold in the same proportions of cash
and shares of Series A TCI Group Common Stock as other holders exercising the
TCI Music Component of their Rights during that period and will receive his or
her total consideration for the shares of Distributed Entity Stock sold upon the
exercise of the related Distributed Entity Component of his or her Rights in the
same proportions of cash and shares of Series A TCI Group Common Stock as other
holders exercising such Distributed Entity Component of their Rights during that
period (subject to rounding or other adjustments made by the Rights Agent and to
the payment of cash in lieu of fractional shares). (Section 4.12). Promptly
following the end of an Exercise Period and the deposit by TCI with the Rights
Agent of the amount of cash and/or number of shares of Series A TCI Group Common
Stock required to make full payment of the purchase price for the shares of TCI
Music Series A Common Stock and Distributed Entity Stock sold to TCI pursuant to
the Rights exercised in such Exercise Period, the Rights Agent will mail to the
holders the purchase price for the shares of TCI Music Series A Common Stock and
Distributed Entity Stock, if any, sold by them. Payment of any cash purchase
price and any cash in lieu of fractional shares of Series A TCI Group Common
Stock will be made by check. (Section 4.11).
Acceleration of Exercise Period. The Exercise Period will be accelerated
upon the occurrence of (a) a Significant Corporate Transaction (as defined
below), (b) any disposition by TCI of equity securities of TCI Music if as a
result of such disposition TCI would cease to be the beneficial owner of at
least 30% in voting power of the outstanding equity securities of TCI Music (a
"Change in Control Transaction"), (c) certain bankruptcy or similar proceedings
by or against TCI or (d) the liquidation or dissolution of TCI. (Section 4.17).
A Significant Corporate Transaction is defined, in general, as the merger or
consolidation of, or the dissolution or liquidation of, an Applicable Entity the
Fair Market Value of which represents a greater percentage of the Undistributed
Value of TCI Music than the percentage thereof represented by the Fair Market
Value of any other Applicable Entity, as determined by the Board of Directors of
TCI Music (whose good faith determination will be conclusive) as of the date the
agreement of merger or consolidation is executed, or the vote of the Board of
Directors of such Applicable Entity to dissolve or liquidate such
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Applicable Entity is taken. (Section 1.01). Promptly following the execution of
the agreement of merger or consolidation, the vote of the directors of the
Applicable Entity or TCI to dissolve or liquidate, the execution by TCI of a
binding agreement to dispose of its TCI Music equity securities, or the
occurrence of any other event that causes the acceleration of the Exercise
Period, as the case may be (each a "Triggering Event"), TCI Music or TCI (or if
applicable, the Applicable Entity) will give written notice thereof to the
other(s), with a copy to the Rights Agent. (Section 4.18). The date as of which
such Fair Market Value is determined will be the last day of the fiscal quarter
of TCI Music immediately preceding the fiscal quarter in which the Triggering
Event occurs. (Section 4.18). The accelerated Exercise Period will begin from 30
to 60 days after the publication of the notice described below, and will last
for 20 business days. (Section 4.19). Except as set forth below, any Rights
(including all Components thereof) not validly exercised prior to the end of the
accelerated Exercise Period will expire. (Section 4.19). If the Exercise Period
is accelerated due to a proposed Significant Corporate Transaction or Change in
Control Transaction and such transaction is not consummated prior to the
expiration of the accelerated Exercise Period, TCI may defer purchasing the
shares of TCI Music Common Stock and Distributed Entity Stock surrendered upon
exercise of the Rights until consummation of such transaction. (Section 4.13).
If a proposed Significant Corporate Transaction or Change in Control Transaction
is terminated or abandoned, the acceleration of the Exercise Period will be
deemed to have been rescinded and annulled and any Rights that expired by virtue
of the failure of the holder to validly exercise them prior to the expiration of
the accelerated Exercise Period (or by virtue of the partial exercise thereof
during such accelerated Exercise Period) will be reinstated. (Sections 4.13,
4.14 and 4.20).
Notice of Exercise Period and Consideration Payable. TCI is required to
publish a notice in The Wall Street Journal between 20 and 30 days before an
Exercise Period begins, stating the number of Rights then outstanding; the
purchase price determined for such Exercise Period in accordance with the Rights
Agreement for each share of TCI Music Series A Common Stock; if the Rights have
one or more Distributed Entity Components, then as to each such Component the
number of shares of Distributed Entity Stock to which such Component relates and
the purchase price determined for such Exercise Period in accordance with the
Rights Agreement for each share of such Distributed Entity Stock; and the form
of consideration (cash or shares of Series A TCI Group Common Stock or a
combination thereof) TCI has elected to pay and, if both such forms have been
elected, the relative proportions thereof or any other basis on which the
relative amounts of cash to be paid and numbers of shares of Series A TCI Group
Common Stock to be issued shall be determined. The Rights Agent is then required
promptly to mail to each registered holder of a Right, by first class mail, a
copy of such notice, together with a letter of transmittal to be used to tender
stock certificates and such other documents as TCI may be required to deliver to
such holder under federal and state securities laws (Section 4.07). Failure to
give the notice in accordance with these provisions extends the Exercise Period
for a period of time equal to the delay in giving the Notice. The tender offer
rules promulgated by the Commission under Section 14(d) of the Exchange Act may
apply to TCI's publishing and mailing of the notice with respect to the exercise
of the Rights to holders of the Rights and to the exercise of the Rights. If the
Rights become exercisable, TCI will comply with such tender offer rules, if then
applicable.
Expiration of Rights. The Rights will expire upon termination of the
Exercise Period. Upon the exercise of any Right, such Right (including any
Component thereof not exercised or not exercised in full) will expire and cease
to be exercisable. Upon the consummation of a Terminating Event (as defined
below) with respect to an Applicable Entity, the Component of each Right (and
fractional Right) that relates to the Capital Stock of such Applicable Entity
will expire and cease to be exercisable. (Section 4.02). A Terminating Event is
defined, in general, as the merger or consolidation of, or the liquidation or
dissolution of, an Applicable Entity. (Section 1.01). If a Terminating Event
occurs with respect to an Applicable Entity the Fair Market Value of which
represents a greater percentage of the Undistributed Value of TCI Music than the
percentage thereof represented by the Fair Market Value of any other Applicable
Entity, such Terminating Event would constitute a Significant Corporate
Transaction and the Exercise Period of the Rights would be accelerated as
described above under "Acceleration of Exercise Period." Upon consummation of
any other Terminating Event, the Exercise Period would not be accelerated and
the value, if any, associated with the Component related to the Applicable
Entity undergoing the Terminating Event would be lost.
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Manner of Exercise. Only whole Rights may be exercised. To exercise a
Right, the holder must surrender to the Rights Agent, at its designated office
in New York, the following, together with the duly completed and signed letter
of transmittal: (i) if the TCI Music Component is being exercised, a certificate
or certificates, representing the shares of TCI Music Series A Common Stock to
be sold to TCI, duly endorsed and in proper form for transfer with such
endorsement guaranteed by a bank or trust company or a broker who is a member of
a national securities exchange, (ii) if a Distributed Entity Component is being
exercised, a certificate or certificates representing the shares of the
applicable Distributed Entity Stock to be sold to TCI, duly endorsed and in
proper form for transfer with such endorsement similarly guaranteed, and (iii)
payment in United States currency of an amount equal to any stamp or other tax
or governmental charge required to be paid in connection with the transfer of
such shares. (Section 4.08).
Adjustments to Rights. The Rights Agreement contains antidilution
provisions pursuant to which the number of Rights outstanding and, if
applicable, the Underlying Number for the Distributed Entity Component of a
Right, will be adjusted to reflect any stock dividend on, or stock split,
reverse stock split or reclassification of, the TCI Music Series A Common Stock
or Distributed Entity Stock (Section 6.02). However, the antidilution provisions
will not protect holders of the Rights against certain actions that could be
taken by TCI Music or a Distributed Entity that could decrease the amount
payable upon exercise of the Rights. For example, any issuance of TCI Music
Series A Common Stock or Distributed Entity Stock at a price below what would be
the Per Share Value of TCI Music or such Distributed Entity if TCI Music or such
Distributed Entity were appraised at the time of such issuance, or any
declaration of a cash dividend by TCI Music or a Distributed Entity, could
decrease the amount eventually payable by TCI upon exercise of the Rights. The
Rights Agreement does not restrict the taking of such actions and the
antidilution provisions are not triggered by them, although the holder of a
Right who also holds a share of TCI Music Series A Common Stock or Distributed
Entity Stock will not be diluted by a dividend declared on any class of the TCI
Music Series A Common Stock or Distributed Entity Stock that he or she holds
since he or she will receive the dividend, thus offsetting any decrease in the
amount eventually payable by TCI to such holder upon the exercise of his or her
Rights. Notwithstanding any adjustment to the number of Rights or to the
Underlying Number for the Distributed Entity Component of a Right, or the
creation of a Distributed Entity Component, each certificate for TCI Music
Series A Common Stock theretofore issued or thereafter issuable may continue to
express solely the number of Rights as are stated on the Rights Certificates
initially issuable pursuant to the Rights Agreement. (Section 6.10). Notices of
each adjustment and of the creation of a Distributed Entity Component will be
given to the Rights holders in accordance with the Rights Agreement. (Section
6.09).
Transfers; Exchanges. Rights may not be transferred or exchanged except in
connection with transfers of the TCI Music Series A Common Stock. The surrender
for transfer of any certificates evidencing TCI Music Series A Common Stock will
constitute a transfer of the Rights associated with such shares of TCI Music
Series A Common Stock represented by such certificate. (Section 3.01).
No Recourse Against Others. Neither TCI Music nor any Distributed Entity
nor any director, officer, employee or stockholder, as such, of TCI Music or any
Distributed Entity shall have any liability to the holders of the Rights for any
obligations of TCI under the Rights Agreement and the Rights or for any claim
based on, in respect of or by reason of such obligations or their creation. Each
holder by accepting a certificate for TCI Music Series A Common Stock will waive
and release such liability. The waiver and release are part of the consideration
for the issue of the Rights. (Section 8.07).
Amendment; Supplement; Waiver. TCI and the Rights Agent may supplement or
amend the Rights Agreement, without the consent of any of the holders of the
Rights, to cure ambiguities or correct or supplement any defective or
inconsistent provisions in the Rights Agreement, or to make other changes that
are not inconsistent with the provisions of the Rights and that do not adversely
affect the holders of the Rights. In addition, the Rights Agreement can be
supplemented or amended or provisions of it may be waived with the written
approval of the holders of a majority of the then outstanding Rights, except
that each holder affected must approve (a) any waiver of a default in payment by
TCI of the purchase price on exercise of a Right or (b) any amendment to the
provisions of the Rights Agreement governing the expiration of the Rights, the
exercise of the Rights, acceleration of the Exercise Period, the determination
of the purchase price
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upon exercise of a Right or the antidilution provisions, if such amendment would
adversely affect the rights of such holder in any material respect. (Section
8.04).
Consideration to be Received by TCI Affiliates. As holders of shares of
DMX Common Stock, Liberty DMX, Inc., UAPI, TCI Pacific Communications, Inc. and
TCI Music Holdings, Inc., will receive one-quarter share of TCI Music Series A
Common Stock and one Right with respect to each whole share of TCI Music Series
A Common Stock in exchange for each share of DMX Common Stock they own at the
Effective Time. In addition, certain subsidiaries of TCI Communications, Inc.
will be issued 62,500,000 shares of TCI Music Series B Common Stock in
connection with the Contribution Agreement. Immediately following the Merger,
(i) the outstanding shares of TCI Music Series A Common Stock will represent
approximately 19.25% of, and 2.3% of the voting power related to, the total
outstanding shares of the TCI Music Common Stock; and (ii) the outstanding
shares of TCI Music Series B Common Stock will represent approximately 80.75%
of, and 97.7% of the voting power related to, the total outstanding shares of
the TCI Music Common Stock. TCI will beneficially own approximately 45.7% of the
outstanding shares of TCI Music Series A Common Stock and 100% of the
outstanding TCI Music Series B Common Stock, which will collectively represent
approximately 89.6% of the outstanding shares of TCI Music Common Stock and
98.7% of the voting power of the outstanding shares of TCI Music Common Stock.
See "ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER -- Contribution
Agreement" and "SECURITY OWNERSHIP OF TCI MUSIC AND DMX."
Exchange of Shares. Promptly after the Effective Time, transmittal forms
will be mailed to each holder of record of shares of DMX Common Stock to be used
in forwarding his or her certificates evidencing such shares for surrender and
exchange for certificates evidencing the shares of TCI Music Series A Common
Stock and the Rights represented thereby to which he or she has become entitled
and, if applicable, cash in lieu of fractional shares of such TCI Music Series A
Common Stock and Rights. After receipt of such transmittal form, each holder of
certificates formerly representing DMX 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 TCI Music Series A Common Stock and the Rights
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 TCI Music Series A Common
Stock and Rights. Such transmittal forms will be accompanied by instructions
specifying other details of the exchange.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
After the Effective Time, each certificate evidencing DMX Common Stock
(other than certificates evidencing shares held directly by DMX or any of its
subsidiaries (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 TCI Music Series A Common Stock and Rights that the holder of such
certificate is entitled to receive and the right to receive any cash payment in
lieu of fractional shares of TCI Music Series A Common Stock and Rights. 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 and Rights, will be paid, without interest.
For a discussion of the procedures that will be followed with respect to
holders of DMX Common Stock who may be subject to the notification and reporting
requirements of the Hart-Scott-Rodino Act, see "-- Governmental Approvals"
below.
CONDITIONS TO THE MERGER
The respective obligations of DMX, TCI and TCI Music 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 DMX Common Stock; (ii) no more than 5% of
the number of DMX stockholders of record have demanded appraisal rights in
accordance with
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Section 262 of the Delaware General Corporation Act; (iii) the waiting period
applicable to the consummation of the Merger under the Hart-Scott-Rodino Act
shall have expired, or been earlier terminated and any other notices or
approvals or consents required by or of governmental entities, to the extent
required to be obtained under the Merger Agreement, shall have either filed or
obtained; and (iv) 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 waiting period under the Hart-Scott-Rodino
Act expired on March 30, 1997. See "-- Governmental Approval."
The obligation of DMX to consummate the transactions contemplated by the
Merger Agreement is also subject to the satisfaction or waiver of the following
conditions: (i) the performance by TCI, TCI Music and Merger 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; and (ii) the
transactions contemplated by the Contribution Agreement shall have been
consummated.
The respective obligations of TCI, TCI Music and Merger 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 DMX,
in all material respects, of the agreements of it in the Merger Agreement to be
performed by it by the Effective Time and the accuracy of DMX's representations
and warranties in all material respects; (ii) receipt of all consents, orders or
approvals of governmental entities and third parties, to the extent required to
be obtained under the Merger Agreement; and (iii) the number of stockholders
exercising dissenter's rights does not exceed 5% of the DMX Common Stock
outstanding as of the date of the Merger Agreement.
GOVERNMENTAL APPROVALS
The only governmental consents and governmental filings that TCI and DMX
are aware of 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) are filings with the Department of Justice and the Federal
Trade Commission under the Hart-Scott-Rodino Act with respect to the Merger.
On February 28, 1997, TCI and DMX each filed a notification of the
transaction with the Federal Trade Commission and the U.S. Department of Justice
pursuant to the Hart-Scott-Rodino Act. The waiting period under the
Hart-Scott-Rodino Act expired on March 30, 1997 without a request for an
extension or additional information from the Federal Trade Commission or the
U.S. Department of Justice.
Certain stockholders of DMX may be individually subject to the notification
and waiting-period requirements of the Hart-Scott-Rodino Act if as a result of
the Merger they will hold TCI Music Series A Common Stock (or a combination of
TCI Music Series A Common 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
DMX and TCI expect to hold as a result of the Merger shares of TCI Music Series
A Common Stock (or a combination of TCI Music Series A Common Stock and other
voting securities of TCI) having a value in excess of $15 million will be
required, as a precondition to receiving such shares, to provide TCI with
evidence of compliance with the Hart-Scott-Rodino Act, satisfactory in form and
substance to TCI and its counsel. If necessary, TCI will deposit into escrow the
shares of TCI Music Series A Common Stock issuable to any stockholder obligated
to file a pre-merger notification and report form under the Hart-Scott-Rodino
Act and will instruct the Exchange Agent to hold such shares pending the
expiration or termination of the applicable waiting period.
COVENANTS
DMX has agreed to conduct its business in the ordinary course and 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. DMX has agreed that, except as required
or permitted by the Merger
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Agreement or consented to in writing by TCI, it will not, prior to the Effective
Time, (i) sell or pledge any capital stock or other ownership interest in any of
its subsidiaries, (ii) amend or propose to amend the DMX Charter or DMX Bylaws,
(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, DMX, or declare, set aside or pay any dividend or other
distribution to stockholders of DMX, (iv) directly or indirectly redeem,
purchase or otherwise acquire any shares of capital stock of, or other ownership
interests in, DMX; (v) (a) issue, deliver or sell any shares of, capital stock
of, or other ownership interests in, DMX, or any option, or warrant or other
right to acquire, or any security convertible into, shares of capital stock of,
or other ownership interests in, DMX, (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 additional indebtedness for borrowed
money or mortgage, pledge or subject to any lien any of its assets or enter into
any other material transaction other than in the ordinary course of business
consistent with past practice, (d) make any payments with respect to any
indebtedness of DMX except for such payments that are scheduled to come due
prior to the Effective Time or (e) acquire any business or business organization
or division thereof that are material, individually or in the aggregate to DMX
taken as a whole or (vi) agree to do any of the foregoing.
DMX further agreed that except as consented to in writing by TCI or
required to comply with applicable law or existing company benefit plans it will
not and will not permit any of its subsidiaries to (i) adopt or 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 fringe benefit 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.
DMX has further agreed that without the consent of TCI it will not take, or
agree to take, any actions that would (x) make any representation or warranty of
DMX contained in the Merger Agreement untrue or incorrect so as to cause the
condition with respect to DMX's representations and warranties not to be
fulfilled as of the Effective Time or (y) result in any of the other conditions
to the obligations of TCI, TCI Music and Merger 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
DMX Board, none of DMX 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, enter into any agreement with
respect to any Acquisition Proposal or participate in negotiations with any
person in connection with any Acquisition Proposal. "Acquisition Proposal" is
defined in the Merger Agreement to mean any proposed (i) merger, consolidation
or similar transaction involving DMX, (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 DMX or its subsidiaries, (iii)
issuance, sale or other disposition of securities representing 50% or more of
the voting power of DMX Common Stock or (iv) any transaction in which any person
shall acquire beneficial ownership (as such term is defined in Rule 13d-3 under
the Exchange Act) or the right to acquire beneficial ownership, or any "group"
(as such term is defined under the Exchange Act) shall have been formed that
beneficially owns or has the right to acquire beneficial ownership, of 50% or
more of the outstanding DMX Common Stock.
CERTAIN PERSONNEL MATTERS
The DMX Board has authorized retention bonuses for four key employees,
including DMX's Chief Financial Officer. Each such employee will be paid an
amount equal to six months' base salary (nine months
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in the case of DMX's Chief Financial Officer), payable upon consummation of the
Merger. The aggregate amount of such payments will be approximately $206,000.
Under the terms of DMX's 1991 Plans, in the case of a merger such as the
Merger, option holders have the right to continue to hold their options, which
become exercisable for the "acquisition consideration." Accordingly, options
granted under the 1991 Plans will carry over after the Merger and be exercisable
for TCI Music Series A Common Stock and Rights (if the Rights are not then
terminated). However, all such options terminate and are not exercisable three
months after the holder is no longer employed or serving as a director of DMX.
By the terms of DMX's 1993 Stock Option Plan and certain option agreements
relating to options granted outside any plans, all outstanding options may be
accelerated, regardless of vesting effective 30 days prior to the date of the
Merger upon written notice to option holders, and, unless exercised, such
options will terminate upon consummation of the Merger. DMX has agreed in the
Merger Agreement to take all action necessary to cause the options that can be
terminated upon consummation of the Merger to be canceled if not otherwise
exercised, and to use its best efforts to cause each other option that is
outstanding that is not terminable upon consummation of the Merger to be
canceled prior to the Effective Time of the Merger. As of the date of this Proxy
Statement/Prospectus, DMX has taken all action necessary to accelerate the
options granted under the 1993 Stock Option Plan and under certain option
agreements; no action has been taken by DMX to cancel any options that will
carry over in the Merger. Messrs. Sparkman and Troxel have agreed to the
cancellation of options granted by DMX under the 1991 Plans that would otherwise
carry over in the Merger, in exchange for options to purchase TCI Music Series A
Common Stock to be granted by TCI Music at the Effective Time. See "MANAGEMENT
OF TCI MUSIC -- Other Arrangements.".
As of May 26, 1997, employees of DMX held options to purchase an aggregate
of 600,000 shares of DMX Common Stock under the 1991 Plans, 2,934,583 shares of
DMX Common Stock under the 1993 Stock Option Plan and 50,000 shares of DMX
Common Stock pursuant to grants made outside any plan. The options granted under
the 1993 Stock Option Plans and outside any plans, are exercisable at a weighted
average exercise price of $3.69 (at exercise prices ranging from $2.00 to
$6.25); the options granted under the 1991 Plans are exercisable at a weighted
average exercise price of $4.32 (at exercise prices ranging from $4.18 to
$5.75).
Pursuant to the Merger Agreement, each employee of the Surviving
Corporation who was an employee of DMX prior to the Effective Time, to the
extent permitted by TCI's employee benefit plans (defined in Section 3(b) of
ERISA) (i) will receive credit for past service with DMX for purposes of
eligibility and vesting under the Surviving Corporation's employee benefit plans
(defined in Section 3(3) of ERISA) to the extent such service was credited under
the DMX benefit plans on the date the transactions contemplated by the Merger
Agreement are consummated, (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 DMX benefit plans and (iii) will receive credit for past service with
DMX for purposes of eligibility and vesting under the Surviving Corporation's
plans and policies with respect to seniority benefits, including vacation and
sick leave.
After the Merger, TCI will provide to TCI Music certain services and other
benefits, including certain administrative and other services pursuant to the
Services Agreement. Such services will include (i) tax reporting, financial
reporting, payroll, employee benefit administration, workers' compensation
administration, telephone, package delivery, management information systems,
billing, lock box, remittance processing and risk management services, (ii)
other services typically performed by TCI's accounting, finance, treasury,
corporate, legal, tax, benefits, insurance, facilities, purchasing and advanced
information technology department personnel, (iii) use of telecommunications and
data facilities and of systems and software developed, acquired or licensed by
TCI from time to time for financial forecasting, budgeting and similar purposes,
including without limitation any such software for use on personal computers, in
any case to the extent available under copyright law or any applicable
third-party contract, (iv) technology support and consulting services and (v)
such other management, supervisory, strategic planning or other support services
as TCI Music and TCI may from time to time mutually determine to be necessary or
desirable. See
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"ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER -- Services Agreement."
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 (i)
indemnify, defend and hold harmless the officers and directors of DMX until the
expiration of the applicable statutes of limitation to the fullest extent
permitted by applicable law and the DMX Charter and DMX Bylaws in effect on the
date of the Merger Agreement and (ii) pay expenses in advance of the final
disposition of any such claim to the fullest extent permitted by and pursuant to
applicable law.
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 DMX's
stockholders, (i) by mutual consent of the DMX Board and the TCI Board, (ii) by
either DMX or TCI (A) if the Merger has not been consummated on or before July
31, 1997, so long as the party seeking to terminate the Merger Agreement has not
breached its obligations under the Merger Agreement in any material respect, or
(B) if the stockholders of DMX shall not have approved the Merger Agreement by
such date, (iii) by DMX, provided DMX has not breached any of its obligations
thereunder in any material respect, 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 or (iv) by TCI, provided TCI has
not breached any of its obligations thereunder in any material respect, if any
of the conditions to its obligation 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 DMX or TCI as
provided above, the Merger Agreement will become void and (except for the
willful breach of the Merger Agreement) there will be no liability or obligation
on the part of any of DMX, TCI, TCI Music or Merger Sub.
DMX, TCI, TCI Music and Merger Sub may agree to amend the Merger Agreement
by or pursuant to action taken by their respective boards of directors, either
before or after approval by the stockholders of DMX of the Merger Agreement,
except that after such approval by the stockholders of DMX, no amendment may be
made that alters the indemnification provisions of the Merger Agreement or
changes the ratio at which DMX Common Stock is to be converted into TCI Music
Series A Common Stock and Rights or that in any way materially adversely affects
the rights of such stockholders, without the further approval of such
stockholders. At any time prior to the Effective Time, DMX, TCI or TCI Music, by
or pursuant to action taken by their respective boards of directors, may agree
to extend the time specified in the Merger Agreement for the performance of any
of the obligations or other acts of the other parties, waive any inaccuracies in
the representations and warranties of the other parties 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 TCI MUSIC SERIES A COMMON STOCK
The issuance of all shares of TCI Music Series A Common 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
DMX 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 DMX generally include individuals
or entities that control, are controlled by, or are under common control with,
DMX and may include certain officers and directors of DMX as well as principal
stockholders of DMX.
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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.
ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER THE MERGER
TCI Music is currently a wholly owned subsidiary of TCI. Following
consummation of the Merger (i) the outstanding shares of TCI Music Series A
Common Stock will represent approximately 19.25% of, and 2.3% of the voting
power related to, the total outstanding shares of the TCI Music Common Stock;
and (ii) the outstanding shares of TCI Music Series B Common Stock will
represent approximately 80.75% of, and 97.7% of the voting power related to, the
total outstanding shares of the TCI Music Common Stock. TCI will beneficially
own approximately 45.7% of the outstanding shares of TCI Music Series A Common
Stock and all of the outstanding shares of TCI Music Series B Common Stock,
which will collectively represent approximately 89.6% of the outstanding shares
of TCI Music Common Stock. Since holders of shares of TCI Music Series A Common
Stock are entitled to one vote per share, and holders of shares of TCI Music
Series B Common Stock are entitled to ten votes per share, on each matter
presented to a vote of the holders of TCI Music Common Stock, TCI will control
approximately 98.7% of the voting power of the outstanding shares of TCI Music
Common Stock. See "DESCRIPTION OF CAPITAL STOCK." Thus, immediately after the
Merger, TCI will have the voting power to control all matters requiring approval
of TCI Music's stockholders voting as a single class, including the election of
directors, the adoption of amendments to the TCI Music Charter and the approval
of mergers and sales of TCI Music's assets.
On or before the Effective Time, TCI Music and TCI will enter into a number
of intercompany agreements more fully described below covering matters such as
the provision of services and allocation of tax liabilities. TCI has also agreed
to provide certain administrative, financial, legal, treasury, accounting, tax
and other services to TCI Music and make available certain of its employee
benefit plans to TCI Music's employees. The terms of these arrangements were
established by TCI in consultation with TCI Music, and will be executed while
TCI Music is a wholly owned subsidiary of TCI and are not the result of
arm's-length negotiations. Accordingly, although TCI Music believes that the
terms of these arrangements are reasonable, there is no assurance that the terms
and conditions of these agreements, or the terms of any future arrangements
between TCI and TCI Music, are or will be as favorable to TCI Music as could be
obtained from unaffiliated third parties. In addition, TCI Music and TCI and
their respective subsidiaries and affiliates may from time to time do business
with one another following the Merger, in areas not governed by any of the
following agreements.
If TCI were to seek to acquire the shares of TCI Music held by the public,
it would likely have the power to do so over the objection of other
stockholders, subject to any applicable provisions of Delaware law requiring
such a transaction to be "fair" to minority stockholders.
Conflicts of interest between TCI Music and TCI could arise with respect to
business dealings between them, including potential acquisitions of businesses
or properties, the issuance of additional securities, the election of new or
additional directors, and the payment of dividends by TCI Music. A conflict of
interest could also arise from TCI's position as the sole and exclusive agent
for TCI Music in any and all matters relating to TCI Music's federal income tax
liability, which includes the sole and exclusive responsibility for the
preparation and filing of consolidated federal and consolidated or combined
state income tax returns (or amended returns), to contest or compromise any
asserted tax adjustment or deficiency and to file, litigate or compromise any
claim for refund on behalf of TCI Music. TCI Music has not instituted any formal
plan or arrangement to address potential conflicts of interest that may arise
between TCI Music and TCI. However, the directors of TCI Music intend to
exercise reasonable judgment and take such steps as they deem necessary under
all of the circumstances in resolving any specific conflict of interest that may
occur and will determine what, if any, specific measures, such as retention of
an independent advisor or independent counsel or appointment of a special
committee, may be necessary or appropriate. There can be no assurance that any
conflicts will be resolved in favor of TCI Music.
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CONTRIBUTION AGREEMENT
At the Effective Time, TCI Music and TCI will enter into the Contribution
Agreement. Pursuant to the Contribution Agreement, TCI will cause each TCI
System Owner to assign and contribute to TCI Music the right to receive the
Contributed Net DMX Revenues of such TCI System Owner for a period beginning on
the date of the closing of the Contribution Agreement and ending on the earlier
of the date that such TCI System Owner ceases to be a TCI System Owner and
December 31, 2006 (the "Termination Date"). TCI will cause each TCI System Owner
that becomes a TCI System Owner to assign to TCI Music the right to receive such
TCI System Owner's Contributed Net DMX Revenues until the Termination Date. In
addition, TCI will cause all of the Contributed Tuners to be contributed to TCI
Music. A "TCI System Owner" is a corporation controlled by TCI in which TCI owns
all of the common equity or an entity other than a corporation that is wholly
owned by TCI. In consideration of such agreement, TCI Music will deliver to TCI,
as designee for the TCI System Owners, 62,500,000 shares of TCI Music Series B
Common Stock and the TCI Music Note. The TCI Music Note will bear interest at
10% per annum, payable semiannually, and will provide for the payment of unpaid
principal and accrued interest not earlier than 180 days after the closing under
the Contribution Agreement.
If the Contribution had been effective as of January 1, 1996, the total
amount of Contributed Net DMX Revenues for the three months ended March 31, 1997
and the year ended December 31, 1996 would have been approximately $4.4 million
and $16.4 million, respectively. Additionally, the book value of the Contributed
Tuners at March 31, 1997 was approximately $4.5 million. The launch by TCI and
other cable operators of video and audio programming using digital compression
technology may materially reduce the Contributed Net DMX Revenues and subscriber
fee revenues of TCI Music. In addition, since December 31, 1996, TCI has not and
is not expected to add to its indirect inventory of commercial tuners prior to
the Effective Time. Accordingly, as such existing inventory of tuners is put
into use by TCI System Owners, the inventory of commercial tuners will be
reduced. See "CERTAIN INFORMATION CONCERNING TCI MUSIC -- Effect of Launch of
Digital Compression Technology."
Pursuant to the Contribution Agreement, effective as of the closing of the
Merger, TCI Music, as obligor, will issue to TCI the TCI Music Note in the
principal amount of $40,000,000 payable to the order of TCI, as obligee, bearing
interest at 10% per annum, which interest will be waived by TCI if principal is
paid in full at or before maturity, which will be 180 days after the closing of
the Merger. TCI Music expects to refinance the TCI Music Note with proceeds of a
new long-term debt financing. No assurance can be given that TCI Music will be
able to obtain such financing on terms acceptable to TCI Music.
DMX is not a party to the Contribution Agreement and no vote of DMX
stockholders is required with respect to the Contribution Agreement. Completion
of the Contribution in accordance with the Contribution Agreement is, however, a
condition to the obligation of DMX to consummate the Merger. The Contribution
was structured to be separate from, but included as a condition to, the Merger
to accommodate TCI's desire not to transfer assets to TCI Music until it was
certain that the Merger would occur while permitting the Contribution and the
Merger to be integrated as transactions for purposes of Section 351 of the Code.
See "CERTAIN CONSEQUENCES OF THE MERGER -- Certain Federal Income Tax
Consequences."
The terms of the Contribution Agreement were determined by TCI and were
discussed with representatives of DMX in the course of negotiations of the
Merger Agreement between TCI and DMX. No attempt was made by either party to
place a fair market value on the Contributed Net DMX Revenues or the Contributed
Tuners contributed by TCI pursuant to the Contribution Agreement, although the
Contributed Tuners were assumed to have a fair market value that is not less
than their book value. From DMX's perspective, the fair market values of those
assets were of relatively small importance compared to the value provided to the
DMX stockholders by the Rights to be granted by TCI to stockholders receiving
TCI Music Class A Common Stock in the Merger, especially in light of the
substantial uncertainty as to the amount of the Contributed Net DMX Revenues
that would be contributed to TCI Music in the future because of the possible
adverse effects of various factors, including the launch of digital compression
technology. See "CERTAIN INFORMATION CONCERNING TCI MUSIC -- Effect of Launch of
Digital Compression
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Technology." None of the parties made any determination of the value of the
shares of TCI Music Class B Common Stock to be issued to TCI pursuant to the
Merger Agreement.
The amount of the TCI Music Note was fixed at $40 million to provide some
compensation to TCI for the reduction in its and its subsidiaries' borrowing
capacity that would result from the loss of cash flow represented by the
transfer of Contributed Net DMX Revenues to TCI Music. Under covenants in
various financing agreements, the amount of debt that TCI (or one or more of its
subsidiaries treated as separate borrowing entities) may incur is limited by
various financial tests, including covenants that limit debt as a multiple of
cash flow. Accordingly, TCI determined that TCI Music should compensate it for a
portion of this lost borrowing capacity. In light of the uncertainty as to the
amount of Contributed Net DMX Revenues that would be paid to TCI Music in the
future and the desire to provide TCI Music with additional revenues, TCI
determined that $40 million represented a reasonable offset against such lost
borrowing capacity and agreed to accept payment in the form of the TCI Music
Note, which will mature 180 days after the Effective Time, to permit TCI Music
sufficient time to obtain long-term debt financing, proceeds of which would be
used to retire the TCI Music Note. No assurance can be given that TCI Music will
be able to obtain such financing on terms acceptable to TCI Music.
TCI LOAN
TCI and DMX have entered into the TCI Loan pursuant to which TCI has agreed
to make loans to DMX from time to time until August 31, 1997, up to an aggregate
outstanding principal amount of $3,500,000. Such loans are due on or before June
1, 2000 and accrue interest at a rate of 12.5% per annum. As of June 4, 1997,
TCI had made approximately $2,420,000 in loans under the TCI Loan.
SERVICES AGREEMENT
Pursuant to the Services Agreement between TCI and TCI Music, following the
Merger, TCI will provide to TCI Music certain services and other benefits,
including certain administrative and other services that were provided by TCI
prior to the Merger. Such services shall include (i) tax reporting, financial
reporting, payroll, employee benefit administration, workers' compensation
administration, telephone, package delivery, management information systems,
billing, lock box, remittance processing and risk management services, (ii)
other services typically performed by TCI's accounting, finance, treasury,
corporate, legal, tax, benefits, insurance, facilities, purchasing, and advanced
information technology department personnel, (iii) use of telecommunications and
data facilities and of systems and software developed, acquired or licensed by
TCI from time to time for financial forecasting, budgeting and similar purposes,
including without limitation any such software for use on personal computers, in
any case to the extent available under copyright law or any applicable
third-party contract, (iv) technology support and consulting services and (v)
such other management, supervisory, strategic planning or other services as TCI
Music may from time to time request. Pursuant to the Services Agreement, TCI has
also agreed to provide TCI Music access to any volume discounts that may be
available to TCI for purchase of certain equipment.
The Services Agreement will also provide that TCI, for so long as TCI
continues to beneficially own shares of TCI Music Common Stock representing at
least a majority in voting power of the outstanding shares of capital stock of
TCI Music entitled to vote generally in the election of directors, will continue
to provide in the same manner, and on the same basis as generally provided from
time to time to other participating TCI subsidiaries, benefits and
administrative services to the Company's employees. In this regard, TCI Music
will be allocated that portion of TCI's compensation expense attributable to
benefits extended to employees of TCI Music.
Pursuant to the Services Agreement, TCI Music from time to time will
reimburse TCI for all direct expenses incurred by TCI in providing such services
and a pro rata share of all indirect expenses incurred by TCI in connection with
the rendering of such services, including a pro rata share of the salary and
other compensation of TCI employees performing services for TCI Music, general
overhead expenses and rental expense for any physical facilities of TCI utilized
by TCI Music. In this regard, it is anticipated that TCI Music will, for the
foreseeable future, share office space with, or sublease office space from, TCI.
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The Services Agreement will continue in effect until terminated by (i) TCI
Music upon 60 days' prior written notice to TCI, (ii) TCI at any time after
three years upon not less than six months' prior notice to TCI Music, and (iii)
either party if the other party is the subject of certain bankruptcy or
insolvency-related events.
TAX SHARING AGREEMENT
Effective July 1, 1995, TCI, TCIC and certain other subsidiaries of TCI
entered into the Tax Sharing Agreement, which formalized pre-existing tax
sharing arrangements and implemented additional procedures for the allocation of
certain consolidated income tax attributes and the settlement of certain
intercompany tax allocations. The Tax Sharing Agreement encompasses U.S.
Federal, state, local and foreign tax consequences and relies upon the Code and
any applicable state, local and foreign tax law and related regulations. On or
before the Effective Time, the Tax Sharing Agreement will be amended to provide
that TCI Music will be treated as if it had been a party to the Tax Sharing
Agreement, effective at the Effective Time. Pursuant to the amended Tax Sharing
Agreement, beginning at the Effective Time, TCI Music is responsible to TCI for
its share of current consolidated income tax liabilities. TCI will be
responsible to TCI Music to the extent that TCI Music's income tax attributes
generated after the effective date are utilized by TCI to reduce its
consolidated income tax liabilities. Accordingly, all tax attributes generated
by TCI Music's operations after the effective date including, but not limited
to, net operating losses, tax credits, deferred intercompany gains, and the tax
basis of assets are inventoried and tracked for the entities comprising TCI
Music.
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BUSINESS OF TCI
TCI and its predecessors have been engaged in the cable television business
since the early 1950's. TCI, through its subsidiaries and affiliates, is
principally engaged in the construction, acquisition, ownership and operation of
cable television systems and the provision of satellite-delivered video
entertainment, information and home shopping programming services to various
distribution media, principally cable television systems. TCI also has interests
in cable and telecommunications operations and television programming in certain
international markets, as well as investments in companies and joint ventures
involved in developing and providing programming for new television and
telecommunications technologies. TCI believes that, measured by the number of
basic subscribers, it is the largest provider of cable television services in
the United States. TCI is a Delaware corporation and was incorporated in 1994.
Its executive offices are located at Terrace Tower II, 5619 DTC Parkway,
Englewood, Colorado 80111-3000; telephone (303) 267-5500.
Additional information concerning TCI is included in the information filed
by TCI with the Commission incorporated by reference in this Proxy
Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE" and
"AVAILABLE INFORMATION."
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BUSINESS OF DMX
GENERAL
DMX is primarily engaged in programming, distributing and marketing a
premium digital music service, Digital Music Express(R) (DMX(R)), which provides
continuous 24-hours-per-day commercial free, CD quality music programming. DMX
is a Delaware corporation and its executive offices are located at 11400 West
Olympic Boulevard, Suite 1100, Los Angeles, CA 90064; telephone (310) 444-1744.
Detailed information concerning DMX is set forth in its Annual Report on Form
10-K for the fiscal year ended September 30, 1996, and its Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997, included as Appendix IV to this
Proxy Statement/Prospectus. Additional information concerning DMX, is included
in the information filed by DMX with the Commission incorporated by reference in
this Proxy Statement/Prospectus. See "INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE" and "AVAILABLE INFORMATION."
CERTAIN INFORMATION CONCERNING TCI MUSIC
GENERAL
TCI Music was incorporated in Delaware in January 1997 and is currently a
wholly owned subsidiary of TCI. Since its formation, TCI Music has not conducted
any significant activities other than those incident to its formation, the
Contribution Agreement, the Merger Agreement and the preparation of this Proxy
Statement/Prospectus. Immediately following the Merger, (i) the outstanding
shares of TCI Music Series A Common Stock will represent approximately 19.25%
of, and 2.3% of the voting power related to, the total outstanding shares of the
TCI Music Common Stock; and (ii) the outstanding shares of TCI Music Series B
Common Stock will represent approximately 80.75% of, and 97.7% of the voting
power related to, the total outstanding shares of the TCI Music Common Stock.
TCI will beneficially own approximately 45.7% of the outstanding shares of TCI
Music Series A Common Stock and all of the outstanding shares of TCI Music
Series B Common Stock, which will collectively represent approximately 89.6% of
the outstanding shares of TCI Music Common Stock and 98.7% of the voting power
of the outstanding shares of TCI Music Common Stock. The executive offices of
TCI Music are located at Terrace Tower II, 5619 DTC Parkway, Englewood, Colorado
80111-3000; telephone (303) 267-5500.
Following consummation of the Merger, TCI Music's business will consist
principally of the business of DMX prior to the Merger. See "BUSINESS OF DMX."
TCI Music intends to evaluate the operations of DMX to determine what actions,
if any, should be taken to improve DMX's operations. TCI Music anticipates that
the Contributed Net DMX Revenues will provide a source of additional revenue not
currently available to DMX. If the Merger had occurred as of January 1, 1996,
Contributed Net DMX Revenues for the three months ended March 31, 1997 and the
year ended December 31, 1996 would have been approximately $4.4 million and
$16.4 million, respectively. See "ARRANGEMENTS BETWEEN TCI AND TCI MUSIC AFTER
THE MERGER -- Contribution Agreement." However, as discussed below, DMX's
subscriber fee revenues and the Contributed Net DMX Revenues could be materially
reduced as a result of the launch of digital compression technology for the
delivery of video and audio services by cable system operators, including TCI,
and the likely elimination of Tuner Distribution in certain markets by cable
operators. See "-- Effect of Launch of Digital Compression Technology." Because
of the uncertainties as to the effect of the launch of Digital Distribution and
the likely elimination of Tuner Distribution in certain markets on DMX's
subscriber fee revenues, no adjustment for Contributed Net DMX Revenues has been
included in the Condensed Pro Forma Combined Statements of Operations appearing
elsewhere in this Proxy Statement/ Prospectus. See "INDEX TO FINANCIAL
STATEMENTS."
TCI Music anticipates that it will evaluate acquisitions of interests in,
or joint ventures or similar arrangements with, other companies engaged in the
audio or video music business as suitable opportunities become available. No
assurance can be given that any such acquisition or other transaction, if any is
effected, will be beneficial to TCI Music. Except for the acquisition of DMX as
discussed in this Proxy Statement/Prospectus, no specific acquisition, joint
venture or similar transaction is under consideration at this time.
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CURRENT DMX DISTRIBUTION
DMX music services are currently delivered primarily through two
distribution methods: (i) directly to cable operators by C-band satellite for
distribution to residential and commercial cable subscribers through a separate
tuner (Tuner Distribution); and (ii) via direct broadcast satellite (DBS) dishes
to residential and commercial subscribers either directly or as part of a
package delivered by DBS distributors, such as PrimeStar and Alpha Star
("Satellite Distribution"). Revenues to DMX from Tuner Distribution and
Satellite Distribution are generated by license fees paid to DMX by the cable
and DBS operators pursuant to so-called "affiliation" agreements between DMX and
such operators. For the 12-month period ended December 31, 1996, revenues from
Tuner Distribution represented approximately 75% of subscription fee revenues,
with approximately 53% of such amount derived from residential Tuner
Distribution subscribers.
In Tuner Distribution, cable operators generally offer DMX music services
to their subscribers for a separate a la carte fee. Customers who subscribe to
DMX music services receive the DMX signal through the same coaxial cable used to
distribute video cable signals, which is connected through a separate DMX tuner
to a customer's stereo system. In order to receive DMX music services via Tuner
Distribution, residential subscribers must subscribe to video programming from
their cable operator; commercial subscribers may, but do not need to, subscribe
to video programming to receive DMX music services. Under DMX's affiliation
agreements with cable operators, the operators generally have the right, but not
the obligation, to distribute DMX music services to subscribers, and pay a per
subscriber license fee to DMX for each paying subscriber receiving DMX music
services. The cable operator sets the fees charged to its commercial and
residential subscribers, which are generally higher than the corresponding
license fees paid by the cable operator to DMX. License fees vary depending on
whether the subscriber is a commercial establishment or a private residence.
For example, a cable operator might charge a residential DMX subscriber
$9.00 per month for DMX music service and, pursuant to its affiliation agreement
with DMX, pay DMX $3.00 per paying subscriber as a license fee. A similar fee
structure exists with cable operators with respect to commercial subscribers,
but both subscriber fees and license fees are significantly higher than for
residential subscribers, with DMX's license fee often based on the greater of a
minimum fee or a percentage of the fee charged to the commercial subscriber.
In Satellite Distribution, DMX music services are generally provided as
part of a package of video and music programming offered to the DBS operator's
subscribers, who pay a single rate for the package of video and music services.
DMX's affiliation agreements with the DBS operators generally provide for a
small per subscriber license fee for each subscriber that purchases a package of
video and music services.
EFFECT OF LAUNCH OF DIGITAL COMPRESSION TECHNOLOGY
Cable operators have recently begun to launch a new method of distributing
video and other programming using digital compression technology. Digital
compression technology can compress, on average, as many as 14 of the current
analog video signals into the space normally occupied by one. Such technology
improves picture quality and allows for carriage of significantly more video
product offerings (Digital Distribution) without cable operators having to build
new cable plant. The technology is distributed through TCI's "Headend in the
Sky" (HITS), that enables TCI and each other participating cable operator to
increase their program offerings and create new packages that could include, if
they so choose, DMX music services as part of a package of video and music
services. The technology permits subscribers to receive video and music signals
through a single standard set-top-tuner or "box" without the use of a separate
tuner for music, as is currently the case with Tuner Distribution. TCI conducted
a beta test of its Digital Distribution in late 1996 and began offering such
service to selected paying customers in three markets during the first quarter
of 1997.
Potential Effects on DMX and TCI Music Residential Subscriber Fee
Revenues. The launch of digital compression technology has the potential to
provide an additional distribution market for DMX music services if cable
operators utilizing Digital Distribution, such as TCI, elect to offer DMX music
services as part of one or more digital video programming packages, thereby
capturing as subscribers customers who might not otherwise elect to subscribe to
DMX music services on an a la carte basis. However, the launch of and the
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transition to Digital Distribution may also have the effect of materially
reducing TCI Music's residential subscriber fee revenues from Tuner Distribution
and Contributed Net DMX Revenues as a result of the expected change from the a
la carte fee structure currently in effect for Tuner Distribution to a fee
structure similar to that in effect for Satellite Distribution. TCI Music does
not expect the launch of Digital Distribution to affect the current rate
structure for commercial cable subscribers or Satellite Distribution.
Effect of New Residential Fee Structure on Per Subscriber Residential
License Fees. TCI Music expects that license fees paid by cable operators for
Digital Distribution that include DMX music services in their digital packages
will be in the range of $.25 to $.50 per subscriber, which are much lower than
the a la carte fees now paid under affiliation agreements currently in effect.
While a substantial increase in the overall number of residential subscribers
purchasing digital packages that include DMX music services could result in
revenues equal to or exceeding the revenues from residential subscribers
currently electing to purchase DMX services for a separate a la carte fee, such
a result depends on a number of factors over which TCI Music has no control,
including whether cable operators elect to include DMX music services as part of
their digital packages, the acceptance by consumers of the digital products and
whether those electing to purchase the digital packages are already DMX
subscribers. Neither TCI nor TCI Music can predict the number of DMX residential
subscribers that will elect to receive a digital package that includes DMX when
it is offered.
Effect of New Residential Fee Structure on Contributed Net DMX
Revenues. The new license fee structure for Digital Distribution will not only
affect DMX's subscriber fee revenues but also the Contributed Net DMX Revenues
that TCI will contribute to TCI Music under the Contribution Agreement.
Contributed Net DMX Revenues are the total revenues received by TCI and certain
of its subsidiaries from sales of DMX music services to their residential and
commercial subscribers net of an amount equal to 10% of the revenues from
residential sales and net of the license fees otherwise payable to DMX for DMX
music services under affiliation agreements currently in effect. If the Merger
had occurred as of January 1, 1996, Contributed Net DMX Revenues for the three
months ended March 31, 1997 and the year ended December 31, 1996 would have been
approximately $4.4 million and $16.4 million, respectively. See "ARRANGEMENTS
BETWEEN TCI AND TCI MUSIC AFTER THE MERGER -- Contribution Agreement." By
definition, Contributed Net DMX Revenues for each current Tuner Distribution
residential subscriber represent a substantial portion of the "spread" between
the rate charged by TCI to residential subscribers and the per subscriber
license fee payable to DMX under its affiliation agreement. Under residential
Digital Distribution, there will be no such "spread" (there will be no separate
a la carte fee charged by TCI, since TCI will be paying a small flat rate per
residential subscriber as a license fee) and Contributed Net DMX Revenues will
be eliminated for each current DMX residential subscriber that elects to
purchase a digital package. Although not included in Contributed Net DMX
Revenues, after the Merger, the license fee payable by TCI to DMX under current
affiliation agreements will continue to be paid to DMX, which will then be a
wholly owned subsidiary of TCI Music.
Potential Elimination of Current Distribution Outlet. TCI Music expects
that Tuner Distribution will continue to be available in markets where Digital
Distribution has not been introduced. However, because Tuner Distribution
currently utilizes more of the cable spectrum than is now used to deliver one
video channel, it is likely that some of such cable operators may determine to
eliminate Tuner Distribution of DMX music services in certain markets to recover
or maintain channel capacity for Digital Distribution. If TCI or any cable
operator terminates Tuner Distribution in any market, all revenues from
residential and commercial subscribers receiving DMX music services via Tuner
Distribution in such market would terminate, unless such residential subscribers
elect to purchase a video and music programming package through Digital
Distribution, and Digital Distribution and other distribution means were made
available to commercial subscribers. Accordingly, DMX's and TCI Music's revenues
could be materially adversely affected if Tuner Distribution were terminated by
cable operators.
Likewise, although cable operators may not as readily terminate Tuner
Distribution to commercial DMX subscribers, because they generally enter into
short term written contracts with commercial subscribers that obligate them to
provide such services, they may still choose to recover channel capacity by
terminating such agreements. In such a case, all revenues from commercial
subscribers receiving DMX services would also be eliminated unless alternative
delivery means such as Satellite Distribution or Digital Distribution were made
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available and accepted by the commercial subscriber. If Tuner Distribution were
to be eliminated, TCI Music expects that substantial additional expenses would
be incurred to retain such commercial subscribers, such as marketing and
equipment expenses, which could offset the revenues retained. In addition, an
available alternative distribution method may result in increased costs to the
subscriber in monthly fees and/or equipment. As a result, there would be a
substantial risk that some commercial subscribers would choose to terminate DMX
music services. Accordingly, DMX's and TCI Music's revenues could be materially
adversely affected if Tuner Distribution were terminated by cable operators.
CERTAIN LITIGATION
In September 1996, after announcement of TCI's proposal to DMX, certain DMX
stockholders filed a putative class action lawsuit in the Delaware Court of
Chancery on behalf of a purported class consisting of all public stockholders of
DMX (other than the directors of DMX and TCI) captioned Brickell Partners v.
Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr.,
Kent Burkhart, J. C. Sparkman, Bhaskar Menon, DMX Inc. and Tele-Communications,
Inc. (Civil Action No. 15206). The complaint seeks as relief, among other
things, an injunction preventing consummation of the Merger as well as
unspecified compensatory damages. Neither TCI nor DMX can estimate, based on
facts available as of the date of this Proxy Statement/Prospectus, the possible
adverse effects if such plaintiffs are successful, which could include the
inability to consummate the Merger, rescission of the Merger and monetary
damages.
DESCRIPTION OF TCI MUSIC CAPITAL STOCK
TCI MUSIC COMMON STOCK
TCI Music's authorized common stock consists of 295,000,000 shares of TCI
Music Series A Common Stock and 200,000,000 shares of TCI Music Series B Common
Stock, par value $.01 per share. As of the date of this Proxy
Statement/Prospectus, there were no shares of TCI Music Series A Common Stock
issued and outstanding and one share of TCI Music Series B Common Stock was
issued and outstanding.
The rights of holders of TCI Music Series A Common Stock and TCI Music
Series B Common Stock are identical except for voting and conversion rights. All
of the shares of TCI Music Series A Common Stock and TCI Music Series B Common
Stock distributed in the Merger will be validly issued, fully paid and
nonassessable.
Voting. Each share of TCI Music Series A Common Stock entitles the holder
to one vote and each share of TCI Music Series B Common Stock entitles the
holder to ten votes on each matter to be voted upon by the holders of TCI Music
Common Stock. Except as may otherwise be required by the DGCL or, with respect
to any series of TCI Music Preferred Stock, as otherwise provided in any
resolution of the TCI Music Board providing for the establishment of such series
of TCI Music Preferred Stock, the holders of the TCI Music Series A Common Stock
and the holders of the TCI Music Series B Common Stock and the holders of each
series of TCI Music Preferred Stock, if any, entitled to vote thereon will vote
as one class on all matters to be voted on by such stockholders of TCI Music.
Neither the holders of TCI Music Series A Common Stock nor the holders of TCI
Music Series B Common Stock have any rights to vote as a separate class or
series on any matter coming before the stockholders of TCI Music, except for
certain limited series voting rights provided under the DGCL. Under the DGCL,
the approval of the holders of a majority of the outstanding shares of any class
of capital stock of a corporation, voting separately as a class, is required to
approve any amendment to the charter that would alter or change the powers,
preferences or special rights of the shares of such class so as to affect them
adversely, provided that, if any amendment would alter or change the powers,
preferences or special rights of one or more series of the class so as to affect
them adversely, but would not so affect the entire class, then only the shares
of the series so affected by the amendment would be entitled to vote thereon
separately as a class. The TCI Music Charter does not provide for cumulative
voting in elections of directors of TCI Music. Under the TCI Music Bylaws
directors may be elected by a plurality of the votes of shares present in person
or represented by proxy at the meeting and entitled to vote on the election of
officers.
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Conversion. Each share of TCI Music Series B Common Stock is convertible
at any time, at the option of its holder, into one share of TCI Music Series A
Common Stock. The TCI Music Series A Common Stock is not convertible into TCI
Music Series B Common Stock.
Dividends. Subject to the preferential rights, if any, of the holders of
outstanding shares of any series of TCI Music Preferred Stock, dividends may be
paid on TCI Music Common Stock as determined by the TCI Music Board out of funds
of TCI Music legally available therefor under the DGCL. Except for dividends
declared or paid as described below under "-- Share Distributions," any
dividends paid on the TCI Music Series A Common Stock or the TCI Music Series B
Common Stock will be paid only on both series, in equal amounts per share.
The TCI Music Board will determine its dividend policy with respect to TCI
Music Common Stock based on TCI Music's results of operations, financial
condition, capital requirements and other circumstances, including restrictions
that may be contained in agreements pursuant to which TCI Music may borrow
funds. It is the TCI Music Board's present intention to retain cash for the
operations of TCI Music and it is not anticipated that cash dividends will be
paid on TCI Music Common Stock in the foreseeable future.
Share Distributions. If at any time a distribution paid in TCI Music
Series A Common Stock or TCI Music Series B Common Stock or any other securities
of TCI Music or of any other corporation, partnership, limited liability
company, trust or other legal entity ("Person") (hereinafter sometimes called a
"share distribution") is to be made with respect to the TCI Music Series A
Common Stock or TCI Music Series B Common Stock, such share distribution will be
declared and paid only as follows:
(a) a share distribution consisting of shares of TCI Music Series A Common
Stock (or Convertible Securities that are convertible into, exchangeable for or
evidence the right to purchase shares of TCI Music Series A Common Stock) to
holders of TCI Music Series A Common Stock and TCI Music Series B Common Stock,
on an equal per share basis; or consisting of shares of TCI Music Series B
Common Stock (or Convertible Securities that are convertible into, exchangeable
for or evidence the right to purchase shares of TCI Music Series B Common Stock)
to holders of TCI Music Series A Common Stock and TCI Music Series B Common
Stock, on an equal per share basis; or consisting of shares of TCI Music Series
A Common Stock (or Convertible Securities that are convertible into,
exchangeable for or evidence the right to purchase shares of TCI Music Series A
Common Stock) to holders of TCI Music Series A Common Stock and, on an equal per
share basis, shares of TCI Music Series B Common Stock (or Convertible
Securities that are convertible into, exchangeable for or evidence the right to
purchase shares of TCI Music Series B Common Stock) to holders of TCI Music
Series B Common Stock; or
(b) a share distribution consisting of shares of any class or series of
security of TCI Music or any other Person other than TCI Music Series A Common
Stock or TCI Music Series B Common Stock (or Convertible Securities that are
convertible into, exchangeable for or evidence the right to purchase shares of
TCI Music Series A Common Stock or TCI Music Series B Common Stock), either on
the basis of a distribution of identical securities, on an equal per share
basis, to holders of TCI Music Series A Common Stock and TCI Music Series B
Common Stock or on the basis of a distribution of one class or series of
securities to holders of TCI Music Series A Common Stock and another class or
series of securities to holders of TCI Music Series B Common Stock, provided
that the securities so distributed (and, if applicable, the securities into
which the distributed securities are convertible, or for which they are
exchangeable, or which the distributed securities evidence the right to
purchase) do not differ in any respect other than their relative voting rights
and related differences in designation, conversion and share distribution
provisions, with holders of shares of TCI Music Series B Common Stock receiving
the class or series having the higher relative voting rights (without regard to
whether such rights differ to a greater or lesser extent than the corresponding
differences in voting rights and related differences in designation, conversion
and share distribution provisions between TCI Music Series A Common Stock and
TCI Music Series B Common Stock), provided that if the securities so distributed
constitute capital stock of a Subsidiary of TCI Music, such rights shall not
differ to a greater extent than the corresponding differences in voting rights,
designation, conversion and share distribution provisions between TCI Music
Series A Common Stock and TCI Music Series B Common Stock, and provided in each
case that such distribution is otherwise made on an equal per share basis.
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The term "Convertible Securities" is defined in the TCI Music Charter as
any securities of TCI Music (other than any series of TCI Music Common Stock)
that are convertible into, exchangeable for or evidence the right to purchase
any shares of any series of TCI Music Common Stock, whether upon conversion,
exercise, exchange, pursuant to anti-dilution provisions of such securities or
otherwise. As used in the TCI Music Charter, the term "Subsidiary" means, when
used with respect to any Person, (i) a corporation in which such Person and/or
one or more Subsidiaries of such Person, directly or indirectly, owns capital
stock having a majority of the voting power of such corporation's capital stock
to elect directors under ordinary circumstances, and (ii) any other Person
(other than a corporation) in which such Person and/or one or more Subsidiaries
of such Person, directly or indirectly, has (x) a majority ownership interest or
(y) the power to elect or direct the election of a majority of the members of
the governing body of such first-named Person. The TCI Music Charter provides
that TCI Music shall not reclassify, subdivide or combine the TCI Music Series A
Common Stock without reclassifying, subdividing or combining the TCI Music
Series B Common Stock, on an equal per share basis, and TCI Music shall not
reclassify, subdivide or combine TCI Music Series B Common Stock without
reclassifying, subdividing or combining the Series A Common Stock, on an equal
per share basis.
Liquidation Rights. In the event of a liquidation, dissolution or winding
up of TCI Music, whether voluntary or involuntary, after payment or provision
for payment of the debts and other liabilities of TCI Music and subject to the
preferential rights, if any, of holders of any then outstanding shares of any
series of TCI Music Preferred Stock, holders of shares of TCI Music Series A
Common Stock and holders of shares of TCI Music Series B Common Stock would be
entitled to share ratably in all assets of TCI Music available for distribution
to holders of TCI Music Common Stock. Neither a consolidation, merger, nor sale
of assets will be construed to be a "liquidation," "dissolution" or "winding up"
of TCI Music.
No Preemptive Rights. Holders of TCI Music Common Stock have no preemptive
rights to subscribe for or purchase additional shares of capital stock or other
obligations or securities convertible into or exercisable for shares of capital
stock that may hereafter be issued by TCI Music.
The National Association of Security Dealers, Inc. has approved the TCI
Music Series A Common Stock for inclusion for trading on its SmallCap Market
upon consummation of the Merger, subject to the condition that the TCI Music
Series A Common Stock trade at a price of $3.00 or more per share for the first
five trading days after the Merger. The Bank of New York has agreed to be the
transfer agent for each class of TCI Music Common Stock.
TCI MUSIC PREFERRED STOCK
TCI Music is authorized to issue up to 5,000,000 shares of preferred stock,
par value $.01 per share ("TCI Music Preferred Stock"). As of the date of this
Proxy Statement/Prospectus no shares of TCI Music Preferred Stock have been
issued.
The TCI Music Preferred Stock may be divided and issued in one or more
series from time to time as determined by the TCI Music Board, without further
stockholder approval. The TCI Music Board is authorized to establish, by
resolution, the number of shares of each series, the powers, designations,
preferences and relative, participating, optional or other rights of each such
series, and the qualifications, limitations, or restrictions thereof. All shares
of any one series of TCI Music Preferred Stock are required to be alike in every
particular. Except to the extent otherwise provided in the resolution or
resolutions providing for the issue of any series of TCI Music Preferred Stock,
the holders of shares of such series will have no voting rights except as may be
required by Delaware law. At the date of this Information Statement, the TCI
Music Board has not authorized the issuance of any shares of TCI Music Preferred
Stock and TCI Music has no current plans for the issuance of any shares of TCI
Music Preferred Stock.
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COMPARISON OF STOCKHOLDERS' RIGHTS
DMX and TCI Music are each incorporated in Delaware, and the rights of
their respective stockholders are governed by the laws of the State of Delaware
and the DMX Charter and DMX Bylaws and the TCI Music Charter and TCI Music
Bylaws, respectively. Upon consummation of the Merger, stockholders of DMX will
become stockholders of TCI Music, which will result in their rights as
stockholders continuing to be governed by Delaware law and also being governed
by the TCI Music Charter and TCI Music Bylaws. Although it is impracticable to
describe all of the differences between the DMX Charter and DMX Bylaws and the
TCI Music Charter and TCI Music Bylaws, the following is a summary of certain
significant differences between the rights of holders of DMX Common Stock and
those of holders of TCI Music Common Stock. The following summary of the TCI
Music Charter and the TCI Music Bylaws is qualified in its entirety by reference
to such documents, which have been filed as exhibits to the Registration
Statement. See "AVAILABLE INFORMATION."
AUTHORIZED CAPITAL STOCK
DMX. DMX's authorized capitalization consists of 100,000,000 shares of DMX
Common Stock.
TCI Music. TCI Music's authorized capitalization consists of a total of
495,000,000 shares of Common Stock, 295,000,000 of which are TCI Music Series A
Common Stock and 200,000,000 of which are TCI Music Series B Common Stock, and
5,000,000 shares of preferred stock, $0.01 par value per share.
VOTING
DMX. Each share of DMX Common Stock entitles the holder to one vote on
each matter presented to stockholders for vote. The DMX Bylaws provide that the
presence, in person or by proxy, of the holders of a majority of the votes
entitled to be cast by the stockholders entitled to vote (the "DMX Voting
Stock") shall constitute a quorum.
TCI Music. Each share of TCI Music Series B Common Stock entitles the
holder to ten votes and each share of TCI Music Series A Common Stock entitles
the holder to one vote on each matter presented to stockholders. Except as
required by the DGCL, the holders of TCI Music Series A Common Stock and TCI
Music Series B Common Stock vote together as a single class. The TCI Music
Bylaws provide that, subject to the rights of the holders of any class or series
of TCI Music preferred stock and except as otherwise provided by law or in the
TCI Music Charter, the presence, in person or by proxy, of the holders of a
majority of the total voting power of the outstanding shares of capital stock of
TCI Music entitled to vote at the meeting (the "TCI Music Voting Stock") is
necessary to constitute a quorum at such meeting for the transaction of any
business.
SPECIAL MEETING OF STOCKHOLDERS
DMX. The DMX Charter and Bylaws provide that, subject to the rights of the
holders of any series of preferred stock of DMX, a special meeting may be called
only by the DMX Board pursuant to a resolution approved by a majority of the
entire DMX Board.
TCI Music. The TCI Music Charter and TCI Music Bylaws provide that a
special meeting of stockholders shall be held at any time, subject to the rights
of the holders of any series of TCI Music preferred stock, upon the call of the
Secretary of TCI Music (a) upon the written request of the holders of not less
than 662/3% of the total voting power of the TCI Music Voting Stock or (ii) at
the request of at least 75% of the members of the TCI Music Board of Directors
then in office.
DIRECTORS
DMX. The DMX Charter and Bylaws provide that the DMX Board shall consist
of not less than three directors, divided into three classes of approximately
equal size, with each class to be elected for a three-year term at each annual
meeting of stockholders. The number of directors shall be determined from time
to time by the vote of a majority of the entire DMX Board, provided that no
decrease in the number of directors shall
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shorten the term of any incumbent director. The DMX Board is currently comprised
of seven directors. Stockholders of DMX do not have cumulative voting rights.
TCI Music. The TCI Music Charter provides for a Board of Directors of not
less than three members, divided into three classes of approximately equal size,
with each class to be elected for a three-year term at each annual meeting of
stockholders. The TCI Music Charter provides that the exact number of directors
shall be fixed by the Board of Directors by resolution. The TCI Music Bylaws
provide that the Board of Directors, by resolution adopted by the affirmative
vote of at least 75% of the members of the Board of Directors then in office,
may increase or decrease the number of directors, provided that any decrease in
the number of directors shall not shorten the term of any incumbent director.
The current number of directors comprising the TCI Music Board of Directors is
seven. Stockholders of TCI Music do not have cumulative voting rights.
REMOVAL OF DIRECTORS
DMX. The DMX Charter provides that, except as otherwise provided by the
terms of any securities of DMX, directors may only be removed for cause by the
affirmative vote of the holders of 66 2/3% of the then outstanding shares of DMX
Common Stock. The DMX Charter defines "cause" as the willful and continuous
failure of a director to substantially perform such director's duties to DMX
(other than any such failure resulting from incapacity because of physical or
mental illness) or the willful engaging by a director in gross misconduct
materially and demonstrably injurious to DMX. The DMX Bylaws provide that the
vacancy caused by any such removal may be filled by the stockholders at the
meeting at which such removal takes place or pursuant to the procedure for
filling vacancies on the Board of Directors. See "-- Vacancies on the Board of
Directors."
TCI Music. The TCI Music Charter provides that, subject to the rights of
the holders of any series of TCI Music preferred stock, directors may be removed
only for cause upon the affirmative vote of the holders of at least 66 2/3% of
the total voting power of the outstanding shares of TCI Music Voting Stock,
voting together as a single class. The TCI Music Charter provides that "cause"
for removal exists if: (i) the director whose removal is proposed has been
convicted, or has been granted immunity to testify where another has been
convicted, of a felony, by a court of competent jurisdiction and such conviction
is no longer subject to direct appeal; (ii) such director has become mentally
incompetent, whether or not so adjudicated, which mental incompetence directly
affects his ability as a director, as determined by at least 66 2/3% of the
members of the TCI Music Board of Directors then in office (other than such
director); or (iii) such director's actions or failure to act have been
determined by 66 2/3% of the members of the TCI Music Board of Directors then in
office (other than such director) to be in derogation of such director's duties.
VACANCIES ON THE BOARD OF DIRECTORS
DMX. The DMX Charter provides that, except as otherwise provided by the
terms of any securities of DMX, newly created directorships resulting from any
increase in the number of directors may be filled by the DMX Board, and any
vacancies on the DMX Board resulting from death, resignation, removal or other
cause may be filled by the affirmative vote of a majority of the remaining
directors then in office even though less than a quorum of the DMX Board, or by
a sole remaining director.
TCI Music. The TCI Music Charter provides that any newly created
directorship resulting from an increase in the number of directors and any
vacancies on the TCI Music Board of Directors caused by death, resignation,
removal, disqualification or other cause, may be filled by the affirmative vote
of a majority of the remaining directors then in office, although less than a
quorum, or by the sole remaining director. Such directors will serve for the
remainder of the full term of the class for which such director was chosen and
until his successor shall have been elected and qualified.
ANTI-TAKEOVER STATUTE; MERGERS, CONSOLIDATIONS AND SALES OF ASSETS
Anti-Takeover Statute. DGCL Section 203, in general, prohibits certain
forms of "business combinations" with an "interested stockholder" within three
years of the date such person became an "interested
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stockholder," unless (i) prior to such date the board of directors of the
corporation approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, exclusive of shares owned by officers, directors and by certain
employee stock plans, or (iii) on or after such date, the business combination
is approved by the board of directors and authorized at a stockholders' meeting
by the affirmative vote of at least 66 2/3% of the outstanding voting stock that
is not owned by the interested stockholder.
An "interested stockholder" of a corporation is defined, subject to certain
exceptions, as any person or entity (and any affiliate or associate of such
person or entity) that (i) is the owner (as defined in Section 203) of 15% or
more of the outstanding voting stock of the corporation; or (ii) is an affiliate
or associate of the corporation and, at any time within the three-year period
immediately prior to the date of determination, was the owner of 15% or more of
the outstanding shares of voting stock of the corporation. The term "business
combination" is defined to include, among other transactions between the
interested stockholder and the corporation or any direct or indirect
majority-owned subsidiary thereof: a merger or consolidation; a sale, pledge,
transfer or other disposition (including as part of a dissolution) of assets
having an aggregate market value equal to 10% or more of either the aggregate
market value of all assets of the corporation on a consolidated basis or the
aggregate market value of all the outstanding stock of the corporation; certain
transactions that would increase the interested stockholder's proportionate
share ownership of the stock of any series of the corporation or such
subsidiary; and any receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits provided by or
through the corporation or any such subsidiary. The term "owner" is broadly
defined to include any person that individually or with or through his or its
affiliates or associates, among other things, beneficially owns such stock, or
has the right to acquire such stock (whether such right is exercisable
immediately or only after the passage of time) pursuant to any agreement or
understanding or upon the exercise of warrants or options or otherwise or has
the right to vote or direct the vote of such stock pursuant to any agreement or
understanding, or has an agreement or understanding with the beneficial owner of
such stock for the purpose of acquiring, holding, voting or disposing of such
stock.
Section 203 applies automatically to Delaware corporations (other than
corporations which do not have a class of voting stock that is listed on a
national securities exchange, authorized for quotation with a registered
national securities association, or held of record by more than 2,000
stockholders) unless the corporation's original certificate of incorporation
contains a provision expressly electing not to be governed by Section 203 or the
corporation has "opted out" of coverage under Section 203 by amending its
certificate of incorporation or bylaws to that effect in accordance with Section
203. A Delaware corporation which is not automatically covered by Section 203
may, however, "opt in" to such coverage by including in its original certificate
of incorporation or any amendment thereto a provision in which the corporation
elects to be governed by Section 203.
DMX. Section 203 of the DGCL automatically applies to DMX since it has a
class of voting stock that is authorized for quotation with a registered
national securities association. Even if Section 203 did not apply to DMX, the
DMX Charter incorporates by reference all of the provisions of DGCL Section 203
except for the provisions that exclude certain corporations from its coverage.
In addition, Article VI of the DMX Charter requires a "Business Combination"
with an "Interested Stockholder" to be approved by the holders of 80% of the
combined voting power of the then outstanding shares of DMX Voting Stock and the
affirmative vote of the holders of a majority of the voting power of the then
outstanding shares of DMX Voting Stock held by persons other than the Interested
Stockholder or any Affiliate or Associate (both as defined in Article VI) of the
Interested Stockholder, unless certain conditions specified in Article VI are
met.
For purposes of Article VI, an "Interested Stockholder" is defined as any
person (other than DMX or a subsidiary or certain of their employee benefit
plans) who is (a) the beneficial owner (as defined below), directly or
indirectly, of 15% or more of the then outstanding shares of DMX Common Stock or
(b) an Affiliate of DMX and at any time within the two-year period immediately
prior to the date in question was the beneficial owner of 15% or more of the
then outstanding shares of DMX Common Stock, or (c) an assignee
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of, or has otherwise succeeded to, any shares of DMX Common Stock which were at
any time within the two-year period immediately prior to the date in question
beneficially owned by a person described in (a) or (b) above (other than shares
acquired through a public offering).
For purposes of Article VI, a "Business Combination" is defined as any of
the following: (a) a merger or consolidation of DMX with an Interested
Stockholder or any corporation (whether or not itself an Interested Stockholder)
which is, or after such merger or consolidation would be, an Affiliate or an
Associate of an Interested Stockholder; (b) the sale or other disposition (in
one transaction or a series of transactions) to or with an Interested
Stockholder or any Affiliate or Associate of an Interested Stockholder of all or
substantially all the assets of DMX or the assets of its subsidiaries
representing more than 75% of the total value of DMX's consolidated
subsidiaries; (c) the sale or other disposition (in one transaction or a series
of transactions) of assets of DMX or any of its subsidiaries having an aggregate
Fair Market Value (as defined in Article VI) of $10 million or more, but less
than the amount specified in clause (b) above, if an Interested Stockholder or
any Affiliate or Associate of an Interested Stockholder is a party to the
transaction, and any merger or consolidation of any of DMX's subsidiaries having
assets with a Fair Market Value of $10 million or more with an Interested
Stockholder or any corporation which is, or after such merger or consolidation
would be, an Affiliate or Associate of an Interested Stockholder; (d) the
issuance or transfer (in one transaction or a series of transactions) of any
securities of DMX or of any of its subsidiaries to an Interested Stockholder or
any Affiliate or Associate of an Interested Stockholder in exchange for cash,
securities or other property (or combination thereof) having an aggregate Fair
Market Value of $10 million or more; (e) the adoption of any plan or proposal
for the liquidation or dissolution of DMX proposed by or on behalf of an
Interested Stockholder or any Affiliate or Associate of an Interested
Stockholder; and (f) any reclassification of securities or recapitalization or
merger or consolidation of DMX with any of its subsidiaries or any other
transaction which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of stock or stock
convertible into stock of DMX or any of its subsidiaries that is beneficially
owned by an Interested Stockholder or any Affiliate or Associate of an
Interested Stockholder.
The term "beneficial owner" is defined as any person that individually or
with or through his or its Affiliates or Associates, among other things,
beneficially owns such stock, or has the right to acquire such stock (whether
such right is exercisable immediately or only after the passage of time)
pursuant to any agreement or understanding or upon the exercise of warrants or
options or otherwise or has the right to vote or direct the vote of such stock
pursuant to any agreement or understanding, or has an agreement or understanding
with the beneficial owner of such stock for the purpose of acquiring, holding,
voting or disposing of such stock.
The supermajority voting requirements described above do not apply to any
transaction otherwise meeting the definition of a Business Combination if each
of the following applicable provisions are met: (i) the transaction was approved
by a majority of the Disinterested Directors (as defined below) and the
Interested Stockholder involved in such Business Combination had acquired the
status of an Interested Stockholder in a manner substantially consistent with an
agreement or memorandum of understanding approved by the Board of Directors
prior to the time such Interested Stockholder acquired such status and the
Interested Stockholder has complied with all requirements imposed by such
agreement or memorandum of understanding; (ii) the Business Combination (other
than a sale or merger described in clause (c) and a liquidation or dissolution
of DMX described in clause (e) of the definition of Business Combination) was
approved by a majority of the Disinterested Directors; or (iii) the Business
Combination meets the fair price and procedural requirements described below. A
"Disinterested Director" is defined as any member of DMX's Board of Directors
who is not affiliated with and not a nominee of an Interested Stockholder or any
Affiliate or Associate of an Interested Stockholder and was a director of DMX
prior to the time such Interested Stockholder became an Interested Stockholder
and any director who is a successor to a Disinterested Director, who is
unaffiliated with and not a nominee of, an Interested Stockholder or any
Affiliate or Associate of an Interested Stockholder, and who was recommended for
election or elected to succeed a Disinterested Director by a majority of the
Disinterested Directors then on the Board.
A Business Combination complies with the "fair price" provisions of Article
VI if, among other things, the aggregate of (a) the consideration to be received
per share by holders of DMX Common Stock in the
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Business Combination equals or exceeds the highest of (i) the highest per share
price paid by the Interested Stockholder or any of its Affiliates or Associates
in acquiring any shares of DMX Common Stock during the two years immediately
prior to the date of the first public announcement of the proposed Business
Combination or in any transaction in which the Interested Stockholder became an
Interested Stockholder (whichever is higher) or (ii) the Fair Market Value per
share of DMX Common Stock on the date of the first public announcement of the
proposed Business Combination or the first date on which the Interested
Stockholder became an Interested Stockholder (whichever is higher). Comparable
"fair price" requirements apply to the price to be paid for shares of other
classes or series of DMX's capital stock. The consideration to be received by
holders of a particular class (or series) of capital stock in the Business
Combination must also be either cash or the same type of consideration used by
the Interested Stockholder and its Affiliates and Associates in acquiring the
largest portion of their interest in such class (or series) of capital stock.
A Business Combination complies with the "procedural" requirements of
Article VI if, between the time that the Interested Stockholder became an
Interested Stockholder and the date of the proposed Business Combination, (i)
DMX has not failed to declare and pay the full amount of dividends on any DMX
preferred stock and shall not have reduced the annual rate of dividends paid on
DMX Common Stock, unless such failure or reduction was approved by a majority of
the Disinterested Directors, (ii) the Interested Stockholder has not become the
direct or indirect beneficial owner of any additional shares of Voting Stock,
except as part of the transaction pursuant to which the Interested Stockholder
became an Interested Stockholder, (iii) the Interested Stockholder has not
received, at any time after the Interested Stockholder became an Interested
Stockholder, whether in connection with the Business Combination or otherwise,
the benefit of any loans, advances, guarantees, pledges or other financial
assistance provided by DMX, and (iv) if applicable, a proxy or information
statement describing the proposed Business Combination and complying with the
requirements of the Exchange Act or the proxy rules promulgated under the
Exchange Act or any replacement legislation has been mailed to all of DMX's
stockholders at least 30 days prior to the consummation of the Business
Combination, whether or not such proxy or information statement is required to
be mailed pursuant to the Exchange Act or any such replacement legislation.
Article VI is intended to reduce the risk of certain types of "two-tiered"
acquisitions in which a person or entity could acquire a substantial block of
DMX's capital stock and then proceed to effect a Business Combination with DMX
in which the consideration paid to the remaining stockholders is lower than the
price per share paid to acquire the initial block or is paid in the form of debt
or other less desirable forms of consideration rather than the form of
consideration used to purchase the initial block. Both Section 203 of the DGCL
and Article VI may, however, render more difficult or discourage a takeover of
DMX, whether or not such action might be deemed desirable by a majority of DMX's
stockholders.
The DMX Board has approved, in accordance with the applicable requirements
of Section 203 of the DGCL, certain transactions, including the TCI-E Merger,
between TCI and its respective affiliates and associates and DMX, which
transactions may have resulted in TCI becoming an interested stockholder of DMX,
within the meaning of Section 203 of the DGCL and an "Interested Stockholder,"
within the meaning of Article VI. See "THE MERGER -- Background of the Merger."
Because such transactions were approved by a majority of the Disinterested
Directors, no supermajority vote is required under either Section 203 or Article
VI in connection with the Merger. See "THE SPECIAL MEETING -- Voting Rights;
Votes Required for Approval."
TCI Music. Section 203 will apply to TCI Music, since the TCI Music
Charter does not contain any provision "opting out" of the application of DGCL
Section 203. As a result, the provisions of Section 203 will remain applicable
to transactions between TCI Music and any of its respective "interested
stockholders."
The TCI Music Charter requires, subject to the rights, if any, of any
series of preferred stock of TCI Music, the affirmative vote of the holders of
at least 66 2/3% of the total voting power of the then outstanding shares of TCI
Music Voting Stock, voting together as a single class, to approve (i) a merger
or consolidation of TCI Music with, or into, another corporation, other than a
merger or consolidation which does not require the consent of stockholders under
the DGCL or a merger or consolidation which has been approved by at least 75% of
the members of the TCI Music Board (in which case, in accordance with the
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DGCL, the affirmative vote of a majority of the total voting power of the
outstanding TCI Music Voting Stock would be required for approval), (ii) the
sale, lease or exchange of all or substantially all of the property and assets
of TCI Music or (iii) the dissolution of TCI Music.
AMENDMENTS TO CERTIFICATE OF INCORPORATION
DMX. The DMX Charter provides that the DMX Charter may be amended, altered
or repealed in any manner prescribed by statute, except that the amendment,
alteration or repeal of, or adoption of any provision inconsistent with,
Articles V (Composition of Board of Directors and Stockholder Meetings), VI
(Procedures for Certain Business Transactions), VII (Additional Statutory
Procedures for Business Combinations with Interested Stockholders), X (Right to
Amend Certificate of Incorporation) or XI (Definitions) of the DMX Charter may
only be effected upon the affirmative vote of the holders of at least 66 2/3% of
the then outstanding shares of DMX Common Stock.
TCI Music. The TCI Music Charter requires the affirmative vote of 66 2/3%
of the total voting power of the outstanding shares of TCI Music Voting Stock,
voting together as a single class, to approve any amendment, alteration or
repeal of any provision of the TCI Music Charter or the addition or insertion of
other provisions therein.
AMENDMENTS TO BYLAWS
DMX. The DMX Bylaws provide that they may be amended, altered or repealed,
and new Bylaws may be adopted, from time to time by the affirmative vote of a
majority of the entire Board of Directors as then constituted, provided that at
the next stockholders' meeting after such amendment, alteration, repeal or
adoption, the stockholders may, by a majority vote of those present and entitled
to vote, alter or repeal any newly adopted Bylaws or restore to their original
status any altered or repealed Bylaws. The notice to stockholders of such
meeting shall include notice that the stockholders will be called on to ratify
any action taken by the Board of Directors with regard to the Bylaws.
TCI Music. The TCI Music Charter and TCI Music Bylaws require (a) the
affirmative vote of 66 2/3% of the total voting power of the outstanding TCI
Music Voting Stock, voting together as a single class, or (b) the affirmative
vote of not less than 75% of the members of the TCI Music Board of Directors
then in office, to approve the adoption, amendment or repeal of any provisions
of the TCI Music Bylaws.
LIMITATION OF LIABILITY OF DIRECTORS AND OFFICERS
Under Delaware law, a corporation may include in its certificate of
incorporation a provision that would, subject to the limitations described
below, eliminate or limit the personal liability of directors to the corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that such provision may not eliminate or limit the liability
of a director (i) for any breach of a director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith
there which involve intentional misconduct or no violation of law, or (iii)
resulting in the receipt by such person of an improper personal benefit.
The DMX Charter and the TCI Music Charter each contain a provision that
limits a director's liability to the full extent permitted by Delaware law, as
discussed above.
PREFERRED STOCK
Neither DMX nor TCI Music have any outstanding preferred stock.
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APPRAISAL RIGHTS
Any stockholder of record of DMX who objects to the Merger may, as an
alternative to receiving the Merger Consideration, demand appraisal of his or
her DMX Common Stock pursuant to Section 262 of the DGCL ("Section 262") (a copy
of which is included as Appendix III hereto) by demanding in writing that, in
lieu of the Merger Consideration, he or she be paid in cash the fair value of
his or her DMX Common Stock.
Any stockholder contemplating the exercise of such right to demand
appraisal should carefully review Section 262, particularly the procedural steps
required to perfect the right of appraisal. A stockholder who fails to comply
with these procedural requirements may lose his or her right of appraisal. A DMX
stockholder who loses his or her right of appraisal will receive the Merger
Consideration for his or her DMX Common Stock.
Set forth below, to be read in conjunction with the full text of Section
262 included as Appendix III hereto, is a summary of the procedures relating to
the exercise of a right of appraisal. The following summary does not purport to
be complete and is qualified in its entirety by reference to Appendix III. For
purposes of the following summary, references to the "Company" in this section
only mean DMX before the Merger and the Surviving Corporation after the Merger.
A stockholder of record who desires to exercise his or her appraisal rights
under Section 262 must satisfy all of the following conditions. A written demand
for appraisal of his or her common stock must be delivered to the Company before
the taking of the vote on the Merger Agreement. The demand will be sufficient if
it reasonably informs the Company of the identity of the stockholder and that he
or she intends thereby to demand appraisal of his or her DMX Common Stock. This
demand must be in addition to and separate from any proxy or vote against the
Merger Agreement. Voting against or failing to vote on the Merger Agreement will
not constitute a demand for appraisal under Section 262. A demand for appraisal
may be made only by or for a stockholder of record. Beneficial owners whose
shares are held of record by another, such as a nominee, broker or depositary,
must have the appraisal demand made by or for the holder of record.
Stockholders electing to exercise their appraisal rights under Section 262
must not vote for adoption of the Merger Agreement. If a stockholder returns a
signed proxy but does not specify a vote against adoption of the Merger
Agreement or a direction to abstain, the proxy will be voted for adoption of the
Merger Agreement, which will have the effect of waiving that stockholder's
appraisal rights.
Within 10 days after the Effective Time, the Surviving Corporation (as
successor to DMX following the Merger) will notify each former stockholder of
DMX who has made such a written demand for appraisal and who has not voted in
favor of the Merger of the date that the Merger became effective.
Within 120 days after the Effective Time, any stockholder who has satisfied
the requirements of Section 262 may deliver to the Company a written demand for
a statement listing the aggregate number of shares of DMX Common Stock not voted
in favor of the Merger and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. The Company must
then mail the statement to the stockholder before the later of (i) 10 days after
such stockholder's written demand for such statement is received by the Company
or (ii) 10 days after the Special Meeting.
Within 120 days after the Effective Time, the Company or any stockholder
who has complied with Section 262 and who is otherwise entitled to appraisal
rights under Section 262 may file a petition in the Delaware Court of Chancery
demanding a determination of the value of the DMX Common Stock of all such
stockholders. The Company does not intend to file such a petition.
Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the Company which shall, within 20 days after such
service, file in the office of the Delaware Register in Chancery in which the
petition was filed a duly verified list of the names and addresses of all
stockholders who have demanded payment for their DMX Common Stock and who have
not reached agreement with the Company as to the value of their shares. If the
petition is filed by the Company, it shall be accompanied by such list. The
Delaware Register in Chancery, if so ordered by the Court, shall give notice of
the time and place fixed for the hearing of such petition by registered or
certified mail to the Company and to the stockholders shown on the
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list at the addresses therein stated. Notice shall also be published at least
one week before the day of the hearing in a newspaper of general circulation
published in the City of Wilmington, Delaware or in such publication as the
Court deems advisable. The Court must approve the forms of the notices by mail
and by publication, and the Company will bear the cost of the notice.
After determining the stockholders entitled to an appraisal, the Court
shall appraise the DMX Common Stock, determining its fair value exclusive of any
element of value arising from the accomplishment or expectation of the Merger,
and the Court shall direct the payment of the appraised value of the DMX Common
Stock together with interest, if any, by the Company to the stockholders
entitled thereto upon surrender to the Company of the certificates representing
such DMX Common Stock. The costs of the proceeding may be determined by the
Court and taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order all or a
portion of the expenses incurred by any stockholder in connection with the
appraisal proceedings, including without limitation, reasonable attorney's fees
and the fees and expenses of experts, to be charged pro rata against the value
of all such DMX Common Stock entitled to an appraisal. Absent such a
determination or assessment, each party bears its own expense.
Stockholders considering seeking appraisal should bear in mind that the
fair value of their DMX Common Stock determined under Section 262 could be more
than, the same as or less than the Merger Consideration they would receive
pursuant to the Merger Agreement if they do not seek appraisal of their stock,
and that investment banking opinions as to fairness are not necessarily opinions
as to fair value under Section 262.
Notwithstanding the foregoing, if no petition has been filed with the
Delaware Court of Chancery within 120 days after the Effective Time, then the
right of appraisal shall cease. Further, if any stockholder delivers to the
Company a written withdrawal of his demand for appraisal, which withdrawal may
be made without the consent of the Company at any time prior to the 60th day
after the Effective Time or with the consent of the Company after such period,
then the right of appraisal shall cease as to such stockholder. Any former DMX
stockholder who withdraws or loses his or her right of appraisal after the
Effective Time will receive the Merger Consideration. Notwithstanding the
foregoing, no appraisal proceeding in the Delaware Court of Chancery may be
dismissed as to any stockholder without the approval of the Court, and such
approval may be conditioned upon such terms as the Court deems just.
The statements made in this summary are qualified in their entirety by
reference to Section 262 of the DGCL. The provisions of Section 262 of the DGCL
are technical in nature and complex. IT IS SUGGESTED THAT ANY HOLDER OF DMX
COMMON STOCK WHO DESIRES TO AVAIL HIMSELF OR HERSELF OF HIS OR HER RIGHT TO
DISSENT CONSULT HIS OR HER COUNSEL BECAUSE FAILURE TO COMPLY STRICTLY WITH THE
PROVISIONS OF SECTION 262 MAY DEFEAT DISSENTERS' RIGHTS.
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MANAGEMENT OF TCI MUSIC
DIRECTORS AND EXECUTIVE OFFICERS
Information regarding each person who is a director or executive officer of
TCI Music is set forth below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ---- --- --------
<S> <C> <C>
Leo J. Hindery, Jr................................. 49 Chairman of the Board
Robert R. Bennett.................................. 39 Director and Acting Chief Financial
Officer
Donne F. Fisher.................................... 58 Director
Peter M. Kern...................................... 29 Director
J.C. Sparkman...................................... 64 Director
David B. Koff...................................... 38 Director, President and Chief Executive
Officer
Lon A. Troxel...................................... 49 Director
Stephen M. Brett................................... 56 Vice President, General Counsel and
Secretary
</TABLE>
Leo J. Hindery, Jr. was appointed Chairman of the Board of TCI Music
effective January 1997. He was appointed as a director of TCI in May 1997 and
President and Chief Operating Officer of TCI effective March 1, 1997 and was
appointed Director and President of TCIC in March 1997. Since 1988 has been the
managing general partner of the general partner of InterMedia Partners and its
affiliated entities. InterMedia Partners is a multi-system cable television
operator. Mr. Hindery is a director of DMX.
Robert R. Bennett was appointed a director of TCI Music effective January
1997 and acting Chief Financial Officer in June 1997. He has been an Executive
Vice President of TCI and President, Chief Executive Officer and a director of
Liberty since April 1997. From June 1995 through March 1997, he was Executive
Vice President, Chief Financial Officer, Secretary, Treasurer and a director of
Liberty. He was Senior Vice President of Liberty from September 1991 to June
1995 and Vice President of TCIC from 1990 through March 1991 while also holding
the titles of Treasurer, Secretary and Chief Financial Officer of Liberty. Mr.
Bennett also serves as a director of BET Holdings, Inc., a Delaware corporation,
which is engaged in the distribution of certain programming.
Peter M. Kern was appointed a director of TCI Music effective January 1997.
Mr. Kern has served as President of Gemini Associates LLC, a firm that provides
strategic advisory services primarily to media companies, since April 1996. From
December 1993 to January 1996 he served as Senior Vice President of Strategic
Development and Corporate Finance of Home Shopping Network, Inc. and served as
its Vice President of Strategic Development and Assistant to the CEO from March
1993 to December 1993. Prior to joining Home Shopping Network, Inc., he served
as Vice President of Corporate Finance and Strategic Development for Whittle
Communications, L.P. and worked at the New York investment banking firm, Bear,
Stearns & Co., Inc.
Donne F. Fisher was appointed a director of TCI Music effective January
1997. He has served as a director of TCI since 1994 and a director of TCIC since
1980. Mr. Fisher was Executive Vice President and Treasurer of TCI from January
1994 until January 1, 1996; served as Executive Vice President of TCIC from
December 1991 to October 1994; and was previously Senior Vice President of TCIC
since 1982 and Treasurer since 1970. Since January 1, 1996 he has provided
consulting services to TCI. Mr. Fisher also serves as a director of DMX, General
Communication, Inc. and United Video Satellite Group Inc.
J.C. Sparkman was appointed a director of TCI Music effective May 1997. He
has been a director of TCI since December 1996. He served as Executive Vice
President of TCI from January 1994 through March 1995. Mr. Sparkman retired in
March of 1995 and has provided consulting services to TCI since March 1995. He
served as Executive Vice President of TCIC from 1987 to October 1995. He also
serves as a director of Shaw Communications, Inc., DMX Inc. and United Video
Satellite Group, Inc.
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David B. Koff was appointed a director, President and Chief Executive
Officer of TCI Music effective May 1997. He has been Vice President -- Corporate
Development of Liberty since August 1994. From March 1993 to August 1994, he was
special counsel to Liberty. From August 1992 to March 1993, he was special
counsel at Brownstein Hyatt Farber & Strickland in Denver. Prior to that, Mr.
Koff was an associate in the Los Angeles office of Latham & Watkins.
Lon A. Troxel was appointed a director of TCI Music effective May 1997. He
was appointed Chief Operating Officer of DMX in April 1997 and served as
Executive Vice President, Commercial Division from April 1994 to April 1997. Mr.
Troxel served as Vice President, U.S./Canada Dealer Sales of AEI Music Networks,
Inc. during 1991 and as Chief Executive Officer and President of Protection One
Alarm Services from May 1988 to October 1990. Mr. Troxel will be appointed
President and Chief Executive Officer of DMX upon consummation of the Merger.
Stephen M. Brett was appointed Vice President, General Counsel and
Secretary of TCI Music in January 1997. Mr. Brett has served as Executive Vice
President and Secretary of TCI since January 27, 1994 and as Senior Vice
President and General Counsel of TCIC since December of 1991. From August of
1988 through December of 1991, Mr. Brett was Executive Vice President -- Legal
and Secretary of United Artist Entertainment Company and its predecessor, United
Artists Communications, Inc.
BOARD COMPOSITION
The TCI Music Charter provides for a classified Board of Directors
consisting of not less than three members, with the exact number of directors to
be fixed by resolution of the TCI Music Board from time to time. The TCI Music
Board currently consists of seven members.
Members of the TCI Music Board are elected to staggered three-year terms,
with approximately one-third elected annually. Mr. Fisher, Mr. Sparkman and Mr.
Troxel are the Class I Directors whose terms expire in 1998, Mr. Kern and Mr.
Bennett are the Class II Directors whose terms expire in 1999 and Mr. Koff and
Mr. Hindery are the Class III Directors whose terms expire in 2000. Executive
officers of TCI Music are appointed by and serve at the discretion of the TCI
Music Board. There are no family relations, of first cousin or closer, among the
above named individuals, by blood, marriage or adoption.
COMMITTEES OF THE BOARD
In compliance with the Nasdaq Stock Market corporate governance standards,
the TCI Music Board has established an Audit Committee comprised of three
directors, Mr. Bennett, Mr. Kern and Mr. Fisher. The duties of the Audit
Committee will include, but are not limited to, conducting reviews of potential
conflicts of interest situations where appropriate. No other committees of the
TCI Music Board have been established.
COMPENSATION OF DIRECTORS
Members of the TCI Music Board who are also full-time employees of TCI
Music or TCI, or any of its respective subsidiaries, will not receive any
additional compensation for their services as directors. TCI Music has not
established any fees for Directors who are not full-time employees of TCI or any
of its subsidiaries. All members of the TCI Music Board will be reimbursed for
expenses incurred to attend any meetings of the TCI Music Board or committee
thereof.
COMPENSATION OF EXECUTIVE OFFICERS
TCI Music was formed on January 21, 1997 and has conducted no significant
activities other than those incident to its formation, the Contribution
Agreement, the Merger Agreement, and the preparation of this Proxy
Statement/Prospectus. All of the executive officers of TCI Music are currently
employees of TCI or its affiliates. TCI Music has no current arrangements with
such persons to provide compensation in connection with their services as
executive officers of TCI Music.
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THE TCI MUSIC, INC. 1997 STOCK INCENTIVE PLAN
General. It is expected that, on or before the Effective Time, the TCI
Music Board will adopt, and TCI, as the sole stockholder of TCI Music prior to
the Merger, will approve, the TCI Music, Inc. 1997 Stock Incentive Plan (the
"1997 Plan"). The 1997 Plan will provide for awards to be made in respect of a
maximum of 4,000,000 shares of TCI Music Series A Common Stock (subject to
certain anti-dilution adjustments). Awards may be made as grants of stock
options ("Options"), stock appreciation rights ("SARs"), restricted shares
("Restricted Shares"), Stock Units (as defined below), performance awards
("Performance Awards") or any combination thereof (collectively, "Awards").
Awards may be made to employees and to consultants and advisors to TCI Music who
are not employees. No Rights can be issued in connection with any Awards under
the 1997 Plan. Shares of TCI Music Series A Common Stock that are subject to
Awards that expire, terminate or are annulled for any reason without having been
exercised (or deemed exercised, by virtue of the exercise of a related SAR), or
are forfeited prior to becoming vested, will return to the pool of such shares
available for grant under the 1997 Plan.
The 1997 Plan will be administered by the Compensation Committee of the TCI
Music Board, or such other committee as the TCI Music Board may in the future
appoint, which shall comprise of at least two persons (the "Committee"). Each
member of the Committee will be a member of the TCI Music Board who is not a
current employee of TCI Music and is not otherwise disqualified from being (A) a
"non-employee director" with respect to TCI Music for purposes of Rule 16b-3
under the Exchange Act (or any successor rule) or (B) an "outside director" with
respect to TCI Music for purposes of Section 162(m) of the Code (or any
successor statute) and the rules and regulations of the Treasury Department
promulgated thereunder.
The Committee will have broad discretion in administering the 1997 Plan,
and is authorized, subject only to the express provisions of the 1997 Plan, to
determine the eligible persons to whom Awards may be made, to determine the
terms and conditions (which need not be identical) of each Award (including the
timing of the grant, the type of Award granted, the pricing and the amount of
the Award and terms related to vesting, exercisability, forfeiture and
termination), and to interpret the provisions of the 1997 Plan and each
agreement relating to Awards granted under the 1997 Plan. The determinations of
the Committee are final and binding upon all participants.
Stock Options. Options granted pursuant to the 1997 Plan may be either
incentive stock options ("Incentive Options") within the meaning of Section 422
of the Code, or nonqualified stock options ("Nonqualified Options"), which do
not qualify under Section 422. The Committee is authorized to determine whether
an Option is an Incentive Option or a Nonqualified Option.
The exercise price of all Options granted under the 1997 Plan will be fixed
by the Committee, and may be more than, less than or equal to the fair market
value of the TCI Music Series A Common Stock on the date the Option is granted.
However, TCI Music does not have any current intention to grant Options with an
exercise price less than the fair market value of the TCI Music Series A Common
Stock on the date of grant.
Subject to the provisions of the 1997 Plan relating to death, retirement
and termination of employment, the term of each Option will be fixed by the
Committee at the time of grant. Options may be exercised in whole or in part at
any time or only after a period of time or in installments, as determined by the
Committee at the time of grant, and the exercisability of Options may be
accelerated by the Committee.
An Option shall be exercised by written notice to the Committee upon the
terms set forth in the agreement relating thereto and in accordance with such
other procedures as the Committee may establish.
The method of payment of the exercise price of an Option will be determined
by the Committee and may consist of cash, a check, a promissory note, the
surrender of already owned shares of TCI Music Series A Common Stock or TCI
Music Series B Common Stock, the withholding of shares of TCI Music Series A
Common Stock issuable upon exercise of such Option, delivery of a properly
executed exercise notice and irrevocable instructions to a broker to deliver
promptly to TCI Music the amount of sale or loan proceeds required to pay the
exercise price, any combination of the foregoing methods of payment or such
other consideration and method of payment as may be permitted for the issuance
of shares under Delaware law, subject, in the case of any permitted method of
payment other than cash, to such conditions as the Committee
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deems appropriate. By way of example, if a holder is permitted to elect to pay
such exercise price by the withholding of shares of TCI Music Series A Common
Stock, the Committee may reserve the discretion to approve or disapprove such
election.
Stock Appreciation Rights. An SAR may be granted under the 1997 Plan to
the holder of an Option (a "related Option") with respect to all or a portion of
the shares of TCI Music Series A Common Stock subject to the related Option (a
"Tandem SAR") or may be granted separately to an eligible participant (a "Free
Standing SAR"). A Tandem SAR may be granted either concurrently with the grant
of the related Option or, if the related Option is a Nonqualified Option, at any
time thereafter and prior to the complete exercise, termination, expiration or
cancellation of the related Option. A Tandem SAR will be exercisable only at the
time and to the extent that the related Option is exercisable and may be subject
to such additional limitations on exercisability as the Committee may determine.
Upon exercise of a Tandem SAR, the related Option will be deemed to have been
exercised to the extent of the number of shares of TCI Music Series A Common
Stock with respect to which such Tandem SAR is exercised. Conversely, upon the
exercise or termination of the related Option, the Tandem SAR will be canceled
automatically to the extent of the number of shares of TCI Music Series A Common
Stock with respect to which the related Option was so exercised or terminated.
Free Standing SARs will be exercisable at the time, to the extent and upon the
terms and conditions determined by the Committee and set forth in the agreement
relating to the Award.
The base price of a Tandem SAR will be the same as the exercise price of
the related Option unless the Committee provides for a higher base price. The
base price of a Free Standing SAR will not be less than the fair market value of
the TCI Music Series A Common Stock on the date of grant of the Free Standing
SAR. Upon exercise of an SAR, the holder will be entitled to receive from TCI
Music, for each share of TCI Music Series A Common Stock with respect to which
the SAR is exercised, an amount equal to the excess of the fair market value of
a share of TCI Music Series A Common Stock on the date of exercise over the base
price per share of such SAR. Such amount shall be paid in cash, shares of TCI
Music Series A Common Stock (valued at their fair market value on the date of
exercise of the SAR) or a combination thereof as specified in the agreement
relating to the Award. Unless the Committee shall otherwise determine, to the
extent a Free Standing SAR is exercisable, it will be exercised automatically
for a cash settlement on its expiration date.
The agreement relating to an Award of SARs may provide for a limit on the
amount payable to a holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the holder
in whole or in part for cash during any specified period, for a limit on the
time periods during which a holder may exercise SARs and for such other limits
on the rights of the holder and other terms and conditions as the Committee may
determine.
Restricted Shares. At the time of any Award of Restricted Shares, the
Committee will designate a period of time which must elapse (the "Restriction
Period") and may impose such other restrictions, terms and conditions that must
be fulfilled, before the Restricted Shares will become vested. The Committee may
determine that (a) Restricted Shares will be issued at the beginning of the
Restriction Period, in which case, such shares will constitute issued and
outstanding shares of TCI Music Series A Common Stock for all corporate purposes
or (b) Restricted Shares will not be issued until the end of the Restriction
Period, in which case the participant receiving the Award will have none of the
rights of a stockholder with respect to the shares of TCI Music Series A Common
Stock covered by such Award until such shares shall have been issued to such
participant at the end of the Restriction Period. The participant will have the
right to vote Restricted Shares issued at the beginning of the Restriction
Period and to receive such dividends and other distributions as the Committee
may, in its sole discretion, designate that are paid or distributed on such
Restricted Shares, and generally to exercise all other rights as a holder of TCI
Music Series A Common Stock, except that, until the end of the Restriction
Period: (i) such participant will not be entitled to take possession of the
stock certificates representing the Restricted Shares; (ii) such participant may
not sell, transfer or otherwise dispose of the Restricted Shares; and (iii)
other than such dividends and other distributions as the Committee may
designate, TCI Music will retain custody of all dividends and distributions made
or declared with respect to the Restricted Shares ("Retained Distributions") and
such Retained Distributions shall not bear interest or be segregated in a
separate account. In the case of Restricted Shares issued at the end of the
Restriction Period, the participant will be entitled to receive, to the extent
specified by the Committee only, cash or property
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corresponding to all dividends and other distributions (or the economic
equivalent thereof) that would have been paid, made or declared on such
Restricted Shares had such shares been issued at the beginning of the
Restriction Period (collectively, "Dividend Equivalents"), and such Dividend
Equivalents will be paid as specified by the Committee in the applicable Award
agreement. A breach of any restrictions, terms or conditions established by the
Committee with respect to any award of Restricted Shares will cause a forfeiture
of such Restricted Shares and any Retained Distributions (including any unpaid
Dividend Equivalents) with respect thereto. The 1997 Plan also provides that the
Committee may authorize awards of cash to a holder of Restricted Shares, payable
at any time after the Restricted Shares become vested.
Upon expiration of the applicable Restriction Period and the satisfaction
of any other applicable conditions, all or part of the Restricted Shares and any
Retained Distributions thereon (including any unpaid Dividend Equivalents) will
become vested and all or part of any cash amount awarded will become payable.
Any Restricted Shares and Retained Distributions thereon (including any unpaid
Dividend Equivalents) which do not so vest will be forfeited.
Stock Units. The 1997 Plan also authorizes the Committee to grant to
eligible participants, either alone or in addition to Options, SARs and
Restricted Shares, awards of TCI Music Series A Common Stock and other awards
that are valued in whole or in part by reference to, or are otherwise based on,
the value of the TCI Music Series A Common Stock ("Stock Units"). The Committee
will determine all terms and conditions of such Awards, including any
restrictions (including restrictions on transfer), deferral periods, or
performance requirements. The provisions of any Award of Stock Units need not be
the same with respect to each recipient and are subject to such rules as the
Committee may establish at the time of grant.
Performance Awards. Performance Awards consist of grants made to an
eligible person subject to the attainment of one or more performance goals. A
Performance Award will be paid, vested or otherwise deliverable solely upon the
attainment of one or more pre-established, objective performance goals
established by the Committee prior to the earlier of (i) 90 days after the
commencement of the period of service to which the performance goals relate, and
(ii) the passage of 25% of the period of service, and in any event while the
outcome is substantially uncertain. A performance goal may be based upon one or
more business criteria that apply to the eligible person, one or more business
units of TCI Music or TCI Music as a whole, and may include any of the
following: revenue, net income, cash flow (as defined for such purpose by the
Committee), stock price, market share, earnings per share, return on equity,
return on assets or decrease in costs. Subject to the foregoing, the terms,
conditions and limitations applicable to any Performance Award will be
determined by the Compensation Committee.
Effect of Termination of Employment. Under the terms of the 1997 Plan, if
the employment of the holder of an Award (which for this purpose includes the
engagement of the holder of an Award as a nonemployee consultant or advisor)
terminates by reason of death or total disability, then, unless the agreement
relating to such Award provides otherwise, (a) all outstanding Options and SARs
granted in such Award will become immediately exercisable in full in respect of
the aggregate number of shares covered thereby, (b) the Restriction Period for
all Restricted Shares granted in such Award will be deemed to have expired and
all such Restricted Shares, any related Retained Distributions and any unpaid
Dividend Equivalents will become vested and any cash amounts payable pursuant to
the related agreement will be adjusted in such manner as may be provided in such
agreement, and (c) all Stock Units granted in such Award will become vested in
full.
Under the terms of the 1997 Plan, if the employment of the holder of an
Award is terminated during the Restriction Period with respect to any Restricted
Shares, or prior to the complete exercise of any Option or SAR or the vesting or
complete exercise of any Stock Units, granted in such Award, then such Options,
SARs and Stock Units will thereafter be exercisable, and the holder's rights to
any such unvested Restricted Shares, Retained Distributions, unpaid Dividend
Equivalents and cash amounts and any such unvested Stock Units will thereafter
vest, only to the extent provided by the Committee in the agreement relating to
such Award, except that (a) if the holder's employment terminates by reason of
death or total disability then any Option or SAR granted in the Award will
remain exercisable for a period of at least one year after such termination (but
not later than the scheduled expiration of such Option or SAR), (b) no Option or
SAR may be exercised after the scheduled expiration date thereof, and (c) if the
holder's employment is terminated for cause (as defined)
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then (i) such participant's rights to all Restricted Shares, Retained
Distributions, unpaid Dividend Equivalents and any cash amounts covered by such
Award will be forfeited immediately, (ii) all Options and SARs and all unvested
or unexercised Stock Units granted in such Award will immediately terminate and
(iii) such participant's interest in all unvested Performance Awards shall be
forfeited immediately.
Additional Provisions. Unless otherwise required by the Committee in the
agreement relating to an Award, each Award will vest and become exercisable in
full upon the occurrence of any of the following change in control transactions:
(a) the TCI Music Board (or stockholders, if TCI Music Board approval is not
required by law) approves any of the following transactions (each an "Approved
Transaction"): (i) a merger, consolidation or binding share exchange to which
TCI Music is a party (x) pursuant to which shares of TCI Music Series A Common
Stock would be converted into or exchanged for cash, securities or other
property (other than a transaction in which the common stockholders of TCI Music
prior to such transaction have the same proportionate ownership of the common
stock of, and voting power with respect to, the surviving corporation
immediately after such transaction) or (y) as a result of which the persons who
are common stockholders of TCI Music prior to such transaction would have less
than a majority of the combined voting power of the outstanding capital stock of
TCI Music immediately following such transaction; (ii) the sale of substantially
all of the assets of TCI Music; or (iii) the liquidation or dissolution of TCI
Music; (b) any person or other entity (other than TCI Music, any subsidiary, any
employee benefit plan sponsored by TCI Music or any subsidiary or any
Controlling Person (as defined)) purchases any common stock of TCI Music
pursuant to a tender or exchange offer, without the prior consent of the TCI
Music Board, or any person or other entity (other than TCI Music, any
subsidiary, any employee benefit plan sponsored by TCI Music or any subsidiary
or any Controlling Person) becomes the beneficial owner of securities of TCI
Music representing 20% or more of the combined voting power of TCI Music's
outstanding securities, other than in a transaction (or series of related
transactions) approved by the TCI Music Board; or (c) during any two-year
period, individuals who at the beginning of such period constitute the entire
TCI Music Board cease to constitute a majority of the TCI Music Board, unless
the election, or nomination for election, of each new director is approved by at
least two-thirds of the directors then still in office who were directors at the
beginning of the period. "Controlling Person" is defined in the 1997 Plan to
mean each of (1) the Chairman of the Board, the President and each of the
directors of TCI Music as of the effective date of the 1997 Plan, and (2) the
respective family members, estates and heirs of each of the persons referred to
in clause (1) and any trust or other investment vehicle for the primary benefit
of any of such persons or their respective family members or heirs. Options,
SARs, or, if applicable, Stock Units not theretofore exercised will terminate
upon consummation of an Approved Transaction. The Committee will have the
discretion, unless otherwise provided in the agreement relating to a particular
Award, to determine that any or all outstanding Awards of any or all types
granted pursuant to the 1997 Plan will not vest or become exercisable on an
accelerated basis in connection with an Approved Transaction or will not
terminate if not exercised prior to consummation of the Approved Transaction, if
action that, in the opinion of the Committee, is equitable and appropriate is
taken by the TCI Music Board or by the surviving or acquiring corporation, as
the case may be, to assume such Award or substitute a new award therefor that
is, as nearly as may be practicable, equivalent to the old Award.
The Committee may require in the agreement relating to an Award that if the
holder acquires any shares of TCI Music Series A Common Stock through the
exercise of Options or SARs or through the vesting of Restricted Shares or Stock
Units granted in the Award, then prior to selling or otherwise transferring any
such shares to a third party, such holder must offer to sell such shares to TCI
Music, at their fair market value, pursuant to a right of first refusal.
No awards may be granted under the 1997 Plan on or after the tenth
anniversary of its effective date. The TCI Music Board or the Committee may at
any time terminate the 1997 Plan and may from time to time suspend or amend the
1997 Plan. Without stockholder approval, no amendment to the 1997 Plan shall
increase the number of shares of TCI Music Series A Common Stock subject to the
1997 Plan, change the class of persons eligible to receive Awards under the 1997
Plan, or otherwise materially increase the benefits accruing to participants
under the 1997 Plan. Termination or amendment of the 1997 Plan may not adversely
affect the rights of any holder of an Award without his or her consent. Subject
to the specific terms of the 1997 Plan, the Committee may accelerate any Award
or waive any conditions or restrictions pertaining to such Award at any time.
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OTHER ARRANGEMENTS
The TCI Music Board of Directors has granted, effective as of the Effective
Time, (i) to each of Messrs. Hindery, Kern and Fisher, options to purchase
833,334 shares of TCI Music Series A Common Stock at a price of $6.25 per share,
(ii) to Messrs. Sparkman and Troxel, options to purchase 100,000 and 200,000
shares, respectively, of TCI Music Series A Common Stock at a price of $6.25 per
share in exchange for options granted by DMX that would otherwise carry over in
the Merger and (iii) to each of Messrs. Bennett and Koff, options to purchase
100,000 shares of TCI Music Series A Common Stock at a price of $6.25 per share.
All such persons are directors of TCI Music and Messrs. Hindery and Fisher are
directors of DMX and Mr. Troxel currently is Chief Operating Officer of DMX.
Such options will vest in 20% cumulative increments, with the first increment
vesting at the Effective Time, and each additional increment vesting on the
anniversary of the Effective Time and will be exercisable for up to ten years
following the Effective Time. No Rights will be issued in connection with any
TCI Music Series A Common Stock issued upon exercise of any such option.
Effective at the Effective Time, Mr. Troxel, Chief Operating Officer of
DMX, will be appointed President and Chief Executive Officer of DMX. In
connection with this appointment, TCI Music has proposed to amend his employment
agreement with DMX to (i) provide for an annual base salary of $275,000, with an
increase to $300,000 in June 1998 and to $325,000 in June 1999 and (ii) extend
the term from November 30, 1999 to five years from the date of the amendment.
See APPENDIX IV, PART III, ITEM 11. EXECUTIVE COMPENSATION. -- "Employment
Agreements and Termination of Employment Agreements" for a description of Mr.
Troxel's current employment agreement.
SECURITY OWNERSHIP OF TCI MUSIC AND DMX
SECURITY OWNERSHIP OF TCI AND TCI MUSIC
TCI currently owns all of the outstanding shares of TCI Music Common Stock.
The following table sets forth: (i) each person known to TCI Music who is
expected to beneficially own more than 5% of either class of the outstanding
shares of TCI Music Common Stock following the Merger; and (ii) the ownership of
Series A TCI Group Common Stock, Series B TCI Group Common Stock, Series A
Liberty Media Group Common Stock and Series B Liberty Media Group Common Stock,
Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value
$.01 per share, of TCI ("Class B Preferred Stock"), Series C Preferred Stock,
Redeemable Convertible TCI Group Preferred Stock, Series G, par value $.01 per
share, of TCI ("Series G Preferred Stock") and Redeemable Convertible Liberty
Media Group Preferred Stock, Series H, par value $.01 per share, of TCI ("Series
H Preferred Stock"), held as of January 31, 1997 by (A) each person who is a
director or is expected to be one of the five most highly compensated executive
officers of TCI Music, including the chief executive officer, (B) all of the
directors and executive officers of TCI Music, as a group; and the pro forma
number of shares and ownership percentage of TCI Music Common Stock to be owned
by such persons and groups of persons immediately following the Effective Time,
assuming such persons do not acquire, or dispose of, any shares of DMX Common
Stock during the period commencing January 31, 1997 and ending on the Effective
Time. Effective January 13, 1997, TCI paid a dividend of one share of Series A
Liberty Media Group Common Stock for each two shares of Series A Liberty Media
Group Common Stock held and one share of Series A Liberty Media Group Common
Stock for each two shares of Series B Liberty Media Group Common Stock held (the
"Liberty Stock Distribution"). The numbers of shares (and corresponding
percentages of series) of the Series A Liberty Media Group Common Stock in the
following table and in the footnotes to the table have been adjusted for the
Liberty Stock Distribution. Shares issuable upon exercise or conversion of
convertible securities are deemed to be outstanding for the purpose of computing
the percentage ownership of persons beneficially owning such convertible
securities, but have not been deemed to be outstanding for the purpose of
computing the percentage ownership of any other person. Voting power in the
table is computed with respect to a general election of directors and,
therefore, the Class B Preferred Stock is included in the calculation
notwithstanding the fact that the Class B Preferred Stock does not generally
vote with respect to matters submitted to a vote of stockholders. No shares of
Series C Preferred Stock, Series G Preferred Stock or Series H Preferred Stock
are owned by any person whose name is set forth in the table. The numbers of
shares of Series B TCI Group Common Stock, Series A
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<PAGE> 88
Liberty Group Common Stock and Series B Liberty Group Common Stock in the table
include interests of certain named directors or executive officers or of members
of the group of directors and executive officers in shares held by the trustee
of TCI's Employee Stock Purchase Plan (the "TCI ESPP") and shares held by the
trustee of United Artist Entertainment Company's Employee Stock Ownership Plan
for their respective accounts. So far as is known to TCI or TCI Music, the
persons indicated below have sole voting and investment power with respect to
the shares indicated as owned by them except as otherwise stated in the notes to
the table, and except for the shares held by the trustee of the TCI ESPP for the
benefit of certain named persons, which shares are voted at the discretion of
the trustee.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT VOTING
NAME AND ADDRESS OF OF BENEFICIAL OF CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
- - -------------- ------------------- ----------------- -------- ------
<S> <C> <C> <C> <C>
TCI Music Series A Tele-Communications, Inc. 6,812,393 45.7 98.7
TCI Music Series B 62,500,000 100
TCI Music Series A Shaw Communications, Inc. 1,900,000 12.8 *
TCI Music Series B -- --
TCI Music Series A James R. Shaw, Sr. 2,079,600 14.0 *
TCI Music Series B -- --
TCI Music Series A Leo J. Hindery, Jr. 833,334(3) 5.3 *
TCI Music Series B -- --
TCI Series A --(4) -- --
TCI Series B -- --
Liberty Media Series A --(4) --
Liberty Media Series B -- --
TCI Class B Preferred -- --
TCI Music Series A Robert R. Bennett 100,000(5) * *
TCI Music Series B -- --
TCI Series A 74,156(6) * *
TCI Series B -- --
Liberty Media Series A 777,707 *
Liberty Media Series B -- --
TCI Class B Preferred 482 *
TCI Music Series A Donne F. Fisher 833,334(7) 5.3 *
TCI Music Series B (individually and as Co-Personal -- --
Representative to the Estate of
Bob Magness)
TCI Series A 4,110,681(8)(9) * 20.8
TCI Series B 31,034,936(8) 36.7
Liberty Media Series A 5,423,725(8)(9) 2.4
Liberty Media Series B 7,758,734(8) 36.6
TCI Class B Preferred 129,299(8) 8.0
TCI Music Series A Peter M. Kern 833,334(10) 5.3 *
TCI Music Series B -- --
TCI Series A -- -- --
TCI Series B -- --
Liberty Media Series A -- --
Liberty Media Series B -- --
TCI Class B Preferred -- --
</TABLE>
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<PAGE> 89
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT VOTING
NAME AND ADDRESS OF OF BENEFICIAL OF CLASS POWER
TITLE OF CLASS BENEFICIAL OWNER OWNERSHIP (1)(2) (1)(2)
- - -------------- ------------------- ----------------- -------- ------
<S> <C> <C> <C> <C>
TCI Music Series A David B. Koff 100,000(5) * *
TCI Music Series B -- --
TCI Series A 25,983(11) * *
TCI Series B -- --
Liberty Media Series A 159,718(11) *
Liberty Media Series B -- --
TCI Class B. Preferred -- --
TCI Music Series A J.C. Sparkman 137,500(12) * *
TCI Music Series B -- --
TCI Series A 279,472(13) * *
TCI Series B -- --
Liberty Media Series A 112,001(13) *
Liberty Media Series B -- --
TCI Class B Preferred -- --
TCI Music Series A Lon A. Troxel 200,000(14) 1.3 *
TCI Music Series B -- --
TCI Series A -- -- --
TCI Series B -- --
Liberty Media Series A -- --
Liberty Media Series B -- --
TCI Class B Preferred -- --
TCI Music Series A Stephen M. Brett -- -- --
TCI Music Series B -- --
TCI Series A 749,745(15) * *
TCI Series B -- --
Liberty Media Series A 281,120(15) *
Liberty Media Series B -- --
TCI Class B Preferred -- --
All Directors and Executive
Officers as a Group
(8 persons)
TCI Music Series A 3,037,502(16) 17.0 *
TCI Music Series B -- --
TCI Series A 5,240,037(16) * 21.8
TCI Series B 31,034,936 36.7
Liberty Media Series A 6,754,271(16) 2.9
Liberty Media Series B 7,758,734 36.6
TCI Class B Preferred 129,781 8.0
</TABLE>
- - ---------------
* Less than 1%
(1) Based upon 14,896,648 shares of Series A TCI Music Common Stock and
62,500,000 shares of Series B TCI Music Common Stock assumed to be
outstanding if the Merger was effective as of January 31, 1997.
(2) Based on 597,497,573 shares of Series A TCI Group Common Stock (after
elimination of shares held by subsidiaries of TCI), 84,647,065 shares of
Series B TCI Group Common Stock, 228,558,926 shares of Series A Liberty
Media Group Common Stock, 21,187,969 shares of Series B Liberty Media Group
Common Stock, 1,620,026 shares of Class B Preferred Stock, 70,575 shares of
Series C Preferred Stock, 6,693,177 shares of Series G Preferred Stock and
6,693,177 shares of Series H Preferred Stock outstanding at January 31,
1997.
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<PAGE> 90
(3) Assumes the exercise in full of stock options to be granted at the
Effective Time to acquire 833,334 shares of TCI Music Series A Common
Stock, 166,667 of which will be exercisable at the Effective Time.
(4) Does not include stock options granted in tandem with stock appreciation
rights in February 1997 to acquire 1,000,000 shares of Series A TCI Group
Common Stock and 250,000 shares of Series A Liberty Media Group Common
Stock. None of these stock options are exercisable.
(5) Assumes the exercise in full of stock options to be granted at the
Effective Time to acquire 100,000 shares of TCI Music Series A Common
Stock, 20,000 of which will be exercisable at the Effective Time.
(6) Assumes the exercise in full of stock options granted in tandem with SARs
in November 1994 to acquire 50,000 shares of Series A TCI Group Common
Stock and 18,750 shares of Series A Liberty Media Group Common Stock.
Options to acquire 20,000 shares of Series A TCI Group Common Stock and
7,500 shares of Series A Liberty Media Group Common Stock were exercisable
as of January 31, 1997. Additionally assumes the exercise in full of stock
options granted in tandem with SARs in December 1995 to acquire 750,000
shares of Series A Liberty Media Group Common Stock. Options to acquire
150,000 shares of Series A Liberty Media Group Common Stock were
exercisable as of January 31, 1997.
(7) Assumes the exercise in full of stock options to be granted at the
Effective Time to acquire 833,334 shares of TCI Music Series A Common
Stock, 166,667 of which will be exercisable at the Effective Time.
(8) Includes 1,524,315 shares of Series A TCI Group Common Stock, 30,785,864
shares of Series B TCI Group Common Stock, 4,419,304 shares of Series A
Liberty Media Group Common Stock, 7,696,466 shares of Series B Liberty
Media Group Common Stock and 125,000 shares of Class B Preferred Stock held
by the Estate of Bob Magness. Mr. Fisher is deemed to have beneficial
ownership over such shares as a Co-Personal Representative to the Estate of
Bob Magness. Included in such beneficial ownership is the assumed exercise
in full of stock options granted in tandem with stock appreciation rights
in November of 1992 to Bob Magness to acquire 1,000,000 shares of Series A
TCI Group Common Stock and 375,000 shares of Series A Liberty Media Group
Common Stock. Additionally assumes the exercise in full of stock options
granted in tandem with stock appreciation rights in December of 1995 to Bob
Magness to acquire 1,000,000 shares of Series A TCI Group Common Stock and
375,000 shares of Series A Liberty Media Group Common Stock. All such
options are currently exercisable.
(9) Assumes the exercise in full of stock options granted in tandem with stock
appreciation rights in November of 1994 to acquire 200,000 shares of Series
A TCI Group Common Stock and 75,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 80,000 shares of Series A TCI Group Common
Stock and 30,000 shares of Series A Liberty Media Group Common Stock were
exercisable as of January 31, 1997. Additionally assumes the exercise in
full of stock options granted in January of 1996 to acquire 50,000 shares
of Series A TCI Group Common Stock and 18,750 shares of Series A Liberty
Media Group Common Stock. Options to acquire 10,000 shares of Series A TCI
Group Common Stock and 3,750 shares of Series A Liberty Media Group Common
Stock were exercisable as of January 31, 1997.
(10) Assumes exercise in full of stock options to be granted at the Effective
Time to acquire 833,334 shares of TCI Music Series A Common Stock, 166,667
of which will be exercisable at the Effective Time.
(11) Assumes exercise in full of options granted in tandem with stock
appreciation rights in November of 1994 to acquire 25,000 shares of Series
A TCI Group Common Stock and 9,375 shares of Series A Liberty Media Group
Common Stock. Options to acquire 10,000 shares of Series A TCI Group Common
Stock and 3,750 shares of Series A Liberty Media Group Common Stock were
exercisable as of January 31, 1997. Additionally assumes the exercise in
full of stock options granted in tandem with stock appreciation rights in
December of 1995 to acquire 150,000 shares of Series A Liberty Media Group
Common Stock. Options to acquire 30,000 shares of Series A Liberty Media
Group Common Stock were exercisable as of January 31, 1997. Excludes 1,312
shares of Series A Liberty Media Group Common Stock and 200 shares of TCI
Class B Preferred Stock beneficially owned by Judith R. Koff, Mr. Koff's
wife, of which Mr. Koff disclaims beneficial ownership.
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<PAGE> 91
(12) Assumes the exercise in full of options to acquire 100,000 shares of TCI
Music Series A Common Stock that will be granted at the Effective Time
(20,000 of which will be exercisable at the Effective Time) in exchange for
the cancellation of options to acquire 12,500 shares of TCI Music Series A
Common Stock that would otherwise carry over in the Merger.
(13) Assumes the exercise in full of options granted in tandem with stock
appreciation rights to acquire 100,000 shares of Series A TCI Group Common
Stock and 37,500 shares of Series A Liberty Media Group Common Stock. All
such options are currently exercisable. Also assumes the exercise in full
of options granted in December 1996, pursuant to TCI's Director Stock
Option Plan, to acquire 50,000 shares of Series A TCI Group Common Stock
and 18,750 shares of Series A Liberty Media Group Common Stock. None of
these options are exercisable until December 13, 1997.
(14) Assumes the exercise in full of options to acquire 200,000 shares of TCI
Music Series A Common Stock that will be granted at the Effective Time
(40,000 of which will be exercisable at the Effective Time) in exchange for
the cancellation of options to acquire 12,500 shares of TCI Music Series A
Common Stock that would otherwise carry over in the Merger.
(15) Assumes the exercise in full of stock options granted in tandem with SARs
in November 1992 to acquire 100,000 shares of Series A TCI Group Common
Stock and 37,500 shares of Series A Liberty Media Group Common Stock.
Options to acquire 80,000 shares of Series A TCI Group Common Stock and
30,000 shares of Series A Liberty Media Group Common Stock were exercisable
as of January 31, 1997. Additionally assumes the exercise in full of stock
options granted in tandem with SARs in November 1993 to acquire 100,000
shares of Series A TCI Group Common Stock and 37,500 shares of Series A
Liberty Media Group Common Stock. Options to acquire 75,000 shares of
Series A TCI Group Common Stock and 28,125 shares of Series A Liberty Media
Group Common Stock were exercisable as of January 31, 1997. Also assumes
the exercise in full of stock options granted in tandem with SARs in
November 1994 to acquire 200,000 shares of Series A TCI Group Common Stock
and 75,000 shares of Series A Liberty Media Group Common Stock. Options to
acquire 80,000 shares of Series A TCI Group Common Stock and 30,000 shares
of Series A Liberty Media Group Common Stock were exercisable as of January
31, 1997. Also assumes the exercise in full of stock options granted in
tandem with SARs in December 1995 to acquire 300,000 shares of Series A TCI
Group Common Stock and 112,500 shares of Series A Liberty Media Group
Common Stock. Options to acquire 60,000 shares of Series A TCI Group Common
Stock and 22,500 shares of Series A Liberty Media Group Common Stock were
exercisable as of January 31, 1997. Additionally assumes the vesting in
full of 40,000 restricted shares of Series A TCI Group Common Stock and
15,000 restricted shares of Series A Liberty Media Group Common Stock. None
of such stock was vested as of January 31, 1997.
(16) Assumes the exercise in full of stock options held by such persons to
acquire 3,000,002 shares of TCI Music Series A Common Stock (600,001 of
which will be exercisable at the Effective Time), and 3,215,000 shares of
Series A TCI Group Common Stock and 2,105,625 shares of Series A Liberty
Media Group Common Stock (of which 2,515,000 and 1,123,125, respectively,
were exercisable as of January 31, 1997).
SECURITY OWNERSHIP OF DMX
The following table sets forth as of May 26, 1997, the beneficial ownership
of DMX Common Stock by (i) each person known to DMX to own more than 5% of DMX
Common Stock, (ii) each director and each of the five most highly compensated
executive officers of DMX, including the chief executive officer, (iii) all
executive officers and directors of DMX as a group and (iv) the pro forma number
and ownership percentage of shares of TCI Music Series A Common Stock that will
be owned by such persons immediately after the Effective Time, assuming such
persons do not acquire, or dispose of, any shares of DMX Common Stock during the
period commencing May 26, 1997 and ending on the Effective Time. Voting power in
the table is computed with respect to the vote required to approve the Merger.
So far as is known to DMX, the persons
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<PAGE> 92
indicated below have sole voting and investment power with respect to the shares
indicated as owned by them, except as otherwise stated in the notes to the
table.
<TABLE>
<CAPTION>
POST-MERGER TCI MUSIC
DMX COMMON STOCK SERIES A COMMON STOCK
-------------------------- ------------------------
AMOUNT AND AMOUNT AND
NATURE OF NATURE OF
BENEFICIAL PERCENT OF BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP(1) CLASS(2) OWNERSHIP CLASS(20)
------------------------------------ ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Tele-Communications, Inc........................ 27,249,575(3) 45.7 6,812,393 45.7
Shaw Communications Inc......................... 7,600,000(4) 12.8 1,900,000 12.8
Jerold H. Rubinstein, Chairman of the Board and
Chief Executive Officer....................... 3,309,161(5) 5.4 384,790(14) 2.6
Kent Burkhart, Director......................... 200,000(6) * 12,500(15) *
Donne F. Fisher, Director....................... -- -- 833,334(16) 5.3
Leo J. Hindery, Jr., Director................... -- -- 833,334(16) 5.3
V. Bhaskar Menon, Director...................... 200,000(7) * 12,500(15) *
James R. Shaw, Sr., Director.................... 8,468,400(8) 14.2 2,079,600 14.0
J.C. Sparkman, Director......................... 350,000(9) * 137,500(17) *
Otis Smith, Executive Vice President............ 100,000(10) * -- --
Douglas G. Talley, Executive Vice President..... 183,333(11) * -- --
Lon Troxel, Chief Operating Officer and
Executive Vice President...................... 150,000(12) * 200,000(18) 1.3
Directors and Executive Officers (a group of 11
persons)...................................... 12,980,894(13) 20.6 4,493,558(19) 26.5
</TABLE>
- - ---------------
* Less than 1%
(1) Each named person has sole voting and investment power with respect to the
shares listed, except as noted below and provided by community property
laws, where applicable.
(2) Shares which the person (or group) has the right to acquire within 60 days
after May 26, 1997 or prior to the consummation of the Merger, are deemed
to be outstanding in calculating the percentage ownership of the person (or
group) but are not deemed to be outstanding as to any other person (or
group). As of May 26, 1997, all outstanding options were exercisable at
prices higher than the average sales prices reported by NASDAQ on such
date.
(3) Shares held by Tele-Communications, Inc. and its subsidiaries and
affiliates were based upon a Schedule 13D, Amendment No. 3, filed on June
6, 1996. The business address of Tele-Communications, Inc. is 5619 DTC
Parkway, Englewood, Colorado 80111.
(4) Based upon a Schedule 13D, filed on March 15, 1995, and a Form 4 filed on
January 9, 1996. Does not include 276,080 shares held by James R. Shaw
Securities Limited, 110,580 shares held by Brasha Holdings Ltd., 110,580
shares held by Jay-Shaw Holdings Ltd., 110,580 shares held by Julmar
Holdings Ltd., and 110,580 shares held by Shawana Estates Ltd., which
entities are affiliates of Shaw Communications Inc. Shaw Communications
Inc. is a public company whose non-voting securities are listed on the
Toronto Stock Exchange and the Alberta Stock Exchange. Mr. Shaw, Sr. and
members of his family and members of Leslie E. Shaw's (Mr. Shaw, Sr.'s
brother) family hold directly and indirectly, a majority of the voting
shares of Shaw Communications Inc. and such shares are governed by the
terms of a voting trust. Mr. Shaw, Sr. and members of his family do not,
directly or indirectly, hold a majority of the publicly traded non-voting
shares. The business address of Shaw Communications Inc. is 630-3rd Avenue,
Suite 900, Calgary, Alberta T2P4L4 Canada.
(5) Includes 9,000 shares owned of record by Mr. Rubinstein's wife and minor
child, 1,836,666 shares which Mr. Rubinstein has the right to acquire
within 60 days of May 26, 1997, by the exercise of vested stock options and
333,334 shares which Mr. Rubinstein will have the right to acquire due to
acceleration of options prior to the Effective Time. See "THE MERGER
AGREEMENT -- Certain Personnel Matters." Mr. Rubinstein's business address
is 11400 West Olympic Boulevard, Suite 1100, Los Angeles, California
90064-1507.
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<PAGE> 93
(6) Represents 200,000 shares which Mr. Burkhart has the right to acquire
within 60 days of May 26, 1997, by the exercise of vested stock options.
(7) Represents 200,000 shares which Mr. Menon has the right to acquire within
60 days of May 26, 1997, by the exercise of vested stock options.
(8) Includes the following shares, to which Mr. Shaw, Sr. disclaims beneficial
ownership: 7,600,000 shares held by Shaw Communications Inc., 276,080
shares held by James R. Shaw Securities Limited, 110,580 shares held by
Brasha Holdings Ltd., 110,580 shares held by Julmar Holdings Ltd., 110,580
shares held by Shawana Estates Ltd., and 110,580 shares held by Jay-Shaw
Holdings Ltd. Mr. Shaw, Sr. holds a majority of the shares of Jay-Shaw
Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining
shares of each such entities, other than certain preferred shares held by
Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, Sr., are held
by children of Mr. Shaw, Sr. Each of the children has reached the age of
majority. Mr. Shaw, Sr. holds 48% of the voting shares of James R. Shaw
Securities Limited. The balance of voting shares are held by and for the
benefit of Mr. Shaw, Sr.'s family members. Includes 150,000 shares which
Mr. Shaw, Sr. has the right to acquire within 60 days of May 26, 1997, by
the exercise of vested stock options. Mr. Shaw, Sr.'s business address
630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4 Canada.
(9) Includes 200,000 shares which Mr. Sparkman has the right to acquire within
60 days of May 26, 1997, by the exercise of vested stock options.
(10) Includes 83,333 shares which Mr. Smith has the right to acquire within 60
days of May 26, 1997, by the exercise of vested stock options and 16,667
shares which Mr. Smith will have the right to acquire due to acceleration
of options prior to the Effective Time. See "THE MERGER
AGREEMENT -- Certain Personnel Matters."
(11) Includes 158,333 shares which Mr. Talley has the right to acquire within 60
days of May 26, 1997 by the exercise of vested stock options and 25,000
shares which Mr. Talley will have the right to acquire due to acceleration
of options prior to the Effective Time. See "THE MERGER
AGREEMENT -- Certain Personnel Matters."
(12) Includes 141,666 shares which Mr. Troxel has the right to acquire within 60
days of May 26, 1997, by the exercise of vested stock options and 8,334
shares which Mr. Troxel will have the right to acquire due to acceleration
of options prior to the Effective Time. See "THE MERGER
AGREEMENT -- Certain Personnel Matters."
(13) Includes 2,983,333 shares which members of the group have the right to
acquire within 60 days of May 26, 1997, by the exercise of vested stock
options and 390,000 shares which members of the group will have the right
to acquire due to acceleration of options prior to the Effective Time. See
"THE MERGER AGREEMENT -- Certain Personnel Matters."
(14) Includes 100,000 shares which Mr. Rubinstein will have the right to acquire
within 60 days after the Effective Time by the exercise of vested stock
options that will carry over in the Merger.
(15) Includes 12,500 shares that such person has the right to acquire within 60
days after the Effective Time by the exercise of vested options that will
carry over in the Merger.
(16) Assumes the exercise in full of stock options to be granted at the
Effective Time to acquire 833,334 shares of TCI Music Series A Common
Stock, 166,667 of which will be exercisable at the Effective Time.
(17) Assumes the exercise in full of stock options to be granted at the
Effective Time to acquire 100,000 shares of TCI Music Series A Common
Stock, 20,000 of which will be exercisable at the Effective Time, in
exchange for cancellation of options to acquire 12,500 shares that would
otherwise carry over in the Merger.
(18) Assumes the exercise in full of stock options to acquire 200,000 shares of
TCI Music Series A Common Stock that will be granted at the Effective Time
(40,000 of which will be exercisable at the Effective Time) in exchange for
the cancellation of options to acquire 12,500 shares of TCI Music Series A
Common Stock that would otherwise carry over in the Merger.
(19) Assumes the exercise in full of options to acquire 2,091,668 shares of TCI
Music Series A Common Stock that such persons have the right to acquire
within 60 days after the Effective Time by the exercise of stock options
that will carry over in the Merger or will be granted at the Effective
Time, 518,334 shares of which will be exercisable at the Effective Time.
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<PAGE> 94
(20) Shares which the person (or group) will have the right to acquire within 60
days after the Effective Time or prior to the consummation of the Merger
and shares underlying options to be granted at the Effective Time are
deemed to be outstanding in calculating the percentage ownership of the
person (or group) but are not deemed to be outstanding as to any other
person (or group).
CERTAIN TRANSACTIONS
TCI beneficially owns approximately 45.7% of the outstanding shares of DMX
Common Stock which includes 2,000,000 shares acquired at $2.50 per share in a
private placement on August 29, 1995 and 4,500,000 shares acquired at $2.00 per
share in a private placement on May 17, 1996. As a result of the merger in 1996
of TCI-E into DMX upon the terms set forth in the Agreement and Plan of Merger
among TCI-E, UAPI and DMX, UAPI, an affiliate of TCI, was issued 10,841,624
shares of Common Stock. See "THE MERGER -- Background of the Merger."
DMX under an agreement with WTCI has a capital lease to lease equipment for
its studio and uplinking facility in Littleton, Colorado. The obligation under
the capital lease at September 30, 1996 was $1,492,550 with terms which extend
to 2000 at an interest rate of 9.5%. DMX is also obligated to WTCI under various
operating leases for uplinking and satellite services. The total expense under
those leases for the fiscal year ended September 30, 1996 and 1995 were
$4,831,000 and $4,489,000, respectively.
Total subscriber fee revenue from TCI and its affiliates represented
approximately 56% and 61% of total subscriber fee revenue for the fiscal years
ended September 30, 1996 and 1995, respectively, with accounts receivable due
from TCI and its affiliates at September 30, 1996 and 1995 totaling
approximately $1,829,000 and $1,876,000, respectively.
On December 10, 1996 DMX entered into a letter agreement with Sky
Entertainment Services in Latin America ("Sky-LA") pursuant to which Sky-LA was
granted the right to carry up to 40 DMX music formats on the Mexican, Brazilian,
North South American and South American platforms of Sky-LA. Sky Entertainment
Services is the brand name for the direct-to-home service offered by the
strategic alliance formed by Organzacoes Globo, Brazil's leading entertainment
group; Mexico's Grupo Televisa S.A.; The News Corporation, Limited; and
Tele-Communications International, Inc. (the "Sky Entertainment Alliance").
Tele-Communications International, Inc. is a subsidiary of TCI.
Shaw Communications Inc. ("Shaw"), beneficially owns approximately 12.75%
of the outstanding shares of DMX Common Stock, which includes shares acquired
through various stock purchase agreements, including 1,100,000 shares acquired
at $2.13 per share in a private placement on March 9, 1995, and 2,000,000 shares
acquired at $2.50 per share in a private placement on August 25, 1995. James R.
Shaw, Sr., President and Chief Executive Officer of Shaw Communications Inc., is
a director of DMX. Mr. Sparkman, a director of DMX, is a director of Shaw
Communications Inc. In March 1992, Shaw, the second largest cable operator in
Canada, entered into a licensing and royalty agreement with DMX which provides
DMX with a monthly, per subscriber programming royalty for both residential and
commercial distribution. In addition, Shaw formed a Canadian company, DMX-Canada
Ltd. which is a partner in a partnership with 450714 B.C. Ltd., a subsidiary of
DMX.
During 1995, DMX and Shaw entered into a series of agreements to accomplish
a reorganization by which Shaw could take full advantage of the Canadian tax
losses incurred in Canada, during the market development period and based on
Shaw's commitment to fund such development costs. This was accomplished through
the transfer of each company's respective equity interests, and the formation of
a new Canadian partnership (also referred to herein as DMX-Canada). DMX
continues to hold an equity interest in the new partnership through its wholly
owned subsidiary, a British Columbia corporation, 450714 B.C. Ltd. There is no
impact from the reorganization on the operations of DMX-Canada, other than to
accomplish the tax structure as outlined above. After Shaw recoups its initial
funding, each company will share in the profits based on their respective equity
interests.
In April 1996 DMX entered into two capital leases with DMX Canada the
proceeds of which were used to purchase DMX Disc equipment leased to two DMX
customers, 9-West and Coach. The obligation under
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<PAGE> 95
the capital lease at September 30, 1996 was $284,461 with terms which extend to
May 2001 at an effective interest rate of 27.21%. The total payments under those
leases for the fiscal year ended September 30, 1996 were $36,889.
In August 1994, the CRTC, which regulates the broadcast industry in Canada,
revoked the license previously granted to DMX-Canada for Canadian distribution
of DMX. DMX-Canada reapplied to the CRTC during 1995 for a license to distribute
DMX to Canadian residential cable subscribers. The CRTC issued a favorable
ruling in December 1995 and requires a one to one ratio of Canadian content to
non Canadian content. DMX-Canada and DMX have negotiated an agreement to
distribute DMX service to the Canadian residential cable market. The service
will include a total of 30 formats and will be distributed through Shaw Cable
Systems and their affiliates. DMX-Canada will also license other Canadian third
party distributors such as Alpha Star Canada and Star Choice. The scheduled
launch of the DMX service for residential distribution is expected as early as
April 1997.
The CRTC does not regulate programming delivered to commercial
establishments by direct broadcast satellite and DMX-Canada has been
distributing the DMX service to the commercial sector since 1994. DMX and
DMX-Canada have negotiated a new license and distribution agreement which grants
an exclusive license and right to distribute the DMX service to commercial
establishments in Canada. The term of the new agreement coincides with the
original agreement dated March 9, 1992 and terminates March 31, 2012. DMX
received total license fees of approximately $50,000 in the fiscal year ended
September 30, 1996 under the original agreement.
Stephen A. Wynn, Chairman of the Board, President and Chief Executive
Officer, Mirage Resorts, Incorporated, resigned as a director of DMX in May 1996
concurrently with his sale of 5,700,000 shares of Common Stock to TCI at $2.00
per share, which included 2,200,000 shares acquired by him at $2.13 per share in
a private placement on February 21, 1995 and 500,000 shares acquired at $2.00
per share in a private placement on March 15, 1996. In April 1995, DMX entered
into a five year commercial music service agreement with Mirage Resorts, Inc.
where DMX provides its DMX for Business music service for a monthly fee.
DMX has entered into definitive agreements with Jerold H. Rubinstein,
Chairman of the Board and Chief Executive Officer of DMX, which provide for Mr.
Rubinstein to either purchase a 90% interest in DMX-E in a transaction referred
to as the "Reorganization Plan," or if agreement cannot be reached with the
creditors of DMX-E, then Mr. Rubinstein will organize a new company ("NewCo")
that will distribute DMX service in Europe. In that event, DMX Inc. will receive
a 10 percent interest in NewCo and DMX-E will be placed in the hands of a
receiver. See "THE MERGER --Interests of Certain Persons in the Merger --
Disposition of European Companies." Because the European Companies are
insolvent, it is not practicable to place a dollar value on Mr. Rubinstein's
interest in the DMX-E transaction.
Certain transactions involving TCI and its respective officers, directors
or affiliates are described in the TCI Form 10-K, which is incorporated herein
by reference. See "AVAILABLE INFORMATION."
LEGAL MATTERS
The validity of the TCI Music Series A Common Stock to be issued in
connection with the Merger and the federal income tax consequences of the Merger
will be passed upon by Sherman & Howard L.L.C., 633 Seventeenth Street, Denver,
Colorado. Certain members of Sherman & Howard L.L.C. serve as Assistant
Secretaries of TCI.
EXPERTS
The consolidated balance sheets of DMX Inc. and subsidiaries as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the years in the
three-year period ended September 30, 1996, and all related financial statement
schedules, which appear in the September 30, 1996 Annual Report on Form 10-K of
DMX Inc., have been incorporated by reference
83
<PAGE> 96
herein and in the Registration Statement in reliance upon the reports, dated
January 15, 1997, of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP
covering the September 30, 1996 statements contains an explanatory paragraph
that states that the Company's recurring losses from operations and net capital
deficiency raise substantial doubt about the entity's ability to continue as a
going concern. The consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
The consolidated balance sheets of DMX -- Europe N.V. and subsidiary as of
September 30, 1996 and 1995, and the related consolidated statements of
operations, stockholders' deficit, and cash flows for each of the years in the
three-year period ended September 30, 1996, which appear in the September 30,
1996 Annual Report on Form 10-K of DMX Inc., have been incorporated by reference
herein and in the Registration Statement in reliance upon the reports, dated
January 9, 1997, of KPMG, chartered accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG covering the September 30, 1996 financial
statements contains an explanatory paragraph that states that the Company's
recurring losses from operations and net capital deficiency raise substantial
doubt about the entity's ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
The consolidated balance sheets of Tele-Communications, Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 1996, and all related
financial statement schedules, which appear in the December 31, 1996 Annual
Report on Form 10-K of Tele-Communications, Inc., have been incorporated by
reference herein and in the Registration Statement in reliance upon the reports,
dated March 24, 1997, of KPMG Peat Marwick LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The combined balance sheets of TCI Group as of December 31, 1996 and 1995,
and the related combined statements of operations, equity, and cash flows for
each of the years in the three-year period ended December 31, 1996, which appear
in the December 31, 1996 Annual Report on Form 10-K of Tele-Communications,
Inc., have been incorporated by reference herein and in the Registration
Statement in reliance upon the report, dated March 24, 1997, of KPMG Peat
Marwick LLP, independent certified public accountants, incorporated by reference
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG Peat Marwick LLP covering the combined financial
statements above refers to the effects of not consolidating TCI Group's interest
in Liberty Media Group for all periods that TCI Group has an interest in Liberty
Media Group.
The combined balance sheets of Liberty Media Group as of December 31, 1996
and 1995, and the related combined statements of operations, equity, and cash
flows for each of the years in the three-year period ended December 31, 1996,
which appear in the December 31, 1996 Annual Report on Form 10-K of Tele-
Communications, Inc., have been incorporated by reference herein and in the
Registration Statement in reliance upon the report, dated March 24, 1997, of
KPMG Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated balance sheets of Telewest Communications plc and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations and cash flows for each of the years in the three-year
period ended December 31, 1996, which appear in the December 31, 1996 Annual
Report on Form 10-K of Tele-Communications, Inc., have been incorporated by
reference herein and in the Registration Statement in reliance upon the report,
dated March 11, 1997, of KPMG Audit Plc, chartered accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing.
The consolidated balance sheets of Sprint Spectrum Holding Company, L.P.
and subsidiaries, development stage enterprises, as of December 31, 1996 and
1995 and the related consolidated statements of operations, changes in partners'
capital and cash flows for each of the two years in the period ended December
31, 1996, for the period from October 24, 1994 (date of inception) to December
31, 1994 and for
84
<PAGE> 97
the cumulative period from October 24, 1994 (date of inception) to December 31,
1996, incorporated in this Proxy Statement/Prospectus by reference from
Tele-Communications, Inc. Annual Report on Form 10-K for the year ended December
31, 1996 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report (which expresses an unqualified opinion and includes an
explanatory paragraph referring to the developmental stage of Sprint Spectrum
Holding Company, L.P. and subsidiaries) which is incorporated herein and in the
Registration Statement by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
The financial statements of American PCS, L.P., not separately presented in
this Proxy Statement/ Prospectus, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon has been incorporated by reference
herein and in the Registration Statement. Such financial statements, to the
extent they have been included in the financial statements of Sprint Spectrum
Holding Company, L.P., have been so included in the Annual Report on Form 10-K
of Tele-Communications, Inc. in reliance on their report given on the authority
of said firm as experts in auditing and accounting.
The combined financial statements of VII Cable which appear in
Tele-Communications, Inc.'s Current Report on Form 8-K dated June 19, 1996, have
been incorporated by reference herein and in the Registration Statement in
reliance on the report dated February 14, 1996 of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
Representatives of KPMG Peat Marwick, DMX's and TCI's independent auditors,
are expected to be present at the Special Meeting and will have the opportunity
to make a statement if they desire to do so. Such representatives are also
expected to be available to respond to appropriate questions.
STOCKHOLDER PROPOSALS
For proposals of stockholders of DMX to be considered for inclusion in the
proxy statement of the 1998 Annual Meeting of Stockholders of DMX (if the Merger
is not consummated), such proposals must be received by the corporate secretary
no later than December 28, 1997.
85
<PAGE> 98
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HISTORICAL FINANCIAL STATEMENTS
TCI Music, Inc.
Independent Auditors' Report........................... F-2
Balance Sheet, March 31, 1997.......................... F-3
Note to Balance Sheet.................................. F-4
PRO FORMA FINANCIAL STATEMENTS
TCI Music, Inc.
Condensed Pro Forma Combined Financial Statements
(unaudited)........................................... F-5
Condensed Pro Forma Combined Balance Sheet, March 31,
1997 (unaudited)...................................... F-6
Condensed Pro Forma Combined Statements of Operations:
Three months ended March 31, 1997 (unaudited)........ F-7
Year ended December 31, 1996 (unaudited)............. F-8
Notes to Condensed Pro Forma Combined Financial
Statements (unaudited)................................ F-9
Tele-Communications, Inc.
Condensed Pro Forma Combined Financial Statements
(unaudited)........................................... F-11
Condensed Pro Forma Combined Balance Sheet, March 31,
1997 (unaudited)...................................... F-12
Condensed Pro Forma Combined Statement of Operations:
Three months ended March 31, 1997 (unaudited)........ F-13
Year ended December 31, 1996 (unaudited)............. F-14
Notes to Condensed Pro Forma Combined Financial
Statements (unaudited)................................ F-15
</TABLE>
F-1
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholder
TCI Music, Inc.:
We have audited the accompanying consolidated balance sheet of TCI Music, Inc.
(a wholly-owned subsidiary of Tele-Communications, Inc.) as of March 31, 1997.
This financial statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit of a balance sheet includes examining, on a test basis, evidence
supporting the amounts and disclosures in that balance sheet. An audit of a
balance sheet also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
balance sheet presentation. We believe that our audit of the balance sheet
provides a reasonable basis for our opinion.
In our opinion, the consolidated balance sheet referred to above presents
fairly, in all material respects, the financial position of TCI Music, Inc. as
of March 31, 1997, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Denver, Colorado
May 30, 1997
F-2
<PAGE> 100
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 1
===
STOCKHOLDER'S EQUITY
Preferred stock, $.01 par value.
Authorized 5,000,000 shares;
no shares issued....................................... $--
Series A common stock, $.01 par value.
Authorized 295,000,000 shares;
no shares issued....................................... --
Series B common stock, $.01 par value.
Authorized 200,000,000 shares;
issued and outstanding 1 share......................... --
Additional paid-in capital.................................. 1
---
$ 1
===
</TABLE>
See accompanying note to balance sheet.
F-3
<PAGE> 101
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTE TO CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(1) ORGANIZATION
TCI Music, Inc. ("TCI Music") was incorporated on January 21, 1997, and on
January 24, 1997 one share of Series B TCI Music common stock was issued to
Tele-Communications, Inc. ("TCI") for a capital contribution of $1. Since
its formation, TCI Music has not conducted any significant activities other
than those incident to its formation, the Contribution Agreement (as
defined below) and the Merger Agreement (as defined below).
Pursuant to an Agreement and Plan of Merger, dated as of February 6, 1997,
as amended (the "Merger Agreement"), by and among TCI Music, TCI Merger
Sub, a wholly owned subsidiary of TCI Music ("Merger Sub") and DMX Inc.
("DMX"), Merger Sub will be merged with and into DMX, with DMX as the
surviving corporation (the "Merger"). As a result of the Merger,
stockholders of DMX will become stockholders of TCI Music. In connection
with the Merger, and pursuant to the terms and conditions of a Contribution
Agreement by and between TCI and TCI Music (the "Contribution Agreement"),
effective as of the closing, TCI and TCI Music will effect certain other
transactions that are collectively referred to herein as the
"Contribution."
In connection with the Merger, TCI and TCI Music will enter into a
Contribution Agreement. Pursuant to the Contribution Agreement, effective
as of the closing of the Merger: (i) TCI Music will issue to TCI (as
designee of certain of its indirect subsidiaries), 62,500,000 shares of TCI
Music Series B Common Stock and a promissory note in the amount of $40
million (the "TCI Music Note"), (ii) until December 31, 2006, certain
subsidiaries of TCI will transfer to TCI Music the right to receive all
revenue from sales of DMX music services to their residential and
commercial subscribers, net of an amount equal to the 10% of revenue from
such sales to residential subscribers and net of the revenue otherwise
payable to DMX (which will be a wholly-owned subsidiary of TCI Music
following the Merger) as license fees for DMX music services under
affiliation agreements currently in effect (the "Contributed Net DMX
Revenue"); (iii) TCI will contribute to TCI Music certain commercial
digital DMX tuners that are not in service as of the effective date of the
Merger (the "Contributed Tuners"), and (iv) TCI will grant to each
stockholder who becomes a stockholder of TCI Music pursuant to the Merger,
one right (a "Right") with respect to each whole share of Series A Common
Stock, $.01 par value per share, of TCI Music ("TCI Music Series A Common
Stock") acquired by such stockholder in the Merger pursuant to the terms of
a Rights Agreement among TCI, TCI Music and the rights agent (the "Rights
Agreement"). The foregoing transactions are collectively referred to herein
as the "Contribution." Upon consummation of the Merger, each outstanding
share of DMX Common Stock will be converted into the right to receive (i)
one-quarter of a share of TCI Music Series A Common Stock, (ii) one Right
with respect to each whole share of TCI Music Series A Common Stock and
(iii) cash in lieu of the issuance of fractional shares of TCI Music Series
A Common Stock and Rights. Each Right will entitle the holder to require
TCI to purchase from such holder one share of TCI Music Series A Common
Stock for $8.00 per share (the equivalent of $2.00 per share of DMX Common
Stock), subject to reduction by the aggregate amount per share of any
dividend and certain other distributions, if any, made by TCI Music to its
stockholders, and payable at the election of TCI, in cash, a number of
shares of Tele-Communications, Inc. Series A TCI Group Common Stock, par
value $1.00 per share, having an equivalent value or a combination thereof,
if during the one-year period beginning on the effective date of the
Merger, the price of TCI Music Series A Common Stock does not equal or
exceed $8.00 per share for a period of at least 20 consecutive trading
days.
F-4
<PAGE> 102
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
Pursuant to an Agreement and Plan of Merger, dated as of February 6, 1997,
as amended (the "Merger Agreement"), by and among Tele-Communications, Inc.
("TCI"), TCI Music, Inc., a wholly-owned subsidiary of TCI ("TCI Music"),
TCI Merger Sub, a wholly owned subsidiary of TCI Music ("Merger Sub") and
DMX Inc. ("DMX"), Merger Sub will be merged with and into DMX, with DMX as
the surviving corporation (the "Merger"). As a result of the Merger,
stockholders of DMX will become stockholders of TCI Music. In connection
with the Merger, and pursuant to the terms and conditions of a Contribution
Agreement by and between TCI and TCI Music (the "Contribution Agreement"),
effective as of the closing, TCI and TCI Music will effect certain other
transactions that are collectively referred to herein as the
"Contribution." See note 1.
Prior to the consummation of the Merger and Contribution, TCI will
beneficially own approximately 45.7% of the outstanding DMX Common Stock,
$0.01 par value ("DMX Common Stock"). Immediately following consummation of
the Merger and Contribution, TCI will beneficially own approximately 45.7%
of the outstanding shares of TCI Music Series A Common Stock $.01 par value
per share ("TCI Music Series A Common Stock"), 100% of the outstanding
shares of TCI Music Series B Common Stock, par value $.01 per share, (the
"TCI Music Series B Common Stock," and together with the TCI Music Series A
Common stock, the "TCI Music Common Stock") and 89.6% of the outstanding
shares of TCI Music Common Stock.
The following unaudited condensed pro forma combined balance sheet of TCI
Music, dated as of March 31, 1997, assumes that the Merger and Contribution
were effective as of such date.
The following unaudited condensed pro forma combined statement of
operations of TCI Music for the three months ended March 31, 1997 and the
year ended December 31, 1996 assumes that the Merger and Contribution were
effective as of January 1, 1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Merger and
Contribution were effective as of January 1, 1996. These condensed pro
forma combined financial statements of TCI Music should be read in
conjunction with the historical consolidated financial statements and the
related notes thereto of DMX.
F-5
<PAGE> 103
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TCI MUSIC DMX PRO FORMA TCI MUSIC
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
ASSETS
Cash -- continuing operations......... $ 1 883,904 -- 883,905
Other current assets -- continuing
operations.......................... -- 5,724,861 -- 5,724,861
--- ------------ ------------ -----------
Total current assets --continuing
operations..................... 1 6,608,765 -- 6,608,766
Current assets -- DMX-Europe N.V...... -- 1,535,685 -- 1,535,685
--- ------------ ------------ -----------
Total current assets........ 1 8,144,450 -- 8,144,451
Property and equipment, net
Continuing operations............... -- 4,186,240 4,500,000(2) 8,686,240
DMX-Europe N.V...................... -- 1,006,972 -- 1,006,972
--- ------------ ------------ -----------
5,193,212 4,500,000 9,693,212
Goodwill, net......................... -- 4,275,264 137,341,678(3) 141,616,942
Other assets.......................... -- 634,430 634,430
--- ------------ ------------ -----------
$ 1 18,247,356 141,841,678 160,089,035
=== ============ ============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities -- continuing
operations.......................... $-- 9,594,285 -- 9,594,285
Current liabilities -- DMX-Europe
N.V................................. -- 12,634,549 -- 12,634,549
--- ------------ ------------ -----------
Total current liabilities... -- 22,228,834 -- 22,228,834
TCI Music Note........................ -- -- 40,000,000(4) 40,000,000
Note payable to TCI................... -- 1,867,791 -- 1,867,791
Capital lease obligation.............. -- 1,170,242 -- 1,170,242
Other liabilities..................... -- 2,031,806 -- 2,031,806
Deferred income taxes................. -- -- 51,878,052(3) 51,878,052
--- ------------ ------------ -----------
Total liabilities........... -- 27,298,673 91,878,052 119,176,725
Stockholders' equity (deficit):
TCI Music Series A Common Stock..... 1 -- 148,966(3) 148,967
TCI Music Series B Common Stock..... -- -- 625,000(2) 625,000
DMX Common Stock.................... -- 596,722 (596,722)(3) --
Additional paid-in capital.......... -- 136,895,686 3,875,000(2) 40,138,343
76,263,343(3)
(136,895,686)(3)
(40,000,000)(4)
Accumulated deficit................. -- (145,909,910) 145,909,910(3) --
Foreign currency translation
reserve.......................... -- (55,812) 55,812(3) --
--- ------------ ------------ -----------
1 (8,473,314) 49,385,623 40,912,310
Treasury stock...................... -- (578,003) 578,003(3) --
--- ------------ ------------ -----------
Total stockholders' equity
(deficit)...................... 1 (9,051,317) 49,963,626 40,912,310
--- ------------ ------------ -----------
$ 1 18,247,356 141,841,678 160,089,035
=== ============ ============ ===========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-6
<PAGE> 104
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TCI MUSIC DMX PRO FORMA TCI MUSIC
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue
Continuing operations................. $ -- 4,824,546 --(6) 4,824,546
DMX-Europe N.V........................ -- 753,836 -- 753,836
---------- ----------- ----------- -----------
-- 5,578,382 -- 5,578,382
Operating, selling, general and
administrative expenses:
Continuing operations................. -- (5,814,342) -- (5,814,342)
DMX-Europe N.V........................ -- (2,609,229) -- (2,609,229)
Depreciation and amortization........... -- (602,244) (3,410,227)(7) (4,012,471)
---------- ----------- ----------- -----------
-- (9,025,815) (3,410,227) (12,436,042)
Operating loss........................ -- (3,447,433) (3,410,227) (6,857,660)
Interest expense, net
Continuing operations................. -- (79,063) (1,000,000)(8) (1,079,063)
DMX-Europe N.V........................ -- (55,618) -- (55,618)
Other income, net....................... -- 83,709 -- 83,709
---------- ----------- ----------- -----------
Loss before income tax benefit..... (3,498,405) (4,410,227) (7,908,632)
Income tax benefit...................... -- -- 1,808,193(9) 1,808,193
---------- ----------- ----------- -----------
Net loss........................... $ -- (3,498,405) (2,602,034) (6,100,439)
========== =========== =========== ===========
Loss per share:
Historical............................ $ (.06)
===========
Pro forma............................. $ (.08)(10)
===========
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-7
<PAGE> 105
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
TCI MUSIC DMX PRO FORMA TCI MUSIC
HISTORICAL HISTORICAL(7) ADJUSTMENTS PRO FORMA
------------ ------------- -------------- ------------
<S> <C> <C> <C> <C>
Revenue:
Continuing operations................ $ -- 17,280,729 --(6) 17,280,729
DMX-Europe N.V....................... -- 1,529,730 -- 1,529,730
------------ ------------ -------------- ------------
-- 18,810,459 -- 18,810,459
Operating, selling, general and
administrative expenses:
Continuing operations............. -- (24,399,774) -- (24,399,774)
DMX-Europe N.V.................... -- (8,818,462) -- (8,818,462)
Depreciation and amortization.......... -- (2,094,558) (13,836,454)(7) (15,931,012)
Loss on disposal -- DMX-Europe N.V..... -- (7,153,278) -- (7,153,278)
------------ ------------ -------------- ------------
-- (42,466,072) (13,836,454) (56,302,526)
Operating loss....................... -- (23,655,613) (13,836,454) (37,492,067)
Equity in loss of DMX-Europe N.V....... -- (7,345,149) -- (7,345,149)
Interest expense, net:
Continuing operations................ -- (200,051) (4,000,000)(8) (4,200,051)
DMX-Europe N.V....................... -- (97,789) -- (97,789)
Other income, net...................... -- 483,631 -- 483,631
------------ ------------ -------------- ------------
Loss before income tax benefit....... (30,814,971) (17,836,454) (48,651,425)
Income tax benefit..................... -- -- 7,312,946 (9) 7,312,946
------------ ------------ -------------- ------------
Net loss.......................... $ -- (30,814,971) (10,523,508) (41,338,479)
============ ============ ============== ============
Loss per share:
Historical........................... $ (.57)
============
Pro forma............................ $ (.54)(10)
============
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-8
<PAGE> 106
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) In connection with the Merger, TCI and TCI Music will enter into a
Contribution Agreement. Pursuant to the Contribution Agreement, effective
as of the closing of the Merger: (i) TCI Music will issue to TCI (as
designee of certain of its indirect subsidiaries), 62,500,000 shares of TCI
Music Series B Common Stock and a promissory note in the amount of $40
million (the "TCI Music Note"), (ii) until December 31, 2006, certain
subsidiaries of TCI will transfer to TCI Music the right to receive all
revenue from sales of DMX music services to their residential and
commercial subscribers, net of an amount equal to the 10% of revenue from
such sales to residential subscribers and net of the revenue otherwise
payable to DMX (which will be a wholly owned subsidiary of TCI Music
following the Merger) as license fees for DMX music services under
affiliation agreements currently in effect (the "Contributed Net DMX
Revenue"), (iii) TCI will contribute to TCI Music certain commercial
digital DMX tuners that are not in service as of the effective date of the
Merger (the "Contributed Tuners"), and (iv) TCI will grant to each
stockholder who becomes a stockholder of TCI Music pursuant to the Merger,
one right (a "Right") with respect to each whole share of Series A Common
Stock, $.01 par value per share, of TCI Music ("TCI Music Series A Common
Stock") acquired by such stockholder in the Merger pursuant to the terms of
a Rights Agreement among TCI, TCI Music and the rights agent (the "Rights
Agreement"). The foregoing transactions are collectively referred to herein
as the "Contribution." Upon consummation of the Merger, each outstanding
share of DMX Common Stock will be converted into the right to receive (i)
one-quarter of a share of TCI Music Series A Common Stock, (ii) one Right
with respect to each whole share of TCI Music Series A Common Stock and
(iii) cash in lieu of the issuance of fractional shares of TCI Music Series
A Common Stock and Rights. Each Right will entitle the holder to require
TCI to purchase from such holder one share of TCI Music Series A Common
Stock for $8.00 per share (the equivalent of $2.00 per share of DMX Common
Stock), subject to reduction by the aggregate amount per share of any
dividend and certain other distributions, if any, made by TCI Music to its
stockholders (the "Put Price"), and, payable at the election of TCI, in
cash, a number of shares of Tele-Communications, Inc. Series A TCI Group
Common Stock, par value $1.00 per share, having an equivalent value or a
combination thereof, if during the one-year period beginning on the
effective date of the Merger (the "Put Period"), the price of TCI Music
Series A Common Stock does not equal or exceed $8.00 per share for a period
of at least 20 consecutive trading days.
(2) Represents the issuance of TCI Music Series B Common Stock pursuant to the
Contribution Agreement. Such issuance results in an increase in TCI Music's
assets only to the extent of TCI's historical cost basis in the Contributed
Tuners (approximately $4,500,000 at March 31, 1997) since TCI's historical
cost basis in the Contributed Net DMX Revenue is zero. See note 1.
(3) Represents the issuance of TCI Music Series A Common Stock pursuant to the
Merger Agreement and the issuance of associated Rights pursuant to the
Rights Agreement (collectively, the "Merger Consideration"). The estimated
aggregate fair value of the Merger Consideration to be issued to entities
not controlled by TCI (the "Unaffiliated Stockholders") and the carryover
basis of the Merger Consideration to be issued to entities controlled by
TCI (the "TCI Stockholders") has been allocated to goodwill as the net book
values of DMX's assets and liabilities are assumed to approximate their
respective fair values. The estimated aggregate fair value of the Merger
Consideration, and the estimated fair values of DMX's assets and
liabilities are based on information available at the date of the
preparation of these condensed combined pro forma financial statements, and
will be adjusted upon final appraisal of the Merger Consideration, and such
DMX assets and liabilities. Although management is not presently aware of
any circumstances which would cause the final purchase price allocation to
be significantly different from that which is reflected in the accompanying
condensed pro forma combined balance sheet, actual valuations and
allocations may differ from those reflected herein. The number of
F-9
<PAGE> 107
TCI MUSIC, INC.
(A WHOLLY-OWNED SUBSIDIARY OF TELE-COMMUNICATIONS, INC.)
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
shares and Rights assumed to be issued is based upon DMX Common Stock
ownership as of March 31, 1997. The estimated fair value of the Merger
Consideration issued to unaffiliated Stockholders will be accreted to the
Put Price during the Put Period and such accretion will be reflected as an
increase in goodwill with a corresponding increase to additional paid-in
capital. Additional information concerning the assumed valuation of the TCI
Music Series A Common Stock is set forth below:
<TABLE>
<S> <C>
Shares to be issued to TCI, valued at carryover basis at
March 31, 1997 (6,812,393 shares)......................... $ 16,588,824
Shares to be issued to others, valued at estimated fair
value of $7.40 per share (8,084,255 shares)............... 59,823,485
------------
Total value assigned to TCI Music Series A Common
Stock........................................... $ 76,412,309
Increase in deferred income tax liability due to purchase
price allocation.......................................... 51,878,052
Elimination of DMX historical stockholders' deficit at March
31, 1997.................................................. 9,051,317
------------
Excess purchase price to be allocated to goodwill........... $137,341,678
============
</TABLE>
None of DMX's currently outstanding stock options are "in-the-money" and
none are expected to be "in-the-money" at the date of the Merger. As such,
DMX's currently outstanding stock options are not expected to have any
impact on the purchase consideration. Any compensation expense associated
with the exchange of TCI Music options for DMX options is not expected to
be material. See note 1.
(4) Represents the issuance of the TCI Music Note. The TCI Music Note will bear
interest at 10% per annum, payable semiannually, and will provide for the
payment of unpaid principal and accrued interest not earlier than 180 days
after consummation of the Contribution. Due to TCI's controlling interest
in TCI Music, such issuance has been treated as a distribution to TCI. See
note 1.
(5) The fiscal year end of DMX is September 30. The amounts reported in the
"DMX historical" column of the condensed pro forma combined statement of
operations for the year ended December 31, 1996 represent the sum of DMX's
operating results for the three months ended December 31, 1996 and the
fiscal year ended September 30, 1996, less DMX's operating results for the
three months ended December 31, 1995.
(6) If the Contributed Net DMX Revenue payments had been in effect for the
three months ended March 31, 1997 and the year ended December 31, 1996, the
aggregate incremental revenue received by TCI Music would have been
approximately $4,400,000 and $16,400,000, respectively. Due to
uncertainties concerning the amount of the Contributed Net DMX Revenue to
be received by TCI Music in future periods, such incremental revenue has
not been reflected in the condensed pro forma combined statement of
operations. See note 1.
(7) Represents amortization of the additional goodwill recorded in connection
with the Merger. Such amortization is calculated using an estimated useful
life of ten years. See note 1.
(8) Represents interest expense on the TCI Music Note. The pro forma adjustment
has been calculated using the 10% interest rate stipulated by the terms of
the TCI Music Note. Interest on the TCI Music Note will be waived by TCI if
principal is paid in full at or before maturity, which will be 180 days
after the close of the Merger.
(9) Represents the income tax effect of the pro forma adjustments related to
the Merger and Contribution.
(10) Represents pro forma loss per share assuming 77,396,648 and 75,923,829
weighted average shares of TCI Music were outstanding during the three
months ended March 31, 1997 and the year ended December 31, 1996,
respectively. Such amounts represents the approximate number of weighted
average shares of TCI Music that would have been outstanding if the Merger
and Contribution had occurred on January 1, 1996.
F-10
<PAGE> 108
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The following unaudited condensed pro forma combined balance sheet of
Tele-Communications Inc. ("TCI"), dated as of March 31, 1997, assumes that
the merger (the "Merger") contemplated by an Agreement and Plan of Merger,
dated as of February 6, 1997, as amended (the "Merger Agreement"), by and
among TCI Music, Inc., a subsidiary of TCI ("TCI Music"), TCI Merger Sub, a
wholly owned subsidiary of TCI Music ("Merger Sub") and DMX, Inc. ("DMX"),
and certain related transactions had occurred as of such date. See note 1.
The following unaudited condensed pro forma combined statement of
operations of TCI for the three months ended March 31, 1997 assumes the
Merger and certain related transactions had occurred as of January 1, 1996.
The following unaudited condensed pro form combined statement of operations
for the year ended December 31, 1996 assumes that the Merger and certain
related transactions, the distribution (the "Distribution") by TCI of all
of the outstanding common stock of TCI Satellite Entertainment, Inc.
("Satellite") (see note 2) and the acquisition by TCI of all the common
stock of a subsidiary of Viacom, Inc. ("VII Cable") (the "VII Cable
Acquisition") (see note 3), had occurred as of January 1, 1996.
The unaudited pro forma results do not purport to be indicative of the
results of operations that would have been obtained if the Merger and
certain related transactions, the Distribution and the VII Cable
Acquisition had occurred as of January 1, 1996. These condensed pro forma
combined financial statements of TCI should be read in conjunction with the
historical financial statements and the related notes thereto of TCI, TCI
Music and DMX.
F-11
<PAGE> 109
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TCI DMX PRO FORMA TCI
HISTORICAL HISTORICAL(1) ADJUSTMENTS(1) PRO FORMA
---------- ------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C>
ASSETS
Cash, receivables and other operating assets..... $ 1,191 $ 8 $ -- $ 1,199
Investment in affiliates and Time Warner, Inc.,
and related receivables........................ 4,935 -- (16)(4) 4,919
Property and equipment, net of accumulated
depreciation................................... 7,688 5 -- 7,693
Franchise costs, intangibles and other assets,
net of amortization............................ 16,862 5 137(4) 17,004
------- ----- ----- -------
$30,676 $ 18 $ 121 $30,815
======= ===== ===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Payables and accruals............................ $ 1,502 $ 22 $ -- $ 1,524
Debt............................................. 15,049 3 -- 15,052
Deferred income taxes............................ 5,946 -- 52(4) 5,998
Other liabilities................................ 251 2 -- 253
------- ----- ----- -------
Total liabilities...................... 22,748 27 52 22,827
------- ----- ----- -------
Minority interests............................... 1,349 -- 60(4) 1,409
Redeemable preferred stocks...................... 655 -- -- 655
Company-obligated mandatorily redeemable
preferred securities of subsidiary trusts
holding solely subordinated debt securities of
TCI
Communications, Inc............................ 1,502 -- -- 1,502
Stockholders' equity (deficit):
Preferred stock................................ -- -- -- --
TCI Group Series A common stock................ 715 -- -- 715
TCI Group Series B common stock................ 85 -- -- 85
Liberty Media Group Series A common stock...... 229 -- -- 229
Liberty Media Group Series B common stock...... 21 -- -- 21
DMX common stock............................... -- 1 (1)(4) --
Additional paid-in capital..................... 3,904 137 (137)(4) 3,904
Cumulative foreign currency translation
adjustment.................................. 5 -- -- 5
Unrealized holding gains for available-for-sale
securities.................................. 11 -- -- 11
Accumulated deficit............................ (234) (146) 146(4) (234)
Stock held by subsidiaries/treasury stock...... (314) (1) 1(4) (314)
------- ----- ----- -------
Total stockholders' equity (deficit)... 4,422 (9) 9 4,422
------- ----- ----- -------
$30,676 $ 18 $ 121 $30,815
======= ===== ===== =======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-12
<PAGE> 110
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
TCI DMX PRO FORMA TCI
HISTORICAL HISTORICAL(1) ADJUSTMENTS(1) PRO FORMA
---------- ------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C>
Revenue..................................... $ 1,827 $ 6 $-- $ 1,833
Operating expenses, selling, general and
administrative expenses and
compensation relating to stock
appreciation rights.................... (1,104) (8) -- (1,112)
Depreciation and amortization............... (374) (1) (3)(11) (378)
------- --- --- -------
Operating income (loss)................... 349 (3) (3) 343
Interest expense............................ (289) -- -- (289)
Interest and dividend income................ 21 -- -- 21
Share of losses of affiliates, net.......... (156) -- 2(12) (154)
Other expense, net.......................... (21) -- --(13) (21)
------- --- --- -------
Loss before income taxes.................. (96) (3) (1) (100)
Income tax benefit.......................... 38 -- --(14) 38
------- --- --- -------
Net loss.................................. (58) (3) (1) (62)
Dividend requirement on redeemable preferred
stocks.................................... (10) -- -- (10)
------- --- --- -------
Net loss attributable to common
stockholders.................... $ (68) $(3) $(1) $ (72)
======= === === =======
Net earnings (loss) attributable to common
stockholders per common share:
TCI Group Series A and Series B common
stock.................................. $ (.12) $ (.13)(9)
======= =======
Liberty Media Group Series A and Series B
common stock........................... $ .06 $ .06(10)
======= =======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-13
<PAGE> 111
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
CONSUMMATED TRANSACTIONS TCI
------------------------------------------------ PRO FORMA-
TCI SATELLITE VII CABLE PRO FORMA CONSUMMATED
HISTORICAL DISTRIBUTION(2) HISTORICAL(3) ADJUSTMENTS(3) TRANSACTIONS
---------- --------------- ------------- -------------- ------------
AMOUNTS IN MILLIONS
<S> <C> <C> <C> <C> <C>
Revenue....................... $ 8,022 $(377) $ 280 $ -- $ 7,925
Operating expenses, cost of
sales, selling, general and
administrative expenses,
compensation relating to
stock appreciation rights
and restructuring charges... (5,774) 373 (176) -- (5,577)
Depreciation and
amortization................ (1,616) 166 (52) (14)(5) (1,516)
------- ----- ----- ---- -------
Operating income (loss)..... 632 162 52 (14) 832
Interest expense.............. (1,096) -- (31) (44)(6) (1,171)
Interest and dividend
income...................... 64 -- 2 -- 66
Share of losses of affiliates,
net......................... (473) -- -- -- (473)
Gain on disposition of
assets...................... 1,593 -- -- -- 1,593
Other income (expense), net... (180) -- 1 (18)(7) (197)
------- ----- ----- ---- -------
Earnings (loss) before
income taxes.............. 540 162 24 (76) 650
Income tax benefit
(expense)................... (262) (53) (13) 11(8) (317)
------- ----- ----- ---- -------
Net earnings (loss)......... 278 109 11 (65) 333
Dividend requirement on
redeemable preferred
stocks...................... (35) -- -- -- (35)
------- ----- ----- ---- -------
Net earnings (loss)
attributable to
common
stockholders........ $ 243 $ 109 $ 11 $(65) $ 298
======= ===== ===== ==== =======
Primary earnings (loss)
attributable to common
stockholders per common and
common equivalent share:
TCI Group Series A and
Series B common stock..... $ (1.22) $ (1.14)(9)
======= =======
Liberty Media Group Series A
and Series B common
stock..................... $ 3.97 $ 3.97(10)
======= =======
Fully diluted net earnings
(loss) attributable to
common stockholders per
common and common equivalent
share:
TCI Group Series A and
Series B common stock..... $ (1.22) $ (1.14)(9)
======= =======
Liberty Media Group Series A
and Series B common stock... $ 3.88 $ 3.88(10)
======= =======
<CAPTION>
PROPOSED TRANSACTIONS
------------------------------
DMX PRO FORMA TCI
HISTORICAL(1) ADJUSTMENTS(1) PRO FORMA
------------- -------------- ---------
AMOUNTS IN MILLIONS
<S> <C> <C> <C>
Revenue....................... $ 18 $ -- $ 7,943
Operating expenses, cost of
sales, selling, general and
administrative expenses,
compensation relating to
stock appreciation rights
and restructuring charges... (33) -- (5,610)
Depreciation and
amortization................ (9) (14)(11) (1,539)
---- ---- -------
Operating income (loss)..... (24) (14) 794
Interest expense.............. -- -- (1,171)
Interest and dividend
income...................... -- -- 66
Share of losses of affiliates,
net......................... (7) 21(12) (459)
Gain on disposition of
assets...................... -- -- 1,593
Other income (expense), net... -- --(13) (197)
---- ---- -------
Earnings (loss) before
income taxes.............. (31) 7 626
Income tax benefit
(expense)................... -- (3)(14) (320)
---- ---- -------
Net earnings (loss)......... (31) 4 306
Dividend requirement on
redeemable preferred
stocks...................... -- -- (35)
---- ---- -------
Net earnings (loss)
attributable to
common
stockholders........ $(31) $ 4 $ 271
==== ==== =======
Primary earnings (loss)
attributable to common
stockholders per common and
common equivalent share:
TCI Group Series A and
Series B common stock..... $ (1.19)(9)
=======
Liberty Media Group Series A
and Series B common
stock..................... $ 4.00(10)
=======
Fully diluted net earnings
(loss) attributable to
common stockholders per
common and common equivalent
share:
TCI Group Series A and
Series B common stock..... $ (1.19)(9)
=======
Liberty Media Group Series A
and Series B common stock... $ 3.91(10)
=======
</TABLE>
See accompanying notes to unaudited condensed pro forma combined financial
statements.
F-14
<PAGE> 112
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
(1) Pursuant to the Merger Agreement, Merger Sub, and DMX, Merger Sub will be
merged with and into DMX, with DMX as the surviving corporation. As a
result of the Merger, stockholders of DMX will become stockholders of TCI
Music. In connection with the Merger, and pursuant to the terms and
conditions of a Contribution Agreement by and between TCI and TCI Music
(the "Contribution Agreement"), effective as of the closing, TCI and TCI
Music will effect certain other transactions that are collectively referred
to herein as the "Contribution."
In connection with the Merger, TCI and TCI Music will enter into a
Contribution Agreement. Pursuant to the Contribution Agreement, effective
as of the closing of the Merger: (i) TCI Music will issue to TCI (as
designee of certain of its indirect subsidiaries), 62,500,000 shares of TCI
Music Series B Common Stock and a promissory note in the amount of $40
million (the "TCI Music Note"), (ii) until December 31, 2006, certain
subsidiaries of TCI will transfer to TCI Music the right to receive all
revenue from sales of DMX music services to their residential and
commercial subscribers, net of an amount equal to 10% of revenue from such
sales to residential subscribers and net of the revenue otherwise payable
to DMX (which will be a wholly-owned subsidiary of TCI Music following the
Merger) as license fees for DMX music services under affiliation agreements
currently in effect (the "Contributed Net DMX Revenue"), (iii) TCI will
contribute to TCI Music certain commercial digital DMX tuners that are not
in service as of the effective date of the Merger (the "Contributed
Tuners"), and (iv) TCI will grant to each stockholder who becomes a
stockholder of TCI Music pursuant to the Merger, one right (a "Right") with
respect to each whole share of Series A Common Stock, $.01 par value per
share, of TCI Music ("TCI Music Series A Common Stock") acquired by such
stockholder in the Merger pursuant to the terms of a Rights Agreement among
TCI, TCI Music and the rights agent (the "Rights Agreement"). The foregoing
transactions are collectively referred to herein as the "Contribution."
Upon consummation of the Merger, each outstanding share of DMX Common Stock
will be converted into the right to receive (i) one-quarter of a share of
TCI Music Series A Common Stock, (ii) one Right with respect to each whole
share of TCI Music Series A Common Stock and (iii) cash in lieu of the
issuance of fractional shares of TCI Music Series A Common Stock and
Rights. Each Right will entitle the holder to require TCI to purchase from
such holder one share of TCI Music Series A Common Stock for $8.00 per
share (the equivalent of $2.00 per share of DMX Common Stock), subject to
reduction by the aggregate amount per share of any dividend and certain
other distributions, if any, made by TCI Music to its stockholders (the
"Put Price"), and, payable at the election of TCI, in cash, a number of
shares of Tele-Communications, Inc. Series A TCI Group Common Stock, par
value $1.00 per share, having an equivalent value or a combination thereof,
if during the one-year period beginning on the effective date of the Merger
(the "Put Period"), the price of TCI Music Series A Common Stock does not
equal or exceed $8.00 per share for a period of at least 20 consecutive
trading days.
The fiscal year end of DMX is September 30. The amounts reported in the
"DMX historical" column of the condensed pro forma combined statement of
operations for the year ended December 31, 1996 represent the sum of DMX's
operating results for the three months ended December 31, 1996 and the
fiscal year ended September 30, 1996, less DMX's operating results for the
three months ended December 31, 1995.
(2) On December 4, 1996, TCI distributed to the holders of shares of TCI Group
common stock of all of the issued and outstanding common stock of
Satellite. At the time of the Distribution, Satellite was a Delaware
corporation and a direct wholly-owned subsidiary of TCI. The Distribution
was effected as a tax-free dividend to, and did not involve the payment of
any consideration by, the holders of TCI Group common stock. Prior to the
Distribution, TCI caused to be transferred to Satellite, or one or more of
Satellite's subsidiaries, certain assets and businesses (and the related
liabilities) of the TCI Group
F-15
<PAGE> 113
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
constituting all of TCI's interests in the business of distributing
multichannel programming services in the United States direct to the home
via medium power or high power broadcast satellite, including the rental
and sale of customer premises equipment relating thereto.
(3) On July 31, 1996, pursuant to certain agreements entered into among TCI
Communications, Inc. ("TCIC"), a subsidiary of TCI, TCI, Viacom
International Inc. and Viacom, Inc. ("Viacom"), TCIC acquired all of the
common stock of VII Cable which, at the time of such acquisition, owned
Viacom's cable systems and related assets.
The transaction was structured as a tax-free reorganization in which VII
Cable initially transferred all of its non-cable assets, as well as all of
its liabilities other than current liabilities, to a new subsidiary of
Viacom ("New Viacom Sub"). VII Cable also transferred to New Viacom Sub the
proceeds (the "Loan Proceeds") of a $1.7 billion loan facility (the "Loan
Facility") arranged by TCIC, TCI and VII Cable. Following these transfers,
VII Cable retained cable assets with a value at closing of approximately
$2.326 billion and the obligation to repay the Loan Proceeds borrowed under
the Loan Facility. Neither Viacom nor New Viacom Sub has any obligation
with respect to repayment of the Loan Proceeds.
Prior to the consummation of the VII Cable Acquisition, Viacom offered to
the holders of shares of Viacom Class A Common Stock and Viacom Class B
Common Stock (collectively, "Viacom Common Stock") the opportunity to
exchange (the "Exchange Offer") a portion of their shares of Viacom Common
Stock for shares of Class A Common Stock, par value $100 per share, of VII
Cable ("VII Cable Class A Stock"). Immediately following the completion of
the Exchange Offer, TCIC acquired from VII Cable shares of VII Cable Class
B Common Stock (the "Share Issuance") in exchange for $350 million (which
was used to reduce VII Cable's obligations under the Loan Facility). At the
time of the Share Issuance, the VII Cable Class A Stock received by Viacom
stockholders pursuant to the Exchange Offer automatically converted into 5%
Class A Senior Cumulative Exchangeable Preferred Stock (the "Exchangeable
Preferred Stock") of VII Cable with a stated value of $100 per share.
The cost to acquire VII Cable was approximately $2.326 billion, consisting
of the Loan Proceeds and the $626 million aggregate par value of the VII
Cable Exchangeable Preferred Stock. The accompanying unaudited pro forma
condensed combined statements of operations do not reflect potential cost
savings attributable to (i) economics of scale which may be realized in
connection with purchases of programming and equipment or (ii)
consolidation of certain operating and administrative functions including
the elimination of duplicative facilities and personnel.
(4) Represents the estimated aggregate fair value of the Merger Consideration
to be issued to entities not controlled by TCI (the "Unaffiliated
Stockholders"). Such estimated aggregate fair value has been allocated to
goodwill as the net book values of DMX's assets and liabilities are assumed
to approximate their respective fair values. The estimated aggregate fair
value of the Merger Consideration, and the estimated fair values of DMX's
assets and liabilities are based on information available at the date of
the preparation of these condensed combined pro forma financial statements,
and will be adjusted upon final appraisal of the Merger Consideration, and
such DMX assets and liabilities. Although management is not presently aware
of any circumstances which would cause the final purchase price allocation
to be significantly different from that which is reflected in the
accompanying condensed pro forma combined balance sheet, actual valuations
and allocations may differ from those reflected herein. The number of
shares and Rights assumed to be issued is based upon DMX Common Stock
ownership as of March 31, 1997. See note 1. The estimated fair value of the
Merger consideration issued to Unaffiliated Stockholders will be accreted
to the Put Price during the Put Period and such accretion will be reflected
as an increase in goodwill with a corresponding increase to minority
interest. Additional information
F-16
<PAGE> 114
TELE-COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
concerning the assumed valuation of the TCI Music Series A Common Stock is
set forth below (dollars in millions):
<TABLE>
<S> <C>
Shares to be issued to TCI, valued at carryover basis
at March 31, 1997 (6,812,393 shares).................. $ 16
Shares to be issued to others, valued at estimated fair
value of $7.40 per share (8,084,255 shares)........... 60
----
Total value assigned to TCI Music Series A
Common Stock................................ 76
Increase in deferred income tax liability due to
purchase price allocation............................. 52
Elimination of DMX historical stockholders' deficit at
March 31, 1997........................................ 9
----
Excess purchase price to be allocated to goodwill...... $137
====
</TABLE>
None of DMX's currently outstanding stock options are "in-the-money" and
none are expected to be "in-the-money" at the date of the Merger. As such,
DMX's currently outstanding stock options are not expected to have any
impact on the purchase consideration. Any compensation expense associated
with the exchange of TCI Music options for DMX options is not expected to
be material. See note 1.
(5) Represents depreciation and amortization of VII Cable's allocated purchase
price based upon a weighted average life of 12.5 years for property and
equipment and a 40 year life for franchise costs.
(6) Represents assumed additional interest expense (after taking into
consideration interest expense reflected in the historical VII Cable
operations) incurred by TCI on the borrowings of the Loan Proceeds. Solely
for the purposes of this presentation, TCI has assumed an interest rate of
7.5% for the year ended December 31, 1996, based upon historical interest
rates adjusted for terms of the Loan Facility.
(7) Reflects a 5.0% cumulative annual dividend on the $626 million of VII Cable
Exchangeable Preferred Stock included in minority share of losses of
consolidated subsidiaries.
(8) Reflects the estimated income tax effect of the VII Cable pro forma
adjustments. The effective income tax rate on a pro forma basis is
adversely affected by the amortization of excess acquisition costs, which
are assumed not to be deductible for tax purposes.
(9) Reflects loss per common share based upon 678.0 million and 664.8 million
weighted average shares of TCI Group common stock for the three months
ended March 31, 1997 and the year ended December 31, 1996. Such amount
represents the weighted average shares disclosed in TCI's historical
financial statements.
(10) Reflects earnings per common share based upon 249.7 million weighted
average shares of Liberty Media Group common stock outstanding for the
three months ended March 31, 1997, and 266.3 million (primary) and 272.4
million (fully diluted) weighted average shares of Liberty Media Group
common stock for the year ended December 31, 1996. Such amounts represent
the weighted average shares disclosed in TCI's historical financial
statements.
(11) Represents amortization of additional goodwill recorded in connection with
the Merger. Such amortization is calculated using an estimated useful life
of ten years.
(12) Represents the elimination of TCI's share of DMX's historical net loss.
(13) No losses have been allocated to minority shareholders of TCI Music due to
TCI's put obligation pursuant to the Rights Agreement.
(14) Represents the income tax effect of the pro forma adjustments related to
the Merger and Contribution.
F-17
<PAGE> 115
APPENDIX I
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") dated as of February
6, 1997, by and among Tele-Communications, Inc., a Delaware corporation ("TCI"),
TCI Music, Inc., a Delaware corporation and wholly owned subsidiary of TCI
("MusicCo"), TCI Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of MusicCo ("Merger Sub") and DMX Inc., a Delaware corporation (the
"Company"):
RECITALS
A. Pursuant to the form of Contribution Agreement attached to this
Agreement as Exhibit A (the "Contribution Agreement"), (i) TCI will cause
certain of its wholly owned subsidiaries to contribute to MusicCo the right to
receive a substantial portion of the revenues attributable to the distribution
and sale by those subsidiaries of the Company's digital music services and (ii)
TCI will grant to each stockholder who becomes a stockholder of MusicCo pursuant
to the Merger, with respect to each whole share of MusicCo stock acquired by
such stockholder in the Merger, one right (a "Right") requiring TCI to purchase
from the holder thereof, at such holder's election, such stock for the price and
at the time specified in the form of Rights Agreement attached to this Agreement
as Exhibit B (the "Rights Agreement") in consideration of the issuance of shares
of Series B Common Stock, par value $.01 per share, of MusicCo ("MusicCo Series
B Common Stock") and a promissory note in the amount of $40,000,000.
B. TCI and MusicCo have proposed that MusicCo will acquire the Company in a
transaction in which: (i) simultaneously with the Contribution, Merger Sub will
merge with and into the Company, as a result of which the Company will become a
wholly owned subsidiary of MusicCo and the stockholders of the Company
immediately prior to such merger will become stockholders of MusicCo; and (ii)
TCI will issue to each stockholder who becomes a stockholder of MusicCo pursuant
to the Merger, with respect to each whole share of MusicCo stock acquired by
such stockholder in the Merger, one Right.
C. The Boards of Directors of TCI, MusicCo, Merger Sub and the Company have
each determined that the Merger is in the best interests of their respective
corporations and stockholders.
NOW, THEREFORE, in consideration of the foregoing premises and the
representations, warranties and agreements contained in this Agreement the
parties to this Agreement agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. As used in this Agreement, the following terms
with initial capital letters will have the meanings set forth below:
"Affiliate" means, as to any Person, any other Person which, directly
or indirectly, controls, is under common control with, or is controlled by,
such Person. As used in this definition, "control" (including, with its
correlative meanings, "controlling," "controlled by" and "under common
control with") means possession, directly or indirectly, of the power to
direct or cause the direction of management and policies of a Person
(whether through the ownership of voting securities, by contract or
otherwise).
"Code" means the Internal Revenue Code of 1986, as amended.
"Environmental Law" means any applicable Legal Requirement relating to
the protection, preservation or restoration of the environment (including,
air, water vapor, surface water, ground water, drinking water supply,
surface land, subsurface land, plant and animal life or any other natural
resource).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"GAAP" means generally accepted accounting principles as in effect
from time to time in the United States of America.
<PAGE> 116
"Knowledge" means the actual present personal knowledge of any
director or any officer of the Company.
"Legal Requirement" means any statute, ordinance, code, law, rule,
regulation, order or other requirement, standard or procedure enacted,
adopted or applied by any Governmental Entity, including judicial decisions
applying common law or interpreting any other Legal Requirement or any
agreement entered into with a Governmental Entity in resolution of a
dispute or otherwise.
"Lien" means any lien, security interest, pledge, charge, claim,
option, right to acquire, restriction on transfer, voting restriction or
encumbrance of any nature.
"Material Adverse Effect" means a material adverse effect on the
business, properties, assets, condition (financial or otherwise),
liabilities or operations of a Person and its Subsidiaries, taken as a
whole, or on the ability of such Person to perform its obligations under
this Agreement.
"MusicCo Series A Common Stock Value" means the product of (a) $4.00
and (b) a fraction, the numerator of which is 59,586,594 and the
denominator of which is the total number of shares of MusicCo Series A
Common Stock issuable to stockholders of the Company at the Effective Time,
assuming no Dissenting Shares.
"NASDAQ" means the over-the-counter market of the National Association
of Securities Dealers, Inc.
"PBGC" means the Pension Benefit Guaranty Corporation.
"Person" means any human being or any partnership, limited liability
company, corporation, business trust, joint stock company, trust,
unincorporated association, joint venture, Governmental Entity or other
entity.
"SEC" means the United States Securities and Exchange Commission.
"Subsidiary" means, with respect to any Person, any corporation or
partnership more than 50% of whose outstanding voting securities or
partnership interests, as the case may be, are directly or indirectly owned
by such Person.
SECTION 1.2 Other Definitions. The following terms are defined in the
Sections indicated:
<TABLE>
<CAPTION>
TERM SECTION
---- -----------
<S> <C>
Acquisition Proposal............................ 8.12
Agreement....................................... Preamble
Antitrust Division.............................. 8.9
Certificate of Incorporation of the Company..... 2.1(a)
Certificate of Merger........................... 2.2
Closing......................................... 3.13
Closing Date.................................... 3.13
Company......................................... Preamble
Company Benefit Plans........................... 6.11(a)
Company Common Stock............................ 3.1(a)
Company Permits................................. 6.8(a)
Company Stock Certificates...................... 3.3(a)
Contribution.................................... 4.1
Contribution Agreement.......................... Recital A
DGCL............................................ 2.1
Dissenting Shares............................... 3.8
Effective Time.................................. 2.2
Equity Affiliate................................ 6.3
ERISA Affiliate................................. 6.11(a)
</TABLE>
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<TABLE>
<CAPTION>
TERM SECTION
---- -----------
<S> <C>
Exchange Act.................................... 5.5
Exchange Agent.................................. 3.3(a)
Executive....................................... 8.13(a)
FTC............................................. 8.9
Governmental Entity............................. 6.8(a)
HSR Act......................................... 5.5
Indemnified Party............................... 8.2(h)(iii)
Indemnifying Party.............................. 8.2(h)(iii)
Joint Proxy Statement/Prospectus................ 8.2(a)
Losses.......................................... 8.2(h)(i)
Meeting......................................... 8.3
Merger.......................................... 2.1
Merger Sub...................................... Preamble
Most Recent Balance Sheet....................... 6.7(c)
MusicCo......................................... Preamble
MusicCo Certificates............................ 3.3(a)
MusicCo Series A Common Stock................... 3.1(a)
MusicCo Series B Common Stock................... Recital A
Other Filings................................... 8.2(b)
Preliminary Joint Proxy Statement/Prospectus.... 8.2(a)
Right........................................... Recital A
Rights Agreement................................ Recital A
SEC Filings..................................... 8.2(c)
SEC Reports..................................... 6.7(a)
Securities Act.................................. 5.5
Surviving Corporation........................... 2.1
Tax............................................. 6.14
TCI............................................. Preamble
Termination Date................................ 10.1(b)
</TABLE>
SECTION 1.3 Use of Terms. Terms used with initial capital letters will have
the meanings specified, applicable to both singular and plural forms, for all
purposes of this Agreement. All pronouns (and any variations) will be deemed to
refer to the masculine, feminine or neuter, as the identity of the Person may
require. The singular or plural includes the other, as the context requires or
permits. The word include (and any variation) is used in an illustrative sense
rather than a limiting sense. The word day means a calendar day. All accounting
terms not otherwise defined in this Agreement will have the meanings ascribed to
them under GAAP.
ARTICLE II
THE MERGER AND RELATED MATTERS
SECTION 2.1 The Merger. Subject to the terms and conditions of this
Agreement and the Delaware General Corporation Law (the "DGCL"), at the
Effective Time: (i) Merger Sub will be merged with and into the Company (the
"Merger"); (ii) the separate existence of Merger Sub will cease and the Company
will continue as the surviving corporation in the Merger (the "Surviving
Corporation"); and the name of the Surviving Corporation will be DMX Inc. From
and after the Effective Time, and without any further action on the part of any
Person, the Merger will have all the effects provided by applicable Legal
Requirements, including Section 262 of the DGCL, the effects described in
Section 3.1 with respect to the capital stock of Merger Sub and the Company and,
subject to applicable Legal Requirements, the following additional effects:
(a) Certificate of Incorporation. At the Effective Time, the Amended
and Restated Certificate of Incorporation of the Company, as amended (the
"Certificate of Incorporation of the Company"), as in
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effect immediately prior to the Effective Time, will become the Certificate
of Incorporation of the Surviving Corporation, and such Certificate of
Incorporation may thereafter be amended as provided therein and by the
DGCL.
(b) Bylaws. At the Effective Time, the Bylaws of Merger Sub, as in
effect immediately prior to the Effective Time, will become the Bylaws of
the Surviving Corporation, and such Bylaws may thereafter be amended or
repealed in accordance with their terms and the Certificate of
Incorporation of the Surviving Corporation and as provided by the DGCL.
(c) Directors. At the Effective Time, the directors of Merger Sub
immediately prior to the Effective Time will become the directors of the
Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation and
the DGCL and until the earlier of such director's resignation or removal or
such director's successor is duly elected and qualified, as the case may
be.
(d) Officers. At the Effective Time, the officers of Merger Sub
immediately prior to the Effective Time will become the officers of the
Surviving Corporation, each to hold office in accordance with the
Certificate of Incorporation and Bylaws of the Surviving Corporation and
the DGCL and until the earlier of such officer's resignation or removal or
such officer's successor is duly appointed and qualified, as the case may
be.
(e) Properties and Liabilities. At the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and
Merger Sub will vest in the Surviving Corporation, and all debts,
liabilities and duties of the Company and Merger Sub will become the debts,
liabilities and duties of the Surviving Corporation.
SECTION 2.2 Effective Time of the Merger. Subject to the terms and
conditions in this Agreement, the parties will prepare, sign and acknowledge, in
accordance with the DGCL, a certificate of merger (the "Certificate of Merger")
and deliver the Certificate of Merger to the Secretary of State of the State of
Delaware for filing pursuant to the DGCL on the Closing Date. The Merger will
become effective upon the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware. As used in this Agreement, the "Effective
Time" means the time at which the Certificate of Merger is filed with the
Secretary of State of the State of Delaware.
ARTICLE III
CONVERSION OF CAPITAL STOCK
SECTION 3.1 CONVERSION OF STOCK. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder of any shares of capital
stock of any corporation:
(a) Each share of Common Stock, $.01 par value per share, of the
Company ("Company Common Stock") issued and outstanding immediately prior
to the Effective Time (except shares subject to Section 3.1(b) and, to the
extent provided in Section 3.8, Dissenting Shares) will be converted into
and will thereafter evidence and become: (i) .5 of a share of Series A
common stock, $.01 par value per share, of MusicCo ("MusicCo Series A
Common Stock"); (ii) one Right with respect to each whole share of MusicCo
Series A Common Stock; and (iii) the right to receive cash in lieu of
fractional shares of MusicCo Series A Common Stock and Rights in accordance
with Section 3.5.
(b) Each share of the capital stock of the Company issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by the Company, if any, will be canceled and retired, and no
MusicCo Series A Common Stock, Rights or other consideration will be
delivered in exchange therefor.
(c) Each share of Common Stock, $.01 par value per share, of Merger
Sub issued and outstanding immediately prior to the Effective Time (except
shares subject to Section 3.1(d)) will be converted into
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and will thereafter evidence and become one validly issued, fully paid, and
nonassessable share of Common Stock, $.01 par value per share, of the
Surviving Corporation.
(d) Each share of the capital stock of Merger Sub issued and
outstanding immediately prior to the Effective Time and owned directly or
indirectly by Merger Sub, if any, will be canceled and retired, and no
Common Stock of the Surviving Corporation or other consideration will be
delivered in exchange therefor.
SECTION 3.2 [Intentionally omitted]
SECTION 3.3 Exchange of Certificates.
(a) Exchange Agent. Prior to the Closing Date, TCI will select The Bank of
New York or another bank or trust company reasonably acceptable to the Company
to act as exchange agent (the "Exchange Agent") in connection with the surrender
of certificates that, prior to the Effective Time, evidenced outstanding shares
of Company Common Stock ("Company Stock Certificates"). Prior to the Closing
Date, MusicCo and TCI will deposit with the Exchange Agent for exchange in
accordance with this Section 3.3 certificates evidencing the shares of MusicCo
Series A Common Stock and the Rights to be issued in the Merger ("MusicCo
Certificates"), which shares of MusicCo Common Stock and Rights will be deemed
to be issued at the Effective Time. At and following the Effective Time, MusicCo
will deliver to the Exchange Agent such cash as may be required from time to
time to make payments of cash in lieu of fractional shares in accordance with
Section 3.5.
(b) Exchange. As soon as practicable after the Effective Time, MusicCo will
cause the Exchange Agent to mail to each Person who was a holder of record of
Company Common Stock at the Effective Time: (i) a letter of transmittal (which
will specify that delivery will be effective, and risk of loss and title to any
Company Stock Certificates will pass, only upon delivery of the Company Stock
Certificates to the Exchange Agent and will be in such form and will have such
other provisions that are specified by MusicCo and reasonably acceptable to the
Company); and (ii) instructions for use in effecting the surrender of Company
Stock Certificates in exchange for MusicCo Certificates (together with any
dividend or distribution with respect thereto made after the Effective Time and
any cash to be paid in lieu of fractional shares pursuant to Section 3.5). Upon
surrender of a Company Stock Certificate for cancellation to the Exchange Agent
or to such other agent or agents as may be appointed by TCI, together with such
letter of transmittal, duly executed, and such other documents as may be
required by the Exchange Agent or such other agent, the holder of such Company
Stock Certificate will be entitled to receive in exchange therefor MusicCo
Certificates representing the number of whole shares of MusicCo Series A Common
Stock and one Right with respect to each whole share of MusicCo Series A Common
Stock that such holder has the right to receive pursuant to this Agreement
(together with any dividend or distribution with respect thereto made after the
Effective Time and any cash to be paid in lieu of fractional shares pursuant to
Section 3.5) and the Company Stock Certificate so surrendered will be canceled.
In the event of a transfer of ownership of Company Common Stock that is not
registered in the transfer records of the Company, MusicCo Certificates
representing the proper number of shares of MusicCo Series A Common Stock and
Rights may be issued to a Person other than the Person in whose name the
surrendered Company Stock Certificate is registered if the Company Stock
Certificate representing such Company Common Stock is presented to the Exchange
Agent accompanied by all documents required to evidence and effect such transfer
and by evidence reasonably satisfactory to MusicCo that any applicable stock
transfer tax has been paid. MusicCo will not directly or indirectly pay or
reimburse any Person for any transfer taxes of the type referred to in the
preceding sentence. If any MusicCo Certificates are to be delivered to a Person
other than the Person in whose name the Company Stock Certificates surrendered
in exchange therefor are registered, it will be a condition to the delivery of
such MusicCo Certificates that the Company Stock Certificates so surrendered are
properly endorsed or accompanied by appropriate stock powers and otherwise in
proper form for transfer, that such transfer otherwise is proper and that the
Person requesting such transfer pay to the Exchange Agent any transfer or other
taxes payable by reason of the foregoing or establishes to the satisfaction of
the Exchange Agent that such taxes have been paid or are not required to be
paid.
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(c) Certificates Not Exchanged. After the Effective Time, each outstanding
Company Stock Certificate will, until surrendered for exchange in accordance
with this Section 3.3, be deemed for all purposes to evidence ownership of the
number of whole shares of MusicCo Series A Common Stock and the whole number of
Rights into which the shares of Company Common Stock (which, prior to the
Effective Time, were represented thereby) are converted in accordance with
Section 3.1, together with the right to receive any dividend or distribution
with respect thereto made after the Effective Time and any cash to be paid in
lieu of fractional shares pursuant to Section 3.5.
(d) Expenses. Except as otherwise expressly provided in this Agreement,
MusicCo will pay all charges and expenses, including those of the Exchange
Agent, in connection with the exchange of shares of MusicCo Series A Common
Stock and Rights for shares of Company Common Stock, except any charges or
expenses that are otherwise solely the liability of one or more holders of
Company Common Stock. Any MusicCo Certificates deposited with the Exchange Agent
that remain unclaimed by the former stockholders of the Company after six months
following the Effective Time will be delivered to MusicCo upon its demand, and
any former stockholders of the Company who have not then complied with the
instructions for exchanging their Company Stock Certificates will thereafter
look only to MusicCo for exchange of Company Stock Certificates and for any
dividend or distribution with respect thereto made after the Effective Time and
any cash to be paid in lieu of fractional shares pursuant to Section 3.5.
SECTION 3.4 Distribution With Respect to Shares Represented by
Unsurrendered Company Stock Certificates. No dividends or other distributions
declared or made after the Effective Time with respect to MusicCo Series A
Common Stock with a record date after the Effective Time will be paid to the
holder of any unsurrendered Company Stock Certificate with respect to the shares
of MusicCo Series A Common Stock issuable upon surrender thereof until the
holder of such Company Stock Certificate surrenders such Company Stock
Certificate in accordance with Section 3.3. Subject to the effect of applicable
Legal Requirements, following surrender of any such Company Stock Certificate,
MusicCo will pay or cause to be paid, without interest, to the record holder of
MusicCo Certificates issued in exchange therefor, (a) at the time of such
surrender, the amount of cash in lieu of fractional shares to which such holder
is entitled pursuant to Section 3.5 and the amount of dividends or other
distributions by MusicCo with a record date after the Effective Time theretofore
paid with respect to such whole shares of MusicCo Series A Common Stock and (b)
at the appropriate payment date, the amount of dividends or other distributions
by MusicCo with a record date after the Effective Time but prior to surrender of
such Company Stock Certificate and a payment date subsequent to such surrender
payable with respect to such whole shares of MusicCo Series A Common Stock.
SECTION 3.5 No Fractional Shares.
(a) Cash Payment in Lieu of Fractional Shares. No certificates or scrip
representing fractional shares of MusicCo Series A Common Stock and Rights will
be issued upon the surrender of Company Stock Certificates pursuant to Section
3.3. Such fractional share interests will not entitle the owner thereof to any
rights as a security holder of MusicCo. In lieu of any such fractional shares of
MusicCo Series A Common Stock and any fractional Rights, each holder of Company
Common Stock entitled to receive shares of MusicCo Series A Common Stock and
Rights in the Merger, upon surrender of a Company Stock Certificate for exchange
pursuant to Section 3.3, will be entitled to receive an amount in cash (without
interest), rounded to the nearest cent, determined by multiplying the MusicCo
Series A Common Stock Value by the fractional interest in MusicCo Series A
Common Stock and Rights to which such holder would otherwise be entitled (after
taking into account all shares of Company Common Stock held of record by such
holder immediately prior to the Effective Time).
(b) Deposit with Exchange Agent. As soon as practicable after the
determination of the amount of cash, if any, to be paid to holders of MusicCo
Series A Common Stock in lieu of any fractional share interests, MusicCo will
promptly deposit with the Exchange Agent cash in the required amounts and the
Exchange Agent will mail such amounts without interest to such holders; provided
however, that no such amount will be paid to any holder with respect to any
Company Stock Certificate prior to the surrender by such holder of such Company
Stock Certificate.
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SECTION 3.6 No Liability. None of TCI, MusicCo, Merger Sub, the Company,
the Surviving Corporation or the Exchange Agent will be liable to any holder of
shares of Company Common Stock for any shares of MusicCo Series A Common Stock,
Rights, dividends or distributions with respect thereto or cash payable in lieu
of fractional shares delivered to a state abandoned property administrator or
other public official pursuant to any applicable abandoned property, escheat or
similar law.
SECTION 3.7 Lost Certificates. If any Company Stock Certificate is lost,
stolen or destroyed, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Company Stock Certificate the shares of MusicCo Series A
Common Stock and Rights (and any dividend or distribution with respect thereto
made after the Effective Time and any cash payable in lieu of fractional shares
pursuant to Section 3.5) deliverable in respect thereof as determined in
accordance with the terms of this Agreement, subject to the condition that the
Person to whom the MusicCo Series A Common Stock and Rights (and any dividend or
distribution with respect thereto made after the Effective Time and any cash
payable in lieu of fractional shares pursuant to Section 3.5) are to be issued,
shall have (a) delivered to MusicCo an affidavit claiming such Company Stock
Certificate to be lost, stolen, or destroyed and (b) if required by MusicCo,
given MusicCo an indemnity satisfactory to MusicCo against any claim that may be
made against MusicCo with respect to the Company Stock Certificate alleged to
have been lost, stolen or destroyed.
SECTION 3.8 Dissenting Shares. Notwithstanding anything in this Agreement
to the contrary, shares of Company Common Stock outstanding immediately prior to
the Effective Time that are held by holders of such shares who have not voted in
favor of the Merger or consented thereto in writing and who have demanded
appraisal rights with respect thereto in accordance with Section 262 of the DGCL
(the "Dissenting Shares") will not be converted into or be exchangeable for the
right to receive MusicCo Series A Common Stock, Rights or any dividend or
distribution with respect thereto made after the Effective Time or any cash
payable in lieu of fractional shares pursuant to Section 3.5, but holders of
Dissenting Shares will be entitled to receive payment of the fair value of their
Dissenting Shares in accordance with the provisions of the DGCL and this Section
3.8. Any shares of Company Common Stock held by a stockholder who, prior to the
Effective Time, withdraws a demand for appraisal of such shares or loses the
right to appraisal as provided in the DGCL will not be considered Dissenting
Shares. The Company will give MusicCo and TCI prompt notice of any written
demands for appraisal of any shares of Company Common Stock, attempted
withdrawals of such demand and any other notices or other documents received by
the Company pursuant to the DGCL relating to stockholders' rights of appraisal.
The Company will make all payments required by the DGCL to be made in respect of
Dissenting Shares, including any costs assessed against the Company pursuant to
Section 262 of the DGCL, and none of TCI, MusicCo or any of their Affiliates
will directly or indirectly reimburse or otherwise provide funds to the Company
with respect to such payments.
SECTION 3.9 Treatment of Stock Options and Other Company Benefit Plans. The
Company will use its best efforts to cause each option that is outstanding prior
to the Effective Time that is not terminable pursuant to its terms upon
consummation of the transactions contemplated by this Agreement to be canceled
prior to or at the Effective Time and the Company will take all action necessary
to cause each such other option to be canceled if not otherwise exercised prior
to or at the Effective Time; provided however that the Company will not pay any
amount of cash or other consideration to the holder of any option in
consideration of the cancellation or termination of such option; and provided
further that with respect to each such option that remains outstanding after the
Effective Time (other than as a result of a breach by the Company of the
provisions of this Section) any Rights issued upon exercise of such option after
the Effective Time will terminate (or have terminated) at the time set forth in
the Rights Agreement. At or prior to the Effective Time, DMX will terminate all
Company Benefit Plans and the DMX Inc. Employee Handbook.
SECTION 3.10 Stockholders' Approval. Subject to the fiduciary duty
obligations under applicable Legal Requirements, the Company will take all
action necessary, in accordance with applicable Legal Requirements and the
Certificate of Incorporation and Bylaws of the Company, to have this Agreement,
the Merger and the transactions contemplated by this Agreement approved by the
holders of capital stock of the Company. The Company will notify TCI of the date
set for any stockholder action to be taken in connection with approval of the
Merger not later than 30 days prior to such date. The Board of Directors of the
Company will, subject to fiduciary duty obligations under applicable Legal
Requirements, recommend that holders of Company
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Common Stock vote to adopt this Agreement and approve the Merger, and will use
reasonable best efforts to solicit from such holders proxies in favor of such
approval and adoption and take all other action necessary or helpful to secure
such favorable vote. Such efforts will include causing the Joint Proxy
Statement/Prospectus to include the recommendation of the Board of Directors of
the Company that its stockholders approve the Merger and related transactions;
provided however, that the Board of Directors of the Company may modify or
withdraw its recommendation if it determines, with the advice of outside
counsel, that it may be required to do so in the exercise of its fiduciary
duties. Unless the Company's Board of Directors releases TCI from such
obligation, TCI will cause all shares of Company Common Stock beneficially owned
(within the meaning of Rule 13d-3 under the Exchange Act) by it on the record
date for the Meeting to be voted in favor of the Merger.
SECTION 3.11 Closing of the Company's Transfer Books. At the Effective
Time, the stock transfer books of the Company will be closed and no transfer of
shares of Company Common Stock will be made thereafter. In the event that, after
the Effective Time, Company Stock Certificates are presented to the Surviving
Corporation, they will be canceled and exchanged for the MusicCo Certificates
(and, if required, cash) as provided in Section 3.3(b) and Section 3.5.
SECTION 3.12 Assistance in Consummation of the Merger. Each of TCI,
MusicCo, Merger Sub and the Company will provide all reasonable assistance to,
and will cooperate with, each other to bring about the consummation of the
Merger as soon as possible in accordance with the terms and conditions of this
Agreement. TCI will cause MusicCo and Merger Sub to perform all of their
respective obligations in connection with this Agreement.
SECTION 3.13 Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") will take place (i) at the offices of Sherman & Howard
L.L.C., 633 Seventeenth Street, Suite 3000, Denver, Colorado, at 9:00 A.M. local
time on the date that is the first business day after the day on which the last
of the conditions set forth in Article VIII (excluding delivery of opinions and
certificates) is fulfilled or waived or (ii) at such other place and time as TCI
and the Company agree in writing. The date on which the Closing occurs is
referred to in this Agreement as the "Closing Date."
ARTICLE IV
THE CONTRIBUTION; THE RIGHTS
SECTION 4.1 Contribution to MusicCo. Subject to the satisfaction of the
conditions to the parties' obligations to effect the Merger, as set forth in
Article IX of this Agreement, at the Closing, TCI will execute and deliver the
Contribution Agreement and the Rights Agreement substantially in the forms
attached as Exhibits A and B, respectively, and pursuant thereto, issue the
Rights in accordance with the terms and conditions of the Rights Agreement and
cause each TCI System Owner (as defined in the Contribution Agreement) to assign
and contribute to MusicCo the right to receive Net DMX Revenues (as defined in
the Contribution Agreement) of such TCI System Owner pursuant to the terms and
conditions of the Contribution Agreement. The foregoing transactions by TCI and
the TCI System Owners pursuant to the Contribution Agreement are referred to in
this Agreement as the "Contribution."
SECTION 4.2 Consideration for Contribution. In consideration for the
Contribution, MusicCo will, concurrently with the Contribution, issue and
deliver to TCI, as designee of the TCI System Owners, 125,000,000 validly
issued, fully paid and nonassessable shares of MusicCo Series B Common Stock and
the Company Note (as defined in the Contribution Agreement).
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ARTICLE V
REPRESENTATIONS AND WARRANTIES OF TCI, MUSICCO AND MERGER SUB
TCI, MusicCo and Merger Sub jointly and severally represent and warrant to
the Company as follows:
SECTION 5.1 Organization and Qualification. Each of TCI, MusicCo and Merger
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power and
authority to carry on its business as it is now being conducted. Each of TCI,
MusicCo and Merger Sub is duly qualified as a foreign corporation to do
business, and is in good standing, in each jurisdiction where the character of
its properties owned or held under lease or the nature of its activities make
such qualification necessary, except where the failure to be so qualified will
not, individually or in the aggregate, have a Material Adverse Effect on it.
SECTION 5.2 Capitalization.
(a) As of the date of this Agreement, the authorized capital stock of
MusicCo consists of: (i) 495,000,000 shares of common stock, par value $.01 per
share, divided into the following classes: 295,000,000 shares of common stock
designated as Series A Common Stock none of which are issued and outstanding and
200,000,000 shares of common stock, designated as Series B Common Stock one
share of which is issued and outstanding; and (ii) 5,000,000 shares of preferred
stock, par value $.01 per share, none of which are issued and outstanding.
(b) All shares of MusicCo Series A Common Stock to be issued in connection
with the Merger, when issued in accordance with this Agreement, will be duly
authorized, validly issued, fully paid and nonassessable.
(c) Merger Sub is a direct, wholly owned subsidiary of MusicCo. MusicCo
will own all the issued and outstanding stock of (i) Merger Sub immediately
prior to the Effective Time and (ii) Surviving Corporation immediately after the
Effective Time.
SECTION 5.3 Authority Relative to this Agreement. Each of TCI, MusicCo and
Merger Sub has all requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement and the consummation of
the transactions contemplated by this Agreement by TCI, MusicCo and Merger Sub
have been duly authorized by the Boards of Directors of TCI, MusicCo and Merger
Sub and by MusicCo as the sole stockholder of Merger Sub, and no other corporate
proceedings on the part of TCI, MusicCo or Merger Sub are necessary to authorize
this Agreement and the transactions contemplated by this Agreement. This
Agreement constitutes a valid and binding obligation of each of TCI, MusicCo and
Merger Sub enforceable against each of them in accordance with its terms,
except, (i) as enforcement may be limited by bankruptcy, insolvency or other
similar Legal Requirements affecting the enforcement of creditors' rights
generally, (ii) as the availability of indemnification and other remedies may be
limited by federal and state securities laws and (iii) for limitations imposed
by general principles of equity.
SECTION 5.4 No Breach; Required Consents. The execution and delivery of
this Agreement by TCI, MusicCo and Merger Sub do not, and the consummation of
the transactions contemplated by this Agreement by TCI, MusicCo and Merger Sub
will not: (a) violate or conflict with the Certificate of Incorporation or
Bylaws of TCI, MusicCo or Merger Sub; (b) except as set forth on Schedule 5.4,
constitute a breach or default (or an event that with notice or lapse of time or
both would become a breach or default) or give rise to any Lien, third-party
right of termination, cancellation, modification or acceleration under any
agreement or undertaking to which TCI, MusicCo or Merger Sub is a party or by
which any of them is bound, except where such breach, default, Lien, third-party
right of termination, cancellation, modification or acceleration would not have
a Material Adverse Effect on TCI, MusicCo or Merger Sub; or (c) subject to
obtaining the approvals and making the filings described in Section 5.5,
constitute a violation of any applicable Legal Requirement, except where such
violation would not have a Material Adverse Effect on TCI, MusicCo or Merger
Sub.
SECTION 5.5 Governmental Consents and Approvals. Neither the execution and
delivery of this Agreement by TCI, MusicCo and Merger Sub nor the consummation
of the transactions contemplated by this Agreement by TCI, MusicCo and Merger
Sub will require any filing or registration with, or authorization, consent or
approval of, any Governmental Entity, except those required in connection, or in
compliance, with
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the provisions of (i) the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended (the "HSR Act"), (ii) the Securities Act of 1933, as amended (the
"Securities Act"), (iii) the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and (iv) the corporation, securities or blue sky laws or
regulations, or similar Legal Requirements, of various states of the United
States, and other than such filings, registrations, authorizations, consents or
approvals the failure of which to make or obtain would not have a Material
Adverse Effect on TCI, MusicCo or Merger Sub or prevent the consummation of the
transactions contemplated by this Agreement.
SECTION 5.6 Operations of MusicCo and Merger Sub. As of the date of this
Agreement, each of MusicCo and Merger Sub has engaged in no other business
activities other than this Agreement and the transactions contemplated by this
Agreement and has no material assets or liabilities other than its rights and
obligations under this Agreement.
SECTION 5.7 No Broker. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of TCI, MusicCo or Merger Sub.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to TCI, MusicCo and Merger Sub as
follows:
SECTION 6.1 Organization and Qualification. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to carry
on its business as it is now being conducted. The Company is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or held under lease or
the nature of its activities makes such qualification necessary, except where
the failure to be so qualified would not, individually or in the aggregate, have
a Material Adverse Effect on the Company.
SECTION 6.2 Capitalization.
(a) The authorized capital stock of the Company consists of 100,000,000
shares of Company Common Stock. As of the date of this Agreement, 59,586,594
shares of Company Common Stock were issued and outstanding.
(b) Except as set forth on Schedule 6.2(b), there are no options, warrants,
calls, subscriptions or other rights, agreements or commitments of any kind, to
which the Company or any of its Subsidiaries is a party, relating to the issued
or unissued capital stock or other securities of the Company.
(c) All issued and outstanding shares of Company Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable, are not
subject to, and have not been issued in violation of, any preemptive rights, and
have not been issued in violation of any federal or state securities laws or any
other Legal Requirement.
SECTION 6.3 Subsidiaries. The only Persons in which the Company directly or
through one or more of its Subsidiaries holds a 5% or greater equity interest
(each an "Equity Affiliate") are those listed on Schedule 6.3 to this Agreement,
which Schedule reflects the percentage and nature of the Company's ownership of
each Subsidiary and Equity Affiliate of the Company. Each of the Company's
Subsidiaries is a corporation or partnership duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation or
formation and has the corporate or partnership power to carry on its business as
it is now being conducted or currently proposed to be conducted. Each of the
Company's Subsidiaries is duly qualified as a foreign corporation or partnership
to do business, and is in good standing, in each jurisdiction where the
character of its properties owned or held under lease or the nature of its
activities makes such qualification necessary except where the failure to be so
qualified will not have a Material Adverse Effect on such Subsidiary. All the
outstanding shares of capital stock of each of the Company's Subsidiaries that
is a corporation are validly issued, fully paid and nonassessable. The shares of
capital stock or partnership or other ownership interests in each of the
Company's Subsidiaries or Equity Affiliates that are owned by the Company
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or by a Subsidiary of the Company are owned free and clear of any Liens, are not
subject to and have not been issued in violation of any preemptive rights and
have not been issued in violation of any federal or state securities laws or any
other Legal Requirement. Except as set forth on Schedule 6.3, there are not, as
of the date hereof, and at the Effective Time there will not be, any outstanding
options, warrants, calls or other rights, agreements or commitments of any
character, to which the Company or any of its Subsidiaries is a party, relating
to the issued or unissued capital stock, other securities or partnership or
other ownership interests in any of the Subsidiaries or Equity Affiliates of the
Company.
SECTION 6.4 Authority Relative to this Agreement. The Company has all
requisite corporate power and authority to execute and deliver this Agreement
and, subject to approval of this Agreement by the holders of the Company Common
Stock, to consummate the transactions contemplated by this Agreement. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated by this Agreement have been duly authorized by the
Company's Board of Directors, including at least a majority of the Disinterested
Directors (as defined in the Certificate of Incorporation of the Company).
Except for the approval of the holders of Company Common Stock, no other
corporate proceedings on the part of the Company are necessary to authorize this
Agreement and the transactions contemplated by this Agreement. The Board of
Directors of the Company has received the opinion of Houlihan Lokey Howard &
Zukin as financial advisor to the Company, to the effect that, as of the date of
this Agreement, the consideration to be received in the Merger by the Company's
stockholders is fair from a financial point of view. Subject to approval of the
stockholders of the Company in accordance with the DGCL, this Agreement
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms except (i) as enforcement may be limited by
bankruptcy, insolvency or other similar Legal Requirements affecting the
enforcement of creditors' rights generally, (ii) as the availability of
indemnification and other remedies may be limited by federal and state
securities laws and (iii) for limitations imposed by general principles of
equity.
SECTION 6.5 No Breach; Required Consents. The execution and delivery of
this Agreement by the Company does not, and the consummation of the transactions
contemplated by this Agreement by the Company will not: (a) subject to the
approval of holders of Company Common Stock, violate or conflict with the
Certificate of Incorporation or Bylaws of the Company; (b) except as set forth
on Schedule 6.5, constitute a breach or default (or an event that with notice or
lapse of time or both would become a breach or default) or give rise to any
Lien, third-party right of termination, cancellation, modification or
acceleration under any agreement or undertaking to which the Company is a party
or by which it is bound, except where such breach, default, Lien, third-party
right of termination, cancellation, modification, or acceleration would not have
a Material Adverse Effect on the Company; or (c) subject to obtaining the
consents, approvals or authorizations and making the filings or registrations
described in Section 6.6, constitute a violation of any Legal Requirement,
except where such violation would not have a Material Adverse Effect on the
Company.
SECTION 6.6 Consents and Approvals. Neither the execution and delivery of
this Agreement by the Company nor the consummation of the transactions
contemplated by this Agreement by the Company will require any filing or
registration with, or authorization, consent or approval of, any Governmental
Entity or any other Person, except those required in connection, or in
compliance, with the provisions of (i) the HSR Act, (ii) the Securities Act,
(iii) the Exchange Act and (iv) the corporation, securities or blue sky laws or
regulations, or similar Legal Requirements, of the various states of the United
States, and other than such other filings, registrations, authorizations,
consents or approvals the failure of which to make or obtain would not have a
Material Adverse Effect on the Company or prevent the consummation of the
transactions contemplated by this Agreement.
SECTION 6.7 Reports and Financial Statements.
(a) SEC Reports. The Company has filed all required forms, reports and
documents required to be filed with the SEC since October 1, 1994 (collectively,
the "SEC Reports"). As of their respective dates or effective dates and except
as the same may have been corrected, updated or superseded by means of a
subsequent filing with the SEC prior to the date of this Agreement, none of the
SEC Reports, including any financial statements or schedules included or
incorporated by reference therein, contained any untrue statement of a material
fact or omitted to state a material fact required to be stated or incorporated
by
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reference therein or necessary in order to make the statements therein, in light
of the circumstances under which they were made, not misleading. The Company has
delivered to TCI, in the forms filed with the SEC, all the SEC Reports.
(b) Financial Statements. The audited consolidated financial statements of
the Company contained in the SEC Reports comply in all material respects with
applicable accounting requirements and with the published rules and regulations
of the SEC with respect thereto, were prepared in accordance with GAAP applied
on a consistent basis during the periods involved (except as may be indicated in
the notes thereto) and present fairly the Company's consolidated financial
condition and the results of its operations as of the relevant dates thereof and
for the periods covered thereby. The unaudited consolidated interim financial
statements of the Company contained in the SEC Reports comply in all material
respects with applicable accounting requirements and with the published rules
and regulations of the SEC with respect thereto, were prepared on a basis
consistent with prior interim periods (except as required by applicable changes
in GAAP or in SEC accounting policies) and include all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of the
Company's consolidated financial condition and results of operations for such
periods.
(c) Absence of Certain Changes. Except as set forth on Schedule 6.7(c),
since the date of the most recent balance sheet of the Company included in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
1996 (the "Most Recent Balance Sheet"), there has not been any: (i) transaction,
commitment, dispute or other event or condition (financial or otherwise) of any
character (whether or not in the ordinary course of business) that, individually
or in the aggregate, has had, or would have, a Material Adverse Effect on the
Company (other than as a result of changes in laws or regulations of general
applicability or any changes resulting from general economic, financial, market
or industry-wide conditions); (ii) any declaration, setting aside or payment of
any dividend or other distribution (whether in cash, stock or property) with
respect to the capital stock of the Company; or (iii) entry into any commitment
or transaction material to the Company and its Subsidiaries taken as a whole
(including any borrowing or sale of assets) except in the ordinary course of
business consistent with past practice.
(d) Absence of Undisclosed Liabilities. Except as disclosed on Schedule
6.7(d), the Company does not have any indebtedness, liability or obligation
required by GAAP to be reflected on a balance sheet that is not reflected or
reserved against in the Most Recent Balance Sheet other than liabilities,
obligations and contingencies that (i) were incurred after the date of the Most
Recent Balance Sheet in the ordinary course of business or (ii) would not, in
the aggregate, have a Material Adverse Effect on the Company.
SECTION 6.8 Compliance with Law; Litigation.
(a) Except as disclosed on Schedule 6.8(a), the Company and its
Subsidiaries hold all permits, licenses, franchises, variances, exemptions,
concessions, leases, instruments, orders and approvals (the "Company Permits")
of all courts, administrative agencies or commissions or other governmental
authorities or instrumentalities, domestic or foreign (each, a "Governmental
Entity") required to be held under applicable Legal Requirements, except such
Company Permits the failure of which to hold, individually or in the aggregate,
does not have and, in the future is not likely to have, a Material Adverse
Effect on the Company. To the Company's Knowledge, the Company and its
Subsidiaries are in compliance with the terms of the Company Permits, except
such failures to comply that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company. To the Company's Knowledge, the
businesses of the Company and its Subsidiaries are not being conducted in
violation of any Legal Requirement, except such violations which, individually
or in the aggregate, would not have a Material Adverse Effect on the Company. No
investigation or review by any Governmental Entity with respect to the Company
or any of its Subsidiaries is pending, or, to the Knowledge of the Company,
threatened, nor has any Governmental Entity indicated to the Company in writing
an intention to conduct the same, other than those the outcome of which would
not have a Material Adverse Effect on the Company.
(b) Except as set forth on Schedule 6.8(b) to this Agreement, there is no
suit, action or proceeding pending or, to the Knowledge of the Company,
threatened against or affecting the Company or any of its Subsidiaries that has
had or is likely to have a Material Adverse Effect on the Company nor is there
any judgment, decree, injunction, rule or order of any Governmental Entity or
arbitrator outstanding against the
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Company or any of its Subsidiaries that has had or is likely to have a Material
Adverse Effect on the Company.
SECTION 6.9 Title to Assets. The Company has good and merchantable title to
all material assets reflected on the Most Recent Balance Sheet, free and clear
of any Lien except: (a) landlord's Liens and Liens for property taxes not
delinquent; (b) statutory Liens that were created in the ordinary course of
business and do not materially detract from the value of such assets or
materially impair the use thereof in the operation of the Company's business;
(c) the Liens listed on Schedule 6.9; (d) leased interests in property owned by
others; and leased interests in property leased to others; and (e) zoning,
building or similar restrictions, easements, rights-of-way, reservations of
rights, conditions, or other restrictions or encumbrances relating to or
affecting real property that do not, individually or in the aggregate,
materially interfere with the use of such real property in the operation of the
Company's business.
SECTION 6.10 Labor and Employee Matters. The Company is not a party to any
contract with any labor organization and has not agreed to recognize any union
or other collective bargaining unit. As of the date of this Agreement, no union
or other collective bargaining unit has been certified as representing any of
the Company's employees. To the Company's Knowledge, as of the date of this
Agreement, there is no representation or organizing effort pending or threatened
against or affecting or involving the Company. The Company and its Subsidiaries
are in compliance with all applicable Legal Requirements relating to the
employment of employees, including any obligations relating to employment
standards legislation, pay equity, occupational health and safety, labor
relations and human rights legislation except for such failures to comply as do
not have, and are not likely to have, a Material Adverse Effect on the Company.
Schedule 6.10 sets forth all agreements or arrangements with any employee of the
Company, whether oral or in writing, with respect to such employee's employment
with the Company other than agreements or arrangements otherwise disclosed on
Schedule 6.11(a).
SECTION 6.11 ERISA.
(a) Schedule 6.11(a) sets forth all "employee benefit plans," as defined in
ERISA, and all other material employee benefit arrangements, programs or payroll
practices, including severance pay, sick leave, vacation pay, salary
continuation for disability, deferred compensation, bonus, stock purchase,
hospitalization, medical insurance, life insurance, tuition reimbursement,
employee assistance and employee discounts, that the Company or any trade or
business (whether or not incorporated) that is treated as a single employer with
the Company under Section 414(b), (c), (m) or (o) of the Code ("ERISA
Affiliate") maintains or has an obligation to make contributions (the "Company
Benefit Plans").
(b) Neither the Company nor any ERISA Affiliate has incurred any
unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with
respect to any multiemployer plan, nor has any of them incurred any liability
due to the termination or reorganization of any multiemployer plan, except any
such liability that would not have a Material Adverse Effect on the Company. To
the Knowledge of the Company, neither the Company nor any of its ERISA
Affiliates reasonably expects to incur any liability due to a withdrawal from or
termination or reorganization of a multiemployer plan, except any such liability
that would not have a Material Adverse Effect on the Company.
(c) Each Company Benefit Plan that is intended to qualify under Section 401
of the Code and the trust maintained pursuant thereto has been determined to be
exempt from federal income taxation under Section 501 of the Code by the
Internal Revenue Service, and to the Knowledge of the Company, nothing has
occurred with respect to any such plan since such determination that is likely
to result in the loss of such exemption or the imposition of any material
liability, penalty or tax under ERISA or the Code. Each Company Benefit Plan has
at all times been maintained in all material respects, by its terms and in
operation, in accordance with all applicable Legal Requirements.
(d) All contributions (including all employer contributions and employee
salary reduction contributions) required to have been made under the Company
Benefit Plans or pursuant to applicable Legal Requirements (without regard to
any waivers granted under Section 412 of the Code) to any funds or trusts
established thereunder or in connection therewith have been made by the due date
thereof (including any
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valid extension or grace period) and no accumulated funding deficiency exists
with respect to any of the Company Benefit Plans subject to Section 412 of the
Code.
(e) To the Knowledge of the Company, there have been no violations of ERISA
or the Code with respect to the filing of applicable reports, documents and
notices regarding the Company Benefit Plans with the Secretary of Labor and the
Secretary of the Treasury or the furnishing of such reports, documents and
notices to the participants or beneficiaries of the Company Benefit Plans,
except such violations that, individually or in the aggregate, would not have a
Material Adverse Effect on the Company.
(f) There are no pending actions, claims or lawsuits that have been
asserted or instituted against the Company Benefit Plans, the assets of any of
the trusts under such plans or the plan sponsor or the plan administrator, or
against any fiduciary of the Company Benefit Plans, with respect to the
operation of such plans (other than routine benefit claims), nor does the
Company have Knowledge of facts that reasonably could be expected to form the
basis for any such action, claim or lawsuit, except any such actions, claims or
lawsuits that, individually or in the aggregate, would not have a Material
Adverse Effect on the Company.
(g) Except as provided in Schedule 6.11(g) and as may be required under
Section 4980B of the Code, neither the Company nor any ERISA Affiliate maintains
any Company Benefit Plan that provides medical or welfare benefits to former
employees.
SECTION 6.12 Approval.
(a) The Board of Directors of the Company at a meeting duly called and
held: (i) determined that the Merger is advisable and fair and in the best
interests of the Company and its stockholders; (ii) approved the Merger and this
Agreement and the transactions contemplated by this Agreement in accordance with
the provisions of Section 251 of the DGCL; (iii) recommended the approval of
this Agreement and the Merger by the holders of the Company Common Stock and
directed that the Merger be submitted for consideration by the Company's
stockholders at the Meeting; and (iv) adopted a resolution having the effect of
causing the Company not to be subject (A) to the super majority voting
provisions of the Certificate of Incorporation of the Company and (B) to the
extent applicable, and if applicable, to the extent permitted by applicable
Legal Requirements, to Section 203 of the DGCL.
(b) The vote of a majority of the outstanding shares of Company Common
Stock is the vote required for the adoption and approval of this Agreement, the
Merger, and the other transactions contemplated by this Agreement.
SECTION 6.13 Financial Advisor. Except for Houlihan Lokey Howard & Zukin,
no broker, finder or investment banker is entitled to any brokerage, finder's or
other fee or commission in connection with the Merger or the transactions
contemplated by this Agreement based upon arrangements made by or on behalf of
the Company. There has been delivered to TCI a true and complete copy of the
agreement pursuant to which Houlihan Lokey Howard & Zukin has been retained to
act as financial advisor to the Company in connection with the Merger.
SECTION 6.14 Taxes. Except as set forth on Schedule 6.14, the Company and
each of its Subsidiaries have timely filed all Tax returns required to be filed
by any of them and have timely paid (or the Company has paid on its behalf) or
have established an adequate reserve for the payment of, all Taxes owed in
respect of the periods covered by such returns. The information contained in
such Tax returns is complete and accurate in all material respects. Except as
set forth on Schedule 6.14, neither the Company nor any Subsidiary of the
Company is delinquent in the payment of any material Tax or other amount owed to
any Governmental Entity. Except as set forth on Schedule 6.14, there are no
claims or investigations pending or, to the Company's Knowledge, threatened
against the Company for past Taxes, except claims and investigations that would
not have a Material Adverse Effect on the Company, and adequate provision for
the claims or investigations set forth on Schedule 6.14 has been made as
reflected on the Most Recent Balance Sheet. Except as set forth on Schedule
6.14, the Company has not waived or extended any applicable statute of
limitations relating to the assessment of any Taxes that would be payable by the
Company. For the purposes of this Agreement, the term "Tax" includes all
federal, state, local and foreign income, profits, estimated, franchise, gross
receipts, payroll, sales, employment, use, property, withholding, excise and
other taxes, duties
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and assessments of any nature whatsoever together with all interest, penalties
and additions imposed with respect to such amounts.
SECTION 6.15 Environmental Laws. Except as described on Schedule 6.15:
(a) each of the Company and its Subsidiaries is in compliance in all
respects with all Environmental Laws, except where the failure to so comply
would not have a Material Adverse Effect on the Company; and
(b) no orders, directions or notices have been issued pursuant to any
Environmental Law and no Governmental Entity has submitted to any of the Company
and its Subsidiaries any request for information pursuant to any Environmental
Law.
SECTION 6.16 Transactions with Affiliates. Except as set forth on Schedule
6.16, there is no lease, sublease, indebtedness, contract, agreement,
commitment, understanding or other arrangement of any kind entered into by the
Company with any officer, director or stockholder of the Company or any
"affiliate" or "associate" of any of them (as those terms are defined in the
Exchange Act), except, in each case, for compensation paid to directors and
officers consistent with previously established policies (including normal merit
increases in such compensation in the ordinary course of business),
reimbursements of ordinary and necessary expenses incurred in connection with
their employment and amounts paid pursuant to Company Benefit Plans.
ARTICLE VII
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 7.1 Conduct of Business of the Company. Prior to the Effective
Time, except as set forth on Schedule 7.1 to this Agreement, without the prior
consent of TCI:
(a) The Company will conduct, and will cause each of its Subsidiaries
to conduct, its business in the ordinary course, and will use, and will
cause each of its Subsidiaries to use, its reasonable best efforts to
preserve intact its present business organization and to preserve
relationships with customers, suppliers and others having business dealings
with them.
(b) Except as required or permitted by this Agreement the Company will
not, and will not permit any of its Subsidiaries to: (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 Certificate or
Articles of Incorporation or Bylaws of the Company or 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 Company or any of its
Subsidiaries, or declare, set aside or pay any dividend or other
distribution to stockholders of the Company; (iv) directly or indirectly
redeem, purchase or otherwise acquire or agree to redeem, purchase or
otherwise acquire any shares of capital stock of, or other ownership
interests in, the Company or any of its Subsidiaries; or (v) agree to do
any of the foregoing.
(c) The Company will not, and will not permit any of its Subsidiaries
to: (i) issue, deliver or sell or agree to issue, deliver or sell any
shares of capital stock of, or other ownership interests in, the Company 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 Company or any of its Subsidiaries, except as
required or permitted by this Agreement; (ii) acquire, lease or dispose of
any assets, other than in the ordinary course of business consistent with
past practice; (iii) create, assume or incur any additional indebtedness
for borrowed money or mortgage, pledge or subject to any Lien any of its
assets or enter into any other material transaction other than in each case
in the ordinary course of business consistent with past practice; (iv) make
any payments with respect to any indebtedness of the Company or its
Subsidiaries except such payments that are scheduled to come due prior to
the Effective Time; (v) acquire by merging or consolidating with, or by
purchasing a substantial ownership interest in, or by any other method, any
business or any other Person, in each case in this clause (v) that are
material,
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individually or in the aggregate, to the Company and its Subsidiaries taken
as a whole; or (vi) agree to do any of the foregoing.
(d) Except as required to comply with applicable Legal Requirements or
existing Company Benefit Plans or as otherwise contemplated by this
Agreement, the Company will not, and will not permit any of its
Subsidiaries to: (i) adopt or terminate or amend any bonus, profit sharing,
compensation, severance, termination, stock option, pension, retirement,
deferred compensation, employment or other Company 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 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 Company 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 Company Benefit Plan (except in the ordinary course of
business consistent with past practice); or (v) agree to do any of the
foregoing.
(e) The Company will not take or agree to take, and will cause its
Subsidiaries not to take or agree to take, any action that would: (i) make
any representation or warranty of the Company set forth in this Agreement
untrue or incorrect so as to cause the condition set forth in Section
9.3(a) of this Agreement not to be fulfilled as of the Effective Time; or
(ii) result in any of the other conditions of this Agreement set forth in
Section 9.1 or Section 9.3 of this Agreement not to be satisfied as of the
Effective Time.
SECTION 7.2 Conduct of Business of TCI. Prior to the Effective Time, except
as contemplated or permitted by this Agreement TCI will not take or agree to
take, and will cause its Subsidiaries not to take or agree to take, any action
that would (i) make any representation or warranty of TCI, MusicCo or Merger Sub
set forth in this Agreement untrue or incorrect so as to cause the condition set
forth in Section 9.2(a) of this Agreement not to be fulfilled as of the
Effective Time or (ii) result in any of the other conditions set forth in
Section 9.1 or Section 9.2 of this Agreement not to be satisfied as of the
Effective Time.
SECTION 7.3 Remedies for Breach. The sole remedies (i) of TCI, MusicCo and
Merger Sub for any breach by the Company of Section 7.1(e), and (ii) of the
Company for any breach by TCI of Section 7.2, will be injunctive relief or
termination of this agreement pursuant to Article X.
ARTICLE VIII
ADDITIONAL AGREEMENTS
SECTION 8.1 Access and Information. Except as otherwise required pursuant
to a contractual obligation that exists as of the date of this Agreement, each
of the Company and TCI and their respective Subsidiaries will afford to the
other and to the other's accountants, counsel and other representatives full
access during normal business hours (and at such other times as the parties may
mutually agree) throughout the period prior to the Effective Time to all of its
properties, books, contracts, commitments, records and personnel. Each of the
Company and TCI will hold, and will cause their respective Subsidiaries to hold
in confidence all such information in accordance with the terms of the
Confidentiality Agreement dated October 2, 1996 between TCI and the Company.
SECTION 8.2 SEC Filings.
(a) The Company, MusicCo and TCI will prepare jointly, and, as soon as
reasonably practicable after the date of this Agreement, file with the SEC a
joint proxy statement/registration statement (the "Preliminary Joint Proxy
Statement/Prospectus") comprising preliminary proxy materials of the Company
under the Exchange Act with respect to the Merger and a Registration Statement
on Form S-4 and preliminary prospectus of MusicCo and TCI under the Securities
Act with respect to the MusicCo Series A Common Stock to be issued in the Merger
and the Rights to be granted pursuant to the Rights Agreement, and will
thereafter use their respective reasonable best efforts to respond to any
comments of the SEC with respect thereto and to cause a definitive joint proxy
statement/registration statement (including all supple-
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ments and amendments thereto, the "Joint Proxy Statement/Prospectus") and proxy
to be mailed to the Company's stockholders as promptly as practicable.
(b) As soon as reasonably practicable after the date hereof, the Company,
MusicCo and TCI will prepare and file any other filings relating to the Merger
and the other transactions contemplated hereby that are required to be filed by
each under the Exchange Act and other applicable Legal Requirements, including,
if required, in the case of TCI, a registration statement on Form 8-A under the
Exchange Act with respect to the Rights and, in the case of MusicCo, a
registration statement on Form 8-B under the Exchange Act with respect to the
MusicCo Series A Common Stock (collectively "Other Filings"), and will use their
reasonable best efforts to respond to any comments of the SEC or any other
appropriate government official with respect thereto.
(c) The Company, on the one hand, and MusicCo and TCI, on the other, will
cooperate with each other and provide all information necessary in order to
prepare the Preliminary Joint Proxy Statement/Prospectus, the Joint Proxy
Statement/Prospectus and the Other Filings (collectively "SEC Filings") and will
provide promptly to the other party any information that such party may obtain
that could necessitate amending any such document.
(d) Each of the Company and TCI will notify the other promptly of the
receipt of any comments from the SEC or its staff or any other government
official and of any requests by the SEC or its staff or any other government
official for amendments or supplements to any of the SEC Filings or for
additional information and will supply the other with copies of all
correspondence between the Company or any of its representatives or TCI or
MusicCo or any of their respective representatives, as the case may be, on the
one hand, and the SEC or its staff or any other government official, on the
other hand, with respect thereto. If at any time prior to the Effective Time,
any event occurs that should be set forth in an amendment of, or a supplement
to, any of the SEC Filings, the Company, MusicCo and TCI promptly will prepare
and file such amendment or supplement and will distribute such amendment or
supplement as required by applicable Legal Requirements, including, in the case
of an amendment or supplement to the Joint Proxy Statement/Prospectus, mailing
such supplement or amendment to the Company's stockholders.
(e) TCI covenants that the SEC Filings (other than any information provided
by the Company for inclusion in the SEC Filings) (i) will comply in all material
respects with the Securities Act and the Exchange Act and (ii) will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
contained therein, in light of the circumstances under which they are made, not
misleading.
(f) The Company covenants that the SEC Filings (other than any information
provided by TCI for inclusion in the SEC Filings) (i) will comply in all
material respects with the Securities Act and the Exchange Act and (ii) will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(g) Expenses. Each party will be responsible for all expenses incurred by
it in complying with this Section 8.2, including all registration, qualification
and filing fees, printing expenses, fees and disbursements of counsel,
applicable blue-sky fees and expenses and the expense of any special audit
incident to or required by the registration or proxy solicitation contemplated
by this Agreement.
(h) Indemnification.
(i) TCI and MusicCo, jointly and severally, will indemnify, defend,
and hold harmless the Company, its officers, directors, employees and
agents and each other Person, if any, who controls any of the foregoing
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any losses, claims, damages or liabilities
(collectively, "Losses"), joint or several, to which any of the foregoing
may become subject under the Securities Act or the Exchange Act or
otherwise, insofar as such Losses (or actions in respect thereof) arise out
of or are based upon (A) an untrue statement or alleged untrue statement of
a material fact contained in any SEC Filing, or (B) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements
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therein, in light of the circumstances under which they were made, not
misleading, provided that such misstatement or omission was based on or
omitted from information provided by TCI or MusicCo in writing for
inclusion in the SEC Filings or was made in reliance upon and in conformity
with such information. TCI promptly will reimburse the Company and each
such officer, director, employee, agent and controlling Person for any
legal or any other expenses reasonably incurred by any of them in
connection with investigating or defending any such Losses (or action in
respect thereof).
(ii) If this Agreement is terminated prior to the consummation of the
Merger, the Company will indemnify, defend and hold harmless each of TCI,
MusicCo and Merger Sub and their officers and directors and each other
Person, if any, who controls any of the foregoing within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act, against
any Losses, joint or several, to which any of the foregoing may become
subject under the Securities Act or the Exchange Act or otherwise, insofar
as such Losses (or actions in respect thereof) arise out of or are based
upon (A) an untrue statement or alleged untrue statement of a material fact
contained in any SEC Filing or (B) the omission or alleged omission to
state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, provided that the misstatement or omission was based
on or omitted from information provided by the Company in writing for use
in the SEC Filings or was made in reliance upon and in conformity with such
information. The Company promptly will reimburse TCI, MusicCo and Merger
Sub and each such officer, director and controlling Person for any legal or
any other expenses reasonably incurred by any of them in connection with
investigating or defending any such Losses (or action in respect thereof).
(iii) For purposes of this Section 8.2, (A) "Indemnifying Party" means
the Person having an obligation hereunder to indemnify any other Person
pursuant to this Section 8.2, (B) "Indemnified Party" means the Person
having the right to be indemnified pursuant to this Section 8.2 and (C) any
information concerning the Company that is included in any SEC Filing that
is provided to the Company or its counsel for review within a reasonable
period before filing or use thereof and to which the Company has not
provided written notice of objection to MusicCo or TCI will be deemed to
have been provided by the Company for inclusion in such SEC Filing.
Whenever any claim for indemnification arises under this Section 8.2, the
Indemnified Party will promptly notify the Indemnifying Party in writing of
such claim and, when known, the facts constituting the basis for such claim
(in reasonable detail). Failure by the Indemnified Party so to notify the
Indemnifying Party will not relieve the Indemnifying Party of any liability
hereunder except to the extent that such failure materially prejudices the
Indemnifying Party.
(iv) After such notice, if the Indemnifying Party undertakes to defend
any such claim, then the Indemnifying Party will be entitled, if it so
elects, to take control of the defense and investigation with respect to
such claim and to employ and engage attorneys of its own choice to handle
and defend such claim, at the Indemnifying Party's cost, risk and expense,
upon notice to the Indemnified Party of such election, which notice
acknowledges the Indemnifying Party's obligation to provide indemnification
hereunder. The Indemnifying Party will not settle any third-party claim
that is the subject of indemnification without the written consent of the
Indemnified Party, which consent will not be unreasonably withheld;
provided however, that the Indemnifying Party may settle a claim without
the Indemnified Party's consent if the settlement (A) makes no admission or
acknowledgment of liability or culpability with respect to the Indemnified
Party, (B) includes a complete release of the Indemnified Party and (C)
does not require the Indemnified Party to make any payment or forego or
take any action. The Indemnified Party will cooperate in all reasonable
respects with the Indemnifying Party and its attorneys in the
investigation, trial and defense of any lawsuit or action with respect to
such claim and any appeal arising therefrom (including the filing in the
Indemnified Party's name of appropriate cross claims and counterclaims) and
the Indemnifying Party will reimburse the Indemnified Party for all
reasonable direct out-of-pocket expenses incurred by the Indemnified Party
in connection with such cooperation. The Indemnified Party may, at its own
expense, participate in any investigation, trial and defense of such
lawsuit or action controlled by the Indemnifying Party and any appeal
arising therefrom. If, after receipt of a claim notice pursuant to Section
8.2(h)(iii), the Indemnifying Party does not undertake to defend any such
claim, the Indemnified Party may, but will have no obligation to, contest
any lawsuit or action
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with respect to such claim and the Indemnifying Party will be bound by the
result obtained with respect thereto by the Indemnified Party (including
the settlement thereof without the consent of the Indemnifying Party). If
there are one or more defenses available to the Indemnified Party that
conflict with those available to the Indemnifying Party, the Indemnified
Party will have the right, at the expense of the Indemnifying Party, to
participate in the defense of the lawsuit or action; provided however, that
the Indemnified Party may not settle such lawsuit or action without the
consent of the Indemnifying Party, which consent will not be unreasonably
withheld.
(v) If the indemnification provided for in this Section 8.2(h) is for
any reason unavailable to the Indemnified Party in respect of any Losses
(or action in respect thereof) then the Indemnifying Party will, in lieu of
indemnifying the Indemnified Party, contribute to the amount paid or
payable by the Indemnified Party as a result of such Losses (or action in
respect thereof), in such proportion as is appropriate to reflect the
relative fault of the Indemnifying Party on the one hand and the
Indemnified Party on the other with respect to the statement or omission
that resulted in such Losses (or action in respect thereof) as well as any
other relevant equitable considerations. Relative fault with respect to an
untrue or alleged untrue statement or omission of a material fact will be
determined by reference to whether the untrue or alleged untrue statement
or omission of a material fact related to information supplied by the
Indemnifying Party on the one hand or the Indemnified Party on the other,
the intent of the parties and their relative knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The amount paid or payable by the Indemnified Party as a result
of the Losses (or action in respect thereof) referred to above will be
deemed to include any legal or other expenses reasonably incurred by the
Indemnified Party in connection with investigating, trying or defending any
such action or claim. No Person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) will be
entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation.
SECTION 8.3 Meeting of Stockholders of the Company. The Company will take
all action necessary, in accordance with the DGCL and the Certificate of
Incorporation and Bylaws of the Company, to duly call, give notice of, convene
and hold a meeting of its stockholders as promptly as practicable, to consider
and vote upon the adoption and approval of this Agreement (as a plan of merger
under Section 251 of the DGCL), the Merger and the other transactions
contemplated by this Agreement (the "Meeting"), to the extent such approval is
required by the DGCL and the Certificate of Incorporation of the Company.
SECTION 8.4 Compliance with the Securities Act. Prior to the Closing Date,
the Company will cause to be delivered to TCI a letter from the Company,
identifying all Persons who were, in its opinion, at the time of the Meeting,
"affiliates" of the Company as that term is used in paragraphs (c) and (d) of
Rule 145 under the Securities Act. TCI may cause the MusicCo Certificates
evidencing MusicCo Series A Common Stock issued to such Persons to bear a legend
referring to the applicability of paragraphs (c) and (d) of Rule 145 under the
Securities Act.
SECTION 8.5 Listing. TCI will use its reasonable best efforts to cause the
shares of MusicCo Series A Common Stock issued in connection with the Merger to
be quoted on NASDAQ, subject to official notice of issuance.
SECTION 8.6 Reasonable Best Efforts. Subject to the fiduciary duty
obligations of the Board of Directors of the Company, each of the parties to
this Agreement will use its reasonable best efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Legal Requirements to consummate
and make effective the transactions contemplated by this Agreement in the most
expeditious manner practicable, including the satisfaction of all conditions to
the Merger.
SECTION 8.7 Public Announcements. No party to this Agreement will make any
public announcements or otherwise communicate with any news media with respect
to this Agreement or any of the transactions contemplated by this Agreement
without prior consultation with the other parties as to the timing and contents
of any such announcement as may be reasonable under the circumstances; provided
however, that nothing contained herein will prevent any party from promptly
making all filings with Governmental Entities
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<PAGE> 134
that may, in its reasonable judgment, be required or advisable in connection
with the execution and delivery of this Agreement or the consummation of the
transactions contemplated by this Agreement so long as such party gives timely
notice to the other parties of the anticipated disclosure and cooperates with
the other parties in designing reasonable procedural and other safeguards to
preserve, to the maximum extent possible, the confidentiality of all information
furnished by the other parties pursuant to this Agreement.
SECTION 8.8 Notification. In the event of, or after obtaining knowledge of
the occurrence or threatened occurrence of, any fact or circumstance that would
cause or constitute a breach of any of its representations and warranties set
forth herein, each party to this Agreement promptly will give notice thereof to
the other parties and will use its best efforts to prevent or remedy such
breach.
SECTION 8.9 HSR Act Filings. TCI and the Company will each make an
appropriate filing of a Notification and Report Form pursuant to the HSR Act no
later than 15 business days after the date of this Agreement. Each such filing
will request early termination of the waiting period imposed by the HSR Act. The
Company and TCI each will use its reasonable best efforts to respond as promptly
as reasonably practicable to any inquiries received from the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") for additional information or documentation and to
respond as promptly as reasonably practicable to all inquiries and requests
received from any other Governmental Entity in connection with antitrust
matters; provided however, that nothing contained herein will be deemed to
preclude either the Company or TCI from negotiating reasonably with any
Governmental Entity regarding the scope and content of any such requested
information or documentation. The Company and TCI each will use their respective
reasonable best efforts to overcome any objections that may be raised by the
FTC, the Antitrust Division or any other Governmental Entity having jurisdiction
over antitrust matters. Notwithstanding the foregoing, TCI will not be required
to make any significant change in the operations or activities of the business
(or any material assets employed therein) of TCI or any of its Affiliates if TCI
determines in good faith that such change would be materially adverse to the
operations or activities of the business (or any material assets employed
therein) of TCI or any of its Affiliates.
SECTION 8.10 Further Assurances. Each of the parties to this Agreement will
execute such documents and other instruments and take such further actions as
may be reasonably necessary or desirable to carry out the provisions of this
Agreement and to consummate the transactions contemplated by this Agreement or,
at and after the Closing Date, to evidence the consummation of the transactions
contemplated by this Agreement. Upon the terms and subject to the conditions of
this Agreement, each of the parties to this Agreement will take or cause to be
taken all actions and to do or cause to be done all other things necessary,
proper or advisable to consummate and make effective as promptly as practicable
the transactions contemplated by this Agreement and to obtain in a timely manner
all necessary waivers, consents and approvals and to effect all necessary
registrations and filings.
SECTION 8.11 Employee Benefits.
(a) To the extent permitted under TCI's employee benefits plans, each
employee of the Surviving Corporation who was an employee of the Company
immediately prior to the Effective Time (i) will receive credit for past service
with the Company for purposes of eligibility and vesting under the Surviving
Corporation's employee benefit plans, as defined in Section 3(3) of ERISA, to
the extent such service was credited under the Company Benefit Plans on the
Closing Date, (ii) will not be subject to any waiting periods or limitations on
benefits for pre-existing conditions under the Surviving Corporation's employee
benefit plans, including any group health and disability plans, except to the
extent such employees were subject to such limitations under the Company Benefit
Plans and (iii) will receive credit for past service with the Company for
purposes of eligibility and vesting under the Surviving Corporation's plans and
policies with respect to seniority benefits, including vacation and sick leave.
SECTION 8.12 No Solicitation. Subject to the fiduciary duties of the Board
of Directors of the Company, neither the Company nor any of its Subsidiaries or
any of their respective officers, directors, representatives or agents will take
any action to (i) initiate the submission of any Acquisition Proposal, (ii)
enter into any agreement with respect to any Acquisition Proposal or (iii)
participate in negotiations with any Person in connection with any Acquisition
Proposal. The Company will promptly communicate to TCI any solicitation
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or inquiry received by the Company and the terms of any proposal or inquiry that
it may receive in respect of any Acquisition Proposal, or of any such
information requested from it or of any such negotiations or discussions being
sought to be initiated with it. Nothing in this Section 8.12 shall be construed
as prohibiting the Board of Directors of the Company from (i) making any
disclosure to the Company's stockholders, or (ii) responding to any unsolicited
proposal or inquiry by advising the Person making such proposal or inquiry of
the terms of this Section 8.12. "Acquisition Proposal" means any proposed (i)
merger, consolidation or similar transaction involving the Company, (ii) sale,
lease or other disposition directly or indirectly by merger, consolidation,
share exchange or otherwise of all or any substantial part of the assets of the
Company or its Subsidiaries, (iii) issue, sale or other disposition of
securities representing 50% or more of the voting power of the Company Common
Stock or (iv) transaction in which any Person acquires 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, 50% or more of the outstanding Company
Common Stock.
SECTION 8.13 Indemnification of Executives.
(a) Indemnification. MusicCo will cause the Surviving Corporation to, and,
should the Surviving Corporation fail or be unable to do so, MusicCo shall,
indemnify, defend, and hold harmless each person who is now, or has been at any
time prior to the date of this Agreement or who becomes prior to the Effective
Time, an officer or director of the Company (each, an "Executive"), against all
losses, expenses, damages, liabilities, costs, judgments, and amounts paid in
settlement in connection with any claim, action, suit, proceeding, or
investigation based on or arising out of, in whole or in part, any actions or
omissions of such Executive as an officer or director of the Company on or prior
to the Effective Time, including actions or omissions relating to any of the
transactions contemplated by this Agreement until the expiration of the
applicable statutes of limitation, to the fullest extent permitted under the
DGCL and the Certificate of Incorporation and Bylaws of the Company as in effect
on the date of this Agreement. MusicCo will cause the Surviving Corporation to
pay expenses in advance of the final disposition of any such claim, action,
suit, proceeding, or investigation to each Executive to the fullest extent
permitted by applicable Legal Requirements upon receipt of any undertaking
required or contemplated by applicable Legal Requirements. Without limiting the
foregoing, in any case in which approval of or a determination by the Surviving
Corporation is required to effectuate any indemnification, (i) the Executives
will conclusively be deemed to have met the applicable standards for
indemnification with respect to any actions or omissions of such Executives as
an officer or director of the Company on or prior to the Effective Time relating
to any of the transactions contemplated by this Agreement (including actions
relating to the Company's European operations) and (ii) MusicCo shall cause the
Surviving Corporation to direct, at the election of any Executive, that the
determination of any such approval shall be made by independent counsel selected
by the Executive and reasonably acceptable to MusicCo, it being agreed that
Irell & Manella LLP shall be acceptable to MusicCo. If any such claim, action,
suit, proceeding, or investigation is brought against any Executive (whether
arising before or after the Effective Time), (i) the Executive may retain
counsel satisfactory to him or her that is reasonably acceptable, and (ii)
MusicCo will pay or will cause the Surviving Corporation to pay all reasonable
fees and expenses of such counsel for the Executive. Neither MusicCo nor the
Surviving Corporation shall have any obligation hereunder to any Executive when
and if a court of competent jurisdiction shall ultimately determine, after
exhaustion of all avenues of appeal, that such Executive is not entitled to
indemnification hereunder.
(b) Successors. If MusicCo or the Surviving Corporation or any of its
successors or assigns (i) consolidates with or merges into any other Person and
will not be the continuing or surviving Person of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
Person, then and in each such case, proper provisions will be made so that the
successors and assigns of MusicCo or the Surviving Corporation assume the
obligations set forth in this Section 8.13.
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ARTICLE IX
CONDITIONS PRECEDENT
SECTION 9.1 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time of the following conditions:
(a) This Agreement, the Merger and the transactions contemplated by
this Agreement shall have been duly approved by the holders of the Company
Common Stock.
(b) The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been earlier terminated and any
other notices or approvals or consents required by or of any Governmental
Entity with respect to the transactions contemplated by this Agreement
noted with an asterisk on Schedule 5.4 or Schedule 6.5 shall have been
either filed or obtained.
(c) The Registration Statement on Form S-4 that includes the Joint
Proxy Statement/Prospectus shall have become effective in accordance with
the provisions of the Securities Act and any necessary state securities law
approvals shall have been obtained and no stop orders with respect thereto
shall have been issued by the SEC and remain in effect.
(d) No Governmental Entity shall have enacted, issued, promulgated,
enforced or entered any Legal Requirement that remains in effect and has
the effect of making the transactions contemplated by this Agreement
illegal or otherwise prohibiting the transactions contemplated by this
Agreement, or that questions the validity or the legality of the
transactions contemplated by this Agreement and that could reasonably be
expected to materially and adversely affect the value of the business of
the Company, it being agreed that each party will use its reasonable best
efforts to have any such injunction lifted.
SECTION 9.2 Conditions to Obligation of the Company to Effect the Merger.
The obligation of the Company to effect the Merger will be subject to the
fulfillment at or prior to the Effective Time of the additional following
conditions:
(a) TCI, MusicCo and Merger Sub shall have performed in all material
respects their agreements contained in this Agreement required to be
performed by them at or prior to the Effective Time and the representations
and warranties of TCI, MusicCo and Merger Sub set forth in this Agreement
if qualified by materiality are true in all respects and if not so
qualified are true in all material respects when made and at and as of the
Effective Time as if made at and as of such time and the Company shall have
received a certificate of TCI, MusicCo and Merger Sub executed on behalf of
each such corporation by the President or a Vice President of such
corporation to that effect.
(b) MusicCo Series A Common Stock issued in connection with the Merger
shall have been authorized for quotation on NASDAQ upon official notice of
issuance.
(c) The Company shall have received the opinion of counsel to TCI,
MusicCo and Merger Sub (which counsel may be an employee of TCI)
substantially to the effect set forth in Exhibit C.
(d) The transactions contemplated by the Contribution Agreement shall
have been consummated on the terms and conditions set forth therein.
SECTION 9.3 Conditions to Obligations of TCI, MusicCo and Merger Sub to
Effect the Merger. The obligations of TCI, MusicCo and Merger Sub to effect the
Merger will be subject to the fulfillment at or prior to the Effective Time of
the additional following conditions:
(a) The Company shall have performed in all material respects its
agreements contained in this Agreement required to be performed by it at or
prior to the Effective Time and, except as contemplated or permitted by
this Agreement, the representations and warranties of the Company set forth
in this Agreement if qualified by materiality are true in all respects and
if not so qualified are true in all material respects when made and at and
as of the Effective Time as if made at and as of such time, and TCI,
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MusicCo and Merger Sub shall have received a certificate of the Company
executed on behalf of the Company by the President or an Executive Vice
President of the Company to that effect.
(b) Those consents of third parties noted with an asterisk on Schedule
5.4 or Schedule 6.5 shall have been obtained.
(c) The number of Dissenting Shares do not exceed 5% of the issued and
outstanding shares of Company Common Stock.
(d) There shall have been no material adverse change in the financial
condition, results of operations, assets, liabilities or business of the
Company since the date of this Agreement.
(e) TCI and MusicCo shall have received the opinion of Irell & Manella
LLP substantially to the effect set forth in Exhibit D.
ARTICLE X
TERMINATION, AMENDMENT AND WAIVER
SECTION 10.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time, whether before or after approval by the
stockholders of the Company:
(a) by mutual consent of the Board of Directors of TCI and the Board
of Directors of the Company;
(b) by either TCI or the Company (i) if at the Meeting (including any
postponement or adjournment thereof), this Agreement, the Merger and the
transactions contemplated by this Agreement are not approved and adopted by
the affirmative vote specified herein or (ii) so long as the terminating
party has not breached its obligations hereunder in any material respect,
after July 31, 1997 (the "Termination Date") if the Merger shall not have
been consummated on or before such date;
(c) by the Company, provided the Company has not breached any of its
obligations hereunder in any material respect, if any of the conditions
specified in Section 9.1 or Section 9.2 have not been satisfied or waived
by the Company (or, in the case of Section 9.1, waived by the Company, TCI,
MusicCo and Merger Sub) at such time as such condition is no longer capable
of satisfaction; or
(d) by TCI, provided that none of TCI, MusicCo or Merger Sub has
breached any of its obligations hereunder in any material respect, if any
of the conditions specified in Section 9.1 or Section 9.3 have not been met
or waived by TCI (or, in the case of Section 9.1, waived by TCI, MusicCo,
Merger Sub and the Company) at such time as such condition is no longer
capable of satisfaction.
SECTION 10.2 Effect of Termination. In the event of termination of this
Agreement by either TCI or the Company, as provided above, this Agreement will
forthwith become void and (except for the willful breach of this Agreement by
any party to this Agreement) there will be no liability on the part of any of
the Company, TCI, MusicCo or Merger Sub.
SECTION 10.3 Amendment. This Agreement may be amended by the parties to
this Agreement, by or pursuant to action taken by all of their Boards of
Directors, at any time before or after approval of this Agreement by the
stockholders of the Company and prior to the Effective Time, but, after such
approval, no amendment will be made that alters the indemnification provisions
of Section 8.2 or changes the ratio at which Company Common Stock is to be
converted into MusicCo Series A Common Stock as provided in Section 3.2 or that
in any way materially adversely affects the rights of such stockholders, without
the further approval of such stockholders. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties to
this Agreement.
SECTION 10.4 Waiver. At any time prior to the Effective Time, the parties
to this Agreement, by or pursuant to action taken by their respective Boards of
Directors, may (i) extend the time for performance of any of the obligations or
other acts of the other parties to this Agreement, (ii) waive any inaccuracies
in the representations and warranties set forth in this Agreement or in any
documents delivered pursuant to this Agreement and (iii) waive compliance with
any of the agreements or conditions set forth in this Agreement.
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Any agreement on the part of a party to this Agreement to any such extension or
waiver will be valid if set forth in an instrument in writing signed on behalf
of such party.
ARTICLE XI
GENERAL PROVISIONS; DEFINITIONS
SECTION 11.1 Non-Survival of Representations, Warranties and Agreements. No
representations and warranties contained in this Agreement will survive beyond
the Closing Date. This Section 11.1 will not limit any covenant or agreement of
the parties to this Agreement that by its terms requires performance after the
Closing Date.
SECTION 11.2 Notices. All notices or other communications under this
Agreement will be in writing and will be given (and will be deemed to have been
duly given upon receipt) by delivery in person, by cable, telegram, telex or
other standard form of telecommunications, or by registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
<TABLE>
<S> <C>
If to the Company:....................... 11400 West Olympic Boulevard
Suite 1100
Los Angeles, California 90064-1501
Attention: President
Telecopy No.: (310) 444-1717
With a copy to:.......................... Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, California 90067-4276
Attention: Alvin G. Segel, Esq.
Telecopy No.: (310) 203-7199
If to TCI, MusicCo or Merger Sub:........ Tele-Communications, Inc.
Terrace Tower II
5619 DTC Parkway
Englewood, Colorado 80111-3000
Attention: Legal Department
Telecopy No.: (303) 488-3217
With a copy to:.......................... Sherman & Howard L.L.C.
633 Seventeenth Street
Suite 3000
Denver, Colorado 80202
Attention: Charles Y. Tanabe, Esq.
Telecopy No.: (303) 298-0940
</TABLE>
or to such other addresses as any party may have furnished to the other parties
in writing in accordance with this Section.
SECTION 11.3 Fees and Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated by this Agreement will be paid by the party incurring
such expenses. The Company's expenses relating to the transactions contemplated
by this Agreement, including fees of Irell & Manella LLP, counsel to the
Company, will be paid or accrued by the Company prior to the Effective Time.
SECTION 11.4 Specific Performance. The parties to this Agreement agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise breached. It is accordingly agreed that the parties will be entitled
to enforce specifically the terms and provisions of this Agreement in any court
of the United States or any state having jurisdiction, this being in addition to
any other remedy to which they are entitled at law or in equity.
24
<PAGE> 139
SECTION 11.5 Third Party Beneficiaries. The parties to this Agreement agree
that the Company's stockholders, officers, directors and employees are intended
third party beneficiaries of the terms of this Agreement, to the extent such
terms refer expressly to such Persons, with full rights hereunder as if each of
them were a party to this Agreement.
SECTION 11.6 Entire Agreement. This Agreement will be of no force or effect
until executed and delivered by all of the parties to this Agreement.
SECTION 11.7 Miscellaneous. This Agreement (including the documents and
instruments referred to in this Agreement) (a) when executed and delivered,
constitutes the entire agreement and supersedes all other prior agreements and
understandings, both written and oral, among the parties, or any of them, with
respect to the subject matter of this Agreement (other than as provided in the
Confidentiality Agreement dated as of October 2, 1996, between the Company and
TCI as the same may be amended) and (b) will be governed in all respects,
including validity, interpretation and effect, by the laws of the State of
Delaware (without giving effect to the provisions thereof relating to conflicts
of law). This Agreement may be executed in two or more counterparts which
together will constitute a single agreement. Any certificate delivered pursuant
to this Agreement will be made without personal liability on the part of the
officer or employee of the Person giving such certificate.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective officers thereunder duly authorized all as of the date first
written above.
TELE-COMMUNICATIONS, INC.
By: /s/ BRENDAN R. CLOUSTON
----------------------------------
Name: Brendan R. Clouston
Title: Executive Vice President and
Chief Operating Officer
TCI MUSIC, INC.
By: /s/ JOHN D. REARDON
----------------------------------
Name: John D. Reardon
Title: President and CEO
TCI MERGER SUB, INC.
By: /s/ JOHN D. REARDON
----------------------------------
Name: John D. Reardon
Title: President and CEO
DMX INC.
By: /s/ JEROLD H. RUBINSTEIN
----------------------------------
Name: Jerold H. Rubinstein
Title: Chief Executive Officer
25
<PAGE> 140
AMENDMENT ONE TO
AGREEMENT AND PLAN OF MERGER
This Amendment One (this "Amendment") to the Agreement and Plan of Merger
dated as of February 6, 1997 is entered into by and among Tele-Communications,
Inc., a Delaware corporation ("TCI"), TCI Music, Inc., a Delaware corporation
and wholly owned subsidiary of TCI ("MusicCo"), TCI Merger Sub, Inc., a Delaware
corporation and wholly owned subsidiary of MusicCo ("Merger Sub") and DMX Inc.,
a Delaware corporation (the "Company") dated May 29, 1997.
RECITALS
A. TCI, MusicCo, Merger Sub and DMX (collectively, the "Parties")
previously entered into the Agreement and Plan of Merger dated as of February 6,
1997 (the "Merger Agreement"), pursuant to which TCI and MusicCo will enter into
the Contribution Agreement and the Rights Agreement in connection with the
consummation of the transactions described in the Merger Agreement.
B. The Parties have determined that certain amendments be made to the
Merger Agreement as set forth in this Amendment.
AGREEMENT
Now, therefore, in consideration of the foregoing premises and the
agreements contained in this Amendment, the Parties agree to the following. This
Amendment may be executed in counterparts.
1. Recital A of the Merger Agreement shall be amended and restated as
follows:
A. Pursuant to the form of Contribution Agreement attached to this
Agreement as Exhibit A (the "Contribution Agreement"), (i) TCI will cause
certain of its subsidiaries to contribute to MusicCo the right to receive a
substantial portion of the revenues attributable to the distribution and
sale by those subsidiaries of the Company's digital music services, (ii)
TCI will cause all of the commercial tuners then indirectly owned by it
that are not in service to be contributed to MusicCo, and (iii) TCI will
grant to each stockholder who becomes a stockholder of MusicCo pursuant to
the Merger, with respect to each whole share of MusicCo stock acquired by
such stockholder in the Merger, one right (a "Right") requiring TCI to
purchase from the holder thereof, at such holder's election, such stock for
the price and at the time specified in the form of Rights Agreement
attached to this Agreement as Exhibit B (the "Rights Agreement") in
consideration of the issuance of shares of Series B Common Stock, par value
$.01 per share, of MusicCo ("MusicCo Series B Common Stock") and a
promissory note in the amount of $40,000,000.
2. Section 1.1 of the Merger Agreement shall be amended to restate the
definition of "MusicCo Series A Common Stock Value" as follows:
"MusicCo Series A Common Stock Value" means the product of (a) $8.00
and (b) a fraction, the numerator of which is 59,586,594 and the
denominator of which is the total number of shares of MusicCo Series A
Common Stock issuable to stockholders of the Company at the Effective Time,
assuming no Dissenting Shares.
3. Section 3.1(a) of the Merger Agreement shall be amended and restated as
follows:
(a) Each share of Common Stock, $.01 par value per share, of the
Company ("Company Common Stock") issued and outstanding immediately prior
to the Effective Time (except shares subject to Section 3.1(b) and, to the
extent provided in Section 3.8, Dissenting Shares) will be converted into
and will thereafter evidence and become: (i) .25 of a share of Series A
common stock, $.01 par value per share, of MusicCo ("MusicCo Series A
Common Stock"); (ii) one Right with respect to each whole share of MusicCo
Series A Common Stock; and (iii) the right to receive cash in lieu of
fractional shares of MusicCo Series A Common Stock and Rights in accordance
with Section 3.5.
<PAGE> 141
4. The form of Contribution Agreement attached as Exhibit A to the Merger
Agreement and the form of Rights Agreement attached as Exhibit B to the Merger
Agreement shall be substituted with the revised form of Contribution Agreement
attached as Exhibit A to this Amendment and the revised form of Rights Agreement
attached as Exhibit B to this Amendment, and any and all references to the
Contribution Agreement or the Rights Agreement in the Merger Agreement shall
refer to the applicable revised form attached to this Amendment.
5. Section 10.3 of the Merger Agreement shall be amended and restated as
follows:
Section 10.3 Amendment. This Agreement may be amended by the parties
to this Agreement, by or pursuant to action taken by all of their Boards of
Directors, at any time before or after approval of this Agreement by the
stockholders of the Company and prior to the Effective Time, but, after
such approval, no amendment will be made that alters the indemnification
provisions of Section 8.2 or changes the ratio at which Company Common
Stock is to be converted into MusicCo Series A Common Stock as provided in
Section 3.1 or that in any way materially adversely affects the rights of
such stockholders, without the further approval of such stockholders. This
Agreement may not be amended except by an instrument in writing signed on
behalf of each of the parties to this Agreement.
6. Subject to the terms and provisions of this Amendment, all of the
provisions of the Merger Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, each of the Parties have caused this Amendment to be
signed by its respective officer, duly authorized all as of the date first
written above.
TELE-COMMUNICATIONS, INC.
By: /s/ STEPHEN M. BRETT
----------------------------------
Name: Stephen M. Brett
Title: Executive Vice President and
Secretary
TCI MUSIC, INC.
By: /s/ STEPHEN M. BRETT
----------------------------------
Name: Stephen M. Brett
Title: Vice President and Secretary
TCI MERGER SUB, INC.
By: /s/ STEPHEN M. BRETT
----------------------------------
Name: Stephen M. Brett
Title: Vice President and Secretary
DMX INC.
By: /s/ JEROLD H. RUBINSTEIN
----------------------------------
Name: Jerold H. Rubinstein
Title: Chief Executive Officer
-2-
<PAGE> 142
APPENDIX II
February 6, 1997
To The Independent Committee of
The Board of Directors
DMX Inc.
Gentlemen:
We understand that pursuant to the Agreement and Plan of Merger dated
February 6, 1997 (the "Merger Agreement"), among Tele-Communications, Inc., TCI
Music, Inc., TCI Merger Sub, Inc. and DMX Inc., TCI Music, Inc. ("MusicCo") will
merge with DMX Inc. ("DMX" hereinafter). In the transaction the issued and
outstanding shares of common stock of DMX will be exchanged for shares of the
common stock of MusicCo on the basis set forth in the Merger Agreement. Such
transaction is referred to herein as the "Merger." It is our understanding that
the Company has formed a special independent committee (the "Committee") to
consider certain matters relating to the Merger.
You have requested our opinion (the "Opinion") as to the matters set forth
below. The Opinion does not address the Company's underlying business decision
to effect the Merger. We have not been requested to, and did not, solicit third
party indications of interest in acquiring all or any part of the Company.
Furthermore, at your request, we have not negotiated the Merger or advised you
with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. reviewed the Company's annual report on Form 10-K for the fiscal
year ended 1996, which the Company's management has identified as being the
most current financial statements available;
2. reviewed copies of the following agreements:
Agreement and Plan of Merger dated as of February 6, 1997 among
Tele-Communications, Inc., TCI Music, Inc., TCI Merger Sub, Inc. and DMX
Inc.;
Rights Agreement among Tele-Communications, Inc., TCI Music, Inc. and
the Rights Agent for the Company's right issued pursuant thereto;
Contribution Agreement by and between Tele-Communications, Inc. and TCI
Music, Inc.;
Loan and Security Agreement between DMX Inc. and Tele-Communications,
Inc. dated February 6, 1997; and
<PAGE> 143
To The Independent Committee of
The Board of Directors
DMX Inc.
February 6, 1997
The Agreements respecting DMX Inc.'s European operations between DMX
Inc. and Jerry Rubinstein;
3. met with, or held discussions with, certain members of the senior
managements of the Company and MusicCo to discuss the operations, financial
condition, future prospects and projected operations and performance of the
Company and MusicCo, and met with representatives of the Company's counsel
to discuss certain matters;
4. visited certain facilities and business offices of the Company;
5. reviewed forecasts and projections prepared by the Company's
management with respect to the Company for the fiscal year ended September
30, 1997 through 2000;
6. reviewed the historical market prices and trading volume for the
Company's publicly traded securities;
7. reviewed certain other publicly available financial data for
certain companies that we deem comparable to the Company, and publicly
available prices and premiums paid in other transactions that we considered
similar to the Merger;
8. conducted such other studies, analyses and inquiries as we have
deemed appropriate.
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us have been reasonably prepared
and reflect the best currently available estimates of the future financial
results and conditions of the Company, and that there has been no material
change in the assets, financial condition, business or prospects of the Company
since the date of the most recent financial statements made available to us.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to the Company and do not assume any
responsibility with respect to it. We have not made any physical inspection or
independent appraisal of any of the properties or assets of the Company. Our
opinion is necessarily based on business, economic, market and other conditions
as they exist and can be evaluated by us at the date of this letter.
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by the public stockholders of the Company in
connection with the Merger is fair to them from a financial point of view.
HOULIHAN, LOKEY, HOWARD & ZUKIN, INC.
-2-
<PAGE> 144
APPENDIX III
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPRAISAL RIGHTS
262 APPRAISAL RIGHTS. -- (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec.228 of this title shall be entitled to an Appraisal by the Court
of Chancery of the fair value of the stockholder's shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.251 (other than a merger effected pursuant to
sec.251(g) of this title), sec.252, sec.254, sec.257, sec.258, sec.263 or
sec.264 of this title:
(1) Provided, however, that no Appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
Appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of sec.251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, Appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to
sec.sec.251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec.253 of this title is not owned by the
parent corporation immediately prior to the merger, Appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
<PAGE> 145
(c) Any corporation may provide in its certificate of incorporation
that Appraisal rights under this section shall be available for the
shares of any class or series of its stock as a result of an amendment
to its certificate of incorporation, any merger or consolidation in
which the corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of this
section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which Appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which Appraisal
rights are available pursuant to subsection (b) or (c) hereof that
Appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the Appraisal of his shares
shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for Appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the Appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to sec.228 or
sec.253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to Appraisal rights
of the approval of the merger or consolidation and that Appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
Appraisal rights. Such notice may, and, if given on or after the effective
date of the merger or consolidation, shall, also notify such stockholders
of the effective date of the merger or consolidation. Any stockholder
entitled to Appraisal rights may, within 20 days after the date of mailing
of such notice, demand in writing from the surviving or resulting
corporation the Appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
Appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to Appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to Appraisal rights
and who has demanded Appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date
2
<PAGE> 146
is fixed and the notice is given prior to the effective date, the record
date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder
who has complied with subsections (a) and (d) hereof and who is
otherwise entitled to Appraisal rights, may file a petition in the Court
of Chancery demanding a determination of the value of the stock of all
such stockholders. Notwithstanding the foregoing, at any time within 60
days after the effective date of the merger or consolidation, any
stockholder shall have the right to withdraw his demand for Appraisal
and to accept the terms offered upon the merger or consolidation. Within
120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a)
and (d) hereof, upon written request, shall be entitled to receive from
the corporation surviving the merger or resulting from the consolidation
a statement setting forth the aggregate number of shares not voted in
favor of the merger or consolidation and with respect to which demands
for Appraisal have been received and the aggregate number of holders of
such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is
received by the surviving or resulting corporation or within 10 days
after expiration of the period for delivery of demands for Appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service
of a copy thereof shall be made upon the surviving or resulting
corporation, which shall within 20 days after such service file in the
office of the Register in Chancery in which the petition was filed a
duly verified list containing the names and addresses of all
stockholders who have demanded payment for their shares and with whom
agreements as to the value of their shares have not been reached by the
surviving or resulting corporation. If the petition shall be filed by
the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if
so ordered by the Court, shall give notice of the time and place fixed
for the hearing of such petition by registered or certified mail to the
surviving or resulting corporation and to the stockholders shown on the
list at the addresses therein stated. Such notice shall also be given by
1 or more publications at least 1 week before the day of the hearing, in
a newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of
the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to Appraisal rights. The Court may require the stockholders who
have demanded an Appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to the
Register in Chancery for notation thereon of the pendency of the
Appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such stockholder.
(h) After determining the stockholders entitled to an Appraisal,
the Court shall appraise the shares, determining their fair value
exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation, together with a fair rate of
interest, if any, to be paid upon the amount determined to be the fair
value. In determining such fair value, the Court shall take into account
all relevant factors. In determining the fair rate of interest, the
Court may consider all relevant factors, including the rate of interest
which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the Appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the Appraisal prior to the final determination of
the stockholder entitled to an Appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required,
may participate fully in all proceedings until it is finally determined
that he is not entitled to Appraisal rights under this section.
3
<PAGE> 147
(i) The Court shall direct the payment of the fair value of the
shares, together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be simple
or compound, as the Court may direct. Payment shall be so made to each
such stockholder, in the case of holders of uncertificated stock
forthwith, and the case of holders of shares represented by certificates
upon the surrender to the corporation of the certificates representing
such stock. The Court's decree may be enforced as other decrees in the
Court of Chancery may be enforced, whether such surviving or resulting
corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the
circumstances. Upon application of a stockholder, the Court may order
all or a portion of the expenses incurred by any stockholder in
connection with the Appraisal proceeding, including, without limitation,
reasonable attorney's fees and the fees and expenses of experts, to be
charged pro rata against the value of all the shares entitled to an
Appraisal.
(k) From and after the effective date of the merger or
consolidation, no stockholder who has demanded his Appraisal rights as
provided in subsection (d) of this section shall be entitled to vote
such stock for any purpose or to receive payment of dividends or other
distributions on the stock (except dividends or other distributions
payable to stockholders of record at a date which is prior to the
effective date of the merger or consolidation); provided, however, that
if no petition for an Appraisal shall be filed within the time provided
in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his
demand for an Appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right
of such stockholder to an Appraisal shall cease. Notwithstanding the
foregoing, no Appraisal proceeding in the Court of Chancery shall be
dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which
the shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
4
<PAGE> 148
APPENDIX IV
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1997, AND AS
AMENDED ON JANUARY 29, 1997 AND JUNE 12, 1997
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-18806
DMX INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 95-4275106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11400 WEST OLYMPIC BOULEVARD, SUITE 1100
LOS ANGELES, CALIFORNIA 90064-1507
(Address of principal executive offices) Zip code
</TABLE>
Registrant's telephone number, including area code: (310) 444-1744
Securities registered pursuant to Section 12(b) of the Act: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Unless otherwise specifically indicated, all monetary references in this
filing are in U.S. dollars.
As of December 31, 1996 the aggregate market value of the Common Stock held
by non-affiliates of the Registrant was approximately $23,080,987.
Number of shares of Common Stock of the Registrant outstanding as of
December 31, 1996: 59,586,594 shares, including 85,630 shares held as Treasury
Stock.
This report includes a total of 35 pages, excluding exhibits. The exhibit
index appears on page 36.
================================================================================
<PAGE> 149
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I
Item 1. Business.................................................... 3
Background.................................................. 3
General..................................................... 3
Goals and Strategies........................................ 4
Domestic Business........................................... 5
International Business...................................... 9
Ancillary Business Opportunities............................ 10
The Superaudio Service...................................... 10
Programming................................................. 10
Commercial Programming...................................... 12
Residential Marketing....................................... 12
Commercial Marketing........................................ 12
Technology.................................................. 13
Research & Development...................................... 14
Satellites.................................................. 14
Music Rights................................................ 14
Competition................................................. 15
Regulation.................................................. 16
Trademarks.................................................. 17
Personnel................................................... 17
Recent Developments......................................... 17
Item 2. Properties.................................................. 18
Item 3. Legal Proceedings........................................... 18
Item 4. Submission of Matters to a Vote of Security Holders......... 19
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 19
Dividends................................................... 20
Item 6. Selected Financial Data..................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations for the fiscal years ended
September 30, 1996 and September 30, 1995................... 20
Summary of Performance...................................... 20
Results of Operations....................................... 21
Liquidity and Capital Resources............................. 25
Item 8. Financial Statements and Supplementary Data................. 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 26
PART III
Item 10. Directors and Executive Officers of Registrant.............. 27
Item 11. Executive Compensation...................................... 29
Employment Agreements and Termination of Employment
Arrangements................................................ 29
Stock Options............................................... 30
Option Exercises and Holdings............................... 31
Compensation Committee Interlocks and Insider
Participation............................................... 31
Director Compensation....................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 32
Item 13. Certain Relationships and Related Transactions.............. 33
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8k.......................................................... 35
Index to Consolidated Financial Statements.................. F-1
Notes to Consolidated Financial Statements.................. F-7
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PART I
ITEM 1. BUSINESS.
BACKGROUND.
DMX Inc. (the "Company") was incorporated pursuant to the laws of the state
of Delaware in May 1990 under the name of International Cablecasting
Technologies Inc. ("ICT"), to accomplish a corporate reorganization which
effected a change of situs of its predecessor company of the same name
("ICT-Canada"). ICT-Canada was incorporated pursuant to the laws of British
Columbia on April 26, 1979, under the name of Can-Am Entertainment Corporation
and on November 14, 1986, changed its name to International Cablecasting
Technologies Inc. On April 27, 1995, ICT changed its name to DMX Inc.
The Company's operations are comprised of those of DMX Inc. and its three
(3) wholly owned subsidiaries: a British Columbia corporation, 450714 B.C. Ltd.,
formed for the purpose of holding the Company's equity interest in its Canadian
joint venture with Shaw Communications Inc. ("Shaw"), the second largest cable
operator in Canada (see "International Development -- Canada"); TEMPO Sound,
Inc. ("TEMPO"), an Oklahoma corporation, which the Company acquired from
Tele-Communications, Inc. ("TCI") in April 1979, in exchange for approximately
224,000 shares of Common Stock of the Company. TEMPO is engaged in a joint
venture with Jones International, Inc. ("Jones"), the eighth largest cable
operator in the United States, to program and deliver Superaudio(R), a basic
analog cable music and information service (currently consisting of nine
formats) for a monthly license fee, to cable operators for distribution to cable
subscribers. TEMPO and Jones each own 50% of the joint venture (See "Domestic
Business -- The Superaudio Service".); DMX-Europe ("DMX-E") of which the
remaining 49% interest was acquired from TCI in exchange for 10.8 Million shares
of DMX Inc.'s Common Stock on May 17, 1996, making it a wholly owned subsidiary
effective on this date. (See "International Business -- Europe")
The following description of the Company's business is premised upon its
operation as a stand-alone entity. On August 30, 1996, the Company received an
unsolicited proposal from TCI proposing the merger of the Company with a TCI
subsidiary. The Company is currently negotiating a definitive agreement with TCI
respecting the proposed merger. See "Business -- Recent Developments." Should
the merger occur, TCI may choose to significantly change the business of the
Company from that described below.
GENERAL.
DMX Inc. is primarily engaged in programming, distributing and marketing a
premium digital music service, Digital Music Express(R) (DMX(R)"), which
provides continuous (24-hours per day), commercial free CD quality music
programming. The DMX music formats are programmed within various music genres
which include: Classical, Jazz, Rock, Oldies, Country, Latin, Urban, Pop/Adult
Contemporary, Instrumental, International and Specialty. Within each music
genre, DMX offers a variety of format selections which are more unique and
narrowly defined than typically would be found on a commercial radio station.
Depending on the distribution method, cable or Ku-Band direct broadcast
satellite ("DBS"), DMX currently offers 30 or 91 formats, respectively. In
addition the Company currently has over 70 titles in its DMX-Disc library
catalogue for on-premise distribution. The Company expects to expand its DBS
channels to 100 in the near future and is continually adding titles to its
on-premise DMX-Disc library. The Company programs each DMX format to provide
more music within each music format than a consumer typically would find on a
radio station, without the high level of repetition commonly found in radio
programming. DMX also offers subscribers the ability to match a "mood" or social
environment with music at the touch of a button. As an example, a restaurant may
choose to play Chamber Music at breakfast, Lite Jazz at lunch, and Great Singers
at dinner. DMX is currently delivered using three different distribution
methods.
First, DMX is delivered, for a monthly per subscriber license fee, direct
to cable operators by C-Band satellite for distribution to residential and
commercial cable subscribers. The DMX signal is received by subscribers through
their existing coaxial cable wire which is connected through a proprietary DMX
tuner to their stereo systems. DMX is delivered in 30 different music formats
for cable distribution. The Company expects the existing analog technology used
in this form of distribution to gradually be replaced by digital
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compression technology using a wider bandwidth, allowing for carriage of
significantly more music formats. (See "Business -- Goals and Strategies")
Second, since June 1994, the Company has delivered DMX to business
establishments, for a monthly per subscriber fee, by DBS direct to small
satellite dishes (approximately one meter or less in diameter) which connects
through a proprietary DMX receiver to a subscriber's sound system. Currently,
DMX is delivered in 91 different music formats for DBS distribution. The Company
expects to expand its formats to 100 in the near future. In October 1995, the
Company expanded the marketing of its DBS service to include residential
subscribers. This extends the residential distribution of DMX into: areas not
currently wired for cable; markets served by a cable operator affiliated with a
competitive digital audio service; and markets served by a cable operator not
affiliated with a digital audio provider. Additionally, the Company has
agreements with third party DBS distributors, PrimeStar and AlphaStar, where DMX
programming is combined with video programming as part of a basic package. With
these DBS distributors, the technology incorporated into their satellite
receiver enables subscribers to receive the DMX signal without the use of a
separate receiver through their satellite provider and standard equipment
package.
Third, DMX is offered as an on-premise business music service via
DMX-Disc(R). The DMX-Disc service offers flexibility in situations where rooftop
satellite dish installations are not possible, or where another building might
block the signal path from the Company's satellite, through the use of
on-premise equipment and custom DMX programmed CDs. DMX-Disc uses a compact disc
interactive ("CD-I") player and a custom programmed library of CDs. These CDs
are manufactured especially by the Company using a compression scheme which
allows for over four hours of pre-recorded music to be played from one CD.
Through the distribution and rotation of library CDs, a DMX-Disc customer is
ensured of always having a fresh DMX playlist, mirroring the playlist from the
DBS satellite feed.
To secure distribution of DMX in foreign markets, the Company has entered
into licensing and royalty arrangements with strategic partners in Canada,
Europe, Australia, Africa, Latin America and the Caribbean, (see
"Business -- International Business"), although the Company has entered into
definitive agreements to dispose of its European operations. (See
"Business -- Recent Developments".)
The Company believes that DMX is differentiated from other sources of audio
programming currently available to residential and commercial consumers.
Subscribers currently receive up to 91 different formats of preprogrammed music
in CD quality fidelity with no commercials or disc jockey interruptions of any
kind. The playlists for most DMX formats include more music cuts than would
typically be heard on a radio broadcast or other competing preprogrammed music
service. (See "Business -- Competition")
The Company is a digital audio programming provider, which licenses to
third party distributors the right to redistribute its programming to
subscribers. To date, this has been accomplished principally through licensing
agreements with cable system operators who redistribute DMX over cable networks
to cable television subscribers. Currently, DMX is available in more than 940
cable systems in the United States representing over 17.6 million cable
households. With the introduction of its Ku-Band technology, the Company
expanded distribution of the DMX service via DBS, and immediately began offering
its DMX for Business(R) service to commercial subscribers not otherwise
accessible by cable. In October 1995, DMX Inc. began employing the DBS method of
delivery to expand the distribution of the DMX service to residential
subscribers. In the Fall of 1994, the Company began direct marketing to multiple
and national account establishments and in the Summer of 1995, began direct
marketing to commercial establishments in its first owned and operated territory
in Southern California. (See "Business -- Domestic Business -- Residential
Service and Commercial Service".)
GOALS AND STRATEGIES.
DMX Inc.'s goal is to continue to build DMX as a brand name consumer and
business service and become the established standard for digital audio services.
Its primary strategies are: (1) to continue to acquire residential and
commercial subscribers in as many markets as possible via its available
distribution methods, (2) to establish and maintain relationships with third
party organizations in related industries which support and enhance the
marketing, distribution and subscriber penetration levels of DMX and, (3) to
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maintain its market position as the brand leader in digital audio through an
emphasis on superior programming and technology.
The Company views the strategy of being the first entrant into a market and
quickly securing distribution commitments for DMX as a key factor during the
start up and development phase of any marketplace. The Company has focused much
of its efforts during the start-up period on securing distribution agreements
with cable operators and satellite programming distributors. From 1989 to the
present the Company has: (i) entered into affiliation agreements with over 50
U.S. cable operators; (ii) entered into distribution agreements with two DBS
programming providers; (iii) entered into distribution agreements for DMX in
Canada, Australia, Latin America, Africa and the Caribbean; and (iv) obtained
distribution on Headend-in-the-Sky by TCI ("HITS"), a new distribution
technology utilizing digital compression. This focus, during the early
development phase of these markets, is intended to provide the Company with
greater distribution potential and limit the market development potential of its
competitors.
The telecommunications industry has seen many changes in recent years with
the entrance of satellite distribution into the marketplace and the continued
movement of cable operators towards digital compression technology. The Company
will continue to prioritize these areas in its strategic plan. Specifically, DMX
will be part of the programming package to be carried on TCI's HITS, TCI's
digital compression technology which is currently being tested in three markets,
and is expected to be rolled out on a nationwide basis in 1997.
In the satellite distribution area, the Company also recently announced
that Sky Entertainment Services in Latin America ("Sky-LA") and American Sky
Broadcasting ("ASkyB") have the right to carry various channels of music taken
from DMX's extensive menu on all Sky platforms in the Americas. Sky
Entertainment Services is the brand name for the direct-to-home service offered
by the strategic alliance formed by Organzacoes Globo, Brazil's leading
entertainment group; Mexico's Grupo Televisa S.A., the largest production and
media company in the Spanish-speaking world; The News Corporation, Limited, one
of the world's largest media companies; and Tele-Communications International,
Inc. This alliance will provide television service to Mexico, all of Central and
South America and parts of the Caribbean. ASkyB is a joint venture between The
News Corporation, Limited and MCI Communications Corporation, which expects to
provide direct-to-home satellite broadcasting services to U.S. consumers
commencing in the fall of 1997.
DMX Inc. will continue to pursue relationships in these areas to ensure
optimal distribution to new subscribers, and believes that its position as a
premier programmer of digital audio places it in a good position to compete in
these new markets.
DOMESTIC BUSINESS.
Since its launch in September 1991, DMX has been distributed by C-Band
satellite to cable systems, which in turn deliver the service over existing
cable networks to cable subscribers. With the launch of DMX on the Ku-band
satellite in June 1994, the Company has been able to expand the market access of
its commercial service, DMX for Business and its residential DBS service DMX
Direct. Ku-Band satellites transmit signals using a higher power than C-Band
satellites, which allows reception by substantially smaller satellite dishes.
The ability to distribute DMX directly to the end user gives the Company much
broader market access and the choice of delivering the DMX signal either by
existing cable or Ku-Band satellite. The DMX signal is distributed by the
Company from its studio and uplinking facility housed in TCI's National Digital
Television Center located in Littleton, Colorado. Additionally, the
implementation of the on-premise DMX-Disc program and the expansion of the Disc
catalogue has allowed the Company to market DMX in the commercial marketplace in
situations where cable and DBS distribution may not be an option (e.g., in
situations where roof-top rights or a cable signal may not be available).
Residential Service.
Today, the cable television industry in the United States is comprised of
more than 11,220 cable systems which serve more than 61.7 million households,
according to the 1996 Television and Cable Fact Book. This represents
approximately 63% of all television households in the country. Of those
households subscribing to cable, nearly 70% subscribe to one or more premium
cable services. It is expected that cable systems will
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transition from analog to digital technology in coming years, resulting in a
wider selection of programming and services available to subscribers due to
increased band-width. This transition will commence with the roll-out of TCI's
HITS in 1997, with the carriage of up to 40 DMX channels, in addition to a much
larger selection of video channels than are currently offered using analog
technology. Additionally, with the wider acceptance of direct broadcast
satellite ("DBS") by consumers, it is expected that residential subscribers may
choose DBS over cable television due to the wider choice of programming. The
Company currently has distribution with two of the four DBS providers servicing
the United States, and with the advent of ASkyB in late 1997, will have carriage
on over 60% of the U.S. DBS providers.
Cable Affiliate Sales The acquisition of subscribers is a joint effort
between the Company and the cable affiliate. To support its affiliates'
marketing efforts, the Company contributes marketing materials and/or
cooperative marketing funds. The retail price of DMX is established in each
local market by the cable operator. Many different pricing strategies such as
separate equipment rental charges, promotional discounts and special offers may
affect the ultimate retail price to the consumer. In the future, the Company
expects DMX to be offered as part of a basic package or as a tier programming
option, as cable affiliates migrate from analog to digital technology.
DMX was launched in the U.S. cable market in September 1991 to residential
subscribers. DMX Inc. currently has distribution commitments representing
approximately 50% of the U.S. cable marketplace. These distribution commitments
are represented by contracts, or "affiliation agreements" reached between the
Company and cable operators which give the operators the right to distribute DMX
to residential subscribers within their franchise territories in exchange for a
monthly per subscriber license fee. Commercial rights are granted under a
separate contract. The Company has reached affiliation agreements with more than
50 multiple system operators ("MSO"). The term of the affiliation agreements
range from one to ten years and require monthly license fees be paid to the
Company for each DMX residential subscriber. Certain of the MSO's affiliated
with the Company have also made direct equity investments in the Common Stock of
DMX Inc. via equity participation agreements as well as direct investment.
In 1989, TCI, the nation's largest MSO, and certain of its subsidiaries,
entered into a series of agreements with the Company which resulted in the
acquisition of approximately 2.0 million shares of the Company's Common Stock
and the right to earn up to approximately 1.4 million additional shares based on
distribution goals, all of which were earned during the fiscal year ended
September 30, 1992. Subsequently TCI has raised their stake through a series of
private placements, and through a transaction completed in May 1996 whereby 10.8
million shares of Common Stock in DMX Inc. was exchanged for TCI's 49% interest
in DMX-Europe N.V., a Netherlands company and its wholly owned subsidiary,
DMX-Europe (UK) Limited, a United Kingdom company collectively, ("DMX-E"). TCI
currently holds approximately 45% of the outstanding Common Stock of DMX Inc.,
and has made a tender offer to acquire the remaining 55%. (See "Business --
Recent Developments".) During fiscal years 1994, 1995, and 1996, TCI accounted
for approximately 65%, 61%, and 53% of the Company's residential cable revenues,
respectively.
Direct-to-Home ("DTH") Sales.
Direct Sales In October 1995, the Company launched its in-house direct
sales effort, DMX-Direct, a DBS service, commonly referred as direct-to-home
("DTH") to the residential marketplace. DMX-Direct uses the Company's DBS
technology launched to commercial customers and offers the same programming
availability. Customers purchase the required equipment and subscribe to
DMX-Direct for a monthly or annual prepaid subscription.
The Company continues developing its nationwide retail dealer network.
Through licensing arrangements with high end audio/video retailers and design
and installation companies, such as those associated with the Consumer
Electronic Design Installation Association ("CEDIA"), these dealers will license
from DMX Inc. the rights to sell and install the Ku-Band receiver and satellite
dish antenna in subscriber's homes for reception of the DMX signal.
Subscriptions to DMX-Direct are then processed and billed by DMX Inc. The
Company currently has approximately 135 dealers. Dealers are promoted by the
Company through the Company's web-site (http://www.dmxmusic.com) as well as
through direct advertising.
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Direct to home sales extend the distribution potential of DMX's residential
service to: areas not currently wired for cable; markets served by a cable
operator affiliated with a competitive digital audio service; and markets served
by cable operators not affiliated with any digital audio provider.
Third Party DBS Sales In October 1995 PrimeStar Partners, L.P.
("PrimeStar"), a leader in the DBS distribution of packaged programming to the
residential market, launched with carriage of DMX. The Company's agreement with
PrimeStar requires PrimeStar to pay a per subscriber license fee to the Company
based on the number of basic subscribers, or based on the number of basic and
premium subscribers when PrimeStar expands the DMX format offerings to include a
premium tier option. PrimeStar distribution gives the DMX brand name nationwide
consumer exposure through the marketing campaigns for PrimeStar. No additional
equipment is required over and above the standard satellite equipment in order
for a subscriber to receive the DMX signal. As of October 1996, there were
approximately 1,400,000 PrimeStar DMX subscribers.
In November 1995, the Company announced that it reached an agreement with
AlphaStar Television Network Inc. ("AlphaStar"), a direct-to-home satellite
service, owned by Tee-Comm Electronics, a digital satellite communications
leader. The agreement calls for AlphaStar to launch DMX in both a 120 channel
premium service and a 30 channel basic service, in exchange for a per subscriber
license fee. A unique part of the agreement calls for DMX Inc. and AlphaStar to
co-market their audio and video programming, as both services will be available
from the same satellite, AT&T Telstar 402R. No additional equipment is required
over and above the standard satellite equipment in order for a subscriber to
receive the DMX signal. As of September 1996, there were approximately 5,600
residential AlphaStar subscribers.
Commercial Service.
The U.S. business marketplace has approximately 7.4 million business
establishments in the top 337 market statistical areas ("MSA"), according to
Equifax/National Data Systems. Approximately 60% of these businesses use some
form of background music, based on marketing research performed by the Company.
From its initial launch in September 1991, the Company's commercial service has
had limited cable access to business establishments which precluded the Company
from pursuing national chain account sales. With the launch of DMX on a Ku-Band
satellite in June 1994 allowing for DBS distribution and the launch of DMX-Disc
on-premise service in 1996, DMX has gained access to 100% of the business
marketplace and continues to expand its market distribution of DMX for Business.
DMX distributes its programming services to the commercial marketplace
through its Commercial Division under the brand name DMX for Business. The
division distributes DMX for Business through three sales departments: Affiliate
Sales, an indirect sales channel of both cable and non-cable franchised
affiliates; National Account Sales; and the Southern California Sales Offices,
two direct sales channels owned and operated by the Company.
Affiliate Sales The Affiliate Sales department was the first sales channel
developed by the Commercial Division. Distribution of DMX for Business began in
1992 through the Company's relationships with cable affiliates. Sales of DMX for
Business via cable distribution was limited by the access to businesses by cable
plant as well as cable distribution to major business markets throughout the
United States. When DMX/DBS became available via AT&T's Telstar 402R satellite,
Affiliate Sales began immediate expansion of its distribution of DMX for
Business, both within the existing cable franchise network as well as to all
non-affiliated U.S. markets. DMX for Business has licensed many of its
residential cable affiliates, as well as independent, third party affiliates,
with the rights to sell DMX for Business on a non-exclusive basis, thus
expanding its network of licensed distributors to cover markets where it is not
affiliated with a cable operator, or where there is distribution of a
competitive service. Affiliates may be licensed to distribute DMX via all three
distribution methods: cable, DBS and DMX-Disc.
The Company's Commercial Division offers its affiliates the non-exclusive
right to sell DMX for Business and requires its affiliates to dedicate a minimum
level of resources and meet specified performance criteria to become a qualified
distributor and maintain a qualified status for distributing DMX for Business.
For cable affiliates, the typical commercial affiliation agreement runs
concurrently with the residential affiliation
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agreement. Non-cable affiliates have a five year agreement to distribute DMX
with a performance evaluation annually. If the affiliate has not met the
Company's performance standards, it could lose its DMX affiliation. The Company
requires its affiliates to pay a set minimum monthly license fee per commercial
subscriber, or a percentage of the subscriber's monthly retail rate, whichever
is greater. The typical contract term with a commercial establishment is a 60
months at a retail rate of approximately $55 per month. The retail pricing is
determined by the affiliate and depends upon many factors such as the square
footage of the business, the number of tuners or receivers used in the business
and the contract length.
National Accounts The National Account Sales department was launched
concurrently with the distribution of DMX for Business via DBS. The department
has been marketing DMX for approximately 2 years, selling DMX services to large
national chain accounts, such as retail and restaurant chains, that require or
demand centralized sales, installation, and customer services. The department
employs an in-house sales force specially trained for selling to national
accounts. DMX Inc.'s commercial non-exclusive affiliation agreements allow its
national accounts sales force to sell directly to commercial establishments
within existing affiliated franchise territories. Sales efforts are being
concentrated at the senior management level of these national account prospects.
National Account contracts generally provide for the DMX for Business service to
be delivered to all of the subscriber's locations for a monthly fee generally
ranging from $40-$55 per location depending upon many factors such as the number
of locations and the number of receivers used within each location. Contract
terms generally range from 36 to 60 months. DMX Inc. has signed multiple
national account agreements with various nationwide and regional business
chains, primarily in the hospitality and retail industries.
The Company has established strategic sales alliances to create name
branding and establish DMX for Business as a viable and credible competitive
service for national chains. Alliances in the cross-branding of DMX include:
Bose Corporation for packaged sound systems; AT&T Tridom in VSAT data and video
network applications; and PrimeStar and AlphaStar for entertainment, news
information and sports TV video services. The DMX national account sales team
works in conjunction with these strategic sales alliances to cross-promote
services and to make joint sales presentations in selling packaged business
communication services and products.
Owned and Operated Accounts In May 1995, the Company launched its first
owned and operated sales group ("O&O") in the Southern California market,
covering a seven county area extending from Ventura to San Diego. The O&O sells
DMX and related business communication services and products direct to both
local and regional chain accounts located in its territory through its own
sales, installation and service team. The O&O also generates revenue from sound
system equipment sales and labor sales from installations and handles all
equipment set-up and follow-up service for new and existing accounts. The O&O's
customer contracts are for a monthly fee generally ranging from $55 to $150
depending on many factors such as number of locations and the number of
receivers installed in the business, and length of contract. The O&O's average
contract term is 48 to 60 months. The O&O continues to grow at a rapid pace as
it continues to increase its penetration of the Southern California commercial
marketplace.
National Customer Services Center The support services required by the
music subscribers of the National Account and O&O Sales Departments are very
specialized and require a highly trained music consultant to support their music
needs, as well as general field installation and service requirements for music,
sound system and related communication equipment. With the growth of national
and O&O accounts and the addition of DMX-Disc to all sales channels, which
requires direct customer service center support, the Company is in the process
of establishing an internal Customer Services Center within the Commercial
Division. The National Customer Services Center will provide ongoing
professional management, training and support required to ensure that DMX for
Business subscribers receive the high quality service demanded by the
competitive commercial marketplace. The Company's existing National Contractor
Network will be utilized to provide field service to these subscribers as
required.
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INTERNATIONAL BUSINESS.
The Company actively seeks prospective strategic partners interested in
distributing DMX in foreign markets. The Company has entered into licensing and
royalty arrangements in Europe, Canada, Australia, Latin America, the Caribbean
and Sub-Saharan Africa and is currently in the process of evaluating other
possible joint relationships to enhance the international distribution of DMX.
Europe.
The Company has entered into definitive agreements providing for the
disposition of DMX-E to Jerold H. Rubinstein, its Chairman and Chief Executive
Officer of the Company. The Company will retain a ten percent equity interest in
DMX-E, which will have an exclusive five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union, and in the
Middle East and will have the right to use the Company's trademarks for two
years. In addition, Mr. Rubinstein has agreed to guaranty certain obligations of
the European operations for satellite-uplink capacity (which guaranty will be
secured by a pledge of the Company's Common Stock owned by Mr. Rubinstein). The
Company had previously determined to cease financial support for its European
operations and, in the absence of some other arrangements to provide financial
support to those companies, to place them in receivership. Mr. Rubinstein will
seek to reorganize the operations of DMX-E and will seek new equity investors.
If DMX-E cannot be reorganized, then Mr. Rubinstein intends to organize the
operations under a new company to distribute the music service on essentially
the same terms and the Company will subscribe for a ten percent equity interest
in the new venture. (See "Business -- Recent Developments".)
Canada.
The Canadian cable market is comprised of approximately 7.6 million basic
cable subscribers which represents approximately 76% of households passed by
cable. Pay service penetration, including extended basic service penetration,
reached approximately 88% during 1995 according to Media STATS September 1995
data. In addition to the residential subscriber potential for DMX, the Canadian
market has approximately 920,000 businesses, according to Statistics Canada.
In 1992, Shaw Communications Inc. ("Shaw"), the second largest MSO in
Canada, entered into a licensing and royalty agreement with the Company which
provides for a monthly per subscriber royalty for both residential and
commercial distribution. The Company, through its subsidiary 450714 B.C. Ltd. is
a partner in the "The DMX-Canada Partnership" ("DMX-Canada"), a partnership with
DMX-Canada Ltd., an affiliate of Shaw. DMX-Canada is the operating entity that
distributes the DMX service in Canada and its territories.
The residential DBS direct-to-home market in Canada is regulated by the
Canadian Radio/Television and Telecommunications Commission ("CRTC"). During
1996 the CRTC issued a license to the Company to provide subscription-based
music service to homes in Canada. This came after a long review process
initiated after the original license was revoked by the CRTC. DMX will be
offered by DMX-Canada to residential subscribers once the Company has determined
the special programming requirements as mandated by the CRTC for the Canadian
residential market.
The CRTC does not regulate programming delivered to commercial
establishments by direct broadcast satellite. DMX-Canada launched DMX for
Business by DBS in November 1994, and has acquired over 2,000 commercial
subscribers in Canada since that date.
In addition to forming DMX-Canada, Shaw has invested in DMX Inc. by
purchasing stock in private placements and making open market purchases, and
currently holds approximately 14% of the outstanding Common Stock of the
Company.
Latin America and The Caribbean.
Commencing in 1997, DMX will be carried on Sky-LA in Mexico, all of central
and South America, and parts of the Caribbean. (See "Business -- Goals and
Strategies".)
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Africa.
During 1995, the Company reached an agreement with TML-Bluestar ("TML-B"),
a South African joint venture company, for distribution of the DMX service in
Sub-Saharan Africa. TML-B then entered into a licensing arrangement with
MultiChoice Africa ("MultiChoice"), for distribution of DMX to MultiChoice
subscribers by Ku-Band DBS. MultiChoice is the only subscriber management
services ("SMS") provider in South Africa, and offers SMS services to more than
2 million pay TV subscribers in Africa and Europe. In South Africa alone,
MultiChoice provides SMS to approximately 950,000 subscribers, according to data
provided by MultiChoice.
TML-B launched DMX in December 1995 and carries 40 music formats. DMX is
sold to both residential and commercial subscribers in exchange for per
subscriber license fees. DMX is being included as part of the MultiChoice basic
package of digital audio and video programs distributed via satellite to
customers in South Africa. The Company does not incur any incremental costs in
providing the signal for distribution to this market, nor is it responsible for
the payment of music rights, pursuant to the terms of its agreement. TML-B plans
to expand its distribution throughout other territories in Sub-Saharan Africa as
these areas develop. Currently TML-B has over 50,000 subscribers.
ANCILLARY BUSINESS OPPORTUNITIES.
The Company is engaged in discussions with various potential strategic
partners to develop other ancillary business opportunities related to its core
DMX service. The ancillary businesses would represent an opportunity to take
advantage of the existing technology and programming infrastructure developed by
the Company for DMX.
The Company is currently testing a digital downloadable satellite messaging
system ("DMX Adnet") that will be made available for multiple location
commercial sales through the National Accounts, O&O and Affiliate sales channels
in 1997. The system is compatible with the DMX/DBS music system and allows for
scheduling and playing of pre-recorded messages, known as "Storecasting" over
the DBS system.
THE SUPERAUDIO SERVICE.
In May 1990, the Company entered into a joint venture agreement with Jones
International, Inc. ("Jones"), the eighth largest MSO, for up to fifteen years
to distribute Superaudio, a basic cable audio service. Each company owns a 50%
interest in the joint venture. The joint venture began operation in July 1990
and combined the Company's basic cable audio service, TEMPO Sound, with its only
direct competitor, Galactic Radio. In connection with the joint venture
arrangement, Jones provides both satellite space and uplinking service for
Superaudio.
Superaudio is a basic cable audio service which is distributed in analog
fidelity and currently provides nine formats of popular music and information
services, including news, children's programming and a reading service for the
visually impaired. The programming line-up includes the use of announcers and
some limited commercial announcements. The Superaudio service is distributed by
satellite from Jones' studio facilities in Englewood, Colorado to cable systems,
which deliver it to their cable subscribers.
The joint venture has entered into affiliation agreements with cable
operators which provide for a monthly license fee per basic subscriber to be
paid to Superaudio. The service is generally marketed as a basic cable audio
service at no additional charge to the subscriber. However, ultimate product
placement and retail pricing is left up to the individual cable operator.
PROGRAMMING.
The Company believes that the primary consumer appeal of DMX is its
superior programming content. The Company has carefully researched and refined
each of its current 91 custom designed music formats. In contrast to radio, the
programming content of the DMX service is continuous music, without commercial
or other interruption, made available in distinct formats that are more narrowly
tailored to fit the music listener's specific taste. DMX is delivered in CD
standard fidelity.
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DMX appeals to a wide variety of listeners by providing multiple music
formats within each music genre. By offering defined music formats, DMX
subscribers can easily select the formats that appeal to them most. For example,
a classical music enthusiast may enjoy symphonies and chamber music, but may not
have the same interest in opera. DMX allows listeners to make these musical
choices without compromising their listening experience. The following table
shows the current format offering by genre:
<TABLE>
<S> <C> <C>
CLASSICAL LATIN U.S. OLDIES
Symphonic - Cumbia 50's Oldies
Chamber Music - Latin Contemporary 60's Oldies
- - - Opera Tejano - 70's Oldies
- - - Lite Classical Salsa - 80's Oldies
- - - Classical Guitar - Mariachi
- Flamenco Music INTERNATIONAL
JAZZ - Brazilian Music - German Oldies/Schlager
Lite Jazz - Rock en Espanol - German Folk Music
Classic Jazz - German Rock
- - - Dixieland URBAN - German Easy Listening
- - - Jazz Vocal Blends Urban Adult Contemporary - French Hits
- - - Acid Jazz Dance - Riviera
Reggae - U.K. Hits
ROCK - R&B/Rap Hits - Euro Hits
Classic Rock Gospel - Euro Oldies
Folk Rock - Motor City Sound - Dutch Hits
- - - Power Hits Rap - Flemish Music
Album Rock Traditional Blues - Caribbean Music
Heavy Metal - Greek Music
Alternative Rock SPECIALTY - Norwegian Music
- - - New Music New Age - Danish Music
- Contemporary Christian - Hebrew Hits
POP/ADULT CONTEMPORARY - Contemporary Blues - Italian Hits
Adult Contemporary - Folk Music - Traditional Italian Music
Love Songs Christian Inspirational - African Rhythms
Great Singers - Children's - Japanese Music
Beautiful - Environmental Sounds - Chinese Music
Instrumentals - Holiday Music - Canto Pop
Show Tunes - Beach Party - Turkish Music
- - - Movie Sound Tracks - The Mirage Channel** - Indian Music
- - - Soft Hits - Cajun - Polka
- - - Contemporary - World Beat
Instrumentals COUNTRY - Oriental/Eastern Mediterranean
- - - Piano Modern Country - Hawaiian Music
- - - New Adult Traditional Country
Contemporary - Bluegrass
Big Band/Swing
Hottest Hits
</TABLE>
- - ---------------
- - - Expanded formats available only on DBS service
** The Mirage Channel is for the exclusive use of Mirage Resorts Incorporated
The Company seeks consumer feedback on DMX programming to help determine
when to add or change formats to meet the ever changing tastes of its listeners.
The Company uses an 800 number for DMX subscribers to call as a means of
gathering customer's suggestions, addressing technical problems or complaints
and at the same time providing the Company with demographic and subscriber
preference information.
The Company programs its music using an in-house programming staff. This
staff is responsible for music research, on-going acquisition of new music
material, programming, scheduling and interfacing with the Company's studio
operations where the DMX service is originated. The Company has developed a
sophisticated proprietary system of programming, originating and distributing
the DMX service. This process involves the use of proprietary software and
hardware for selecting songs and encoding the music information into a data
stream, which then is uplinked to the Company's satellites for delivery to its
cable affiliates and DBS
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customers. The same programming process is used in developing DMX-Disc custom
four hour CD's, which are maintained in a library catalogue for replication and
distribution to the Company's DMX-Disc customers.
COMMERCIAL PROGRAMMING.
The Company believes that the primary commercial appeal of DMX is its
superior programming and available choice of music. In contrast to radio, DMX
provides continuous music, without commercials or other interruptions, made
available in distinct formats that are tailored to fit the commercial account's
specific business atmosphere.
DMX appeals to a wide variety of businesses by providing multiple music
programs within each music format. To help DMX subscribers in selecting the
appropriate music for their business, DMX for Business utilizes its proprietary
Music Application Program (MAP(TM)). MAP assists DMX subscribers in analyzing
their business image, demographics and desired energy level to create a custom
music program to enhance the business' atmosphere, making it simple to tailor
the audio atmosphere of any business.
In conjunction with the launch of DMX on a Ku-Band satellite, the Company
expanded its DMX programming from the 30 formats available by cable to a 120
channel capacity DBS system. There are currently 91 channels available for
commercial subscribers and the Company plans to continue expanding its music
line-up. The Company believes this will further enhance the appeal of DMX by
offering greater choice and flexibility to commercial subscribers. This will
increase the likelihood of a subscriber finding more DMX programs to match its
music needs, thereby choosing DMX over a competitive service. As part of the DMX
programming process, the programming staff constantly reviews and modifies the
programming line-up to meet the needs of its commercial subscribers.
RESIDENTIAL MARKETING.
The Residential Division's primary marketing focus is to support cable
operators and other DMX distributors by providing creative and integrated
marketing campaigns and expert music consulting advice. DMX Inc. has developed
various marketing campaigns, in addition to ongoing special promotions, to
assist cable operators with the acquisition and retention of DMX subscribers.
A typical acquisition program's target marketing materials include such
items as newspaper and cable guide advertising; point of purchase materials;
demonstration units; direct mail inserts; 30 second commercial television spots
in addition to a 15 minute infomercial; training programs for affiliate customer
service representatives; specialty holiday promotion materials; and press
releases and assistance with public relations events. Retention materials
include: A listener's guide to promote product understanding; a DMX-DJ(R)
program guide explaining the use of the DMX-DJ and format description.
In 1995, the Company launched a DMX web site on the Internet. The web page
is informational and provides the user with information such as: "What is DMX",
"Music Charts", "Contests", "Music Central" and more, which covers programming,
how to get DMX, cable distributors, DBS information, residential and commercial
information, as well as many other related topics, like DMX merchandise. Access
to the DMX web site also acts as a gateway to other related music companies' web
sites on the Internet. In 1996 "What's on DMX" was added to the web site,
allowing users to see information on the last five songs played on any channel
of DMX at any given time. The DMX web site will undergo continued development to
create cross promotional tie-ins, new product development information, and many
other ancillary topics to provide DMX subscribers with a vast array of music and
DMX related information. The DMX web site can be accessed at
http://www.dmxmusic.com.
COMMERCIAL MARKETING.
The Commercial Division's marketing strategy is to create and implement
marketing and promotional programs that establish DMX as the branded name and
recognizable leader in digital music services. This is being accomplished
through the development and deployment of one of the industry's best sales
training, sales management, and sales support programs; business-to-business
marketing programs; and the development of a
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unique multimedia network of digital business communication services through
strategic sales and marketing alliances with some of the world's most recognized
companies.
DMX for Business Affiliate marketing programs include: sales literature,
trade advertising, participation in local trade shows, and direct mail. Within
National Accounts and O&O, the Commercial Divisions' marketing programs include
attendance at national trade shows, trade advertising, and direct sales through
presentations, demonstrations and trials of DMX for Business. DMX also has
marketing relationships with: Bose Corporation, one of the world's leading
manufacturers of consumer and professional packaged sound systems and
loudspeaker products; AT&T Tridom for VSAT data and video network applications;
Audiocom, one of the nation's leading providers of customized business
messaging, for message production services; and Philips Electronics, the
co-developer and a leading manufacturer of compact disc technology, including
the DMX-Disc CD-I players. All of these relationships form a powerful alliance
for the delivery of multimedia services to the commercial marketplace and have
validated DMX as a premiere digital music service in the commercial market. In
addition, the sales and marketing teams of each organization have increased
DMX's market presence and brand identification and have added reciprocal value
to each other through the distribution of these packaged services.
In the summer of 1996, the Company was the official programmed music
supplier to the Olympic Games in Atlanta, Georgia. This opportunity provided the
Company with substantial brand name exposure and demonstration opportunities.
Many of the Olympic sites, including the athlete's villages, sports arenas,
hospitality areas, transportation centers and plaza areas were equipped with
DMX. The Company provided all of the 200 national anthems required at the medal
ceremonies by using its proprietary DMX-Disc technology. As part of the Olympic
Games cross-promotion, DMX developed the Olympic Channel, appropriately located
on channel 96. The Olympic Channel, designed specifically for use at the Olympic
Games, was made available to DMX subscribers in 1996 and included inspirational
regional and international songs and featured songs from a special five CD set
of Olympic music produced by the Atlanta Committee for the Olympic Games, Inc.
TECHNOLOGY.
The Company owns certain patents to its technology as well as to jointly
developed technology used in the origination, distribution and reception of DMX
via cable, DBS, and DMX-Disc. Affiliated cable operators use special equipment
designed to receive the DMX signal and then deliver it over the existing cable
network to cable subscribers in the affiliated operator's system. Each
subscriber must be equipped with a special DMX cable tuner (the "DM-2000"
tuner), which is designed to connect to the existing coaxial cable used for
other cable programming services and to any commercial stereo system using
industry standard audio jacks. Subscribers receiving DMX via direct broadcast
satellite must be equipped with a small satellite dish antenna and a DMX DBS
receiver (the "DR-200" receiver), which like the DM-2000 tuner connects directly
to any stereo system. Either tuner allows the subscriber to select any of the
available formats at any time. The tuner can be controlled manually, or by a
hand held remote control device. One such remote control device, the DMX-DJ(R),
compatible with both tuners, provides the subscriber with complete programming
information about any song being heard on DMX. The information is shown in a
display window on the DMX-DJ using a liquid crystal display ("LCD"). Programming
information provided includes: song title, artist, composer, album title, record
company label, DMX identification number and chart position, if any. A basic
remote control is also available which controls the necessary functions on each
tuner, but does not include the display of programming information.
DMX is transmitted using multiple distribution technologies based on
various compression algorithms which allow the signal to be delivered to the
subscriber in CD quality fidelity. These compression technologies are known as
SuperSound, AC-3 and MUSICAM. The SuperSound scheme is currently used for U.S.
and European cable transmission. AC-3 is currently used for U.S. DBS
transmission. MUSICAM is used for European DTH transmission and will ultimately
replace SuperSound for European cable transmission. The Company expects to be in
a position to offer the U.S. Cable operators currently using SuperSound the
option of migrating to AC-3 or MUSICAM, based on the standard adopted for the
U.S. market as digital compression technology becomes widely used.
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ADVANCED SECURITY.
The digital audio signal is encrypted (scrambled) at the point of origin
and encoded using a proprietary algorithm. Decryption (descrambling) takes place
in the subscriber's reception equipment, using a custom circuit that also
decodes the audio signal and controls the unique addressing of each unit, in
addition to controlling features such as day-parting.
RESEARCH & DEVELOPMENT.
DMX Inc. views its research and development efforts as a key component of
maintaining its leadership position in digital audio. In order to keep its
technology at the forefront and to deliver DMX using multiple distribution
paths, the Company is continuing research and development activities which
include refinements to its residential and commercial DBS technology and the
development of AC-3 and MUSICAM compression compatible technology for use in
distribution of its cable delivered signal.
An example of recent Research and Development efforts was the design and
testing of the DMX Adnet Storecasting system as well as the development of the
"What's on DMX" addition to the Company's web page. In addition, the Company
will continue to develop enhancements to the DMX service and other upgrades to
its technology as may be required. The Company is currently testing its audio
encoding for compatibility with HITS, and has been through a series of
technology revisions since testing commenced in August 1996. The audio signal is
Dolby AC3 encoded under the M-Peg transmission technology, to be compatible with
the General Instrument digital boxes being used with HITS. There will be 40
DMXchannels offered as part of the "All TV" HITS package. The current DMX-DJ is
in the process of being redesigned as the existing remote does not work with the
new digital boxes.
SATELLITES.
C-Band Transmission The Company sub-leases space on a U.S. domestic
communications satellite known as Satcom C-3, Transponder 24. The sub-lease was
entered into in December 1992 with a subsidiary of TCI, Western
Tele-Communications, Inc. ("WTCI"), which in turn has leased the satellite
transponder from GE American Communications, Inc. ("GE"). The Company began
using the satellite in Spring 1993. This satellite is used by other cable
industry program providers and its signal can be received by most U.S. cable
operators. The satellite areas of coverage include Hawaii, Alaska, Mexico and
Central and Northern South America.
Ku-Band Transmission In March 1996 DMX completed the signal migration from
the AT&T Telstar 401 satellite to the AT&T 402R satellite. The satellite
sub-lease, was entered into in May 1994 with WTCI, which in turn has leased the
satellite transponder service operated by AT&T SKYNET.
European Transmission In 1994, the Company entered into an agreement with
WTCI for the sub-lease of satellite space on an international C-Band satellite
known as TDRS. The DMX signal is uplinked to the TDRS satellite directly from
the Company's studio and uplink facility in Littleton, Colorado.
MUSIC RIGHTS.
The Company has entered into agreements with the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music Inc. ("BMI"), and
SESAC. The agreements provide for performance royalties to be paid by the
Company for all music played on DMX in the United States.
The Company's agreement with ASCAP for commercial distribution was
previously governed by an interim industry wide agreement. A final form of
agreement covering commercial distribution was finalized in 1995. The Company
signed that agreement and thus, effected a new agreement term through May 1999.
The Residential Agreement is currently governed by an interim, industry wide
agreement which will remain in effect until such time as new industry rates are
determined. During 1995, the Company entered into a new residential agreement
with BMI, with a term extending through September 30, 1999. The Company's
agreement with BMI for commercial distribution has expired, and the Company is
currently operating under a month-to-month extension. DMX is part of an
industry-wide negotiating group currently discussing renewal
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terms, and expects this to be finalized in the near future. The Company's
agreements with SESAC for residential and commercial distribution both expire in
June 1997, and the Company expects these agreements to be renewed on
substantially the same terms.
COMPETITION.
Digital audio services compete for consumers' time and discretionary income
that is spent on other sources of entertainment, such as radio, other
pre-recorded music services, on-air television, basic and premium television
services, and in-home video and audio systems. Competition for cable system
relationships to increase distribution is based primarily on the relative
quality and quantity of programming, financial strength, quality of marketing to
attract and retain subscribers, technical reliability and performance and the
overall cost of the services to affiliated distributors taking into account the
purchase cost of the hardware, the operating cost of the technology and the
monthly license fees.
The Company currently has one main competitor in the residential
marketplace, Music Choice, formerly known as Digital Cable Radio, a digital
audio service similar to DMX. The Company principally competes for third party
cable and DBS affiliations with this competitor. Once a decision is made to
affiliate with a digital audio provider, a substantial capital investment must
be made in cable system headend receiving equipment and individual subscriber
tuners and remote controls which are unique to that digital audio provider's
service. In addition, the channel capacity of many cable systems might not
permit the systems to carry two digital audio services. In addition, most of the
Company's affiliation agreements prohibit a distributor from offering a
competitive music service. Therefore, the Company believes it is unlikely that a
cable operator or other affiliated distributor would introduce a competitive
digital audio service and, to date, none has done so. As a result, the Company
does not directly compete with Music Choice for subscribers once an affiliation
agreement is signed.
In the direct-to-home residential DBS marketplace, DMX is carried on the
PrimeStar and AlphaStar DBS networks. Music Choice is carried on DirecTV. Muzak,
one of the Company's competitors in the commercial marketplace, secured DBS
distribution with Echostar Communication Corporation's DISH Network. The Company
recently announced that Sky-LA and ASkyB will carry DMX. Sky-LA is expected to
be introduced in Latin America in April 1997. ASkyB is expected to be introduced
in the USA in late 1997. (See "Business -- Goals and Strategies".)
The Company also has competition in the commercial marketplace from other
pre-programmed business music providers, such as Muzak and AEI. However, the
distribution technology and the quality and quantity of music programming is
significantly different. As an example, Muzak does not offer cable distribution
and only has 16 channels on its standard analog DBS system. Although Muzak does
have 30 channels on the Echostar Dish Network, that service does not provide the
management control functions required by the commercial marketplace. AEI only
offers 6 channels from its analog DBS service. Also, all other competitors offer
fewer music programming options, compared to DMX's 91 options available on DBS.
DMX for Business is competitively priced with other business music services.
DMX-Disc, the Company's proprietary CD technology, provides an additional
distribution method to better compete in situations which require an on-premise
music service solution. This technology is vastly superior to the tape programs
offered by AEI and Muzak, and the only competitor to offer a similar product is
AEI which also offers an on-premise CD system.
As a result, the Company believes that it has a substantial advantage over
the competition due to more flexible distribution methods and the depth and
quality of music programming offered to business music users through DMX for
Business. These competitors, to date, have not presented the Company with
material problems in negotiating contracts with favorable financial terms.
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REGULATION.
DMX Inc.'s operations generally are not of a type subject to regulation by
any government agency other than the routine regulations applicable to any
business. As a programming provider, however, there are certain related
regulations that affect the Company.
Although programming providers, such as DMX Inc., are not directly
regulated by the Federal Communications Commission ("FCC"), the operations of
cable television and satellite distribution systems are subject to the
Telecommunications Act of 1996 (the "Telecommunications Act") which replaced the
Communications Act of 1934, as amended, including the Cable Communications
Policy Act of 1984, as amended (the "Cable Act"), and to regulation thereunder
by the FCC. Any laws or regulations that adversely affect satellite or
transmission services, copyright or royalty agreements, or which would have an
adverse effect on the growth of the cable television and satellite industries
may also have an adverse effect on the Company.
The comprehensive overhaul of the Communications Act of 1934 undoubtedly
will have an effect on cable television. The Telecommunications Act removes
regulatory restrictions which for years have kept the cable, telephone, long
distance and broadcast industries segregated. The reforms also provide for
removal of the price controls on cable television rates within three years of
enactment. It is still unclear if the changes made will significantly affect
programmers, such as DMX Inc.
Program Access and Carriage Agreements.
Called "the most successful" provisions of The Cable Television Consumer
Protection and Competition Act of 1992 ("1992 Act"), program access and carriage
agreement provisions aimed at protecting programmers, and ultimately consumers,
from discriminatory practices by cable system operators, affect programmers such
as the Company. For example, cable operators are prohibited from requiring or
coercing programmers to give them exclusive carriage agreements, unfair pricing
or financial interests in the programming company in exchange for carrying a
particular programming services. While these provisions generally benefit the
Company by guaranteeing it access to a broader market, the MSOs with which the
Company has affiliation agreements, and which have ownership interests in the
Company, are also subject to these provisions and may not discriminate against
other programmers for the benefit of the Company.
In the 103rd and 104th Congress, legislation was introduced which would
repeal the program access requirements of the 1992 Act; however, those efforts
have been unsuccessful to date and any future action is uncertain.
Copyright and Royalty Provisions.
On November 1, 1995, President Clinton signed into law Senate Bill 227, the
Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act"). The law
amends U.S. copyright law to provide sound recording owners with an exclusive
performance right in sound recordings that are performed by means of
subscription service digital transmissions. The legislation was drafted to
protect performers and copyright owners in sound recordings, who were
potentially disadvantaged by the birth of the digital subscription services.
The 1995 Act establishes a new right of owners of the performance rights,
such as the performers and record companies, to control digital transmission of
sound recordings. The 1995 Act provides a compulsory license for non-interactive
subscription services, but does not provide a compulsory license for interactive
services which allow the listener to select performance of a musical piece based
on a menu or schedule. As a general matter, the digital performance right does
not apply to traditional radio and TV broadcasts, background music services such
as MUZAK, or to music transmitted at restaurants, department stores, hotels or
amusement parks in the traditional manner.
The Company is currently in the process of negotiating the terms of this
new required royalty which will apply only to the Residential area of the
business and has made provisions using an estimated rate. The Company is not
aware of any new legislation that may be introduced in 1997 which would
adversely impact its business. Any other changes in U.S. law or regulations
which would impose new or higher royalty fees, or
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cause compliance with copyright and royalty regulations to be more burdensome,
could have a material adverse effect on DMX Inc.
TRADEMARKS.
The Company has filed for worldwide trademark registration (including DMX,
Digital Music Express, DMX for Business, DMX-DJ and, through its joint venture
with Jones, Superaudio). The Company believes that its trademarks are valuable
properties and intends to defend them vigorously.
Under the Company's agreements for the disposition of DMX-E to Jerold
Rubinstein, the European company will have the right to use the Company's
trademarks for two years following the consummation of the transaction.
PERSONNEL.
As of December 15, 1996, the Company had 134 full-time employees, 29 of
whom were engaged in administration, 66 in sales and marketing, 32 in studio and
programming and 7 in engineering. The Company's employees are not covered by any
collective bargaining agreement, and the Company considers its relations with
its employees to be satisfactory.
RECENT DEVELOPMENTS.
TCI Proposal to acquire DMX Inc.
On August 30, 1996, the Company received an unsolicited proposal from TCI
proposing the merger of the Company with a TCI subsidiary. Following receipt of
the proposal, the Company established a special committee of its Board of
Directors to consider the proposal and retained Houlihan Lokey Howard & Zukin to
act as its financial advisor. The Company is currently negotiating the terms of
a definitive merger agreement with TCI, which owns approximately 45% of DMX
Inc.'s outstanding stock. The merger agreement would provide for a merger in
which DMX Inc. would be acquired by a new corporation ("Music Co.") to be formed
by TCI pursuant to which the shareholders of DMX Inc. would receive Class A
Common Stock of Music Co. representing approximately 19.25% of the total
outstanding shares of Music Co.'s Class A Common Stock and Class B Common Stock.
The Class A Common Stock would be identical to the Class B Common Stock to be
held by TCI except that each share of Class B Common Stock would have ten votes
on all matters while shares of Class A Common Stock would have one vote. In
connection with the merger and the issuance of the Class B Common Stock to TCI,
TCI would cause certain affiliates to contribute and transfer to Music Co. all
of their respective rights, title and interest in certain specified assets. To
the extent that Music Co.'s Class A Common Stock does not trade at or above $2
per share for at least twenty consecutive trading days during the first year
following the merger, holders of the Class A Common Stock would have the right,
exercisable during the 30 day period beginning on the first anniversary of the
merger, to require TCI to purchase such Class A Common Stock at a price of $2.00
per share, payable at TCI's option either in cash or shares of TCI's TCI Group
Series A Common Stock. In connection with the merger negotiations, the Company
is negotiating with TCI for a $3.5 million loan to purchase, or reimburse the
Company for the purchase of, tuners and related equipment.
Disposal of DMX-E.
The Company has entered into definitive agreements providing for the
disposition of DMX-E to Mr. Jerold Rubinstein, the Company's Chairman and Chief
Executive Officer. DMX Inc. will retain a ten percent equity interest in the
companies which would have an exclusive, five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union, and in the
Middle East and will have the right to use the Company's trademarks for two
years. In addition, Mr. Rubinstein had agreed to guaranty certain obligations of
the European operations for satellite-uplink capacity. The Company had
previously determined to cease financial support for DMX-E operations and, in
the absence of some other arrangements to provide financial support to DMX-E, to
place them in receivership. Mr. Rubinstein will seek to reorganize the
operations of DMX-E and will seek new equity investors. If DMX-E cannot be
reorganized, then
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Mr. Rubinstein intends to organize a new company to distribute the music service
on essentially the same terms and the Company will subscribe for a ten percent
equity interest in the new venture.
At September 30, 1996 the estimated loss on disposal of DMX-E was accounted
for in the Company's consolidated financial statements.
ITEM 2. PROPERTIES.
The Company's corporate offices are located at 11400 West Olympic
Boulevard, Suite 1100 and Suite 1400, Los Angeles, California 90064-1507. The
five year lease agreement expires in September 2001 and contains a five year
renewal option. The premises are approximately 26,505 square feet and the
monthly rental rate is approximately $47,700, which is subject to certain cost
of living adjustments and pro rata property taxes.
The Company maintains a regional sales and marketing office in New York
City, located at 342 Madison Avenue, Suite 902, New York, New York 10173-0002.
The New York regional office occupies approximately 2,500 square feet and the
monthly rental rate is approximately $4,500. The five year lease expires in
January 1998.
The Company leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located in TCI's National Digital
Television Center at 4100 East Dry Creek Road, Littleton, Colorado 80122. The
six year lease agreement with WTCI, a subsidiary of TCI, is subject to the
Company's right to terminate the origination and uplinking services at any time
with 60 days prior notice and upon payment of early termination fees. WTCI
charges the Company approximately $78,000 per month, which includes
approximately $6,400 for space rental and $72,000 for satellite uplinking
services, of which, approximately $25,000 is related to DMX-E and is paid by
DMX-E (although the Company is obligated for these charges). In addition, WTCI
has provided, via a capital lease with interest at 9.5%, up to $2.2 million for
studio equipment at the facility, of which approximately $2.2 million had been
expended at September 30, 1996.
The Company leases engineering facilities in Southern California located at
3551 Voyager Street, Suites 104 D and F, Torrance, California 90503. These
facilities contain approximately 4,400 square feet and the monthly rental is
$3,400. The lease expires in January 1997. The Company is currently in
negotiations to extend the terms of its lease, but no definitive agreement has
been reached beyond a month-to-month term.
The Company maintains a regional sales office in Schaumberg, located at
2300 North Barrington Road, Suite 555, Schaumberg, Illinois 60195. The office is
approximately 1,062 square feet and the monthly rental rate is approximately
$1,600. The five year lease expires in January 2001.
The Company maintains a regional sales office in Seattle, located at 1417
Fourth Avenue, Suite 800, Seattle, Washington 98101. The Company also manages
its DMX-Disc operations from this location. The office is approximately 2,400
square feet and the monthly rental rate is approximately $2,700. The five year
lease expires in November 2001.
The Company maintains its Southern California O&O sales office in Irvine,
located at 15235 Alton Parkway, Suite 100, Irvine, California 92618. The office
is approximately 4,280 square feet and the monthly rental rate is approximately
$3,000. The four year lease expires in July 1999.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company may be a party to legal actions arising in
the ordinary course of business, including claims by former employees. Although
some of these actions could be expected to involve claims for substantial
amounts, except as set forth in the next paragraph, the Company does not believe
that any currently pending litigation to which it is a party will have a
materially adverse effect on its financial condition or results of operations.
On September 8, 1996, a purported class action lawsuit entitled Brickell
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar,
18
<PAGE> 166
DMX Inc., and Tele-Communications, Inc. (Civil Action No. 15206) was filed in
the Delaware Chancery Court alleging, among other things, that the proposed
acquisition of the Company by TCI is wrongful, unfair and harmful to the
Company's public stockholders and seeking to enjoin the consummation of the
Merger. The Company believes that this action is without merit and intends to
defend it vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of the Company's security holders
during the fourth quarter of the Company's fiscal year ended September 30, 1996.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock currently trades on the Nasdaq National Market
System under the symbol "TUNE".
The following table sets forth the range of high and low sales prices
during each quarter presented of the Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
------------- ----- -----
<S> <C> <C>
December, 1994............................................. 3.000 1.500
March, 1995................................................ 4.000 2.438
June, 1995................................................. 3.375 2.000
September, 1995............................................ 3.313 2.125
December, 1995............................................. 3.000 2.125
March, 1996................................................ 2.875 1.750
June, 1996................................................. 2.250 0.813
September, 1996............................................ 1.938 0.563
</TABLE>
On December 31, 1996, the closing price reported by Nasdaq was $1.031.
Stockholders are urged to obtain current market quotations for the Common Stock.
As of December 31, 1996 there were 434 Stockholders of record of the Company
with approximately 55% of the shares held in "street name."
DIVIDENDS.
No dividends have been paid to date by the Company. Management of the
Company does not intend to pay any cash dividends in the foreseeable future;
rather, it is expected that the Company will retain any earnings to finance its
operations and growth.
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<PAGE> 167
ITEM 6. SELECTED FINANCIAL DATA.
The following is a summary of selected financial data. See the financial
statements included herein for more detailed information.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Revenue.............................. $ 17,326,603 $ 12,773,384 $ 9,377,059 $ 4,792,527 $ 773,861
Operating, selling, general and
administrative expenses............ 30,460,622 22,166,898 20,558,849 17,726,103 27,306,904
Depreciation and amortization........ 1,883,415 1,341,775 1,065,666 790,229 565,694
Loss on disposal of DMX-Europe
N.V................................ 7,153,278 -- -- -- --
------------ ------------ ------------ ------------ ------------
Net operating loss................... (22,170,712) (10,735,289) (12,247,456) (13,723,805) (27,098,737)
Equity earnings in Galactic/TEMPO.... 197,227 306,640 223,852 143,622 283,889
Equity loss in DMX-Europe N.V........ (11,852,650) (13,271,599) (4,746,239) (3,553,932) --
Interest income (expense), net....... (188,507) 73,540 38,168 85,943 482,974
Other income (expense), net.......... 159,865 547,179 226,461 640,197 (108,530)
------------ ------------ ------------ ------------ ------------
Net loss............................. $(33,854,777) (23,079,529) (16,505,214) (16,407,975) (26,440,404)
============ ============ ============ ============ ============
Loss per share....................... $ (0.68) (0.60) (0.48) (0.52) (0.90)
============ ============ ============ ============ ============
BALANCE SHEET DATA
(AT END OF YEAR)
Current assets....................... $ 7,719,069 12,122,658 9,650,493 3,102,741 10,972,178
Investments in Galactic/TEMPO Sound
Partnership........................ 504,156 456,929 450,289 476,448 332,826
Goodwill, net of accumulated
amortization....................... 4,535,658 -- -- 15,459 41,960
Other assets, net of accumulated
depreciation....................... 99,148 166,419 55,169 54,000 219,141
Property and equipment, net of
accumulated depreciation........... 5,893,988 4,336,378 4,443,995 3,225,093 2,388,227
------------ ------------ ------------ ------------ ------------
Total assets......................... $ 18,752,019 17,082,384 14,599,946 6,873,741 13,954,332
============ ============ ============ ============ ============
Current liabilities.................. $ 16,636,107 3,250,042 3,405,082 3,714,835 3,198,719
Royalty payable...................... 1,773,275 1,251,983 713,421 267,770 37,162
Deferred revenue..................... 295,461 376,395 418,540 -- --
Capital lease obligation............. 1,401,426 1,446,085 1,502,990 -- --
Notes payable........................ -- -- 201,090 382,545 --
Investment in DMX-Europe N.V......... -- 15,886,116 8,175,171 3,428,932 --
------------ ------------ ------------ ------------ ------------
Total liabilities.................... 20,106,269 22,210,621 14,416,294 7,794,082 3,235,881
Net stockholders' (deficit) equity... (1,354,250) (5,128,237) 183,652 (920,341) 10,718,451
------------ ------------ ------------ ------------ ------------
Total liabilities and stockholders'
equity............................. $ 18,752,019 17,082,384 14,599,946 6,873,741 13,954,332
============ ============ ============ ============ ============
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
SUMMARY OF PERFORMANCE.
The net loss for the fiscal year ended September 30, 1996 was $33.8 million
or $0.68 per share compared to $23.1 million or $0.60 per share for the fiscal
year ended September 30, 1995. The increase in the net loss of $10.7 million
primarily resulted from the Company's accrual for estimated loss on disposal of
DMX-E of $7.2 million and the increased net loss resulting from DMX-E's
operations of $3.5 million. The Company has entered into agreements which
provide for the disposition of DMX-E to Mr. Jerold H. Rubinstein, its Chairman
and Chief Executive Officer. The Company had previously determined to cease
financial support of DMX-E and, in the absence of some other arrangements to
provide financial support to those Companies, to
20
<PAGE> 168
place them in receivership. Accordingly, the Company has estimated the loss on
the disposal of DMX-E in the accompanying consolidated statements of operations.
The increase in revenues of $4.5 million or 35.6% was primarily attributed
to the growth in commercial subscribers and growth in residential subscribers
resulting from the launch of DMX on PrimeStar in the first quarter of the fiscal
year.
The Company continues to focus on expanding its market share in the
commercial arena and continues to develop third party distribution
relationships. In the first quarter of the 1996 fiscal year, DMX was launched by
two third party distributors: PrimeStar and TML-Bluestar. PrimeStar initially
offered eight DMX formats as a basic service to all PrimeStar subscribers for a
per subscriber fee, and will be expanding the DMX format offerings to include
both basic and premium tier options. TML-Bluestar is offering 40 music formats
to all MultiChoice basic subscribers in Sub-Saharan Africa for a per subscriber
license fee. The Company does not incur any incremental costs in providing the
signal to TML-Bluestar for distribution, nor is it responsible for the payment
of music rights. Additionally, DMX was launched on AlphaStar Television Network
Inc. as a basic service for a per subscriber license fee in the latter part of
the 1996 fiscal year.
RESULTS OF OPERATIONS.
REVENUE DMX INC.
The Company's revenues were generated from affiliated cable system
subscriber fees for cable distribution of DMX to residential and commercial
subscribers; affiliated cable system subscribers fees for DBS distribution to
commercial subscribers; subscriber fees from third party DBS distributors;
subscriber fees from the Company's DBS distribution through its DMX for
Business, commercial national account sales program and owned and operated sales
program; subscriber fees from the Company's launch of a DTH service through its
DMX-Direct sales program; fees from the Company's recent launch of on-premise
business music service, DMX-Disc; and fees earned from licensing and royalty
arrangements in foreign markets.
Total revenues for the fiscal year increased to $16.5 million in 1996 from
$12.8 million in 1995. The $3.7 million or 29.1% increase was primarily
attributed to: (i) increased residential subscriber fees resulting from the
launch of DMX on PrimeStar in the first fiscal quarter of 1996 (this added
source of revenue did not exist in the prior year); (ii) continued growth in
commercial subscriber fee revenue as a result of increased sales and marketing
activity in the affiliate sales, national accounts, and O&O groups; and (iii)
increased other revenue representing equipment sales and lease revenue related
to the growth and increased sales and marketing activity of the commercial sales
group. In June, 1994, the Company launched on the Ku-Band satellite which
enabled DMX for Business to gain access to nearly 100% of the business
marketplace in the United States. Concurrent with this launch, the Company's
commercial division implemented its national accounts sales program, and in May
1995 launched its first owned and operated sales group ("O&O") in the Southern
California business market.
Commercial subscriber fees represented approximately 36.0% as compared to
30.7% of total subscriber fee revenue for the fiscal years ended September 30,
1996 and 1995, respectively. Residential subscriber fees represented
approximately 64.0% and 69.3% of total subscriber fee revenue for the fiscal
years ended September 30, 1996, and 1995, respectively. Subscriber fee revenue
from TCI and its affiliates represented approximately 55% and 61% of total
subscriber fees, for the years ended September 30, 1996 and 1995, respectively.
Total revenues for the 1995 fiscal year increased to $12.8 million from
$9.4 million in 1994. The $3.4 million or 36.2% increase was primarily
attributed to increased commercial subscriber fees of 103% and an increase in
residential subscriber fees of approximately 16.9%. Commercial subscriber fees
represented approximately 31% and 20% of total subscriber fee revenue for the
fiscal years ended September 30, 1995 and 1994, respectively. Residential
subscriber fees represented approximately 69% and 80% of total subscriber fee
revenue for the fiscal years ended September 30, 1995 and 1994, respectively.
Subscriber fee revenue from TCI and its affiliates represented approximately 61%
and 65% of total subscriber fees for the years ended September 30, 1995 and
1994, respectively.
21
<PAGE> 169
REVENUE DMX-E.
The Company has not previously consolidated the operations of DMX-E and as
such amounts for 1996 represent the activities from acquisition date of May 17,
1996 through September 30, 1996. As discussed below, the Company has decided to
dispose of or cease the operations of DMX-E.
OPERATING EXPENSES -- DMX INC.
Total operating expenses increased to $39.5 million for the fiscal year
ended September 30, 1996 from $23.5 million for 1995. The $16.0 million or 68%
increase was primarily attributed to the inclusion of operating expenses and
estimated loss on disposal of DMX-E. Additionally, the increase was attributable
to increased sales and marketing expense of $1.1 million resulting from the
expansion of the national accounts sales program and the O&O sales group;
increased studio and programming expense of $1.2 million resulting from an
increase in music rights commensurate with the growth in subscribers and fee
revenue; the increased number of music formats from 69 to over 90 channels and
increased satellite and uplink costs due to double illumination in December 1995
through February 1996, while the Company migrated from the AT&T Telstar 401
Ku-Band satellite to the AT&T Telstar 402R Ku-Band satellite.
Total operating expenses increased to $23.5 million for the fiscal year
ended September 30, 1995 from $21.6 million for 1994. The $1.9 million or 8.8%
increase was primarily attributed to increased studio and programming expense of
$2.3 million, reflecting the transponder and uplinking expenses due to the
Ku-Band satellite launch in June 1994 and increased music rights expense
corresponding to subscriber fee revenue growth; increased sales and marketing
expense of $969,000, due to new commercial sales programs; and an increased
general and administrative expense of $614,000 primarily due to an increase in
the provision for doubtful accounts. These increases were partially offset by
the decrease in stock bonus expense of $2.0 million.
General and Administrative Expenses.
General and administrative expenses include costs incurred to operate the
Company's corporate office facilities, such as rent and insurance, personnel
costs associated with the general corporate and finance staff, as well as
outside professional fees for legal, audit and tax services.
General and administrative expenses increased to $5.8 million for the
fiscal year ended September 30, 1996 from $5.5 million for 1995. The $291,000
net increase was primarily attributed to net increases in personnel cost of
$290,000 which included an increased performance bonus paid to the Chairman, a
reclassification of a certain executive's compensation from sales and marketing
to general and administrative, and increases due to additional staff which all
occurred in the first half of the fiscal year and was partially offset by
decreases in salaries because of an executive officer and other staff leaving
the Company in the second half of the fiscal year. Other net changes in general
and administrative expenses included increased legal fees of $161,000 and
increased printing and investor materials of $100,000 due to the DMX-E merger
and special shareholders meeting regarding such merger and other business
development activities; partially offset by a reduction in occupancy expense of
$77,000 which resulted from the negotiation of more favorable lease terms;
decreased consultant fee expense of $74,000; decreased other shareholder
relations expense of $63,000 and decreased public relations expense of $26,000.
General and administrative expenses increased to $5.5 million for the
fiscal year ended September 30, 1995 from $4.9 million for 1994. This $614,000
or 12.5% net increase was primarily attributed to the increase in provision for
doubtful accounts of $543,000; an increase in personnel costs of $286,000, due
to the use of temporary consultants and addition and replacement of staff, a
performance bonus paid to the Chairman and normal salary adjustments; increase
in rent of $49,000; less reductions in legal expense of $164,000 and public
relations expense of $75,000 as the Company relied less on outside firms and
established a public relations department internally.
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<PAGE> 170
Sales and Marketing Expenses.
Sales and marketing expenses include costs incurred for both the
residential and commercial sales divisions in connection with new cable system
launches of DMX; the related cooperative funding provided to systems to assist
their marketing efforts; the costs related to the marketing of DMX for Business;
the accrual of the Scientific-Atlanta royalties; the sales and support staff and
related expenses; and the development of marketing campaigns and materials.
Sales and marketing expense increased to $8.6 million for the fiscal year
ended September 30, 1996 from $7.4 million for 1995. The $1.1 million or 14.9%
increase represented an increase of $477,000 in salaries and commissions
resulting from increased sales and marketing activities of the Company's
commercial division, which added sales and support staff for the national
account sales program and the O&O group. Other sales and marketing expense
increases primarily represented increased office, rent and telephone of $221,000
related to the commercial division expansion; increased travel and entertainment
and convention and conferences totaling $363,000, reflecting growth in the sales
force and direct marketing activities for both the residential and commercial
divisions, including the Company's contribution and marketing activities related
to the 1996 Summer Olympics.
Sales and marketing expense increased to $7.4 million for the fiscal year
ended September 30, 1995 from $6.5 million for 1994. The increase of $969,000 or
15.0% primarily represented increased salaries and commissions of $930,000 from
the launch of the Company's DMX-Direct sales program during the year and the
reallocation of the related executive's salary in charge of that program from
general and administrative expense in the prior year and the building of the
sales and support staff for the national account sales program and owned and
operated sales program.
Other fluctuations in sales and marketing expense during the fiscal year
ended September 30, 1995 included an increase in installation costs of $100,000
related to commercial sales; an increase in the Scientific-Atlanta royalty
accrual of $93,000 commensurate with the growth in cable subscriber revenue;
increases in travel & entertainment expense of $100,000, postage and shipping of
$96,000 and other miscellaneous office expense of $67,000, as the sales force
grew and direct marketing for both residential and commercial divisions played a
more significant role as compared to expenses incurred for new cable system
launches and related cooperative funding provided to the cable systems in prior
years. Marketing expenses related to new cable system launches and related
cooperative funding provided to the systems decreased by $470,000.
Studio and Programming Expenses.
Studio and programming expenses include costs incurred for music
performance royalties, music research and programming of DMX formats, studio
facility overhead, satellite transponder and uplinking expenses.
Studio and programming expense increased to $9.0 million for the fiscal
year ended September 30, 1996 from $7.8 million for 1995. The $1.2 million or
15.4% increase represented increased music rights expense of $776,000
commensurate with the growth in subscribers and fee revenue; increased uplink
and satellite cost of $156,000, representing the cost of double illumination as
the Company migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T
Telstar 402R Ku-Band satellite in the second quarter of the fiscal year. The
remainder of the net increase of $231,000 represented increased salaries,
program consultant expenses and the direct costs related to the Company's
increase in music formats from approximately 69 to over 90 over the last year
and DMX-Disc production cost incurred to establish the new on-premise DMX-Disc
product line.
Studio and programming expense increased to $7.8 million for the fiscal
year ended September 30, 1995 from $5.5 million for 1994. The increase of $2.3
million or 41.8% primarily represented an increase in satellite transponder and
uplinking expense of $1.4 million attributed to the Ku-Band satellite launch in
June 1994; an increase in music rights expense of $616,000 commensurate with the
growth in subscribers and fee revenue; and an increase in salaries of $243,000
reflecting added studio and programming personnel to manage the expansion to
over 90 channels by the end of the year.
23
<PAGE> 171
International Development Expenses.
International development expenses include costs incurred for the continued
development of DMX distribution opportunities outside of the United States.
International development expense decreased to $2,000 for the fiscal year
ended September 30, 1996 from $168,000 for 1995 as the Company did not focus on
new development of DMX distribution in foreign companies, outside of Europe, as
it had in previous years.
International development expense increased to $168,000 for the fiscal year
ended September 30, 1995 from $61,000 for 1994. The increase was primarily due
to consulting fees and increased travel expenses related to business
development, and the demonstration of DMX to potential foreign partners.
Research and Development Expenses.
Research and development expenses include costs incurred for the ongoing
development of new technologies and refinements of existing technology used in
the distribution of DMX both in the U.S. and in Europe including the DTH
technology developed for DMX-E's launch on the ASTRA satellite in 1995. Overhead
and project development costs of the engineering department are allocated on a
shared benefit basis with DMX-E.
Research and development expense of $778,000 for the fiscal year ended
September 30, 1996 remained comparable with the prior year's expense of $725,000
as the infrastructure for both the Company and DMX-E has been established and
new development of major projects was curtailed.
Research and development expense decreased to $725,000 for the fiscal year
ended September 30, 1995 from $990,000 for 1994. The decrease was primarily
attributed to the research and development department dedicating resources to
the development of DTH technology for DMX-E which was charged to DMX-E.
Stock Bonus and Options Compensation.
Stock bonus and option compensation expense for the fiscal years ended
September 30, 1996 and 1995 was $550,000 and related to the extension of the
exercise date to December 31, 1996 on options to purchase 350,000 shares of
common stock granted to the Chairman in October 1990. The decrease in stock
bonus and option compensation expense of $2.1 million to $500,000 for the fiscal
year ended September 30, 1995 from $2.6 million for 1994 represented the
compensation related to a stock bonus granted the Chairman in 1991.
OPERATING EXPENSES -- DMX-E.
The Company has not previously consolidated the operations of DMX-E and
such amounts for 1996 represent the activities from acquisition date of May 17,
1996 through September 30, 1996. As discussed below, the Company has decided to
dispose or cease the operations of DMX-E.
OTHER INCOME (EXPENSE).
Other income (expense) includes the Company's earnings or losses from its
investment activities as well as miscellaneous other income and expense.
Other Income.
Other income decreased to $172,000 for the fiscal year ended September 30,
1996 from $780,000 and represents lease income from DMX-E for the equipment
lease.
Other income increased to $780,000 for the fiscal year ended September 30,
1995 from $332,000 for 1994. The increase was primarily attributed to the
reversal of an accrued liability of $300,000 which was recorded as an estimated
liability in 1990 related to pre-manufacturing prototype testing and
enhancements to the digital audio tuner which the Company no longer has an
obligation to pay.
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<PAGE> 172
Other Expense.
Other expense for the fiscal year ended September 30, 1996 totaled $12,000
as compared to $233,000 for 1995. The decrease related to an accrual for music
performance royalties of $220,000 in the fiscal year 1995 as settlement of a
contract negotiation.
Other expense for the fiscal year ended September 30, 1995 totaled $233,000
as compared to $106,000 for the fiscal year ended September 30, 1994. This
increase relates to an accrual related to music performance royalties of
$220,000 as settlement of a contract negotiation.
Disposal of DMX-E.
The Company has entered into definitive agreements providing for the
disposition of DMX-E to Mr. Jerold Rubinstein, the Company's Chairman and Chief
Executive Officer. DMX Inc. will retain a ten percent equity interest in the
companies which would have an exclusive, five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union, and in the
Middle East and will have the right to use the Company's trademarks for two
years. In addition, Mr. Rubinstein has agreed to guaranty certain obligations of
the European operations for satellite-uplink capacity. The Company had
previously determined to cease financial support for DMX-E operations and, in
the absence of some other arrangements to provide financial support to DMX-E, to
place them in receivership. Mr. Rubinstein will seek to reorganize the
operations of DMX-E and will seek new equity investors. If DMX-E cannot be
reorganized, then Mr. Rubinstein intends to organize a new company to distribute
the music service on essentially the same terms and the Company will subscribe
for a ten percent equity interest in the new venture.
At September 30, 1996 the estimated loss on disposal of DMX-E was accounted
for in the Company's consolidated financial statements. The estimated loss on
the disposal of DMX-E includes the Company's net investment in these
subsidiaries of $5.7 million and other obligations guaranteed by the Company of
$1.4 million.
The net loss from DMX-E operations increased to $16.8 million for the
fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase
of $3.5 million was attributed to the Company recording 100% of DMX-E net loss
for the fiscal year ended September 30, 1996 as compared to recording 100% of
DMX-E loss for the fourth quarter of the fiscal year ended September 30, 1995
and 51% for the first three quarters of the fiscal year 1995. In the fiscal year
ended September 30, 1995, DMX-E fully utilized all funds available under the
TCI-E credit facility. In the fourth quarter of the fiscal year ended September
30, 1995, the Company funded operating losses of DMX-E and accordingly the
equity in loss of DMX-E included operating losses funded by the Company in
excess of its guaranteed portion of the debt.
The equity in loss of DMX-E increased to $13.3 million for the fiscal year
ended September 30, 1995 from $4.7 million for 1994. The increase of $8.6
million was attributed to DMX-E's increased net loss due to increased technical,
legal and administrative expenses incurred to develop the necessary
infrastructure to provide 83 DMX channels for the DTH launch on the ASTRA
satellite system. DMX was launched in August 1995 in Germany, Austria and
Switzerland and marked the beginning of the Pan European launch of DMX
distribution.
LIQUIDITY AND CAPITAL RESOURCES.
The Company has historically funded its operations primarily through the
sale of its common stock. During the fiscal year ended September 30, 1996, the
Company generated funds through financing activities that included proceeds of
$10.3 million resulting from the sale of $1.0 million of its Common Stock to a
former director-shareholder, the sale of $9.0 million of Common Stock to TCI and
$293,000 from the exercise of options by the Chief Executive Officer to purchase
150,000 shares of Common Stock at $1.95 per share. The decrease in cash of $7.5
million for the year was the net result of $10.3 million of cash raised in
financing activities less cash used in investing activities of $8.5 million,
relating primarily to the funding of DMX-E losses, and cash used in operating
activities of $8.9 million.
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With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from it's operating activities on a
prospective basis, and has reduced its operating expenses to extend the U.S.
operation's working capital. However, the Company will need additional funding
to meet certain obligations related to the discontinuance of operations of DMX-E
and to continue to expand and develop the Company's business pursuant to
management's current plans. The Company is negotiating with TCI for a $3.5
million loan to fund past and future tuner purchases. At December 31, 1996, the
Company was obligated to purchase 8,300 Comstream DR-200 Digital Satellite
Receivers at an aggregate cost of approximately $3,000,000. To the extent not
otherwise satisfied by approved customers or affiliates of the Company, the
Company intends to utilize a portion of the proceeds of the TCI loan to fund
such purchase commitment. The Company is negotiating to extend the term of the
purchase commitment and may also seek to obtain additional financing, if
necessary, for such tuner purchases. However there can be no assurances that
such extension or financing can be obtained. However, the Company is not seeking
additional financing at this time to fund its other operational requirements and
its obligations related to the discontinuance of the operations of DMX-E due to
the pendency of the TCI acquisition proposal and management's belief that with
the closure of the Company's European operations, its domestic cash flow should
be sufficient to meet the Company's cash requirements. However, if such
assumption is not accurate or if future financing is required and is not
available, then management would seek to continue to reduce operating expenses
and capital spending as necessary as a means to stem cash shortfalls. These
operating expenses include both discretionary spending, such as sales and
marketing expenses and overhead costs, such as general and administrative
expenses. Such expenses will continually be evaluated giving consideration to
the cash flow generated from subscriber fee revenue, anticipated growth in such
revenue and available working capital. There can be no assurance that the
Company will be able to reduce its operating expenses sufficiently to meet its
available cash resources while maintaining its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The consolidated
financial statements do not include all potential adjustments that could result
from potential claims under the above noted parent guarantees or other
obligations of DMX-E. As described in notes 2 and 11 to the Company's
consolidated financial statements and in Discontinued Operations of DMX-E above,
the Company has ceased funding the operations of DMX-E and Company has entered
into agreements providing for the disposition of DMX-E to Jerold Rubinstein,
Chairman and Chief Executive Officer of the Company. Mr. Rubinstein will seek to
reorganize the operations of DMX-E and also seek new equity partners. To the
extent a reorganization cannot be achieved and in the absence of some other
arrangement to provide financial support to DMX-E, the European companies will
be placed into receivership. In such circumstances, claims may be filed under
the guarantees . Such adjustments could have a material adverse effect upon the
financial position and results of operations of the Company.
INFLATION.
Management believes that the effect of inflation has not been material to
the Company. However, inflation in the costs of personnel, marketing,
programming or certain other operating expenses could significantly affect the
Company's future operations. Current economic conditions indicate a relatively
low inflationary period and as a result, inflation is not expected to materially
affect the Company in fiscal 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K for the Company's Consolidated Financial Statements, the notes thereto, the
Consolidated Financial Statements of DMX-Europe N.V. and subsidiary, the notes
thereto and Schedules filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The Company's Certificate of Incorporation and Bylaws provide that the
number of directors shall be determined from time to time by the Board of
Directors but may not be less than three. The Board of Directors is currently
composed of seven members. The Bylaws further provide for the division of the
directors into three classes of approximately equal size, with directors in each
class elected for a three-year term and approximately one-third of the directors
elected each year.
None of the directors or executive officers were selected pursuant to any
arrangement or understanding, other than with the directors and executive
officers of the Company acting within their capacity as such. There are no
family relationships among directors or executive officers of the Company as of
the date hereof.
The following table sets forth biographical information of the directors of
the Company.
<TABLE>
<CAPTION>
YEAR FIRST
BECAME
PRINCIPAL OCCUPATION OR EMPLOYMENT DIRECTOR/
DIRECTORS AGE AND OCCUPATION FOR THE PAST FIVE YEARS TERM EXPIRES
--------- --- -------------------------------------- ----------------
<S> <C> <C> <C>
Kent Burkhart............. 62 Chairman of Burkhart/Douglas and Associates 1990/1998
since 1973. He is also President and a Director
of Degree Communications.(1)
Donne F. Fisher........... 58 Director of TCI Communications, Inc. since 1980 1996/1996
and of Tele-Communications, Inc. since June of
1994. Mr. Fisher is also a director of General
Communication, Inc. and United Video Satellite
Group Inc.
Leo J. Hindery, Jr........ 49 Founder, Managing General Partner and Chief 1996/1997
Executive Officer of InterMedia Partners since
1988. Mr. Hindery is a Director of InterMedia
Partners and Home Shopping Network, Inc.
Bhaskar Menon............. 62 Formerly Chairman and Chief Executive Officer 1991/1997
of EMI Music Worldwide from 1979 through July
1990; President and Chairman of the
International Federation of the Phonographic
Industry (IFPI) from 1989 through June 1991;
private businessman since June 1991; Chairman
of I.M.I. Incorporated since 1995.
Jerold H. Rubinstein...... 58 Chairman of the Board and Chief Executive 1986/1996
Officer of the Company since May 1986; Director
of United Services Advisors, Inc. since 1989;
Director of Spatializer Audio Laboratories,
Inc. since 1992; Chairman of the Board of
DMX-Europe since May 1993.
James R. Shaw, Sr......... 62 Founder, President and Chief Executive Officer 1993/1998
of Shaw Communications Inc. since 1970.
</TABLE>
- - ---------------
<TABLE>
<S> <C> <C> <C>
(1) A radio venture, which Mr. Burkhart was involved with through Degree Communications, defaulted
on its loan obligation in the amount of $6,000,000. The secured lender asserted its rights to
have a receiver appointed in August 1991. The receivership closed September 29, 1992.
</TABLE>
27
<PAGE> 175
<TABLE>
<CAPTION>
<S> <C> <C> <C>
J.C. Sparkman............. 64 Director of Tele-Communications, Inc. since 1989/1996
January 1997. Retired. Formerly Executive Vice
President of Tele-Communications, Inc. for more
than five years. A director of Shaw
Communications Inc., TSX -- Texscan Inc. and
United Video Satellite Group Inc.
</TABLE>
The following table sets forth biographical information of the executive
officers of the Company. For a discussion of the biographical information of Mr.
Rubinstein, see "Directors" immediately above.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION OR EMPLOYMENT
EXECUTIVE OFFICERS AGE AND OCCUPATION FOR THE PAST FIVE YEARS
------------------ --- --------------------------------------
<S> <C> <C>
J. Wendy Kim........... 41 Corporate Secretary and Chief Financial Officer since 1995.
Formerly Senior Vice President, Chief Financial Officer of
Bank of San Pedro from 1992 to 1994. Formerly Senior Manager
at KPMG Peat Marwick LLP from 1981 to 1992.
Otis Smith............. 55 Executive Vice President, Programming and Residential
Division since June 1995, Executive Vice President,
Programming of the Company since December 1992. Formerly a
record industry executive.
Douglas G. Talley...... 49 Executive Vice President and Chief Technical Officer of the
Company since January 1995. Formerly Vice President and
Chief Technical Officer from October 1992 to January 1995.
Formerly Chairman and founder of Digital Radio Labs from
1988 to 1992.
Lon A. Troxel.......... 49 Executive Vice President, Commercial Division of the Company
since April 1994; formerly Vice President, U.S./Canada
Dealer Sales at AEI Music Networks, Inc. during 1991; and
Chief Executive Officer and President of Protection One
Alarm Services from May 1988 to October 1990.
</TABLE>
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Under Section 16(a) of the Exchange Act, the Company's directors, executive
officers and any persons holding ten percent or more of the Common Stock are
required to report their ownership of Company Stock and any changes in that
ownership to the Securities and Exchange Commission (the "SEC") and to furnish
the Company with copies of such reports. Specific due dates for these reports
have been established and the Company is required to report in its Proxy
Statement any failure to file on a timely basis by such persons. Based solely
upon a review of copies of reports filed with the SEC during the fiscal year
ended September 30, 1996, all persons subject to the reporting requirements of
Section 16(a) filed all required reports on a timely basis.
28
<PAGE> 176
ITEM 11. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation.
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and for the four most highly compensated executive
officers of the Company (the "Named Executives") (determined as of the end of
the last fiscal year) for each of the fiscal years ended September 30, 1996,
1995 and 1994:
SUMMARY COMPENSATION TABLE.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUT
------------------------------ ---------------------------- -------
OTHER RESTRICTED SECURITIES ALL
NAME AND ANNUAL STOCK UNDERLYING LTIP OTHER
PRINCIPAL/POSITION YEAR SALARY(1) BONUS COMP AWARDS OPTIONS/SARS(#) PAYOUT COMP(2)
------------------ ---- --------- -------- ------- ---------- --------------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JEROLD H. RUBINSTEIN 1996 $509,600 $250,000 -- -- -- -- $ 579
Chairman of the Board 1995 509,615 200,000 -- -- 1,000,000 -- 924
Chief Executive Officer 1994 513,576 -- -- -- 350,000 -- 1,000
ROBERT M. MANNING 1996 291,965 -- -- -- -- -- --
Executive Vice 1995 251,923 -- -- -- 25,000 -- --
President(3) 1994 228,937 -- -- -- -- -- --
OTIS SMITH 1996 280,289 -- -- -- -- -- --
Executive Vice President, 1995 263,200 -- -- -- 50,000 -- --
Programming and Residential 1994 210,335 -- -- -- -- -- --
DOUGLAS G. TALLEY 1996 248,077 -- -- -- -- -- --
Executive Vice President, 1995 223,077 -- -- -- 75,000 -- --
Chief Technical Officer 1994 203,846 -- -- -- -- -- --
LON A. TROXEL 1996 256,377 -- -- -- -- -- --
Executive Vice President, 1995 241,673 -- -- -- 25,000 -- --
Commercial 1994 223,905 -- -- -- 75,000 -- --
</TABLE>
- - ---------------
(1) Includes salary, accrued vacation and amounts deferred by the named
executive pursuant to the DMX Inc. Savings Plan.
(2) Amounts contributed by the Company to the Savings Plan on behalf of the
Named Executives.
(3) Mr. Manning resigned from the Company effective September 30, 1996.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS.
Jerold H. Rubinstein is employed on an at-will basis. The Company and Mr.
Rubinstein entered into a Deferred Compensation Agreement as of October 15, 1991
(the "Rubinstein Agreement"), the terms of which were ratified by the
stockholders at the 1992 Annual Meeting. Under the Rubinstein Agreement, the
Company accrued, for the benefit of Mr. Rubinstein, $200,000 per year plus
annual interest at the rate of 1% over prime, compounded quarterly, on December
31 of each year from 1992 through 1996. In December 1993, the Compensation
Committee rescinded the Rubinstein Agreement, effective October 1, 1993, and
accelerated the payment of the outstanding compensation at September 30, 1993,
with interest through November 30, 1993. In addition, Mr. Rubinstein's annual
salary was adjusted to $500,000 through September 30, 1996, coinciding with the
original term of the Rubinstein Agreement.
The Company and Mr. Rubinstein also entered into a Stock Bonus Agreement
(the "Stock Bonus Agreement") as of October 15, 1991. Under the Stock Bonus
Agreement, Mr. Rubinstein was granted a stock bonus in the aggregate amount of
1,027,520 shares of Common Stock (the "Restricted Shares"). Pursuant to the
Stock Bonus Agreement, Mr. Rubinstein's rights in the Restricted Shares
originally vested over a period of three years, beginning September 15, 1992. In
August 1993, the Stock Bonus Agreement was amended to change the vesting
schedule to provide that no shares would vest in fiscal 1993 and 685,013 shares
would vest in fiscal 1994. In consideration of Mr. Rubinstein's agreement for
the deferral in the vesting of the shares, the Company granted Mr. Rubinstein a
non-qualified option, pursuant to the 1993 Stock Option Plan, to purchase 70,000
shares of Company Stock at an exercise price of $5.00 per share, the fair market
value of the stock on the date of the grant.
The Company and Robert M. Manning entered into an Employment Agreement
dated October 18, 1991, amended effective October 1, 1993 (the "Manning
Agreement"), pursuant to which Mr. Manning was
29
<PAGE> 177
entitled to receive an annual base salary of $150,000 for the period from
November 1, 1991 through October 31, 1994. Pursuant to the Manning Agreement,
Mr. Manning received a grant of an employee stock option to purchase 50,000
shares of Common Stock. Based on contributions to the Company and its
management, Mr. Manning's annual salary was increased to $185,000 in July 1992,
and effective October 1, 1993, the Manning Agreement was extended to September
30, 1996, and his annual salary was adjusted to $225,000 for fiscal 1994,
$250,000 for fiscal 1995 and $275,000 for fiscal 1996. Mr. Manning resigned
September 30, 1996.
The Company and DigiTempo, Inc., a California corporation, entered into an
Employment Agreement dated October 17, 1994, whereby DigiTempo, Inc. furnishes
the services of Otis Smith, in the capacity of Executive Vice President, to the
Company, and DigiTempo, Inc. receives annual compensation of $275,000 for the
period from October 17, 1994 to October 16, 1997. Mr. Smith receives basic and
extended benefits commensurate with other senior management level employees such
as vacation pay and other fringe benefits. If Mr. Smith becomes disabled during
the term of the agreement, DigiTempo, Inc. shall receive the same compensation
it is entitled to under the agreement for a time period not exceeding six
months.
The Company and Lon A. Troxel entered into an Employment Agreement dated
October 1, 1991 (the "Troxel Agreement"), pursuant to which Mr. Troxel is
entitled to receive an annual base salary of $175,000 for the period from
October 1, 1991 to September 30, 1995. Pursuant to the Troxel Agreement, Mr.
Troxel was reimbursed $18,000 for moving expenses and was granted an employee
stock option to purchase 50,000 shares of Stock. Based on contributions to the
Company and its management, effective December 1, 1993, the Troxel Agreement was
extended to December 31, 1996, and his annual salary was adjusted to $225,000
for 1994, $240,000 for 1995, and $255,000 for 1996. In addition, Mr. Troxel was
granted an employee stock option to purchase 75,000 shares of Common Stock. On
September 16, 1996, a second amendment to the Troxel Agreement was entered into
which adjusted his annual salary to $275,000 effective December 1, 1996 and
extended the Troxel Agreement to November 30, 1999. Mr. Troxel has agreed not to
acquire more than a 10% direct or indirect ownership in any cable company, other
than the Company, without the prior written consent of the Company. If Mr.
Troxel becomes disabled during the term of the agreement, he shall receive the
same compensation he is entitled to under the agreement for a time period not
exceeding six months.
The Company and Douglas G. Talley entered into an Employment Agreement
dated January 1, 1995 (the "Talley Agreement"), pursuant to which Mr. Talley is
entitled to receive an annual base salary of $225,000 for the period from
January 1, 1995 through December 31, 1995; $250,000 for 1996; and $275,000 for
1997. Pursuant to the Talley Agreement, Mr. Talley received a grant of an
employee stock option to purchase up to 75,000 shares of Common Stock. Mr.
Talley receives basic and extended benefits commensurate with other senior
management employees such as vacation pay and other fringe benefits. If Mr.
Talley becomes disabled during the term of the agreement, he shall receive the
same compensation he is entitled to under the agreement for a time period not
exceeding six months.
STOCK OPTIONS.
No stock option grants issued to Named Executives for the 1996 fiscal year.
30
<PAGE> 178
OPTION EXERCISES AND HOLDINGS.
The following table provides information with respect to the Named
Executives concerning the exercise of options during the fiscal year ended
September 30, 1996 and unexercised options held by the Named Executives as of
September 30, 1996:
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1996
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS AT
UNDERLYING 9/30/96
SHARES ACQUIRED VALUE OPTIONS AT 9/30/96 ($)(1)
ON EXERCISE REALIZED --------------------------- ---------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jerold H. Rubinstein......... 150,000 292,500 1,586,667 783,333 -- --
Robert M. Manning............ N/A N/A 239,583 16,667 -- --
Otis Smith................... N/A N/A 66,667 33,333 -- --
Douglas G. Talley............ N/A N/A 133,333 50,000 -- --
Lon A. Troxel................ N/A N/A 108,333 41,667 -- --
</TABLE>
- - ---------------
(1) Value of unexercised "in-the-money" options is the difference between the
market price of the Common Stock on September 30, 1996 ($1.8125 per share)
and the exercise price of the option, multiplied by the number of shares
subject to the option. At September 30, 1996 no options were "in-the-money."
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
Jerold H. Rubinstein, Chairman of the Board and Chief Executive Officer of
the Company, was appointed to the Compensation Committee for the 1996 fiscal
year. Mr. Rubinstein beneficially owns 5.17% of the outstanding shares of Common
Stock. (See Part III for a discussion of the compensation Mr. Rubinstein
receives.)
J.C. Sparkman, a Director and Chairman of the Compensation Committee,
retired in the last fiscal year as a senior executive officer and Director of
TCI. Mr. Sparkman is currently a director of Shaw Communications Inc. Mr.
Sparkman beneficially owns less than 1% of the outstanding Common Stock of the
Company, which includes 100,000 shares acquired at $2.50 per share in a private
placement on September 21, 1995. TCI directly through its subsidiaries
beneficially owns 43.54% of the outstanding shares of Common Stock.
The Company and a subsidiary of TCI entered into a ten year network
affiliation agreement in 1989 under which the Company's basic audio and Digital
Music Express services are made available to TCI cable television subscribers.
The Company continues to pursue commercial applications of its DMX service for
businesses, stores, restaurants, hotels and other establishments through its
existing affiliation agreements both in areas wired for cable and by direct
broadcast satellite. TCI and its various subsidiaries' payments of license fees
to the Company accounted for approximately 55% of the Company's consolidated
gross revenues during the fiscal year ended September 30, 1996.
The Company leases studio facilities in Colorado for the origination and
uplinking of the DMX service. The studio is located in TCI's National Digital
Television Center at 4100 East Dry Creek Road, Littleton, Colorado 80122. The
six year lease agreement with WTCI, a subsidiary of TCI, is subject to the
Company's right to terminate the origination and uplinking services at any time,
with 60 days prior notice and upon payment of early termination fees. WTCI
charges the Company approximately $78,000 per month, which includes
approximately $6,400 for space rental and $72,000 for satellite uplinking
services, of which, approximately $25,000 is related to DMX-E and is paid by
DMX-E (although the Company is obligated for these payments). In addition, WTCI
provided, via a capital lease with interest at 9.5%, up to $2.2 million of
funding for studio equipment at the facility, of which approximately $2.2
million had been expended at September 30, 1996.
31
<PAGE> 179
The Company sub-leases space on a U.S. domestic communications satellite
known as C-3 Transponder 24. The sub-lease was entered into in December 1992
with WTCI, which in turn leases the satellite transponder from GE American
Communications, Inc. WTCI's monthly charge for the satellite, uplink and
management fee is approximately $204,000.
The Company sub-leases space on a Ku-Band satellite known as AT&T TELSTAR
402R. The sub-lease was entered into in March 4, 1994 with WTCI, which in turn
leases the transponder from AT&T Corp. Monthly sub-lease charges for the
transponder and uplink is approximately $166,000.
DIRECTOR COMPENSATION.
The Company does not pay fees to its directors for their service on the
Board of Directors or for attendance at meetings of the Board or committees.
Directors who were not full-time salaried employees of the Company or its
subsidiaries received a grant in fiscal 1996 of options to acquire 50,000 shares
of Common Stock, under the DMX Inc. 1993 Stock Option Plan, upon their effective
date of service as a director and after each twelve month period of continuous
service as director of the Company thereafter, received an additional option to
acquire 50,000 shares up to a maximum of two such periods.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth the beneficial ownership of Common Stock as
of December 31, 1996 by each person known to the Company to be the beneficial
owner of more than five percent of the outstanding shares of Common Stock by
each executive officer and director of the Company, and by all directors and
executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENT
NAME OF BENEFICIAL OWNERSHIP(1) OF CLASS(2)
---- -------------------------- -----------
<S> <C> <C>
Tele-Communications, Inc.................................... 27,249,575(3) 45.73%
Shaw Communications Inc..................................... 7,600,000(4) 12.21%
Jerold H. Rubinstein, Chairman of the Board and Chief
Executive Officer......................................... 3,025,828(5) 4.96%
Kent Burkhart, Director..................................... 200,000(6) *
V. Bhaskar Menon, Director.................................. 200,000(7) *
James R. Shaw, Sr., Director................................ 8,468,000(8) 14.18%
J.C. Sparkman, Director..................................... 350,000(9) *
Otis Smith, Executive Vice President........................ 83,333(10) *
Douglas G. Talley, Executive Vice President................. 133,333(11) *
Lon Troxel, Executive Vice President........................ 133,333(12) *
Directors and Executive Officers............................ 12,600,894(13) 20.30%
(a group of 9 persons)
</TABLE>
* Less than 1%
(1) Each named person has sole voting and investment power with respect to the
shares listed, except as noted below and provided by community property
laws, where applicable.
(2) Shares which the person (or group) has the right to acquire within 60 days
after December 31, 1996, are deemed to be outstanding in calculating the
percentage ownership of the person (or group) but are not deemed to be
outstanding as to any other person (or group).
(3) Shares held by Tele-Communications, Inc. and its subsidiaries and
affiliates were based upon a Schedule 13D, Amendment No. 3, filed on June
6, 1996. The business address of Tele-Communications, Inc. is 5619 DTC
Parkway, Englewood, Colorado 80111.
(4) Based upon a Schedule 13D, filed on March 15, 1995, and a Form 4 filed on
January 9, 1996. Does not include 276,080 shares held by James R. Shaw
Securities Limited, 110,580 shares held by Brasha Holdings Ltd., 110,580
shares held by Jay-Shaw Holdings Ltd., 110,580 shares held by Julmar
Holdings Ltd., and 110,580 shares held by Shawnee Estates Ltd., which
entities are affiliates of Shaw Communications Inc. Shaw Communications
Inc. is a public company whose non-voting securities are
32
<PAGE> 180
listed on the Toronto Stock Exchange and the Alberta Stock Exchange. Mr.
Shaw, Sr. and members of his family and members of Leslie E. Shaw's (Mr.
Shaw, Sr.'s brother) family hold directly and indirectly, a majority of the
voting shares of Shaw Communications Inc. and such shares are governed by
the terms of a voting trust. Mr. Shaw, Sr. and members of his family do
not, directly or indirectly, hold a majority of the publicly traded
non-voting shares. The business address of Shaw Communications Inc. is
630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
(5) Includes 9,000 shares owned of record by Mr. Rubinstein's wife and minor
child and 1,386,667 shares which Mr. Rubinstein has the right to acquire
within 60 days of December 31, 1996, by the exercise of vested stock
options. Mr. Rubinstein's business address is 11400 West Olympic Boulevard,
Suite 1100, Los Angeles, California 90064-1507.
(6) Represents 200,000 shares which Mr. Burkhart has the right to acquire
within 60 days of December 31, 1996, by the exercise of vested stock
options.
(7) Represents 200,000 shares which Mr. Menon has the right to acquire within
60 days of December 31, 1996, by the exercise of vested stock options.
(8) Includes the following shares, to which Mr. Shaw, Sr. disclaims beneficial
ownership: 7,600,000 shares held by Shaw Communications Inc., 276,080
shares held by James R. Shaw Securities Limited, 110,580 shares held by
Brasha Holdings Ltd., 110,580 shares held by Julmar Holdings Ltd., 110,580
shares held by Shawana Estates Ltd., and 110,580 shares held by Jay-Shaw
Holdings Ltd. Mr. Shaw, Sr. holds a majority of the shares of Jay-Shaw
Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining
shares of each such entities, other than certain preferred shares held by
Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, Sr., are held
by children of Mr. Shaw, Sr. Each of the children has reached the age of
majority. Mr. Shaw, Sr. holds 48% of the voting shares of James R. Shaw
Securities Limited. The balance of voting shares are held by and for the
benefit of Mr. Shaw, Sr.'s family members. Includes 100,000 shares which
Mr. Shaw, Sr. has the right to acquire within 60 days of December 31, 1996,
by the exercise of vested stock options. Mr. Shaw, Sr.'s business address
630-3rd Avenue, Suite 900, Calgary, Alberta T2P4L4.
(9) Includes 200,000 shares which Mr. Sparkman has the right to acquire within
60 days of December 31, 1996, by the exercise of vested stock options.
(10) Includes 83,333 shares which Mr. Smith has the right to acquire within 60
days of December 31, 1996, by the exercise of vested stock options.
(11) Includes 133,333 shares which Mr. Talley has the right to acquire within 60
days of December 31, 1996 by the exercise of vested stock options.
(12) Includes 133,333 shares which Mr. Troxel has the right to acquire within 60
days of December 31, 1996, by the exercise of vested stock options.
(13) Includes 2,493,333 shares which members of the group have the right to
acquire within 60 days of December 31, 1996, by the exercise of vested
stock options. Includes those shares described in note 8, to which Mr.
Shaw, Sr. has disclaimed beneficial ownership.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Tele-Communications, Inc. ("TCI"), beneficially owns 43.54% of the
outstanding shares of Common Stock which includes 2,000,000 shares acquired at
$2.50 per share in a private placement on August 29, 1995 and 4,500,000 shares
acquired at $2.00 per share in a private placement on May 17, 1996. As a result
of the merger in 1996 of TCI-E into the Company upon the terms set forth in the
Agreement and Plan of Merger among TCI-E, United Artists Programming
International, Inc. ("UAPI") and the Company, UAPI, an affiliate of TCI, was
issued 10,841,624 shares of Common Stock.
The Company under an agreement with Western Tele-Communications, Inc.
("WTCI"), a subsidiary of TCI, has a capital lease to lease equipment for its
studio and uplinking facility in Littleton, Colorado. The obligation under the
capital lease at September 30, 1996 was $1,492,550 with terms which extend to
2000 at an interest rate of 9.5%. The Company is also obligated to WTCI under
various operating leases for uplinking
33
<PAGE> 181
and satellite services. The total expense under those leases for the fiscal year
ended September 30, 1996 and 1995 were $4,831,000 and $4,489,000, respectively.
Total subscriber fee revenue from TCI and its affiliates represented
approximately 56% and 61% of total subscriber fee revenue for the fiscal years
ended September 30, 1996 and 1995, respectively, with accounts receivable due
from TCI and its affiliates at September 30, 1996 and 1995 totaling
approximately $1,829,000 and $1,876,000, respectively.
Shaw Communications Inc. ("Shaw"), beneficially owns 12.21% of the
outstanding shares of Common Stock of the Company, which includes shares
acquired through various stock purchase agreements, including 1,100,000 shares
acquired at $2.13 per share in a private placement on March 9, 1995, and
2,000,000 shares acquired at $2.50 per share in a private placement on August
25, 1995. James R. Shaw, Sr., President and Chief Executive Officer of Shaw
Communications Inc., is a director of the Company. Mr. Sparkman a director of
the Company is a director of Shaw Communications Inc. In March 1992, Shaw, the
second largest cable operator in Canada, entered into a licensing and royalty
agreement with the Company which provides the Company with a monthly, per
subscriber programming royalty for both residential and commercial distribution.
In addition, Shaw formed a Canadian company, DMX-Canada Ltd. which is a partner
in "The DMX-Canada Partnership", a partnership with 450714 B.C. Ltd., a
subsidiary of the Company.
During 1995, the Company and Shaw entered into a series of agreements to
accomplish a reorganization by which Shaw could take full advantage of the
Canadian tax losses incurred in Canada, during the market development period and
based on Shaw's commitment to fund such development costs. This was accomplished
through the transfer of each company's respective equity interests, and the
formation of a new Canadian partnership (also referred to herein as DMX-Canada).
DMX Inc. continues to hold an equity interest in the new partnership through its
wholly owned subsidiary, a British Columbia corporation, 450714 B.C. Ltd. There
is no impact from the reorganization on the operations of DMX-Canada, other than
to accomplish the tax structure as outlined above. After Shaw recoups its
initial funding, each company will share in the profits based on their
respective equity interests.
In August 1994, the CRTC, which regulates the broadcast industry in Canada,
revoked the license previously granted to DMX-Canada for Canadian distribution
of DMX. DMX-Canada reapplied to the CRTC during 1995 for a license to distribute
DMX to Canadian residential cable subscribers. The CRTC issued a favorable
ruling in December 1995. DMX-Canada is currently reviewing the economic terms of
the ruling and the feasibility of developing DMX distribution to cable
subscribers. There is no date currently set for a launch. The CRTC does not
regulate programming delivered to commercial establishments by direct broadcast
satellite. DMX-Canada launched its DMX for Business service in Shaw's affiliated
territories in Vancouver and Edmonton in November 1994. DMX-Canada expanded the
distribution of DMX in 1995.
Stephen A. Wynn, Chairman of the Board, President and Chief Executive
Officer, Mirage Resorts, Incorporated, resigned as a director of the Company in
May 1996 concurrently with his sale of 5,700,000 shares of Common Stock to TCI
at $2.00 per share, which included 2,200,000 shares acquired by him at $2.13 per
share in a private placement on February 21, 1995 and 500,000 shares acquired at
$2.00 per share in a private placement on March 15, 1996. In April 1995, the
Company entered into a five year commercial music service agreement with Mirage
Resorts, Inc. where the Company provides its DMX for Business music service for
a monthly fee.
The Company has entered into definitive agreements with Jerold H.
Rubinstein, Chairman of the Board and Chief Executive Officer, of the Company,
which provide for Mr. Rubinstein to either purchase a 90% interest in DMX-E in a
transaction reference to as the "Reorganization Plan", or if agreement cannot be
reached with the creditors of DMX-E, then Mr. Rubinstein will organize a new
company ("NewCo") that will distribute DMX service in Europe. In that event, DMX
Inc. will receive a 10 percent interest in NewCo and DMX-E will be placed in the
hands of a receiver. See "Business -- Recent Developments."
34
<PAGE> 182
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K.
(a) Consolidated Financial Statements and Schedules. Reference is made to
the Index to Consolidated Financial Statements of DMX Inc. and Subsidiaries and
Schedules for the period ended September 30, 1996, for a list of financial
statements and schedules filed as part of this report at page F-1.
The Consolidated Financial Statements of its subsidiary, DMX-Europe (N.V.)
as of and for the period ended September 30, 1996, filed as part of this report
at page F-19.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
the quarter ended September 30, 1996.
(c) Exhibits. Following is a list of Exhibits filed with this report.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1(1) -- Form of Arrangement Agreement [2.1]*
2.2(2) -- Certificate of Discontinuance issued by Department of
Consumer and Corporate Affairs, Canada[2.2]*
2.3(2) -- Certificates of Domestication, Merger, Name Change and
Correction filed in Delaware by ICT-Canada and
ICT-Delaware to implement the Reorganization as of
September 28, 1990 [2.3]*
3.1(12) -- Amended and Restated Certificate of Incorporation of the
Registrant
3.2(1) -- Bylaws of the Registrant [3.2]*
4.1(3) -- Articles IV, VI, VII, VIII, XI, XII of the Certificate of
Incorporation of the Registrant (filed as part of Exhibit
3.1)
4.2(1) -- Articles II, III, VII and XI of the Bylaws of the
Registrant (filed as part of Exhibit 3.2)
4.3(4) -- Form of Agent's Warrant to Cruttenden & Company and
Robert S. London [4.3]*
4.4(1) -- Broker's Warrant to Merit Investment Corporation [4.4]*
4.5(1) -- Form of Option Agreement for Director, Officer and
Employee Options [4.5]*
4.6(5) -- TCI Equity Participation Agreement [4.6]*
4.7(1) -- Viacom Equity Participation Agreement [4.7]*
4.8(1) -- KBL Services Equity Participation Agreement [4.8]*
4.9**(11) -- Loan Agreement between ICT-Europe and TCI-Euromusic
("TCI-E"), (without exhibits) dated May 19, 1993
4.10(11) -- Contribution Agreement between TCI-Euromusic and the
Registrant dated May 19, 1993
10.1(5) -- TCI Equity Participation Agreement (filed as Exhibit 4.6)
10.2(1) -- Viacom Equity Participation Agreement (filed as Exhibit
4.7)
10.3(1) -- KBL Services Equity Participation Agreement (filed as
Exhibit 4.8)
10.4**(11) -- Affiliation Agreement between the Registrant and Colony
Communications dated May 1, 1992 [10.4]*
10.5**(11) -- Affiliation Agreement between the Registrant and Crown
Media, Inc., dated July 1, 1992 [10.5]*
10.6**(11) -- Affiliation Agreement between the Registrant and Prime II
Management, L.P. [10.6]*
</TABLE>
35
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.7(11) -- Stock Purchase Agreement between the Registrant and
various private parties, dated August 2, 1991 [10.7]*
10.8(11) -- Stock Purchase Agreement between the Registrant and
Scudder Development Fund, dated August 23, 1993 [10.8]*
10.9(11) -- Stock Purchase Agreement between the Registrant and Crown
Media, Inc. dated July 22, 1992 [10.9]*
10.10(11) -- Stock Purchase Agreement between the Registrant and Crown
Media, Inc. dated August 30, 1993 [10.10]*
10.11(11) -- Stock Purchase Agreement between the Registrant and
Brahman Partners, II, L.P. dated September 15, 1993
[10.11]*
10.12(11) -- Stock Purchase Agreement between the Registrant and Quota
Fund, N.V.-Brahman, dated September 15, 1993 [10.12]*
10.13(11) -- Stock Purchase Agreement between the Registrant and
Genesis Capital Fund, dated September 15, 1993 [10.13]*
10.14(11) -- Stock Purchase Agreement between the Registrant and Shaw
Cablesystems, dated March 9, 1992 [10.14]*
10.15(11) -- Stock Purchase Agreement between the Registrant and Shaw
Communications, Inc., dated September 30, 1993 [10.15]*
10.16(6) -- Stock Bonus Agreement with Jerold H. Rubinstein****
[10.15]*
10.17(11) -- Amendment to Stock Bonus Agreement****
10.18(6) -- Deferred Compensation Agreement with Jerold H.
Rubinstein**** [10.16]*
10.19(1) -- Employment Agreement with W. Thomas Oliver***[10.11]*
10.20(11) -- Employment Agreement with Robert M. Manning***
10.21(5) -- SSI Affiliation Agreement [10.2]*
10.22(5) -- Viacom Affiliation Agreement [10.3]*
10.23(5) -- KBLCOM Residential Affiliation Agreement [10.4]*
10.24(2) -- Western Tele-Communications ("WTCI") Security Agreement
and Promissory Note [10.14]*
10.25(7) -- Studio Facility and Uplinking Agreement between Western
Tele-Communications, Inc. and the Registrant [10.15]*
10.26**(11) -- Agreement for Acquisition of Capital Stock and for the
Governance of ICT-Europe N.V. ("ICT-E") (without
exhibits), dated May 19, 1993
10.27**(11) -- ICT-Europe Technology License and Services Agreement
(without exhibits), dated May 19, 1993
10.28**(11) -- ICT-Europe Trademark Agreement (without exhibits), dated
May 19, 1993
10.29**(11) -- ICT-Europe Loan Agreement, dated May 19, 1993 (filed as
Exhibit 4.9)
10.30(11) -- Contribution Agreement between TCI-Euromusic and ICT,
dated May 19, 1993 (filed as Exhibit 4.10)
10.31(11) -- ICT-Europe Equipment Lease, dated May 18, 1993 (without
exhibits)
10.32(11) -- Registrant Promissory Note in favor of TCI-E, dated May
19, 1993
10.33(11) -- Registrant Security Agreement in favor of TCI-E, (without
exhibits) dated May 19, 1993
10.34**(11) -- License and Distribution Agreement between ICT-Europe and
Broadcom International Holdings, as amended, dated March
31, 1992
</TABLE>
36
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.35**(11) -- License and Distribution Agreement between the Registrant
and DMX-Canada, dated March 9, 1992
10.36(4) -- NACR License and Marketing Agreement [10.10]*
10.37(2) -- Manufacturing and Sales Agreement between the Registrant
and Scientific-Atlanta, Inc. [10.12]*
10.38(2) -- License and Technical Assistance Agreement between the
Registrant and Scientific-Atlanta [10.13]*
10.39(1) -- FSL Development and Licensing Agreement, as amended
[10.8]*
10.40(1) -- GE American Communication, Inc. Agreement Regarding
Satellite Carriage [10.9]*
10.41**(11) -- COMSTREAM Agreement between the Registrant and COMSTREAM
Corporation, dated July 22, 1993
10.42**(11) -- COMSTREAM Option Agreement between the Registrant and
COMSTREAM Corporation, dated July 22, 1993
10.43(1) -- Joint Venture Agreement with Galactic Radio, Partners,
Inc. [10.7]*
10.44**(11) -- Sky Subscribers Management and Access Agreement between
ICT-Europe and Sky Subscribers Services Limited, 1993
10.45**(11) -- NDC Technology License Agreement between News Datacom
Limited, ICT-Europe and ICT-Europe UK, dated July 26,
1993
10.46(6) -- Employee Stock Purchase Plan**** [10.17]*
10.47(6) -- 1991 Incentive Stock Option Plan**** [10.18]*
10.48(8) -- 1991 Non-Qualified Stock Option Plan**** [4.10]*
10.49(8) -- 1991 Non-Qualified Stock Option Plan for Non-Employee
Directors**** [4.11]
10.50(9) -- 1993 Stock Option Plan**** [28.1]*
10.51(9) -- Form of ICT Non-Qualified Stock Option Agreement****
(Non-Employee Director) [28.2]*
10.52(9) -- Form of ICT Non-Qualified Stock Option Agreement****
(Employee and Employee-Director) [28.3]*
10.53(9) -- Form of ICT Incentive Stock Option Agreement**** [28.4]*
10.54(11) -- Principal Executive Office Lease, California
10.55(11) -- C-3 Satellite Transponder Sub-Lease Agreement between
WTCI and the Registrant
10.56(10) -- Satellite Transponder Management Agreement between WTCI
and the Registrant, dated December 2, 1992
10.57(10) -- Satellite Transponder Management Agreement between WTCI
and the Registrant, dated January 27, 1993
10.58(10) -- Assignment and Assumption Agreement between WTCI and
ICT-Europe (without exhibits)
10.59**(10) -- Assignment Agreement between IDB and WTCI, dated January
21, 1993
10.60(10) -- Agreement between the Registrant and the American Society
of Composers, Authors & Publishers, dated December 20,
1991
10.61**(10) -- Agreement between the Registrant and Broadcast Music
Inc., dated October 11, 1991, as supplemented and amended
10.62**(10) -- Agreement between the Registrant and SESAC, dated
December 26, 1991
</TABLE>
37
<PAGE> 185
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.63**(11) -- Affiliation Agreement between the Registrant and Scripps
Howard, Inc. dated April 30, 1994
10.64***(11) -- Employment Agreement between the Registrant and Lon
Troxel, dated October 1, 1991, as amended.
10.65***(11) -- Employment Agreement between the Registrant and Keno
Thomas, dated January 24, 1994
10.66(11) -- International Cablecasting Technologies Inc. Savings
Plan, as amended
10.67(11) -- Addendum to KBLCOM Affiliation Agreement
10.68***(12) -- Employment Agreement between the Registrant and
DigiTempo, Inc., dated October 17, 1994
10.69***(12) -- Employment Agreement between the Registrant and Doug
Talley, dated January 1, 1995 >
10.70*** -- Employment Agreement between the Registrant and Lon
Troxel, dated October 1, 1991, as amended September 16,
1996
10.71***** -- Affiliation Agreement between the Registrant and
PrimeStar Partners, dated January 25, 1995
10.72***** -- Affiliation Agreement between the Registrant and
AlphaStar Television Network, Inc., dated November 29,
1995
10.73***** -- Stock Purchase and Shareholders Agreement between DMX
Inc., DMX-Europe (UK) Limited, DMX-Europe N.V. and Jerold
H. Rubinstein
10.74 -- Subscription and Shareholders Agreement between DMX Inc.,
Jerold H. Rubinstein and Xtra Music Limited
11.1 -- Statement Regarding Computation of Per Share Earnings
(included in the Registrant's Financial Statements)
21.1 -- Listing of All Subsidiaries of the Registrant
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of KPMG Peat Marwick Chartered Accountants
27. -- Financial Data Schedule
</TABLE>
- - ---------------
(1) Incorporated by Reference to the Registrant's Registration Statement on
Form S-1, July 10, 1990, file #33-35690
(2) Incorporated by Reference to the Registrant's Post-Effective Amendment No.
2 to Registration Statement on Form S-1, May 24, 1991, file #33-35690
(3) Incorporated by reference to the Registrant's Post-Effective Amendment No.
1 to Registration Statement on Form S-1, filed on October 15, 1990, file
#33-35690
(4) Incorporated by Reference to the Registrant's Amendment No. 2 to
Registration Statement on Form S-1, September 28, 1990, file #33-35690
(5) Incorporated by Reference to the Registrant's Amendment No. 1 to
Registration Statement on Form S-1, August 31, 1990, file #33-35690
(6) Incorporated by Reference to the Registrant's Registration Statement on
Form S-1, February 24, 1992, file #33-35690
(7) Incorporated by Reference to the Registrant's Post-Effective Amendment No.
3 to Registration Statement on Form S-1, August 15, 1991, file #33-35690
(8) Incorporated by Reference to the Registrant's 1992 10-K, December 13, 1992
(9) Incorporated by Reference to the Registrant's 1993 Registration Statement
on Form S-8, May 3, 1993
38
<PAGE> 186
(10) Incorporated by reference to the Registrant's 1993 10-K, December 23, 1993
(11) Incorporated by Reference to the Registrant's 1994 10-K, December 29, 1994
(12) Incorporated by Reference to the Registrant's 1995 10-K, January 9, 1996
* Indicates exhibit number of document in original filing
** Registrant has received confidential treatment for a portion of the
referenced exhibit
*** Indicates Management Contract
**** Indicates Compensatory Plan
***** Registrant has requested confidential treatment for a portion of the
referenced exhibit
39
<PAGE> 187
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
<PAGE> 188
DMX INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report on Consolidated Financial
Statements and Financial Statement Schedules.............. F-2
Consolidated Financial Statements of DMX Inc.:
Consolidated Balance Sheets -- September 30, 1996 and
1995................................................... F-3
Consolidated Statements of Operations -- Years ended
September 30, 1996, 1995 and 1994...................... F-4
Consolidated Statements of Stockholders' Deficit -- Years
ended September 30, 1996, 1995 and 1994................ F-5
Consolidated Statements of Cash Flows -- Years ended
September 30, 1996, 1995 and 1994...................... F-6
Notes to Consolidated Financial Statements................ F-7
Financial Statement Schedules have not been provided as any
information has been included in the financial statements
and notes thereto
Consolidated Financial Statements of DMX-Europe N.V......... F-19
Independent Auditors' Report................................ F-20
Consolidated Balance Sheets -- Assets....................... F-21
Consolidated Balance Sheets -- Liabilities and Stockholders'
Equity.................................................... F-22
Consolidated Statements of Operations....................... F-23
Consolidated Statement of Stockholders' Equity.............. F-24
Consolidated Statements of Cash Flows....................... F-25
Notes to Consolidated Financial Statements.................. F-26
</TABLE>
F-1
<PAGE> 189
INDEPENDENT AUDITORS' REPORT
The Board of Directors
DMX Inc.:
We have audited the consolidated financial statements of DMX Inc. and
subsidiaries as listed in the accompanying index. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We have conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DMX Inc. and
subsidiaries as of September 30, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996, in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
12 to the consolidated financial statements, the Company has experienced
recurring losses from operations and has a net capital deficiency that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 12. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in the year ended
September 30, 1994.
KPMG Peat Marwick LLP
Los Angeles, California
January 15, 1997
F-2
<PAGE> 190
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 928,399 $ 8,622,119
Securities held to maturity -- 165,000
Prepaid expenses 464,545 112,281
Equipment inventory 438,163 264,895
Accounts receivable:
Trade related party 1,828,973 1,876,453
Other trade 2,732,018 1,893,020
Other -- 45,692
Allowance for doubtful accounts (251,247) (856,802)
------------- -------------
Total current assets 6,140,851 12,122,658
-------------
Current assets DMX-Europe N.V.:
Cash 192,635 --
Prepaid expenses 851,586 --
Equipment inventory 98,517 --
Accounts receivable (net) 435,480 --
------------- -------------
Total current assets DMX-Europe N.V. 1,578,218 --
------------- -------------
Total current assets 7,719,069 12,122,658
Investment in Galactic/TEMPO Sound (note 4) 504,156 456,929
Property and equipment, net (note 6) 4,418,799 4,336,378
Property and equipment DMX-Europe N.V., net (note 6) 1,475,189 --
Goodwill, net 4,535,658 --
Other assets 99,148 166,419
------------- -------------
Total Assets $ 18,752,019 $ 17,082,384
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 1,097,476 $ 1,182,878
Accrued liabilities (note 7) 4,886,837 1,449,938
Accrued loss on disposal -- DMX-Europe N.V. (note 5) 1,468,530 --
Short-term note payable to bank (note 8) -- 45,000
Note payable (note 8) -- 201,090
Current portion of capital lease obligation (note 11) 410,108 371,136
------------- -------------
Total current liabilities continuing operations 7,862,951 3,250,042
Current liabilities DMX-Europe N.V.:
Accounts payable 7,284,664 --
Accrued liabilities 1,488,492 --
------------- -------------
Total current liabilities DMX-Europe N.V. 8,773,156 --
------------- -------------
Total current liabilities 16,636,107 3,250,042
Deferred revenue 295,461 376,395
Royalty payable (note 11) 1,773,275 1,251,983
Investment in DMX-Europe N.V. (note 5) -- 15,886,116
Capital lease obligation (note 11) 1,401,426 1,446,085
Stockholders' deficit (note 9):
Common Stock, $.01 par value. Authorized 100,000,000
shares; issued 59,672,224 shares in 1996 and 43,680,600
shares in 1995 596,722 436,806
Paid-in capital 136,758,259 99,210,706
Accumulated deficit (138,078,913) (104,224,136)
Foreign currency translation reserve (52,315) 26,390
Treasury stock, 85,630 shares, at cost (578,003) (578,003)
------------- -------------
Net stockholders' deficit (1,354,250) (5,128,237)
Commitments and contingencies (note 11) -- --
------------- -------------
Total Liabilities and Stockholders' Deficit $ 18,752,019 $ 17,082,384
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 191
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Subscriber fee revenues -- related party $ 9,086,434 $ 7,695,978 $ 6,095,088
Subscriber fee revenues -- other 6,972,671 4,920,380 3,281,971
Other revenue, net 431,060 157,026 --
Revenue -- DMX - Europe N.V. (note 5) 836,438 -- --
------------ ------------ ------------
17,326,603 12,773,384 9,377,059
Operating expenses:
General and administrative 5,803,043 5,511,615 4,897,948
Sales and marketing 8,570,141 7,438,023 6,468,848
Studio and programming 9,016,760 7,773,759 5,455,766
International development 1,598 168,629 61,251
Research and development 778,047 725,164 990,445
Compensation to affiliates -- -- 122,654
Stock bonus and option compensation 549,708 549,708 2,561,937
Depreciation and amortization 1,883,415 1,341,775 1,065,666
Operating expenses -- DMX - Europe N.V. (note 5) 5,741,325 -- --
Loss on disposal of DMX - Europe N.V. (note 5) 7,153,278 -- --
------------ ------------ ------------
39,497,315 23,508,673 21,624,515
Net operating loss (22,170,712) (10,735,289) (12,247,456)
Other income (expense):
Galactic/TEMPO Sound 197,227 306,640 223,852
Equity in loss of DMX - Europe N.V. (note 5) (11,852,650) (13,271,599) (4,746,239)
Interest income 111,610 282,234 190,899
Interest expense (246,181) (208,694) (152,731)
Interest expense DMX - Europe N.V.(note 5) (53,936) -- --
Other income 172,270 779,866 332,368
Other expense (12,405) (232,687) (105,907)
------------ ------------ ------------
(11,684,065) (12,344,240) (4,257,758)
------------ ------------ ------------
Net loss $(33,854,777) $(23,079,529) $(16,505,214)
============ ============ ============
Loss per share $ (.68) $ (.60) $ (.48)
============ ============ ============
Weighted average number of shares 49,675,569 38,505,107 34,436,464
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 192
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
--------------------- CURRENCY
NUMBER OF PAID IN ACCUMULATED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT STOCK RESERVE TOTAL
---------- -------- ------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1993 32,031,480 $320,315 $ 63,976,740 $ (64,639,393) $(578,003) $ -- $ (920,341)
Issuance of common stock 3,530,000 35,300 14,951,725 -- -- -- 14,987,025
Cost of issuance -- -- (62,409) -- -- -- (62,409)
Issuance of common stock as
compensation to affiliates 34,107 341 122,313 -- -- -- 122,654
Issuance of common stock as
compensation 685,013 6,850 2,005,379 -- -- -- 2,012,229
Accrued compensation (note 9) -- -- 549,708 -- -- -- 549,708
Net loss -- -- -- (16,505,214) -- -- (16,505,214)
---------- -------- ------------ ------------- --------- -------- ------------
Balance at September 30, 1994 36,280,600 362,806 81,543,456 (81,144,607) (578,003) -- 183,652
Issuance of common stock 7,400,000 74,000 17,188,500 -- -- -- 17,262,500
Cost of issuance -- -- (70,958) -- -- -- (70,958)
Accrued compensation (note 9) -- -- 549,708 -- -- -- 549,708
Foreign currency translation
reserve -- -- -- -- -- 26,390 26,390
Net loss -- -- -- (23,079,529) -- -- (23,079,529)
---------- -------- ------------ ------------- --------- -------- ------------
Balance at September 30, 1995 43,680,600 436,806 99,210,706 (104,224,136) (578,003) 26,390 (5,128,237)
Issuance of common stock 15,991,624 159,916 37,237,643 -- -- -- 37,397,559
Cost of issuance -- -- (239,798) -- -- -- (239,798)
Accrued compensation (note 9) -- -- 549,708 -- -- -- 549,708
Foreign currency translation
reserve -- -- -- -- -- (78,705) (78,705)
Net loss -- -- -- (33,854,777) -- -- (33,854,777)
---------- -------- ------------ ------------- --------- -------- ------------
Balance at September 30, 1996 59,672,224 $596,722 $136,758,259 $(138,078,913) $(578,003) $(52,315) $ (1,354,250)
========== ======== ============ ============= ========= ======== ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 193
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(33,854,777) (23,079,529) (16,505,214)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 2,229,646 1,341,775 1,065,666
Loss on retirement of property and equipment -- -- 107,806
Dividend from Galactic/TEMPO Sound 150,000 300,000 250,011
Equity in earnings of Galactic/TEMPO Sound (197,227) (306,640) (223,852)
Equity in loss of DMX-Europe N.V. 11,853,686 13,271,599 4,746,239
Loss on disposal of DMX-Europe N.V. 7,153,278 -- --
Compensation expense for stock issued to
affiliates -- -- 122,654
Compensation expense for stock bonus and
options 549,708 549,708 2,561,937
Provision for doubtful accounts 643,148 700,000 156,802
Decrease in deferred compensation -- -- (370,095)
(Increase) decrease in prepaid and other
current assets (947,596) 76,315 (427,852)
Decrease in advances to DMX-Europe N.V. -- 490,296 161,387
(Increase) in receivables (1,077,525) (715,015) (1,283,119)
Decrease (increase) in other assets 93,157 (111,250) (1,169)
(Decrease) increase in deferred revenue (80,934) (42,145) 418,540
Increase in royalty payable 521,292 538,562 445,651
Increase (decrease) in accounts payable and
accrued liabilities 4,035,653 (33,365) 37,941
------------ ------------ ------------
Net cash used in operating activities (8,928,491) (7,019,689) (8,736,667)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net (1,519,444) (954,101) (540,105)
Advances to DMX-Europe N.V., net (681,846) (2,044,311) --
Investment in preferred stock of DMX-Europe
(UK) Limited (6,440,000) (3,500,000) --
Purchase of securities held to maturity -- (165,000) (2,244,781)
Proceeds from matured securities held to
maturity 165,000 2,279,738 490,043
------------ ------------ ------------
Net cash used in investing activities (8,476,290) (4,383,674) (2,294,843)
------------ ------------ ------------
Cash flows from financing activities:
Issuance of common stock, net 10,346,094 17,191,542 14,924,616
Repayment of note payable to bank (45,000) (240,000) (240,000)
Repayment of note payable -- (181,455) (181,455)
Repayment of principal portion of capital lease
obligation (397,398) (228,225) (71,419)
------------ ------------ ------------
Net cash provided by financing
activities 9,903,696 16,541,862 14,431,742
------------ ------------ ------------
Net (decrease) increase in cash and
cash equivalents (7,501,085) 5,138,499 3,400,232
Cash and cash equivalents, beginning of year 8,622,119 3,483,620 83,388
------------ ------------ ------------
Cash and cash equivalents, end of year $ 1,121,034 8,622,119 3,483,620
============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 194
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
(1) INCORPORATION AND NATURE OF BUSINESS.
DMX Inc. (the "Company"), formerly International Cablecasting Technologies
Inc. ("ICT"), was incorporated under the laws of the state of Delaware in May
1990, to accomplish a corporate reorganization which effected a change of situs
of its predecessor company of the same name (ICT-Canada). ICT-Canada was
incorporated pursuant to the Company Act (British Columbia) on April 26, 1979,
by registration of its Memorandum and Articles under the name Can-Am
Entertainment Corporation. On November 14, 1986, its name was changed to
International Cablecasting Technologies Inc. On April 27, 1995, the Company
changed its name to DMX Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Accounting Principles and Consolidation.
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, TEMPO Sound, 450714 B.C. Ltd. and DMX-Europe
N.V. and subsidiary ("DMX-E"). All material intercompany balances and
transactions have been eliminated.
Goodwill.
Goodwill was calculated as the purchase price of DMX-E less the fair value
of net assets acquired and is being amortized over 20 years. Goodwill will be
eliminated upon the ultimate disposition of DMX-E pursuant to the Company's plan
to dispose of its operations as described in note 5. In connection with the
anticipated disposal of operations and considering the terms of such agreements
goodwill has been reduced by $5,685,000 due the impairment of its value.
Revenue Recognition and Allowance for Doubtful Accounts.
The Company recognizes revenue based upon subscriber levels for affiliate
sales and the contract terms for its direct sales. The calculation of subscriber
levels for affiliate sales is based on billing and sales information provided by
its affiliates. Direct sales revenue is recognized beginning at inception of
service ratably over the contract terms. The Company analyzes subsequent cash
receipts and other data to determine the adequacy of its allowance for doubtful
accounts.
Accounts receivable and subscriber fee revenue from related party consists
of receivables and revenues due from Tele-Communications, Inc. ("TCI"), and its
affiliates. At September 30, 1996, TCI held 45.42% of the outstanding common
stock of the Company. Total subscriber fee revenue from TCI for the fiscal years
ended September 30, 1996, 1995 and 1994 represented approximately 56%, 61% and
65%, respectively, of total subscriber fee revenue.
Investment in Galactic/TEMPO Sound Partnership.
The Company's 50% investment in Galactic/TEMPO Sound, a partnership with
Galactic Radio Partners, Inc., is accounted for using the equity method. The
50-50 joint venture commenced July 16, 1990, providing basic cable audio
programming to cable television system operators.
Disposition of DMX-Europe N.V. and Subsidiary.
On December 13, 1996, the Company announced that its board of directors had
approved the disposition of DMX-Europe N.V. and its subsidiary, DMX-Europe (UK)
Limited collectively, ("DMX-E") to Jerold H. Rubinstein, Chairman and Chief
Executive Officer of the Company. The Company had previously determined
F-7
<PAGE> 195
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
to cease financial support of DMX-E and, in the absence of some other
arrangements to provide financial support to those Companies, to place them in
receivership. The Company has since entered into definitive agreements with Mr.
Rubinstein providing for such disposition.
Mr. Rubinstein will seek to reorganize the operations of DMX-E and will
seek new equity investors. In the event DMX-E cannot be reorganized, Mr.
Rubinstein intends to organize a new company to distribute the music service on
essentially the same terms. DMX Inc. will retain or obtain a ten percent equity
interest in the European companies which would have an exclusive, five year,
royalty-free license to distribute the DMX service in Europe, the former Soviet
Union, and in the Middle East.
The Company has accounted for the effects of this disposal and accordingly
has estimated the loss on the disposal of DMX-E in the accompanying consolidated
statements of operations. The loss on disposal was estimated as the net
investment of DMX-E of $5,720,000 and the incurrence of certain potential
liabilities of $1,469,000 in conjunction with such disposal activities.
DMX-E was formed by the Company to provide the necessary management,
marketing services and operating structure for the distribution of Digital Music
Express(R) ("DMX(R)"), throughout Europe. In 1993, TCI-Euromusic, Inc.
("TCI-E"), an indirect affiliate of Tele-Communications, Inc. ("TCI"), acquired
a 49% equity interest in DMX-E through the purchase of 49% of the outstanding
common stock of DMX-E for $120,100, in addition to providing a $24.4 million
credit facility which was used for the start-up costs and initial operations of
DMX-E. The Company partially guaranteed the credit facility, and would be liable
for one-half of the TCI-E's "loss" as defined, which may be payable at the
option of the Company, in the Company's Common Stock.
On May 17, 1996, DMX Inc. consummated the merger of TCI-Euromusic, Inc.
("TCI-E") pursuant to the terms of the Agreement and Plan of Merger ("the
Agreement"), dated August 28, 1995, as amended as of November 1, 1995 and
January 17, 1996 among the Company, TCI-E and United Artists Programming
International, Inc. ("UAPI"), an indirect affiliate of TCI and owner of the
outstanding shares of TCI-E. As a result of the merger, the Company acquired the
remaining 49% interest in DMX-E.
The merger was accounted for as a purchase and the Company issued
10,841,624 shares of its Common Stock to UAPI at a purchase price totaling
$27,104,060. The purchase price less the fair value of TCI-E net assets
acquired, resulted in goodwill of $10,415,701 which is being amortized over 20
years and was calculated as follows:
<TABLE>
<S> <C>
Purchase price $27,104,060
Less book value of TCI-E net assets acquired (3,479,694)
-----------
23,624,366
Purchase price adjustments:
To adjust the investment in DMX-E for losses recorded by
TCI-E, which were also recognized by DMX Inc. based on
the modified equity method of accounting (9,026,263)
To reverse allowance for uncollectible interest recorded by
TCI-E @ 49% of the interest accrued on the notes
receivable (4,213,793)
Other 31,391
-----------
Goodwill $10,415,701
===========
</TABLE>
The accompanying consolidated balance sheet of the Company at September 30,
1996 is consolidated with the accounts of DMX-E and the accompanying
consolidated statements of operations and cash flows of the Company were
consolidated with the accounts of DMX-E for the period from May 18, 1996 through
F-8
<PAGE> 196
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
September 30, 1996. Prior to May 18, 1996, the Company accounted for its
investment in DMX-E using the equity method of accounting.
Property and Equipment.
Property and equipment is carried at cost and is depreciated over three to
six years using the straight-line method. Leasehold improvements are carried at
cost and are depreciated over the shorter of the estimated five-year useful life
of the related asset or the term of the lease.
Income Taxes.
Effective October 1, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the
"asset and liability" method of accounting for income taxes. The adoption of
SFAS No. 109 did not have any effect on the results of operations for 1994.
Foreign Currency Translation Reserve.
Unrealized gains and losses resulting from the translation of financial
statements are reflected as a separate component of stockholders' equity.
Loss per Share.
The loss per share has been calculated by dividing the loss for the year by
the weighted average number of common shares issued and outstanding during the
period. Outstanding share options, warrants, awards and shares contingently
issuable under equity participation agreements have not been considered in the
computation as their impact on the net loss per common share would be
antidilutive.
Cash Equivalents.
Cash equivalents include highly liquid investments with an original
maturity of three months or less.
Cash Flow Information.
Cash payments for interest in fiscal 1996, 1995 and 1994 were $246,200,
$236,500 and $152,700, respectively.
Use of Estimates.
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosures
of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Concentration of Credit Risk.
The Company's accounts receivable balance is comprised primarily of amounts
due from cable system operators, with the majority due from its largest
customer, TCI.
Reclassifications.
Certain reclassifications of prior period amounts have been made to conform
to the current year's reporting format.
F-9
<PAGE> 197
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) ALLOWANCE FOR DOUBTFUL ACCOUNTS.
A summary of the activity of the allowance for doubtful accounts for the
years ended September 30, 1996, 1995 and 1994 follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-----------------------------------
1996 1995 1994
----------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 856,802 156,802 --
Provision for doubtful accounts 643,148 700,000 156,802
Accounts charged-off (1,248,703) -- --
----------- -------- --------
Balance, end of year $ 251,247 856,802 156,802
=========== ======== ========
</TABLE>
(4) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
The summarized balance sheet and operating data for the twelve month
periods ended September 30, 1996 and 1995 of the Galactic/TEMPO Sound
partnership follows:
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Current assets $ 890,383 828,804
Non-current assets 143,797 186,747
Current liabilities 26,021 101,694
Partners' capital 1,008,159 913,857
Partners' draws for the period (300,000) (600,000)
Revenues 2,226,753 1,903,178
Operating expenses (1,832,299) (1,289,898)
Net income $ 394,454 613,280
=========== ===========
</TABLE>
(5) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY.
The summarized operating data for the years ended September 30, 1996, 1995
and 1994, of DMX-Europe N.V. and subsidiary follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED SEPTEMBER 30,
-------------------------------------------
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue $ 1,559,262 151,176 51,274
Operating, selling, general and
administrative expenses 15,594,979 16,500,784 8,057,052
Depreciation and amortization 909,022 541,678 125,697
------------ ------------ -----------
Operating loss (14,944,739) (16,891,286) (8,131,475)
Interest expense (3,115,621) (2,876,252) (1,217,452)
Other 22,851 54,519 22,892
------------ ------------ -----------
Net loss $(18,037,509) (19,713,019) (9,326,035)
============ ============ ===========
</TABLE>
F-10
<PAGE> 198
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The summarized balance sheet date of DMX-E as of May 17, 1996 follows:
<TABLE>
<CAPTION>
AT
MAY 17, 1996
(UNAUDITED)
---------------
<S> <C>
BALANCE SHEET DATA:
Current assets $ 2,146,889
Property and equipment net of accumulated depreciation 1,668,368
------------
Total assets $ 3,815,257
============
Trade accounts payable and accrued expenses $ 7,940,963
Intercompany -- payables due parent 2,726,157
Long-term debt 30,792,911
------------
Total liabilities 41,460,031
Net stockholders' deficit (37,644,774)
------------
Total liabilities and stockholders' deficit $ 3,815,257
============
</TABLE>
Long-term debt at September 30, 1996 of $34,393,318 represents intercompany
debt which included the original principal amount of the TCI-E note of
$24,436,000, the intercompany payables at May 17, 1996 of $2,726,157 and related
accrual interest of $7,231,161 thereon. Amounts were eliminated in the
accompanying consolidated balance sheets.
For the period from October 1, 1995 through May 17, 1996 and for the year
ended September 30, 1995, the Company charged DMX-E for certain expenses
totaling $682,000 and $3,816,000, respectively, related to salaries,
programming, marketing, equipment lease and research and development expenses
incurred by the Company on DMX-E's behalf. Amounts are included in the
accompanying consolidated statements of operations.
For the period from May 17, 1996 through September 30, 1996, the Company
charged DMX-E for certain expenses totaling $269,000, related to salaries,
programming, marketing, equipment lease and research and development expenses
incurred by the Company on DMX-E's behalf; $51,000 for royalties and $874,000
for interest on intercompany debt. These amounts along with the intercompany
balances were eliminated in consolidation in the accompanying consolidated
balance sheet and statement of operations.
In 1996, the Company was issued 10,000,000 shares of redeemable
non-cumulative, convertible, preferred stock by DMX-Europe (UK) Limited and had
advanced $3,377,000 for subscriptions to additional shares. These funds were
used to fund the operations of DMX-E.
F-11
<PAGE> 199
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) PROPERTY AND EQUIPMENT.
Property and equipment as of September 30, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Furniture and equipment $ 3,957,369 2,041,147
Leasehold improvements 181,348 186,573
Studio equipment 6,144,707 4,041,594
Music library 918,126 845,218
Computer system 1,251,460 498,411
----------- -----------
12,453,010 7,612,943
Less accumulated depreciation and amortization (6,559,022) (3,276,565)
----------- -----------
$ 5,893,988 4,336,378
=========== ===========
</TABLE>
At September 30, 1996, studio equipment included approximately $245,000 in
equipment, net of accumulated depreciation of $475,000, that is being leased to
DMX-E for a monthly fee of approximately $23,000. Lease income related to leased
equipment to DMX-E for the period from October 1, 1995 through May 17, 1996, and
the fiscal years ended September 30, 1995 and 1994 was approximately $172,000,
$245,000 and $215,000, respectively, and is included in other income. For the
period from May 18, 1996 through September 30, 1996, the lease income of
approximately $103,000 was eliminated in consolidation.
Studio equipment of $1,247,000, net of accumulated depreciation of
$919,000, at September 30, 1996 was financed under the capital lease obligation.
During the fiscal year ended September 30, 1994, the Company moved its
studio and uplinking facility from Douglasville, Georgia to Littleton, Colorado.
As a result, the Company retired equipment that would not be used in operations
at its new location. The Company retired equipment with a net book value of
$107,806, resulting in a loss recorded during the fiscal year ended September
30, 1994 included in other expense in the accompanying consolidated statements
of operations.
(7) ACCRUED LIABILITIES.
Accrued liabilities at September 30, 1996 and 1995 were comprised of the
following:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accrued music right royalties $1,574,449 $ 776,562
Accrued marketing credits 2,575,408 --
Accrued employee benefits 205,347 352,408
Other accrued expenses 531,633 320,968
---------- ----------
$4,886,837 $1,449,938
========== ==========
</TABLE>
(8) NOTES PAYABLE.
At September 30, 1995, note payable to bank of $45,000 was secured by a
certificate of deposit included in securities held to maturity. The note bore
interest at one percent (1%) over the interest earned on the certificate of
deposit, or 6.2%. The note was repaid in the first quarter of 1996.
At September 30, 1995, note payable of $201,090 was payable to
TCI-Euromusic, Inc. and bore interest at the rate of nine percent (9%) per
annum. The studio equipment purchased with the original proceeds of
F-12
<PAGE> 200
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
$564,000 from this loan, is leased to DMX-E. The note was repaid in connection
with the merger with TCI-Euromusic, Inc. on May 17, 1996.
(9) STOCKHOLDERS' DEFICIT.
Stock Options and Commitments.
The Company has issued options to purchase Common Stock to certain
directors, officers and employees under various stock option plans. The option
prices represent fair market values at the date of grant. Transactions in stock
options under these plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
--------- ------------
<S> <C> <C>
Outstanding options at September 30,
1993 2,401,667 $1.95-$8.875 per share, expiring on various
dates, December 31, 1995 to July 1, 2006.
Options issued 825,000 $3.50-$5.375 per share
Options exercised (30,000) $4.59-$4.18 per share
Options expired and terminated (100,834) $4.18-$8.875 per share
---------
Outstanding options at September 30,
1994 3,095,833 $1.95-$6.25 per share, expiring on various
dates, December 31, 1996 to July 1, 2006.
Options issued 1,631,250 $2.00-$3.25 per share
Options expired and terminated (331,250) $3.25-$5.625 per share
---------
Outstanding options at September 30,
1995 4,395,833 $1.95-$6.25 per share, expiring on various
dates, December 31, 1996 to July 1, 2006
Options issued 100,000 $2.563 per share
Option expired and canceled (230,000) $2.563-$4.180 per share
Option exercised (150,000) $1.95 per share
---------
Outstanding options at September 30,
1996 4,115,833 $1.95-$6.25 per share, expiring on various
dates, December 31, 1996 to July 1, 2006
</TABLE>
At September 30, 1996, options to purchase 3,157,500 shares were
exercisable at prices ranging from $1.95 to $6.25 per share. 2,891,250 of
the exercisable options were held by officers and directors of the Company.
Equity Participation Agreements with Affiliates.
The Company entered into equity participation agreements with certain
affiliated cable companies during the fiscal years ended September 30, 1989
through 1992. Pursuant to the terms of those agreements, the Company issues
shares of Common Stock in exchange for the distribution of DMX, based on
distribution goals. Compensation to affiliates expense is calculated at the fair
market value of the Common Stock issued at the date the affiliated cable company
complied with the terms of the agreement. For the fiscal years ended September
30, 1996 and 1995, no shares of Common Stock were earned by the affiliated cable
companies. In 1994, a total of 34,107 shares, were earned and issued.
Stock Bonus and Option Compensation.
Stock bonus expense included $549,708 of compensation for each of the years
in the three-year period ended September 30, 1996, related to the 1992 extension
of the exercise date of an option issued in October 1990. The exercise date was
extended from 1993 to December 31, 1996 and is an option to purchase
F-13
<PAGE> 201
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
350,000 shares of common stock granted to Jerold H. Rubinstein, Chairman and
Chief Executive Officer ("Chairman and CEO"). During the fiscal year ended
September 30, 1996, options to purchase 150,000 shares were exercised.
Stock bonus expenses included $2,012,229 of compensation for the year ended
September 30, 1994, related to a stock bonus granted the Chairman and CEO in
1991. The grant was for 1,027,520 shares of Common Stock at $5.875 per share
with original vesting at one-third per year. During the fiscal year ended
September 30, 1993, the Stock Bonus Agreement was amended to change the vesting
schedule, whereby two-thirds or 685,013 of the 1,027,520 shares granted would
all vest in 1994. As consideration for the Chairman and CEO's agreement to defer
the vesting of the shares, the Company granted the Chairman and CEO a non-
qualified option, pursuant to the 1993 Option Plan, to purchase 70,000 shares of
Common Stock at $5.00 per share (the fair market value of the Common Stock on
the date of grant).
Common Stock.
During 1996, the Company completed private placements with certain related
parties. Stephen A. Wynn, a director of the Company, acquired 500,000 shares
at$2.00 per share on March 15, 1996. TCI acquired 4,500,000 shares at $2.00 per
share on May 17, 1996 and was issued 10,841,624 shares valued at $2.50 per share
in the Company merger with TCI-E. In addition, TCI bought Stephen A. Wynn's
5,200,000 shares in the Company for $2.00 per share.
During 1995, the Company completed private placements with certain related
parties. Tele-Communications, Inc. acquired 2,000,000 shares, at $2.50 per share
on August 29, 1995. Shaw Communications Inc. acquired 1,100,000 shares, at $2.13
per share on March 9, 1995, and acquired 2,000,000 shares at $2.50 per share on
August 25, 1995. J.C. Sparkman, a director of the Company, acquired 100,000
shares at $2.50 per share on September 21, 1995. Stephen A. Wynn, a director of
the Company, acquired 2,200,000 shares at $2.13 per share on February 21, 1995.
(10) INCOME TAXES.
At September 30, 1996, the Company had approximately $82,900,000 of net
operating loss carryforwards for U.S. Federal income tax reporting purposes,
expiring in years 2002 through 2011. The net operating loss carryforward for
U.S. Federal income tax purposes does not include deductions for the following:
equity in loss of DMX-E and option compensation, offset partially by a deduction
of executive compensation resulting from the exercise of stock options for U.S.
Federal income tax purposes. The amount of U.S. income tax loss carryforwards
available to offset U.S. taxable income in any year may be limited under Section
382 of the Internal Revenue Code of 1986 ("Code"), as amended, which limits the
amount of loss carryforwards that may be utilized in any particular tax period
when a "change of control" of the Company has occurred for U.S. tax purposes.
Any deferred tax amount relating to the net operating loss carryforwards,
or any other deferred tax asset, has been fully offset by a valuation allowance.
Accordingly, no income tax benefit has been recorded.
(11) COMMITMENTS AND CONTINGENCIES.
Capital Lease with Related Party.
During fiscal 1995 the Company entered into an Agreement (the "Agreement")
with Western Tele-Communications, Inc. ("WTCI"), a subsidiary of TCI, to lease
up to $2.2 million of equipment on a draw-down basis. As of September 30, 1996,
the Company had drawn $2,166,000 to finance equipment for its studio and
uplinking facility in Littleton, Colorado. This amount is included in Property
and Equipment in the
F-14
<PAGE> 202
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
accompanying consolidated balance sheets. The Agreement term extends through the
year 2000, at an interest rate of 9.5%.
Operating Lease Commitments.
The Company is obligated under various operating leases for office space,
uplinking and satellite services. Certain leases are cancelable subject to
penalties. Total expenses under these leases were approximately $5,324,000 in
1996, $5,097,900 in 1995 and $4,185,000 in 1994 and are included in general and
administrative, sales and marketing and studio expenses in the accompanying
consolidated statements of operations.
Minimum lease payments under the capital and operating leases at September
30, 1996 follows:
<TABLE>
<CAPTION>
OPERATING OPERATING
FISCAL YEAR ENDING CAPITAL LEASES WITH LEASES WITH
SEPTEMBER 30: LEASE RELATED PARTIES OTHERS
------------------ ---------- --------------- -----------
<S> <C> <C> <C>
1997 $ 622,173 $ 4,516,200 $ 607,900
1998 622,173 4,516,200 727,200
1999 610,550 4,516,200 703,500
2000 407,906 3,316,800 679,300
2001 73,778 2,258,400 666,900
Thereafter -- 7,904,400 --
---------- ----------- ----------
Total minimum lease payments $2,336,580 $27,028,200 $3,384,800
=========== ==========
Less amounts representing interest (525,046)
----------
Present value of net minimum lease payments $1,811,534
==========
</TABLE>
The operating leases with related parties include the lease of studio
facilities in Colorado and uplinking and satellite services from WTCI. Total
expenses under leases with related party were $4,831,000 in 1996, $4,489,000 in
1995 and $3,678,000 in 1994.
Manufacturing Commitments and Royalty Payables.
The Company and Scientific-Atlanta, Inc. ("S-A"), had an agreement with
respect to the manufacture, distribution and servicing of the DM-2000 tuners and
DMX-DJ's. The Company was not obligated to purchase or guarantee the purchase of
any minimum number of tuners or DMX-DJ's, but S-A was the exclusive tuner
manufacturer in the U.S. and Canada and earned a royalty of approximately five
percent (5%) of the Company's premium audio service revenues until August 1996.
No payments are required until the Company achieves "operating breakeven", as
defined in the agreement.
The Company and Comstream Corporation ("Comstream"), have an agreement with
respect to the manufacture, distribution and servicing of the DR-200 Digital
Satellite Receiver. The Company has guaranteed the purchase of 50,000 digital
satellite receivers by it, its approved customers and/or affiliates within 42
months after commencement of the agreement.
The Company licenses rights to rerecord and distribute music from a variety
of sources and pays royalties to songwriters and publishers through contracts
negotiated with performing rights societies such as the American Society of
Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and
the Society of European Stage Authors and Composers ("SESAC"). The Company has
separate agreements with ASCAP, BMI and SEASAC for residential and commercial
distribution. Certain of the agreements are being negotiated on an industrywide
basis mainly over new rate structures that may require retroactive rate
increases.
F-15
<PAGE> 203
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act")
was signed into law on November 1, 1995. The 1995 Act establishes the right of
owners of the performance rights, such as the performers and record companies,
to control digital transmission of sound recordings by means of subscription
service digital transmissions. The 1995 Act provides a compulsory license for
noninteractive subscription services. An arbitration proceeding relating to
residential digital music distribution is pending before the United States
Copyright Office. The purpose of the proceeding is to determine the statutory
license royalty rate to be paid under the 1995 Act by the Company and other
digital music residential subscription services on services transmitted to
non-business subscribers. The rate charged is retroactive to February 1996 and
is contingent on the negotiated rate agreed to as result of the arbitration
proceeding. The Company has been accruing at an estimated rate of 3% of
residential subscriber fee revenue since such date.
Although the Company cannot predict the outcome of rate negotiations and
proceedings, the Company has been accruing for the potential increases in rates.
To the extent the actual negotiated rates exceed the rate estimates used in the
accrual, additional amounts may be incurred.
401(k) Savings Plan.
The Company maintains a qualified defined contribution 401(k) savings plan.
Prior to January 1, 1995 eligible participants vested 100% in employer matching
contributions of 10% of the participants pretax deferrals invested in the
Company's common stock. Subsequent to January 1, 1995, eligible participants
vest in employer matching contributions of 10% of the participants pretax
deferrals invested in the Company's common stock in accordance with the vesting
schedule as defined in the agreement. The discretionary employer matching
contribution was 10 percent of the participants pretax deferrals invested in the
Company's common stock. For the fiscal year ended September 30, 1996, the
Company's employee benefit expense for matching contributions totaled $5,160.
Parent Guarantees.
The Company has guaranteed certain contracts of DMX-E related to their
uplink services agreement and subscriber management services agreement. To the
extent DMX-E is unable to perform under the agreements, certain creditors of
DMX-E may pursue claims against the Company under the guarantees. A claim under
the guaranty of DMX-E's obligation to indemnify British Sky Broadcasting under
the uplink services agreement could potentially approximate $1.3 million which
is included in the loss on disposal of DMX-E in the accompanying consolidated
statement of operations. The Company has also guaranteed certain other
obligations of DMX-E under the Subscriber Management Services Agreement between
DMX-E and Selco Servicegesellschaft Fur Elektronische Kommunikation mbH and the
related side letter agreement. The Company cannot estimate the amount of any
potential claims at this time under such guarantee; however, such liabilities
could have a material adverse effect upon the financial position and results of
operation of the Company.
As described in note 2, "Discontinued Operations of DMX-Europe N.V. and
subsidiary", the Company has ceased funding the operations of DMX-E and has
entered into agreements providing for the disposition of DMX-E to Jerold
Rubinstein, Chairman and Chief Executive Officer of the Company. Mr. Rubinstein
will seek to reorganize the operations of DMX-E and also seek new equity
partners. To the extent a reorganization cannot be achieved and in the absence
of some other arrangement to provide financial support to DMX-E, the European
companies will be placed into receivership. In such circumstances, claims may be
filed under the guarantees discussed above or other claims may be asserted.
F-16
<PAGE> 204
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Legal Actions.
From time to time the Company may be a party to legal actions arising in
the ordinary course of business, including claims by former employees. In the
opinion of the Company's management, after consultation with counsel, except as
set forth in the next paragraph, disposition of such matters are not expected to
have a material adverse effect upon the financial position, results of
operations or liquidity of the Company.
On September 8, 1996, a purported class action lawsuit entitled Brickell
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX Inc., and
Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware
Chancery Court alleging, among other things, that the proposed acquisition of
the Company by TCI is wrongful, unfair and harmful to the Company's public
stockholders and seeking to enjoin the consummation of the Merger. The Company
believes that this action is without merit and intends to defend it vigorously.
(12) LIQUIDITY AND CAPITAL RESOURCES.
The Company has historically funded its operations primarily through the
sale of its common stock. During the fiscal year ended September 30, 1996, the
Company generated funds through financing activities that included proceeds of
$10.3 million resulting from the sale of $1.0 million of its Common Stock to a
former director-shareholder, the sale of $9.0 million of Common Stock to TCI and
$293,000 from the exercise of options by the Chief Executive Officer to purchase
150,000 shares of Common Stock at $1.95 per share. The decrease in cash of $7.5
million for the year was the net result of $10.3 million of cash raised in
financing activities less cash used in investing activities of $8.5 million,
relating primarily to the funding of DMX-E losses, and cash used in operating
activities of $8.9 million.
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from its operating activities on a
prospective basis, and has reduced its operating expenses to extend the U.S.
operation's working capital. However, the Company will need additional funding
to meet certain obligations related to the discontinuance of operations of DMX-E
and to continue to expand and develop the Company's business pursuant to
management's current plans. The Company is negotiating with TCI for a $3.5
million loan to fund past and future tuner purchases. At December 31, 1996, the
Company was obligated to purchase 8,300 Comstream DR-200 Digital Satellite
Receivers at an aggregate cost of approximately $3,000,000. To the extent not
otherwise satisfied by approved customers or affiliates of the Company, the
Company intends to utilize a portion of the proceeds of the TCI loan to fund
such purchase commitment. The Company is negotiating to extend the term of the
purchase commitment, and may also seek to obtain additional financing, if
necessary, for such tuner purchases. However there can be no assurances that
such extension or financing can be obtained. However, the Company is not seeking
additional financing at this time to fund its other operational requirements and
its obligations related to the discontinuance of the operations of DMX-E due to
the pendency of the TCI acquisition proposal and management's belief that with
the closure of the Company's European operations, its domestic cash flow should
be sufficient to meet the Company's cash requirements. However, if such
assumption is not accurate or if future financing is required and is not
available, then management would seek to continue to reduce operating expenses
and capital spending as necessary as a means to stem cash shortfalls. These
operating expenses include both discretionary spending, such as sales and
marketing expenses and overhead costs, such as general and administrative
expenses. Such expenses will continually be evaluated giving consideration to
the cash flow generated from subscriber fee revenue, anticipated growth in such
revenue and available working capital. There can be no assurance that the
Company will be able to reduce its operating expenses sufficiently to meet its
available cash resources while maintaining its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The Company has
experienced reoccurring losses from operations and has a
F-17
<PAGE> 205
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
net capital deficiency. While the Company believes it will be able to generate
cash from its operating activities on a prospective basis, there can be no
assurance that such cash, if any, combined with other financings will be
sufficient to meet the Company's existing and future obligations. The
consolidated financial statements do not include all potential adjustments that
could result from potential claims under the above noted parent guarantees or
other obligations of DMX-E. As described in notes 2 and 11 to the Company's
consolidated financial statements and in "Disposal of DMX-E" above, the Company
has ceased funding the operations of DMX-E and the Company has entered into
agreements providing for the disposition of DMX-E to Jerold Rubinstein, Chairman
and Chief Executive Officer of the Company. Mr. Rubinstein will seek to
reorganize the operations of DMX-E and also seek new equity partners. To the
extent a reorganization cannot be achieved and in the absence of some other
arrangement to provide financial support to DMX-E, the European companies will
be placed into receivership. In such circumstances, claims may be filed under
the guarantees. Such adjustments could have a material adverse effect upon the
financial position and results of operations of the Company.
(13) RECENT DEVELOPMENTS.
On August 30, 1996, the Company received an unsolicited proposal from TCI
proposing the merger of the Company with a TCI subsidiary. Following receipt of
the proposal, the Company established a special committee of its Board of
Directors to consider the proposal and retained Houlihan Lokey Howard & Zukin to
act as its financial advisor. The Company is currently negotiating the terms of
a definitive merger agreement with TCI, which owns approximately 45% of DMX
Inc.'s outstanding stock. The merger agreement would provide for a merger in
which DMX Inc. would be acquired by a new corporation ("Music Co.") to be formed
by TCI pursuant to which the shareholders of DMX Inc. would receive Class A
Common Stock of Music Co. representing approximately 19.25% of the total
outstanding shares of Music Co.'s Class A Common Stock and Class B Common Stock.
The Class A Common Stock would be identical to the Class B Common Stock to be
held by TCI except that each share of Class B Common Stock would have ten votes
on all matters while shares of Class A Common Stock would have one vote. In
connection with the merger and the issuance of the Class B Common Stock to TCI,
TCI would cause certain affiliates to contribute and transfer to Music Co. all
of their respective rights, title and interest in certain specified assets. To
the extent that Music Co.'s Class A Common Stock does not trade at or above $2
per share, for at least twenty consecutive trading days during the first year
following the merger, holders of the Class A Common Stock would have the right,
exercisable during the 30 day period beginning on the first anniversary of the
merger, to require TCI to purchase such Class A Common Stock at a price of $2.00
per share, payable at TCI's option either in cash or shares of TCI's TCI Group
Series A Common Stock. In connection with the merger negotiations, the Company
is negotiating with TCI for a $3.5 million loan to purchase, or reimburse the
Company for the purchase of, tuners and related equipment.
F-18
<PAGE> 206
DMX-EUROPE N.V.
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996, 1995 AND 1994
WITH INDEPENDENT AUDITORS' REPORT
F-19
<PAGE> 207
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of DMX-Europe N.V.
We have audited the accompanying consolidated balance sheets of DMX-Europe
N.V. and subsidiary as of September 30, 1996 and 1995 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended September 30, 1996. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of DMX-Europe
N.V. and subsidiary at September 30, 1996 and 1995 and the results of their
operations and their cash flows for each of the years in the three-year period
ended September 30, 1996 in conformity with generally accepted accounting
principles in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 8 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 8. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
KPMG
Chartered Accountants London, England
Registered Auditors January 9, 1997
F-20
<PAGE> 208
DMX-EUROPE N.V.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND 1995
ASSETS
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 192,635 $ 694,079
Prepaid expenses 851,586 971,998
Trade accounts receivable 435,480 96,712
Inventories 98,517 226,525
----------- ----------
Total current assets 1,578,218 1,989,314
----------- ----------
Fixed assets
Equipment 3,080,294 2,806,647
Less accumulated depreciation and amortization (1,605,105) (697,413)
----------- ----------
1,475,189 2,109,234
----------- ----------
Total assets $ 3,053,407 $4,098,548
=========== ==========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-21
<PAGE> 209
DMX-EUROPE N.V.
CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1996 AND 1995
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Current liabilities
Trade accounts payable $ 7,284,664 $ 3,761,246
Due to parent company 355,152 2,044,311
Accrued expenses 1,495,546 1,899,710
------------ ------------
Total current liabilities 9,135,362 7,705,267
Long term debt (note 3) 34,393,318 28,664,046
------------ ------------
Total liabilities 43,528,680 36,369,313
------------ ------------
Stockholders' equity/(deficit)
Common stock 10 Dutch Florins par value, authorised
100,000 shares, issued 39,216 shares 245,100 245,100
Minority interests -- non-cumulative, non-voting,
convertible, redeemable 5% preference shares of $1 each
of DMX-Europe (UK) Limited owned by DMX Inc.,
authorised 10,000,000 shares:
subscribed and issued 10,000,000 --
subscribed and unissued 3,377,000 3,500,000
Accumulated deficit (54,045,058) (36,007,549)
Cumulative translation adjustment (52,315) (8,316)
------------ ------------
Net stockholders' deficit (40,475,273) (32,270,765)
------------ ------------
Total liabilities and stockholders' equity $ 3,053,407 $ 4,098,548
============ ============
</TABLE>
See accompanying notes to the consolidated financial statements.
F-22
<PAGE> 210
DMX-EUROPE N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Revenues
Subscriber fees $ 1,357,733 $ 151,176 $ 51,274
Other revenue 201,529 -- --
------------ ------------ -----------
1,559,262 151,176 51,274
Operating expenses
General and administrative 3,386,993 3,117,943 1,979,256
Sales and marketing 3,109,790 3,259,442 1,125,124
Studio and programming 8,766,981 8,148,891 4,135,345
Research and development 331,215 1,974,508 817,327
Depreciation and amortization 909,022 541,678 125,697
------------ ------------ -----------
16,504,001 17,042,462 8,182,749
------------ ------------ -----------
Loss from operations (14,944,739) (16,891,286) (8,131,475)
Other income/(expenses)
Interest income 22,851 54,519 22,892
Interest expense (3,115,621) (2,876,252) (1,217,452)
------------ ------------ -----------
Net loss $(18,037,509) $(19,713,019) $(9,326,035)
============ ============ ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
F-23
<PAGE> 211
DMX-EUROPE N.V.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
TOTAL
COMMON PREFERENCE ACCUMULATED TRANSLATION STOCKHOLDERS'
STOCK STOCK DEFICIT ADJUSTMENT EQUITY
-------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance October 1, 1993 $245,100 $ -- $ (6,968,495) $ 32,312 $ (6,691,083)
Movement year ended September 30,
1994 -- -- -- (12,630) (12,630)
Net loss for the year ended
September 30, 1994 -- -- (9,326,035) -- (9,326,035)
-------- ----------- ------------ -------- ------------
Balance October 1, 1994 245,100 -- (16,294,530) 19,682 (16,029,748)
Movement year ended September 30,
1995 -- -- -- (27,998) (27,998)
Subscribed and unissued preference
shares -- 3,500,000 -- -- 3,500,000
Net loss for the year ended
September 30,1995 -- -- (19,713,019) -- (19,713,019)
-------- ----------- ------------ -------- ------------
Balance October 1, 1995 245,100 3,500,000 (36,007,549) (8,316) (32,270,765)
Movement year ended September 30,
1996 -- -- -- (43,999) (43,999)
Authorised and subscribed
preference shares -- 10,000,000 -- -- 10,000,000
Conversion of unissued to issued
preference shares -- (3,500,000) -- -- (3,500,000)
Subscribed and unissued preference
shares -- 3,377,000 -- -- 3,377,000
Net loss for the year September
30, 1996 -- -- (18,037,509) -- (18,037,509)
-------- ----------- ------------ -------- ------------
Balance September 30, 1996 $245,100 $13,377,000 $(54,045,058) $(52,315) $(40,475,273)
======== =========== ============ ======== ============
</TABLE>
F-24
<PAGE> 212
DMX-EUROPE N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ -----------
<S> <C> <C> <C>
Cash Flow from Operating Activities:
Net loss $(18,037,509) $(19,713,019) $(9,326,035)
Adjustments to Reconcile Net Loss to Net Cash Used
in Operating Activities:
Depreciation and amortization 909,022 541,678 125,697
Change in prepaid expenses 133,140 (520,647) (54,974)
Change in accounts receivable (364,432) (67,496) (6,885)
Change in inventories 123,943 (227,292) --
Change in accounts payable 3,539,707 3,510,898 (276,604)
Change in accrued liabilities (379,443) 1,073,850 206,877
Change in intercompany liability with DMX Inc. (1,689,159) 1,554,015 (161,386)
Change in accrued interest liability with
TCI -- Euromusic (4,228,046) 2,849,368 1,217,425
Change in accrued interest liability with DMX Inc. 874,250 -- --
------------ ------------ -----------
Net cash used in operating activities (19,118,527) (10,998,645) (8,275,885)
------------ ------------ -----------
Cash flows from investing activities:
Purchase of equipment (288,174) (2,277,906) (246,180)
------------ ------------ -----------
Net Cash Used in Investing Activities (288,174) (2,277,906) (246,180)
------------ ------------ -----------
Cash flow's from financing activities:
Note payable DMX Inc. 33,519,068 -- --
Loan principal (assignments)/drawdowns (24,436,000) 9,436,000 9,500,000
Subscribed preference stock 9,877,000 3,500,000 --
------------ ------------ -----------
Net cash provided by financing activities 18,960,068 12,936,000 9,500,000
------------ ------------ -----------
Effect of Exchange rate changes on cash (54,811) (29,004) 5,337
------------ ------------ -----------
Net change in cash and cash equivalents (501,444) (369,555) 983,272
Cash and cash equivalents, beginning of year 694,079 1,063,634 80,362
------------ ------------ -----------
Cash and cash equivalents, end of year $ 192,635 $ 694,079 $ 1,063,634
============ ============ ===========
</TABLE>
No interest or tax was paid in any of the periods presented.
F-25
<PAGE> 213
DMX-EUROPE N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
(1) INCORPORATION AND NATURE OF BUSINESS
DMX-Europe N.V. was incorporated under the laws of the Netherlands on
February 17, 1992. DMX-Europe N.V.'s primary business is to market premium
digital audio channels of music programming, known as Digital Music Express(R)
("DMX(R)"), throughout Europe to cable, and direct-to-home subscribers.
DMX-Europe N.V. owns 100% of the outstanding share capital of DMX-Europe
(UK) Limited, a United Kingdom company.
DMX Inc., a Delaware corporation, owns 100% of the outstanding common stock
having acquired the 49% shareholding previously held by TCI-Euromusic Inc.,
("TCI-E"), a Colorado corporation and a subsidiary of Tele-Communications, Inc.,
("TCI"), as part of the merger transaction on May 17, 1996 whereby DMX Inc.
acquired all the outstanding equity of TCI-E.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation
The company and its subsidiary, DMX-Europe (UK) Limited have suffered
recurring losses from operations, have negative working capital and a net
stockholders' deficit. In addition, during 1996, DMX Inc. stated that it would
no longer financially support DMX-Europe. In December 1996, DMX Inc.'s board of
directors approved the disposal of DMX-Europe N.V. and subsidiary, DMX-Europe
(UK) Limited ("DMX-E") to Mr. Jerold Rubinstein, its Chairman and Chief
Executive Officer. DMX Inc. will retain a ten percent equity interest in the
companies which would have an exclusive five year, royalty free license to use
DMX Inc.'s music in Europe, the former Soviet Union, and in the Middle East. It
is Mr. Rubinstein's intention to seek to reorganize the operation of DMX-E and
seek new equity investors. However, there can be no assurances that the proposed
reorganization will take place or that new equity investors will be found.
Accordingly there is significant doubt as to the company's ability to continue
as a going concern. The financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
Accounting Principles and Consolidation
These consolidated financial statements are prepared in accordance with
generally accepted accounting principles in the United States. The consolidated
financial statements include the accounts of the company and its wholly owned
subsidiary, DMX-Europe (UK) Limited. All material intercompany transactions have
been eliminated.
Cash Equivalents
Cash equivalents of approximately $193,000 at September 30, 1996, (1995:
$694,000) consist of balances held by banks.
The company considers short-term, highly liquid investments with original
maturities of three months or less to be cash equivalents.
Research and Development
Research and development costs are expensed as incurred and amounted to
$334,000 during 1996 (1995: $1,988,000).
Equipment
Equipment is stated at cost and depreciated over 3 to 5 years using the
straight line method.
F-26
<PAGE> 214
DMX-EUROPE N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
Inventories
Inventories are stated at the lower of cost and net realisable value.
Foreign Currency
The financial statements of DMX-Europe N.V. and its subsidiary are
maintained in their functional currencies, US Dollars and British Pound
Sterling, respectively. Translation gains have been recorded in a separate
section of stockholders' equity. Exchange gains resulting from foreign currency
transactions, amounting to $69,042 (1995: $13,930), have been included in the
consolidated statement of operations.
Income Taxes
These financial statements adopt the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 109. SFAS No. 109 requires the "asset and
liability" method of accounting for income taxes.
(3) LONG TERM DEBT
Long term debt at September 30, 1996, and September 30, 1995 consists of
the following:
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Loan draw-downs from TCI-Euromusic Inc...................... $ -- $24,436,000
Interest on the above loan.................................. -- 4,228,046
Note payable DMX Inc........................................ 33,519,068 --
Accrued interest on the above............................... 874,250 --
----------- -----------
$34,393,318 $28,664,046
=========== ===========
</TABLE>
On May 19, 1993, the company entered into a financing agreement with its
then 49% shareholder, TCI-E. Under the terms of this agreement, TCI-E agreed to
provide a maximum loan facility of $24,436,000 to the company. As at September
30, 1995, DMX-Europe N.V. had drawn down the maximum amount, $24,436,000,
available under this facility.
On May 17, 1996 TCI-E was fully merged with and into DMX Inc. the parent
company of DMX-Europe N.V. As a result of this merger the loan principal of
$24,436,000 together with the related accrued interest outstanding as at May 17,
1996 of $6,356,911 was assigned to DMX Inc.
These assigned loan and accrued interest amounts, together with the
intercompany liability of $2,726,157 due to DMX Inc. as at May 17, 1996, were
converted into a note payable totalling $33,519,068 in favour of DMX Inc. The
terms and conditions attaching to this note payable have yet to be finalised and
incorporated into a formal loan agreement. In the interim, an interest charge of
7% per annum is being accrued on the total amount of the note payable
outstanding.
As at September 30, 1996 accrued interest of $874,250 was due and payable
to DMX Inc. as part of this interim arrangement.
F-27
<PAGE> 215
DMX-EUROPE N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
(4) COMMITMENTS
The company is obligated under various operating leases for office space,
uplinking and satellite services, which include sub leases for Astra digital
subcarriers and associated advertising and marketing commitments. Certain leases
are cancellable subject to penalties. The company is also obligated under
various agreements for the provision of subscriber management services. Total
expenses under these leases and agreements were approximately $8,937,000 in 1996
(1995: $8,263,000) and are included in general and administrative, studio and
programming, and sales and marketing costs in the accompanying consolidated
statements of operations. As of September 30, 1996, minimum annual lease
commitments were as follows:
<TABLE>
<S> <C>
Fiscal year ending 30 September:
1997............................................... $ 9,902,000
1998............................................... 6,567,000
1999............................................... 5,950,000
2000............................................... 6,252,000
2001............................................... 6,094,000
Thereafter......................................... 6,157,000
-----------
Total minimum lease commitments............... $40,922,000
===========
</TABLE>
(5) RELATED PARTY TRANSACTIONS
DMX-Europe N.V. has incurred expenses of approximately $1,036,997 (1994:
$2,392,181) for salaries, programming, marketing and research and development
costs recharged from DMX Inc. These are included in the consolidated financial
statements as part of operating expenses.
(6) INCOME TAXES
As at September 30, 1996 the company and its subsidiary have net operating
losses carried forward for Dutch and UK tax authority purposes. These have still
to be quantified with the relevant fiscal authority. However any deferred tax
asset relating to net operating losses carried forward, or any other deferred
tax asset, will be fully offset by a valuation allowance. Accordingly, no income
tax benefit has been recorded.
(7) SEGMENTAL ANALYSIS
<TABLE>
<CAPTION>
1996 1995 1994
---------- -------- -------
<S> <C> <C> <C>
UK and Eire........................................ $ 229,114 $ 18,125 $ 8,503
Germany, Austria and Switzerland................... 1,087,378 -- --
Scandinavia........................................ 59,797 78,250 42,458
Rest of Europe..................................... 162,973 54,801 313
Asia Pacific rim................................... 20,000 -- --
---------- -------- -------
$1,559,262 $151,176 $51,274
========== ======== =======
</TABLE>
(8) LIQUIDITY AND CAPITAL RESERVES
The company and its subsidiary, DMX-Europe (UK) Limited have suffered
recurring losses from operations, have negative working capital and a net
stockholders' deficit. In addition, during 1996, DMX Inc. stated that it would
no longer financially support DMX-Europe. In December 1996, DMX Inc.'s board of
directors approved the disposal of DMX-Europe N.V. and subsidiary, DMX-Europe
(UK) Limited ("DMX-E") to Mr. Jerold Rubinstein, its Chairman and Chief
Executive Officer. DMX Inc. will retain a ten percent equity interest in the
companies which would have an exclusive five year, royalty free license to use
F-28
<PAGE> 216
DMX-EUROPE N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(FORMING PART OF THE CONSOLIDATED FINANCIAL STATEMENTS)
DMX Inc.'s music in Europe, the former Soviet Union, and in the Middle East. It
is Mr. Rubinstein's intention to seek to reorganize the operation of DMX-E and
seek new equity investors. However, there can be no assurances that the proposed
reorganization will take place or that new equity investors will be found.
Accordingly there is significant doubt as to the company's ability to continue
as a going concern. The financial statements do not include any adjustment that
might result from the outcome of this uncertainty.
F-29
<PAGE> 217
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DMX INC.
------------------------------------
Registrant
By: /s/ JEROLD H. RUBINSTEIN
----------------------------------
Jerold H. Rubinstein
Chairman of the Board and
Chief Executive Officer
Date: January 14, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JEROLD H. RUBINSTEIN Chairman of the Board and January 14, 1997
- - ----------------------------------------------------- Chief Executive Officer
Jerold H. Rubinstein
/s/ J. WENDY KIM Chief Financial Officer and January 14, 1997
- - ----------------------------------------------------- Corporate Secretary
J. Wendy Kim
/s/ KENT BURKHART Director January 8, 1997
- - -----------------------------------------------------
Kent Burkhart
/s/ DONNE F. FISHER Director January 14, 1997
- - -----------------------------------------------------
Donne F. Fisher
/s/ LEO J. HINDERY, JR. Director January 14, 1997
- - -----------------------------------------------------
Leo J. Hindery, Jr.
/s/ BHASKAR MENON Director January 10, 1997
- - -----------------------------------------------------
Bhaskar Menon
/s/ JAMES R. SHAW, SR. Director January 10, 1997
- - -----------------------------------------------------
James R. Shaw, Sr.
/s/ J.C. SPARKMAN Director January 9, 1997
- - -----------------------------------------------------
J.C. Sparkman
</TABLE>
F-30
<PAGE> 218
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 15, 1997
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
OR
[ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to .
Commission File No. 0-18806
DMX INC.
(Exact name of Registrant as specified in its Charter)
<TABLE>
<S> <C>
DELAWARE 95-4275106
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11400 WEST OLYMPIC BOULEVARD, SUITE 1100, LOS ANGELES, CA 90064-1507
(Address of Principal Executive Offices) (Zip code)
</TABLE>
(310) 444-1744
(Registrant's telephone number, including area code)
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At March 31, 1997, the Registrant had 59,586,594 shares of its Common Stock
outstanding, excluding 85,630 shares held as Treasury Stock.
This report includes a total of 15 pages, excluding exhibits. The exhibit
index appears on page 16.
================================================================================
<PAGE> 219
PART I.
ITEM 1. FINANCIAL STATEMENTS
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997
WITH COMPARATIVE FIGURES AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............. $ 883,904 $ 928,399
Prepaid expenses...................... 648,811 464,545
Equipment inventory................... 579,330 438,163
Accounts receivable:
Trade related party................. 1,648,601 1,828,973
Other trade......................... 3,229,148 2,732,018
Allowance for doubtful accounts..... (381,029) (251,247)
------------- -------------
Total current assets........... 6,608,765 6,140,851
Current assets DMX-Europe N.V.:
Cash.................................. 136,191 192,635
Prepaid expenses...................... 586,871 851,586
Equipment inventory................... 90,963 98,517
Accounts receivable (net)............. 721,660 435,480
------------- -------------
Total current assets DMX-Europe
N.V........................... 1,535,685 1,578,218
------------- -------------
Total current assets........... 8,144,450 7,719,069
Investment in Galactic/TEMPO Sound (note
3).................................... 526,159 504,156
Property and equipment, net (note 5).... 4,186,240 4,418,799
Property and equipment DMX-Europe N.V.,
net (note 5).......................... 1,006,972 1,475,189
Goodwill, net (note 2 and 4)............ 4,275,264 4,535,658
Other assets............................ 108,271 99,148
------------- -------------
Total Assets................... $ 18,247,356 $ 18,752,019
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable...................... $ 2,118,163 1,097,476
Accrued liabilities................... 5,549,313 4,886,837
Accrued loss on disposal -- DMX-Europe
N.V. (note 4)....................... 1,468,530 1,468,530
Current portion of capital lease
obligation.......................... 458,279 410,108
------------- -------------
Total current liabilities...... 9,594,285 7,862,951
Current liabilities DMX-Europe N.V.:
Accounts payable...................... 10,441,835 7,284,664
Accrued liabilities................... 2,192,714 1,488,492
------------- -------------
Total current liabilities
DMX-Europe N.V................ 12,634,549 8,773,156
------------- -------------
Total current liabilities...... 22,228,834 16,636,107
Deferred revenue........................ 258,531 295,461
Royalty payable......................... 1,773,275 1,773,275
Note payable related party (note 6)..... 1,867,791 --
Capital lease obligation................ 1,170,242 1,401,426
Stockholders' deficit (note 7):
Common Stock, $.01 par value.
Authorized 100,000,000 shares;
issued 59,672,224 shares at March
31, 1997 and at September 30,
1996................................ 596,722 596,722
Paid-in capital....................... 136,895,686 136,758,259
Accumulated deficit................... (145,909,910) (138,078,913)
Foreign currency translation
reserve............................. (55,812) (52,315)
Treasury stock, 85,630 shares, at
cost................................ (578,003) (578,003)
------------- -------------
Net stockholders' deficit........... (9,051,317) (1,354,250)
Commitments and contingencies (note
8).................................... -- --
------------- -------------
Total Liabilities and
Stockholders' Deficit......... $ 18,247,356 $ 18,752,019
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
1
<PAGE> 220
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTH PERIODS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Revenues:
Subscriber fee revenues -- related
party.............................. $ 4,772,259 $ 4,353,559
Subscriber fee revenues -- other...... 4,209,483 3,159,978
Other revenue, net.................... 372,596 119,226
Revenue -- DMX-Europe N.V. (note 4)... 1,447,129 --
----------- ------------
10,801,467 7,632,763
Operating expenses:
General and administrative............ 3,034,308 2,779,077
Sales and marketing................... 3,331,336 4,696,127
Studio and programming................ 4,950,136 4,505,277
Research and development.............. 358,152 416,912
Stock bonus and option compensation... 137,427 274,854
Depreciation and amortization......... 1,193,713 805,762
Operating expenses -- DMX-Europe N.V.
(note 4)........................... 5,578,790 --
----------- ------------
18,583,862 13,478,009
NET OPERATING LOSS............ (7,782,395) (5,845,246)
Other income (expense):
Galactic/TEMPO Sound.................. 172,003 31,241
Equity in loss of DMX-Europe N.V.
(note 4)........................... -- (9,486,767)
Interest income....................... 17,061 74,633
Interest expense...................... (137,592) (100,042)
Interest expense -- DMX-Europe N.V.
(note 4)........................... (99,473) --
Other income.......................... 1,520 137,080
Other expense......................... (2,121) --
----------- ------------
(48,602) (9,343,855)
NET LOSS...................... $(7,830,997) $(15,189,101)
=========== ============
Loss per share.......................... $ (.13) $ (.35)
=========== ============
Weighted average number of shares....... 59,586,594 43,727,048
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 221
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revenues:
Subscriber fee revenues -- related
party.............................. $ 2,382,615 $ 2,209,613
Subscriber fee revenues -- other...... 2,215,820 1,669,996
Other revenue, net.................... 226,111 82,686
Revenue -- DMX-Europe N.V. (note 4)... 753,836 --
----------- -----------
5,578,382 3,962,295
Operating expenses:
General and administrative............ 1,497,052 1,265,837
Sales and marketing................... 1,634,242 2,446,196
Studio and programming................ 2,517,207 2,414,383
Research and development.............. 165,841 199,442
Stock bonus and option compensation... -- 137,427
Depreciation and amortization......... 602,244 425,436
Operating expenses -- DMX-Europe N.V.
(note 4)........................... 2,609,229 --
----------- -----------
9,025,815 6,888,721
NET OPERATING LOSS............ (3,447,433) (2,926,426)
Other income (expense):
Galactic/TEMPO Sound.................. 77,352 62,937
Equity in loss of DMX-Europe N.V.
(note 4)........................... -- (4,979,266)
Interest income....................... 7,403 15,791
Interest expense...................... (79,063) (57,809)
Interest expense -- DMX-Europe N.V.
(note 4)........................... (55,618) --
Other income.......................... 132 68,068
Other expense......................... (1,178) --
----------- -----------
(50,972) (4,890,279)
NET LOSS...................... $(3,498,405) $(7,816,705)
=========== ===========
Loss per share.......................... $ (.06) $ (.18)
=========== ===========
Weighted average number of shares....... 59,586,594 43,774,007
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 222
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE PERIOD FROM SEPTEMBER 30, 1995 TO MARCH 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK FOREIGN
--------------------- CURRENCY
NUMBER OF PAID IN ACCUMULATED TREASURY TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT STOCK RESERVE TOTAL
---------- -------- ------------ ------------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1995... 43,680,600 $436,806 $ 99,210,706 $(104,224,136) $(578,003) $ 26,390 $ (5,128,237)
Issuance of common stock........ 15,991,624 159,916 37,237,643 -- -- -- 37,397,559
Cost of issuance................ -- -- (239,798) -- -- -- (239,798)
Accrued compensation............ -- -- 549,708 -- -- -- 549,708
Foreign currency translation
reserve....................... -- -- -- -- -- (78,705) (78,705)
Net loss........................ -- -- -- (33,854,777) -- -- (33,854,777)
---------- -------- ------------ ------------- --------- -------- ------------
Balance at September 30, 1996... 59,672,224 $596,722 $136,758,259 $(138,078,913) $(578,003) $(52,315) $ (1,354,250)
Accrued compensation
(unaudited)................... -- -- 137,427 -- -- -- 137,427
Foreign currency translation
reserve (unaudited)........... -- -- -- -- -- (3,497) (3,497)
Net loss (unaudited)............ -- -- -- (7,830,997) -- -- (7,830,997)
---------- -------- ------------ ------------- --------- -------- ------------
Balance at March 31, 1997
(unaudited)................... 59,672,224 $596,722 $136,895,686 $(145,909,910) $(578,003) $(55,812) $ (9,051,317)
========== ======== ============ ============= ========= ======== ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 223
DMX INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
SIX MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................. $(7,830,997) $(15,189,101)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 1,680,613 805,762
Equity in loss (earnings) of
Galactic/TEMPO Sound............. (172,003) (31,241)
Equity in loss of DMX-Europe
N.V.............................. -- 9,486,767
Compensation expense for stock
bonus and options................ 137,427 274,854
Provision for doubtful accounts.... 433,824 --
Increase in prepaid and other
current assets................... (15,691) (205,253)
Increase in receivables............ (904,841) (1,351,689)
Increase in other assets........... (9,123) (129,073)
Decrease in deferred revenue....... (36,930) (57,418)
Increase in royalty payable........ -- 288,674
Increase in accounts payable and
accrued liabilities.............. 5,511,252 1,620,084
----------- ------------
Net cash used in operating
activities.................. (1,206,469) (4,487,634)
----------- ------------
Cash flows from investing activities:
Purchase of property and equipment,
net................................ (700,397) (765,365)
Advances to DMX-Europe N.V., net...... -- (551,848)
Investment in preferred stock of
DMX-Europe (UK) Limited............ -- (5,990,000)
Proceeds from securities held to
maturity........................... -- 165,000
Dividend from Galactic/TEMPO Sound.... 150,000 --
----------- ------------
Net cash used in investing
activities.................. (550,397) (7,142,213)
----------- ------------
Cash flows from financing activities:
Issuance of common stock, net......... -- 1,000,000
Proceeds from note payable to related
party.............................. 1,867,791 2,500,000
Repayment of note payable to bank..... -- (45,000)
Repayment of principal portion of
capital lease obligation........... (211,864) (174,784)
----------- ------------
Net cash used by financing
activities.................. 1,655,927 3,280,216
----------- ------------
Net decrease in cash and cash
equivalents................. (100,939) (8,349,631)
Cash and cash equivalents, beginning of
period................................ 1,121,034 8,622,119
----------- ------------
Cash and cash equivalents, end of
period................................ $ 1,020,095 $ 272,488
=========== ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 224
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION.
The accompanying consolidated balance sheets of DMX Inc. and Subsidiaries
("the Company") at March 31, 1997, the related consolidated statements of
operations for the six months and three months ended March 31, 1997 and 1996,
and related statements of cash flows and stockholders' deficit for the six
months ended March 31, 1997 are unaudited. However, such information reflects
all normal recurring adjustments which, in the opinion of management, are
necessary to present fairly the Company's financial position at March 31, 1997
and the results of operations and cash flows for the six months ended March 31,
1997 and 1996. The results of operations for the six months ended March 31,
1997, are not necessarily indicative of the results of operations to be expected
for the entire fiscal year. The accompanying financial information for the six
months and three months ended March 31, 1997 and 1996, should be read in
conjunction with the audited consolidated financial statements and notes thereto
included in the Company's Annual report filed on Form 10-K for the year ended
September 30, 1996.
The Consolidated Financial Statements includes accounts of DMX Inc. and its
wholly owned subsidiaries TEMPO Sound, Inc., 450714 B.C., Ltd. and DMX-Europe
N.V. and subsidiary. All intercompany transactions and balances have been
eliminated.
Certain reclassifications of prior period amounts were made to conform to
the current period reporting format.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Goodwill.
Goodwill was calculated as the purchase price of DMX-Europe N.V. and
subsidiary ("DMX-E) less the fair value of net assets acquired and is being
amortized over 20 years. Goodwill will be eliminated upon the ultimate
disposition of DMX-E pursuant to the Company's plan to dispose of its operations
as described in note 4. In connection with the anticipated disposal of
operations and considering the terms of such agreements goodwill was reduced by
$5,685,000 in the 1996 fiscal year due to the impairment of its value.
(3) INVESTMENT IN GALACTIC/TEMPO SOUND PARTNERSHIP.
The summarized balance sheet and operating data for the six months ended
March 31, 1997, and the twelve months ended September 30, 1996, of the
Galactic/TEMPO Sound Partnership follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED TWELVE MONTHS ENDED
MARCH 31, 1997 SEPTEMBER 30, 1996
(UNAUDITED) (UNAUDITED)
---------------- -------------------
<S> <C> <C>
Current assets.......................... $ 857,000 890,000
Non-current assets...................... 244,000 144,000
Current liabilities..................... 49,000 26,000
Partners' capital....................... 1,052,000 1,008,000
Partners' draws......................... (300,000) (300,000)
Revenues................................ 1,136,000 2,227,000
Operating expenses...................... (792,000) (1,833,000)
Net income.............................. $ 344,000 394,000
========== ==========
</TABLE>
6
<PAGE> 225
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(4) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY.
The summarized operating data for the six months ended March 31, 1997 of
DMX-Europe N.V. and subsidiary follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
1997
(UNAUDITED)
----------------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue..................................................... $ 1,447,129
Operating, selling, general and administrative expenses
(including $579,308 of intercompany expenses)............. 5,671,198
Depreciation and amortization............................... 486,900
-----------
Operating loss.............................................. (4,710,969)
Interest expense (including $1,169,954 of intercompany
expense).................................................. (1,290,489)
Other....................................................... 21,062
-----------
Net loss.................................................... $(5,980,396)
===========
</TABLE>
Disposition of DMX-Europe N.V. and Subsidiary.
On December 13, 1996, the Company announced that its board of directors had
approved the disposition of DMX-Europe N.V. and its subsidiary, DMX-Europe (UK)
Limited collectively, ("DMX-E") to Jerold H. Rubinstein, Chairman and Chief
Executive Officer of the Company. The Company had previously determined to cease
financial support of DMX-E and, in the absence of some other arrangements to
provide financial support to those Companies, to place them in receivership. The
Company has since entered into definitive agreements with Mr. Rubinstein
providing for such disposition.
Mr. Rubinstein will seek to reorganize the operations of DMX-E and will
seek new equity investors. In the event DMX-E cannot be reorganized, Mr.
Rubinstein intends to organize a new company to distribute the music service on
essentially the same terms. DMX Inc. will retain or obtain a ten percent equity
interest in the European companies which would have an exclusive, five year,
royalty-free license to distribute the DMX service in Europe, the former Soviet
Union, and in the Middle East and will have the right to use the Company's
trademarks for two years.
The Company has accounted for the effects of this disposal and accordingly
has estimated the loss on the disposal of DMX-E in the September 30, 1996
consolidated statements of operations. The loss on disposal was estimated as the
net investment of DMX-E of $5,720,000 and the incurrence of certain potential
liabilities of $1,469,000 in conjunction with such disposal activities.
DMX-E was formed by the Company to provide the necessary management,
marketing services and operating structure for the distribution of Digital Music
Express(R) ("DMX(R)"), throughout Europe. In 1993, TCI-Euromusic, Inc.
("TCI-E"), an indirect affiliate of Tele-Communications, Inc. ("TCI"), acquired
a 49% equity interest in DMX-E through the purchase of 49% of the outstanding
common stock of DMX-E for $120,100, in addition to providing a $24.4 million
credit facility which was used for the start-up costs and initial operations of
DMX-E. The Company partially guaranteed the credit facility, and would be liable
for one-half of the TCI-E's "loss" as defined, which was payable at the option
of the Company, in the Company's Common Stock.
7
<PAGE> 226
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(4) INVESTMENT IN DMX-EUROPE N.V. AND SUBSIDIARY, CONTINUED.
On May 17, 1996, DMX Inc. consummated the merger of TCI-E pursuant to the
terms of the Agreement and Plan of Merger ("the Agreement"), dated August 28,
1995, as amended as of November 1, 1995 and January 17, 1996 among the Company,
TCI-E and United Artists Programming International, Inc. ("UAPI"), an indirect
affiliate of TCI and owner of the outstanding shares of TCI-E. As a result of
the merger, the Company acquired the remaining 49% interest in DMX-E.
The merger was accounted for as a purchase and the Company issued
10,841,624 shares of its Common Stock to UAPI at a purchase price totaling
$27,104,060. The purchase price less the fair value of TCI-E net assets
acquired, resulted in goodwill of $10,415,701 which is being amortized over 20
years and was calculated as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $27,104,060
Less book value of TCI-E net assets acquired................ (3,479,694)
-----------
23,624,366
Purchase price adjustments:
To adjust the investment in DMX-E for losses recorded by
TCI-E, which were also recognized by DMX Inc. based on the
modified equity method of accounting...................... (9,026,263)
To reverse allowance for uncollectible interest recorded by
TCI-E @ 49% of the interest accrued on the notes
receivable................................................ (4,213,793)
Other....................................................... 31,391
-----------
Goodwill.................................................... $10,415,701
===========
</TABLE>
The accompanying consolidated balance sheets of the Company at March 31,
1997 and September 30, 1996 is consolidated with the accounts of DMX-E and the
accompanying consolidated statements of operations and cash flows of the Company
were consolidated with the accounts of DMX-E for the six and three months ended
March 31, 1997. Prior to May 18, 1996, the Company accounted for its investment
in DMX-E using the equity method of accounting.
(5) PROPERTY AND EQUIPMENT.
Property and equipment as of March 31, 1997 and September 30, 1996, consist
of the following:
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1996
----------- -------------
<S> <C> <C>
Furniture and equipment................................... $ 4,459,105 3,957,369
Leasehold improvements.................................... 200,834 181,348
Studio equipment.......................................... 6,195,372 6,144,707
Music library............................................. 1,038,264 918,126
Computer system........................................... 1,282,975 1,251,460
----------- -----------
13,176,550 12,453,010
Less accumulated depreciation and amortization............ (7,983,338) (6,559,022)
----------- -----------
$ 5,193,212 5,893,988
=========== ===========
</TABLE>
8
<PAGE> 227
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(5) PROPERTY AND EQUIPMENT, CONTINUED.
At March 31, 1997, studio equipment included approximately $173,000 in
equipment, net of accumulated depreciation of $546,000, that is being leased to
DMX-E for a monthly fee of approximately $23,000. Lease income related to
equipment leased to DMX-E for the six months ended March 31, 1997 was $137,520
and was eliminated in consolidation. Lease income for the six months ended March
31, 1996 was $137,520 and is included in other income.
Studio equipment of $1,057,500, net of accumulated depreciation of
$1,138,000, at March 31, 1997 was financed under the capital lease obligation.
(6) NOTE PAYABLE RELATED PARTY.
On February 6, 1997 the Company entered into a loan and security agreement
with TCI which provides the Company up to $3.5 million. The loan proceeds were
used to purchase and/or reimburse the Company for equipment and certain costs
related to obtaining commercial customers. The loan bears an annual interest
rate of 12.5% and is to be paid in 36 equal monthly installments commencing July
1, 1997. At May 9, 1997 the principal balance outstanding was approximately
$2,420,000 and accrued interest was approximately $45,000.
(7) STOCKHOLDERS' (DEFICIT) EQUITY.
Stock Options and Commitments.
The Company has issued options to purchase common stock to certain
directors, officers and employees under various stock option plans. The option
prices represent fair market values at the date of grant. Transactions in stock
options under these plans are summarized as follows:
<TABLE>
<CAPTION>
SHARES OPTION PRICE
--------- -------------------------------------
<S> <C> <C>
Outstanding options at September 30,
1996.................................. 4,115,833 $1.95 - $6.25 per share, expiring on
various dates, December 31, 1996 to
July 1, 2006
Options expired and canceled............ (456,250) $1.95 - $5.75 per share
---------
Outstanding options at March 31, 1997... 3,659,583 $1.95 - $6.25 per share, expiring on
=========
various dates, May 1998
to July 1, 2006.
</TABLE>
At March 31, 1997, options to purchase 3,136,249 shares were exercisable at
prices ranging from $1.95 to $6.25 per share, 2,859,999 of the exercisable
options were held by officers and directors of the Company.
New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 123 which
is effective for years commencing after December 15, 1995. The Company does not
intend to adopt the measurement and recognition criteria of Statement No. 123
but will be adopting the pro forma disclosure requirements of Statement No. 123
in its 1997 financial statements.
(8) COMMITMENTS AND CONTINGENCIES.
Parent Guarantees.
The Company has guaranteed certain contracts of DMX-E related to their
uplink services agreement and subscriber management services agreement. To the
extent DMX-E is unable to perform under the
9
<PAGE> 228
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(8) COMMITMENTS AND CONTINGENCIES, CONTINUED.
agreements, certain creditors of DMX-E may pursue claims against the Company
under the guarantees. A claim under the guaranty of DMX-E's obligation to
indemnify British Sky Broadcasting under the uplink services agreement could
potentially approximate $1.3 million which is included in the loss on disposal
of DMX-E in the accompanying consolidated statement of operations. The Company
has also guaranteed certain other obligations of DMX-E under the Subscriber
Management Services Agreement between DMX-E and Selco Servicegesellschaft Fur
Elektronische Kommunikation mbH and the related side letter agreement. The
Company cannot estimate the amount of any potential claims at this time under
such guarantee; however, such liabilities could have a material adverse effect
upon the financial position and results of operation of the Company.
As described in note 4, "Investment in DMX-Europe N.V. and subsidiary", the
Company has ceased funding the operations of DMX-E and has entered into
agreements providing for the disposition of DMX-E to Jerold Rubinstein, Chairman
and Chief Executive Officer of the Company. Mr. Rubinstein will seek to
reorganize the operations of DMX-E and also seek new equity partners. To the
extent a reorganization cannot be achieved and in the absence of some other
arrangement to provide financial support to DMX-E, the European companies will
be placed into receivership. In such circumstances, claims may be filed under
the guarantees discussed above or other claims may be asserted.
Legal Actions.
From time to time the Company may be a party to legal actions arising in
the ordinary course of business, including claims by former employees. In the
opinion of the Company's management, after consultation with counsel,
disposition of such matters are not expected to have a material adverse effect
upon the financial position, results of operations or liquidity of the Company.
On September 8, 1996, a purported class action lawsuit entitled Brickell
Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R.
Shaw, Sr., Kent Burkhart, J.C. Sparkman, Menon Bhaskar, DMX Inc., and
Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware
Chancery Court alleging, among other things, that the proposed acquisition of
the Company by TCI is wrongful, unfair and harmful to the Company's public
stockholders and seeking to enjoin the consummation of the Merger. The Company
believes that this action is without merit and intends to defend it vigorously.
(9) TCI MERGER.
On February 6, 1997, the Company, TCI Music, Inc., and TCI Merger Sub, Inc.
executed an Agreement and Plan of Merger which provides for the merger (the
"Merger") of Merger Sub, Inc. with and into the Company. The stockholders of the
Company would receive stock of TCI Music, Inc. representing approximately 19.25%
of TCI Music, Inc. with TCI and its affiliates holding the remaining 80.75%.
Upon consummation of the merger, each outstanding share of common stock of the
Company will be converted into (i) one-half of a share of TCI Music, Inc. Series
A Common Stock, and (ii) one Right for each whole share of TCI Music, Inc.
Series A Common Stock received. Each Right will entitle the holder to require
TCI to purchase from such holder one share of TCI Music, Inc. Series A Common
Stock for $4.00 per share if during the one year period beginning on the
effective date of the merger, the price of TCI Music, Inc. Series A Common Stock
does not equal or exceed $4.00 per share for a period of at least 20 consecutive
trading days. The $4.00 is payable at the election of TCI in either cash, a
number of shares of Tele-Communications, Inc. Series A TCI Group Common Stock
having a equivalent value, or a combination of cash and stock.
The Merger is conditioned upon certain regulatory and other approvals,
including approval by the affirmative vote of holders of a majority of the
outstanding shares of the Company's common stock.
10
<PAGE> 229
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
(10) LIQUIDITY AND CAPITAL RESOURCES.
The decrease in cash of $101,000 for the six months ended March 31, 1997,
was the net result of $1.9 million provided by financing activities and used to
purchase equipment of $700,000, primarily related to the obtaining of commercial
customers, $212,000 used to pay the Company's capital lease obligation and
approximately $1.2 million of cash used in operating activities.
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from its operating activities on a
prospective basis, and has reduced its operating expenses to extend its working
capital. However, the Company will need additional funding to meet certain
obligations related to the discontinuance of operations of DMX-E and to continue
to expand and develop the Company's business pursuant to management's current
plans. On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provides the Company up to $3.5 million. The loan
proceeds will be used to purchase and/or reimburse the Company for equipment and
certain costs related to obtaining commercial customers. The loan bears an
annual interest rate of 12.5% and is to be paid in 36 equal monthly installments
commencing July 1, 1997. However, the Company is not seeking any other
additional financing at this time to fund its other operational requirements and
its obligation related to the discontinuance of the operations of DMX-E due to
the pendency of the Merger. As more fully described in note 9, on February 6,
1997, TCI and the Company executed a definitive Merger Agreement pursuant to
which the Company would become a wholly-owned subsidiary of TCI Music, Inc., a
newly formed TCI subsidiary. Pursuant to a Contribution Agreement between TCI
and TCI Music, Inc., to be entered into at the closing of the merger, TCI will
transfer to TCI Music, Inc. among other things, the revenue it derives from its
business with the Company. After giving effect to these transactions, TCI Music,
Inc. as successor to the Company, is expected to be cash flow positive. However,
if such assumption is not accurate or if future financing is required and is not
available, then management would seek to continue to reduce operating expenses
and capital spending as necessary as a means to stem cash shortfalls. These
operating expenses include both discretionary spending, such as sales and
marketing expenses and overhead costs, such as general and administrative
expenses. Such expenses will continually be evaluated giving consideration to
the cash flow generated from subscriber fee revenue, anticipated growth in such
revenue and available working capital. There can be no assurance that the
Company will be able to reduce its operating expenses sufficiently to meet its
existing cash requirements while maintaining its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The consolidated
financial statements do not include all potential adjustments that could result
from potential claims under the above noted parent guarantees or other
obligations of DMX-E. As described in notes 4 and 8, the Company has ceased
funding the operations of DMX-E and has entered into agreements providing for
disposition of DMX-E to Jerold Rubinstein, Chairman and Chief Executive Officer
of the Company. Mr. Rubinstein is seeking to reorganize the operations of DMX-E
and is also seeking new equity partners. To the extent a reorganization cannot
be achieved and in the absence of some other arrangement to provide financial
support to DMX-E, the European companies will be placed into receivership. In
such circumstances, claims may be filed under the guarantees. Such adjustments
could have a material adverse effect upon the financial position and results of
operations of the Company.
To the extent that this Quarterly Report contains forward looking
statements with respect to the financial condition, results of operations or
business of the Company, such statements involve risks and uncertainties
including but not limited to those factors described above and those described
in the Company's Annual Report on Form 10-K ("10-K") for the year ended
September 30, 1996. The foregoing is not a complete
11
<PAGE> 230
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
description of the Company's business or the risks associated with an investment
in the Company. A more complete discussion of these items can be found in the
10-K under the heading "Business".
ITEM 2. MANAGEMENTS' DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SUMMARY OF PERFORMANCE.
The net loss for the six months ended March 31, 1997 was $7.8 million or
$0.13 per share, compared to $15.2 million or $0.35 per share, for the six
months ended March 31, 1996. The net loss for the three months ended March 31,
1997 was $3.5 million or $0.06 per share, compared to $7.8 million or $0.18 per
share for the three months ended March 31, 1996. The decrease in the net loss
was primarily attributed to increased revenues to $10.8 million for the six
months ended March 31, 1997, compared to $7.6 million for the six months ended
March 31, 1996 and increased revenues to $5.6 million for the three months ended
March 31, 1997, compared to $4.0 million for the three months ended March 31,
1996 and decreased operating expenses of DMX-E. Prior to May 17, 1996 the
Company recorded the losses of DMX-E using the equity method and subsequent to
that date, the financial statements of DMX-E were consolidated. Total
consolidated operating expenses for the six months ended March 31, 1997
increased to $18.6 million from $13.5 million for the six months ended March 31,
1996 and increased to $9.0 million for the three months ended March 31, 1997,
compared to $6.9 million for the three months ended March 31, 1996. The increase
of $5.1 million and $2.1 million for each respective period was due to the
inclusion of DMX-E operating expenses of $5.6 million and $2.6 million as
compared to the recorded equity loss in DMX-E of $9.5 million and $5.0 million
in other income/expense for the six months and three month ended March 31, 1996,
respectively.
RESULTS OF OPERATIONS
Revenue -- DMX Inc.
The Company's revenues increased to $10.8 million for the six months ended
March 31, 1997 from $7.6 million for the six months ended March 31, 1996. The
$3.2 million increase was primarily attributed to increased subscriber fee
revenues of $1.5 from continued growth in commercial subscribers and residential
PrimeStar subscribers and $1.4 million of DMX-E revenues included in
consolidated revenues for the six months ended March 31, 1997.
Revenues increased to $5.6 million for the three months ended March 31,
1997 from $4.0 for the three months ended March 31, 1996. The $1.6 million
increase was attributed to increased subscriber fee revenues of $719,000 from
continued growth in commercial subscribers and residential PrimeStar subscribers
and $754,000 of DMX-E revenues included in consolidated revenue for the three
months ended March 31, 1997.
Commercial subscriber fee revenue for the six months ended March 31, 1997
represented approximately 41.6% of total subscriber fee revenue compared to
33.2% of total subscriber fee revenue for the six months ended March 31, 1996
and represented approximately 42.7% for the three months ended March 31, 1997,
compared to 33.4% for the three months ended March 31, 1996. Residential
subscriber fee revenue for the six months ended March 31, 1997 represented
approximately 58.4% of total subscriber fee revenue compared to 66.8% of total
subscriber fee revenue for the six months ended March 31, 1997 and represented
approximately 57.3% for the three months ended March 31, 1997, compared to 66.6%
for the three months ended March 31, 1996.
12
<PAGE> 231
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
Revenue -- DMX-E.
The Company began consolidating the operations of DMX-E from the
acquisition date of May 17, 1996. As discussed below, the Company has decided to
dispose of or cease the operations of DMX- E.
Operating Expenses.
Total operating expenses increased to $18.6 million for the six months
ended March 31, 1997 from $13.5 million for the six months ended March 31, 1996.
The increase of $5.1 million was primarily attributable to the inclusion of $5.6
million of DMX-E operating expenses for the six months ended March 31, 1997 as
compared to the recorded equity in loss of DMX-E of $9.5 million in other
income/expense for the six months ended March 31, 1996, when the Company
accounted for DMX-E on the equity method.
Total operating expenses increased to $9.0 million for the three months
ended March 31, 1997 from $6.9 million for the three months ended March 31,
1996. The increase of $2.1 million was primarily attributable to the inclusion
of $2.6 million of DMX-E operating expenses for the three months ended March 31,
1997, as compared to the recorded equity in loss of DMX-E of $5.0 million in
other income/expense for the three months ended March 31, 1996, when the Company
accounted for DMX-E on the equity method.
General and Administrative Expenses.
General and administrative expenses increased to $3.0 million for the six
months ended March 31, 1997 from $2.8 million for the six months ended March 31,
1996. The $255,000 net increase consisted of increased legal fees of $519,000
due to the pending merger transaction with TCI and the activities related to the
disposition of DMX-E, a provision for doubtful accounts of $434,000 and
increased rent of $50,000, due to expansion of space for the commercial sales
and marketing divisions, reduced by decreases in salaries and related expenses
of $563,000 resulting from two executive officers leaving the Company in the
third and fourth quarters of the 1996 fiscal year and the performance bonus
which was paid to the Chairman in the first quarter of 1996 fiscal year;
decreases in other professional and consultancy fees of $92,000 and decreases in
public/shareholder relation expenses of $100,000.
General and administrative expenses increased to $1.5 million for the three
months ended March 31, 1997 from $1.3 million for the three months ended March
31, 1996. The net increase of $231,000 consisted of increased legal fees of
$226,000 due to the pending merger transaction with TCI and the activities
related to the disposition of DMX-E; a provision for doubtful accounts of
$92,000 and increase in rent of approximately $100,000, due to the expansion of
space for the commercial and sales marketing divisions, reduced by salaries and
related expenses of $118,000 resulting from two executives officers leaving the
Company subsequent to the second quarter in the 1996 fiscal year, decreases in
professional and consultancy fees of $47,000 and decreases in public/shareholder
relation expenses of $31,000.
Sales and Marketing Expenses.
Sales and marketing decreased to $3.3 million for the six months ended
March 31, 1997 from $4.7 million for the six months ended March 31, 1996. The
net decrease of $1.4 million primarily represented a decrease in royalties of
$289,000 as the manufacture, distribution and servicing agreement with
Scientific Atlanta, Inc. expired in August 1996; a decrease in net installation
cost of $102,000 for commercial accounts as the Company typically recoups the
cost of installations; and decreases in warranty service expense of $99,000,
13
<PAGE> 232
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
salaries and consultants of $323,000, travel and entertainment of $164,000,
marketing expenses of $242,000, and office and other related expenses of $89,000
due to the Company's efforts to reduce overhead.
Sales and marketing decreased to $1.6 million for the three months ended
March 31, 1997 from $2.4 million for the three months ended March 31, 1996. The
net decrease of $812,000 primarily represented a decrease in royalties of
$145,000 as the manufacture, distribution and servicing agreement with
Scientific Atlanta, Inc. expired in August 1996; a decrease in net installation
cost of $33,000 for commercial accounts as the Company typically recoups the
cost of installations; and decreases in warranty service expense of $96,000
salaries and consultants of $169,000, travel and entertainment of $75,000,
marketing expenses of $182,000, convention and conference expense of $43,000 and
office and other related expenses of $22,000 due to the Company's efforts to
reduce overhead.
Studio and Programming Expenses.
Studio and programming expenses increased to $4.9 million for the six
months ended March 31, 1997 from $4.5 million for the six months ended March 31,
1996. The $445,000 increase was primarily attributed to an increase in music
rights of $453,000 commensurate with the growth in subscribers and fee revenue.
Other components of the net increase represent approximately $286,000 relating
to programming expenses incurred on behalf of DMX-E for the six months ended
March 31, 1997. Prior to the consolidation of DMX-E financial statements with
the Company's, these expenses were charged to DMX-E, however, the benefit of
DMX-E's reimbursement has been eliminated in the consolidated financial
statements for the six months ended March 31, 1997; reduced by a decrease in
satellite and uplink expense of $314,000 due to the double illumination cost as
the Company migrated from the AT&T Telstar 401 Ku-Band satellite to the AT&T
Telstar 402R Ku-Band satellite in 1996.
Studio and programming expenses increased to $2.5 million for the three
months ended March 31, 1997 from $2.4 million for the three months ended March
31, 1996. The $103,000 increase was primarily attributed to approximately
$101,000 relating to programming expenses incurred on behalf of DMX-E for the
three months ended March 31, 1997. Prior to the consolidation of DMX-E financial
statements with the Company's, these expenses were charged to DMX-E, however,
the benefit of DMX-E's reimbursement has been eliminated in the consolidated
financial statements for the three months ended March 31, 1997. Other components
of the net increase represent an increase in music rights of $301,000
commensurate with the growth in subscribers and fee revenue reduced by a
decrease in satellite and uplink expense of $317,000 due to the double
illumination cost as the Company migrated from the AT&T Telstar 401 Ku-Band
satellite to the AT&T Telstar 402R KuBand satellite in 1996.
Operating Expenses -- DMX-E.
The Company began consolidating the operations of DMX-E from the
acquisition date of May 17, 1996. As discussed below, the Company has decided to
dispose of or cease the operations of DMX- E
Disposal of DMX-E.
The Company has entered into definitive agreements providing for the
disposition of DMX-E to Mr. Jerold Rubinstein, the Company's Chairman and Chief
Executive Officer. DMX Inc. will retain a ten percent equity interest in the
companies which would have an exclusive, five-year, royalty-free license to
distribute the DMX music service in Europe, the former Soviet Union and in the
Middle East and will have the right to use the Company's trademarks for two
years. In addition, Mr. Rubinstein has agreed to guaranty certain obligations of
the European operations for satellite-uplink capacity. The Company had
previously
14
<PAGE> 233
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
determined to cease financial support for DMX-E operations and in the absence of
some other arrangements to provide financial support to DMX-E, to place the
companies in receivership. Mr. Rubinstein will seek to reorganize the operations
of DMX-E and will seek new equity investors. If DMX-E cannot be reorganized,
then Mr. Rubinstein intends to organize a new company to distribute the music
service on essentially the same terms and the Company will subscribe for a ten
percent equity interest in the new venture.
The Company estimated the loss on the disposal of DMX-E, which included its
net investment of $5.7 million and other obligations guaranteed by the Company
of $1.4 million, was accounted for in the Company's consolidated financial
statements at September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES.
The decrease in cash of $101,000 for the six months ended March 31, 1997,
was the net result of $1.9 million provided by financing activities and used to
purchase equipment of $700,000, primarily related to the obtaining of commercial
customers, $212,000 used to pay the Company's capital lease obligation and
approximately $1.2 million of cash used in operating activities.
With the discontinuation of the operations of DMX-E, management believes
that the Company will begin to generate cash from its operating activities on a
prospective basis and has reduced its operating expenses to extend its working
capital. However, the Company will need additional funding to meet certain
obligations related to the discontinuance of operations of DMX-E and to continue
to expand and develop the Company's business pursuant to management's current
plans. On February 6, 1997 the Company entered into a loan and security
agreement with TCI which provides the Company up to $3.5 million. The loan
proceeds as of May 9, 1997 totaling $2.4 million have been used to purchase
and/or reimburse the Company for equipment and certain costs related to
obtaining commercial customers. The loan bears an annual interest rate of 12.5%
and is to be paid in 36 equal monthly installments commencing July 1, 1997.
However, the Company is not seeking any other additional financing at this time
to fund its other operational requirements and its obligation related to the
discontinuance of the operations of DMX-E due to the pendency of the Merger. As
more fully described in note 9 to the Company's consolidated financial
statements, on February 6, 1997, TCI and the Company executed a definitive
Merger Agreement pursuant to which the Company would become a wholly-owned
subsidiary of TCI Music, Inc., a newly formed TCI subsidiary. Pursuant to a
Contribution Agreement between TCI and TCI Music, Inc., to be entered into at
the closing of the merger, TCI will transfer to TCI Music, Inc. among other
things, the revenue it derives from its business with the Company. After giving
effect to these transactions, TCI Music, Inc. as successor to the Company, is
expected to be cash flow positive. However, if such assumption is not accurate
or if future financing is required and is not available, then management would
seek to continue to reduce operating expenses and capital spending as necessary
as a means to stem cash shortfalls. These operating expenses include both
discretionary spending, such as sales and marketing expenses and overhead costs,
such as general and administrative expenses. Such expenses will continually be
evaluated giving consideration to the cash flow generated from subscriber fee
revenue, anticipated growth in such revenue and available working capital. There
can be no assurance that the Company will be able to reduce its operating
expenses sufficiently to meet its existing cash requirements while maintaining
its competitive position.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. The consolidated
financial statements do not include all potential adjustments that could result
from potential claims under the above noted parent guarantees or other
obligations of DMX-E. As described in notes 4 and 8 to the Company's
consolidated financial statements and in the Disposal of DMX-E above, the
Company has ceased funding the operations of DMX-E and has entered
15
<PAGE> 234
DMX INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SIX MONTH PERIOD ENDED MARCH 31, 1997
(UNAUDITED)
into agreements providing for disposition of DMX-E to Jerold Rubinstein,
Chairman and Chief Executive Officer of the Company. Mr. Rubinstein is seeking
to reorganize the operations of DMX-E and also seeks new equity partners. To the
extent a reorganization cannot be achieved and in the absence of some other
arrangement to provide financial support to DMX-E, the European companies will
be placed into receivership. In such circumstances, claims may be filed under
the guarantees. Such adjustments could have a material adverse effect upon the
financial position and results of operations of the Company.
To the extent that this Quarterly Report contains forward looking
statements with respect to the financial condition, results of operations or
business of the Company, such statements involve risks and uncertainties
including but not limited to those factors described above and those described
in the Company's Annual Report on Form 10-K ("10-K") for the year ended
September 30, 1996. The foregoing is not a complete description of the Company's
business or the risks associated with and investment in the Company. A more
complete discussion of these items can be found in the 10-K under the heading
"Business".
16
<PAGE> 235
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER EVENTS.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) None.
(b) Reports on Form 8-K. The Company filed no reports on Form 8-K during
the quarter ended March 31, 1997.
II-1
<PAGE> 236
SIGNATURES
DMX INC.
(REGISTRANT)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ JEROLD H. RUBINSTEIN Chairman of the Board and Chief May 15, 1997
- - ----------------------------------------------------- Executive Officer
Jerold H. Rubinstein
/s/ JOANNE WENDY KIM Chief Financial Officer and Corporate May 15, 1997
- - ----------------------------------------------------- Secretary
Joanne Wendy Kim
</TABLE>
II-2
<PAGE> 237
[FORM OF PROXY]
DMX INC.
11400 WEST OLYMPIC BLVD.
SUITE 1100
LOS ANGELES, CALIFORNIA 90064
PROXY FOR SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD JULY 11, 1997
The undersigned hereby appoints Jerold H. Rubinstein and Wendy J. Kim,
or either of them, proxies and attorneys-in-fact for the undersigned, each with
full power of substitution, and hereby authorizes them to vote at the Special
Meeting of stockholders of DMX Inc. (the "Company") to be held at the Company's
executive offices, located at 11400 West Olympic Boulevard, Suite 1100, Los
Angeles, California 90064 on July 11, 1997, starting at 10:00 a.m., local time,
and at all adjournments or postponements thereof, all the shares of common
stock, $.01 par value, of the Company standing in the name of the undersigned
or which the undersigned maybe entitled to vote as follows:
1. FOR [ ] AGAINST [ ] ABSTAIN [ ] approval of the
Agreement and Plan of Merger dated as of February 6, 1997, as amended
by Amendment One to Merger Agreement, described in the Proxy
Statement/Prospectus and as set forth in Appendix I thereto;
2. In their discretion, the proxies are authorized to vote on such other
business as may properly come before the Special Meeting or any
adjournments or postponements thereof;
hereby revoking any proxy or proxies heretofore given by the undersigned.
THIS PROXY IS BEING SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE
COMPANY AND MAY BE REVOKED PRIOR TO ITS EXERCISE. THIS PROXY, WHEN PROPERLY
EXECUTED, WILL BE VOTED AS DIRECTED ABOVE BY THE UNDERSIGNED. IF NO DIRECTION
IS MADE, IT WILL BE VOTED FOR PROPOSAL 1 AND IN THE PROXIES' DISCRETION ON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL MEETING.
---------------------------------------------
By:
-----------------------------------------
Your signature should appear exactly as your
name appears in the space at the left.
For joint accounts, all owners should sign.
When signing in a fiduciary or representative
capacity, please give your full title as such.
Date:
---------------------------------------
PLEASE SIGN AND RETURN THIS PROXY CARD TODAY
USING THE ENCLOSED POSTAGE PAID ENVELOPE.
