-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cnn4sHQY5JuLGvMkDZs5W0Dq1f46N2PXcDSJx1y39axKBRJWDHF+EstX6BUVlRWO YA58hUWaNNbfNKI5EqpUKQ== 0000950148-98-000754.txt : 19980401 0000950148-98-000754.hdr.sgml : 19980401 ACCESSION NUMBER: 0000950148-98-000754 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 20 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TCI MUSIC INC CENTRAL INDEX KEY: 0001040449 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 841380293 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-22815 FILM NUMBER: 98583869 BUSINESS ADDRESS: STREET 1: 8101 EAST PRENTICE AVE. STREET 2: SUITE 500 CITY: ENGLEWOOD STATE: CO ZIP: 80111 BUSINESS PHONE: 3037215400 MAIL ADDRESS: STREET 1: 5619 DTC PARKWAY CITY: ENGLEWOOD STATE: CO ZIP: 80111 10-K405 1 FORM 10-K405 1 As filed with the Securities and Exchange Commission on March 31, 1998. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________ to ________________. COMMISSION FILE NUMBER 0-22815 TCI MUSIC, INC. (Exact name of registrant as specified in its charter) DELAWARE 84-1380293 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8101 EAST PRENTICE AVENUE, SUITE 500 ENGLEWOOD, CO 80111 (Address of principal executive offices) Zip code
Registrant's telephone number, including area code: (303) 267-5500 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.01 Par Value Indicate by check mark whether registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Unless otherwise specifically indicated, all monetary references in this filing are in U.S. dollars. As of January 31, 1998 the aggregate market value of the Common Stock held by non-affiliates of TCI Music, Inc. was approximately $18,469,509. Number of shares of Common Stock of TCI Music, Inc. outstanding as of January 31, 1997: 18,237,356 shares. 2
TABLE OF CONTENTS Page ---- PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 PART II Item 5. Market for TCI Music, Inc.'s Common Equity and Related Stockholder Matters . . . . . . . . . . . . . . . . 17 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . 20 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . 26 PART III Item 10. Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . 34 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 47
3 PART I ITEM 1. BUSINESS. GENERAL DEVELOPMENT OF BUSINESS. TCI Music, Inc. , a Delaware corporation("TCI Music" or the "Company") was incorporated in January 1997 as a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI") for the purpose of acquiring DMX Inc., a Delaware corporation ("DMX"). Since its formation, the Company has acquired three businesses: DMX on July 11, 1997, The Box Worldwide, Inc. a Florida corporation ("The Box") on December 16, 1997, and Paradigm Music Entertainment Company, a Delaware Corporation ("Paradigm") on December 31, 1997. DMX is primarily engaged in programming, distributing and marketing an audio digital music service, which provides continuous commercial-free CD-quality music programming. The Box is primarily engaged in programming, distributing and marketing an interactive music video television programming service to cable television systems and low power television stations and full power broadcast stations via satellite delivery. Paradigm operates two music distribution web sites: SonicNet and Addicted to Noise. The Company acquired DMX to provide digital audio services to both residential and commercial markets; The Box to serve as the platform for music video; and Paradigm to provide music-related content to DMX and The Box and to position itself to take advantage of developments in music distribution through the Internet. TCI Music's business for the six months ended December 31, 1997 consisted principally of the business of DMX. DMX Merger. On July 11, 1997, DMX and TCI Music, consummated a merger pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29, 1997 (the "DMX Merger Agreement"), among DMX, TCI, TCI Music, and TCI Music Merger Sub ("Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby Merger Sub was merged with and into DMX (the "DMX Merger"), with DMX as the surviving corporation. Pursuant to the DMX Merger, TCI Music became the successor registrant to DMX. In connection with the DMX Merger, TCI and TCI Music entered into a Contribution Agreement dated July 11, 1997, as amended by the Amended and Restated Contribution Agreement (the "Amended Contribution Agreement"). Pursuant to the Amended Contribution Agreement: (i) TCI Music issued to TCI (as designee of certain of its indirect subsidiaries), 62,500,000 shares of TCI Music Series B Common Stock, par value $.01 per share ("TCI Music Series B Common Stock"), and a promissory note in the amount of $40 million, (ii) TCI is required to deliver, or cause certain of its subsidiaries to deliver to TCI Music monthly payments aggregating $18 million annually, adjusted annually through 2017 (the "Annual TCI Payments"); (iii) TCI contributed to TCI Music certain digital commercial tuners that were not in service, and (iv) TCI granted to each stockholder of DMX who became a stockholder of TCI Music pursuant to the DMX Merger, one right (a "TCI Right") with respect to each whole share of Series A Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series A Common Stock") acquired by such stockholder in the DMX Merger pursuant to the terms of a Rights Agreement among TCI, TCI Music and The Bank of New York to require TCI to purchase from such holder one share of TCI Music Series A Common Stock at a purchase price of $8.00 per share payable at the election of TCI, in cash, a number of shares of Tele-Communications, Inc. Series A TCI Group Common Stock, par value $.01 per share, ("TCI Group Series A Stock") having an equivalent value or a combination thereof, if during the one-year period beginning on July 11, 1997, the effective date of the DMX Merger, the price of TCI Music Series A Common Stock with associated TCI Rights does not equal or exceed $8.00 per share for a period of at least 20 consecutive trading days. Upon consummation of the DMX Merger, each outstanding share of Common Stock of DMX, $.01 par value per share ("DMX Common Stock"), was converted into the right to receive (i) one-quarter of a share of TCI Music Series A Common Stock, (ii) one TCI Right with respect to each whole share of TCI Music Series A Common Stock and (iii) cash in lieu of fractional shares of TCI Music Series A Common Stock and TCI Rights. 3 4 Effective July 11, 1997, TCI Music, as the successor registrant to DMX, changed its fiscal year end from September 30 to December 31, and reported the nine month transition period ended June 30, 1997 on the Transition Report on Form 10-K filed on October 9, 1997. The Box Merger. On December 16, 1997, TCI Music, TCI Music Acquisition Sub, Inc., a Florida corporation and a wholly-owned subsidiary of TCI Music, and The Box, consummated a merger pursuant to an Agreement and Plan of Merger dated as of August 12, 1997 (the "Box Merger Agreement"), whereby 24,892,623 outstanding shares of common stock of The Box were converted into the right to receive a fraction of a share of TCI Music Series A Convertible Preferred Stock, $.01 par value per share ("TCI Music Preferred Stock"), equal to the quotient of $1.50 divided by three times the average of the average daily closing bid and asked prices of one share of TCI Music Series A Common Stock trading with an associated TCI Right, for a period of 20 consecutive trading days ending on the third trading day prior to the closing of the Box Merger as reported on the Nasdaq SmallCap Market and cash in lieu of fractional shares of Music Series A Preferred Stock. Each share of TCI Music Preferred Stock is convertible, at the option of the holder, into three shares of TCI Music Series A Common Stock without associated TCI Rights, subject to certain antidilution adjustments and certain adjustments for dividends and distributions, if any. The Box's 6% Convertible Redeemable Preferred Stock, par value $.15 per share and stated value of $1.50 per share ("BOX Preferred Stock"), was purchased by the Company for $2,652,466. Paradigm Merger. On December 31, 1997, TCI Music, Inc., TCI Para Merger Sub, Inc., a wholly-owned subsidiary of TCI Music, and Paradigm, consummated a merger pursuant to an Agreement of Merger, dated as of December 8, 1997 (the "Paradigm Merger Agreement"), whereby, an aggregate of 4,272,174 outstanding shares of Class A Common Stock, Class B Common Stock and Class E Common Stock of Paradigm were converted into a number of shares of TCI Music Series A Common Stock without TCI Rights determined by dividing $24,000,000 by the average of the average daily closing bid and asked prices of one share of TCI Music Series A Common Stock trading with an associated TCI Right, for a period of 20 consecutive trading days ending on the third day prior to the closing of the Paradigm Merger as reported on the Nasdaq SmallCap Market and cash in lieu of fractional shares. Additionally, under the terms of the Paradigm Merger Agreement, TCI Music made a cash payment of approximately $5,332,000 to Paradigm for working capital needs and payment of Paradigm debt. The TCI Rights are not separable from and trade together with the TCI Music Series A Common Stock issued in the DMX Merger on the Nasdaq SmallCap Market under the symbol "TUNE". Accordingly, the market price of one share of TCI Music Series A Common Stock, includes the value, if any, ascribed by the market to a TCI Right. The shares of TCI Music Series A Common Stock issued in the Paradigm Merger and into which the TCI Music Preferred Stock issued in the Box Merger is convertible do not have any such associated TCI Rights. If a holder of TCI Music Preferred Stock converts shares of TCI Music Preferred Stock into shares of TCI Music Series A Common Stock prior to the termination or expiration of the TCI Rights, the TCI Music Series A Common Stock without the TCI Rights received upon conversion will not be tradable on the Nasdaq SmallCap Market under the Symbol "TUNE" with the TCI Music Series A Common Stock that includes the TCI Rights until such TCI Rights terminate or expire. TCI Music had three classes of stock outstanding at December 31, 1997: TCI Music Series A Common Stock and TCI Music Series B Common Stock and the TCI Music Preferred Stock (collectively the "TCI Music Stock"). TCI beneficially owns approximately 4.8% of the outstanding TCI Music Preferred Stock, 37.7% of the outstanding shares of TCI Music Series A Common Stock and 100% of the outstanding shares of TCI Music Series B Common Stock, which collectively represents 97.5% of the voting power of the outstanding shares of TCI Music Stock. Certain statements in this Annual Report on Form 10-K (this "Report") constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of TCI Music and subsidiaries or industry results, to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, among others: general economic and business conditions and industry trends; the continued strength of the multichannel video programming distribution industry and the satellite services industry; uncertainties inherent in proposed business strategies and development plans; rapid technological changes; future financial performance, including availability, 4 5 terms and deployment of capital; availability of qualified personnel; changes in, or the failure or the inability to comply with, government regulation, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings; changes in the nature of key strategic relationships with partners and joint venturers; competitor responses to the Company's products and services, and the overall market acceptance of such products and services, including acceptance of the pricing of such products and services; and other factors referenced in this Report. These forward-looking statements speak only as of the date of this Report. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. DESCRIPTION OF BUSINESS. The Company, through its subsidiaries DMX, The Box and Paradigm, is principally engaged in: (i) programming, distributing, and marketing continuous commercial-free compact disc-quality music programming; (ii) programming, distributing, and marketing an interactive music video television programming service; and (iii) distributing and marketing music entertainment products through traditional and non-traditional channels. Digital Audio - DMX. DMX is primarily engaged in programming, distributing and marketing a digital music service (the "DMX Service"), Digital Music Express(R) ("DMX Service"), which provides continuous, commercial-free, CD-quality music programming. The DMX music formats are programmed within various music genres which include: Classical, Jazz, Rock, Oldies, Country, Latin, Urban, Pop/Adult Contemporary, Instrumental, International and Specialty. Within each music genre, DMX offers a variety of format selections which are more unique and narrowly defined than typically would be found on a commercial radio station. DMX services are delivered by cable, Ku-Band direct broadcast satellite ("DBS") or via on-premise disc. DMX currently offers 30 and 97 formats for cable distribution and DBS, respectively. In addition, DMX currently has over 200 titles in its library catalogue for DMX-Disc distribution where cable and DBS are not available ("DMX-Disc"). DMX programs each DMX format to provide more music within each music format than a consumer typically would find on a radio station, without the high level of repetition commonly found in radio programming. DMX also offers subscribers the ability to match a "mood" or social environment with music at the touch of a button. As an example, a restaurant may choose to play Chamber Music at breakfast, Lite Jazz at lunch, and Great Singers at dinner. DMX delivers its DMX Service by three different distribution methods: Cable Distribution, Satellite Distribution and DMX-Disc. Cable Distribution - Cable operators generally offer the DMX Service to their subscribers for a separate a la carte fee. Customers who subscribe to the DMX Service receive the DMX signal through the same coaxial cable used to distribute video cable signals, which is connected through a separate DMX tuner (Tuner Distribution) to a customer's stereo system. In order to receive the DMX Service via Tuner Distribution, residential subscribers must subscribe to cable video programming from their cable operator; commercial subscribers may, but do not need to, subscribe to video programming to receive the DMX Service. Under DMX's affiliation agreements with cable operators, the operators generally have the right, but not the obligation, to distribute the DMX Service to subscribers, and pay a per subscriber license fee to DMX for each paying subscriber receiving the DMX Service. The cable operator sets the fees charged to its commercial and residential subscribers, which are generally higher than the corresponding license fees paid by the cable operator to DMX. License fees vary depending on whether the subscriber is a commercial establishment or a private residence. For example, a cable operator might charge a residential DMX subscriber $9.00 per month for DMX music service and, pursuant to its affiliation agreement with DMX, pay DMX $3.00 per paying subscriber as a license fee. A similar fee structure exists with cable operators with respect to commercial subscribers, but both subscriber fees and license fees are significantly higher for commercial subscribers, with DMX's license fee often based on the greater of a minimum fee or a percentage of the fee charged to the commercial subscriber. 5 6 Satellite Distribution - DMX Service is delivered, for a monthly subscriber fee, by DBS to small satellite dishes transmitted from the Ku-Band satellite directly to residential and commercial subscribers or as part of a package of video and music programming delivered by DBS distributors, such as PRIMESTAR or cable digital program providers such as Headend in the Sky ("HITS") by TCI ("Satellite Distribution"). DMX's affiliation agreements with the DBS operators and cable digital program providers generally provide for a relatively small per subscriber license fee attributable to the DMX Service and payable to DMX for each subscriber that purchases a package of video and music services. DMX-Disc - DMX Service is offered as an on-premise business music service via DMX-Disc. The DMX-Disc service offers flexibility in situations where rooftop DBS installations are not possible, or where another building might block the signal path from DMX's satellite, through the use of on-premise equipment and custom DMX programmed CDs. DMX-Disc uses a compact disc interactive player and a custom programmed library of CDs. These CDs are manufactured by DMX using a compression scheme which allows for over four hours of pre-recorded music to be played from one CD. Through the distribution and rotation of library CDs, a DMX-Disc customer is ensured of always having a fresh DMX playlist, mirroring the playlist from the DBS feed. DMX serves more than 900 affiliates comprised of cable systems, owned and operated offices, DBS program providers and independent franchises in 50 states. DMX currently is accessible to more than 18 million cable subscribers and 11 million businesses in the United States. DMX distributes music throughout the United States, Canada, Mexico, Latin America, the Caribbean and Sub-Sahara Africa. Digital Compression Technology. Cable operators have recently begun to offer a new method of distributing video and other programming using digital compression technology ("Digital Distribution"). Digital compression technology can compress, on average, as many as 12 of the current analog video signals into the space normally occupied by one. Such technology improves picture quality and allows for carriage of significantly more video product offerings without cable operators having to build new cable plant. The technology is distributed through TCI's HITS, that enables TCI and each other participating cable operator to increase their program offerings and create new packages that could include, if they so choose, the DMX Service as part of a package of video and music services. Digital Distribution permits subscribers to receive video and music signals through a single standard set-top-tuner or "box" without the use of a separate tuner for music, as is currently the case with Tuner Distribution. TCI began offering such service to selected markets during 1997. The launch of digital compression technology has the potential to provide an additional distribution market for the DMX Service. If cable operators utilizing Digital Distribution, such as TCI, elect to offer DMX Services as part of one or more digital video programming packages, the DMX Service will be provided to customers who might not otherwise elect to subscribe to DMX Services as a separate premium service. However, the launch of and the transition to Digital Distribution may also have the effect of materially reducing DMX's residential subscriber fee revenues from Tuner Distribution as a result the expected change from the separate fee structure currently in effect for Tuner Distribution to a small per subscriber fee structure similar to that in effect for Satellite Distribution. TCI Music expects that license fees paid by cable operators for Digital Distribution that include DMX Services in their digital packages will be in the range of $.25 to $.50 per subscriber, which are much lower than the separate fees for the DMX Service now paid to DMX under affiliation agreements currently in effect. While a substantial increase in the overall number of residential subscribers purchasing digital packages that include the DMX Service could result in revenues equal to or exceeding the revenues from residential subscribers currently electing to purchase the DMX Service for a separate fee, such a result depends on a number of factors over which TCI Music has no control, including whether cable operators elect to include the DMX Service as part of their digital packages, the acceptance by consumers of the digital products and whether those electing to purchase the digital packages are already DMX subscribers. TCI Music cannot predict the number of DMX residential subscribers that will elect to receive a digital package that includes DMX when it is offered. The new license fee structure for Digital Distribution will not affect the Annual TCI Payments that TCI will pay to TCI Music or DMX under the Amended Contribution Agreement. Although no assurances can be given, TCI Music does not expect the launch of Digital Distribution to affect the current rate structure of commercial cable subscribers or Satellite Distribution. 6 7 TCI Music expects that Tuner Distribution will continue to be available in markets where Digital Distribution has not been introduced. However, because Tuner Distribution utilizes more of the cable spectrum than is currently used to deliver one video channel, it is likely that some cable operators, including TCI, may decide to eliminate Tuner Distribution of DMX Services in certain markets to recover or maintain channel capacity for Digital Distribution. If TCI or any other cable operator other than TCI that pays DMX a flat fee for distribution of the DMX Service terminates Tuner Distribution in any market, all revenues from residential and commercial subscribers receiving the DMX Service via Tuner Distribution in such market would terminate, unless such residential subscribers elect to purchase a video and music programming package through Digital Distribution, and Digital Distribution and other distribution means were made available to commercial subscribers. Accordingly, DMX's and TCI Music's revenues could be materially adversely affected if Tuner Distribution were terminated by cable operators. Likewise, although cable operators may not as readily terminate Tuner Distribution to commercial DMX subscribers, because they generally enter into short term written contracts with commercial subscribers that obligate them to provide such services, they may still choose to recover channel capacity by terminating such agreements. In such event, all revenues from commercial subscribers receiving the DMX Service would also be eliminated unless alternative delivery means such as Satellite Distribution or Digital Distribution were made available to and accepted by the commercial subscriber. If Tuner Distribution were to be eliminated, TCI Music expects that substantial additional expenses would be incurred to retain such commercial subscribers, such as marketing and equipment expenses, which could offset the revenues retained. In addition, an available alternative distribution method may result in increased costs to the subscriber in monthly fees and/or equipment. As a result, there would be a substantial risk that some commercial subscribers would choose to terminate the DMX Service. Accordingly, DMX's and TCI Music's revenues could be materially adversely affected if Tuner Distribution were terminated by cable operators. Music Video - The Box. The Box (formerly Video Jukebox Network, Inc.) is primarily engaged in programming, distributing and marketing an interactive music video television programming service known as THE BOX(R) (the "BOX Service"), operating on a continuous basis. The Box currently exhibits its television programming through 102 box units installed in cable television systems, 46 box units installed in low power television stations and 11 boxes installed in full power broadcast stations. The BOX Service is available to approximately 41.4 million households in 155 cities located in 35 states and in Washington, D.C., Puerto Rico, Argentina, Aruba, Chile, Holland, Italy, New Zealand, Peru, and Venezuela. The Box also broadcasts a national satellite version of the BOX Service on Transponder 13 on the Hughes satellite Galaxy 7. An additional estimated 2.2 million households are presently receiving the BOX Service through its digital satellite delivery. Transponder and uplink services are provided by National Digital Television Center, Inc., a wholly owned subsidiary of TCI ("NDTC"). Viewers of the BOX Service can passively watch The Box programming or can actively participate in determining its programming by selecting specific music videos. Viewers make their selections by dialing a 900 telephone number (or comparable telephone technology) and entering, via touch-tone telephone, a three-digit code assigned to the music video. This allows the viewer to directly communicate with The Box's local box computer. When the computer receives the viewer's request, an acknowledgment appears on all television screens in the local system tuned to the BOX Service. Viewers selecting music videos aired on the BOX Service are charged a fee. Viewers who watch the BOX Service passively pay no charges above their cost for cable service. The BOX Service presents approximately eight minutes of advertising each hour integrated between videos. Transmission of The Box programming can be accomplished through the use of only one cable television channel, one broadcast television channel or through satellite delivery, none of which requires addressable technology. Viewers do not need additional hardware to watch the BOX Service or to select music videos interactively. The one exception is that a digital receiver is necessary for home satellite dishes to pick up the satellite transmission. 7 8 The Box is one of the only companies to deliver an interactive television product to millions of homes in the United States and around the globe. The Box has advanced the original analog technology to a new digital format and has converted all U.S. boxes to this format except for low performing boxes, which were switched to The Box's satellite feed. This new digital technology allows the Company to further localize all programming, deliver an improved on-air look, expand advertising inventory due to random access of digital files, eliminate significant operating expenditures and provide refurbished analog boxes necessary for international expansion. Internet and Other Music Products - Paradigm. Paradigm is an entertainment company with a limited operating history, having commenced operations in November 1995. Its primary focus has been on its operations through its subsidiary SonicNet, Inc.'s ("SonicNet"), two music web sites, SonicNet (http://www.sonicnet.com) and Addicted to Noise ("ATN") (http://www.addict.com). These sites provide artist interviews, music performances, editorial music industry and consumer news product reviews and related interactive consumer directed programming. Paradigm also operates Paradigm Associated Labels ("PAL"), a portfolio of genre specific record labels which produce record releases of new artists, compilations and catalog reissues. The emphasis of SonicNet's web site is to inform consumers of new artists and their performances and provide interviews and chats with artists, product samples and reviews and the option to purchase related artist music products and merchandise. SonicNet currently utilizes Music Boulevard, a third-party online distribution service, to effect sales of artist music products and merchandise. Paradigm intends to develop its own online direct selling capabilities within the next 12-24 months in conjunction with third parties. ATN is an online music magazine and music news and information provider. ATN's main feature is the "Daily Music News of the World" (updated several times daily with breaking news items) which provides viewers with news associated with the music industry, artists, products, etc. Album reviews are also included on the site. In addition to music news, ATN also has feature stories and/or interviews with top artists such as Pearl Jam, REM, Oasis, Phish, Smashing Pumpkins and Bruce Springsteen, which are enhanced with audio and video clips. SonicNet also offers cybercast concerts and launched a series of cybercasts during the summer of 1997 called "Supercasts" which included cybercasts of numerous festivals such as the Tibetan Freedom Festival, the Lilith Fair, Lolapalooza, WARP Tour, H.O.R.D.E., Further Festival, Oz Fest, and ROAR Festival. Since acquiring SonicNet in 1997, Paradigm has also launched a syndicated music news service whose initial customers include Pointcast, Inc. (the leading push technology service), "The Hub," (a destination feature of America Online), and Yahoo (Internet search service). As part of its music news services, SonicNet repackages and syndicates the music news content of the ATN website, which is linked to SonicNet's website, and procures advertisers to be included on such website. SonicNet has also commenced publishing www.trouserpress.com, the exclusive online edition of the definitive music guide to new wave, punk and alternative music and the Alternative Buyers Guide, an online electronic guide for new music consumers. SonicNet's revenues, which to date have been minimal, are currently derived solely from advertising and syndication fees. Companies advertising their goods and services on SonicNet's website currently include Levi Strauss & Co., Sony Station, Carter-Wallace, Inc., Ford Motor Company, J Crew, Microsoft, Kenwood and Intel Corp. Paradigm has expanded SonicNet overseas through an agreement with Japan's Digital Garage to provide exclusive SonicNet feed, translated into Japanese and custom packaged for the Japanese youth market and an agreement with Telstra (the national telephone company of Australia) for Australia and parts of the Far East. PAL's focus has been the development of new artist releases and related artist development, encompassing modern rock, alternative, power-pop, dance and techno artists. PAL currently has three wholly-owned Independent Labels: Paradigm Records, Big Deal and Mutant Sound Systems ("Mutant"), each of which maintains a separate roster of artists with a separate and distinct repertoire focus. PAL's primary focus for 1998 will shift to the creation, production, marketing, sale and distribution of compilation projects and special product development for both SonicNet and The Box. Paradigm initially recruited new and emerging artists from the alternative rock/pop genre but has diversified into the electronic music genre in 1997 through Mutant. In addition, Paradigm may purchase outright or license a finished single or album by an artist in these or other genres. 8 9 Paradigm has also developed a catalog of classic rock archival recordings to which Paradigm has the exclusive right to own, control or exploit. Rights have been acquired to approximately 2,000 master recordings by way of catalog acquisitions and related license agreements. Paradigm intends to acquire rights to additional master recordings. Paradigm will also attempt to enter into license agreements with the major labels in order to more fully exploit its catalog. TECHNOLOGY. DMX has rights to use the technology used in the origination, distribution and reception of DMX via cable, DBS, and DMX-Disc. Affiliated cable operators use special equipment designed to receive the DMX signal and then deliver it over the existing cable network to cable subscribers in the affiliated operator's system. Each subscriber (other than those receiving DMX via Digital Distribution) must be equipped with a special DMX cable tuner (the "DM-2000" tuner), which is designed to connect to the existing coaxial cable used for other cable programming services and to any commercial stereo system using industry standard audio jacks. Subscribers receiving DMX via direct broadcast satellite must be equipped with a small satellite dish antenna and a DMX DBS receiver (the "DR-200" receiver), which like the DM-2000 tuner connects directly to any stereo system. Either tuner allows the subscriber to select any of the available formats at any time. The tuner can be controlled manually, or by a hand held remote control device. One such remote control device, the DMX*DJ(R), compatible with both tuners, provides the subscriber with complete programming information about any song being heard on DMX. The information is shown in a display window on the DMX*DJ using a liquid crystal display. Programming information provided includes: song title, artist, composer, album title, record company label, DMX identification number and chart position, if any. A basic remote control is also available which controls the necessary functions on each tuner, but does not include the display of programming information. DMX is transmitted using multiple distribution technologies based on various compression algorithms which allow the signal to be delivered to the subscriber in CD quality fidelity. These compression technologies are known as SuperSound, AC-3 and MUSICAM. The SuperSound scheme is currently used for U.S. cable transmission and was also used for European cable transmission. AC-3 is currently used for U.S. DBS transmission. MUSICAM was used for European DTH transmission and could ultimately replace SuperSound for European cable transmission. DMX expects to be in a position to offer the U.S. Cable operators currently using SuperSound the option of migrating to AC-3 or MUSICAM, based on the standard adopted for the U.S. market as digital compression technology becomes widely-used. RESEARCH & DEVELOPMENT. The Company views its research and development efforts as a key component of maintaining its leadership position in digital audio. In order to keep its technology at the forefront and to deliver DMX using multiple distribution paths, the Company is continuing research and development activities which include refinements to its residential and commercial DBS technology and the development of AC-3 and MUSICAM compression compatible technology for use in distributing its cable delivered signal. SATELLITES. There are a limited number of satellites with orbital positions suitable for transmission of DMX's and The Box's signals and a limited number of available transponders on those satellites. Satellite transponders receive signals, translate signal frequencies and transmit signals to receiving satellite dish antennas. DMX and The Box (in connection with a national version of its programming) sublease transponder capacity form NDTC, which also provides facilities for uplink transmission of DMX's and The Box's signals to the transponders. NDTC in turn, leases the satellite transponder capacity on the satellite known as Satcom C-3 (Transponder 24) from GE American Communications, Inc., the satellite known as Loral Telstar 4, formerly known as AT&T Telstar 402R, from AT&T Skynet in connection with the transmission of DMX's signals and the Hughes satellite known as Galaxy 7 (Transponder 13) in connection with the transmission of The Box's signals. The term of DMX's principal transponder sublease with NDTC for the Satcom satellite runs through the end of the life of that satellite or April 2005, whichever is earlier. The term of DMX's transponder sublease with NDTC for the Loral Telstar 4 runs through February 2000. Although there has never been sustained interruption of DMX's or The Box's signals due to transponder failure or satellite unavailability, failure or loss, no assurance can be given that any such event will not occur in the future. If such an event were to occur or if NDTC were unable to provide transponder services to DMX or The Box, DMX or The Box would have to seek alternative transponder or satellite facilities. However, 9 10 alternative facilities may not be available on a timely or cost-effective basis and may require the expense of repositioning each DBS subscriber's satellite dish in order to receive signals from another satellite. Any one or more of these events could require DMX or The Box, as the case may be, to incur additional expenditures and could degrade DMX's or The Box's ability to serve its customer base and have a material adverse effect on the Company's financial condition and results of operations. If DMX or The Box is required to enter into new transponder lease agreements, no assurance can be given that it will be able to do so on terms as favorable as those in its current agreements with NDTC. COMPUTER SYSTEMS AND SOFTWARE COMPATIBILITY IN THE YEAR 2000. Many existing computer programs use only two digits to identify a year in a date. If not corrected, many computer applications and systems could fail or create erroneous results by or at the year 2000. Additionally, TCI Music is planning a program of communications with its significant suppliers, customers and affiliated companies to determine the readiness of these third parties and the impact on the Company as a consequence of their own year 2000 issues. TCI Music's manual assessment of the impact of the year 2000 date change should be complete by mid-1999. TCI Music is in the process of identifying computer systems and software that may not function correctly in the year 2000. TCI Music believes that it will be able to identify, and, if necessary, modify or replace such systems and software before any year 2000 associated problems arise. No assurances can be given that such modification and replacement will be completed before any year 2000 associated problems arise or that increased costs arising from unanticipated problems will not have a material adverse effect on the Company. MUSIC RIGHTS. DMX has entered into agreements or is operating under interim agreements with the American Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music Inc. ("BMI"), and the Society of European Stage Authors and Composers ("SESAC"). The agreements provide for performance royalties to be paid by DMX for all music played on DMX in the United States. DMX has an agreement with ASCAP for commercial distribution with a term through May 1999. The residential agreement with ASCAP is currently governed by an interim, industry-wide agreement that will remain in effect until such time as new industry rates are determined. During 1995, DMX entered into a new residential agreement with BMI, with a term extending through September 30, 1999. DMX's agreement with BMI for commercial distribution has expired, and DMX is currently operating under a month-to-month extension. DMX is part of an industry-wide negotiating group currently discussing renewal terms, and expects terms to be finalized in the near future. DMX's agreements with SESAC for residential and commercial distribution both expired in June 1997. Certain of the agreements that are being negotiated on an industry wide basis over new rate structures may require retroactive rate increases. DMX has continued to accrue royalties that are under negotiations based on its best estimates, after consultation with legal counsel and consideration of the terms and rates of the expired contracts. DMX was involved in an arbitration proceeding with the Recording Industry Association of America regarding royalty rates which will be payable to the sound recordings owners pursuant to the Digital Performance Right in Sound Recordings Act of 1995 (the "1995 Digital Act") (see "Business - Government Regulation"). Music videos on The Box are played through negotiated license agreements with organizations that represent composers. The Company currently pays no fee to the distributors of these music videos played in the Untied States; however, there can be no assurance that the Company will continue to obtain music videos for airing in the United States at no charge or on terms deemed satisfactory to the Company. Fees are paid for performance and composer rights in international markets where the Company operates. COMPETITION. TCI Music, DMX, The Box and Paradigm each face significant competition in their respective industries. TCI Music and DMX compete with other providers of cable television and DBS programming (including competitors who provide digital music programming similar to the DMX Service) for subscribers of, relationships with, and channel space on, cable television and DBS systems and The Box competes with other music programming providers. 10 11 DMX currently has one main competitor in the residential marketplace, Music Choice. DMX principally competes for third party cable and DBS affiliations with Music Choice. Most of DMX's affiliation agreements prohibit a distributor from offering a competitive music service and it is also unlikely that a cable operator or other affiliated distributor would introduce a competitive digital audio service because of channel capacity. As a result, DMX does not directly compete with Music Choice for subscribers once an affiliation agreement is signed. In the direct-to-home residential DBS marketplace, DMX is carried by PRIMESTAR networks. Music Choice is carried on DirecTV. Muzak, one of DMX's competitors in the commercial marketplace, secured residential DBS distribution with Echostar Communication Corporation's DISH Network. DMX entered into an agreement with Sky-LA and DMX is currently being offered in Mexico and Latin America. DMX also competes in the commercial marketplace, through its Commercial Division DMX for Business(R) with other programmed business music providers, such as Muzak and AEI. However, the distribution technology and the quality and quantity of music programming is significantly different. As an example, Muzak does not offer cable distribution and only has 16 channels on its standard analog DBS system. Although Muzak does have 60 channels on the Echostar DISH Network, that service does not provide the management control functions required by the commercial marketplace. AEI only offers 6 channels from its analog DBS service. All other competitors offer fewer music programming options, compared to DMX's 97 options available on DBS. DMX for Business is competitively priced with other business music services. The television programming business in the United States is highly competitive. The Box competes for channel space and viewers with several music video television programmers, including MTV, VH-1, BET Jazz, M2 and Much Music. In addition, The Box competes with a large number of other cable programming services for the limited amount of channel space presently available on cable systems, including, among others, the History Channel and the Home and Garden Channel. Substantially all of The Box's competitors are larger and possess greater financial resources than The Box. The Box is not aware of any competitor which currently offers and operates a service comparable to the interactive component of The Box's programming. Paradigm competes with other companies that manufacture and distribute music recordings, many of which have substantially greater resources, including established distribution channels, than Paradigm. In addition, Paradigm faces competition from other providers of products, services and information available through the Internet and Online services. Further, Paradigm relies to a significant extent upon, and competes for, licensing arrangements which allow Paradigm to produce and distribute its products, services and information, In light of Paradigm's limited operating history, no assurances can be given that Paradigm will be able to successfully compete in these industries. GOVERNMENT REGULATION. In addition to regulations routinely applicable to any business, certain segments of the Company's operations are directly regulated or substantially affected by regulations adopted by the Federal Communications Commission ("FCC"). For example, satellite cable video programming services, cable television and satellite distribution systems and television stations are subject to the Communications Act of 1934, as amended, the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act"), and/or the Telecommunications Act of 1996 (the "1996 Telecom Act"), and rules and regulations under such acts. The Copyright Act of 1976 also directly affects certain Company operations. Cable Television Systems. The FCC regulates the providers of satellite communications services and facilities for the transmission of satellite programming services, the cable television systems that carry such services and to some extent the video programming services themselves. Cable television systems are also regulated by municipalities or other state and local government authorities. Municipalities generally have the jurisdiction to grant and to review the transfer of franchises, to review rates charged to subscribers, and to require public, educational and governmental channels, except to the extent that such jurisdiction is pre-empted by federal law. Any such rate regulations or other franchise conditions could place downward pressure on subscriber fees earned by the providers of cable television programming, and regulatory carriage requirements could adversely affect the number of channels available to carry such programming. 11 12 Cable television systems are subject to extensive rate regulations, which control, among other things, rate increases for changes in costs, including programming costs, and for additional channels. The FCC's rate regulations have impaired the willingness and ability of cable operators to add programming services and to invest in additional cable plant to expand channel capacity. Consequently, the cumulative impact of the FCC's rate regulation is likely to continue to have an adverse effect on the Company's programming interests. The 1996 Telecom Act eliminates rate regulation of non-basic tiers in all cable systems as of March 31, 1999. However, certain members of Congress and FCC officials have called for an extension of such rate regulation and also have urged more rigorous rate regulation (including the imposition of limits on pass-throughs of programming cost increases). The 1992 Cable Act also imposed obligations upon cable operators to carry "local" broadcast stations which choose a "must carry" right, as distinguished from a "retransmission consent" right. The rules adopted by the FCC generally provide for mandatory carriage by cable systems of all local full-power commercial television broadcast signals selecting must carry status and, depending on a cable system's channel capacity, non-commercial television broadcast signals. On March 31, 1997, the United States Supreme Court upheld the constitutionality of the must carry regulations. Such statutorily mandated carriage of broadcast stations, coupled with the provisions of the 1984 Cable Act, which require cable television systems with 36 or more "activated" channels to reserve a percentage of such channels for commercial use by unaffiliated third parties (leased access) and permit franchise authorities to require the cable operator to provide channel capacity for public, educational and governmental access, could adversely affect the Company's programming interests by limiting the carriage of such services in cable systems with limited channel capacity. The channel capacity devoted to must carry could increase dramatically if television broadcast stations proceed with planned conversions to digital transmission and the FCC determines that cable systems must carry all analog and digital signals transmitted by television stations. Carriage Agreements. Under the 1992 Cable Act, the FCC adopted regulations prohibiting cable operators from requiring a financial interest in a program service as a condition of carriage of such service, coercing exclusive rights in a video programming service or favoring affiliated programmers so as to restrain unreasonably the ability of an unaffiliated video programmer to compete. Video Programming Ownership and Carriage. The 1992 Cable Act required the FCC to, among other things, (1) prescribe rules and regulations establishing reasonable limits on the number of channels on a cable system that will be allowed to carry video programming in which the owner of such cable system has an attributable interest; and (2) consider the necessity and appropriateness of imposing limitations on the degree to which multichannel video programming distributors (including cable operators) may engage in the creation or production of video programming. In 1993, the FCC adopted regulations limiting carriage by a cable operator of national programming services in which that operator holds an attributable interest to 40% of the first 75 activated channels on each of the cable operator's systems. The rules provide for the use of two additional channels or a 45% limit, whichever is greater, provided that the additional channels carry minority controlled programming services. The regulations also grandfather existing carriage arrangements which exceed the channel limits, but require new channel capacity to be devoted to unaffiliated programming services until the system achieves compliance with the regulations. Channels beyond the first 75 activated channels are not subject to such limitations, and the rules do not apply to local or regional programming services. These rules may limit carriage of the Company's video programming services on certain systems of cable operators affiliated with the Company, such as TCI. In the same rulemaking, the FCC concluded that additional restrictions on the ability of multichannel distributors to engage in the creation or production of video programming presently are unwarranted. Closed Captioning. The 1996 Telecom Act also required the FCC to establish rules and an implementation schedule to ensure that video programming is fully accessible to the hearing impaired through closed captioning. On August 22, 1997, the FCC released new rules which will require substantial closed 12 13 captioning over an eight to ten year phase-in period with only limited exemptions. As a result, the Company's video programming operations are expected to incur additional costs for closed captioning. Copyright and Royalty Payments. The 1995 Digital Act amends U.S. copyright law to provide sound recording owners with an exclusive performance right in sound recordings that are performed by means of subscription service digital transmissions. The 1995 Digital Act provides a compulsory license for non-interactive subscription services, but it does not provide a compulsory license for interactive services which allow the listener to select performance of a musical piece based on a menu or schedule. As a general matter, the digital performance right does not apply to traditional radio and TV broadcasts, background music services such as MUZAK(R), or to music transmitted at restaurants, department stores, hotels or amusement parks in the traditional manner. An arbitration panel formed to determine the statutory license royalty rate to be paid under the 1995 Digital Act by the Company (and other digital music residential subscription services) on services transmitted to non-business subscribers rendered a decision before the United States Copyright Office. On November 28, 1997, the arbitration panel issued a report recommending a royalty rate of 5%. However, on January 27, 1998, the Librarian of Congress released a notice stating that, as recommended by the Register of Copyrights, they had decided not to adopt the "determination of the arbitration panel in its entirety," was reviewing the arbitration panel's report and the record, and would render his decision in the next several weeks. The final royalty rate could have an adverse effect on the Company if the Company is required to pay a higher license royalty rate than the rate at which the Company has been accruing. Because the royalty rate will be retroactive to February 1996, the Company has accrued 5% of residential subscriber fee revenue since such date. Television Stations. The Company, through its wholly-owned subsidiary VJN LPTV Corp., is authorized by the FCC to operate 20 low power television ("LPTV") stations (the "LPTV Stations"), of which the Company is currently operating 19 LPTV Stations. An FCC license for the ownership or operation of an LPTV station is effective for a maximum period of five years. These licenses are renewable for another five years if the licensee is in compliance with FCC rules. FCC regulations require the Company to obtain approval from the FCC prior to acquiring or selling an LPTV station. The Company also is subject to certain FCC regulations and policies regulating the content of its programming and the operation of its stations. When the FCC established LPTV service, it determined that LPTV stations would have secondary status to full- service television stations. The Commission has concluded that, during the upcoming transition to digital television, there is insufficient available spectrum to preserve all existing LPTV Stations. In order to provide full service television stations with a second digital channel, a number of LPTV stations will be displaced, especially in the major markets. On February 23, 1998, the FCC released the final table of digital allotments. The Company has not yet determined the impact of the final allotment upon the LPTV Stations and its LPTV station affiliates. "900" Telecommunications Services. Certain Company operations are subject to rules adopted by the FCC and Federal Trade Commission ("FTC") with respect to interstate 900 telecommunications services. The rules provide, among other things, that: specific price and product identification information must be given before a consumer incurs a charge in excess of $2.00 for a 900 call; where technically feasible, local exchange carriers must provide customers with the option of blocking all 900 calls; and a subscriber's telephone service cannot be disconnected for failure to pay interstate 900 service charges. Several states also are considering legislation similar to the rules adopted by the FCC. Because the Company has taken steps to reduce chargebacks by instituting certain credit limits and call blocking of non-paying customers, the Company believes that the FCC and FTC rules presently do not have a material adverse effect on the Company's business. 13 14 Internet. The applicability to the Internet of existing laws in various jurisdictions governing issues such as property ownership, sales and other taxes, libel, personal privacy, rights of publicity, language requirements and content restrictions, is uncertain and could expose the Company to liability. The laws of certain foreign countries provide the owner of copyrighted products with the exclusive right to expose, through sound and video samples, copyrighted items for sale to the public and the right to distribute such products. Any new legislation or regulation, or the application of existing laws and regulations to the Internet could have a material adverse effect on the Company. For example, major U.S.-based online services (and personnel) have been challenged by German authorities for making certain content accessible in Germany. If the Company were alleged to violate federal, state or foreign, civil or criminal law, even if the Company successfully defended such claims, it could have a material adverse effect on the Company. The Company believes that its use of third party material on its Internet Web sites is permitted under current provisions of copyright law. However, legal rights to certain aspects of Internet content and commerce are not clearly settled and the Company's ability to rely upon one or more exemptions or defenses under copyright law is uncertain. There can be no assurance that the Company will be able to continue to provide rights to information, including downloadable music samples and artist record and other information. The failure to be able to offer such information could have a material adverse effect on the Company. Although the FCC decided on May 7, 1997 not to allow local telephone companies to impose per-minute Internet access charges, several telecommunications carriers are seeking to have Internet telecommunications services regulated by the FCC in the same manner as other telecommunications services. In addition, because the growing popularity and use of the Internet purportedly has burdened the existing telecommunications infrastructure, local telephone carriers have petitioned the FCC to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on such providers. If any of these petitions is granted, or the relief sought therein is otherwise granted, the costs of communicating on the Internet could increase substantially, potentially slowing the growth in use of the Internet. Any such new legislation or regulation or application or interpretation of existing laws could have a material adverse effect on the Company's Internet businesses. Proposed Changes in Regulation. The regulation of cable television systems, satellite programming services, and television stations is subject to the political process and has been in constant flux over the past decade. Regulation of Internet-related business is now developing. This process continues in the context of legislative proposals for new laws and the adoption or deletion of administrative regulations and policies. Further material changes in the law and regulatory requirements must be anticipated, and there can be no assurance that the Company's business will not be affected adversely by future legislation, new regulation or deregulation. TRADEMARKS AND COPYRIGHTS. DMX has filed for worldwide trademark registration (including DMX, Digital Music Express, DMX for Business, DMX*DJ and, through its joint venture with Jones, Superaudio). DMX believes that its trademarks are valuable properties and intends to defend them vigorously. Under DMX's agreements with XTRA Music Limited, a corporation under the laws of England, the European company will have the right to use DMX's trademarks for two years. The Box owns two United States copyrights on certain software. Since a copyright primarily protects written expression but not ideas, concepts or principles, The Box's copyrights may not afford protection against competitors who independently develop comparable software. In addition, The Box has obtained United States registrations for its trademarks "THE BOX (with design)", "Music Television You Control", "THE BOX - Music Television You Control (with design)", "THE BOX", "BOXtunes", "The Jukebox Network", and "The Jukebox Network (with design)". Applications have been filed for registration in the United States of its trademarks "Xposure", "Big Phat Ones", "BOXtalk", and "The Box Worldwide". The Box has also obtained registration s for "THE BOX (with design)", "THE BOX - 14 15 Music Television You Control (with design)", "BOXtops", "BOXtalk", and certain other marks in the following countries: Benelux, France, Germany, Sweden and Peru. The Box has also filed in or is in the process of filing for trademark registration of "THE BOX (with design)", "THE BOX - Music Television You Control (with design)", "THE BOX (with design)", "THE BOX -Music Television You Control (with design)", "BOXtops", "BOXtalk", and certain other marks in the following countries: Argentina, Australia, Brazil, Canada, Chile, Finland, Italy, Japan, Mexico, New Zealand, Norway, Portugal, Spain Venezuela and the United Kingdom and the Republic of Ireland. The Box has licensed VJNIL, its former subsidiary that is now owned by a United Kingdom media company, EMAP, to a 99 year license for use of its trademarks in the United Kingdom and the Republic of Ireland. Although one trademark has been registered, the major filings related to "THE BOX (with design) and "THE BOX - Music Television You Control (with design)" have not completed registration. The Box also holds three United States patents relating to its telephone access display systems, which enable viewers to telephonically select music videos. The systems may also have other interactive television applications such as shopping, trivia, comedy, sports and general information. The Box has also received patents for its telephone access display system in Italy and Canada and has a pending application in France. In May 1995, May 1996 and June 1996, The Box filed new patent applications and addendum for the interactive video system, The Digital Box. Further, in May 1996, The Box filed an international patent with the European Union and the United Kingdom for this same digital technology. The Box plans on filing additional applications for patents in other foreign countries. There can be no assurance as to the breadth or degree of protection which such copyrights, trademarks and patents may afford The Box. PERSONNEL. As of December 31, 1997, The Company had 326 full-time employees. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES. TCI Music's principal executive offices are located at 8101 East Prentice Avenue, Suite 500, Englewood, Colorado 80111. TCI Music does not own or lease any real or personal property other than through its interests in its operating subsidiaries. TCI Music's operating companies own or lease fixed assets necessary for the operation of their respective businesses, including office space, transponder space, headends, and customer equipment. TCI Music believes that all the Company's facilities are adequate for its current and anticipated needs. ITEM 3. LEGAL PROCEEDINGS. From time to time the Company may be a party to legal actions arising in the ordinary course of business, including claims by former employees. Although some of these actions could be expected to involve claims for substantial amounts, except as set forth in the next paragraph, the Company does not believe that any currently pending litigation to which it is a party will have a materially adverse effect on its financial condition or results of operations. On September 8, 1996, a purported class action lawsuit entitled Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Bhaskar Menon, DMX Inc., and Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware Chancery Court alleging, among other things, that the proposed acquisition of DMX by TCI is wrongful, unfair and harmful to DMX's public stockholders and seeking to enjoin the consummation of the Merger. DMX believes that this action is without merit and intends to defend it vigorously. On July 23, 1997, Jeri L. Amstutz, a former employee of DMX Inc., filed a complaint in Superior Court of California, County of Los Angeles, Jeri L. Amstutz v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100. The plaintiff alleges certain wrongful employment practices. The plaintiff seeks compensatory damages for lost wages and benefits, foreseeable consequential and incidental damages in an unspecified amount, as well as attorneys' fees, costs and prejudgment 15 16 interest. The plaintiff also seeks punitive damages and damages for emotional distress (and similar harm) in unspecified amounts which the plaintiff claims to believe will exceed $2,000,000. On July 23, 1997, Marnie Tenden, a former employee of DMX Inc., filed a complaint in Superior Court of California, County of Los Angeles, Marnie Tenden v. DMX Inc., Otis Smith, Jerold Rubinstein and Does 1 to 100, which alleges sex discrimination and retaliatory harassment. The plaintiff seeks compensatory damages for lost wages and benefits, foreseeable consequential and incidental damages, as well as attorneys' fees, costs and prejudgment interest. The plaintiff also seeks punitive damages and damages for emotional distress (and similar harm) in unspecified amounts which the plaintiff claims to believe will exceed $500,000. DMX has received a letter from counsel for Selco Servicegesellschaft fur elektronische Kommunikation mbH ("Selco") requesting that DMX make a proposal to settle claims alleged by Selco for damages in the amount of approximately $3.5 million with respect to a guaranty by DMX of obligations of DMX-Europe N.V., a subsidiary of DMX ("DMX-E") under a Subscriber Management Services Agreement between DMX-E and Selco. TCI Music and DMX do not believe that DMX has any liability to Selco under that guaranty. Nevertheless, neither TCI Music nor DMX can estimate, based on the facts available as of the date of this Report, whether Selco will continue to pursue its claims and, if Selco elects to initiate formal legal proceedings, whether DMX will be held liable for any material amount. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of TCI Music's security holders during the fourth quarter of December 31, 1997. 16 17 PART II ITEM 5. MARKET FOR TCI MUSIC'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Since July 14, 1997, The TCI Music Series A Common Stock (with associated TCI Rights) was quoted on the Nasdaq SmallCap Market under the symbol "TUNE". The following table sets forth the range of high and low sales prices of TCI Music Series A Common Stock since July 14, 1997 for the periods indicated:
QUARTER ENDED HIGH LOW ------------- ---- --- September 30, 1997 (from July 14, 1997) 7.7500 6.7500 December 31, 1997 7.8125 7.3750
The prices reflect inter-dealer quotations without adjustments for retail markup, markdown or commission; and do not necessarily reflect actual transactions. On December 31, 1997, the closing price for the TCI Music Series A Common Stock (with associated TCI Rights) reported by Nasdaq was $7.625. As of December 31, 1997 there were 175 Stockholders of record of TCI Music, Inc. with approximately 31% of the shares held in "street name." Each share of TCI Music Series A Common Stock issued in the DMX Merger trades together with the TCI Right granted by TCI in connection with the DMX Merger. Each TCI Right entitles the holder to require TCI to purchase from such holder one share of TCI Music Series A Common Stock for $8.00 (subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders), payable at the election of TCI, in cash, a number of shares of TCI Group Series A Stock having an equivalent value, or a combination thereof, if during the one-year period beginning on July 11, 1997 the price of the TCI Music Series A Common Stock trading with associated TCI Rights does not equal or exceed $8.00 (as adjusted) for a period of at lease 20 consecutive trading days. If the TCI Rights are not earlier terminated upon satisfaction of such price requirement, they will be exercisable for a 30-day period commencing on July 11, 1998 and will expire on the last day of such 30 day period unless extended by their terms. Because the TCI Rights trade together with the shares of TCI Music Series A Common Stock, the current market price of one share of TCI Music Series A Common Stock necessarily includes a value for the associated TCI Right. Accordingly, no assurances can be made that the market price per share of TCI Music Series A Common Stock will be maintained at or near its current level upon termination or expiration of the TCI Rights. There currently is no established public trading market for the TCI Music Series A Common Stock without TCI Rights. The TCI Music Series A Common Stock issued in the Paradigm Merger and into which the TCI Music Preferred Stock issued in the Box Merger is convertible do not have any associated TCI Rights. Such a market may begin when the TCI Rights expire or terminate. TCI Music Series A Common Stock without attached TCI Rights will trade under the symbol "TUNE" after the TCI Rights expire or terminate, if the TCI Music Series A Common Stock remains eligible for continued listing on the Nasdaq SmallCap Market. In order to continue to be listed on the Nasdaq SmallCap Market, the TCI Music Series A Common Stock must comply with certain maintenance requirements of the Nasdaq SmallCap Market, which require that TCI Music maintain (i) at least $2 million in net tangible assets, $35 million in market capitalization or $500,000 of net income in the latest fiscal year, (ii) a public float of 500,000 shares valued at $1 million or more, (iii) a minimum bid price of $1.00 per share, (iv) two market makers and (v) at least 300 shareholders. Although TCI Music believes that TCI Music Series A Common Stock currently satisfies these standards, no assurances can be made that TCI Music will continue to comply with these maintenance requirements. In particular, if the TCI Rights become exercisable as of July 11, 1998, the number of stockholders exercising TCI Rights and the number of TCI Rights that are exercised may cause the TCI Music Series A Common Stock to fail to satisfy one or more of the Nasdaq SmallCap Market maintenance standards. Failure to satisfy Nasdaq's maintenance requirements may result in the TCI Music Series A Common Stock being de-listed from Nasdaq and trading would thereafter be conducted on the over-the-counter market. DIVIDENDS. No dividends have been paid by TCI Music, Inc. as of December 31, 1997. The Company does anticipate paying cash dividends in the foreseeable future. 17 18 ITEM 6. SELECTED FINANCIAL DATA. The following is a summary of selected financial information relating to the financial condition and results of operation of TCI Music and its predecessor. (Amounts in thousands, except per share data.)
SIX MONTHS NINE MONTHS ENDED ENDED --------------------------------------------------------------------------------- DECEMBER 31, JUNE 30, SEPTEMBER 30, 1997 1997 1996 1995 1994 1993 --------------------------------------------------------------------------------- INCOME STATEMENT DATA Revenue $ 22,955 16,594 17,326 12,773 9,377 4,793 Operating, selling, general and administrative expenses 14,294 27,437 30,459 22,166 20,559 17,726 Depreciation and amortization 6,317 1,789 1,884 1,342 1,065 790 Loss on disposal of DMX-Europe N.V -- 1,738 7,153 -- -- -- --------------------------------------------------------------------------------- Net operating income (loss) 2,344 (14,370) (22,170) (10,735) (12,247) (13,723) Share of earnings of affiliates 76 203 197 307 224 144 Equity loss in DMX-Europe N.V -- -- (11,854) (13,271) (4,746) (3,554) Interest income (expense), net (280) (422) (300) (209) 38 85 Other income (expense), net (223) (119) 272 829 226 640 ---------------------------------------------------------------------------------- Net earnings (loss) before income taxes 1,917 (14,708) (33,855) (23,079) (16,505) (16,408) Income tax expense (2,382) -- -- -- -- -- ---------------------------------------------------------------------------------- Net loss $ (465) (14,708) (33,855) (23,079) (16,505) (16,408) ================================================================================== Basic and diluted loss per common share(a) $ (0.01) (0.25) (0.68) (0.60) (0.48) (0.52) ================================================================================== Weighted average number of common shares 77,423 59,587 49,676 38,585 34,436 31,648
(a) Loss per common share has been restated for all periods to reflect the adoption of Statements of Financial Accounting Standards No. 128, "Earnings per Share". See note 11 to the accompanying consolidated financial statements. 18 19
SEPTEMBER 30, ---------------------------------------------------------------------------------- DECEMBER 31, JUNE 30, 1997 1997 1996 1995 1994 1993 ---------------------------------------------------------------------------------- BALANCE SHEET DATA Current assets $ 25,863 6,186 7,719 12,123 9,651 3,103 Investments in affiliates, accounted for under 1,201 558 504 457 450 476 the equity method Intangibles, net 153,265 -- 4,536 -- -- 16 Other assets, net 910 110 99 166 55 54 Property and equipment, net 13,488 4,132 5,894 4,336 4,444 3,225 ---------------------------------------------------------------------------------- Total assets $ 194,727 10,986 18,752 17,082 14,600 6,874 ================================================================================== Current liabilities $ 23,080 14,705 16,932 3,626 3,824 3,715 Other liabilities 2,063 2,082 1,773 1,252 713 268 Capital lease obligation -- 23 1,401 1,446 1,503 -- Notes payable 53,236 -- -- -- 201 382 Related party debt 4,359 3,887 -- -- -- -- Deferred income tax 2,811 -- -- -- -- -- Investment in and advances to DMX-Europe 9,058 6,591 -- 15,886 8,175 3,429 ---------------------------------------------------------------------------------- Total liabilities 94,607 27,288 20,106 22,210 14,416 7,794 Convertible preferred stock 35,588 -- -- -- -- -- Stockholders' (deficit) equity 64,532 (16,302) (1,354) (5,128) 184 (920) ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 194,727 10,986 18,752 17,082 14,600 6,874 ==================================================================================
19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL. On July 11, 1997, DMX and TCI Music, consummated a merger pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29, 1997 (the "DMX Merger Agreement"), among DMX, TCI, TCI Music, and TCI Music Merger Sub ("Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby Merger Sub was merged with and into DMX (the "DMX Merger"), with DMX as the surviving corporation. Pursuant to the DMX Merger, TCI Music became the successor registrant to DMX. Upon consummation of the DMX Merger, each outstanding share of Common Stock of DMX, $.01 par value per share ("DMX Common Stock"), was converted into the right to receive (i) one-quarter of a share of TCI Music Series A Common Stock, (ii) one TCI Right with respect to each whole share of TCI Music Series A Common Stock and (iii) cash in lieu of fractional shares of TCI Music Series A Common Stock and TCI Rights. The acquisition was accounted for by the purchase method effective July 1, 1997. On December 16, 1997, shareholders of The Box voted to approve an Agreement and Plan of Merger dated as of August 12, 1997, the Box Merger, pursuant to which The Box became a wholly-owned subsidiary of TCI Music and each outstanding share of common stock of The Box was converted into the right to receive .07 of a share of TCI Music Preferred Stock. Each share of TCI Music Preferred is convertible into three shares of TCI Music Series A Common Stock without an associated TCI Right. Effective December 31, 1997, shareholders of Paradigm voted to approve an Agreement and Plan of Merger dated as of December 9, 1997, the Paradigm Merger, pursuant to which Paradigm became a wholly-owned subsidiary of TCI Music and shareholders of Paradigm received 0.61 restricted shares of TCI Music Series A Common Stock, without an associated TCI Right for each share of Paradigm common stock held. The acquisition of the Box and Paradigm were accounted for by the purchase method. Accordingly, the results of operations of such acquired entities have been included in the financial results of TCI Music since their respective dates of acquisition. See notes 1 and 4 to the accompanying consolidated financial statements. TCI Music's assets include businesses which are principally engaged in: (i) programming, distributing, and marketing continuous commercial-free compact disc-quality music programming; (ii) programming, distributing, and marketing an interactive music video television programming service; and (iii) distributing and marketing music entertainment products through traditional and non-traditional channels. Due to the consummation of the DMX Merger, and related change in fiscal year ends by TCI Music to December 31, 1997, the results of operations include a transition period. Accordingly, to provide a meaningful basis for comparison, for purpose of the following analysis and discussion, the six month period ended December 31, 1997 will be compared with the corresponding period ended December 31, 1996, the nine month period ended June 30, 1997 will be compared with the corresponding period ended June 30, 1996, and the year ended September 30, 1996 will be compared to the corresponding period ended September 30, 1995. ACCOUNTING STANDARDS. The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") in February of 1997. SFAS 128 establishes a new computation, presentation and disclosure requirements for earnings per share ("EPS"). SFAS 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common stockholders divided by the weighted average outstanding shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, etc.) as if they had been converted at the beginning of periods presented. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted EPS. The Company adopted SFAS 128 as of December 31, 1997 and has restated all prior period EPS data, as required. SFAS 128 did not have a material impact on EPS for any period presented. 20 21 During 1997, the FASB also issued Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130"). SFAS 130 establishes standards for reporting and displaying of comprehensive income and its components in the financial statements. It does not, however, require a specific format for the statement, but requires the Company to display an amount representing total comprehensive income for the period in that financial statement. The Company is in the process of determining its preferred format. This Statement is effective for fiscal years beginning after December 15, 1997. YEAR 2000. Many existing computer programs use only two digits to identify a year in a date. If not corrected, many computer applications and systems could fail or create erroneous results by or at the year 2000. TCI Music is in the process of identifying computer systems and software that may not function correctly in the year 2000. Additionally, TCI Music is planning a program of communications with its significant suppliers, customers and affiliated companies to determine the readiness of these third parties and the impact on the Company as a consequence of their own year 2000 issues. TCI Music's manual assessment of the impact of the year 2000 dated change should be complete by mid-1999. TCI Music believes that it will be able to identify, and, if necessary, modify or replace such systems and software before any year 2000 associated problems arise. No assurances can be given that such modification and replacement will be completed before any year 2000 associated problems arise or that costs arising from unanticipated problems will not have a material adverse effect on the Company. SUMMARY OF OPERATIONS. REVENUE. Total revenues, exclusive of revenue from DMX-Europe N.V. and subsidiary ("DMX-E"), for the six months ended December 31, 1997 increased to $22.9 million from $9.0 million for the six months ended December 31, 1996. The $13.9 million or 155% increase was primarily attributed to $9.9 million of revenue from sales of DMX Music services to TCI's residential and commercial subscribers as a result of the DMX Merger and the Amended Contribution Agreement. Pursuant to the Amended Contribution Agreement, TCI is required to deliver, or cause certain of its subsidiaries to deliver to TCI Music monthly payments aggregating $18 million annually, adjusted annually through 2017 (the "Annual TCI Payments"). Pursuant to the Amended Contribution Agreement, the Annual TCI payments will represent (a) revenue of certain subsidiaries of TCI that is attributable to the distribution and sale of the DMX service to certain cable subscribers (net of an amount equal to 10% of such revenue derived from residential customers and license fees otherwise payable to DMX pursuant to the Affiliation Agreement) and (b) compensation to TCI Music and DMX for various other rights. The remaining increase is attributable to continued growth in commercial subscriber fee revenue of $2.7 million, the inclusion of 15 days of viewer revenue of $460,000 and advertising revenue of $365,000 from the Box Merger on December 16, 1997 and approximately $400,000 from increased equipment lease and sales revenue. Exclusive of the Annual TCI Payments, the commercial subscriber fees represented 52% as compared to 41% of total subscriber fee revenue for the six months ended December 31, 1997 and 1996, respectively. Residential subscriber fees, exclusive of the Annual TCI Payments, represented approximately 48% as compared to 59% of total subscriber fee revenue for the six months ended December 31, 1997 and 1996, respectively. Subscriber fee revenue from TCI and its affiliates, exclusive of the Annual TCI Payments, represented approximately 49% and 55% of total subscriber fees for the six months ended December 31, 1997 and 1996, respectively. Total revenue, exclusive of revenue from DMX-E, for the nine months ended June 30, 1997 increased to $14.4 million from $12 million for the nine months ended June 30, 1996. The $2.4 million or 20% increase was primarily attributed to: (i) continued growth in commercial subscriber fee revenue as a result of increased sales and marketing activity in the affiliate sales, national accounts, and Owned and Operated ("O&O") groups; (ii) continued growth in DMX residential subscriber fees from PRIMESTAR subscribers; and (iii) increased other revenue representing equipment sales and lease revenue related to the growth and increased sales and marketing activity of the commercial sales group. 21 22 Commercial subscriber fees represented approximately 44% and 34% of total subscriber fee revenue for the nine months ended June 30, 1997 and 1996, respectively. Residential subscriber fees represented approximately 56% and 66% of total subscriber fee revenue for the nine months ended June 30, 1997, and 1996, respectively. Subscriber fee revenue from TCI and its affiliates represented approximately 50% and 57% of total subscriber fees, for the nine months ended June 30, 1997 and 1996, respectively. Total revenue, exclusive of revenue from DMX-E, for the fiscal year ended September 30, 1996 increased to $16.5 million from $12.8 million for the fiscal year ended September 30, 1995. The $3.7 million or 29% increase was primarily attributed to: (i) increased residential subscriber fees resulting from the launch of DMX on PRIMESTAR in the first fiscal quarter of 1996; (ii) continued growth in commercial subscriber fee revenue as a result of increased sales and marketing activity in the affiliate sales, national accounts, and O&O groups; and (iii) increased other revenue representing equipment sales and lease revenue related to the growth and increased sales and marketing activity of the commercial sales group. In June, 1994, DMX launched its DMX Service on the Ku-Band satellite which enabled DMX for Business to gain access to nearly 100% of the business marketplace in the United States. Concurrent with this launch, DMX's commercial division implemented its national accounts sales program, and in May 1995 launched its first O&O sales group in the Southern California business market. Commercial subscriber fees represented approximately 36% and 31% of total subscriber fee revenue for the fiscal years ended September 30, 1996 and 1995, respectively. Residential subscriber fees represented approximately 64% and 69% of total subscriber fee revenue for the fiscal years ended September 30, 1996, and 1995, respectively. Subscriber fee revenue from TCI and its affiliates represented approximately 55% and 61% of total subscriber fees, for the years ended September 30, 1996 and 1995, respectively. Cable operators continue to develop and launch Digital Distribution, a new method of distributing video and other programming using digital compression technology. Sensor technology enables TCI and other participating cable operators to increase their program offerings and create new packages that could include, if they so choose, DMX Services. The launch of digital compression technology has the potential to provide an additional distribution market for DMX Services if cable operators utilizing Digital Distribution elect to offer DMX Services as part of one or more digital video programming packages, thereby capturing as subscribers, customers who might not otherwise elect to subscribe to DMX Services as a separate pay premium service. However, the launch of and the transition to Digital Distribution may also have the effect of materially reducing residential subscriber fee revenues as a result of a change from the current fee structure in which audio subscribers pay a separate fee for DMX. DMX expects that license fees paid by cable operators for Digital Distribution that include DMX Services in their digital packages will be much lower than the separate fees now paid under affiliation agreements. While a substantial increase in the overall number of residential subscribers purchasing digital packages that include DMX Services could result in revenue equal to or exceeding the revenue from residential subscribers currently electing to purchase DMX Services for a separate fee, such a result depends on a number of factors over which TCI Music has no control, including whether cable operators elect to include DMX Services as part of their digital packages, the acceptance by consumers of the digital products and whether those electing to purchase the digital packages are already DMX subscribers. TCI Music cannot predict the effect of digital compression technology on DMX revenue. The new license fee structure for Digital Distribution will not affect the Annual TCI Payments that TCI will pay to TCI Music or DMX under the Amended Contribution Agreement. Although no assurances can be given, TCI Music does not expect the launch of Digital Distribution to affect the current rate structure of commercial cable subscribers or Satellite Distribution. TCI Music derives operating revenues from interactive music video television programming services through its wholly-owned subsidiary, The Box. The Box has entered into program affiliation agreements with approximately 68 percent of the cable system operators that presently carry The Box's programming in the United States. Pursuant to such agreements, The Box pays cable operators the greater of a guaranteed minimum monthly fee per subscriber or a specified percentage of the gross revenues generated by each cable operator's system. Substantially all such cable operators are 22 23 presently receiving the guaranteed minimum monthly fee, which fee bears no direct relationship to the revenues generated by The Box's programming. TCI Music periodically evaluates available alternatives to affiliation agreements that do not generate revenues in excess of direct costs. Such alternatives may include the cancellation of program affiliation agreements, which will reduce net viewer revenues and advertising sales, unless The Box is able to replace these program affiliation agreements with affiliation agreements with other cable operators. Consistent with industry practice, The Box's written programming affiliation agreements with cable system operators may be canceled by either party upon 90 days prior written notice. In addition, approximately 41 percent of The Box's domestic subscribers are carried by cable system operators that have not entered into written programming affiliation agreements with The Box. Therefore, no assurance can be given that The Box's programming will continue to be carried by the cable operators who currently carry the Box Service. If The Box were to experience a high rate of terminations, operating revenues from interactive music video television programming would be adversely affected. OPERATING EXPENSES. Operating expenses increased to $6.5 million for the six months ended December 31, 1997 from $5.1 million for the six months ended December 31, 1996. The $1.4 million or 27% increase was primarily attributed to (i) $900,000 of fees paid to TCI as compensation for services rendered in generating the TCI Annual Payments pursuant to the Amended Contribution Agreement, (ii) $300,000 of operating expenses from the inclusion of The Box from the acquisition date on December 16, 1997 consisting of domestic and international transport fees, site costs and satellite uplink fees, (iii) $300,000 net increase of DMX studio and programming expenses consisting of a $400,000 increase in music rights, which was commensurate with the increase in subscriber fee revenue and offset by a $100,000 decrease of salaries and consultant fees, and (iv) $100,000 decrease in research and development. Operating expenses increased to $8.2 million for the nine months ended June 30, 1997 from $7.2 million for the nine months ended June 30, 1996. The increase of $1.0 million or 12% is primarily attributed to increased music rights expense of $765,000 commensurate with the growth in subscribers and fee revenue and $334,000 relating to programming expenses incurred on behalf of DMX-E for the nine months ended June 30, 1997. Prior to consolidation of DMX-E's results of operations with DMX, these expenses were charged to DMX-E, however, the benefit of DMX-E's reimbursement has been eliminated in the consolidated financial statements for the nine months ended June 30, 1997. These increases were offset by reductions in satellite and uplinking fees of $275,000 due to the migration to a new satellite. Operating expenses increased to $9.8 million for the fiscal year ended September 30, 1996 from $8.7 for the fiscal year ended September 30, 1995. The $1.1 million or 13% increase represented increased music rights expense of $776,000 commensurate with the growth in subscribers and fee revenue, increased uplink and satellite cost of $156,000 and an additional $231,000 for salaries, program consultant expenses and the direct costs related to increasing available music formats from 69 to over 90. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $7.5 million for the six months ended December 31, 1997 from $6.9 million for the six months ended December 31, 1996. The $600,000 increase was primarily attributable to increases in (i) corporate expenses of $300,000, which includes salaries and professional services resulting from merger-related expenses, (ii) $800,000 of operating expenses of The Box for 16 day period ended December 31, 1997, (iii) and $635,000 of DMX salaries related to an increase in sales and marketing personnel. Such increases were offset by decreases of $871,000 in the provision for doubtful accounts and a $240,000 reduction in DMX trade show expenses. 23 24 Selling, general and administrative expenses of $10.6 million for the nine months ended June 30, 1997 were consistent with the nine months ended June 30, 1996. Increases in legal expenses associated with the DMX Merger and restructuring of DMX-E, the provision for doubtful accounts, and rent expense were offset by decreases in salary expenses associated with a performance bonus paid to an executive officer in the prior year, expiration of a royalty agreement and other individually insignificant items. Selling, general and administrative expenses increased to $14.3 million for the fiscal year ended September 30, 1996 from $12.9 for the fiscal year ended September 30, 1995. The $1.4 increase was primarily attributed to (i) $767,000 in salaries and commissions resulting from a performance bonus paid to a former executive officer of DMX and additional sales and marketing staff and efforts in the commercial division, (ii) $363,000 expenses related to direct marketing activities for both the residential and commercial divisions, including marketing activities related to the 1996 Summer Olympics, (iii) and other individually insignificant items. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense increased $5.3 million or 495% for the six months ended December 31, 1997 compared with the corresponding period ended December 31, 1996. Such increase is directly attributable to an increase in the balance of property and equipment and intangibles resulting from the DMX Merger and The Box Merger. Depreciation and amortization increased $488,000 or 37% for the nine month period ended June 30, 1997 as compared with the corresponding period ended June 30, 1996. Such increase was primarily attributable to amortization of excess cost over the fair value of net assets acquired related to the purchase of the 49% interest in DMX-E in May 1996. Depreciation and amortization expense increased to $542,000 or 40% for the fiscal year ended September 30, 1996 as compared to the corresponding prior fiscal year end. Such increase was attributable to amortization of excess cost over the fair value of net assets acquired related to the purchase of the 49% interest in DMX-E in May 1996 and increased depreciation resulting from purchases of subscriber equipment. OPERATING EXPENSES - DMX-E. The results of operations of DMX-E for 1996 represent the activities from acquisition date of DMX-E on May 17, 1996 through September 30, 1996 and were consolidated with DMX's results of operations. As discussed below, DMX-E was deconsolidated as of June 30,1997 and ceased operations on July 1, 1997. DISPOSAL OF DMX-E. DMX-E and its subsidiary DMX-Europe (UK) Limited ("DMX-E UK"), ceased operation on July 1, 1997. DMX-E UK was placed into receivership on July 1, 1997 and into liquidation proceedings on July 18, 1997. DMX-Europe N.V. ("DMX-E NV") has been inactive since July 1, 1997 and entered liquidation proceedings in December 1997. The Company has accounted for the effect of the disposal of DMX-E and has estimated the loss on the disposal of DMX-E in the consolidated statements of operations. At June 30, 1997 the loss on disposal of DMX-E of $1.7 million represented the write down of assets to their net realizable values. At September 30, 1996 and December 31, 1996, the estimated loss on disposal of $7.1 million of DMX-E was accounted for in DMX's consolidated financial statements. The estimated loss on the disposal of DMX-E includes DMX's net investment in these subsidiaries of $5.7 million and other obligations guaranteed by DMX of $1.4 million. The net loss from DMX-E operations decreased to $6.4 million for the nine months ended June 30, 1997 compared to $14 million for the nine months ended June 30, 1996. In the fourth quarter ended September 30, 1996, DMX ceased funding the operations of DMX-E. The net losses since that period were primarily related to accrued expenses for their uplink and satellite business and associated advertising and marketing commitments. 24 25 The net loss from DMX-E operations increased to $16.8 million for the fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase of $3.5 million was attributed to DMX recording 100% of DMX-E net loss for the fiscal year ended September 30, 1996 as compared to recording 100% of DMX-E loss for the fourth quarter of the fiscal year ended September 30, 1995 and 51% for the first three quarters of the fiscal year 1995. In the fiscal year ended September 30, 1995, DMX-E fully utilized all funds available under the $25 million credit facility provided by TCI Euromusic, Inc., an indirect affiliate of TCI. In the fourth quarter of the fiscal year ended September 30, 1995, DMX funded operating losses of DMX-E and accordingly the equity in loss of DMX-E included operating losses funded by DMX in excess of its guaranteed portion of the debt. INTEREST EXPENSE AND INTEREST INCOME. TCI Music incurred related party interest expense of $385,000 for the six months ended December 31, 1997 which related to intercompany debt, a $3.5 million equipment loan, capital lease obligation and amounts borrowed related to the purchase of DMX, The Box and Paradigm. Other interest income represents earnings on funds held in a money market account and interest on notes receivable. LIQUIDITY AND CAPITAL RESOURCES. On December 31, 1997, TCI Music entered into a revolving loan agreement with several banks to provide up to $100 million. The agreement provides for interest charges at LIBOR or at the banks base rate. $53.2 million was drawn to pay related party debts and costs associated with the DMX Merger, the Box Merger and the Paradigm Merger. At December 31, 1997, TCI Music had approximately $47 million available under the revolving loan agreement. For additional information concerning TCI Music's debt see note 10 to the accompanying consolidated financial statements. In connection with the Box Merger, TCI Music issued the TCI Music Preferred Stock. For additional information concerning the terms of the TCI Music Preferred Stock, see notes 4 and 11 to the accompanying consolidated financial statements. The increase in cash of $7.9 million for the six months ended December 31, 1997 was the net results of funds provided by operating activities of $3.2 million and net funds provided by financing activities of $13.7 million offset by cash used in investing activities of $9.0 million. During the six months ended December 31, 1997, the Annual TCI Payments were a primary source of the net cash generated by operating activities of $3.3 million. Together, with the funds provided by financing activities of $13.7 million, which was initially provided by intercompany debt and subsequently replaced with the revolving loan agreement, the Company funded its inventory activities of $9.1 million which primarily consisted of the cash used for the acquisitions of the DMX Merger, the Box Merger and the Paradigm Merger. TCI Music believes that net cash provided by operating activities (including the Annual TCI Payments) and available capacity pursuant to the revolving loan agreement will provide adequate sources of liquidity for the next year and intermediate future. As previously described, TCI Music is entitled to receive the Annual TCI Payments through 2017. As described in notes 5 and 11 to DMX's consolidated financial statements and in the disposal of DMX-E above, DMX-E has ceased operations on July 1, 1997. DMX-E UK was placed into receivership on July 1, 1997 and into liquidation proceedings on July 18, 1997. DMX-E NV, has entered into liquidation proceedings in December 1997. In such circumstances, claims may be filed under the guarantees. Such adjustments could have a material adverse effect upon the financial position and results of operations of DMX. 25 26 INFLATION. Management believes that the effect of inflation has not been material to the Company. However, inflation in the costs of personnel, marketing, programming or certain other operating expenses could significantly affect the Company's future operations. Current economic conditions indicate a relatively low inflationary period and as a result, inflation is not expected to materially affect the Company in 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K for TCI Music, Inc.'s Consolidated Financial Statements, the notes thereto and Schedules filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 26 27 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following lists the directors and executive officers of TCI Music, Inc. ("TCI Music" or the "Company"), their birth dates, and a description of their business experience and positions held with the Company as of March 1, 1998. Directors of TCI Music are elected to staggered three year terms with approximately one-third elected annually. The date the present term of office expires for each director is the date of the Annual Meeting of the Company's stockholders held during the year footnoted opposite their names. All officers are appointed for an indefinite term, serving at the pleasure of the Board of Directors. Directors of TCI Music
Name Positions ---- --------- Robert R. Bennett (2) Has served as a director of TCI Music since January 1997, and served as Born April 19, 1958 acting Chief Financial Officer of TCI Music from June 1997 until July 1997. Mr. Bennett has served as an Executive Vice President of Tele-Communications, Inc. ("TCI") since April 1997. Mr. Bennett has served as President and Chief Executive Officer of Liberty Media Corporation ("Liberty"), a subsidiary of TCI, since April 1997. From June 1995 through March 1997, Mr. Bennett was an Executive Vice President, Chief Financial Officer, Secretary and Treasurer of Liberty. Mr. Bennett served as Senior Vice President of Liberty from September 1991 to June 1995. Mr. Bennett also serves as a director of BET Holdings, Inc., a Delaware corporation, which is engaged in the distribution of certain programming. Donne F. Fisher (1) Has served as a director of TCI Music since January 1997. Mr. Fisher was an Born May 24, 1938 Executive Vice President of TCI from January 1994 through January 1, 1996. On January 1, 1996, Mr. Fisher resigned his position as Executive Vice President of TCI and has been providing consulting services to TCI since January 1996. Mr. Fisher served as an Executive Vice President of TCI Communications, Inc. ("TCIC"), a subsidiary of TCI and predecessor company of TCI, from December 1991 to October 1994. Mr. Fisher has served as a director of TCI since June 1994, has served as a TCIC director since 1980, and has served as a director of TCI Pacific Communications, Inc. ("TCI Pacific"), a subsidiary of TCI, since July 1996. Mr. Fisher is a director of General Communication, Inc.
27 28
Name Positions ---- --------- Leo J. Hindery, Jr. (3) Has served as Chairman of the Board of TCI Music since January 1997. Born October 31, 1947 Mr. Hindery has served as a director of TCI since May 1997. Mr. Hindery has served as the President and Chief Operating Officer of TCI since March 1997. Mr. Hindery has served as President and Chief Executive Officer of TCIC since March 1997 and has served as President and Chief Executive Officer of TCI Pacific since September 1997. Mr. Hindery has served as a director of TCIC since March 1997, and has served as a director of TCI Pacific since September 1997. In addition, Mr. Hindery is President, Chief Executive Officer and/or a director of many of TCI's subsidiaries. Mr. Hindery was previously founder, Managing General Partner and Chief Executive Officer of InterMedia Partners, a cable TV operator, and its affiliated entities from 1988 until March 1997. Mr. Hindery was a director of DMX Inc. ("DMX") from May 1996 to July 1997. Mr. Hindery is a director of United Video Satellite Group, Inc. and At Home Corporation, both of which are consolidated subsidiaries of TCI. Mr. Hindery is also a director of TCI Satellite Entertainment, Inc. and Cablevision Systems Corporation. Peter M. Kern (2) Has served as a director of TCI Music since January 1997. Mr. Kern also Born June 2, 1967 provides consulting services to TCI. Mr. Kern has served as President of Gemini Associates Inc., a firm that provides strategic advisory services primarily to media companies, since April 1996. From December 1993 to January 1996, he served as Senior Vice President of Strategic Development and Corporate Finance of Home Shopping Network, Inc. and served as its Vice President of Strategic Development and Assistant to the Chief Executive Officer from March 1993 to December 1993. Prior to joining Home Shopping Network, Inc., he served as Vice President of Corporate Finance and Strategic Development for Whittle Communications, L.P. and worked at the New York investment banking firm, Bear, Stearns & Co., Inc. David B. Koff (3) Has served as a director of TCI Music since May 1997. Mr. Koff was interim Born December 26, 1958 President and Chief Executive Officer of TCI Music from May 1997 to December 31, 1997. Since December 31, 1997, Mr. Koff has served as a Vice President and Assistant Secretary of TCI Music. He has been a Senior Vice President of Liberty since February 1998. He was Vice President - Corporate Development of Liberty from August 1994 to February 1998. From March 1993 to August 1994, he was special counsel to Liberty. From August 1992 to March 1993, he was special counsel to Brownstein Hyatt Farber & Strickland, a Denver law firm.
28 29
Name Positions ---- --------- Thomas McPartland (2) Has served as a director and President and Chief Executive Officer of Born June 30, 1958 TCI Music since December 31, 1997. Mr. McPartland served as Chairman of the Board, President and Chief Executive Officer of Paradigm Music Entertainment Company ("Paradigm") since its formation in November 1995. Prior to co-founding Paradigm, from April 1995 he served as Executive Vice President and a director for the Zomba Group of Companies, North America, a privately- held worldwide music entertainment company. From January 1994 to April 1995, Mr. McPartland was Senior Vice President, Worldwide Business Development, for BMG Entertainment a division of Bertelsmann AG, an international media company. From October 1992 to January 1994, Mr. McPartland served as Senior Vice President of BMG Ventures, a division of BMG Entertainment. J C Sparkman (1) Has served as a director of TCI Music since May 1997. He has served as a Born September 12, 1932 director of TCI since December 1996. Mr. Sparkman served as an Executive Vice President of TCI from January 1994 to March 1995. Mr. Sparkman retired in March 1995 and has provided consulting services to TCI since March 1995. Mr. Sparkman served as an Executive Vice President of TCIC from 1987 to October 1994 and as a director of DMX from 1989 to July 1997. Mr. Sparkman is a director of Shaw Communications, Inc. ("Shaw"). Lon A. Troxel (1) Has served as a director of TCI Music since May 1997. Mr. Troxel was Born October 14, 1947 appointed President and Chief Executive Officer of DMX in July 1997. Mr. Troxel served as Chief Operating Officer of DMX from April 1997 to July 1997, and served as Executive Vice President, Commercial Division from October 1991 to April 1997.
- ------------------ (1) Director's term expires in 1998. (2) Director's term expires in 1999. (3) Director's term expires in 2000. 29 30 Non-Director Executive Officers of TCI Music
Name Positions ---- --------- Stephen M. Brett Has served as Vice President, General Counsel and Secretary of TCI Music Born September 20, 1940 since January 1997, and has been a director, Vice President and Secretary of DMX since July 1997. Mr. Brett has served as Executive Vice President, General Counsel and Secretary of TCI since January 1994, as an Executive Vice President of TCIC since October 1997, and as the General Counsel and Secretary of TCIC since October 1991. Mr. Brett served as Senior Vice President of TCIC from 1991 to October 1997. Mr. Brett is a Vice President and Secretary of most of TCI's subsidiaries. Joanne Wendy Kim Has served as Vice President-Finance and Treasurer since July 1997, and as Born March 2, 1955 Acting Chief Financial Officer since December 1997. Ms. Kim has served as Corporate Secretary and Chief Financial Officer of DMX since 1995, and Executive Vice President since July 1997. Prior to joining DMX she served as Senior Vice President, Chief Financial Officer of Bank of San Pedro from 1992 to 1994.
There are no family relationships, of first cousin or closer, among TCI Music's directors or executive officers, by blood, marriage or adoption. During the past five years, none of the above persons have had any involvement in such legal proceedings as would be material to an evaluation of his or her ability or integrity. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires TCI Music's executive officers and directors, and persons who own more than ten percent of a registered class of TCI Music's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission ("SEC"). Executive officers, directors and greater-than-ten-percent shareholders are required by SEC regulation to furnish TCI Music with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such Section 16(a) forms filed on Forms 3, 4 and 5, and amendments thereto furnished to TCI Music with respect to its most recent fiscal year, TCI Music believes that, during the year ended December 31, 1997, its executive officers, directors and greater-than-ten-percent beneficial owners complied on a timely basis with all Section 16(a) filing requirements. 30 31 ITEM 11. EXECUTIVE COMPENSATION. (a) Summary Compensation Table The following table shows, for the period from July 1, 1997 (the beginning of the month in which the Company became a public company) through December 31, 1997 (the "Reporting Period"), a summary of certain information regarding all forms of compensation for the Chief Executive Officer and the only other executive officer (the "named executive officers") whose total annual salary and bonus exceeded $100,000 during the Reporting Period.
Annual Compensation Long Term ------------------- Compensation Awards ---------------- Securities Underlying Name and Stock All Other Principal Salary Bonus Other Annual Options/ Compensation Compensation SARs(1) Position Year ($) ($) $ (#) $ - ------------ ---- --------- --------- ---------------- ------------ --------------- David B. Koff (2) 1997 --- --- --- 100,000 --- President and Chief Executive Officer Lon A. Troxel 1997 $ 189,660 --- ---(3) 200,000 --- President and CEO, DMX
(1) For information concerning these awards see "Option/SAR-Grants in Last Fiscal Year" set forth below. There were no grants of restricted stock or payments from other long term incentive plans; therefore columns for "Restricted Stock Awards" and "LTIP Payouts" are omitted. (2) Mr. Koff is an executive officer of Liberty and is compensated by Liberty for his services. No salary, bonus or other annual compensation was paid to Mr. Koff for his services to TCI Music during the Reporting Period. (3) Certain perquisites and other personal benefits did not exceed the lesser of $50,000 or 10% of the total amounts reported in the Salary and Bonus columns during the Reporting Period. 31 32 (b) Option/SAR Grants in Last Fiscal Year The following table shows all individual grants of stock options and stock appreciation rights ("SARs") by the Company to each of the named executive officers during the Reporting Period.
Number of Securities Underlying % of Total Options/ Options/SARs to Exercise SARs Employees Price Expiration Name Granted(1) in Fiscal Year ($/sh)(2) Date Grant Date Present Value ($)(3) ---- ------- -------------- -------- ------------- ---------------------------- David B. Koff, 100,000 10.7% $6.25 7/11/2007 338,000 President and Chief Executive Officer Lon A. Troxel, 200,000 21.3% $6.25 7/11/2007 676,000 President and CEO, DMX
(1) All grants of stock options were options to purchase Series A Common Stock, $.01 par value per share of TCI Music ("TCI Music Series A Common Stock"). All stock options were granted in tandem with SARs. All options were granted pursuant to the TCI Music 1997 Stock Incentive Plan (the "1997 Plan") effective July 11, 1997, vest in 20% cumulative increments, with the first increment vesting as of July 11, 1997, with each additional increment vesting on each of the next four anniversaries thereof. Notwithstanding the vesting schedule, the option shares become available for purchase if grantee's employment with the Company terminates as a result of the total disability or death of the grantee. Further, the option shares will become available for purchase in the event of an Approved Transaction, Board Change, or Control Purchase (each as defined in the 1997 Plan), unless, in the case of an Approved Transaction, the compensation committee under the circumstances specified in the 1997 Plan, determines otherwise. In addition, Mr. Koff's options become available for purchase if he ceases to be a director of TCI Music for any reason other than voluntary termination, and Mr. Troxel's options become available for purchase if his employment is terminated by the Company without "cause" or by him for "good reason" (as defined in his option agreement.) (2) There was no market for the shares of the TCI Music Series A Common Stock on July 11, 1997, the date of grant. Each share of TCI Music Series A Common Stock issued in connection with the merger of DMX and a subsidiary of TCI Music (the "DMX Merger") trades together with a right granted by TCI to each such holder of TCI Music Series A Common Stock (a "TCI Right"). The shares of TCI Music Series A Common Stock (with associated TCI Rights) commenced trading on the Nasdaq SmallCap Market on July 14, 1997. There is no public trading market for TCI Music Series A Common Stock without associated TCI Rights. The options are exercisable for TCI Music Series A Common Stock without associated TCI Rights. (3) The values shown are based on the Black-Scholes model and are stated in current annualized dollars on a present value basis. The key assumptions used in the model for purposes of this calculation include the following: (a) a 6.1% risk-free interest rate; (b) a 50% volatility factor; (c) a 60-month expected life term; 32 33 and (d) the closing market price of a unit consisting of one share of TCI Music Series A Common Stock and its associated TCI Right (which trade together on the Nasdaq SmallCap Market under the symbol "TUNE") on December 31, 1997, or $7.625, resulting in a fair value of the options granted during the Reporting Period of $3.38. The actual value the executive may realize will depend upon the extent to which the stock price exceeds the exercise price on the date the option is exercised. Accordingly, the value, if any, realized by the executive will not necessarily be the value determined by the model. (c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values The following table shows certain information with respect to the exercise of stock options/SARs by the named executive officers during the Reporting Period and year-end value of unexercised stock options/SARs at December 31, 1997.
Number of Unexercised Value of Unexercised In Securities Underlying the Money Options/SARs Shares Valued Options/SARs at at FY-End ($)(1) Acquired on Realize FY-End (#) Name Exercise (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable ---- ----------- --------- ------------------------- ------------------------- David B. Koff, -- -- 20,000/80,000 $27,500/$110,000 President and Chief Executive Officer Lon A. Troxel, -- -- 40,000/160,000 $55,000/$220,000 President and CEO, DMX
(1) The values indicated are based upon the closing trading price of a unit consisting of one share of TCI Music Series A Common Stock and its associated TCI Right (which trade together on the Nasdaq SmallCap Market under the symbol "TUNE") on December 31, 1997, or $7.625. The shares of TCI Music Series A Common Stock underlying such options will not have any associated TCI Rights, and accordingly the value of a share of TCI Music Series A Common Stock, without an attached TCI Right, may be substantially lower than the market value of TCI Music Series A Common Stock trading with associated TCI Rights. (d) Compensation of Directors (1) Standard Arrangements. Members of the Board of TCI Music who are also full-time employees of TCI Music or TCI, or any of their respective subsidiaries, do not receive any additional compensation for their services as directors. TCI Music has not established any fees for directors who are not full-time employees of TCI Music or TCI or any of their respective subsidiaries. All members of the TCI Music Board are reimbursed for expenses incurred to attend any meetings of the TCI Music Board and any committee thereof. (2) Other Arrangements. The TCI Music Board granted, effective as of July 11, 1997, (i) to each of Messrs. Hindery, Kern and Fisher, options to purchase 833,334 shares of TCI Music Series A Common 33 34 Stock at a price of $6.25 per share, (ii) to Mr. Troxel, options to purchase 200,000 shares of TCI Music Series A Common Stock at a price of $6.25 per share, (iii) to each of Messrs. Sparkman, Bennett and Koff, options to purchase 100,000 shares of TCI Music Series A Common Stock at a price of $6.25 per share. Such options will vest in 20% cumulative increments, with the first increment vesting as of July 11, 1997, and each additional increment vesting on each anniversary date thereafter, and will be exercisable for up to ten years following July 11, 1997. No TCI Rights will be issued in connection with any TCI Music Series A Common Stock issued upon exercise of any such option. (e) Employment Agreements, Termination of Employment and Change of Control Arrangements In connection with the merger of Paradigm and a subsidiary of TCI Music (the "Paradigm Merger"), TCI Music agreed to appoint Mr. McPartland as TCI Music's President and Chief Executive Officer pursuant to the terms of Mr. McPartland's Employment Agreement with Paradigm at a compensation level to be determined between Mr. McPartland and TCI Music (but not to be less than $375,000 per annum). TCI Music also agreed that Mr. McPartland is entitled to participate in bonus, incentive stock option and other benefit programs on a basis consistent with the practice of TCI Music in compensating senior executives. Mr. McPartland's Employment Agreement with Paradigm is for a three-year period terminating on December 31, 1998. The Employment Agreement provides that if Paradigm terminates Mr. McPartland's employment agreement other than for cause (as defined in the Employment Agreement), Mr. McPartland is entitled to receive his base annual salary for the unexpired term of the agreement, plus benefits and bonus, if any, along with any salary accrued to the date of his termination. DMX and Lon A. Troxel are parties to an Employment Agreement dated October 1, 1991, as amended, pursuant to which Mr. Troxel receives annual salary of $300,000 from June 1, 1998 through May 31, 1999 and $325,000 during the years ending May 31, 2000, 2001 and 2002. Pursuant to the Employment Agreement Mr. Troxel has agreed not to acquire more than a 10% direct or indirect ownership in any cable company, other than DMX, without the prior written consent of DMX. Mr. Troxel receives basic and extended benefits commensurate with other senior management employees such as vacation pay and other fringe benefits. If Mr. Troxel becomes disabled during the term of the agreement, he will receive the same compensation he is entitled to under the Employment Agreement for a time period not exceeding six months. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) Security Ownership of TCI Music The following table sets forth information with respect to the beneficial ownership of the common and preferred stock of TCI Music as of December 31, 1997 by: (i) each person who is known by TCI Music to be the beneficial owner of more than five percent of any class of the outstanding shares of the TCI Music Series A Common Stock, the Series B Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series B Common Stock") and the Series A Convertible Preferred Stock, $.01 par value per share, of TCI Music ("TCI Music Preferred Stock"); (ii) each director of TCI Music; (iii) the named executive officers; and (iv) all of TCI Music's directors and executive officers as a group. Shares issuable upon exercise or conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of persons beneficially owning such convertible securities, but have not been deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Voting power in the table is computed with respect to a general election of directors. So far as is known to TCI Music, the persons indicated below 34 35 have sole voting and investment power with respect to the shares indicated as owned by them, except as otherwise stated in the notes to the table. All information is taken from or based upon ownership filings made by such persons with the SEC or upon information provided by such persons to the Company. The address of the directors and named executive officers of TCI Music is 8101 East Prentice Avenue, Suite 500, Englewood, Colorado 80111.
Amount and Nature of Name and Address of Beneficial Percent of Voting Beneficial Owner Title of Class Ownership Class(1) Power(1) -------------------------- -------------- --------- -------- -------------- Tele-Communications, Inc. Series A Common 6,812,393(2) 37.6 97.5 5619 DTC Parkway Series B Common 62,500,000(2) 100.0 Englewood, CO 80111 Series A Preferred 84,242 4.8 Shaw Communications, Inc. Series A Common 1,900,000(3) 10.5 * 630 Third Avenue Series B Common -- -- Suite 900 Series A Preferred -- -- Calgary, Alberta CANADA T2P 4L4 JR Shaw Series A Common 2,095,125(4) 11.6 * c/o Shaw Communications, Series B Common -- -- Inc. Series A Preferred -- -- H.F. Lenfest Series A Common -- -- * c/o StarNet, Inc. Series B Common -- -- 1332 Enterprise Drive Series A Preferred 501,292(5) 28.8 Suite 200 West Chester, PA 19380 Chris Blackwell Series A Common -- -- * c/o Island Trading Series B Common -- -- Company Series A 400 Lafayette Street Preferred 175,000(7) 10.0 New York, NY 10003 Louis Wolfson, III Series A Common -- -- * c/o Venture Corporation Series B Common -- -- 9350 S. Dixie Hwy., Suite Series A Preferred 96,651 5.5 900 Miami, FL 33156 J. Patrick Michaels, Jr. Series A Common -- -- * c/o CEA Investors, Inc. Series B Common -- -- 101 E. Kennedy Blvd., Series A 321,379(6) 18.4 Suite 3300 Preferred Tampa, FL 33602 CEA Investors, Inc. Series A Common -- -- * 101 E. Kennedy Blvd., Series B Common -- -- Suite 3300 Series A 315,484(6) 18.1 Tampa, FL 33602 Preferred Robert R. Bennett Series A Common 100,000(9) * * Series B Common -- -- Series A -- -- Preferred Donne F. Fisher Series A Common 833,334(8) 4.4 * Series B Common -- -- Series A -- -- Preferred Leo J. Hindery, Jr. Series A Common 833,334(8) 4.4 * Series B Common -- -- Series A -- -- Preferred
35 36
Amount and Nature of Name and Address of Beneficial Percent of Voting Beneficial Owner Title of Class Ownership Class(1) Power(1) -------------------------- -------------- --------- -------- -------------- Peter M. Kern Series A Common 833,334(8) 4.4 * Series B Common -- -- Series A Preferred -- -- David B. Koff Series A Common 100,000(9) * * Series B Common -- -- Series A Preferred -- -- Thomas McPartland Series A Common 454,552 2.5 * Series B Common -- -- Series A Preferred -- -- J C Sparkman Series A Common 137,500(9) * * Series B Common -- -- Series A Preferred -- -- Lon A. Troxel Series A Common 200,000(10) 1.1% * Series B Common -- -- Series A Preferred -- -- All Directors and Executive Officers as a Group (10 PERSONS) Series A Common 3,542,054(11) 19.6 * Series B Common -- -- Series A Preferred -- -- - -------
* Less than 1% (1) Based upon 18,098,983 shares of TCI Music Series A Common Stock, 62,500,000 shares of TCI Music Series B Common Stock and 1,742,484 shares of TCI Music Preferred Stock outstanding on December 31, 1997. (2) Effective July 1, 1997, TCI transferred 2,587,222 shares of TCI Music Series A Common Stock and 62,500,000 shares of Series B Common Stock (all the shares of TCI Music Series A Common Stock and TCI Music Series B Common Stock beneficially owned by TCI, excluding 1,514,766 shares of TCI Music Series A Common Stock indirectly owned by Liberty and 2,710,406 shares of TCI Music Series A Common Stock indirectly owned by a TCI subsidiary, Tele-Communications International, Inc.) to Liberty. In exchange for the TCI Music Series A Common Stock and TCI Music Series B Common Stock acquired from TCI, Liberty (i) agreed to reimburse TCI for all amounts paid by TCI to holders of TCI Rights to the extent that TCI Rights are exercised and (ii) issued a promissory note to TCI in the amount of $80,000,000. Of the total consideration, $21,000,000 was allocable to the TCI Music Series A Common Stock (with associated TCI Rights) acquired by Liberty. The note may be reduced by the value of shares of Tele-Communications, Inc. Series A Liberty Media Group Common Stock, par value $.01 per share ("Liberty Group Series A Common Stock") or Tele-Communications, Inc. Series B Liberty Media Group Stock, par value $.01 per share ("Liberty Group Series B Stock") issued by TCI for the benefit of any TCI entity other than an entity within the Liberty Media Group. Liberty also may elect to pay $50,000,000 of that note by delivery of a Stock Appreciation Rights Agreement that will give TCI the right to receive 20% of the appreciation in value of Liberty's investment in TCI Music, to be determined as of July 11, 2002. The Stock Appreciation Rights Agreement will provide that TCI will receive at least $73,500,000 if Liberty's investment in TCI Music is to be valued on that date; if by mutual agreement of TCI and Liberty, such investment is to be valued (and payment made to TCI) before July 11, 2002, the minimum amount payable to TCI will be $50,000,000, plus an accretion to the agreed upon valuation date equal to 8% per annum, compounded annually. (3) Does not include 69,020 shares of TCI Music Series A Common Stock held by James R. Shaw Securities Limited, 32,145 shares of TCI Music Series A Common Stock held by Brasha Holdings Ltd., 29,670 shares of TCI Music Series A Common Stock held by Jay-Shaw Holdings Ltd., 32,145 shares of TCI Music Series A Common Stock held by Julmar Holdings Ltd., and 32,145 shares of TCI Music Series A Common Stock held by Shawana Estates Ltd., which entities are affiliates of 36 37 Shaw. Shaw is a public company whose non-voting securities are listed on the Toronto Stock Exchange and the Alberta Stock Exchange. Mr. Shaw, members of his family and members of Leslie E. Shaw's (Mr. Shaw's brother) family hold directly and indirectly, a majority of the voting shares of Shaw and such shares are governed by the terms of a voting trust. Mr. Shaw and members of his family do not, directly or indirectly, hold a majority of the publicly traded non-voting shares of Shaw. (4) Includes the following shares of TCI Music Series A Common Stock, of which Mr. Shaw disclaims beneficial ownership: 1,900,000 shares held by Shaw, 69,020 shares held by James R. Shaw Securities Limited, 32,145 shares held by Brasha Holdings Ltd., 29,670 shares held by Jay-Shaw Holdings Ltd., 32,145, shares held by Julmar Holdings Ltd., 32,145 shares held by Shawana Estates Ltd. Mr. Shaw holds a majority of the shares of Jay-Shaw Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining shares of each such entities, other than certain preferred shares held by Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, are held by children of Mr. Shaw. Each of the children has reached the age of majority. Mr. Shaw holds 48% of the voting shares of James R. Shaw Securities Limited. The balance of voting shares are held by and for the benefit of Mr. Shaw's family members. (5) StarNet Interactive Entertainment, Inc., a Delaware corporation ("StarNet Interactive"), is a wholly-owned subsidiary of StarNet, Inc. ("StarNet"), which is a wholly-owned subsidiary of Lenfest Communications, Inc. ("LCI"). H.F. Lenfest (together with his children) and TCI each beneficially own 50% of the common stock of LCI. Mr. Lenfest is the sole director of StarNet and StarNet Interactive and President, Chief Executive Officer and a director of LCI. Through contractual arrangements among the stockholders of LCI, Mr. Lenfest has the exclusive right to control a majority of the Board of Directors of LCI and the management and business affairs of LCI, StarNet and StarNet Interactive. TCI has disclaimed beneficial ownership of the shares of TCI Music Preferred Stock beneficially owned by Mr. Lenfest, LCI, StarNet and StarNet Interactive (the "StarNet Group"). The StarNet Group has disclaimed beneficial ownership of the shares of capital stock of TCI Music beneficially owned by TCI. (6) CEA Investors, Inc. ("CEA Investors"), a Florida corporation, is the sole general partner of CEA Investors Partnership II, Ltd. ("CEA II"). J. Patrick Michaels, Jr. ("Michaels") is the sole director and the President of CEA Investors. Michaels is the sole trustee of The J. Patrick Michaels, Jr. Family Trust, the sole stockholder of CEA Investors. Michaels has sole power to vote or direct the vote of 320,496 shares of TCI Music Preferred Stock, shared power to vote or direct the vote of 883 shares of TCI Music Preferred Stock, sole power to dispose or direct the disposition of 320,496 shares of TCI Music Preferred Stock, and shared power to dispose or direct the disposition of 883 shares of TCI Music Preferred Stock. Michaels shares voting and dispositive power with the Kimberly Lynn Michaels Trust with respect to 883 shares. Michaels disclaims beneficial ownership of any shares of TCI Music Preferred Stock held by CEA II, CEA Investors or The Kimberly Lynn Michaels Trust, except to the extent of his pecuniary interest therein. (7) Island Trading Company ("Island") is a wholly-owned subsidiary of Island International Limited, the capital stock of which is held in trust by The Island Settlement, both of which have disclaimed beneficial ownership of the shares of TCI Music Preferred Stock beneficially owned by Island. Mr. Blackwell has shared voting power and shared dispositive power with respect to such shares. (8) Assumes the exercise in full of stock options to acquire 833,334 shares of TCI Music Series A Common Stock, 166,667 of which are currently exercisable. (9) Assumes the exercise in full of stock options to acquire 100,000 shares of TCI Music Series A Common Stock, 20,000 of which are currently exercisable. (10) Assumes the exercise in full of options to acquire 200,000 shares of TCI Music Series A Common Stock, 40,000 of which are currently exercisable. (11) Assumes the exercise in full of options held by such persons to acquire 3,050,002 shares of TCI Music Series A Common Stock, 610,001 of which are currently exercisable. (b) Security Ownership of TCI The following table sets forth, as of December 31, 1997, the ownership of Tele-Communications, Inc. Series A TCI Group Common Stock, par value $.01 per share ("TCI Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group Common Stock, par value $.01 per share ("TCI Group Series B Stock"), Liberty 37 38 Group Series A Stock, Liberty Group Series B Stock, Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value $.01 per share ("Ventures Group Series A Stock"), Tele-Communications, Inc. Series B TCI Ventures Group Common Stock, par value $.01 per share ("Ventures Group Series B Stock"), Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share, of TCI ("Class B Preferred Stock"), Convertible Preferred Stock, Series C - TCI Group ("TCOMA Series C Preferred Stock"), Convertible Preferred Stock, Series C - Liberty Media Group ("LBTYA Series C Preferred Stock"), Redeemable Convertible TCI Group Preferred Stock, Series G, par value $.01 per share ("Series G Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series H, par value $.01 per share ("Series H Preferred Stock"), held by (i) each person known by TCI Music to own beneficially more than 5% of any such class or series outstanding on that date, (ii) each person who is a director or named executive officer of TCI Music and (iii) all of the directors and executive officers of TCI Music as a group. Shares issuable upon exercise or conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of persons beneficially owning such convertible securities, but have not been deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Voting power in the table is computed with respect to a general election of directors and, therefore, the Class B Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock are included in the calculation notwithstanding the fact that the Class B Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock do not generally vote with respect to matters submitted to a vote of stockholders. So far as is known to TCI Music, the persons indicated below have sole voting and investment power with respect to the shares indicated as owned by them except as otherwise stated in the notes to the table and except for the shares held by the trustee of TCI's Employee Stock Purchase Plan (the "TCI ESPP") for the benefit of such person, which shares are voted at the discretion of the trustee. Effective February 6, 1998, TCI issued a stock dividend to holders of Liberty Group Series A Stock and Liberty Group Series B Stock consisting of one share of Liberty Group Series A Stock for every two shares of Liberty Group Series A Stock owned and one share of Liberty Group Series B Stock for every two shares of Liberty Group Series B Stock owned (the "1998 Liberty Group Stock Dividend"). As a result of the 1998 Liberty Group Stock Dividend, the number of shares underlying options granted to purchase Liberty Group Series A Stock and the price to purchase such shares have been adjusted. Effective February 6, 1998, TCI issued a stock dividend to holders of Ventures Group Series A Stock and Ventures Group Series B Stock consisting of one share of Ventures Group Series A Stock for each share of Ventures Group Series A Stock owned and one share of Ventures Group Series B Stock for each share of Ventures Group Series B Stock owned (the "1998 Ventures Group Stock Dividend"). As a result of the 1998 Ventures Group Stock Dividend, the number of shares underlying options granted to purchase Ventures Group Series A Stock and Ventures Group Series B Stock and the price to purchase such shares have been adjusted. The information in the table has been adjusted for the 1998 Liberty Group Stock Dividend and the 1998 Ventures Group Stock Dividend. All information is taken from or based upon ownership filings made by such persons with the SEC Commission or upon information provided by such persons to the Company. 38 39
Amount and Nature Name of of Beneficial Percent Voting Beneficial Owner Title of Class Ownership of Class(1) Power (1) ---------------- -------------- --------- ----------- --------- Robert R. Bennett TCI Group Common Stock Series A 131,185(2) * * Series B ___ ___ Liberty Media Group Common Stock Series A 1,776,805(2) * Series B ___ ___ Ventures Group Common Stock Series A 77,910(2) * Series B ___ ___ TCI Preferred Stock Class B 482 * Series C ___ ___ Series G ___ ___ Series H ___ ___ Donne F. Fisher TCI Group Common Stock Series A 433,732(3) * * Series B 183,012(3) * Liberty Media Group Common Stock Series A 381,838(3) * Series B 93,402 * Ventures Group Common Stock Series A 306,184(3) * Series B 268,738 * TCI Preferred Stock Class B 4,299(3) * Series C ___ ___ Series G ___ ___ Series H Leo J. Hindery, TCI Group Common Stock Jr. Series A 1,924,534(4) * 1.60% Series B 1,684,775(5) 3.49% Liberty Media Group Common Stock Series A 1,125,000(4) * Series B ___ ___ Ventures Group Common Stock Series A 1,550,932(4) * Series B 1,721,360(5) 3.89% TCI Preferred Stock Class B ___ ___ Series C ___ ___ Series G ___ ___ Series H ___ ___ Peter M. Kern TCI Group Common Stock Series A 70,000(6) * * Series B 24,069(7) * Liberty Media Group Common Stock Series A ___ ___ Series B ___ ___ Ventures Group Common Stock Series A 60,000(6) * Series B 12,296(7) * TCI Preferred Stock Class B ___ ___ Series C ___ ___ Series G ___ ___ Series H ___ ___
39 40
Amount and Nature Name of of Beneficial Percent of Voting Beneficial Owner Title of Class Ownership Class (1) Power (1) ---------------- -------------- --------- --------- --------- David B. Koff TCI Group Common Stock Series A 19,839(8) * * Series B ___ ___ Liberty Media Group Common Stock Series A 269,865(8) ___ Series B ___ ___ Ventures Group Common Stock 15,596(8) ___ Series A ___ ___ Series B ___ ___ TCI Preferred Stock Class B ___ ___ Series C ___ ___ Series G ___ ___ Series H ___ ___ Thomas McPartland TCI Group Common Stock Series A ___ ___ ___ Series B ___ ___ Liberty Media Group Common Stock Series A ___ ___ Series B ___ ___ Ventures Group Common Stock Series A ___ ___ Series B ___ ___ TCI Preferred Stock Class B ___ ___ Series C ___ ___ Series G ___ ___ Series H ___ ___ J C Sparkman TCI Group Common Stock Series A 200,921(9) * * Series B ___ ___ Liberty Media Group Common Stock Series A 141,751(9) * Series B ___ ___ Ventures Group Common Stock Series A 107,102(9) * Series B ___ ___ TCI Preferred Stock Class B ___ ___ Series C ___ ___ Series G ___ ___ Series H ___ ___ Lon A. Troxel TCI Group Common Stock Series A ___ ___ ___ Series B ___ ___ Liberty Media Group Common Stock Series A ___ ___ Series B ___ ___ Ventures Group Common Stock Series A ___ ___ Series B ___ ___ TCI Preferred Stock Class B ___ ___ Series C ___ ___ Series G ___ ___ Series H ___ ___
40 41
Amount and Nature Name of of Beneficial Percent of Voting Beneficial Owner Title of Class Ownership Class (1) Power (1) ---------------- -------------- --------- --------- --------- All Directors and Executive TCI Group Common Stock Officers as a Group Series A 3,574,956 * 2.4% (10 Persons) Series B 1,896,856 3.9% Liberty Media Group Common Stock Series A 3,966,379 1.3% Series B 93,402 * Ventures Group Common Stock Series A 2,117,724 * Series B 2,002,394 4.5% TCI Preferred Stock Class B 4,781(3) * Series C ___ ___ Series G ___ ___ Series H ___ ___
- ---------- * Less than 1% (1) Based on 458,473,123 shares of TCI Group Series A Stock, 48,230,923 shares of TCI Group Series B Stock, 313,225,982 shares of Liberty Group Series A Stock, 31,681,124 shares of Liberty Group Series A Stock, 365,719,524 shares of Ventures Group Series A Stock, 44,228,902 shares of Ventures Group Series B Stock, 1,552,490 shares of Class B Preferred Stock, 70,575 shares of TCOMA Series C Preferred Stock, 70,575 shares of LBTYA Series C Preferred Stock, 6,567,344 shares of Series G Preferred Stock, and 6,567,894 shares of Series H Preferred Stock outstanding at December 31, 1997, in each case after elimination of shares held by TCI and its subsidiaries. In addition, such numbers have been adjusted for the February 9, 1998 transactions with Dr. Malone and the Estate of Bob Magness. As a result of such February 9, 1998 transactions, the following adjustments to the December 31, 1997 outstanding share numbers were made: (i) a reduction of 10,201,040 shares in the outstanding number of TCI Group Series A Stock, (ii) an increase of 10,017,145 shares in the outstanding number of TCI Group Series B Stock, (iii) a reduction of 11,666,508 shares in the outstanding number of Ventures Group Series A Stock, and (iv) an increase of 12,034,298 shares in the outstanding number of Ventures Group Series B Stock. (2) Assumes the exercise in full of stock options granted in tandem with stock appreciation rights in November 1994 to acquire 35,000 shares of TCI Group Series A Stock, 28,125 shares of Liberty Group Series A Stock, 30,000 shares of Ventures Group Series A Stock, 21,000 shares, 16,875 shares and 18,000 shares of which, respectively, were exercisable as of December 31, 1997. Additionally assumes the exercise in full of stock options granted in tandem with stock appreciation rights in December 1995 to acquire 1,125,000 shares of Liberty Group Series A Stock, 450,000 shares of which were exercisable as of December 31, 1997. Also assumes the exercise in full of stock options granted in tandem with stock appreciation rights in July 1997 to acquire 80,000 shares of TCI Group Series A Stock, 600,000 shares of Liberty Group Series A Stock and 30,000 shares of Ventures Group Series A Stock, none of which were exercisable as of December 31, 1997. Does not include stock appreciation rights with respect to 150,000 shares of TCI Group Series A Stock, 150,000 shares of Liberty Group Series A Stock or 130,000 shares of Ventures Group Series A Stock. Upon exercise, such stock appreciation rights are payable, at TCI's election, in cash or in shares of TCI Group Series A Stock or Liberty Group Series A Stock, as applicable. Also includes 2,332 shares of TCI Group Series A Stock, 1,929 shares of Liberty Group Series A Stock and 2,068 shares of Ventures Group Series A Stock held in trust by the TCI ESPP for the benefit of Mr. Bennett. (3) Assumes the exercise in full of stock options granted in tandem with stock appreciation rights in November 1994 to acquire 140,000 shares of TCI Group Series A Stock, 112,500 shares of Liberty Group Series A Stock and 120,000 shares of Ventures Group Series A Stock, 84,000 shares, 67,500 shares and 72,000 shares of which, respectively, were exercisable as of December 31, 1997. Additionally assumes the exercise of stock options granted in January 1996 to acquire 50,000 shares of TCI Group Series A Stock and 28,125 shares of Liberty Group Series A Stock, 10,000 shares and 5,625 shares of which, respectively, were exercisable as of December 31, 1997. Includes 210 shares of Class B Preferred Stock held by Mr. Fisher's wife. (4) Assumes the exercise in full of options granted in tandem with stock appreciation rights in February 1997 to acquire 700,000 shares of TCI Group Series A Stock, 375,000 shares of Liberty Group Series A Stock and 600,000 shares of Ventures Group Series A Stock, none of which are exercisable until February 1998. Also assumes the exercise in full of options granted in tandem with stock appreciation rights in July 1997 to acquire 1,050,000 shares of TCI Group Series A Stock, 750,000 shares of Liberty Group Series A Stock and 900,000 shares of Ventures Group Series A Stock, none of which are exercisable until July 1998. Also includes 174,534 shares of restricted TCI Group Series A Stock and 50,932 shares of restricted Ventures Group Series A Stock. Such shares vest as to 50% in July 2001 and as to the remaining 50% in July 2002. 41 42 (5) Includes 1,684,775 shares of TCI Group Series B Stock and 1,721,360 shares of Ventures Group Series B Stock held by trusts, to which Mr. Hindery is the trustee and over which Dr. Malone has the power to direct the voting. Dr. Malone also has a right of first refusal with respect to any proposed transfer of such shares. Such right of first refusal may be exercised by Dr. Malone either by the payment of cash or, subject to certain exceptions, by the exchanging of shares of TCI Group Series A Stock for such TCI Group Series B Stock or Ventures Group Series A Stock for such Ventures Group Series B Stock. If not exercised by Dr. Malone, such right of first refusal may be exercised by TCI. (6) Assumes the exercise in full of stock options to acquire 70,000 shares of TCI Group Series A Stock and 60,000 shares of Ventures Group Series A Stock, none of which were exercisable as of December 31, 1997. (7) All of these shares are held in a series of trusts of which Mr. Hindery is the trustee. (8) Assumes the exercise in full of stock options granted in tandem with stock appreciation rights in November 1994 to acquire 17,500 shares of TCI Group Series A Stock and 14,063 shares of Liberty Group Series A Stock and 15,000 shares of Ventures Group Series A Stock, 10,500 shares, 8,437 shares and 9,000 shares of which, respectively, were exercisable as of December 31, 1997. Additionally assumes the exercise of stock options granted in tandem with stock appreciation rights in December 1995 to acquire 180,000 shares of Liberty Group Series A Stock, 72,000 shares of which were exercisable as of December 31, 1997. Also assumes the exercise in full of stock options granted in tandem with stock appreciation rights in July 1997 to acquire 75,000 shares of Liberty Group Series A Stock, none of which were exercisable as of December 21, 1997. Excludes 1,312 shares of Liberty Group Series A Stock and 200 shares of Class B Preferred Stock beneficially owned by Judith R. Koff, Mr. Koff's wife, of which Mr. Koff disclaims beneficial ownership. (9) Assumes the exercise in full of stock options granted in tandem with stock appreciation rights to acquire 70,000 shares of TCI Group Series A Stock, 30,000 shares of Liberty Group Series A Stock and 60,000 shares of Ventures Group Series A Stock, all of which were exercisable as of December 31, 1997. Also assumes the exercise in full of stock options granted in tandem with stock appreciation rights in December 1996 to acquire 50,000 shares of TCI Group Series A Stock and 28,125 shares of Liberty Group Series A Stock, 10,000 shares and 5,625 shares of which, respectively, were exercisable as of December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TCI beneficially owns approximately 37.6% of the outstanding shares of TCI Music Series A Common Stock, 100% of the outstanding shares of TCI Music Series B Common Stock, and 4.8% of the outstanding shares of the TCI Music Preferred Stock, collectively representing 97.5% of the aggregate voting power related to the outstanding shares of the TCI Music Series A Common Stock, the TCIM Series B Common Stock and the TCIM Preferred Stock. TCI acquired such shares of TCI Music Series A Common Stock and TCI Music Series B Common Stock upon the consummation of the DMX Merger on July 11, 1997 and the TCI Music Preferred Stock upon consummation of the merger of The Box Worldwide, Inc. ("The Box") with a subsidiary of TCI Music (the "Box Merger") on December 16, 1997. DMX, under an agreement with National Digital Television Center, Inc., a wholly-owned subsidiary of TCI ("NDTC"), has a capital lease to lease equipment at NDTC's studio and uplinking facility in Littleton, Colorado, with terms which extend to 2000 at an interest rate of 9.5%. DMX is also obligated to NDTC under various operating leases for uplinking and satellite services. On December 10, 1996, DMX entered into a letter agreement with Sky Entertainment Services in Latin America ("Sky-LA") pursuant to which Sky-LA was granted the right to carry up to 40 DMX music formats on the Mexican, Brazilian, North South American and South American platforms of Sky-LA. Sky Entertainment Services is the brand name for the direct-to-home service offered by the strategic alliance formed by Organzacoes Globo, Brazil's leading entertainment group; Mexico's Grupo Televisa S.A.; The News Corporation Limited; and Tele-Communications International, Inc., a subsidiary of TCI. Shaw beneficially owns approximately 10.5% of the outstanding shares of TCI Music Series A Common Stock, which it acquired upon the consummation of the DMX Merger on July 11, 1997, in exchange for the shares of common stock of DMX it owned prior to the DMX Merger. JR Shaw, President and Chief Executive Officer of Shaw, was a director of DMX prior to the DMX Merger. Mr. Shaw beneficially owns 11.6% of TCI Music Series A Common Stock, which he acquired upon the consummation of the DMX Merger 42 43 in exchange for the shares of common stock of DMX he beneficially owned prior to the DMX Merger. Mr. Sparkman, a former director of DMX and a director of TCI Music, is a director of Shaw. In addition, a subsidiary of Shaw and a subsidiary of DMX, 450714 B.C. Ltd., each own a 50% interest in DMX-Canada, Ltd. In March 1992, Shaw, the second largest cable operator in Canada, entered into a licensing and distribution agreement with DMX which grants to DMX-Canada Ltd. the exclusive license and right to distribute DMX's premium service in Canada, which was amended on November 1, 1994 by the Commercial License and Distribution Agreement and on April 14, 1997 by the Residential License and Distribution Agreement. Such licensing and distribution agreement, as amended, provides DMX with a monthly, per subscriber programming royalty for both residential and commercial distribution. During 1995, DMX and Shaw entered into a series of agreements to accomplish a reorganization by which Shaw could take full advantage of the Canadian tax losses incurred in Canada during the market development period and based on Shaw's commitment to fund such development costs. This was accomplished through the transfer of each company's respective equity interests and the formation of a new Canadian partnership (also referred to herein as "DMX-Canada"). DMX continues to hold an equity interest in the new partnership through its wholly-owned subsidiary, a British Columbia corporation, 450714 B.C. Ltd. There is no impact from the reorganization on the operations of DMX-Canada, other than to accomplish the tax structure as outlined above. After Shaw recoups its initial funding, each company will share in the profits based on their respective equity interests. In April 1996, DMX entered into two capital leases with DMX-Canada the proceeds of which were used to purchase DMX Disc equipment leased to two DMX customers, Nine West and Coach. The obligation under the capital lease was for a term which extended to May 2001 at an effective interest rate of 27.21%. In May 1997, the lease balance of $268,625 was paid in full through an offset of license fees due to DMX totaling $220,714 and cash for the balance of $47,911. In August 1994, the Canadian Radio - Television and Telecommunications Commission ("CRTC") which regulates the broadcast industry in Canada, revoked the license previously granted to DMX-Canada for Canadian distribution of DMX. DMX-Canada reapplied to the CRTC during 1995 for a license to distribute DMX to Canadian residential cable subscribers. The CRTC issued a favorable ruling in December 1995 and requires a one to one ratio of Canadian content to non-Canadian content. DMX-Canada and DMX have negotiated an agreement to distribute DMX's digital music services (the "DMX Services") to the Canadian residential cable market. The service will include a total of 30 formats and will be distributed through Shaw Cable Systems and their affiliates. DMX-Canada will also license other Canadian third party distributors such as Star Choice. The launch of the DMX Service for residential distribution was July 1997. The CRTC does not regulate programming delivered to commercial establishments by direct broadcast satellite, and DMX-Canada has been distributing the DMX Service to the commercial sector since 1994. DMX and DMX-Canada have negotiated a new license and distribution agreement which grants an exclusive license and right to distribute the DMX Service to commercial establishments in Canada. The term of the new agreement coincides with the original agreement dated March 9, 1992, and terminates March 31, 2012. DMX received total license fees of approximately $212,000 for the six months ended December 31, 1997 under the agreements. On April 21, 1994, The Box entered into a Lease Agreement with Island, pursuant to which The Box leased from Island approximately 16,000 square feet of space for its principal executive offices. Payment of rent commenced on July 15, 1995 at a base rental of $22.00 per square foot for the first year of the lease term, increasing to $39.00 per square foot for the seventh and final year of the lease term. The base rental rate does 43 44 not include certain operating expenses to be borne by The Box for the entire term of the lease and capped for the first three years of the lease term. The Box has the right to renew the lease subject to the negotiation of a new rental rate, based upon the then-current market rate. On August 13, 1997, The Box paid Communications Equity Associates, Inc. ("CEA"), a company controlled by Mr. Michaels, a fee of $250,000 for investment banking services provided to The Box. Upon the closing of the Box Merger, CEA was paid an additional fee of $250,000. CEA agreed to accept these payments as satisfaction of The Box's obligation to pay CEA a fee of approximately $1.9 million in connection with the Box Merger pursuant to the Domestic Financing Agreement between The Box and CEA dated as of October 8, 1996. The Box is a party to a program affiliation agreement with Satellite Services, Inc., an wholly-owned subsidiary of TCI ("SSI"), pursuant to which The Box pays SSI affiliate fees. The Box is a party to a program affiliation agreements with Lenfest Communications, Inc., and Suburban Cable TV Co., Inc., companies controlled by H.F. Lenfest. TCI Music and TCI have entered into a number of intercompany agreements more fully described below covering matters such as the provision of services and allocation of tax liabilities. TCI also provides certain administrative, financial, legal, treasury, accounting, tax and other services to TCI Music and makes available certain of its employee benefit plans to TCI Music's employees. The terms of these arrangements were established by TCI in consultation with TCI Music and are not the result of arm's-length negotiations. Accordingly, although TCI Music believes that the terms of these arrangements are reasonable, there is no assurance that the terms and conditions of these agreements, or the terms of any future arrangements between TCI and TCI Music, are as favorable to TCI Music as could be obtained from unaffiliated third parties. In addition, TCI Music and TCI and their respective subsidiaries and affiliates may from time to time do business with one another in areas not governed by any of the following agreements. Amended Contribution Agreement. In connection with the DMX Merger, TCI Music and TCI entered into a Contribution Agreement dated July 11, 1997, pursuant to which TCI agreed to cause certain of its affiliates to assign and contribute to TCI Music the right to receive the revenue from sales of the DMX Service net of an amount equal to 10% of the revenue from such sales to residential subscribers and net of license fees otherwise payable to DMX for a 10-year period beginning July 1, 1997, and to transfer certain equipment to DMX useful in DMX's business. In consideration of such agreement, in connection with the consummation of the DMX Merger, TCI Music delivered to TCI, as designee for certain TCI affiliates, 62,500,000 shares of TCI Music Series B Common Stock and a note in the principal amount of $40,000,000. Pursuant to the Agreement and Plan of Merger dated as of August 12, 1997 (the "Box Merger Agreement"), TCI Music and TCI entered into the Amended Contribution Agreement, as amended, effective as of July 1, 1997 (the "Contribution Agreement"), which provides, among other things, for TCI to deliver, or cause certain of its subsidiaries to deliver, in lieu of TCI's obligation to cause its affiliates to make contributions to TCI Music under the Contribution Agreement, to TCI Music payments aggregating $18 million, increased annually by the percentage increase, if any, in CPI for the prior year, for a term of 20 years. Affiliation Agreement. In connection with the Box Merger Agreement, effective as of July 1, 1997, DMX and SSI entered into an Affiliation Agreement (the "Affiliation Agreement") pursuant to which DMX granted to SSI and certain of its affiliates the non-exclusive right to distribute and subdistribute the DMX Service to commercial and residential customers for a 10-year period in exchange for licensing fees paid by SSI to DMX. 44 45 Under the Affiliation Agreement, SSI will pay an annual fee to DMX of $8,500,000 for the initial three years, subject to adjustment annually (beginning July 1, 1998) by the percentage change in the CPI for the prior year and for changes in the number of subscribers as a result of divestiture or acquisition of cable systems. During the fourth through tenth years of the term of the Affiliation Agreement, the annual fee will be further adjusted on a monthly basis upward or downward, as the case may be, based on an increasing percentage of the increase or decrease in the actual number of subscribers above or below a specified number of residential and commercial subscribers, provided that such fees cannot be reduced below a specified minimum license fee, which minimum fee is decreased each year in years four through ten. During the six months ended December 31, 1997, TCI Music recognized $4.2 million pursuant to the Affiliation Agreement. The Affiliation Agreement between DMX and SSI dated July 6, 1989 (the "Old Affiliation Agreement"), provides for distribution by SSI-affiliated cable systems of the DMX Service and the Superaudio service (a basic analog music service provided through a joint venture between DMX and an affiliate of Jones Intercable, Inc.). Although the Affiliation Agreement supersedes the Old Affiliation Agreement with respect to the DMX Service, the Old Affiliation Agreement remains in effect through June 30, 1999, with respect to the Superaudio service. TCI Music Note. On July 11, 1997, in connection with the DMX Merger, the Company entered into a $2 million revolving credit note with TCI Communications, Inc., a subsidiary of TCI, and pursuant to the Amended Contribution Agreement entered into a $40 million promissory note with TCI. The interest rate on the notes was 10% per annum. On December 30, 1997, the Company paid in full $900,000 drawn under the $2 million revolving credit note and related accrued interest of $24,000 and the $40 million note. The accrued interest on the $0 million note of $1.9 million was forgiven pursuant to the terms of the note agreement. TCI Rights. In connection with the DMX Merger, pursuant to a Rights Agreement dated July 11, 1997, by and among TCI Music, TCI and The Bank of New York, as rights agent, TCI issued one TCI Right with each share of TCI Music Series A Common Stock issued to DMX stockholders in connection with the DMX Merger. Each TCI Right entitles the holder to require TCI to purchase from such holder the related share of TCI Music Series A Common Stock for $8.00 per share (subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders) payable at the election of TCI in cash, a number of shares of TCI Group Series A Stock having an equivalent value or a combination thereof, if, during the one year period beginning July 11, 1997, the price of TCI Music Series A Common Stock (trading together with associated TCI Rights) does not equal or exceed $8.00 per share for a period of at least 20 consecutive trading days. If the TCI Rights have not terminated prior to July 11, 1998, they will become exercisable for a 30-day period following such date and will expire on the last day of such 30-day period, unless extended by their terms. TCI Loan. On February 6, 1997, the Company entered into a loan and security agreement with TCI which provided $3.5 million. The loan proceeds were used to purchase equipment and pay certain costs related to obtaining commercial customers. The outstanding balance at December 31, 1997 was $3.1 million which was payable in 34 equal monthly installments, which commenced September 1, 1997 at an interest rate of 12.5% per annum. Interest expense for the six months ended December 31, 1997, was $207,000. The loan was paid in full on March 2, 1998. Liberty Loans. On September 19, 1997, the Company entered into a $2.18 million note payable with Liberty. The proceeds were issued to Paradigm as a note receivable pursuant to the letter of intent in contemplation of 45 46 the Paradigm Merger. Interest on the note was 10% per annum. The Company paid in full principal and related accrued interest of $62,000 on December 30, 1997. On December 16, 1997, the Company entered into a $3.75 million note payable with Liberty. The proceeds were used to purchase the outstanding preferred stock of The Box in connection with the Box Merger. The Company paid in full the principal and related accrued interest of $15,000 on December 30, 1997. Services Agreement. Pursuant to a Services Agreement between TCI and TCI Music (the "Services Agreement"), TCI shall provide services to TCI Music for administration and operation of the businesses of TCI Music and its subsidiaries as requested by TCI Music from time to time. These services can include: (i) tax reporting, financial reporting, payroll, employee benefit administration, workers' compensation administration, telephone, package delivery, management information systems, billing, lock box, remittance processing and risk management services, (ii) other services typically performed by TCI's accounting, finance, treasury, corporate, legal, tax, benefits, insurance, facilities, purchasing, and advanced information technology department personnel, (iii) use of telecommunications and data facilities and of systems and software developed, acquired or licensed by TCI from time to time for financial forecasting, budgeting and similar purposes, including without limitation any such software for use on personal computers, in any case to the extent available under copyright law or any applicable third-party contract, (iv) technology support and consulting services and (v) such other management, supervisory, strategic planning and other services as TCI Music may from time to time request. Pursuant to the Services Agreement, TCI also provides TCI Music access to any volume discounts that may be available to TCI for the purchase of certain equipment. The Services Agreement also provides that TCI, for so long as TCI continues to beneficially own at least a majority of the voting power of the outstanding shares of the TCI Music Series A Common Stock, TCI Music Series B Common Stock and the TCI Music Preferred Stock, will continue to provide, in the same manner and on the same basis as generally provided from time to time to other participating TCI subsidiaries, benefits and administrative services to TCI Music's employees. In this regard, TCI Music will be allocated that portion of TCI's compensation expense attributable to benefits extended to employees of TCI Music. Pursuant to the Services Agreement, TCI Music from time to time will reimburse TCI for all direct expenses incurred by TCI in providing such services and a pro rata share of all indirect expenses incurred by TCI in connection with the rendering of such services, including a pro rata share of the salary and other compensation of TCI employees performing services for TCI Music, general overhead expenses and rental expense for any physical facilities of TCI utilized by TCI Music. In this regard, it is anticipated that TCI Music will, for the foreseeable future, share office space with, or sublease office space from, TCI. The Services Agreement will continue in effect until terminated by (i) TCI Music upon 60 days' prior written notice to TCI, (ii) TCI at any time after three years upon not less than six months' prior notice to TCI Music, and (iii) either party if the other party is the subject of certain bankruptcy or insolvency-related events. 46 47 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K. (a) Consolidated Financial Statements and Schedules. Reference is made to the Index to Consolidated Financial Statements of TCI Music, Inc. and Subsidiaries and Schedules for the six month period ended December 31, 1997, for a list of financial statements and schedules filed as part of this report at page F-1. (b) Reports on Form 8-K. During the quarter ended December 31, 1997, the Company filed one report on Form 8-K. On December 31, 1997, the Company disclosed the consummation of the December 16, 1997 merger with The Box Worldwide, Inc. (c) Exhibits. Following is a list of Exhibits filed with this report.
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Merger, dated as of February 6, 1997, as amended by Amendment One dated May 29, 1997, by and among Tele-Communications, Inc., TCI Music, Inc., TCI Merger Sub, Inc., and DMX Inc. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 2.2 Agreement and Plan of Merger dated as of August 12, 1997 among TCI Music, Inc., TCI Music Acquisition Sub, Inc. and The Box Worldwide, Inc. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 2.3 Agreement of Merger dated as of December 8, 1997 among TCI Music, Inc., TCI Para Merger Sub, Inc. and Paradigm Music Entertainment Company 3.1 Certificate of Incorporation of TCI Music, Inc. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 3.2 Bylaws of TCI Music, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.1 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (with TCI Rights) (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.2 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (without TCI Rights) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 4.3 Specimen Stock Certificate for the Series B Common Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 33-28613-01)) 4.4 Specimen Stock Certificate for the Series A Convertible Preferred Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
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EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.5 TCI Music, Inc. Certificate of Designations for Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 4.6 Rights Agreement among Tele-Communications, Inc., TCI Music, Inc., and the Bank of New York, as Rights Agent, dated as of July 11, 1997 (Incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997) 4.7 Amendment to Rights Agreement among Tele-Communications, Inc., TCI Music, Inc. and the Bank of New York, as Rights Agent, dated March 18, 1998 10.1 Amended and Restated Contribution Agreement between Tele-Communications, Inc. and TCI Music, Inc. dated July 11, 1997 (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.2 Revolving Loan Agreement between TCI Music, Inc. and Certain Lender Parties Thereto dated December 30, 1997 10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment dated January 27, 1998 10.4 Letter Agreement between TCI Music, Inc. and Tele-Communications, Inc., dated November 7, 1997, extending Promissory Note dated July 11, 1997 (attached as Exhibit A) (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.5 Promissory Note dated July 11, 1997 between TCI Music, Inc. and Tele-Communications, Inc. 10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation 10.7 Services Agreement between Tele-Communications, Inc. and TCI Music, Inc. (Incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997) 10.8 Loan and Security Agreement by and between DMX Inc. and Tele-Communications, Inc., dated as of February 6, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 10.9**** TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.83 to the Transition Report of TCI Music, Inc. on Form 10-K filed with the Securities and Exchange Commission on October 9, 1997) 10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff, dated July 11, 1997 10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel, dated July 11, 1997 10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C. Sparkman, dated July 11, 1997
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.13**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Leo J. Hindery, Jr., dated July 11, 1997 10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R. Bennett, dated July 11, 1997 10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F. Fisher, dated July 11, 1997 10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J. Kern, dated July 11, 1997 10.17**** Form of TCI Music, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.18*** Employment Agreement between DMX Inc. and Lon Troxel, dated October 1, 1991, as amended August 22, 1997 (Incorporated by reference to Exhibit 10.64 to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994, and to Exhibit 10.82 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.19*** Employment Agreement dated January 1, 1996 between Paradigm Music Entertainment Company, Inc. and Thomas McPartland 10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland, Attorney in fact 10.21** Affiliation Agreement between International Cablecasting Technologies Inc. and Satellite Services, Inc., dated July 6 1989 (Incorporated by reference to Exhibit 10.2 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.22** Affiliation Agreement between International Cablecasting Technologies Inc. and Viacom Cable, dated May 4, 1990 (Incorporated by reference to Exhibit 10.3 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.23** Affiliation Agreement between International Cablecasting Technologies Inc. and KBLCOM Incorporated, dated June 20, 1990 (Incorporated by reference to Exhibit 10.4 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.24 National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., Security Agreement and Promissory Note, dated March 26, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No 33-35690)) 10.25** Uplink Services Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated March 16, 1991 (Incorporated by reference to Exhibit 10.15 to DMX Inc.'s Post-Effective Amendment No. 3 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 15, 1991 (Commission File No. 33-35690)) 10.26** License and Distribution Agreement between International Cablecasting Technologies Inc. and Broadcom International Holdings, dated March 31, 1992, as amended (Incorporated by reference to Exhibit 10.34 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
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EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.27 Manufacturing and Sales Agreement between International Cablecasting Technologies Inc. and Scientific- Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.12 to DMX Inc.'s Post- Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No. 33-35690)) 10.28 License and Technical Assistance Agreement between International Cablecasting Technologies Inc. and Scientific-Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No. 33-35690)) 10.29 Development and Licensing Agreement between International Cablecasting Technologies Inc. and Frederikson & Shu Laboratories, Inc., as amended March 29, 1990 (Incorporated by reference to Exhibit 10.8 to DMX Inc.'s Registration on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690)) 10.30 Agreement between GE American Communications, Inc. and International Cablecasting Technologies Inc., dated April 14, 1989 (Incorporated by reference to Exhibit 10.9 to DMX Inc.'s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690)) 10.31 Partnership Agreement between TEMPO Sound, Inc. and Galactic Radio Partners, Inc., dated May 7, 1990 (Incorporated by reference to Exhibit 10.7 to DMX Inc.'s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690)) 10.32 C-3 Satellite Transponder Sub-Lease Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated December 2, 1992 (Incorporated by reference to Exhibit 10.55 to DMX Inc.'s 1993 Report on From 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.33 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated December 2, 1992 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.34 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated January 27, 1993 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.35 Assignment and Assumption Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc. and International Cablecasting Technologies Europe N.V., dated April 22, 1993 (Incorporated by reference to Exhibit 10.58 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.36** Assignment Agreement between IDB Communications Group, Inc. and National Digital Television Center, Inc., formerly known a Western Tele-Communications, Inc., dated January 21, 1993 (Incorporated by reference to Exhibit 10.59 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.37 Agreement between International Cablecasting Technologies Inc. and the American Society of Composers, Authors & Publishers, dated December 20, 1991 (Incorporated by reference to Exhibit 10.60 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.38** Agreement between International Cablecasting Technologies Inc. and Broadcast Music Inc., dated October 11, 1991, as supplemented and amended (Incorporated by reference to Exhibit 10.61 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
50 51
Exhibit Number Description - ------ ----------- 10.39** Agreement between DMX Inc. and SESAC, dated December 26, 1991 (Incorporated by reference to Exhibit 10.62 to DMX Inc.'s 1993 Report on From 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.40 International Cablecasting Technologies Inc. Savings Plan, Amended and Restated Generally Effective as of May 1, 1992 (Incorporated by reference to Exhibit 10.66 to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994) 10.41 Addendum to Affiliation Agreement between KBLCOM and International Cablecasting Technologies Inc., dated May 4, 1994 (Incorporated by reference to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994) 10.42** Affiliation Agreement between DMX Inc. and PRIMESTAR Partners, dated January 25, 1995 (Incorporated by reference to Exhibit 10.71 to DMX Inc.'s 1996 Report on Form 10-K, filed with the Securities and Exchange Commission on January 14, 1997) 10.43 Subscription and Shareholders Agreement between DMX Inc., Jerold H. Rubinstein and XTRA Music Limited, dated December 18, 1996 (Incorporated by reference to Exhibit 10.74 to DMX Inc.'s 1996 Report on Form 10-K, filed with the Securities and Exchange Commission on January 14, 1997) 10.44** Commercial License and Distribution Agreement between DMX Inc. and DMX-Canada Partnership, dated November 1, 1994 (Incorporated by reference to Exhibit 10.75 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.45** Residential License and Distribution Agreement between DMX Inc. and DMX-Canada (1995) Ltd., dated March 9, 1992, as amended April 18, 1997 (Incorporated by reference to Exhibit 10.76 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.46 Channel Distribution Agreement between DMX Inc. and XTRA Music Limited, dated July 3, 1997 (Incorporated by reference to Exhibit 10.77 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.47 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Technology License and Services Agreement, dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.79 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.48 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Trademark Agreement, dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.80 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.49 Assignment Agreement between DMX Inc. and Jerold H. Rubinstein, dated July 8, 1997 (Incorporated by reference to Exhibit 10.81 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.50 License Agreement between Broadcast Music, Inc. and DMX Inc., dated August 7, 1995 (Incorporated by reference to Exhibit 10.55 to the Registration Statement on Form S-1 of TCI Music, Inc., filed with the Securities and Exchange Commission on November 12, 1997)
51 52
Exhibit Number Description - ------ ----------- 10.51 Separation and Mutual Release Agreement between DMX Inc. and Jerold Rubinstein, dated July 11, 1997 (Incorporated by reference to Exhibit 10.53 to the Registration Statement on Form S-4 of TCI Music, Inc., filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.52 Background/Foreground Music Service License Agreement between American Society of Composers, Authors and Publishers and International Cablecasting Technologies Inc., dated April 4, 1995 (Incorporated by reference to Exhibit 10.54 of the Registration Statement on Form S-4 of TCI Music, Inc., filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.53 Service Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and West Interactive Corporation, dated July 31, 1992 (Incorporated by reference to Exhibit 19.18 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1991) 10.54 Lease Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Island Trading Company, Inc., dated April 21, 1994 (Incorporated by reference to Exhibit 10.37 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1994) 10.55 Equipment and Service Agreement between The Box Worldwide, Inc. formerly known as Video Jukebox, Inc., and Hughes Network Systems, Inc., dated February 27, 1996 (Incorporated by reference to Exhibit 10.27 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1996) 10.56 International Representation Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Communications Equity Associates, Inc. dated September 14, 1995 (Incorporated by reference to Exhibit 10.28 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1996) 10.57 Service Affiliate Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Suburban Cable TV Co., Inc., dated August 4, 1997 (Incorporated by reference to Exhibit 10.1 to The Box Worldwide, Inc.'s Report on Form 10-QSB for the quarter ended September 30, 1997) 10.58 Affiliation Agreement between The Box Worldwide, Inc. and Satellite Services, Inc., dated February 27, 1997 21 Subsidiaries of TCI Music, Inc. 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
_____________ * TCI Music, Inc. has requested confidential treatment for a portion of the referenced Exhibit. ** TCI Music, Inc. has received confidential treatment for a portion of the referenced Exhibit. *** Indicated management contract. **** Indicates compensatory plan or arrangement. 52 53 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND JUNE 30, 1997 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 54 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) Index to Consolidated Financial Statements
Page ---- Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Consolidated Financial Statements of TCI Music, Inc. and DMX Inc. (Predecessor): Consolidated Balance Sheets - December 31, 1997 and June 30, 1997 . . . . . . . . . . . . . . . . . . F-3 Consolidated Statements of Operations - Six months ended December 31, 1997 and 1996 (unaudited), nine months ended June 30, 1997 and 1996 (unaudited) and fiscal years ended September 30, 1996 and 1995 . .F-5 Consolidated Statements of Stockholders' Equity (Deficit) - Six months ended December 31, 1997 and 1996 (unaudited), nine months ended June 30, 1997 and fiscal years ended September 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-7 Consolidated Statements of Cash Flows - Six months ended December 31, 1997 and 1996 (unaudited), nine months ended June 30, 1997 and 1996 (unaudited) and years ended September 30, 1996 and 1995 . . . . .F-8 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .F-10
Financial Statement Schedules have not been provided as any required information has been included in the consolidated financial statements and notes thereto or are not required F-1 55 INDEPENDENT AUDITORS' REPORT We have audited the consolidated financial statements of TCI Music, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of TCI Music, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCI Music, Inc. and subsidiaries as of December 31, 1997 and of DMX Inc. and subsidiaries (Predecessor) as of June 30, 1997 and the results of their operations and their cash flows for the six months ended December 31, 1997, nine months ended June 30, 1997 and the years ended September 30, 1996 and 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective July 11, 1997, TCI Music, Inc. acquired all of the outstanding stock of DMX Inc. in a business combination accounted for as a purchase. As a result of the acquisition the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG Peat Marwick LLP Los Angeles, California February 20, 1998 F-2 56 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND JUNE 30, 1997
TCI MUSIC, INC. DMX INC. (NOTE 1) (NOTE 1) -------------------------------------------- ASSETS DECEMBER 31, 1997 JUNE 30, 1997 -------------------------------------------- (AMOUNTS IN THOUSANDS) Current assets: Cash and cash equivalents $ 7,915 664 Cash DMX-Europe N.V. (note 5) -- 168 Trade receivable: Related party (note 6) 2,530 1,482 Other 6,275 3,004 Allowance for doubtful accounts (note 3) (563) (451) ------------------ ---------------- 8,242 4,035 Prepaid expenses and other 2,993 827 Equipment inventory 6,713 492 ------------------ ---------------- Total current assets 25,863 6,186 Investment in equity interests 1,201 558 Property and equipment, net (note 7): Furniture, machinery and equipment 7,024 4,399 Leasehold improvements 543 213 Studio equipment 5,599 3,432 Music library 300 1,047 Computer system 459 571 Software 676 -- ------------------ ---------------- 14,601 9,662 Less accumulated depreciation and amortization (1,113) (5,694) ------------------ ---------------- 13,488 3,968 Property and equipment DMX-Europe N.V., net (note 5) -- 164 Intangible assets, net (note 8) 153,265 -- Other assets 910 110 ------------------ ---------------- TOTAL ASSETS $ 194,727 10,986 ================== ================
See accompanying notes to consolidated financial statements (continued) F-3 57 CONSOLIDATED BALANCE SHEETS, CONTINUED DECEMBER 31, 1997 AND JUNE 30, 1997
TCI MUSIC, INC. DMX INC. (NOTE 1) (NOTE 1) ---------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) DECEMBER 31, 1997 JUNE 30, 1997 ---------------------------------- (AMOUNTS IN THOUSANDS) Current liabilities: Accounts payable $ 4,390 1,815 Accrued liabilities (note 9) 10,561 7,524 Accrued loss on disposal - DMX-Europe N.V. (note 5) 2,827 2,827 Deferred revenue 186 -- Current portion of capital lease obligation (note 10) 27 23 Current portion of debt (note 10) 3,327 -- Income taxes payable, related party (note 13) 1,762 -- --------- --------- 23,080 12,189 Current liabilities DMX-Europe N.V. (note 5): Accounts payable -- 1,014 Accrued liabilities -- 1,525 Investment in and advances to DMX-Europe N.V 9,058 6,591 --------- --------- Total current liabilities DMX-Europe N.V 9,058 9,130 --------- --------- Total current liabilities 32,138 21,319 Other liabilities 2,063 2,082 Related party debt and accrued interest (note 6) 4,359 3,887 Debt (note 10) 53,236 -- Deferred income taxes (note 13) 2,811 -- --------- --------- Total liabilities 94,607 27,288 TCI Music, Inc. redeemable convertible preferred stock, $.01 par value; Authorized 5,000,000 shares; Issued 1,742,484 shares; $39,154 liquidation preference and redemption value 35,588 -- Stockholders' equity (deficit): DMX Inc. common stock, $.01 par value; Authorized 100,000,000 shares; Issued 59,672,224 shares -- 597 TCI Music, Inc. common stock: Series A Common Stock, $.01 par value; Authorized 295,000,000 shares; Issued 18,098,983 shares 181 -- Series B Common Stock, $.01 par value; Authorized 200,000,000 shares; Issued 62,500,000 shares 625 -- Paid-in capital 64,193 136,896 Accumulated deficit (465) (152,787) Foreign currency translation adjustment (2) (430) Treasury stock, 85,630 shares at cost -- (578) --------- --------- Total stockholders' equity (deficit) 64,532 (16,302) --------- --------- Commitments and contingencies (note 12) $ 194,727 10,986 ========= =========
See accompanying notes to consolidated financial statements F-4 58 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
TCI MUSIC, INC. (NOTE 1) DMX INC. (NOTE 1) ----------------- --------------------------------------------------------------- DECEMBER 31, JUNE 30, SEPTEMBER 30, ------------------------------------ -------------------------------------------- 1997 1996 1997 1996 1996 1995 ---------------------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) Subscriber fee revenue - related party (note 6)$ 15,502 4,828 6,907 6,648 9,086 7,696 Subscriber fee revenue - other 5,918 3,949 6,902 5,034 6,973 4,920 Viewer revenue, net 460 -- -- -- -- -- Advertising revenue 365 -- -- -- -- -- Other revenue, net 710 221 565 271 431 157 Revenue - DMX-Europe N.V. (note 5) -- 1,291 2,220 238 836 -- ---------------------------------------------------------------------------------- 22,955 10,289 16,594 12,191 17,326 12,773 Operating expenses: Operating 6,477 5,072 8,178 7,206 9,796 8,667 Selling, general and administrative 7,523 6,990 10,633 10,618 14,373 12,949 Stock compensation (note 11) 294 275 137 412 550 550 Depreciation and amortization 6,317 1,061 1,789 1,302 1,884 1,342 Operating expenses - DMX-Europe N.V. (note 5) -- 6,855 8,489 2,110 5,740 -- Loss on disposal of DMX-Europe N.V. (note 5) -- 7,153 1,738 -- 7,153 -- ---------------------------------------------------------------------------------- 20,611 27,406 30,964 21,648 39,496 23,508 Net operating income (loss) 2,344 (17,117) (14,370) (9,457) (22,170) (10,735)
(continued) F-5 59 CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
TCI MUSIC, INC. (NOTE 1) DMX INC. (NOTE 1) ----------------- ---------------------------------------------------------------- DECEMBER 31, JUNE 30, SEPTEMBER 30, ------------------------------------ ------------------------------------ ------ 1997 1996 1997 1996 1996 1995 ----------------------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) ` Other income (expense): $ Interest income (expense): Related party (385) -- -- -- -- -- DMX-Europe N.V -- (98) (174) (296) (54) -- Other 105 (88) (248) (190) (246) (209) ----------------------------------------------------------------------------------- (280) (186) (422) (486) (300) (209) Share of earnings of affiliates 76 185 203 108 197 307 Loss of DMX-Europe N.V. (note 5) -- -- -- (11,854) (11,854) (13,271) Other, net (223) 74 (119) 547 272 829 ----------------------------------------------------------------------------------- Income (loss) before income taxes 1,917 (17,044) (14,708) (21,142) (33,855) (23,079) Income tax expense 2,382 -- -- -- -- -- ----------------------------------------------------------------------------------- Net loss $ (465) (17,044) (14,708) (21,142) (33,855) (23,079) =================================================================================== Basic and diluted loss per common share $ (0.01) (0.32) (0.25) (0.44) (0.68) (0.60) =================================================================================== Weighted average number of common shares 77,423 53,695 59,587 47,739 49,676 38,585 ===================================================================================
See accompanying notes to consolidated financial statements F-6 60 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) SIX MONTHS ENDED DECEMBER 31, 1997, NINE MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
FOREIGN COMMON STOCK CURRENCY ------------------------- PAID IN ACCUMULATED TREASURY TRANSLATION SERIES A SERIES B CAPITAL DEFICIT STOCK ADJUSTMENT TOTAL -------------------------------------------------------------------------------- DMX INC. (NOTE 1) BALANCE AT SEPTEMBER 30, 1994 $ 363 -- 81,543 (81,145) (578) -- 183 Issuance of common stock 74 -- 17,188 -- -- -- 17,262 Cost of issuance -- -- (70) -- -- -- (70) Accrued compensation (note 11) -- -- 550 -- -- -- 550 Foreign currency translation adjustment -- -- -- -- -- 26 26 Net loss -- -- -- (23,079) -- -- (23,079) -------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1995 437 -- 99,211 (104,224) (578) 26 (5,128) Issuance of common stock 160 -- 37,238 -- -- -- 37,398 Cost of issuance -- -- (240) -- -- -- (240) Accrued compensation (note 11) -- -- 550 -- -- -- 550 Foreign currency translation adjustment -- -- -- -- -- (78) (78) Net loss -- -- -- (33,855) -- -- (33,855) -------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30, 1996 597 -- 136,759 (138,079) (578) (52) (1,353) Accrued compensation (note 11) -- -- 137 -- -- -- 137 Foreign currency translation adjustment -- -- -- -- -- (378) (378) Net loss -- -- -- (14,708) -- -- (14,708) -------------------------------------------------------------------------------- BALANCE AT JUNE 30, 1997 $ 597 -- 136,896 (152,787) (578) (430) (16,302) ==================================================================================================================================== TCI MUSIC, INC. (NOTE 1) Initial capitalization $ 149 625 39,546 -- -- -- 40,320 Recognition of stock compensation -- -- 294 -- -- -- 294 Accretion of put option (note 8) -- -- 2,425 -- -- -- 2,425 Eliminate investment and advances to subsidiary -- -- (252) -- -- -- (252) Issuance of common stock 32 -- 22,304 -- -- -- 22,336 Accretion of redeemable convertible preferred stock -- -- (124) -- -- -- (124) Foreign currency translation adjustment -- -- -- -- -- (2) (2) Net loss -- -- -- (465) -- -- (465) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 181 625 64,193 (465) -- (2) 64,532 ================================================================================
See accompanying notes to consolidated financial statements F-7 61 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
TCI MUSIC, INC. (NOTE 1) DMX INC. (NOTE 1) ---------------------------------------------------------------------------- DECEMBER 31, JUNE 30, SEPTEMBER 30, ---------------------------------------------------------------------------- 1997 1996 1997 1996 1996 1995 ---------------------------------------------------------------------------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net loss $ (465) (17,044) (14,708) (21,142) (33,855) (23,079) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 6,317 1,651 2,462 1,413 2,230 1,342 Share of earnings of affiliates (76) (185) (203) (108) (197) (307) Share of loss of DMX-Europe N.V -- -- -- 11,854 11,854 13,271 Loss on disposal of DMX-Europe N.V -- 7,153 1,738 -- 7,153 -- Loss on disposal of property and equipment -- -- 46 -- -- -- Compensation expense for stock bonus and options 294 275 137 412 550 550 Provision for doubtful accounts 264 985 810 -- 643 700 Changes in operating assets and liabilities net of the effect of acquisitions: (Increase) decrease in prepaid and other current assets (2,166) 70 30 (827) (948) 76 Decrease in advances to DMX-Europe N.V -- -- -- -- -- 490 (Increase) decrease in receivables (390) 1,525 (777) (1,996) (1,078) (715) (Increase) decrease in other assets (619) 13 (42) 65 93 (111) (Decrease) increase in deferred revenue -- (12) 13 (87) (81) (42) Increase in royalty payable -- 87 -- 434 521 538 (Decrease) increase in accounts payable and accrued liabilities (2,298) 4,283 8,823 2,370 4,036 (33) Increase in taxes payable to related party 1,762 -- -- -- -- -- Increase in deferred taxes 620 -- -- -- -- -- ---------------------------------------------------------------------------- Net cash provided by (used in) operating activities $ 3,243 (1,199) (1,671) (7,612) (9,079) (7,320) ----------------------------------------------------------------------------
(continued) F-8 62 CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
TCI MUSIC, INC. (NOTE 1) DMX INC. (NOTE 1) ----------------- ---------------------------------------------------------- DECEMBER 31, JUNE 30, SEPTEMBER 30, ------------------------------------------------------------------------------ 1997 1996 1997 1996 1996 1995 ------------------------------------------------------------------------------ (UNAUDITED) (UNAUDITED) Cash flows from investing activities: Cash paid for acquisitions $(7,567) -- -- -- -- -- Capital expended for property and equipment (1,513) (770) (1,055) (1051) (1,519) (954) Investments in affiliates (50) -- -- -- -- -- Return of capital from affiliates 100 -- 150 150 150 300 Advances to DMX-Europe N.V., net -- -- -- (682) (682) (2,044) Investment in preferred stock of DMX-Europe (UK) Limited -- -- -- (6,440) (6,440) (3,500) Purchase of securities held to maturity -- -- -- -- -- (165) Proceeds of securities held to maturity -- -- -- 165 165 2,279 ------------------------------------------------------------------------------ Net cash used in investing activities (9,030) (770) (905) (7,858) (8,326) (4,084) Cash flows from financing activities: Issuance of common stock, net -- -- -- 10,346 10,346 17,192 Borrowing (repayment) of note payable due to related party (39,527) -- 2,517 -- -- -- Borrowing (repayment) of note payable to bank 53,236 -- -- (45) (45) (240) Repayment of note payable -- -- -- -- -- (182) Repayment of principal portion of capital lease obligation (7) (203) (229) (295) (397) (228) ------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 13,702 (203) 2,288 10,006 9,904 16,542 ------------------------------------------------------------------------------ Net (decrease) increase in cash and cash equivalents 7,915 (2,172) (288) (5,464) (7,501) 5,138 Cash and cash equivalents, beginning of period -- 3,158 1,121 8,622 8,622 3,484 ------------------------------------------------------------------------------ Cash and cash equivalents, end of period$ $ 7,915 986 833 3,158 1,121 8,622 ==============================================================================
See accompanying notes to consolidated financial statements F-9 63 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) ORGANIZATION. TCI Music, Inc. ("TCI Music" or "the Company") was incorporated on January 21, 1997, and on January 24, 1997 one share of TCI Music Series B common stock, $.01 par value per share ("TCI Music Series B Common Stock"), was issued to Tele-Communications, Inc. ("TCI") for a capital contribution of $1. On July 11, 1997, DMX Inc. ("DMX") and TCI Music, consummated a merger pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29, 1997 (the "DMX Merger Agreement"), among DMX, TCI, TCI Music, and TCI Merger Sub ("Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby Merger Sub was merged with and into DMX (the "DMX Merger"), with DMX as the surviving corporation and TCI Music became the successor registrant to DMX. The DMX Merger was deemed effective July 1, 1997 for accounting purposes. See note 4. Effective December 16, 1997, The Box Worldwide, Inc., ("The Box") and TCI Music consummated a merger pursuant to an Agreement and Plan of Merger, dated August 12, 1997 (the "Box Merger Agreement"), among The Box, TCI Music, and TCI Music Acquisition Sub, Inc., a wholly-owned subsidiary of TCI Music, whereby TCI Music Acquisition Sub, Inc. was merged into The Box (the "Box Merger"), with The Box as the surviving Corporation and a wholly-owned subsidiary of TCI Music. See note 4. Effective December 31, 1997, Paradigm Music Entertainment Company ("Paradigm") and TCI Music consummated a merger pursuant to an Agreement and Plan of Merger, dated December 9, 1997 (the "Paradigm Merger Agreement"), among Paradigm, TCI Music and TCI Para Merger Sub, Inc., ("TCI Para Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby TCI Para Merger Sub was merged into Paradigm (the "Paradigm Merger"), with Paradigm the surviving corporation and a wholly-owned subsidiary of TCI Music. See note 4. TCI Music has three classes of stock outstanding at December 31, 1997, the TCI Music Series A Convertible Preferred Stock, $.01 par value per share ("TCI Music Preferred Stock"), TCI Music Series A Common Stock, $.01 par value per share ("TCI Music Series A Common Stock") and TCI Music Series B Common Stock (collectively the "TCI Music Stock"). TCI beneficially owns approximately 5% of the outstanding TCI Music Preferred Stock, 37.77% of the outstanding shares of TCI Music Series A Common Stock and 100% of the outstanding shares of TCI Music Series B Common Stock, which collectively represents approximately 81.1% of the outstanding shares of TCI Music Stock, assuming conversion of the TCI Music Preferred Stock, representing 97.5% of the voting power of the outstanding shares of TCI Music Stock. For the six months ended December 31, 1997, TCI Music's business consisted principally of the business of DMX, which is primarily engaged in programming, distributing and marketing a digital music service; Digital Music Express(R), providing continuous 24-hours-per-day commercial free, compact disc quality music programming. The merger with The Box was effective December 16, 1997 and was accounted for under the purchase method for accounting purposes. Therefore, results from operations of The Box for the 15 days ended December 31, 1997 have been included in the accompanying consolidated financial statements. The Box is primarily engaged in programming, distributing and marketing an interactive music video television programming service known as THE BOX (the Box Service) operating 24 hours-per-day, seven days a week. Additionally, the Paradigm Merger was accounted for under the purchase method of accounting effective December 31, 1997. Paradigm is a broad based music entertainment company utilizing traditional and non-traditional marketing and distribution channels to exploit music entertainment products. PRINCIPLES OF CONSOLIDATION. In the accompanying financial statements and in the following text, references are made to DMX, The Box, Paradigm and TCI Music. The financial statements as of June 30, 1997 and for the six months ended December 31, 1996, the nine months ended June 30, 1997 and 1996 and the years ended September 30, 1996 and 1995 reflect the consolidated results of operations and financial condition of DMX and are referred to as "DMX" (the predecessors' operations). The financial statements as of December 31, 1997 and for the six months then ended reflect the consolidated results of operations F-10 64 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 and financial condition of TCI Music. The accompanying consolidated financial statements include the accounts of the Company and those of all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated for all periods presented. As a result of the DMX Merger, the consolidated financial information for the periods after the DMX Merger is presented on a different cost basis than that for the periods before the DMX Merger and, therefore, is not comparable. Effective July 11, 1997, TCI Music as the successor registrant to DMX, changed its fiscal year end from September 30 to December 31, and reported the nine month transition period ended June 30, 1997 on Form 10-K. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. CASH EQUIVALENTS. Cash equivalents consist of investments which are readily convertible into cash and maturities of three months or less at the time of acquisition. REVENUE RECOGNITION. Subscriber revenue is recognized based upon subscriber levels for affiliate sales and the contract terms for its direct sales. The calculation of subscriber levels for affiliate sales is based on billing and sales information provided by its affiliates. Direct sales revenue is recognized beginning at inception of service ratably over the contract terms. Viewer revenue is recognized when the viewer-requested music video has aired net of estimated, probable denial calls and other billing charges. Advertising revenue is recognized when the commercials have aired. For the six months ended December 31, 1997, approximately, 72% of subscriber fee revenue is derived from services provided to subscribers of TCI and its affiliates. Total subscriber fee revenue from TCI for the six months ended December 31, 1996, the nine months ended June 30, 1997 and 1996 and the fiscal years ended September 30, 1996 and 1995 represented approximately 55%, 50%, 56%, 56% and 61%, respectively, of total subscriber fee revenue. CONCENTRATION OF CREDIT RISK. The Company's accounts receivable balance is comprised primarily of amounts due from cable system operators, with the majority due from its largest customer, TCI, advertisers and telephone company partners. INVENTORY. Inventory consisted of receivers, amplifiers, compact disc players, compact discs, packaging material and finished product and is valued at the lower of cost (determined on a first-in, first-out method) or estimated net realizable value. PROPERTY AND EQUIPMENT. Property and equipment is carried at cost and is depreciated over the estimated useful lives of three to ten years using the straight-line method. Leasehold improvements are carried at cost and are amortized over the shorter of the estimated five-year useful life of the related asset or the term of the lease. INVESTMENTS IN EQUITY INTERESTS. Investments in equity interests consists of investments in companies in which the Company has an equity interest of at least 20% but not more than 50% and are accounted for under the equity method. F-11 65 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 INTANGIBLE ASSETS. Intangible assets primarily consists of the excess cost over the fair value of net assets acquired in the DMX, The Box and Paradigm Mergers and are being amortized over 10 years. (See note 4.) INCOME TAXES. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK OPTIONS. As permitted under the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". As such, compensation expense is recorded on the date of grant when the current market price of the underlying stock exceeded the exercise price and the required pro forma net income (loss) and earnings (loss) per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. FOREIGN CURRENCY TRANSLATION ADJUSTMENT. Unrealized gains and losses resulting from the translation of financial statements are reflected as a separate component of stockholders' equity. EARNINGS (LOSS) PER COMMON AND POTENTIAL COMMON SHARE. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") in February of 1997. SFAS 128 establishes new computation, presentation and disclosure requirements for earnings per share ("EPS"). SFAS 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, etc.) as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted EPS. The Company adopted SFAS 128 as of December 31, 1997 and has restated all prior period EPS data, as required. SFAS 128 did not have a material impact on EPS for any periods presented. See note 11. USE OF ESTIMATES. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the accrual of music rights and royalties, and the disclosures of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 66 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically assesses the recoverability of the carrying amount of long-lived assets, including intangible assets. A loss is recognized when expected future cash flows (undiscounted and without interest) are less than the carrying amount of the asset. The impairment loss is determined as the difference by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are carried at the lower of their financial statement carrying amounts or fair value less costs to sell. FAIR VALUES OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires the Company to disclose estimated fair values for its financial instruments. The carrying amounts of cash, other current assets, trade accounts payable, and accrued expenses and debt approximate fair value because of the short maturity of those instruments and the short term repricing structure of the debt. RECLASSIFICATIONS. Certain reclassifications of prior period amounts have been made to conform to the current year's reporting format. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest was $411,000, $114,000, $247,000 $191,000, $246,000 and $209,000 for the six months ended December 31, 1997 and 1996, nine months ended June 30, 1997 and 1996 and fiscal years ended September 30, 1996 and 1995, respectively. Cash paid for taxes for all periods presented was not material. Significant noncash investing and financing activities are as follows for the period ended December 31, 1997 (in thousands): Cash paid for acquisitions: Fair value of assets acquired $ 34,168 Net liabilities assumed (38,495) Debt issued to related party (40,000) Deferred liability recorded (3,583) Value assigned to affiliation agreements and commercial contracts 8,740 Excess of cost paid over fair value of net assets acquired 144,604 Equity interest of acquired entities (97,867) ---------------- Cash paid for acquisitions $ 7,567 ================ Noncash accretion of put option to purchase shares from a subsidiary (note 4) $ 2,425 ================
F-13 67 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (3) ALLOWANCE FOR DOUBTFUL ACCOUNTS. A summary of the activity of the allowance for doubtful accounts for the six months ended December 31, 1997, nine months ended June 30, 1997 and fiscal years ended September 30, 1996 and 1995 follows (amounts in thousands):
TCI MUSIC, INC. DMX INC. ------------------ ----------------------------------------------- SIX MONTHS NINE MONTHS ENDED ENDED FOR THE YEARS ENDED DECEMBER 31, JUNE 30, SEPTEMBER 30, 1997 1997 1996 1995 -------------------------------------------------------------------- Balance, beginning of period $ 451 251 857 157 Provision for doubtful accounts 264 810 643 700 Accounts charged-off (152) (610) (1,249) -- -------------------------------------------------------------------- Balance, end of period $ 563 451 251 857 ====================================================================
(4) MERGERS AND RELATED TRANSACTIONS. DMX MERGER. In connection with the DMX Merger, TCI and TCI Music entered into a Contribution Agreement dated July 11, 1997, as amended by the Amended and Restated Contribution Agreement (the "Amended Contribution Agreement"). Pursuant to the Amended Contribution Agreement: (i) TCI Music issued to TCI (as designee of certain of its indirect subsidiaries), 62,500,000 shares of TCI Music Series B Common Stock, and a promissory note in the amount of $40 million, (ii) TCI is required to deliver, or cause certain of its subsidiaries to deliver to TCI Music monthly payments aggregating $18 million annually, adjusted annually through 2017 (the "Annual TCI Payments"), which represent revenue of certain subsidiaries of TCI that is attributable to the distribution and sale of the DMX service to certain cable subscribers who receive the DMX Service (net of an amount equal to 10% of such revenue derived from residential customers and license fees otherwise payable to DMX pursuant to the Affiliation Agreement); and compensation to TCI Music and DMX for various other rights; (iii) TCI contributed to TCI Music certain digital commercial tuners that are not in service, and (iv) TCI granted to each stockholder of DMX who became a stockholder of TCI Music pursuant to the DMX Merger, one right (a "TCI Right") with respect to each whole share of TCI Music Series A Common Stock, acquired by such stockholder in the DMX Merger pursuant to the terms of the Rights Agreement among TCI, TCI Music and the Bank of New York to require TCI to purchase from such holder one share of TCI Music Series A Common Stock at a purchase price of $8.00 per share payable at the election of TCI, in cash, a number of shares of Tele-Communications, Inc. TCI Group Series A Common Stock, having an equivalent value or a combination thereof, if during the one-year period beginning on July 11, 1997, the effective date of the DMX Merger, the price of TCI Music Series A Common Stock does not equal or exceed $8.00 per share for a period of at least 20 consecutive trading days. Upon consummation of the DMX Merger, each outstanding share of DMX Common Stock was converted into the right to receive (i) one-quarter of a share of TCI Music Series A Common Stock, (ii) one TCI Right with respect to each whole share of TCI Music Series A Common Stock and (iii) cash in lieu of fractional shares of TCI Music Series A Common Stock and TCI Rights. Until the TCI Rights expire or are exercised, the TCI Rights are evidenced by a legend on the certificates for shares of TCI Music Series A Common Stock issued in the DMX Merger. Accordingly, the TCI Rights associated with the shares of TCI Music Series A Common Stock are represented solely by, and are not separable from, such shares of TCI Music Series A Common Stock, and the surrender or transfer of any such certificate for shares of TCI Music Series A Common Stock will also constitute the surrender or transfer of the TCI Rights F-14 68 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 associated with the TCI Music Series A Common Stock represented by such certificate. The DMX Merger was effective July 1, 1997 and was accounted for under the purchase method of accounting. The estimated aggregate fair value of the TCI Music Series A Common Stock and associated TCI Rights (the "DMX Merger Consideration") issued to entities not controlled by TCI ("Unaffiliated Stockholders") and the carryover basis of the DMX Merger Consideration issued to entities controlled by TCI aggregated approximately $73.9 million. The Company performed an allocation of the purchase price to excess cost over the fair value of net assets acquired as the net book values of DMX assets and liabilities were estimated to approximate their respective fair values and affiliate agreements of commercial contracts. The number of shares of TCI Music Series A Common Stock and TCI Rights issued were based upon DMX Common Stock ownership as of June 30, 1997. The estimated fair value of the DMX Merger Consideration issued to Unaffiliated Stockholders is being accreted to the value of $8.00 per share (the equivalent of $2.00 per share of DMX Common Stock), subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders during the one-year period beginning on the effective date of the DMX Merger. Such accretion is reflected as an increase in excess cost with a corresponding increase to additional paid-in capital. Additional information concerning the valuation of the TCI Music Series A Common Stock is set forth below (dollar amounts in thousands): Shares issued to TCI, valued at carryover basis at June 30, 1997 (6,812,393 shares) $ 14,087 Shares issued to others, valued at estimated fair value of $7.40 per share (8,084,255 shares) 59,824 --------------- Total value assigned to TCI Music Series A Common Stock 73,911 DMX Merger costs incurred by TCI Music 1,397 Elimination of DMX historical stockholders' deficit at June 30, 1997 16,302 Increase in deferred income tax liability resulting from purchase price allocation 3,583 Affiliation agreements and commercial contracts (8,740) ---------------- Excess of cost over fair value of net assets acquired $ 86,453 ===============
F-15 69 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The following table represents the summary balance sheet of DMX at June 30, 1997 prior to the consummation of the DMX Merger and the opening summary balance sheet of TCI Music subsequent to the consummation of the DMX Merger (amounts in thousands):
TCI MUSIC DMX -------------------- -------------------- Assets ------ Current assets $ 5,694 6,186 Property and equipment, net 4,132 4,132 Other assets 101,953 668 ------------------- ------------------- $ 111,779 10,986 =================== =================== Liabilities and Equity ---------------------- Current liabilities $ 24,422 21,296 Capital lease obligation 23 23 Other liabilities 3,127 2,082 Due to related party 43,887 3,887 ------------------- ------------------- Total liabilities 71,459 27,288 Equity (deficit) 40,320 (16,302) ------------------- ------------------- $ 111,779 10,986 =================== ===================
THE BOX MERGER. In connection with the Box Merger, TCI Music, TCI Music Acquisition Sub, Inc., a Florida corporation and a wholly-owned subsidiary of TCI Music ("Acquisition Sub"), and The Box, entered into the "Box Merger Agreement". Pursuant to the Box Merger Agreement, 24,892,623 outstanding shares of common stock of The Box were converted into the right to receive a fraction of a share of TCI Music Preferred Stock, equal to the quotient of $1.50 divided by three times the average of the average daily closing bid and asked prices of one share of TCI Music Series A Common Stock trading with an associated TCI Right for a period of 20 consecutive trading days ending on the third trading day prior to the closing of the Box Merger as reported on the Nasdaq SmallCap Market and cash in lieu of fractional shares of TCI Music Series A Preferred Stock. Each share of TCI Music Preferred Stock is convertible at the option of the holder into three shares of TCI Music Series A Common Stock without associated TCI Rights, subject to certain antidilution adjustments and certain adjustments for dividends and distributions, if any. Each share of TCI Music Preferred Stock is entitled to vote on all matters submitted to a vote of the holders of the TCI Music Series A Common Stock and to the number of votes equal to the number of shares of TCI Music Series A Common Stock into which such share is convertible as of the record date for the matter to be voted upon. The Box's 6% Convertible Redeemable Preferred Stock, par value $.15 per share and stated value of $1.50 per share ("Box Preferred Stock"), was purchased by the Company for $2,652,466. Each share of TCI Music Series A Common Stock currently outstanding trades together with an associated TCI Right issued in connection with the DMX Merger. The TCI Rights will terminate or expire on or before August 10, 1998 unless extended by their terms. The shares of TCI Music Series A Common Stock into which the TCI Music Preferred Stock is convertible do not have any such associated TCI Rights, and if a holder of TCI Music Preferred Stock converts shares into TCI Music Series A Common Stock prior to the termination or expiration of the TCI Rights, the TCI Music Series A Common Stock without the TCI Rights received upon conversion will not be tradable on the Nasdaq SmallCap Market under the Symbol "TUNE" with the TCI Music Series A Common Stock that includes the TCI Rights until such TCI Rights terminate or expire. F-16 70 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The Box Merger was effective December 16, 1997 and was accounted for under the purchase method of accounting. Accordingly, the results of operations for The Box have been included in the accompanying consolidated financial statements for the fifteen day period ended December 31, 1997. The estimated aggregate fair value of the TCI Music Preferred Stock (the Box Merger Consideration) issued to Unaffiliated Stockholders and the carryover basis of the Box Merger Consideration issued to entities controlled by TCI aggregated approximately $35.5 million. The Company has performed a preliminary allocation of the purchase price to excess cost over the fair value of net assets acquired as the net book values of The Box's assets and liabilities were estimated to approximate their respective fair values, and is awaiting information and evaluation at which point it will finalize such allocation. The number of shares issued was based upon Box Common Stock ownership as of December 15, 1997. Excess cost is being amortized over ten years. Additional information concerning the valuation of the TCI Music Preferred Stock is set forth below (dollar amounts in thousands): Shares issued to TCI, valued at carryover basis at December 16, 1997 (84,242 shares) $ 790 Shares issued to others, valued at estimated fair value (without the TCI Right upon conversion) of $20.91 per share (1,658,242 shares) 34,674 --------------- Total value assigned to TCI Music Preferred Stock 35,464 Merger costs incurred by TCI Music 345 Elimination of The Box historical stockholders' equity at December 16, 1997 (6,897) --------------- Excess of cost over fair value of net assets acquired $ 28,912 ===============
PARADIGM MERGER. In connection with the Paradigm Merger, TCI Music, TCI Para Merger Sub, a wholly-owned subsidiary of TCI Music ("Merger Corp. "), and Paradigm, entered into the Paradigm Merger Agreement. Pursuant to the Paradigm Merger Agreement, all the outstanding shares of common stock of Paradigm ("Paradigm Common Stock") were converted into a number of shares of TCI Music Series A Common Stock determined by dividing $24,000,000 by the average of the average daily closing bid and asked prices of one share of TCI Music Series A Common Stock trading with an associated TCI Right, for a period of 20 consecutive trading days ending on the third day prior to the closing of the Paradigm Merger, as reported on the Nasdaq SmallCap Market and cash in lieu of fractional shares. The shares of TCI Music Series A Common Stock issued in the Paradigm Merger do not have the associated TCI Rights attached and are not tradable on the Nasdaq SmallCap Market under the symbol "TUNE" until such TCI Rights expire or terminate. Additionally, under the terms of the Paradigm Merger Agreement TCI Music made a cash payment of approximately $5,332,000 to Paradigm for working capital needs and payment of Paradigm debt. The Paradigm Merger was effective December 31, 1997 and was accounted for under the purchase method of accounting. Accordingly, the results of operations for Paradigm have been included in the accompanying consolidated financial statements for the one day period ended December 31, 1997. The estimated aggregate fair value of the TCI Music Series A Common Stock issued in the Paradigm Merger equaled approximately $22.3 million and has been allocated to excess cost over fair value of net assets acquired as the net book values of Paradigm's assets and liabilities were estimated to approximate their respective fair values. The number of shares issued was based upon Paradigm's Common Stock ownership as of December 30, 1997. Additional information concerning the assumed valuation of the TCI Music Series A Common Stock is set forth below (dollar amounts in thousands): F-17 71 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997
TCI Music Series A Common Stock issued at estimated fair value (without the TCI Right) of $6.97 per share (3,204,532 shares) $ 22,336 Cash payment at closing 5,332 Merger costs incurred by TCI Music 137 Paradigm's historical stockholders' deficit at December 31, 1997 1,434 --------------- Excess of cost over fair value of net assets acquired $ 29,239 ===============
The following unaudited pro forma summarized operating results of the Company assuming the DMX Merger, the Box Merger and Paradigm Merger had been consummated on October 1, 1996, and after giving effect to certain adjustments, including amortization of intangibles, increased interest expense on debt related to the acquisition are as follows (amounts in thousands):
SIX MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, 1997 JUNE 30, 1997 ----------------- ----------------- Revenue $ 44,516 44,190 ================= ================= Net loss $ (13,960) (18,328) ================= ================== Pro forma net loss per common share $ (0.18) (0.24) ================= =================
The foregoing unaudited pro forma information is based upon historical results of operations and is not necessarily indicative of the results that would have been obtained had the DMX, The Box and Paradigm mergers actually occurred on October 1, 1996. (5) INVESTMENT IN AND DISPOSITION OF DMX-EUROPE N.V. AND SUBSIDIARY. On May 17, 1996, DMX consummated the merger of TCI-Euromusic, Inc. ("TCI-E"), an indirect affiliate of TCI ("the TCI-E Merger") pursuant to the terms of the Agreement and Plan of Merger, dated August 28, 1995, as amended on November 1, 1995 and January 17, 1996 among DMX, TCI-E and United Artists Programming International, Inc. ("UAPI"), an indirect affiliate of TCI and owner of the outstanding shares of TCI-E. As a result of the TCI-E Merger, DMX acquired the remaining 49% interest in DMX-Europe N.V. ("DMX-E NV") and its subsidiary DMX-Europe (UK) Limited ("DMX-E UK"), collectively ("DMX-E"). DMX-E ceased operation on July 1, 1997. As DMX-E UK was placed into receivership on July 1, 1997 and into liquidation on July 18, 1997, the Company no longer has control over operations and activities. Accordingly the accompanying balance sheets give effect to the deconsolidation of DMX-E UK as of December 31, 1997 and June 30, 1997. DMX-E NV, although inactive since July 1, 1997, was placed into receivership on December 23, 1997. Accordingly, the accompanying balance sheet as of December 31, 1997 gives effect to the deconsolidation of DMX-E. As a result of the DMX-E cessation of operations, the Subscription and Shareholder Agreement dated December 18, 1996 (the "Definitive Agreement") between DMX; Mr. Jerold H. Rubinstein, an individual; and XTRA Music Limited, a corporation under laws of England ("XTRA") was put into place pursuant to which a termination certificate was executed in July 1997, terminating the Stock Purchase Agreement dated December 18, 1996 that provided for the disposition of DMX-E to Mr. Jerold H. Rubinstein. Pursuant to the Definitive Agreement, DMX obtained a 10% interest in XTRA and a channel distribution agreement was executed between XTRA and DMX (the "Channel Distribution Agreement"). The Channel Distribution Agreement provides XTRA an exclusive, five-year, royalty-free license to distribute the DMX F-18 72 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 music service in Europe, the former Soviet Union and in the Middle East and the right to use DMX's trademarks for two years. The music service is currently not being distributed by XTRA as Mr. Jerold H. Rubinstein is seeking financial partners. The Company has accounted for the effects of the loss on disposal of DMX-E and has estimated the loss on the disposal of DMX-E in the consolidated statements of operations. The loss on disposal of DMX-Europe N.V. reflected a write down of the assets to their estimated net realizable value at June 30, 1997. The loss on disposal for 1996 was estimated as the net investment of $5,720,000 and the incurrence of certain potential liabilities of $1,469,000 in conjunction with such disposal activities. (6) RELATED PARTY TRANSACTIONS. Pursuant to an Amended and Restated Contribution Agreement between TCI and TCI Music to be effective as of July 1, 1997 (the "Amended Contribution Agreement") TCI is required to deliver, or cause certain of its subsidiaries to deliver to TCI Music monthly payments aggregating $18 million annually, adjusted annually through 2017 (the "Annual TCI Payments"). Pursuant to the Amended Contribution Agreement, the Annual TCI payments will represent (i) revenue of certain subsidiaries of TCI that is attributable to the distribution and sale of the DMX service to certain cable subscribers (net of an amount equal to 10% of such revenue derived from residential customers and license fees otherwise payable to DMX pursuant to the Affiliation Agreement) and (ii) compensation to TCI Music and DMX for various other rights. During the six months ended December 31, 1997, TCI Music recognized $9.9 million pursuant to the Amended Contribution Agreement. Pursuant to an affiliation agreement (the "Affiliation Agreement") between Satellite Services, Inc., a wholly-owned subsidiary of TCI ("SSI") and DMX, effective as of July 1, 1997, SSI has the non-exclusive right to distribute and subdistribute the DMX Service to commercial and residential customers for a 10-year period in exchange for licensing fees paid by SSI to DMX. Under the Affiliation Agreement, SSI will pay an annual fee to DMX of $8,500,000 for the initial three years, subject to adjustment annually (beginning July 1, 1998) by the percentage change in the CPI for the prior year and for changes in the number of subscribers, a result of divestiture or acquisition of cable systems. During the fourth through tenth years of the term of the Affiliation Agreement, the annual fee will be further adjusted on a monthly basis upward or downward, as the case may be, based on an increasing percentage of the increase in actual number of subscribers above or below a specified number of residential and commercial subscribers, provided that such fees cannot be reduced below a specified minimum license fee, which minimum fee is decreased each year in years four through ten. See note 13 for the intercompany tax allocation policy. On February 6, 1997 the Company entered into a loan and security agreement with TCI which provided $3.5 million. The loan proceeds were used to purchase equipment and pay certain costs related to obtaining commercial customers. The outstanding balance at December 31, 1997 was $3.1 million which was payable in 34 equal monthly installments which commenced September 1, 1997 at an interest rate of 12.5% per annum. Interest expense for the six months ended December 31, 1997 was $207,000. The loan was paid in full on March 2, 1998. On July 11, 1997 in connection with the DMX Merger, the Company entered into a $2 million revolving credit note with TCI Communications, Inc., a subsidiary of TCI, and pursuant to the Amended Contribution Agreement entered into a $40 million promissory note with TCI. The interest rate on the notes was 10% per annum. On December 30, 1997, the Company paid in full $900,000 drawn under the $2 million revolving credit note and related accrued interest of $42,000 and the $40 million note. The accrued interest on the $40 million note of $1.9 million was forgiven pursuant to the terms of the note agreement. F-19 73 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 On September 19, 1997, the Company entered into a $2.18 million note payable with Liberty Media Corporation, a wholly owned subsidiary of TCI ("Liberty"). The proceeds were issued to Paradigm as a note receivable pursuant to the letter of intent in contemplation of the Paradigm Merger. See note 4. Interest on the note was 10% per annum. The Company paid in full the principal and related accrued interest of $62,000 on December 30, 1997. On December 16, 1997 the Company entered into a $3.75 million note payable with Liberty Media Corporation. The proceeds were used to purchase the outstanding preferred stock of The Box in connection with the Box Merger. The Company paid in full the principal and related accrued interest of $15,000 on December 30, 1997. The Company has an equipment lease with the National Digital Television Center, Inc. ("NDTC"), a subsidiary of TCI, for the equipment at the studio and uplinking facility in Littleton, Colorado. The outstanding balance of the capital lease obligation at December 31, 1997 was approximately $1.2 million with terms that extend through the year 2000, at an interest rate of 9.5%. Total interest expense for the six months ended December 31, 1997 was $59,000. The related studio equipment had a net book value of approximately $728,000 at December 31, 1997 and is included in Property and Equipment, in the accompanying consolidated balance sheets. Additionally the Company leases certain office space and uplinking and satellite services from the NDTC. (see note 12) The components of related party debt at December 31, 1997 and June 30, 1997 were as follows (amounts in thousands):
PRINCIPAL INTEREST TOTAL --------- --------- ----- December 31, 1997 ----------------- $3.5 million equipment loan $ 3,117 32 3,149 Capital lease obligation 1,171 39 1,210 -------------- ------------ --------------- $ 4,288 71 4,359 ============== ============ =============== June 30, 1997 ------------- $3.5 million equipment loan $ 2,420 97 2,517 Capital lease obligation 1,370 -- 1,370 -------------- ------------ --------------- $ 3,790 97 3,887 ============== ============ ===============
(7) PROPERTY AND EQUIPMENT. At December 31, 1997, studio equipment with a net book value of $728,000 was held under a capital lease and was included in the balance of furniture, machinery and equipment. Studio equipment with a net book value of $137,000, net of accumulated depreciation of $583,000 was leased to DMX-E for a monthly fee of approximately $23,000, and was written off at June 30, 1997. Lease income related to leased equipment to DMX-E for the period from October 1, 1995 through May 17, 1996, and the fiscal year ended September 30, 1995 was approximately $172,000 and $245,000, respectively, and was included in other income. For the nine months ended June 30, 1997 and the period from May 18, 1996 through September 30, 1996, the lease income of approximately $160,000 and $103,000, respectively, was eliminated in consolidation. F-20 74 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (8) INTANGIBLE ASSETS. The balance of intangible assets as of December 31, 1997 principally consists of the excess of cost over the fair value of the net assets acquired in the DMX, The Box and Paradigm acquisitions (see note 4). Such intangibles are being amortized over a 10 year period. The balance at December 31, 1997 is comprised of the following items (amounts in thousands): DMX Merger: Affiliation agreements and Commercial contracts $ 8,740 Excess of cost over fair value of net assets acquired 86,453 Utilization of net operating loss (see note 13) (1,393) Accretion of put option for the six months ended December 31, 1997 (see note 4) 2,425 Box Merger: Excess cost over fair value of net assets acquired 28,912 Launch incentive fee, net 1,225 Purchase of Box preferred shares 210 Other 575 Paradigm Merger: Excess cost over fair value of net assets acquired 29,239 Other 1,822 Accumulated amortization as of December 31, 1997 (4,943) --------------- Intangible assets, net $ 153,265 ===============
(9) ACCRUED LIABILITIES. Accrued liabilities as of December 31, 1997 and June 30, 1997 were comprised of the following (amounts in thousands):
TCI MUSIC, INC. DMX INC. DECEMBER 31, JUNE 30, 1997 1997 --------------------------------------- Accrued music right royalties $ 3,827 2,920 Accrued marketing credits -- 2,305 Other accrued expenses 6,734 2,299 ------------------ ----- $ 10,561 7,524 ================== =====
F-21 75 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (10) DEBT AND OTHER PAYABLES. On December 30, 1997 the Company entered into a revolving loan agreement (the Revolving Loan Agreement) with several banks which provides for borrowings up to $100 million. Interest on borrowings under the agreement is tied to London Interbank Offered Rate ("LIBOR"), plus an applicable margin dependent upon the Company's leverage ratio, as defined, for the preceding quarter or at the banks base rate. The first advance of $53.2 million was used to payoff related party debt and amounts paid in connection with the close of the Paradigm Merger (see notes 4 and 6). The Revolving Loan Agreement matures on June 30, 2005 with principal, reductions beginning semi-annually on June 30, 2000 based on a scheduled percentage of the total commitment. A commitment fee is charged on the unborrowed portion of the Revolving Loan Agreement commitment ranging from .25% to .375% based upon the leverage ratio for the preceding quarter. The balance of outstanding draws at March 2, 1998 was $72 million bearing interest at 30 day LIBOR plus .7% or average rate of 6.4%. In connection with the Paradigm Merger, the Company assumed debt consisting of two bridge loans and a note payable to an individual. As of December 31, 1997 the balance outstanding on the bridge loans was $2,944,900 and accrued interest of $256,600. The notes bear interest at 10% per annum and were paid in full, including accrued interest, in January 1998. The note payable to an individual bears interest at prime with $25,000 due April 1, 1998 and the remaining balance is being paid monthly through August 15, 1998. The following debt payment schedules includes related party debt and capital lease (see note 6) and the third party debt described above as of December 31, 1997 (amounts in thousands):
THIRD RELATED PARTY PARTY TOTAL ------------------------------------------------------ 1998 $ 1,626 3,354 4,980 1999 1,750 -- 1,750 2000 912 1,597 2,509 2001 -- 5,324 5,324 2002 -- 9,425 9,425 Thereafter -- 36,890 36,890 ---------------- ------ ------ $ 4,288 56,590 60,878 ================ ====== ======
The fair market value of TCI Music's debt approximated its carrying value at December 31, 1997. F-22 76 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (11) STOCKHOLDERS' EQUITY (DEFICIT). STOCK OPTIONS. Upon consummation of the DMX Merger, the Company granted options to the board of directors to purchase 3,000,002 shares of TCI Music Series A Common Stock at a price of $6.25 per share. The options vest in 20% cumulative increments, with the first increment vested on the effective day of the DMX Merger, and each additional increment vesting on the anniversary date. The options will be exercisable for up to ten years with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. Additionally, the Company granted options to employees to purchase 496,800 shares of TCI Music Series A Common Stock at a price of $6.25 per share under the TCI Music, Inc. 1997 Stock Incentive Plan which is authorized to issue up to 4,000,000 shares. The options will vest annually in 20% cumulative increments beginning on the first anniversary date of the DMX Merger. The options will be exercisable for up to ten years with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. Upon consummation of the Box Merger, the Company granted options to employees under the TCI Music, Inc. 1997 Stock Incentive Plan to purchase 92,060 shares of TCI Music Series A Common Stock at $6.25 per share. The vesting schedules vary with expirations ranging between April 1, 1998 and March 31, 2002 with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. Two former employees were granted options under no plan, to purchase 9,630 shares of TCI Music Series A Common Stock each at $6.25 per share. These options vested on the effective day of the Box Merger and expire on December 31, 1998 with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. A former employee was granted options to purchase 1,400 shares of TCI Music Preferred Stock at an exercise price of $18.75 per share. The options vested on the effective day of the Box Merger and expire on March 16, 1998. The Company issued awards of stock options to directors and employees and recorded compensation of $294,000 pursuant to APB Opinion No. 25 for the six months ended December 31, 1997. Had the Company determined compensation expense under SFAS No. 123 by calculating the fair value at the grant date using the Black-Scholes option-pricing model, the Company's net loss and loss per share would have been increased to the pro forma amount for the six months ended December 31, 1997: Net loss (dollar amounts in thousands) As reported $ (465) Pro forma $ (2,884) Net loss per share As reported $ (0.01) Pro forma $ (0.04) Weighted average common stock outstanding 77,423,352
The following assumptions were used in arriving at the estimated pro forma net loss: 6.10% weighted average risk-free interest rate; 60 month weighted average expected life; 50% weighted average expected volatility and the weighted average expected individual yield was zero. The weighted average fair value of the options granted during the period was $3.31. At December 31, 1997 the number of exercisable options were 705,588. The weighted average remaining contractual life for outstanding options at December 31, 1997 was 9.3 years. F-23 77 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 At June 30, 1997, options to purchase 3,584,583 shares were exercisable at prices ranging from $2.063 to $6.25 per share and include accelerated options to purchase 400,000 shares that were exercisable prior to the DMX Merger, July 11, 1997. By terms of the DMX Inc. 1993 Stock Option Plan, options issued, outstanding and unexercised were terminated upon consummation of the DMX Merger. Exercisable options held by officers and directors of DMX at June 30, 1997 totaled 3,373,333. DMX had issued options to purchase DMX Common Stock to certain directors, officers and employees under various stock option plans. The option prices represent fair market values at the date of grant. Transactions in stock options under these plans are summarized as follows:
SHARES OPTION PRICE ---------- ------------------------------------------------- Outstanding options at September 30, 1995 4,395,833 $1.95 - $6.25 per share, expiring on various dates, December 31, 1996 to July 1, 2006 Options issued 100,000 $2.563 per share Options expired and canceled $2.563 - $4.180 per share (230,000) Options exercised $1.95 per share (150,000) ---------- Outstanding options at September 30, 1996 4,115,833 $1.95 - $6.25 per share, expiring on various dates, December 31, 1996 to July 1, 2006 Options expired $1.95 - $5.75 per share (531,250) ---------- Outstanding options at June 30, 1997 3,584,583 $2.063 - $6.25 per share, expiring on various ========== dates, June 30, 1998 to July 1, 2006
The per share fair value of stock options granted during the years ended September 30, 1996 and 1995 ranged from $1.69 to $2.69 on the date of grant using the Black-Scholes option-pricing model. There were no options granted during the nine months ended June 30, 1997. DMX applies APB Opinion No. 25 in accounting for its Plans and accordingly, no compensation cost was recognized to the extent the exercise price of the stock options equaled the fair value. Had DMX determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, DMX's net loss and loss per share would have been increased to the pro forma amounts indicated below (dollar amounts in thousands, except per share data):
NINE MONTHS ENDED YEAR ENDED JUNE 30, SEPTEMBER 30, 1997 1996 1995 ------------------------------------------------------ Net loss: As reported $ (14,708) (33,855) (23,079) Pro forma (15,216) (34,363) (23,575) Net loss per share: As reported (0.25) (0.68) (0.60) Pro forma (0.26) (0.69) (0.61) Weighted average common stock and potential common stock outstanding 59,586,594 49,675,569 38,505,107
F-24 78 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 Pro forma net income reflects only options granted during the years ended September 30, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. Stock bonus expense included in stock compensation in the accompanying financial statements of $137,427 for the nine months ended June 30, 1997 and $549,708 of compensation for each of the years ended September 30, 1996 and 1995, related to the 1992 extension of the exercise date of an option issued in October 1990. The exercise date was extended from 1993 to December 31, 1996 and represented an option to purchase 350,000 shares of common stock granted to Jerold H. Rubinstein, the former Chairman and Chief Executive Officer of DMX. During the fiscal year ended September 30, 1996, options to purchase 150,000 shares were exercised and at December 31, 1996 the remaining options to purchase 200,000 shares expired. CAPITAL STOCK. The Company has the authority to issue 500 million shares of Capital Stock consisting of (i) 295 million shares of TCI Music Series A Common Stock; (ii) 200 million shares of TCI Music Series B Common Stock; and (iii) 5 million shares of TCI Music preferred stock. The TCI Music Series A Common Stock and TCI Music Series B Common Stock are identical except for voting and conversion rights. Each share of TCI Music Series A Common Stock entitles the holder to one vote and each share of TCI Music Series B Common Stock entitles the holder to ten votes. Each share of TCI Music Series B Common Stock is convertible, at the option of the holder, at any time into one share of TCI Music Series A Common Stock. The TCI Music Series A Common Stock is not convertible into TCI Music Series B Common Stock. REDEEMABLE PREFERRED STOCK. The TCI Music preferred stock may be divided and issued in one or more series from time to time as determined by the board of directors of TCI Music, without further shareholder approval. As of December 31, 1997, the board of directors of TCI Music has authorized the issuance of 2,250,000 shares of TCI Music Preferred Stock in connection with the Box Merger. The TCI Music Preferred Stock may be converted by the holder at any time in whole or in part into shares of TCI Music Series A Common Stock at the conversion rate of three shares of TCI Music Series A Common Stock for one share of TCI Music Preferred Stock, subject to certain adjustments for antidilution, dividends and distributions, as defined. Subject to the rights of holders of senior securities and to any restrictions set forth in any security or debt instrument, the holders of TCI Music Preferred Stock will be entitled to receive cash dividends on each share of TCI Music Preferred Stock in amount equal to the product of (i) the amount of the cash dividend declared on one share of TCI Music Series A Common Stock or any other security into which the shares of TCI Music Preferred Stock are then convertible and (ii) the number of shares of TCI Music Series A Common Stock or other security into which one share of TCI Music Preferred Stock may be converted as of the date such dividend is declared. Such dividends shall be payable to holders of TCI Music Preferred Stock only if, and when the board of directors of TCI Music declares cash dividends on TCI Music Series A Common Stock. If TCI Music is prohibited from paying the full dividends which have been declared to holders of TCI Music Preferred Stock, the amount that is available will be distributed among the holders of TCI Music Preferred Stock ratably in proportion to the full amounts to which they would otherwise be entitled. Each share of TCI Music Preferred Stock is entitled to vote on all matters submitted to a vote of the holders of TCI Music Series A Common Stock and the number of votes equal to the number of shares of TCI Music Series A Common Stock into which such shares are convertible as of the record date in the matters to be voted upon. F-25 79 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 Upon any liquidation, dissolution or winding up (or deemed liquidation by virtue of a change in control or a sale of all or substantially all of the assets of TCI Music) of TCI Music subject to the prior payment in full of amounts to which any senior securities are entitled, holders of TCI Music Preferred Stock are entitled only to the liquidation value of their shares to be paid pari passu with payments to holders of parity securities. The liquidation value of TCI Music Preferred Stock at December 31, 1997 is equal to $39.2 million, to be increased each year by the greater of (i) the percentage increase in the CPI over the prior year (but not to exceed 5%) or (ii) 3%. The Company may, at its option, redeem, at the liquidation value, all or part of the shares of TCI Music Preferred Stock ratably among the holders of such shares by giving written notice to such holders (i) during the 30 day periods immediately following the fourth, sixth and eighth anniversaries of the issue date of the TCI Music Series A Preferred Stock, (ii) at any time after the closing price of the TCI Music Series A Common Stock exceeds 125% of the purchase price benchmark for a period of at least 30 consecutive business days and (iii) at any time after the tenth anniversary of the issue date. Holders of TCI Music Preferred Stock may require TCI Music to redeem, at the liquidation value, all or part of their shares any time after the tenth anniversary of the issue date by giving written notice to TCI Music stating the number of shares such holder elects to redeem. If there are insufficient funds available for redemption purposes, all available funds will be used to redeem the maximum possible number of shares ratably among those holders requiring shares to be redeemed, including shares of parity securities required to be redeemed. As of December 31, 1997, the Company has recorded approximately $124,000 for the accretion to the liquidation value of the TCI Music Preferred Stock using the effective interest method over a ten year period at a 3% effective rate. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE. Basic and diluted loss per share was calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the periods presented. Potential common shares, consisting of TCI Music Preferred Stock convertible into TCI Music Series A Common Stock, and employee stock options were not included in the computation of weighted average shares outstanding for diluted loss per share because their inclusion would be anti-dilutive. Dilutive securities and stock options at December 31, 1997 and 1996 were 3,602,592 and 3,659,583, respectively; at June 30, 1997 were 3,584,583; and at September 30, 1996 and 1995 were 4,115,833 and 4,395,833, respectively. (12) COMMITMENTS AND CONTINGENCIES. VENDOR COMMITMENTS. DMX and Scientific-Atlanta, Inc. ("S-A"), had an agreement with respect to the manufacture, distribution and servicing of the DM-2000 tuners and DMX*DJ's. DMX was not obligated to purchase or guarantee the purchase of any minimum number of tuners or DMX*DJ's, and S-A was the exclusive tuner manufacturer in the United States and Canada and earned a royalty of approximately five percent (5%) of DMX's premium audio service revenues until August 1996. No payments are required until DMX achieves "operating breakeven", as defined in the agreement. ACCRUED MUSIC RIGHT ROYALTIES. DMX licenses rights to re-record and distribute music from a variety of sources and pays royalties to songwriters and publishers through contracts negotiated with performing rights societies such as the American Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and the Society of European Stage Authors and Composers F-26 80 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 ("SESAC"). DMX has separate agreements with ASCAP, BMI and SESAC for residential and commercial distribution. Certain of the agreements are being negotiated on an industrywide basis mainly over new rate structures that may require retroactive rate increases. DMX has continued to accrue royalties that are under negotiations based on its best estimate, after consultation with counsel and consideration of the terms and rates of the expired contracts. The Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act") was signed into law on November 1, 1995. The 1995 Act establishes the right of owners of the performance rights, such as the performers and record companies, to control digital transmission of sound recordings by means of subscription service digital transmissions. The 1995 Act provides a compulsory license for noninteractive subscription services. An arbitration panel rendered a decision before the United States Copyright Office in late November 1997 that determined the statutory license royalty rate of 5% to be paid under the 1995 Act by DMX and other digital music residential subscription services on services transmitted on non-business subscribers, and required back payments be made on a forward basis amortized over approximately thirty months, without interest. As of December 31, 1997, the Company's accrued music royalties include the license royalty at the assessed rate of 5% pursuant to this decision. On January 28, 1998, the United States Copyright office issued a brief order noting that it would not adopt the arbitrators' decision in its entirety and has not specified what provisions would be adopted or not. OPERATING LEASE COMMITMENTS. The Company is obligated under various operating leases for office space, uplinking and satellite services. Certain leases are cancelable subject to penalties. Total expenses under these leases were approximately $2,741,000 and $2,538,000 for the six months ended December 31, 1997 and 1996, respectively, $4,023,000 for the nine months ended June 30, 1997, and $5,324,000 and $5,097,000 for the fiscal years ended September 30, 1996 and 1995, respectively. Minimum lease payments under non cancelable operating leases for each of the next five years are summarized as follows (amounts in thousands):
OPERATING LEASES WITH OPERATING LEASES RELATED PARTIES WITH OTHERS TOTAL -------------------------------------------------------------------- 1998 $ 4,543 3,580 8,123 1999 4,557 3,280 7,837 2000 2,737 2,487 5,224 2001 2,258 1,697 3,955 2002 2,228 222 2,450 Thereafter 3,571 75 3,646
The operating leases with related parties include the lease of studio facilities in Colorado and uplinking and satellite services from NDTC. Total expenses under leases with related party were $2,599,000 and $2,268,000 for the six months ended December 31, 1997 and 1996, respectively, $3,392,000 for the nine months ended June 30, 1997 and $4,831,000 and $4,489,000 for the fiscal years ended September 30, 1996 and 1995, respectively. PARENT GUARANTEES. As described in note 5, "Investment in and Disposition of DMX-Europe N.V. and Subsidiary", DMX-E ceased operations and DMX-E U.K. was put into receivership on July 1, 1997 and into liquidation proceedings on July 18, 1997. DMX-Europe NV, has been inactive since July 1, 1997, and was placed into receivership on December 23, 1997. As a result claims may be filed under the following guarantees. F-27 81 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The Company has guaranteed certain contracts of DMX-E related to their uplink services agreement and subscriber management services agreement. To the extent DMX-E is unable to perform under the agreements, certain creditors of DMX-E may pursue claims against the Company under the guarantees. A claim under the guaranty of DMX-E's obligation to indemnify British Sky Broadcasting under the uplink services agreement could potentially approximate $1.3 million which is included in the loss on disposal of DMX-E in the accompanying consolidated statement of operations. The Company has also guaranteed certain other obligations of DMX-E under the Subscriber Management Services Agreement between DMX-E and Selco Servicegesellschaft fur elektronische Kommunikation mbH ("Selco"), and the related side letter agreement. The Company cannot estimate the amount of any potential claims at this time under such guarantee. (See "Legal Action" below.) DMX has received a letter from counsel for Selco Servicegesellschaft fur elektronische Kommunikation mbH ("Selco") requesting that DMX make a proposal to settle claims alleged by Selco for damages in the amount of approximately $3.5 million with respect to a guaranty by DMX of obligations of DMX-E N.V. under a Subscriber Management Services Agreement between DMX-E N.V. and Selco. TCI Music does not believe that DMX has any liability to Selco under that guaranty. Nevertheless, TCI Music cannot estimate, based on the facts available as of the date of this Form 10-K, whether Selco will continue to pursue its claims and, if Selco elects to initiate formal legal proceedings, whether DMX will be held liable for any material amount. LEGAL ACTIONS. On September 8, 1996, a purported class action lawsuit entitled Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Bhaskar Menon, DMX Inc., and Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware Chancery Court alleging, among other things, that the proposed acquisition of DMX by TCI is wrongful, unfair and harmful to DMX's public stockholders and seeking to enjoin the consummation of the Merger. DMX believes that this action is without merit and intends to defend it vigorously. On July 23, 1997, Jeri L. Amstutz, a former employee of DMX, filed a complaint in Superior Court of California, County of Los Angeles seeking compensatory damages for lost wages and benefits, foreseeable consequential and incidental damages in an unspecified amount, as well as attorneys' fees, costs and prejudgment interest in connection with alleged wrongful employment practices. The plaintiff also seeks punitive damages and damages for emotional distress (and similar harm) in unspecified amounts which the plaintiff claims to believe will exceed $2,000,000. On July 23, 1997, Marnie Tenden a former employee of DMX, filed a complaint in Superior Court of California, County of Los Angeles, which alleges sex discrimination and retaliatory harassment. The plaintiff seeks compensatory damages for lost wages and benefits, foreseeable consequential and incidental damages, as well as attorneys' fees, costs and prejudgment interest. The plaintiff also seeks punitive damages and damages for emotional distress (and similar harm) in unspecified amounts which the plaintiff claims to believe will exceed $500,000. From time to time the Company may be a party to legal actions arising in the ordinary course of business, including claims by former employees. In the opinion of the Company's management, after consultation with counsel, disposition of such matters are not expected to have a material adverse effect upon the financial position, results of operations or liquidity of the Company. F-28 82 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (13) INCOME TAXES. TCI Music is included in the consolidated federal income tax return of TCI. Income tax expense or benefit for TCI Music is based on those items in the consolidated calculation applicable to TCI Music. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among the subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in amounts due to related parties. Income tax (benefit) expense consists of (amounts in thousands):
CURRENT DEFERRED TOTAL -------------------------------------------------------- Six months ended December 31, 1997: Intercompany allocation $ 1,379 -- 1,379 State and local tax 383 29 412 -------------------------------------------------------- Federal tax -- 591 591 $ 1,762 620 2,382 ========================================================
Income tax (benefit) expense differs from the amounts computed by the federal income tax rate of 35% as a result of the following (amounts in thousands):
SIX MONTHS ENDED DECEMBER 31, 1997 --------------- Computed expected tax expense $ 671 State and local income taxes, net of federal income tax benefit 268 Amortization not deductible for income tax purposes 1,555 Change in allocated state tax rate (112) --------------- $ 2,382 ===============
The lack of tax expense (benefit) for the period prior to June 30, 1997 resulted from the generated losses during the periods which were not benefited due to the evaluation of the likelihood of future taxable income. F-29 83 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax (liabilities) at December 31, 1997 are presented below (amounts in thousands): Deferred tax assets: Net operating loss carryforwards $ 39,650 Investments in affiliates, due principally to undistributed earnings in affiliates 21,273 Intangible assets due to an increase in tax basis upon completion of the DMX Merger 15,820 Other future deductible amounts due principally to non-deductible accruals 323 --------------- Total deferred tax assets 77,066 Less - valuation allowance (76,743) --------------- Net deferred assets 323 --------------- Deferred tax liabilities: Property and equipment, due principally to differences in depreciation (1,132) Intangible assets, due principally to differences in amortization (2,002) --------------- Deferred tax liabilities (3,134) --------------- Net deferred tax liabilities $ (2,811) ===============
At December 31, 1997, the Company has net operating loss carryforwards from the DMX Merger, the Box Merger and Paradigm Merger of approximately $100,254,000 which expire between 2001 and 2011. These net operating losses are subject to certain rules limiting their usage. The components of deferred tax assets and liabilities as of June 30, 1997 consisted primarily of net operating loss carryforward and undistributed earnings from affiliates. Such net assets were fully reserved with a valuation allowance. As the DMX, The Box and Paradigm Mergers were considered to be tax free acquisitions for tax purposes, any utilization of the net operating loss would reduce the value of the excess purchase price and not be taken into income. As of December 31, 1997, the excess purchase price of the DMX Merger was reduced by approximately $1.3 million resulting from utilization of such net operating losses. F-30 84 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, TCI Music, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TCI MUSIC, INC. (Registrant) By: /s/ THOMAS MCPARTLAND --------------------------------- Date: March 30, 1997 Thomas McPartland President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of TCI Music, Inc. and in the capacities and on the dates indicated.
SIGNATURE DATE TITLE --------- ---- ----- /s/ LEO J. HINDERY March 30, 1998 Chairman of the Board ------------------------------- LEO J. HINDERY /s/ ROBERT R. BENNETT March 30, 1998 Director ------------------------------- ROBERT R. BENNETT /s/ DONNE F. FISHER March 30, 1998 Director ------------------------------- DONNE F. FISHER /s/ PETER M. KERN March 30, 1998 Director ------------------------------- PETER M. KERN /s/ DAVID B. KOFF March 30, 1998 Director ------------------------------- DAVID B. KOFF /s/ THOMAS MCPARTLAND March 30, 1998 Director, President and ------------------------------- Chief Executive Officer THOMAS MCPARTLAND /s/ J.C. SPARKMAN March 30, 1998 Director ------------------------------- J.C. SPARKMAN /s/ LON A. TROXEL March 30, 1998 Director ------------------------------- LON A. TROXEL /s/ STEPHEN M. BRETT March 30, 1998 Secretary, Vice President and ------------------------------- General Counsel STEPHEN M. BRETT /s/ JOANNE WENDY KIM March 30, 1998 Vice President-Finance ------------------------------- Principal Financial Officer and JOANNE WENDY KIM Principal Accounting Officer
85 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------ ----------- 2.1 Agreement and Plan of Merger, dated as of February 6, 1997, as amended by Amendment One dated May 29, 1997, by and among Tele-Communications, Inc., TCI Music, Inc., TCI Merger Sub, Inc., and DMX Inc. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 2.2 Agreement and Plan of Merger dated as of August 12, 1997 among TCI Music, Inc., TCI Music Acquisition Sub, Inc. and The Box Worldwide, Inc. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 2.3 Agreement of Merger dated as of December 8, 1997 among TCI Music, Inc., TCI Para Merger Sub, Inc. and Paradigm Music Entertainment Company 3.1 Certificate of Incorporation of TCI Music, Inc. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 3.2 Bylaws of TCI Music, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.1 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (with TCI Rights) (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.2 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (without TCI Rights) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 4.3 Specimen Stock Certificate for the Series B Common Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 33-28613-01)) 4.4 Specimen Stock Certificate for the Series A Convertible Preferred Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
86
EXHIBIT NUMBER DESCRIPTION ------ ----------- 4.5 TCI Music, Inc. Certificate of Designations for Series A Convertible Preferred Stock (Incorporated by reference to Exhibit 4.3 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 4.6 Rights Agreement among Tele-Communications, Inc., TCI Music, Inc., and the Bank of New York, as Rights Agent, dated as of July 11, 1997 (Incorporated by reference to Exhibit 4.1 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997) 4.7 Amendment to Rights Agreement among Tele-Communications, Inc., TCI Music, Inc. and the Bank of New York, as Rights Agent, dated March 18, 1998 10.1 Amended and Restated Contribution Agreement between Tele-Communications, Inc. and TCI Music, Inc. dated July 11, 1997 (Incorporated by reference to Exhibit 10.2 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.2 Revolving Loan Agreement between TCI Music, Inc. and Certain Lender Parties Thereto dated December 30, 1997 10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment dated January 27, 1998 10.4 Letter Agreement between TCI Music, Inc. and Tele-Communications, Inc., dated November 7, 1997, extending Promissory Note dated July 11, 1997 (attached as Exhibit A) (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.5 Promissory Note dated July 11, 1997 between TCI Music, Inc. and Tele-Communications, Inc. 10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation 10.7 Services Agreement between Tele-Communications, Inc. and TCI Music, Inc. (Incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997) 10.8 Loan and Security Agreement by and between DMX Inc. and Tele-Communications, Inc., dated as of February 6, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 10.9**** TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.83 to the Transition Report of TCI Music, Inc. on Form 10-K filed with the Securities and Exchange Commission on October 9, 1997) 10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff, dated July 11, 1997 10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel, dated July 11, 1997 10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C. Sparkman, dated July 11, 1997
87
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.13**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Leo J. Hindery, Jr., dated July 11, 1997 10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R. Bennett, dated July 11, 1997 10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F. Fisher, dated July 11, 1997 10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J. Kern, dated July 11, 1997 10.17**** Form of TCI Music, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.18*** Employment Agreement between DMX Inc. and Lon Troxel, dated October 1, 1991, as amended August 22, 1997 (Incorporated by reference to Exhibit 10.64 to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994, and to Exhibit 10.82 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.19*** Employment Agreement dated January 1, 1996 between Paradigm Music Entertainment Company, Inc. and Thomas McPartland 10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland, Attorney in fact 10.21** Affiliation Agreement between International Cablecasting Technologies Inc. and Satellite Services, Inc., dated July 6 1989 (Incorporated by reference to Exhibit 10.2 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.22** Affiliation Agreement between International Cablecasting Technologies Inc. and Viacom Cable, dated May 4, 1990 (Incorporated by reference to Exhibit 10.3 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.23** Affiliation Agreement between International Cablecasting Technologies Inc. and KBLCOM Incorporated, dated June 20, 1990 (Incorporated by reference to Exhibit 10.4 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.24 National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., Security Agreement and Promissory Note, dated March 26, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No 33-35690)) 10.25** Uplink Services Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated March 16, 1991 (Incorporated by reference to Exhibit 10.15 to DMX Inc.'s Post-Effective Amendment No. 3 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 15, 1991 (Commission File No. 33-35690)) 10.26** License and Distribution Agreement between International Cablecasting Technologies Inc. and Broadcom International Holdings, dated March 31, 1992, as amended (Incorporated by reference to Exhibit 10.34 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
88
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.27 Manufacturing and Sales Agreement between International Cablecasting Technologies Inc. and Scientific- Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.12 to DMX Inc.'s Post- Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No. 33-35690)) 10.28 License and Technical Assistance Agreement between International Cablecasting Technologies Inc. and Scientific-Atlanta, Inc., dated February 28, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No. 33-35690)) 10.29 Development and Licensing Agreement between International Cablecasting Technologies Inc. and Frederikson & Shu Laboratories, Inc., as amended March 29, 1990 (Incorporated by reference to Exhibit 10.8 to DMX Inc.'s Registration on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690)) 10.30 Agreement between GE American Communications, Inc. and International Cablecasting Technologies Inc., dated April 14, 1989 (Incorporated by reference to Exhibit 10.9 to DMX Inc.'s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690)) 10.31 Partnership Agreement between TEMPO Sound, Inc. and Galactic Radio Partners, Inc., dated May 7, 1990 (Incorporated by reference to Exhibit 10.7 to DMX Inc.'s Registration Statement on Form S-1, filed with the Securities and Exchange Commission on July 10, 1990 (Commission File No. 33-35690)) 10.32 C-3 Satellite Transponder Sub-Lease Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated December 2, 1992 (Incorporated by reference to Exhibit 10.55 to DMX Inc.'s 1993 Report on From 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.33 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated December 2, 1992 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.34 Satellite Transponder Management Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc. and International Cablecasting Technologies Inc., dated January 27, 1993 (Incorporated by reference to Exhibit 10.57 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.35 Assignment and Assumption Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc. and International Cablecasting Technologies Europe N.V., dated April 22, 1993 (Incorporated by reference to Exhibit 10.58 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.36** Assignment Agreement between IDB Communications Group, Inc. and National Digital Television Center, Inc., formerly known a Western Tele-Communications, Inc., dated January 21, 1993 (Incorporated by reference to Exhibit 10.59 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.37 Agreement between International Cablecasting Technologies Inc. and the American Society of Composers, Authors & Publishers, dated December 20, 1991 (Incorporated by reference to Exhibit 10.60 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.38** Agreement between International Cablecasting Technologies Inc. and Broadcast Music Inc., dated October 11, 1991, as supplemented and amended (Incorporated by reference to Exhibit 10.61 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
89
Exhibit Number Description - ------ ----------- 10.39** Agreement between DMX Inc. and SESAC, dated December 26, 1991 (Incorporated by reference to Exhibit 10.62 to DMX Inc.'s 1993 Report on From 10-K, filed with the Securities and Exchange Commission on December 23, 1993) 10.40 International Cablecasting Technologies Inc. Savings Plan, Amended and Restated Generally Effective as of May 1, 1992 (Incorporated by reference to Exhibit 10.66 to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994) 10.41 Addendum to Affiliation Agreement between KBLCOM and International Cablecasting Technologies Inc., dated May 4, 1994 (Incorporated by reference to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994) 10.42** Affiliation Agreement between DMX Inc. and PRIMESTAR Partners, dated January 25, 1995 (Incorporated by reference to Exhibit 10.71 to DMX Inc.'s 1996 Report on Form 10-K, filed with the Securities and Exchange Commission on January 14, 1997) 10.43 Subscription and Shareholders Agreement between DMX Inc., Jerold H. Rubinstein and XTRA Music Limited, dated December 18, 1996 (Incorporated by reference to Exhibit 10.74 to DMX Inc.'s 1996 Report on Form 10-K, filed with the Securities and Exchange Commission on January 14, 1997) 10.44** Commercial License and Distribution Agreement between DMX Inc. and DMX-Canada Partnership, dated November 1, 1994 (Incorporated by reference to Exhibit 10.75 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.45** Residential License and Distribution Agreement between DMX Inc. and DMX-Canada (1995) Ltd., dated March 9, 1992, as amended April 18, 1997 (Incorporated by reference to Exhibit 10.76 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.46 Channel Distribution Agreement between DMX Inc. and XTRA Music Limited, dated July 3, 1997 (Incorporated by reference to Exhibit 10.77 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.47 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Technology License and Services Agreement, dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.79 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.48 Termination Agreement between DMX Inc. and DMX-Europe N.V., a Netherlands corporation (Trademark Agreement, dated May 19, 1993), dated July 3, 1997 (Incorporated by reference to Exhibit 10.80 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.49 Assignment Agreement between DMX Inc. and Jerold H. Rubinstein, dated July 8, 1997 (Incorporated by reference to Exhibit 10.81 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.50 License Agreement between Broadcast Music, Inc. and DMX Inc., dated August 7, 1995 (Incorporated by reference to Exhibit 10.55 to the Registration Statement on Form S-1 of TCI Music, Inc., filed with the Securities and Exchange Commission on November 12, 1997)
90
Exhibit Number Description - ------ ----------- 10.51 Separation and Mutual Release Agreement between DMX Inc. and Jerold Rubinstein, dated July 11, 1997 (Incorporated by reference to Exhibit 10.53 to the Registration Statement on Form S-4 of TCI Music, Inc., filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.52 Background/Foreground Music Service License Agreement between American Society of Composers, Authors and Publishers and International Cablecasting Technologies Inc., dated April 4, 1995 (Incorporated by reference to Exhibit 10.54 of the Registration Statement on Form S-4 of TCI Music, Inc., filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.53 Service Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and West Interactive Corporation, dated July 31, 1992 (Incorporated by reference to Exhibit 19.18 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1991) 10.54 Lease Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Island Trading Company, Inc., dated April 21, 1994 (Incorporated by reference to Exhibit 10.37 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1994) 10.55 Equipment and Service Agreement between The Box Worldwide, Inc. formerly known as Video Jukebox, Inc., and Hughes Network Systems, Inc., dated February 27, 1996 (Incorporated by reference to Exhibit 10.27 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1996) 10.56 International Representation Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Communications Equity Associates, Inc. dated September 14, 1995 (Incorporated by reference to Exhibit 10.28 to The Box Worldwide, Inc.'s Report on Form 10-KSB for the fiscal year ended December 31, 1996) 10.57 Service Affiliate Agreement between The Box Worldwide, Inc., formerly known as Video Jukebox, Inc., and Suburban Cable TV Co., Inc., dated August 4, 1997 (Incorporated by reference to Exhibit 10.1 to The Box Worldwide, Inc.'s Report on Form 10-QSB for the quarter ended September 30, 1997) 10.58 Affiliation Agreement between The Box Worldwide, Inc. and Satellite Services, Inc. dated February 27, 1997 21 Subsidiaries of TCI Music, Inc. 23 Consent of KPMG Peat Marwick LLP 27 Financial Data Schedule
_____________ * TCI Music, Inc. has requested confidential treatment for a portion of the referenced Exhibit. ** TCI Music, Inc. has received confidential treatment for a portion of the referenced Exhibit. *** Indicated management contract. **** Indicates compensatory plan or arrangement. EX-2.3 2 EXHIBIT 2.3 1 EXHIBIT 2.3 AGREEMENT OF MERGER THIS AGREEMENT OF MERGER (this "Agreement") dated as of December 8, 1997, is entered into by and among TCI Music, Inc., a Delaware corporation ("TCI Music"), TCI Para Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of TCI Music ("Merger Sub"), and Paradigm Music Entertainment Company, a Delaware corporation (the "Company"). RECITALS TCI Music has proposed that it will acquire the Company in a transaction in which Merger Sub will merge with and into the Company, as a result of which TCI Music will become the holder of all the outstanding shares of common stock of the Company and the holders of shares of common stock of the Company outstanding immediately prior to such merger will become holders of shares of Series A Common Stock of TCI Music (the "Merger"). NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties and agreements contained in this Agreement, the parties to this Agreement agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. As used in this Agreement, the following terms with initial capital letters will have the meanings set forth below: "Affiliate" means, as to any Person, any other Person which, directly or indirectly, controls, is under common control with, or is controlled by, such Person. As used in this definition, "control" (including, with correlative meaning, "controlling," "controlled by" and "under common control with") means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person (whether through the ownership of voting securities, by contract or otherwise). "Box Prospectus" means the registration statement of TCI Music on Form S-4 declared effective by the SEC on November 12, 1997. "Code" means the Internal Revenue Code of 1986, as amended. "Company Common Stock" means the shares of Class A Common Stock, Class B Common Stock and Class E Common Stock, each par value $0.01 per share, of the Company. 2 "Environmental Law" means any applicable Legal Requirement relating to the protection, preservation or restoration of the environment (including, air, water vapor, surface water, ground water, drinking water supply, surface land, subsurface land, plant and animal life or any other natural resource). "Equity Affiliate" means, as to any Person, any other Person in which such Person or any of its Subsidiaries holds a five percent or greater equity interest. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" means, as to any Person, any trade or business (whether or not incorporated) that is treated as a single employer with such Person under Section 414(b), (c), (m) or (o) of the Code. "GAAP" means generally accepted accounting principles as in effect from time to time in the United States of America. "Governmental Entity" means any court, administrative agency or commission or other governmental authority, department, agency or instrumentality, whether domestic or foreign. "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Knowledge" means the actual present knowledge of a Person that is a human being and, in the case of a Person that is not a human being, the present actual knowledge of the directors and officers (or the human beings having duties comparable to those of directors and officers) of such Person. "Legal Requirement" means any statute, ordinance, code, law, rule, regulation, order or other requirement, standard or procedure enacted, adopted or applied by any Governmental Entity, including judicial decisions applying common law or interpreting any other Legal Requirement or any agreement entered into with a Governmental Entity in resolution of a dispute or otherwise. "Lien" means any lien, security interest, pledge, charge, claim, option, right to acquire, restriction on transfer, voting restriction or encumbrance of any nature. "Material Adverse Effect" means a material adverse effect on the business, properties, assets, condition (financial or otherwise), liabilities or operations of a Person and its Subsidiaries, taken as a whole, or on the ability of such Person to perform its obligations under this Agreement. -2- 3 "PBGC" means the Pension Benefit Guaranty Corporation. "Person" means any human being or any partnership, limited liability company, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Entity or other entity. "Registration Rights Agreement" means the Registration Rights Agreement in the form of Exhibit C among the Company and the Persons who receive TCI Music Common Stock in the Merger, to be executed and delivered at the Closing. "SEC" means the United States Securities and Exchange Commission. "Subsidiary" means, as to any Person, any other Person more than 20% of whose outstanding voting securities or partnership or other equity interests, as the case may be, are directly or indirectly owned by such Person. "Tax" means all federal, state, local and foreign income, profits, estimated, franchise, gross receipts, payroll, sales, employment, use, property, withholding, excise and other taxes, duties and assessments of any nature, together with all interest, penalties and additions imposed with respect to such amounts. "TCI Music Common Stock" means the Series A Common Stock of TCI Music, par value $.01 per share. "TCI Music Common Stock Unit" means one share of TCI Music Common Stock and the corresponding, non-detachable TCI Right. "TCI Music Loan" means the loan made by TCI Music to the Company pursuant to the Loan and Security Agreement dated September 18, 1997 between TCI Music and the Company. "TCI Music Series A Common Stock Value" means the average of the mean daily closing bid and asked prices of one TCI Music Common Stock Unit for a period of 20 consecutive trading days ending on the third trading day prior to the Closing, as reported on the SmallCap Market of the National Association of Securities Dealers, Inc. "TCI Right" means the right of the holder of a share of TCI Music Common Stock issued on July 11, 1997 to require Tele-Communications, Inc., to purchase such share under certain conditions on or before August 10, 1998, unless such right is extended by its terms. -3- 4 "Voting Agreement" means the Voting Agreement dated as of September 18, 1997 among TCI Music, the Company and the Company Stockholders (as defined therein). "Warrants" means securities or other obligations of the Company that are convertible into or exercisable or exchangeable for shares of Company Common Stock, whether or not such securities or obligations are vested, exercisable, conditional or contingent upon one or more events. Section 1.2 Other Definitions. The following terms are defined in the Sections indicated: Term Section ---- ------- Act 2.1 Acquisition Proposal 7.9 Agreement Preamble Blair 2.1(e) Blair Contract 2.1(e) Box Merger Agreement 4.7(c) Bylaws 2.1(b) Certificates 3.3 Certificate of Incorporation 2.1(a) Closing 3.13 Closing Date 3.13 Common Conversion Number 3.1(b) Company Preamble Company Benefit Plans 5.11(a) Company Bylaws 3.10 Company Charter 2.3 Company Permits 5.8(a) Company Stock Certificates 3.3(a) Dissenting Shares 3.8 DMX Prospectus 4.7(b) Effective Time 2.2 Escrow Agreement 8.3(d) Exchange Act 4.6 Exchange Agent 3.3(a) Executive 7.10(a) Filings 7.2(a) Meeting 7.3 Merger 2.1 Merger Shares 3.1(a) Merger Stock Value 3.1(a) Merger Sub Preamble -4- 5 Most Recent Company Balance Sheet 5.7(c) Most Recent TCI Music Balance Sheet 4.7(c) Per-Share Merger Value 3.1(b) Proxy Statement/Private Placement Memorandum 7.3 Representation Letter 7.13 Securities Act 4.6 Surviving Corporation 2.1 TCI 8.2(b) TCI Music Preamble TCI Music Certificates 3.3(a) TCI Music Permits 4.8(a) TCI Music SEC Reports 4.7(a) Warrant Cancellation 3.1(b) Warrant Certificates 3.3 Warrant Conversion Number 3.1(b) Section 1.3 Use of Terms. Terms used with initial capital letters will have the meanings specified, applicable to both singular and plural forms, for all purposes of this Agreement. All pronouns (and any variations) will be deemed to refer to the masculine, feminine or neuter, as the identity of the Person may require. The singular or plural includes the other, as the context requires or permits. The word "include" (and any variation) is used in an illustrative sense rather than a limiting sense. The word "day" means a calendar day. All accounting terms not otherwise defined in this Agreement will have the meanings ascribed to them under GAAP. ARTICLE II THE MERGER AND RELATED MATTERS Section 2.1 The Merger. Subject to the terms and conditions of this Agreement and the Delaware General Corporation Law (the "Act"), at the Effective Time: (i) Merger Sub will be merged with and into the Company (the "Merger"); (ii) the separate existence of Merger Sub will cease and the Company will continue as the surviving corporation in the Merger (the "Surviving Corporation"); and (iii) the name of the Surviving Corporation will be Paradigm Music Entertainment Company. From and after the Effective Time, and without any further action on the part of any Person, the Merger will have all the effects provided by applicable Legal Requirements, including the Act, the effects described in Section 3.1 with respect to the capital stock of Merger Sub and the Company and, subject to applicable Legal Requirements, the following additional effects: (a) Certificate of Incorporation. At the Effective Time, the Certificate of Incorporation of Merger Sub, as in effect immediately prior to the Effective Time, will become the Certificate of Incorporation of the Surviving Corporation (the "Certificate of Incorporation"), and the Certificate of Incorporation may thereafter be amended or restated as provided therein and by the Act. -5- 6 (b) Bylaws. At the Effective Time, the bylaws of Merger Sub, as in effect immediately prior to the Effective Time, will become the bylaws of the Surviving Corporation (the "Bylaws"), and the Bylaws may thereafter be amended or repealed in accordance with their terms and the Certificate of Incorporation and as provided by the Act. (c) Directors. At the Effective Time, the directors of Merger Sub immediately prior to the Effective Time will become the directors of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation, the Bylaws and the Act and until the earlier of such director's resignation or removal or such director's successor is duly elected and qualified, as the case may be. At the Effective Time Mr. Thomas McPartland will become a director of TCI Music and TCI Music's Board of Directors will consider nominating Mr. Robert Meyrowitz as a director of TCI Music. (d) Officers. At the Effective Time, the officers of Merger Sub immediately prior to the Effective Time will become the officers of the Surviving Corporation, each to hold office in accordance with the Certificate of Incorporation, the Bylaws and the Act and until the earlier of such officer's resignation or removal or such officer's successor is duly appointed and qualified, as the case may be. At the Effective Time if Mr. Thomas McPartland has accepted TCI Music's offer described in Section 7.12, Mr. David Koff will resign as President and Chief Executive Officer of TCI Music and Mr. Thomas McPartland will be appointed to replace Mr. Koff as President and Chief Executive Officer of TCI Music. (e) Properties and Liabilities. At the Effective Time, all the properties, rights, privileges, powers and franchises of the Company and Merger Sub will vest in the Surviving Corporation. At the Effective Time, except for the amounts, if any, payable by the Company to D.H. Blair & Co., Inc. ("Blair") pursuant to the letter agreement dated November 4, 1996 (the "Blair Contract")($200,000 of which will be paid by the Company's stockholders by granting options to Blair, exercisable at $.05 per share, to purchase shares of TCI Music Common Stock valued at the Per-Share Merger Value and $125,000 of which will be paid by TCI Music in cash immediately prior to the Effective Time), all debts, liabilities and duties of the Company and Merger Sub will become the debts, liabilities and duties of the Surviving Corporation. Section 2.2 Effective Time of the Merger. Subject to the terms and conditions in this Agreement, on the Closing Date the parties will deliver a certificate of merger complying with Section 251(c) of the Act to the Secretary of State of the State of Delaware for filing pursuant to the Act. The Merger will become effective upon the filing of such certificate with the Secretary of State of the State of Delaware. As used in this Agreement, the "Effective Time" means the time at which the certificate of merger is filed with the Secretary of State of the State of Delaware. Section 2.3 Actions Prior to Merger. Immediately prior to the Effective Time the issued and outstanding shares of the Company's Class E Common Stock will be converted into an equal number of shares of the Company's Class A Common Stock by the filing of a restatement to the Company's Second Restated Certificate of Incorporation (the "Company Charter") in the form -6- 7 attached as Exhibit E with the Secretary of State of Delaware effecting such conversion and eliminating therefrom all provisions relating to Class E Common Stock. ARTICLE III CONVERSION OF CAPITAL STOCK Section 3.1 Consideration and Conversion of Stock. (a) Consideration. The aggregate consideration deliverable by TCI Music in the Merger will be $24,000,000 (less the product of the Per-Share Merger Value (as defined below) and the number of Dissenting Shares) (the "Merger Stock Value") payable in a number of shares of TCI Music Common Stock (collectively, the "Merger Shares") determined by dividing the Merger Stock Value by the TCI Music Series A Common Stock Value. The Merger Shares will be allocated among holders of Company Common Stock and Warrants as provided in Section 3.1. In addition, TCI Music will, if the Merger occurs, provide to the Company $4,970,831 cash, payable, at the election of TCI Music, either by TCI Music purchasing debt owed by the Company at the Effective Time (other than the TCI Music Loan) as follows: cash to the Company at the Effective Time. Such amount will be used for working capital and other purposes (as pre-approved by TCIM) and to repay an aggregate principal amount of indebtedness of Paradigm equal to approximately $4,300,000, together with accrued and unpaid interest as follows: (i) approximately $3,600,000 in aggregate principal amount pursuant to certain bridge loan promissory notes payable to the holders of Warrants, (ii) $450,000 for aggregate principal amount under certain promissory notes issued to a partnership, the limited partners of which are the grandchildren of the sole stockholder of Blair, (iii) the balance of the $312,500 in aggregate principal amount under a loan from an officer of the Company and (iv) $125,000 to pay additional accrued 1997 consulting fees under the consulting agreements of the Company. (b) Conversion of Company Common Stock and Warrants. The Merger Shares will be deliverable to holders of Company Common Stock at the Effective Time, by virtue of the Merger and without any action on the part of the holders of any shares of Company Common Stock. Each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (except shares subject to Section 3.1(c) and Dissenting Shares) will be converted into and will thereafter evidence and become that number of shares of TCI Music Common Stock equal to the Common Conversion Number. For purposes of this Agreement, "Common Conversion Number" means the quotient (rounded to the nearest one hundredth) resulting from dividing (x) the Per-Share Merger Value by (y) the TCI Series A Common Stock Value. At the Effective Time, the Company will allocate a portion of the Merger Shares and such Merger Shares will be deliverable to each holder of Warrants who has agreed to cancel the Warrants (the "Warrant Cancellation") held by such holder and receive in exchange therefor with respect to each share of Company Common Stock issuable upon conversion, exercise or exchange of Warrants that number of shares of TCI Music Common Stock equal to the Warrant Conversion Number. For purposes of this Agreement, the "Warrant Conversion Number" means the quotient (rounded to the nearest one hundredth) resulting -7- 8 from dividing (x) the difference between the Per-Share Merger Value and the exercise price of such Warrant by (y) the TCI Series A Common Stock Value. As used in this Section 3.1, "Per-Share Merger Value" means the quotient resulting from dividing (x) the sum of $24,000,000 and the aggregate exercise price of all Warrants subject to the Warrant Cancellation by (y) the total number of shares of Company Common Stock outstanding at the Effective Date, including as shares of Company Common Stock deemed to be outstanding for purposes of calculating the Per-Share Merger Value, without duplication, all shares of Company Common Stock issuable upon the conversion, exercise or exchange of Warrants. If the total number of shares of Company Common Stock held by any stockholder or underlying any Warrant is not convertible into a whole number of shares of TCI Music Common Stock, such stockholder or holder of Warrants will have the right to receive cash in lieu of any fractional share of TCI Music Common Stock as provided in Section 3.5. (c) Cancellation. Any shares of Company Common Stock held by the Company or any subsidiary of the Company (not including shares held by the Company under escrow arrangements) will be canceled at the Effective Time and no TCI Music Common Stock or other consideration will be delivered in exchange therefor. (d) Merger Sub Shares. (i) Each share of capital stock of Merger Sub issued and outstanding immediately prior to the Effective Time (except shares subject to clause (ii)) will be converted into, and will thereafter evidence and become one validly issued, fully paid and nonassessable share of common stock $.01 par value per share of the Surviving Corporation; and (ii) any shares of the issued and outstanding capital stock of Merger Sub that are owned directly or indirectly by Merger Sub immediately prior to the Effective Time will be canceled and retired, and no common stock of the Surviving Corporation or other consideration will be delivered in exchange therefor. Section 3.2 [Intentionally Deleted.] Section 3.3 Exchange of Certificates. (a) Exchange Agent. The Bank of New York (or, if The Bank of New York is unable or unwilling to serve in such capacity, another bank or trust company selected by TCI Music and reasonably acceptable to the Company) will act as exchange agent (the "Exchange Agent") in connection with the surrender of certificates that, prior to the Effective Time, evidenced outstanding shares of Company Common Stock ("Company Stock Certificates") and Warrants ("Warrant Certificates") (collectively, the "Certificates"). Prior to the Closing Date, TCI Music will deposit with the Exchange Agent for exchange in accordance with this Section 3.3 certificates evidencing the shares of TCI Music Common Stock to be issued in the Merger ("TCI Music Certificates"), which shares of TCI Music Common Stock issuable to holders of Company Common Stock and Warrants will be deemed to be issued at the Effective Time. At and following the Effective Time, TCI Music will deliver to the Exchange Agent such cash as may be required from time to time to make payments of cash in lieu of fractional shares of TCI Music Common Stock in accordance with Section 3.5. -8- 9 (b) Exchange. As soon as practicable after the Effective Time, but subject to the provisions of Section 3.8 regarding Dissenting Shares, TCI Music will cause the Exchange Agent to mail to each Person who was a holder of record of Company Common Stock or Warrants at the Effective Time: (i) a letter of transmittal (which will specify that delivery will be effective, and risk of loss and title to any Certificates will pass, only upon delivery of the Certificates to the Exchange Agent and will be in such form and will have such other provisions that are specified by TCI Music and reasonably acceptable to the Company); and (ii) instructions for effecting the surrender of Certificates in exchange for TCI Music Certificates (together with any cash to be paid in lieu of fractional shares of TCI Music Common Stock pursuant to Section 3.5). Upon surrender of a Certificate for cancellation to the Exchange Agent or to such other agent or agents as may be appointed by TCI Music, together with such letter of transmittal, duly executed, and such other documents as may be required by the Exchange Agent or such other agent, the holder of such Certificate will be entitled to receive in exchange therefor TCI Music Certificates representing the number of whole shares of TCI Music Common Stock that such holder has the right to receive pursuant to this Agreement (together with any cash to be paid in lieu of fractional shares of TCI Music Common Stock pursuant to Section 3.5) and the Certificates so surrendered will be canceled. In the event of a transfer of ownership of Company Common Stock that is not registered in the transfer records of the Company, TCI Music Certificates representing the proper number of shares of TCI Music Common Stock may be issued to a Person other than the Person in whose name the surrendered Company Stock Certificate is registered if the Company Stock Certificate representing such Company Common Stock is presented to the Exchange Agent accompanied by all documents required to evidence and effect such transfer and by evidence reasonably satisfactory to TCI Music that any applicable stock transfer tax has been paid. TCI Music will not directly or indirectly pay or reimburse any Person for any transfer taxes of the type referred to in the preceding sentence. If any TCI Music Certificates are to be delivered to a Person other than the Person in whose name the Certificates surrendered in exchange therefor are registered, it will be a condition to the delivery of such TCI Music Certificates that the Certificates so surrendered are properly endorsed or accompanied by appropriate stock powers and otherwise in proper form for transfer, that such transfer otherwise is proper and that the Person requesting such transfer pay to the Exchange Agent any transfer or other taxes payable by reason of the foregoing or establishes to the satisfaction of the Exchange Agent that such taxes have been paid or are not required to be paid. (c) Certificates Not Exchanged. After the Effective Time, each outstanding Company Stock Certificate and Warrant Certificate subject to the Warrant Cancellation will, until surrendered for exchange in accordance with this Section 3.3, be deemed for all purposes to evidence ownership of the number of whole shares of TCI Music Common Stock into which the shares of Company Common Stock and Warrants (which, prior to the Effective Time, were represented thereby) are converted in accordance with Section 3.1, together with the right, if any, to receive dividends or distributions with respect thereto made after the Effective Time pursuant to Section 3.4 and any cash to be paid in lieu of fractional shares of TCI Music Common Stock pursuant to Section 3.5. -9- 10 (d) Delivery of Representation Letter. No TCI Music Certificate will be issued pursuant to this Section 3.3 to any Person who was a holder of Company Common Stock or Warrants until TCI Music receives a duly executed Representation Letter from such holder. (e) Stock Certificate Legend. All certificates representing Merger Shares will bear a legend substantially in the following form: "The shares represented by this certificate have not been registered under the Securities Act of 1933, as amended, or any state securities laws, and may not be sold, pledged or otherwise transferred or encumbered unless they are so registered or unless an exemption from registration is available. As of the date of their issuance the shares represented hereby are not listed for trading on Nasdaq or any other securities exchange. Certain shares of TCI Music Series A Common Stock trade together with associated rights issued by Tele-Communications, Inc. ('Rights') on the Nasdaq SmallCap Market, under the symbol 'TUNE.' Such Rights will terminate prior to, or expire on, August 10, 1998 unless extended pursuant to their terms. The shares of TCI Music Series A Common Stock represented by this certificate do not include associated Rights and are not tradeable on the Nasdaq SmallCap Market under the symbol 'TUNE' until the Rights terminate or expire. Prior to the termination or expiration of the Rights, no public trading market is available for the shares of TCI Music Series A Common Stock represented by this certificate unless an application for listing the TCI Music Series A Common Stock without the associated Rights has been approved by Nasdaq." (f) Expenses. Except as otherwise expressly provided in this Agreement, TCI Music will pay all charges and expenses, including those of the Exchange Agent, in connection with the exchange of shares of TCI Music Common Stock for shares of Company Common Stock and Warrants, except any charges or expenses that are otherwise solely the liability of one or more holders of Company Common Stock or Warrants. Any TCI Music Certificates deposited with the Exchange Agent that remain unclaimed by the former holders of Company Common Stock and Warrants after six months following the Effective Time will be delivered to TCI Music upon its demand, and any former holders of Company Common Stock and Warrants who have not then complied with the instructions for exchanging their Certificates will thereafter look only to TCI Music for exchange of Certificates and for any dividend or distribution with respect thereto made after the Effective Time pursuant to Section 3.4 and any cash to be paid in lieu of fractional shares of TCI Music Common Stock pursuant to Section 3.5. Section 3.4 Dividends and Other Distributions. No dividends or other distributions declared or made after the Effective Time with respect to shares of TCI Music Common Stock with a record date after the Effective Time will be paid to the holder of any unsurrendered -10- 11 Certificate with respect to the shares of TCI Music Common Stock issuable upon surrender thereof until the holder of such Certificate surrenders such Certificate in accordance with Section 3.3. Subject to the effect of applicable Legal Requirements, following surrender of any such Certificate, TCI Music will pay or cause to be paid, without interest, to the record holder of TCI Music Certificates issued in exchange therefor, (a) the amount, if any, of TCI Music dividends and other distributions declared or authorized to be made by TCI Music with a record date after the Effective Time payable with respect to the shares of TCI Music Common Stock represented thereby and (b) at the appropriate payment date, the amount of dividends and other distributions (if any) declared or authorized to be made by TCI Music with a record date after the Effective Time and a payment date subsequent to surrender of such Certificates that are payable with respect to such holder's shares of TCI Music Common Stock. Section 3.5 No Fractional Shares. (a) Cash Payment in Lieu of Fractional Shares. No certificates or scrip representing fractional shares of TCI Music Common Stock will be issued upon the surrender of Certificates pursuant to Section 3.3. No such fractional interest will entitle the owner thereof to any rights as a security holder of TCI Music. In lieu of any such fractional shares of TCI Music Common Stock, each holder of Company Common Stock and Warrants entitled to receive shares of TCI Music Common Stock in the Merger, upon surrender of such Person's Certificates for exchange pursuant to Section 3.3, will be entitled to receive an amount in cash (without interest), rounded to the nearest cent, determined by multiplying the TCI Music Series A Common Stock Value by the fractional share interest in TCI Music Common Stock to which such holder otherwise would be entitled. (b) Deposit with Exchange Agent. As soon as practicable after the determination of the amount of cash, if any, to be paid to holders of shares of TCI Music Common Stock in lieu of any fractional shares, TCI Music will promptly deposit with the Exchange Agent cash in the required amounts and the Exchange Agent will mail such amounts without interest to such holders; provided, however, that no such amount will be paid to any holder with respect to any Certificate prior to the surrender by such holder of such Certificate. Section 3.6 No Liability. None of TCI Music, Merger Sub, the Company, the Surviving Corporation or the Exchange Agent will be liable to any holder of shares of Company Common Stock or Warrants for any shares of TCI Music Common Stock, dividends or distributions with respect thereto or cash payable in lieu of fractional shares of TCI Music Common Stock delivered to a state abandoned property administrator or other public official pursuant to any applicable abandoned property, escheat or similar law. Section 3.7 Lost Certificates. If any Certificate is lost, stolen or destroyed, the Exchange Agent will issue in exchange for such lost, stolen or destroyed Certificate the shares of TCI Music Common Stock (and any dividend or distribution with respect thereto payable pursuant to Section 3.4 and any cash payable in lieu of fractional shares of TCI Music Common Stock -11- 12 pursuant to Section 3.5) deliverable in respect thereof as determined in accordance with the terms of this Agreement, subject to the condition that the Person to whom the TCI Music Common Stock (and any dividend or distribution with respect thereto payable pursuant to Section 3.4 and any cash payable in lieu of fractional shares pursuant to Section 3.5) are to be issued, shall have (a) delivered to TCI Music an affidavit claiming such Certificate to be lost, stolen, or destroyed and (b) if required by TCI Music, given TCI Music an indemnity satisfactory to TCI Music against any claim that may be made against TCI Music with respect to the Certificate alleged to have been lost, stolen or destroyed. Section 3.8 Dissenting Shares. Notwithstanding anything in this Agreement to the contrary, holders of shares of Company Common Stock outstanding immediately prior to the Effective Time who have not voted in favor of the Merger or consented thereto in writing and who have demanded appraisal rights with respect thereto in accordance with the Act (the "Dissenting Shares") will not have their shares of Company Common Stock converted into or be exchangeable for the right to receive shares of TCI Music Common Stock or any dividend or distribution with respect thereto made after the Effective Time or any cash payable in lieu of fractional shares of TCI Music Common Stock pursuant to Section 3.5, but instead will be entitled to receive payment of the fair value of their Dissenting Shares in accordance with the provisions of the Act and this Section 3.8. Any shares of Company Common Stock held by a stockholder who, prior to the Effective Time, withdraws a demand for appraisal of such shares or loses the right to appraisal as provided in the Act will not be considered Dissenting Shares. The Company will give TCI Music prompt notice of any written demands for appraisal of any shares of Company Common Stock, attempted withdrawals of such demand and any other notices or other documents received by the Company pursuant to the Act relating to stockholders' rights of appraisal. The Company will make all payments required by the Act to be made in respect of Dissenting Shares, including any costs assessed against the Company pursuant to the Act, and TCI Music or any of its Affiliates will directly or indirectly reimburse or otherwise provide funds to the Company with respect to such payments. Section 3.9 [Intentionally Deleted.] Section 3.10 Stockholders' Approval. Subject to fiduciary duty obligations of the Board of Directors of the Company under applicable Legal Requirements, the Company will use its best efforts, in accordance with applicable Legal Requirements and the Company Charter and bylaws of the Company (the "Company Bylaws"), to have this Agreement, the Merger and the transactions contemplated by this Agreement approved by the holders of capital stock of the Company entitled to vote thereon. The Company will notify TCI Music of the date set for any stockholder action to be taken in connection with approval of the Merger not later than 20 days prior to such date. The Board of Directors of the Company will, subject to fiduciary duty obligations under applicable Legal Requirements, recommend that holders of Company Common Stock vote to adopt this Agreement and approve the Merger and the transactions contemplated by this Agreement, and will use best efforts to solicit from such holders proxies in favor of such approval and adoption and take all other action necessary or helpful to secure such favorable vote. -12- 13 Section 3.11 Closing of the Company's Transfer Books. At the Effective Time, the stock transfer books of the Company will be closed and no transfer of shares of Company Common Stock will be made thereafter. In the event that, after the Effective Time, Company Stock Certificates are presented to the Surviving Corporation, they will be canceled and exchanged for the TCI Music Certificates (and, if required, cash) as provided in Section 3.3(b) and Section 3.5. Section 3.12 Assistance in Consummation of the Merger. Each of TCI Music, Merger Sub and the Company will provide all reasonable assistance to, and will cooperate with, each other to bring about the consummation of the Merger as soon as possible in accordance with the terms and conditions of this Agreement. Section 3.13 Closing. The closing of the transactions contemplated by this Agreement (the "Closing") will take place (i) at the offices of Reid & Priest LLP, 40 West 57th Street, New York, New York, at 9:00 a.m. local time on the date that is the first business day after the day on which the last of the conditions set forth in Article VIII (excluding delivery of opinions and certificates) is fulfilled or waived or (ii) at such other place and time as TCI Music and the Company agree in writing. The date on which the Closing occurs is referred to in this Agreement as the "Closing Date." ARTICLE IV REPRESENTATIONS AND WARRANTIES OF TCI MUSIC AND MERGER SUB TCI Music and Merger Sub jointly and severally represent and warrant to the Company as follows: Section 4.1 Organization and Qualification. Each of TCI Music and Merger Sub is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and each has all requisite corporate power and authority to carry on its business as it is now being conducted. Each of TCI Music and Merger Sub is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities make such qualification necessary, except where the failure to be so qualified will not, individually or in the aggregate, have a Material Adverse Effect on it. Section 4.2 Capitalization. (a) TCI Music. As of the date of this Agreement, the authorized capital stock of TCI Music consists of: (i) 495,000,000 shares of common stock, par value $.01 per share, divided into the following classes: 295,000,000 shares of common stock designated as Series A Common Stock, of which 14,896,649 shares are issued and outstanding as of the date of this Agreement, and 200,000,000 shares of common stock, designated as Series B Common Stock, of which 62,500,000 shares are issued and outstanding as of the date of this Agreement and (ii) 5,000,000 shares of -13- 14 preferred stock, par value $.01 per share, none of which is issued and outstanding as of the date of this Agreement. All shares of TCI Music Common Stock to be issued in connection with the Merger, when issued in accordance with this Agreement, will be duly authorized, validly issued, fully paid and nonassessable. (b) Merger Sub. As of the Effective Time, the authorized capital stock of Merger Sub will consist of 1,000 shares of common stock, par value $.01 per share, of which 1,000 shares will be issued and outstanding, all of which will be owned beneficially and of record by TCI Music immediately prior to the Effective Time. Section 4.3 Subsidiaries. Schedule 4.3 to this Agreement reflects the percentage and nature of TCI Music's ownership of each Subsidiary and Equity Affiliate of TCI Music as of the date of this Agreement. Each of TCI Music's Subsidiaries is duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation and has the corporate or partnership power to carry on its business as it is now being conducted or currently proposed to be conducted. Each of TCI Music's Subsidiaries is duly qualified to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified will not have a Material Adverse Effect on TCI Music. All the outstanding shares of capital stock of each of TCI Music's Subsidiaries that is a corporation are validly issued, fully paid and nonassessable. Except as set forth on Schedule 4.3, the shares of capital stock or partnership or other ownership interests in each of TCI Music's Subsidiaries or Equity Affiliates that are owned by TCI Music or by a Subsidiary of TCI Music are owned free and clear of any Liens except Liens securing indebtedness for borrowed money or the deferred purchase price of property, are not subject to and have not been issued in violation of any preemptive rights and have not been issued in violation of any federal or state securities laws or any other Legal Requirement. Except as disclosed in the TCI Music SEC Reports, the Box Prospectus or on Schedule 4.3, there are not, as of the date hereof, and at the Effective Time there will not be, any outstanding options, warrants, calls or other rights, agreements or commitments of any character, to which TCI Music or any of its Subsidiaries is a party, relating to the issued or unissued capital stock, other securities or partnership or other ownership interests in any of the Subsidiaries or Equity Affiliates of TCI Music. Section 4.4 Authority Relative to this Agreement. Each of TCI Music and Merger Sub has all requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement by TCI Music and Merger Sub have been duly authorized by the Boards of Directors of TCI Music and Merger Sub and by TCI Music as the sole stockholder of Merger Sub, and no other corporate proceedings on the part of TCI Music or Merger Sub are necessary to authorize this Agreement and the transactions contemplated by this Agreement. This Agreement constitutes a valid and binding obligation of each of TCI Music and Merger Sub enforceable against each of them in accordance with its terms, except (i) as enforcement may be limited by bankruptcy, insolvency or other similar Legal Requirements affecting the enforcement of creditors' rights generally, (ii) as the availability -14- 15 of indemnification and other remedies may be limited by federal and state securities laws and (iii) for limitations imposed by general principles of equity. Section 4.5 No Breach; Required Consents. The execution and delivery of this Agreement by TCI Music and Merger Sub do not, and the consummation of the transactions contemplated by this Agreement by TCI Music and Merger Sub will not: (a) violate or conflict with the certificate of incorporation or bylaws of TCI Music or Merger Sub; (b) constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) or give rise to any Lien, third-party right of termination, cancellation, modification or acceleration under any agreement or undertaking to which TCI Music or Merger Sub is a party or by which either of them is bound, except where such breach, default, Lien, third-party right of termination, cancellation, modification or acceleration would not have a Material Adverse Effect on TCI Music or Merger Sub; or (c) subject to obtaining the approvals and making the filings described in Section 4.6, constitute a violation of any applicable Legal Requirement, except where such violation would not have a Material Adverse Effect on TCI Music or Merger Sub. Section 4.6 Consents and Approvals. Neither the execution and delivery of this Agreement by TCI Music and Merger Sub nor the consummation of the transactions contemplated by this Agreement by TCI Music and Merger Sub will require TCI Music or Merger Sub to make any filing or registration with, or obtain any authorization, consent or approval of, any Governmental Entity, except those required in connection, or in compliance, with the provisions of (i) the Communications Act of 1934, as amended, (ii) the Securities Act of 1933, as amended (the "Securities Act"), (iii) the Securities Exchange Act of 1934, as amended (the "Exchange Act") and (iv) the corporation, securities or blue sky laws or regulations, or similar Legal Requirements, of various states of the United States, and other than such filings, registrations, authorizations, consents or approvals the failure of which to make or obtain would not have a Material Adverse Effect on TCI Music or Merger Sub or prevent the consummation of the transactions contemplated by this Agreement. With respect to the lack of any filing being required under the HSR Act, such representation and warranty is made solely in reliance on the representation and warranty of the Company set forth in the last sentence of Section 5.6. Section 4.7 Reports and Financial Statements. (a) SEC Reports. TCI Music has filed all required forms, reports and documents required to be filed with the SEC since TCI Music was incorporated (collectively, the "TCI Music SEC Reports"). As of their respective dates or effective dates and except as the same may have been corrected, updated or superseded by means of a subsequent filing with the SEC prior to the date of this Agreement, none of the TCI Music SEC Reports, including any financial statements or schedules included or incorporated by reference therein, contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. TCI Music has delivered to the Company, in the forms filed with the SEC, all the TCI Music SEC Reports. -15- 16 (b) Financial Statements. The audited consolidated financial statements of TCI Music and DMX Inc. contained in the Box Prospectus were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and present fairly the financial condition and results of operations of each company, respectively, as of the relevant dates thereof and for the periods covered thereby. The unaudited condensed pro forma combined interim financial statements of TCI Music contained in the Box Prospectus present the financial condition and results of operations of TCI Music as of the dates and for the periods indicated therein on a pro forma basis and such financial statements, as of the date of the Box Prospectus, conformed in all material respects with the requirements for pro forma financial statements set forth in Article 11 of Regulation S-X under the Exchange Act. (c) Absence of Certain Changes. Except as disclosed in the TCI Music SEC Reports and the Box Prospectus, except for TCI Music's intention to purchase the preferred stock of The Box Worldwide, Inc. owned by EMAP plc prior to the Effective Time and except for the transactions contemplated by the Merger Agreement dated August 12, 1997 among TCI Music, TCI Music Acquisition Sub, Inc. and The Box Worldwide, Inc. (the "Box Merger Agreement"), since the date of the most recent balance sheet of TCI Music included in the Box Prospectus (the "Most Recent TCI Music Balance Sheet"), there has not been any: (i) transaction, commitment, dispute or other event or condition (financial or otherwise) of any character (whether or not in the ordinary course of business) that, individually or in the aggregate, has had, or would have, a Material Adverse Effect on TCI Music (other than as a result of changes in laws or regulations of general applicability or any changes resulting from general economic, financial, market or industry-wide conditions); (ii) declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the capital stock of TCI Music; or (iii) entry into any commitment or transaction material to TCI Music and its Subsidiaries taken as a whole (including any borrowing or sale of assets) except in the ordinary course of business consistent with past practice. (d) Absence of Undisclosed Liabilities. Except as disclosed in the TCI Music SEC Reports or the Box Prospectus, TCI Music does not have any indebtedness, liability or obligation required by GAAP to be reflected on a balance sheet that is not reflected or reserved against in the Most Recent TCI Music Balance Sheet other than liabilities, obligations and contingencies that (i) were incurred after the date of the Most Recent TCI Music Balance Sheet in the ordinary course of business, (ii) were incurred pursuant to the Box Merger Agreement or (iii) would not, in the aggregate, have a Material Adverse Effect on TCI Music. (e) Proxy Statement Disclosure. The Proxy Statement/Private Placement Memorandum delivered to Company stockholders in connection with the Merger, to the extent it relates to TCI Music, its Subsidiaries and their respective businesses, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances in which they were made, not misleading. -16- 17 Section 4.8 Compliance with Law; Litigation. (a) Permits. Except as disclosed in the TCI Music SEC Reports, TCI Music and its Subsidiaries hold all permits, licenses, franchises, variances, exemptions, concessions, leases, instruments, orders and approvals (the "TCI Music Permits") of all Governmental Entities required to be held under applicable Legal Requirements, except for such TCI Music Permits the failure of which to hold, individually or in the aggregate, does not have and, in the future is not likely to have, a Material Adverse Effect on TCI Music. To TCI Music's Knowledge, TCI Music and its Subsidiaries are in compliance with the terms of the TCI Music Permits, except for such failures to comply that, individually or in the aggregate, would not have a Material Adverse Effect on TCI Music. To TCI Music's Knowledge, the businesses of TCI Music and its Subsidiaries are not being conducted in violation of any Legal Requirement, except for such violations which, individually or in the aggregate, would not have a Material Adverse Effect on TCI Music. No investigation or review by any Governmental Entity with respect to TCI Music or any of its Subsidiaries is ongoing, pending, or, to the Knowledge of TCI Music, threatened, nor has any Governmental Entity indicated to TCI Music in writing an intention to conduct the same, other than those the outcome of which would not have a Material Adverse Effect on TCI Music. (b) Litigation. Except as disclosed in the TCI Music SEC Reports, the Box Prospectus or on Schedule 4.8(b), there is no suit, action or proceeding pending or, to the Knowledge of TCI Music, threatened, against or affecting TCI Music or any of its Subsidiaries that has had or is likely to have a Material Adverse Effect on TCI Music, nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against TCI Music or any of its Subsidiaries that has had or is likely to have a Material Adverse Effect on TCI Music. Section 4.9 Title to Assets. Except as disclosed in the TCI Music SEC Reports or the Box Prospectus, TCI Music and its Subsidiaries have good and merchantable title to all material assets reflected on the unaudited pro forma combined balance sheet as of March 31, 1997 included in TCI Music's Amendment No. 1 to Registration Statement on Form S-4 filed with the SEC on June 12, 1997, free and clear of any Lien except: (a) landlord's Liens and Liens for property taxes not delinquent; (b) statutory Liens that were created in the ordinary course of business and do not materially detract from the value of such assets or materially impair the use thereof in the operation of TCI Music's business; (c) the Liens listed on Schedule 4.3; (d) Liens securing indebtedness for borrowed money or securing the deferred purchase price of any property; (e) leased interests in property owned by others and leased interests in property leased to others; and (f) zoning, building or similar restrictions, easements, rights-of-way, reservations of rights, conditions, or other restrictions or encumbrances relating to or affecting real property that do not, individually or in the aggregate, materially interfere with the use of such real property in the operation of TCI Music's business. Section 4.10 Labor and Employee Matters. TCI Music is not a party to any contract with any labor organization and has not agreed to recognize any union or other collective bargaining unit. No union or other collective bargaining unit has been certified as representing any of -17- 18 TCI Music's employees. To TCI Music's Knowledge, there is no representation or organizing effort pending or threatened against or affecting or involving TCI Music. TCI Music and its Subsidiaries are in compliance with all applicable Legal Requirements relating to the employment of employees, including any obligations relating to employment standards legislation, pay equity, occupational health and safety, labor relations and human rights legislation except for such failures to comply as do not have, and are not likely to have, a Material Adverse Effect on TCI Music. Section 4.11 ERISA. (a) Benefit Plans. Schedule 4.11(a) sets forth all "employee benefit plans," as defined in ERISA, and all other material employee benefit arrangements, programs or payroll practices, including severance pay, sick leave, vacation pay, salary continuation for disability, deferred compensation, bonus, stock purchase, hospitalization, medical insurance, life insurance, tuition reimbursement, employee assistance and employee discounts, that TCI Music or any of its ERISA Affiliates maintains or has an obligation to make contributions (the "TCI Music Benefit Plans"). (b) Multi-Employer Plans. Neither TCI Music nor any of its ERISA Affiliates has incurred any unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with respect to any multiemployer plan, nor has any of them incurred any liability due to the termination or reorganization of any multiemployer plan, except any such liability that would not have a Material Adverse Effect on TCI Music. To the Knowledge of TCI Music, neither TCI Music nor any of its ERISA Affiliates reasonably expects to incur any liability due to a withdrawal from or termination or reorganization of a multiemployer plan, except any such liability that would not have a Material Adverse Effect on TCI Music. (c) Plan Qualification. Each TCI Music Benefit Plan that is intended to qualify under Section 401 of the Code and the trust maintained pursuant thereto has been determined to be exempt from federal income taxation under Section 501 of the Code by the Internal Revenue Service, and to the Knowledge of TCI Music, nothing has occurred with respect to any such plan since such determination that is likely to result in the loss of such exemption or the imposition of any material liability, penalty or tax under ERISA or the Code. Each TCI Music Benefit Plan has at all times been maintained in all material respects, by its terms and in operation, in accordance with all applicable Legal Requirements. (d) Contributions. All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under the TCI Music Benefit Plans or pursuant to applicable Legal Requirements (without regard to any waivers granted under Section 412 of the Code) to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension or grace period) and no accumulated funding deficiency exists with respect to any of the TCI Music Benefit Plans subject to Section 412 of the Code. -18- 19 (e) No Violations. To the Knowledge of TCI Music, there have been no violations of ERISA or the Code with respect to the filing of applicable reports, documents and notices regarding the TCI Music Benefit Plans with the Secretary of Labor and the Secretary of the Treasury or the furnishing of such reports, documents and notices to the participants or beneficiaries of the TCI Music Benefit Plans, except such violations that, individually or in the aggregate, would not have a Material Adverse Effect on TCI Music. (f) Litigation. There are no pending actions, claims or lawsuits that have been asserted or instituted against the TCI Music Benefit Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the TCI Music Benefit Plans, with respect to the operation of such plans (other than routine benefit claims), nor does TCI Music have Knowledge of facts that reasonably could be expected to form the basis for any such action, claim or lawsuit, except any such actions, claims or lawsuits that, individually or in the aggregate, would not have a Material Adverse Effect on TCI Music. Section 4.12 Operations of Merger Sub. As of the date of this Agreement, Merger Sub has engaged in no business activities other than in connection with this Agreement and the transactions contemplated by this Agreement and has no material assets or liabilities other than its rights and obligations under this Agreement. Section 4.13 No Broker. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of TCI Music or Merger Sub. Section 4.14 Taxes. TCI Music and each of its Subsidiaries have timely filed all Tax returns required to be filed by any of them and have timely paid or have established an adequate reserve for the payment of, all Taxes owed in respect of the periods covered by such returns, except where the failure to file such Tax returns or timely pay or establish an adequate reserve for the payment of such Taxes will not have a Material Adverse Effect on TCI Music. The information contained in such Tax returns is complete and accurate in all material respects. Neither TCI Music nor any Subsidiary of TCI Music is delinquent in the payment of any Tax or other amount owed to any Governmental Entity, except where the amount owed, when paid, or the delinquency in paying the amount owed will not have a Material Adverse Effect on TCI Music. There are no claims or investigations pending or, to TCI Music's Knowledge, threatened against TCI Music or any of its Subsidiaries for past Taxes, except claims and investigations that would not have a Material Adverse Effect on TCI Music and adequate provision for which has been made on the Most Recent TCI Music Balance Sheet. None of TCI Music or its Subsidiaries has waived or extended any applicable statute of limitations relating to the assessment of any Taxes that would be payable by TCI Music or such Subsidiary. Section 4.15 Environmental Laws. Each of TCI Music and its Subsidiaries is in compliance in all respects with all Environmental Laws, except where the failure to so comply would -19- 20 not have a Material Adverse Effect on TCI Music. No orders, directions or notices have been issued pursuant to any Environmental Law and no Governmental Entity has submitted to any of TCI Music and its Subsidiaries any request for information pursuant to any Environmental Law. Section 4.16 Transactions with Affiliates. Except as disclosed in the TCI Music SEC Reports, the Box Prospectus or as contemplated by this Agreement, there is no lease, sublease, indebtedness, contract, agreement, commitment, understanding or other arrangement of any kind entered into by TCI Music or Merger Sub with any officer, director or shareholder of TCI Music or Merger Sub or any "affiliate" or "associate" (as those terms are defined in the Exchange Act) of either of them, except, in each case, for compensation paid to directors and officers consistent with previously established policies (including normal merit increases in such compensation in the ordinary course of business), reimbursements of ordinary and necessary expenses incurred in connection with their employment and amounts paid or benefits granted pursuant to TCI Music Benefit Plans. ARTICLE V REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to TCI Music and Merger Sub as follows: Section 5.1 Organization and Qualification. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power and authority to carry on its business as it is now being conducted. The Company is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified would not, individually or in the aggregate, have a Material Adverse Effect on the Company. Section 5.2 Capitalization. (a) Capital Stock. The authorized capital stock of the Company consists of 31,999,900 shares of Series A Common Stock, $.01 par value per share, of which 2,084,204 shares are issued and outstanding (6,000 of which currently are held in escrow), 1,000,100 shares of Series B Common Stock, $.01 par value per share, of which 1,000,005 shares are issued and outstanding (566,670 of which currently are held in escrow), 2,000,000 shares of Series E Common Stock, $.01 par value per share, of which 1,187,965 shares are issued and outstanding (none of which currently is held in escrow), and 5,000,000 shares of preferred stock, par value $.01 per share, of which no shares are issued and outstanding. (b) Options and Other Rights. Except as set forth on Schedule 5.2(b), there are no options, warrants, calls, subscriptions or other rights, agreements or commitments of any kind (including preemptive rights), to which the Company or any of its Subsidiaries is a party, relating -20- 21 to the issued or unissued capital stock or other securities of the Company or any Subsidiary. Schedule 5.2(b) sets forth, for all such options, warrants, calls, subscriptions or other rights, agreements or commitments that are outstanding (i) the number of shares and the class or series of capital stock of the Company issuable pursuant thereto, (ii) the exercise or conversion price, (iii) the exercise or conversion period and (iv) if not immediately exercisable or convertible, the date on which they can be exercised or converted. (c) Due Authorization. All issued and outstanding shares of Company Common Stock have been duly authorized and validly issued and are fully paid and nonassessable, are not subject to, and have not been issued in violation of, any preemptive rights, and have not been issued in violation of any federal or state securities laws or any other Legal Requirement. Section 5.3 Subsidiaries. Schedule 5.3 reflects the percentage and nature of the Company's ownership of each Subsidiary and Equity Affiliate of the Company as of the date of this Agreement. Each of the Company's Subsidiaries is a corporation or partnership duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or formation and has the corporate or partnership power to carry on its business as it is now being conducted or currently proposed to be conducted. Each of the Company's Subsidiaries is duly qualified to do business as a foreign corporation or partnership, and is in good standing, in each jurisdiction where the character of its properties owned or held under lease or the nature of its activities makes such qualification necessary, except where the failure to be so qualified will not have a Material Adverse Effect on the Company. All the outstanding shares of capital stock of each of the Company's Subsidiaries that is a corporation are validly issued, fully paid and nonassessable. Except as set forth on Schedule 5.3, the shares of capital stock or partnership or other ownership interests in each of the Company's Subsidiaries or Equity Affiliates that are owned by the Company or by a Subsidiary of the Company are owned free and clear of any Liens, are not subject to and have not been issued in violation of any preemptive rights and have not been issued in violation of any federal or state securities laws or any other Legal Requirement. Except as set forth on Schedule 5.3, there are not as of the date hereof, and at the Effective Time there will not be, any outstanding options, warrants, calls or other rights, agreements or commitments of any character, to which the Company or any of its Subsidiaries is a party, relating to the issued or unissued capital stock, other securities or partnership or other ownership interests in any of the Subsidiaries or Equity Affiliates of the Company. Section 5.4 Authority Relative to this Agreement. The Company has all requisite corporate power and authority to execute and deliver this Agreement and, subject to approval of this Agreement by the holders of a majority of the outstanding shares of Company Common Stock, to consummate the transactions contemplated by this Agreement. The execution and delivery of this Agreement and the consummation of the transactions contemplated by this Agreement have been duly authorized by the Company's Board of Directors. Except for the approval by a vote of the holders of a majority of the voting power represented by all of the outstanding shares of Company Common Stock and the filing of a restatement of the Company Charter deleting the provisions relating to Class E Common Stock, no other corporate proceedings on the part of the Company are -21- 22 necessary to authorize this Agreement and the transactions contemplated by this Agreement. Subject to approval by the holders of a majority of the outstanding shares of Company Common Stock in accordance with the Act, this Agreement constitutes a valid and binding obligation of the Company enforceable in accordance with its terms except (i) as enforcement may be limited by bankruptcy, insolvency or other similar Legal Requirements affecting the enforcement of creditors' rights generally, (ii) as the availability of indemnification and other remedies may be limited by federal and state securities laws and (iii) for limitations imposed by general principles of equity. Section 5.5 No Breach; Required Consents. The execution and delivery of this Agreement by the Company does not, and the consummation of the transactions contemplated by this Agreement by the Company will not: (a) subject to the approval of the holders of a majority of the outstanding shares of Company Common Stock, violate or conflict with the Company Charter or Company Bylaws; (b) constitute a breach or default (or an event that with notice or lapse of time or both would become a breach or default) or give rise to any Lien, third-party right of termination, cancellation, modification or acceleration under any agreement or undertaking to which the Company is a party or by which it is bound, except where such breach, default, Lien, third-party right of termination, cancellation, modification, or acceleration would not have a Material Adverse Effect on the Company; or (c) subject to obtaining the consents, approvals or authorizations and making the filings or registrations described in Section 5.6, constitute a violation of any Legal Requirement, except where such violation would not have a Material Adverse Effect on the Company. Section 5.6 Consents and Approvals. Except as set forth on Schedule 5.6, neither the execution and delivery of this Agreement by the Company nor the consummation of the transactions contemplated by this Agreement will require the Company to make any filing or registration with, or obtain any authorization, consent or approval of, any Governmental Entity or any other Person, except those required in connection, or in compliance, with the provisions of (i) the Communications Act of 1934, as amended, (ii) the Securities Act, (iii) the Exchange Act and (iv) the corporation, securities or blue sky laws or regulations, or similar Legal Requirements, of the various states of the United States, and other than such other filings, registrations, authorizations, consents or approvals the failure of which to make or obtain would not have a Material Adverse Effect on the Company or prevent the consummation of the transactions contemplated by this Agreement. The Company is an ultimate parent entity, as such term is defined in 16 C.F.R. Section 801.1(a)(3). Neither the Company nor any entity controlled by the Company is engaged in manufacturing, and the Company's total assets are (and, immediately prior to the Effective Time, will be) less than $10,000,000, all as determined in accordance with 16 C.F.R. Sections 801.1(a)-(c), 801.1(j) and 801.11. Section 5.7 Reports and Financial Statements. (a) SEC Reports. The Company has not been required by any applicable Legal Requirement to file any form, report or document with the SEC. The Company filed a registration statement on Form SB-2/A and a Form 8-A12G with the SEC on August 19, 1997, file no. 333-23781 (collectively, the "Company SEC Reports"). As of their respective dates or effective dates -22- 23 and except as the same may have been corrected, updated or superseded by means of a subsequent filing with the SEC prior to the date of this Agreement which has been delivered by the Company to TCI Music and except for information about Blair that was provided by Blair, none of the Company SEC Reports, including the financial statements and schedules included or incorporated by reference therein, contained any untrue statement of a material fact or omitted to state a material fact required to be stated or incorporated by reference therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. The Company has delivered to TCI Music, in the forms filed with the SEC, all the Company SEC Reports. (b) Financial Statements. The audited consolidated financial statements of the Company, Purple Demon, Inc. and SonicNet, Inc. contained in the Company SEC Reports comply in all material respects with applicable accounting re quirements and with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with GAAP applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto) and present fairly the Company's, Purple Demon, Inc.'s and SonicNet, Inc.'s consolidated financial condition and the results of their operations as of the relevant dates thereof and for the periods covered thereby. The unaudited consolidated interim financial statements of the Company, Purple Demon, Inc. and SonicNet, Inc. contained in the Company SEC Reports comply in all material respects with applicable accounting requirements and with the published rules and regulations of the SEC with respect thereto, were prepared on a basis consistent with prior interim periods (except as required by applicable changes in GAAP or in SEC accounting policies) and include all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the Company's consolidated financial condition and results of operations for such periods. (c) Absence of Certain Changes. Except as provided on Schedule 5.7(c), since the date of the most recent consolidated balance sheet of the Company included in the Company SEC Reports (the "Most Recent Company Balance Sheet") there has not been any: (i) transaction, commitment, dispute or other event or condition (financial or otherwise) of any character (whether or not in the ordinary course of business) that, individually or in the aggregate, has had, or would have, a Material Adverse Effect on the Company (other than as a result of changes in laws or regulations of general applicability or any changes resulting from general economic, financial, market or industry-wide conditions); (ii) declaration, setting aside or payment of any dividend or other distribution (whether in cash, stock or property) with respect to the capital stock of the Company; or (iii) entry into any commitment or transaction material to the Company and its Subsidiaries taken as a whole (including any borrowing or sale of assets) except in the ordinary course of business consistent with past practice. (d) Absence of Undisclosed Liabilities. The Company does not have any indebtedness, liability or obligation required by GAAP to be reflected on a balance sheet that is not reflected or reserved against in the Most Recent Company Balance Sheet other than liabilities, obligations and contingencies that (i) were incurred after the date of the Most Recent Company -23- 24 Balance Sheet in the ordinary course of busi ness or (ii) would not, in the aggregate, have a Material Adverse Effect on the Company. (d) Proxy Statement Disclosure. The Proxy Statement/Private Placement Memorandum delivered to Company stockholders in connection with the Merger, to the extent it relates to the Company, its Subsidiaries and their respective businesses, will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make such statements, in light of the circumstances in which they were made, not misleading. Section 5.8 Compliance with Law; Litigation. (a) Permits. The Company and its Subsidiaries hold all permits, licenses, franchises, variances, exemptions, concessions, leases, instruments, orders and approvals (the "Company Permits") of all Governmental Entities required to be held under applicable Legal Requirements, except such Company Permits the failure of which to hold, individually or in the aggregate, does not have and, in the future is not likely to have, a Material Adverse Effect on the Company. To the Company's Knowledge, the Company and its Subsidiaries are in compliance with the terms of the Company Permits, except for such failures to comply that, individually or in the aggregate, would not have a Material Adverse Effect on the Company. To the Company's Knowledge, the businesses of the Company and its Subsidiaries are not being conducted in violation of any Legal Requirement, except for such violations which, individually or in the aggregate, would not have a Material Adverse Effect on the Company. No investigation or review by any Governmental Entity with respect to the Company or any of its Subsidiaries is ongoing, pending, or, to the Knowledge of the Company, threatened, nor has any Governmental Entity indicated to the Company in writing an intention to conduct the same, other than those the outcome of which would not have a Material Adverse Effect on the Company. (b) Litigation. Except as provided on Schedule 5.8(b), there is no suit, action or proceeding pending or, to the Knowledge of the Company, threatened against or affecting the Company or any of its Subsidiaries that has had or is likely to have a Material Adverse Effect on the Company nor is there any judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any of its Subsidiaries that has had or is likely to have a Material Adverse Effect on the Company. Section 5.9 Title to Assets. Except as set forth on Schedule 5.9, the Company and its Subsidiaries have good and merchantable title to all material assets reflected on the Most Recent Company Balance Sheet, free and clear of any Lien except: (a) landlord's Liens and Liens for property taxes not delinquent; (b) statutory Liens that were created in the ordinary course of business and do not materially detract from the value of such assets or materially impair the use thereof in the operation of the Company's business; (c) the Lien that secures the TCI Music Loan; (d) leased interests in property owned by others; and leased interests in property leased to others; and (e) zoning, building or similar restrictions, easements, rights-of-way, reservations of rights, -24- 25 conditions, or other restrictions or encumbrances relating to or affecting real property that do not, individually or in the aggregate, materially interfere with the use of such real property in the operation of the Company's business. The Company has purchased all of the assets of the Addicted to Noise business for consideration that did not exceed $220,000 in cash and promissory notes and 75,000 shares of Class A Common Stock of the Company. Section 5.10 Labor and Employee Matters. The Company is not a party to any contract with any labor organization and has not agreed to recognize any union or other collective bargaining unit. No union or other collective bargaining unit has been certified as representing any of the Company's employees. To the Company's Knowledge, there is no representation or organizing effort pending or threatened against or affecting or involving the Company. The Company and its Subsidiaries are in compliance with all applicable Legal Requirements relating to the employment of employees, including any obligations relating to employment standards legislation, pay equity, occupational health and safety, labor relations and human rights legislation except for such failures to comply as do not have, and are not likely to have, a Material Adverse Effect on the Company. Schedule 5.10 sets forth all agreements or arrangements with any employee of the Company, whether oral or in writing, with respect to such employee's employment with the Company other than agreements or arrangements otherwise disclosed on Schedule 5.11(a). Section 5.11 ERISA. (a) Benefit Plans. Schedule 5.11(a) sets forth all "employee benefit plans," as defined in ERISA, and all other material employee benefit arrangements, programs or payroll practices, including severance pay, sick leave, vacation pay, salary continuation for disability, deferred compensation, bonus, stock purchase, hospitalization, medical insurance, life insurance, tuition reimbursement, employee assistance and employee discounts, that the Company or any of its ERISA Affiliates maintains or has an obligation to make contributions (the "Company Benefit Plans"). (b) Multiemployer Plan. Neither the Company nor any of its ERISA Affiliates has incurred any unsatisfied withdrawal liability, as defined in Section 4201 of ERISA, with respect to any multiemployer plan, nor has any of them incurred any liability due to the termination or reorganization of any multiemployer plan, except any such liability that would not have a Material Adverse Effect on the Company. To the Knowledge of the Company, neither the Company nor any of its ERISA Affiliates reasonably expects to incur any liability due to a withdrawal from or termination or reorganization of a multiemployer plan, except any such liability that would not have a Material Adverse Effect on the Company. (c) Plan Qualification. Each Company Benefit Plan that is intended to qualify under Section 401 of the Code, and a form of trust that is similar in all material respects to the trust maintained pursuant thereto, have been determined to be exempt from federal income taxation under Section 501 of the Code by the Internal Revenue Service, and to the Knowledge of the Company, nothing has occurred with respect to any such plan since such determination that is likely to result -25- 26 in the loss of such exemption or the imposition of any material liability, penalty or tax under ERISA or the Code. Each Company Benefit Plan has at all times been maintained in all material respects, by its terms and in operation, in accordance with all applicable Legal Requirements. (d) Contributions. All contributions (including all employer contributions and employee salary reduction contributions) required to have been made under the Company Benefit Plans or pursuant to applicable Legal Requirements (without regard to any waivers granted under Section 412 of the Code) to any funds or trusts established thereunder or in connection therewith have been made by the due date thereof (including any valid extension or grace period) and no accumulated funding deficiency exists with respect to any of the Company Benefit Plans subject to Section 412 of the Code. (e) No Violations. To the Knowledge of the Company, there have been no violations of ERISA or the Code with respect to the filing of applicable reports, documents and notices regarding the Company Benefit Plans with the Secretary of Labor and the Secretary of the Treasury or the furnishing of such reports, documents and notices to the participants or beneficiaries of the Company Benefit Plans, except such violations that, individually or in the aggregate, would not have a Material Adverse Effect on the Company. (f) Litigation. There are no pending actions, claims or lawsuits that have been asserted or instituted against the Company Benefit Plans, the assets of any of the trusts under such plans or the plan sponsor or the plan administrator, or against any fiduciary of the Company Benefit Plans, with respect to the operation of such plans (other than routine benefit claims), nor does the Company have Knowledge of facts that reasonably could be expected to form the basis for any such action, claim or lawsuit, except any such actions, claims or lawsuits that, individually or in the aggregate, would not have a Material Adverse Effect on the Company. (g) Medical/Welfare Plans. Except as provided in Schedule 5.11(g) and as may be required under Section 4980B of the Code, neither the Company nor any of its ERISA Affiliates maintains any Company Benefit Plan that provides medical or welfare benefits to former employees. Section 5.12 Approval. (a) Board of Directors. The Board of Directors of the Company at meetings duly called and held: (i) determined that the Merger is advisable and fair and in the best interests of the Company and its stockholders; (ii) approved the Merger, this Agreement and the transactions contemplated by this Agreement in accordance with the provisions of the Act; and (iii) recommended the approval of this Agreement and the Merger by the holders of the Company Common Stock and directed that the Merger be submitted for consideration by the Company's stockholders at the Meeting in accordance with the provisions of the Act. (b) Stockholders. The vote of a majority of the outstanding shares of the Company Common Stock entitled to vote, voting as a single class, is the only vote required for the -26- 27 adoption and approval of this Agreement, the Merger and the other transactions contemplated by this Agreement. The Persons who are beneficial owners of the shares of the Company's Class B Common Stock that are held in escrow will not vote with respect to amending the escrow provisions to which such shares are subject to release them from escrow due to conflicts of interest with respect to such amendment and release. No class or series of shares of capital stock of the Company is entitled to vote on the adoption and approval of this Agreement, the Merger or the other transactions contemplated by this Agreement as a separate class or series. Section 5.13 Financial Advisor/Investment Banker. Except for amounts, if any, payable to Blair pursuant to the Blair Contract, $200,000 of which will be paid by the Company's stockholders by granting options to Blair, exercisable at $.05 per share, to purchase shares of TCI Music Common Stock valued at the Per-Share Merger Value and $125,000 of which will be paid by TCI Music in cash immediately prior to the Effective Time, the Company or the Surviving Corporation, no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger or the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company. The Company has delivered to TCI Music a true and complete copy of the Blair Contract. Section 5.14 Taxes. The Company and each of its Subsidiaries have timely filed all Tax returns required to be filed by any of them and have timely paid or have established an adequate reserve for the payment of, all Taxes owed in respect of the periods covered by such returns, except where the failure to file such Tax returns or timely pay or establish an adequate reserve for the payment of such Taxes, will not have a Material Adverse Effect on the Company. The information contained in such Tax returns is complete and accurate in all material respects. Neither the Company nor any Subsidiary of the Company is delinquent in the payment of any Tax or other amount owed to any Governmental Entity, except where the amount owed, when paid, or the delinquency in paying the amount owed will not have a Material Adverse Effect on the Company. There are no claims or investigations pending or, to the Company's Knowledge, threatened against the Company or any of its Subsidiaries for past Taxes, except claims and investigations that would not have a Material Adverse Effect on the Company and adequate provision for which has been made on the Most Recent Balance Sheet. Except as set forth on Schedule 5.14, none of the Company or its Subsidiaries has waived or extended any applicable statute of limitations relating to the assessment of any Taxes that would be payable by the Company or such Subsidiary. Section 5.15 Environmental Laws. Each of the Company and its Subsidiaries is in compliance in all respects with all Environmental Laws, except where the failure to so comply would not have a Material Adverse Effect on the Company. No orders, directions or notices have been issued pursuant to any Environmental Law and no Governmental Entity has submitted to any of the Company and its Subsidiaries any request for information pursuant to any Environmental Law. -27- 28 Section 5.16 Transactions with Affiliates. Except as disclosed in the Company SEC Reports, there is no lease, sublease, indebtedness, contract, agreement, commitment, understanding or other arrangement of any kind entered into by the Company with any officer, director or stockholder of the Company or any "affiliate" or "associate" of any of them (as those terms are defined in the Exchange Act) or of the Company, except, in each case, for compensation paid to directors and officers consistent with previously established policies (including normal merit increases in such compensation in the ordinary course of business), reimbursements of ordinary and necessary expenses incurred in connection with their employment and amounts paid or benefits granted pursuant to Company Benefit Plans. ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER Section 6.1 Conduct of Business of the Company. Prior to the Effective Time, without the prior written consent of TCI Music: (a) Ordinary Course. The Company will conduct, and will cause each of its Subsidiaries to conduct, its business in the ordinary course substantially in accordance with past practice, and will use, and will cause each of its Subsidiaries to use, its reasonable best efforts to preserve intact its current business organization and to preserve relationships with customers, suppliers and others having business dealings with them. (b) Absence of Changes. Except as required by this Agreement the Company will not, and will not permit or cause any of its Subsidiaries to, directly or indirectly: (i) pledge or otherwise encumber any capital stock or other interest in the Company or any of its Subsidiaries; (ii) amend or propose to amend the Company Charter or Company Bylaws or similar constituent or governing documents of any of its Subsidiaries; (iii) split, combine or reclassify the outstanding capital stock of, or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of capital stock of, or other ownership interests in, the Company or any of its Subsidiaries; (iv) declare, set aside or pay any dividend, distribution or other payment to any stockholder, director or officer of the Company or any of it Subsidiaries other than regularly scheduled payroll; (v) redeem, purchase or otherwise acquire any shares of capital stock of, or other ownership interests in, the Company or any of its Subsidiaries; (vi) issue, deliver or sell any shares of capital stock of, or other ownership interests (including any option, warrant or other right to acquire, or any security convertible into, shares of capital stock of, or other ownership interests) in the Company or any of its Subsidiaries; (vii) acquire, lease or dispose of any assets, other than in the ordinary course of business consistent with past practice; (viii) create, assume or incur any indebtedness, other than the TCI Music Loan and other indebtedness incurred to refinance outstanding indebtedness of the Company for borrowed money in an amount not exceeding $10,000; (ix) mortgage, pledge or subject to any Lien any of its assets except Liens described in clauses (b) or (c) of Section 5.9; (x) enter into any other material transaction except in the ordinary course of business consistent with past practice; (xi) make any payment or transfer any property with respect -28- 29 to any indebtedness of the Company or any Subsidiary except such payments with respect to the indebtedness of the Company as are scheduled to come due prior to the Effective Time; (xii) acquire by merging or consolidating with, by acquiring assets of, by purchasing an ownership interest in, or by any other method, any business or any other Person; or (xiii) agree to do, or to cause or permit any Subsidiary to do, any of the foregoing. (c) Compensation. Except as required to comply with applicable Legal Requirements or with employment agreements of the Company, SonicNet, Inc. or Addicted to Noise, or with Company Benefit Plans that were entered into or established on or before August 1, 1997, or as required by this Agreement, the Company will not, and will not permit any of its Subsidiaries to: (i) adopt, terminate or amend any bonus, profit sharing, compensation, severance, termination, stock option, pension, retirement, deferred compensation, employment or other benefit plan, agreement, trust, fund or other arrangement for the benefit or welfare of any director, officer or current or former employee; (ii) increase in any manner the compensation or benefits of any director, officer, consultant or employee; (iii) grant any award or option under any bonus, benefit, incentive, performance or other compensation plan or arrangement; (iv) take any action to fund or in any other way secure the payment of compensation or benefits under any employee plan, agreement, contract, benefit plan or arrangement; or (v) agree to do, or to cause or permit any Subsidiary to do, any of the foregoing. (d) Affiliate Transactions. The Company will not, and will not permit any of its Subsidiaries to, enter into any transaction, contract or arrangement with any officer, stockholder, director, consultant, employee of the Company or any Subsidiary or any Person that is an "affiliate" or "associate" of any of the foregoing, as those terms are defined in Rule 12b-2 under the Exchange Act, whether or not such transaction would be in the ordinary course of business. (e) Cooperation. The Company will not take or agree to take, and will cause its Subsidiaries not to take or agree to take, any action that would: (i) make any representation or warranty of the Company set forth in this Agreement untrue or incorrect or result in any breach of this Agreement or (ii) result in any of the conditions of this Agreement set forth in Sections 8.1 or 8.3 of this Agreement not being satisfied as of the Effective Time. (f) Use of Loan Proceeds. The Company will use the proceeds of the TCI Music Loan only for the purposes permitted by the Loan Agreement. (g) Financial Statements. Upon the request of TCI Music at any time prior to the Effective Time, the Company will prepare and deliver to TCI Music, within 20 days after such request, such financial statements (including audited financial statements) as may be required by TCI Music to meet its financial reporting obligations, including requirements under applicable securities laws. To the extent the Company would not otherwise be required to prepare such financial statements, all costs and expenses of preparing such financial statements will be borne by TCI Music. -29- 30 Section 6.2 Conduct of Business of TCI Music. Prior to the Effective Time, except as contemplated or permitted by this Agreement TCI Music will not take or agree to take, and will cause its Subsidiaries not to take or agree to take, any action that would (i) make any representation or warranty of TCI Music or Merger Sub set forth in this Agreement untrue or incorrect so as to cause the condition set forth in Section 8.2(a) of this Agreement not to be fulfilled as of the Effective Time or (ii) result in any of the other conditions set forth in Sections 8.1 or 8.2 of this Agreement not to be satisfied as of the Effective Time. Section 6.3 Remedies for Breach. The sole remedies (i) of TCI Music and Merger Sub for any breach by the Company of Section 6.1(a), and (ii) of the Company for any breach by TCI Music of Section 6.2, will be injunctive relief or termination of this Agreement pursuant to Article IX, unless such breach is willful or intentional, in which event any and all available legal or equitable remedies may be obtained. ARTICLE ADDITIONAL AGREEMENTS Section 7.1 Access and Information. Each of the Company and TCI Music and their respective Subsidiaries will afford to the other and to the other's accountants, counsel and other representatives full access during normal business hours (and at such other times as the parties may mutually agree) throughout the period prior to the Effective Time to all of its properties, books, contracts, commitments, records and personnel. Section 7.2 Proxy Statement/Private Placement Memorandum/Filings. (a) Proxy Statement/Private Placement Memorandum. The Company and TCI Music will prepare jointly a proxy statement/private placement memorandum (the "Proxy Statement/Private Placement Memorandum") comprising proxy materials of the Company and the private placement memorandum of TCI Music with respect to the TCI Music Common Stock to be issued in the Merger and the Company will cause the Proxy Statement/Private Placement Memorandum to be mailed to holders of record of Company Common Stock and Warrants as promptly as practicable after the Proxy Statement/Private Placement Memorandum is prepared. (b) Filings. As soon as reasonably practicable after the date hereof, the Company and TCI Music will prepare and file any other filings relating to the Merger and the other transactions contemplated hereby that are required to be filed by each under the Exchange Act and other applicable Legal Requirements (collectively "Filings"), and will use their reasonable best efforts to respond to any comments of any appropriate Governmental Entity with respect thereto. The Company, on the one hand, and TCI Music and Merger Sub, on the other, will cooperate with each other and provide all information necessary to prepare the Filings and will provide promptly to the other party any information that such party may obtain that could necessitate amending any such document. -30- 31 (c) Cooperation. Each of the Company and TCI Music will notify the other promptly of the receipt of any comments from any Governmental Entity and of any requests by the SEC or its staff or any other government official for amendments or supplements to any of the Filings or for additional information and will supply the other with copies of all correspondence between the Company or any of its representatives, or TCI Music or any of its representatives, as the case may be, on the one hand, and any Governmental Entity, on the other hand, with respect thereto. If at any time prior to the Effective Time, any event occurs that should be set forth in an amendment of, or a supplement to, any of the Filings, the Company and TCI Music promptly will prepare and file such amendment or supplement and will distribute such amendment or supplement as required by applicable Legal Requirements. Section 7.3 Meeting of Stockholders of the Company. The Company will take all action necessary, in accordance with the Act and the Company Charter and Company Bylaws, to duly call, give notice of, convene and hold a meeting of its stockholders as promptly as practicable to consider and vote upon the adoption and approval of this Agreement, the Merger and the other transactions contemplated by this Agreement (the "Meeting"), to the extent such approval is required by the Act and the Company Charter and Company Bylaws. Section 7.4 Reasonable Best Efforts. Subject to the fiduciary duty obligations of the Board of Directors of the Company, each of the parties to this Agreement will use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable Legal Requirements to consummate and make effective the transactions contemplated by this Agreement in the most expeditious manner practicable, including the satisfaction of all conditions to the Merger. Section 7.5 Public Announcements. No party to this Agreement will make any public announcements or otherwise communicate with any news media with respect to this Agreement or any of the transactions contemplated by this Agreement without prior consultation with the other parties as to the timing and contents of any such announcement as may be reasonable under the circumstances; provided however, that nothing contained herein will prevent any party from promptly making all Filings that may, in its reasonable judgment, be required or advisable in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated by this Agreement so long as such party gives timely notice to the other parties of the anticipated disclosure and cooperates with the other parties in designing reasonable procedural and other safeguards to preserve, to the maximum extent possible, the confidentiality of all information furnished by the other parties pursuant to this Agreement. Section 7.6 Notification. In the event of, or after obtaining Knowledge of the occurrence or threatened occurrence of, any fact or circumstance that would cause or constitute a breach of any of its representations and warranties, obligations or covenants set forth herein, each party to this Agreement promptly will give notice thereof to the other parties and will use its reasonable best efforts to prevent or remedy such breach. -31- 32 Section 7.7 Further Assurances. Each of the parties to this Agreement will execute such documents and other instruments and take such further actions as may be reasonably necessary or desirable to carry out the provisions of this Agreement and to consummate the transactions contemplated by this Agreement or, at and after the Closing Date, to evidence the consummation of the transactions contemplated by this Agreement. Upon the terms and subject to the conditions of this Agreement, each of the parties to this Agreement will take or cause to be taken all actions and to do or cause to be done all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and to obtain in a timely manner all necessary waivers, consents and approvals and to effect all necessary Filings. Section 7.8 Employee Matters. (a) Employment. Immediately prior to the Effective Time, if so requested by TCI Music the Company will give notice of termination of employment to all of its employees other than Thomas McPartland, David Friedensohn, Michael Goldberg, Nicholas Butterworth, Dean Brownrout and David Wolin, which termination will be conditional upon the consummation of the Merger. The Company will provide TCI Music with executed agreements between the Company and each of Robert B. Meyrowitz and Lou Falcigno terminating their consulting agreements with the Company on terms satisfactory to TCI Music prior to the Effective Time. TCI Music may, but will have no obligation to, employ or offer employment to any employees of the Company other than Thomas McPartland. The Company has provided to TCI Music a list of all employees of the Company and its Subsidiaries as of September 1, 1997, showing their current positions, rates of compensation and dates of hire. Within 30 days after the date of execution of this Agreement (or such earlier date as TCI Music and the Company may mutually agree) but in any event prior to the Effective Time, TCI Music will provide to the Company in writing a list of employees TCI Music desires to employ following the Closing, subject to satisfaction of TCI Music's conditions for employment (the "Desired Employees"). The Company will coordinate in all reasonable respects with TCI Music to allow TCI Music to evaluate personnel files and interview employees of the Company and its Subsidiaries to make hiring decisions. (b) Compensation. The Company will pay or cause to be paid to all employees of the Company and its Subsidiaries all compensation, including salaries, commissions, bonuses, deferred compensation, reasonable severance, insurance, pensions, profit sharing, vacation (other than vacation that is allowed to be carried over pursuant to this Section), sick pay and other compensation or benefits to which they are entitled for periods prior to the Closing, including all amounts, if any, payable on account of the termination of their employment. As to any employees who are entitled to severance payments but are offered employment with TCI Music, the Company will use its reasonable best efforts to obtain waivers of such employees' rights to severance payments upon acceptance of such offers of employment. (c) Benefits. The Company will be responsible for maintenance and distribution of benefits accrued under any employee benefit plan (as defined in ERISA) maintained by the Company or any of its Subsidiaries pursuant to the provisions of such plans. TCI Music will not -32- 33 assume any obligation or liability for any such accrued benefits nor any fiduciary or administrative responsibility to account for or dispose of any such accrued benefits under any employee benefit plans maintained by the Company or any of its Subsidiaries. (d) Claims and Obligations. All claims and obligations under, pursuant to or in connection with any welfare, medical, insurance, disability or other employee benefit plans of the Company or any of its Subsidiaries or arising under any Legal Requirement affecting employees of the Company or any of its Subsidiaries incurred on or before the Closing Date or resulting or arising from events or occurrences occurring or commencing on or before the Closing Date will be satisfied or accrued by the Company prior to the Closing, and TCI Music will not have or assume any obligation or liability in connection with any such plan. (e) Coverage. The Company will retain full responsibility and liability for offering and providing "continuation coverage" of any "qualified beneficiary" who is covered by a "group health plan" sponsored or contributed to by such party and who has experienced a "qualifying event" or is providing "continuation coverage" on or prior to the Closing Date. "Continuation coverage," "qualified beneficiary," "group health plan," and "qualified event" all will have the meanings given such terms under Code Section 4980B. (f) No Third Party Liability. Nothing in this Agreement will (i) require TCI Music to assume any collective bargaining agreement between the Company or any of its Subsidiaries and any labor organization or (ii) be deemed to make any employee of any of the parties a third-party beneficiary of this Agreement. (g) Surviving Company Benefits. To the extent permitted under the TCI Music Benefits Plans, each person who was an employee of the Company or any of its Subsidiaries immediately prior to the Effective Time and who is hired by the Surviving Corporation or TCI Music at or after the Effective Time (i) will receive credit for past service with the Company or any of its Subsidiaries for purposes of eligibility and vesting under the Surviving Corporation's employee benefit plans, as defined in Section 3(3) of ERISA, to the extent such service was credited under the Company Benefit Plans on the Closing Date, (ii) will not be subject to any waiting periods or limitations on benefits for pre-existing conditions under the Surviving Corporation's employee benefit plans, including any group health and disability plans, except to the extent such employees were subject to such limitations under the Company Benefit Plans, and (iii) will receive credit for past service with the Company or any of its Subsidiaries for purposes of eligibility and vesting under the Surviving Corporation's plans and policies with respect to seniority benefits, including vacation and sick leave. Section 7.9 No Solicitation. Neither the Company nor any of its Subsidiaries or any of their respective officers, directors, representatives or agents will take any action to (i) initiate the submission of any Acquisition Proposal, (ii) enter into any agreement with respect to any Acquisition Proposal or (iii) participate in negotiations with, or provide information concerning the Company, its assets, liabilities or business to, any Person in connection with any Acquisition -33- 34 Proposal. The Company will promptly communicate to TCI Music any solicitation or inquiry received by the Company and the terms of any proposal or inquiry that it may receive in respect of any Acquisition Proposal, or of any such information requested from it or of any such negotiations or discussions being sought to be initiated with it. Nothing in this Section 7.9 will be construed as prohibiting the Board of Directors of the Company from (i) making any disclosure to the Company's stockholders or (ii) responding to any unsolicited proposal or inquiry by advising the Person making such proposal or inquiry of the terms of this Section 7.9. "Acquisition Proposal" means any proposed (i) merger, consolidation or similar transaction involving the Company or any Subsidiary, (ii) sale, lease or other disposition, directly or indirectly, by merger, consolidation, share exchange or otherwise of all or any substantial part of the assets of the Company or any Subsidiary, (iii) issue, sale or other disposition of securities representing 10% or more of the voting power of the Company Common Stock or (iv) transaction in which any Person proposes to acquire beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act) of, or the right to acquire beneficial ownership of, or any "group" (as such term is defined under the Exchange Act) has been formed which beneficially owns or has the right to acquire beneficial ownership of, 10% or more of the outstanding Company Common Stock. Section 7.10 Indemnification of Executives. (a) Indemnification. TCI Music will cause the Surviving Corporation to, and, if the Surviving Corporation fails or is unable to do so, TCI Music will, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date of this Agreement or who becomes prior to the Effective Time, an officer or director of the Company (each, an "Executive"), against all losses, expenses, damages, liabilities, costs, judgments and amounts paid in settlement in connection with any claim, action, suit, proceeding, or investigation based on or arising out of, in whole or in part, any actions or omissions of such Executive as an officer or director of the Company on or prior to the Effective Time, including actions or omissions relating to any of the transactions contemplated by this Agreement, to the fullest extent permitted under the Act, the Company Charter and Company Bylaws and the Indemnification Agreements listed on Schedule 7.10(a). TCI Music will cause the Surviving Corporation to pay expenses in advance of the final disposition of any such claim, action, suit, proceeding, or investigation to each Executive to the fullest extent permitted by applicable Legal Requirements upon receipt of any undertaking required or contemplated by applicable Legal Requirements. Without limiting the foregoing, in any case in which approval of or a determination by the Surviving Corporation is required to effectuate any indemnification, (i) the Executives will conclusively be deemed to have met the applicable standards for indemnification with respect to any actions or omissions of such Executives as officers or directors of the Company on or prior to the Effective Time relating to any of the transactions contemplated by this Agreement and (ii) TCI Music will cause the Surviving Corporation to direct, at the election of any Executive, that the determination of any such approval shall be made by independent counsel selected by the Executive and reasonably acceptable to TCI Music. If any such claim, action, suit, proceeding, or investigation is brought against any Executive (whether arising before or after the Effective Time), (i) the Executive may retain counsel satisfactory to him or her that is reasonably acceptable to TCI Music, and (ii) TCI Music will pay or will cause the Surviving -34- 35 Corporation to pay all reasonable fees and expenses of such counsel for the Executive, as such fees and expenses are incurred, upon receipt of a written undertaking by the Executive that the Executive will repay the amounts so paid if it ultimately is determined that he or she is not entitled to be indemnified by the Surviving Corporation as authorized by the Act. Neither TCI Music nor the Surviving Corporation will have any obligation hereunder to any Executive when and if a court of competent jurisdiction ultimately determines, after exhaustion of all avenues of appeal, that such Executive is not entitled to indemnification hereunder. (b) Successors. If TCI Music or the Surviving Corporation or any of its successors or assigns (i) consolidates with or merges into any other Person and is not the continuing or surviving Person of such consolidation or merger or (ii) transfers all or substantially all of its properties and assets to any Person, proper provisions will be made so that the successors and assigns of TCI Music or the Surviving Corporation assume the obligations set forth in this Section 7.10. Section 7.11 Cancellation of Warrants, Options, Etc. The Company will use its best efforts to cause no Warrants to be exercised and all Warrants to be canceled at the Effective Time without the payment of cash or any other consideration by the Company or any Subsidiary (other than the allocation of Merger Shares to the holders thereof pursuant to Section 3.1). Section 7.12 McPartland Employment. Prior to the Effective Time TCI Music will offer to employ Thomas McPartland as the President and Chief Executive Officer of TCI Music after the Effective Time on terms set forth in the employment agreement dated January 1, 1996 between the Company and Mr. McPartland and such offer will include as a provision that he be entitled to participate in bonus, incentive, stock option and other benefit programs on a basis consistent with the practice of TCI Music in compensating senior executives. Section 7.13 Representation Letter. The Company will mail to each holder of record of Company Common Stock and Warrants at the same time the Proxy Statement/Private Placement Memorandum is mailed to such Persons, a letter in the Form attached as Exhibit D (the "Representation Letter"). The Company will use its best efforts to obtain and deliver to TCI Music a duly executed original Representation Letter from each holder of record of Company Common Stock and Warrants prior to the Effective Time. ARTICLE VIII CONDITIONS PRECEDENT Section 8.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligations of each party to effect the Merger will be subject to the fulfillment at or prior to the Effective Time of the following conditions: -35- 36 (a) Stockholders' Action. This Agreement, the Merger and the transactions contemplated by this Agreement shall have been duly approved by a vote of the holders of the number of the outstanding shares of Company Common Stock required to approve the Merger and such transactions pursuant to the Act and the Company Charter and the Company Bylaws. (b) Third Party Action. No Governmental Entity shall have enacted, issued, promulgated, enforced or entered any Legal Requirement that remains in effect and has the effect of making the transactions contemplated by this Agreement illegal or otherwise prohibiting the transactions contemplated by this Agreement, or that questions the validity or the legality of the transactions contemplated by this Agreement and that could reasonably be expected to materially and adversely affect the value of the Company or its business, it being agreed that each party will use its reasonable best efforts to have any such injunction lifted. Section 8.2 Conditions to Obligation of the Company to Effect the Merger. The obligation of the Company to effect the Merger will be subject to the fulfillment at or prior to the Effective Time of the additional following conditions: (a) Performance/Representations and Warranties. TCI Music and Merger Sub shall have performed in all material respects their agreements contained in this Agreement required to be performed by them at or prior to the Effective Time and the representations and warranties of TCI Music and Merger Sub set forth in this Agreement, if qualified by materiality, are true in all respects and if not so qualified, are true in all material respects, when made and at and as of the Effective Time as if made at and as of such time, and the Company shall have received a certificate of TCI Music and Merger Sub executed on behalf of each such corporation by the President or a Vice President of such corporation to that effect. (b) Legal Opinion. The Company shall have received the opinion of counsel to TCI Music and Merger Sub (which counsel may be an employee of TCI) substantially to the effect set forth in Exhibit A. (c) Absence of Changes. There shall have been no material adverse change in the financial condition, results of operations, assets, liabilities, business or prospects of TCI Music since the date of this Agreement. (d) Registration Rights Agreement. TCI Music shall have executed and delivered the Registration Rights Agreement in substantially the form set forth on Exhibit C. (e) TCI Agreement. The Company shall have received a letter from Tele-Communications, Inc. ("TCI") or one or more Affiliates controlled by TCI pursuant to which TCI or such Affiliates agree to continue to be beneficial owners (as determined pursuant to Rule 13d-3 under the Exchange Act) of shares of TCI Music capital stock representing at least one-third of the total voting power of all voting stock of TCI Music through the earlier of the date the Merger Shares -36- 37 are registered, or such registration obligations expire, pursuant to the terms of the Registration Rights Agreement. Section 8.3 Conditions to Obligations of TCI Music and Merger Sub to Effect the Merger. The obligations of TCI Music and Merger Sub to effect the Merger will be subject to the fulfillment at or prior to the Effective Time of the additional following conditions: (a) Performance/Representations and Warranties. The Company shall have performed in all material respects its agreements contained in this Agreement required to be performed by it at or prior to the Effective Time and, except as contemplated or permitted by this Agreement, the representations and warranties of the Company set forth in this Agreement, if qualified by materiality, are true in all respects and if not so qualified, are true in all material respects, when made and at and as of the Effective Time as if made at and as of such time, and TCI Music and Merger Sub shall have received a certificate of the Company executed on behalf of the Company by the President or an Executive Vice President of the Company to that effect. (b) Consents. All consents of third parties required to be obtained with respect to the Merger and the other transactions contemplated by this Agreement shall have been obtained. (c) Cancellation of Warrants and Registration Rights; No Exercise of Warrants. TCI Music shall have received evidence satisfactory to it of (i) the unanimous consent of the holders of all Warrants that are outstanding or effective as of the date of this Agreement to be subject to the Warrant Cancellation and that such consent is still in effect at the Effective Time; (ii) the consent of any Person that has registration rights with respect to the Company's Warrants or capital stock of the cancellation or termination thereof and that such consent is still in effect at the Effective Time; and (iii) no notice of exercise of Warrants was received by the Company and no Warrants were exercised after the date of this Agreement and prior to the Effective Time. (d) Stockholders; Escrow Shares. TCI Music shall have received evidence satisfactory to it that (i) the number of Dissenting Shares do not exceed 10% of the issued and outstanding shares of Company Common Stock and (ii) all shares of Series A, Series B and Series E Common Stock of the Company currently held in escrow pursuant to the Stock Escrow Agreement dated as of November 21, 1995 among the Company, certain of its stockholders and American Stock Transfer & Trust Company (the "Escrow Agreement"), the Company Charter or otherwise, have been released. To the extent permitted by law and the Escrow Agreement, if the Company's stockholders and Blair do not consent to the release of the Class B Shares held in escrow prior to the Effective Time and the beneficial owners of such shares do not otherwise receive Merger Shares in replacement therefor in connection with the Merger, TCI Music will vote for or consent to the release from escrow of the TCI Music Series A Common Stock into which such shares will be converted at the Effective Time. Such release of TCI Music Series A Common Stock will be accomplished in a manner that does not require the recipients of those shares to recognize income or gain if that method of releasing the shares is not likely to have any adverse effect on TCI Music. -37- 38 (e) Absence of Changes. There shall have been no material adverse change (other than a decrease in the Company's working capital consistent with decreases experienced in recent periods) in the financial condition, results of operations, assets, liabilities, business or prospects of the Company since the date of the Most Recent Company Balance Sheet included in the Company SEC Reports. (f) Legal Opinion. TCI Music shall have received the opinion of Reid & Priest LLP, counsel to the Company, substantially to the effect set forth in Exhibit B. (g) Representation Letter. TCI Music shall have received from each holder of Company Common Stock or Warrants a duly executed Representation Letter in the form of Exhibit D. (h) Termination of Consulting Agreements. TCI Music shall have received executed agreements between the Company and each of Robert B. Meyrowitz and Lou Falcigno terminating their consulting agreements with the Company as of the Effective Time on terms satisfactory to TCI Music. (i) Blair Release and Waiver. TCI Music and the Company shall have received from Blair, in forms acceptable to TCI Music, a receipt with respect to payment of all amounts payable under the Blair Contract and release and waiver with respect to any other amounts claimed by Blair to be payable in connection with the Company's proposed initial public offering. (j) Filing of Restatement to Company Charter Stock. TCI Music shall have received evidence satisfactory to it that the restatement to the Company Charter in the form of Exhibit E has been duly filed with the Secretary of State of the State of Delaware. ARTICLE TERMINATION, AMENDMENT AND WAIVER Section 9.1 Termination. This Agreement may be terminated at any time prior to the Effective Time, whether before or after approval of the Merger by the stockholders of the Company: (a) By Mutual Consent. By mutual consent of the Board of Directors of TCI Music and the Board of Directors of the Company. (b) By TCI Music or the Company. By either TCI Music or the Company (i) if at the Meeting (including any postponement or adjournment thereof), this Agreement, the Merger and the transactions contemplated by this Agreement are not approved and adopted by the affirmative vote specified herein or (ii) at any time after January 15, 1998, if the Merger has not been consummated on or before such date, and in either case so long as the terminating party is not in -38- 39 breach of any of its obligations hereunder in any material respect as of the time such party gives notice of its election to terminate this Agreement and, if the Company is the terminating party, so long as the TCI Music Loan has been repaid in full, together with accrued interest, and none of the Company Stockholders (as defined in the Voting Agreement) is in breach of any obligations under the Voting Agreement as of the time that the Company gives notice of its election to terminate this Agreement. (c) By the Company. By the Company (provided the Company is not in breach of any of its obligations under this Agreement in any material respect and none of the Company Stockholders is in breach of any obligations under the Voting Agreement, in each case as of the time that the Company gives notice of its election to terminate this Agreement) if any of the conditions specified in Section 8.1 or Section 8.2 have not been waived by the Company (or, in the case of Section 8.1, waived by the Company, TCI Music and Merger Sub) or satisfied, at such time as such condition is no longer capable of satisfaction. (d) By TCI Music. By TCI Music (provided that neither TCI Music nor Merger Sub is in breach of any of its obligations hereunder in any material respect as of the time TCI Music gives notice of its election to terminate this Agreement) if any of the conditions specified in Section 8.1 or Section 8.3 have not been waived by TCI Music (or, in the case of Section 8.1, waived by TCI Music, Merger Sub and the Company) or satisfied, at such time as such condition is no longer capable of satisfaction. Section 9.2 Effect of Termination. In the event of termination of this Agreement by either TCI Music or the Company, as provided above, this Agreement will forthwith become void and (except for the willful breach of this Agreement by any party to this Agreement occurring prior to such termination) there will be no liability on the part of any of the Company, TCI Music or Merger Sub, except that the Company will remain liable under the TCI Music Loan. Section 9.3 Amendment. This Agreement may be amended by the parties to this Agreement, by or pursuant to action taken by all of their Boards of Directors, at any time before or after approval of this Agreement by the stockholders of the Company and prior to the Effective Time, but, after such approval, no amendment will be made that alters the indemnification provisions of Section 7.2 or changes the ratio at which Company Common Stock is to be converted into TCI Music Common Stock as provided in Section 3.2 without stockholder approval. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties to this Agreement. Section 9.4 Waiver. At any time prior to the Effective Time, the parties to this Agreement, by or pursuant to action taken by their respective Boards of Directors, may (i) extend the time for performance of any of the obligations or other acts of the other parties to this Agreement, (ii) waive any inaccuracies in the representations and warranties set forth in this Agreement or in any documents delivered pursuant to this Agreement and (iii) waive compliance with any of the agreements or conditions set forth in this Agreement. Any agreement on the part of -39- 40 a party to this Agreement to any such extension or waiver will be valid if set forth in an instrument in writing signed on behalf of such party. ARTICLE X GENERAL PROVISIONS; DEFINITIONS Section 10.1 Non-Survival of Representations, Warranties and Agreements. No representations and warranties contained in this Agreement will survive beyond the Closing Date. This Section 10.1 will not limit any covenant or agreement of the parties to this Agreement that by its terms requires performance after the Closing Date. Section 10.2 Notices. All notices or other communications under this Agreement will be in writing and will be given (and will be deemed to have been duly given upon receipt) by delivery in person, by cable, telegram, telex or other standard form of telecommunications, or by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to the Company: Paradigm Music Entertainment Company 67 Irving Place North 4th Floor New York, New York 10003 Attention: President Telecopy: (212) 387-8171 With a copy to: Reid & Priest LLP 40 West 57th Street New York, New York 10019 Attention: Michael S. Elkin, Esq. Telecopy No.: (212) 603-2298 If to TCI Music or Merger Sub: TCI Music, Inc. 8101 East Prentice Avenue Suite 500 Englewood, Colorado 80111 Telecopy No.: (303) 488-3217 -40- 41 With a copy to: Legal Department Terrace Tower II 5619 DTC Parkway Englewood, Colorado 80111-3000 Attention: David B. Koff, President Telecopy No.: (303) 721-5443 With a copy to: Sherman & Howard L.L.C. 633 Seventeenth Street Suite 3000 Denver, Colorado 80202 Attention: Charles Y. Tanabe, Esq. Telecopy No.: (303) 298-0940 or to such other addresses as any party may have furnished to the other parties in writing in accordance with this Section. Section 10.3 Fees and Expenses. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated by this Agreement (other than any fees payable to Blair, which will be paid as provided in Section 5.13) will be paid by the party incurring such expenses. The Company's expenses relating to the transactions contemplated by this Agreement, including fees of Reid & Priest LLP, counsel to the Company, will be paid or accrued by the Company prior to the Effective Time. Section 10.4 Specific Performance. The parties to this Agreement agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties will be entitled to enforce specifically the terms and provisions of this Agreement in any court of the United States or any state having jurisdiction, in addition to any other remedy to which they are entitled at law or in equity. Section 10.5 Entire Agreement. This Agreement will be of no force or effect until executed and delivered by all of the parties to this Agreement. This Agreement (including the documents and instruments referred to in this Agreement), when executed and delivered, constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter of this Agreement, except that the letter agreement dated September 18, 1997 between the Company and TCI Music will remain in effect to the extent necessary to preserve the rights and obligations of the parties accruing prior to the date hereof. Section 10.6 Miscellaneous. This Agreement may be executed in two or more counterparts which together will constitute a single agreement. Any certificate delivered pursuant -41- 42 to this Agreement will be made without personal liability on the part of the officer or employee of the Person giving such certificate. Section 10.7 GOVERNING LAW AND VENUE; WAIVER OF JURY TRIAL. (a) THIS AGREEMENT WILL BE DEEMED TO BE MADE UNDER, AND IN ALL RESPECTS WILL BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH, THE LAW OF THE STATE OF DELAWARE. The parties hereby irrevocably submit to the jurisdiction of the court of the State of Delaware and the federal courts of the United States of America located in the State of Delaware solely in respect of the interpretation and enforcement of the provisions of this Agreement and of the documents referred to in this Agreement, and in respect of the transactions contemplated hereby, and hereby waive, and agree not to assert, as a defense in any action, suit or proceeding for the interpretation or enforcement hereof or of any such document, that it is not subject thereto or that such action, suit or proceeding may not be brought or is not maintainable in said courts or that the venue thereof may not be appropriate or that this Agreement or any such document may not be enforced in or by such courts, and the parties hereto irrevocably agree that all claims with respect to such action or proceeding will be heard and determined in such a Delaware state or federal court. The parties hereby consent to and grant any such court jurisdiction over the person of such parties and over the subject matter of such dispute and agree that mailing of process or other papers in connection with any such action or proceeding in the manner provided in Section 10.2 or in such other manner as may be permitted by law will be valid and sufficient service thereof. (b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY THAT MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH PARTY UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.7. -42- 43 IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their respective duly authorized officers all as of the date first written above. TCI MUSIC, INC. By: /s/ David B. Koff -------------------------------------- Name: David B. Koff Title: President TCI PARA MERGER SUB, INC. By: /s/ David B. Koff -------------------------------------- Name: David B. Koff Title: President PARADIGM MUSIC ENTERTAINMENT COMPANY By: /s/ Thomas McPartland -------------------------------------- Name: Thomas McPartland Title: President EX-4.7 3 EXHIBIT 4.7 1 EXHIBIT 4.7 AMENDMENT TO RIGHTS AGREEMENT This Amendment to Rights Agreement, dated as of March 18, 1998 (the "Amendment"), is by and among TELE-COMMUNICATIONS, INC., a Delaware corporation ("TCI" or the "Company"), TCI MUSIC, INC., a Delaware corporation ("MusicCo"), and THE BANK OF NEW YORK, a New York banking corporation, as Rights Agent for the Company's rights issued pursuant to the Rights Agreement dated as of July 11, 1997 (the "Rights Agreement"). RECITALS Section 8.03 of the Rights Agreement provides that the Company and the Rights Agent may from time-to-time supplement or amend the Rights Agreement without the approval of any Holder in order to cure any ambiguity or to correct or supplement any provision contained therein that may be defective or inconsistent with any other provision therein or to make any other provisions in regard or manner or questions arising thereunder that the Company and the Rights Agent may deem necessary or desirable and that shall not be inconsistent with the provisions of the Rights and shall not adversely affect the interest of the Holders. Accordingly, the parties wish to amend the initial Rights Agreement as provided herein. AGREEMENT In consideration of the foregoing, and of the provisions of the Rights Agreement permitting amendments of the kind contemplated hereby, the parties agree as follows: 1. Definitions. As used in this Amendment, the terms with initial capital letters will have the meanings assigned to them in the Rights Agreement. 2. Definition of Fair Market Value. There shall be added as the last sentence of the definition of Fair Market Value the following: Notwithstanding the foregoing, the Fair Market Value of one share of stock of an Applicable Entity (including, in the case of MusicCo Series A Common Stock, one share of MusicCo Series A Common Stock and each Right, if any, relating thereto) means, as of any date, (i) the closing sale price of such stock as quoted on the principal securities exchange (including, if applicable, the NASDAQ National Market) on which such stock is traded or (ii) if such stock is not traded on any securities exchange, the average of the low bid price and high bid price of such stock, as reported by NASDAQ or, if no such price is reported by NASDAQ, as reported by any reputable successor entity, or, if there is no such successor entity, by such New York Stock Exchange member firm as may be selected by MusicCo. 2 3. Current Market Price of a TCI Series A Share. The first sentence of the last paragraph of Section 4.05 of the Rights Agreement shall be deleted in its entirety and the following substituted therefor: As used herein, the "Current Market Price" of a TCI Series A Share shall be the average of the daily closing prices for a share of TCI Series A Common Stock for 30 consecutive trading days commencing 45 trading days before the date that the Notice to Rights Holders described in Section 4.07 is first published as provided in Section 4.07. 4. Certification by the Company. The Company has delivered to the Rights Agent a certificate from an officer of the Company which states that this Amendment is in compliance of the terms of Section 8.03 of the Rights Agreement, and the Rights Agent is relying on such certificate in executing this Amendment. 5. No Other Amendment. Except as amended hereby, the Rights Agreement will continue in full force and effect without any amendment or modification thereof. 6. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterpart shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. TELE-COMMUNICATIONS, INC. By: /s/ STEPHEN M. BRETT ---------------------------------------- Name: Stephen M. Brett -------------------------------------- Title: Executive Vice President ------------------------------------- TCI MUSIC, INC. By: /s/ STEPHEN M. BRETT ---------------------------------------- Name: Stephen M. Brett -------------------------------------- Title: Vice President ------------------------------------- THE BANK OF NEW YORK, as Rights Agent By: /s/ JOSEPH VARCA ---------------------------------------- Name: Joseph Varca -------------------------------------- Title: Vice President ------------------------------------- EX-10.2 4 EXHIBIT 10.2 1 EXHIBIT 10.2 $100,000,000 REVOLVING LOAN AGREEMENT AMONG TCI MUSIC, INC. and THE BANKS WHOSE NAMES APPEAR AS "BANKS" ON THE SIGNATURE PAGES HEREOF, with BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS ADMINISTRATIVE AGENT, and CREDIT LYONNAIS NEW YORK BRANCH and ROYAL BANK OF CANADA, AS SYNDICATION AGENTS December 30, 1997 2 TABLE OF CONTENTS ARTICLE 1 - DEFINITIONS......................................................................1 ARTICLE 2 - LOANS...........................................................................17 Section 2.1 The Loans.........................................................17 Section 2.2 Manner of Borrowing and Disbursement..............................17 Section 2.3 Interest..........................................................20 Section 2.4 Fees..............................................................22 Section 2.5 Reduction of Commitment...........................................22 Section 2.6 Prepayment........................................................23 Section 2.7 Repayment.........................................................23 Section 2.8 Notes; Loan Accounts..............................................24 Section 2.9 Manner of Payment.................................................24 Section 2.10 Reimbursement.....................................................25 Section 2.11 Application of Proceeds...........................................26 Section 2.12 Capital Adequacy..................................................27 Section 2.13 Bank Tax Forms....................................................27 ARTICLE 3 - CONDITIONS PRECEDENT............................................................28 Section 3.1 Conditions Precedent to Effectiveness of Agreement and Initial Advance...........................................................28 Section 3.2 Conditions Precedent to Each Advance..............................29 ARTICLE 4 - REPRESENTATIONS AND WARRANTIES..................................................30 Section 4.1 Representations and Warranties....................................30 Section 4.2 Survival of Representations and Warranties, etc...................36 ARTICLE 5 - GENERAL COVENANTS...............................................................36 Section 5.1 Preservation of Existence and Similar Matters.....................36 Section 5.2 Business; Compliance with Applicable Law..........................37 Section 5.3 Maintenance of Properties.........................................37 Section 5.4 Accounting Methods and Financial Records..........................37 Section 5.5 Insurance.........................................................37 Section 5.6 Payment of Taxes and Claims.......................................37 Section 5.7 Visits and Inspections............................................38 Section 5.8 Payment of Indebtedness...........................................38 Section 5.9 Use of Proceeds...................................................38 Section 5.10 ERISA.............................................................38 Section 5.11 Indemnity.........................................................38 Section 5.12 Further Assurances................................................39 Section 5.13 Broker's Claims...................................................40
3 Section 5.14 Covenants Regarding Formation of Subsidiaries and Acquisitions....40 ARTICLE 6 - INFORMATION COVENANTS...........................................................40 Section 6.1 Quarterly Financial Statements and Information....................40 Section 6.2 Annual Financial Statements and Information; Certificate of No Default........................................................41 Section 6.3 Performance Certificates..........................................41 Section 6.4 Copies of Other Reports...........................................42 Section 6.5 Notice of Litigation and Other Matters............................42 Section 6.6 Loss of Agreements................................................43 ARTICLE 7 - NEGATIVE COVENANTS..............................................................43 Section 7.1 Indebtedness for Borrowed Money...................................43 Section 7.2 Investments.......................................................44 Section 7.3 Limitation on Liens...............................................45 Section 7.4 Amendment and Waiver..............................................45 Section 7.5 Liquidation; Disposition or Acquisition of Assets.................46 Section 7.6 Limitation on Guaranties..........................................46 Section 7.7 Restricted Payments and Purchases.................................46 Section 7.8 Leverage Ratio....................................................46 Section 7.9 Pro Forma Debt Service Coverage Ratio.............................47 Section 7.10 Interest Coverage Ratio...........................................47 Section 7.11 Affiliate Transactions............................................47 Section 7.12 ERISA Liabilities.................................................48 Section 7.13 Limitation on Upstream Dividends by Subsidiaries..................48 Section 7.14 TCI Revenue Agreement.............................................48 Section 7.15 Designation of Restricted and Unrestricted Subsidiary.............48 ARTICLE 8 - DEFAULT.........................................................................49 Section 8.1 Events of Default.................................................49 Section 8.2 Remedies..........................................................51 ARTICLE 9 - THE ADMINISTRATIVE AGENT........................................................52 Section 9.1 Appointment and Authorization.....................................52 Section 9.2 Delegation of Duties..............................................52 Section 9.3 Interest Holders..................................................53 Section 9.4 Consultation with Counsel.........................................53 Section 9.5 Documents.........................................................53 Section 9.6 Agents and Affiliates.............................................53 Section 9.7 Responsibility of the Agents......................................53 Section 9.8 Action by Administrative Agent....................................54 Section 9.9 Notice of Default.................................................54
-ii- 4 Section 9.10 Responsibility Disclaimed.........................................55 Section 9.11 Indemnification...................................................55 Section 9.12 Credit Decision...................................................55 Section 9.13 Successor Administrative Agent....................................56 Section 9.14 Syndication Agents and Co-Agents..................................56 ARTICLE 10 - CHANGE IN CIRCUMSTANCES AFFECTING LIBOR ADVANCES...............................56 Section 10.1 LIBOR Basis Determination Inadequate..............................57 Section 10.2 Illegality........................................................57 Section 10.3 Increased Costs...................................................57 Section 10.4 Effect On Other Advances..........................................59 ARTICLE 11 - MISCELLANEOUS..................................................................59 Section 11.1 Notices...........................................................59 Section 11.2 Expenses..........................................................61 Section 11.3 Waivers...........................................................61 Section 11.4 Set-Off...........................................................62 Section 11.5 Assignment........................................................62 Section 11.6 Counterparts......................................................64 Section 11.7 Governing Law.....................................................65 Section 11.8 Severability......................................................65 Section 11.9 Headings..........................................................65 Section 11.10 Interest..........................................................65 Section 11.11 Entire Agreement..................................................66 Section 11.12 Amendment and Waiver..............................................66 Section 11.13 Other Relationships...............................................66 Section 11.14 Confidentiality...................................................66 Section 11.15 Survival of Various Provisions....................................67 ARTICLE 12 - WAIVER OF JURY TRIAL...........................................................67 Section 12.1 Waiver of Jury Trial..............................................67
-iii- 5 LOAN AGREEMENT FOR $100,000,000 REVOLVING CREDIT FACILITY among TCI MUSIC, INC. and THE BANKS WHOSE NAMES APPEAR AS "BANKS" ON THE SIGNATURE PAGES HEREOF, with BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, AS ADMINISTRATIVE AGENT, and CREDIT LYONNAIS NEW YORK BRANCH and ROYAL BANK OF CANADA, AS SYNDICATION AGENTS Dated as of the 30th day of December, 1997 THIS AGREEMENT is made as of the 30th day of December, 1997, by and among TCI MUSIC, INC., the Administrative Agent (as defined herein) and the Banks (as defined herein). NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by each of the parties hereto, the parties hereby agree as follows: ARTICLE 1 - Definitions. For the purposes of this Agreement: "Acquisition" shall mean (whether by purchase, exchange, issuance of stock or other equity or debt securities, merger, reorganization or any other method) (i) any acquisition by the Borrower or any of its Restricted Subsidiaries of any other Person, which Person shall then become consolidated with the Borrower or any such Restricted Subsidiary in accordance -1- 6 with GAAP, or (ii) any acquisition by the Borrower or any of its Restricted Subsidiaries of all or any substantial part of the assets of any other Person. "Administrative Agent" shall mean Bank of America National Trust and Savings Association, in its capacity as Administrative Agent for the Banks or any successor Administrative Agent appointed pursuant to Section 9.13 hereof. "Administrative Agent's Office" shall mean the office of the Administrative Agent located at the address set forth in Section 11.1 hereof, or such other office as may be designated pursuant to the provisions of Section 11.1 hereof. "Advance" shall mean amounts advanced by the Banks to the Borrower pursuant to Article 2 hereof on the occasion of any borrowing; and Advances shall mean more than one Advance. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under common control with the Borrower other than a Restricted Subsidiary . For purposes of this definition, "control" when used with respect to any Person means the power to direct or cause the direction of the management and policies of such Person, whether by contract or otherwise. "Affiliation Agreement" shall mean that certain Affiliation Agreement dated as of July 1, 1997, between DMX Inc. and Satellite Services, Inc.. "Affiliate Debt Subordination Agreement" shall mean any Affiliate Debt Subordination Agreement from any Affiliate in favor of the Administrative Agent and in substantially the form of Exhibit A attached hereto. "Agreement" shall mean this Loan Agreement, as amended, supplemented, restated or otherwise modified from time to time. "Agreement Date" shall mean December 30, 1997. "Annualized Operating Cash Flow" shall mean, as of any calculation date, (a) Operating Cash Flow (for the quarter end being tested or the most recently completed fiscal quarter, as the case may be) times (b) four (4). "Applicable Law" shall mean, in respect of any Person, all provisions of constitutions, statutes, rules, regulations, and orders of governmental bodies or regulatory agencies applicable to such Person, including, without limitation, all orders and decrees of all courts and arbitrators in proceedings or actions to which the Person in question is a party or by which it is bound. -2- 7 "Applicable Margin" shall mean the interest rate margin applicable to Base Rate Advances and LIBOR Advances, as the case may be, in each case determined in accordance with Section 2.3(f) hereof. "Assignment and Assumption Agreement" shall mean that certain form of Assignment and Assumption Agreement in substantially the form of Exhibit B attached hereto, pursuant to which each Bank may, as further provided in Section 11.5 hereof, sell a portion of its Loans or Commitment. "Authorized Signatory" shall mean, with respect to any Person, such senior personnel of such Person as may be duly authorized and designated in writing by such Person to execute documents, agreements, and instruments on behalf of such Person. "Banks" shall mean those banks whose names are set forth on the signature pages hereof under the heading "Banks" and any assignees of the Banks which hereafter become parties hereto pursuant to and in accordance with Section 11.5 hereof; and "Bank" shall mean any one of the foregoing Banks. "Base Rate" shall mean, as of any date, a fluctuating interest rate per annum equal to the sum of (a) the higher of (i) the Prime Rate, or (ii) the sum of (1) the Federal Funds Rate, plus (2) one-half of one percent (1/2%), plus (b) the Applicable Margin. The Base Rate shall be adjusted automatically as of the opening of business on the effective date of each change in the Prime Rate or the Federal Funds Rate, as the case may be, to account for such change, and shall also be changed as and when provided in Section 2.3(f) hereof to reflect changes in the Applicable Margin. "Base Rate Advance" shall mean an Advance which bears interest at the Base Rate which the Borrower requests to be made as a Base Rate Advance or is reborrowed as a Base Rate Advance, in accordance with the provisions of Section 2.2 hereof, and which shall be in a principal amount of at least $500,000 and in an integral multiple of $250,000, except for a Base Rate Advance which is in an amount equal to the unused amount of the Commitment, which Advance may be in such amount. "Borrower" shall mean TCI Music, Inc., a Delaware corporation. "Business Day" shall mean a day on which banks and foreign exchange markets are open for the transaction of business required for this Agreement in London, England, Los Angeles, California and New York, New York, as relevant to the determination to be made or the action to be taken. "Capital Expenditures" shall mean with respect to any Person, expenditures for the purchase of tangible assets of long-term use which would be required to be capitalized on the balance sheet of such Person in accordance with GAAP. -3- 8 "Capital Stock" shall mean, as applied to any Person, any capital stock or ownership interests of such Person, regardless of class or designation, and all warrants, options, purchase rights, conversion or exchange rights, voting rights, calls or claims of any character with respect thereto. "Capitalized Lease Obligation" shall mean that portion of any obligation of a Person as lessee under a lease which at the time would be required to be capitalized on the balance sheet of such lessee in accordance with GAAP. "Cash Management Suspension Notice" shall mean a notice delivered to the Borrower executed by the Majority Banks following the occurrence of a Default stating that it is a "Cash Management Suspension Notice." Such Cash Management Suspension Notice shall be in effect from the time such notice is sent until the earlier of (a) such time as it is revoked by notice delivered to the Borrower executed by the Administrative Agent at the request of the Majority Banks, or (b) such time as the event to which it relates is cured or waived in accordance with the terms of this Agreement and the Borrower has given the Administrative Agent and the Banks written notice of the Borrower's intent to resume its ordinary cash management practices. "Change of Control" shall mean any change in the ownership of the Borrower to which the Majority Banks have not consented in writing that results in less than fifty and one-tenth of one percent (50.1%) of all voting rights (after giving effect to any member's agreement or voting trust agreements) with respect to the Capital Stock of the Borrower (including, without limitation, warrants, options, conversion rights, voting rights and calls or claims of any character with respect thereto, to the extent exercisable prior to repayment in full of the Obligations) being owned directly or indirectly by one or more of (a) TCI, (b) Liberty, (c) John C. Malone, (d) the estate of Bob Magness (including the legal heirs of Bob Magness), or (e) the legal heirs of John C. Malone; provided, however, that in the case of clause (d) and (e) above, TCI or Liberty continues to appoint the management of the Borrower. "Co-Agents" shall mean Fleet National Bank and Banque Paribas; and "Co-Agent" shall mean any one of the foregoing Co-Agents. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. "Commitment" shall mean the several obligations of the Banks to advance the aggregate sum of up to $100,000,000 to the Borrower pursuant to the terms hereof, as such obligations may be reduced from time to time. "Commitment Ratios" shall mean the percentages as of the date of determination in which the Banks are severally bound to satisfy the Commitment to make Advances to the -4- 9 Borrower pursuant to the terms hereof, which as of the Agreement Date are as set forth below:
Percentage (Rounded to the Banks nearest 1/10%) Dollar Commitment ----- --------------- ----------------- Bank of America National Trust and Savings Association 30.0% $ 30,000,000 Royal Bank of Canada 20.0% $ 20,000,000 Credit Lyonnais New York Branch 20.0% $ 20,000,000 Fleet National Bank 15.0% $ 15,000,000 Banque Paribas 15.0% $ 15,000,000 TOTAL: 100% $ 100,000,000
"Control Shareholders" shall mean any one or more of the following: (i) TCI or any wholly-owned direct or indirect Subsidiary of TCI; (ii) Liberty or any wholly-owned direct or indirect Subsidiary of Liberty; and (iii) any other shareholder holding greater than 20% of the Capital Stock of the Borrower having ordinary voting power to elect a majority of the board of directors or other governing body. "DBS Agreement" shall mean any agreement between the Borrower (or any of its Restricted Subsidiaries) and a provider of direct broadcast satellite services pursuant to which such provider agrees, among other things, to distribute and exhibit to its subscribers programming of the Borrower and/or its Restricted Subsidiaries. "Default" shall mean any Event of Default, and any other event specified in Section 8.1 hereof which with any passage of time or giving of notice (or both) would constitute such event an Event of Default. "Default Rate" shall mean a simple per annum interest rate equal to the sum of (a) the Base Rate or the LIBOR Basis otherwise applicable plus (b) two percent (2%). "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as in effect on the Agreement Date and as such Act may be amended thereafter from time to time. "ERISA Affiliate" shall mean (a) any corporation which is a member of the same controlled group of corporations (within the meaning of Code Section 414(b)) as is the Borrower, (b) any other trade or business (whether or not incorporated) under common control (within the meaning of Code Section 414(c)) with the Borrower, (c) any other corporation, partnership or other organization which is a member of an affiliated service -5- 10 group (within the meaning of Code Section 414(m)) with the Borrower, or (d) any other entity required to be aggregated with the Borrower pursuant to regulations under Code Section 414(o). "Event of Default" shall mean any of the events specified in Section 8.1 hereof, provided that any requirement for notice or lapse of time, or both, has been satisfied. "FCC" shall mean the Federal Communications Commission, or any successor thereto. "Federal Funds Rate" shall mean, as of any date, the weighted average of the rates on overnight federal funds transactions with the members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by the Administrative Agent. "Fee Agreements" shall mean all agreements by and between the Borrower on the one hand, and the Administrative Agent or the Banks (or any of them) on the other hand, setting forth the applicable fees relating to this Agreement. "GAAP" shall mean, as in effect from time to time, generally accepted accounting principles consistently applied. "Guaranty" or "Guaranteed," as applied to an obligation (each a "primary obligation"), shall mean and include (a) any guaranty, direct or indirect, in any manner, of any part or all of such primary obligation, and (b) any agreement, direct or indirect, contingent or otherwise, the practical effect of which is to assure in any way the payment or performance (or payment of damages in the event of non-performance) of any part or all of such primary obligation, including, without limiting the foregoing, any reimbursement obligations as to amounts drawn down by beneficiaries of outstanding letters of credit or capital call requirements, without limitation, and any obligation of such Person (the "primary obligor"), whether or not contingent, (i) to purchase any such primary obligation or any property or asset constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of such primary obligation or (2) to maintain working capital, equity capital or the net worth, cash flow, solvency or other balance sheet or income statement condition of any other Person, (iii) to purchase property, assets, securities or services primarily for the purpose of assuring the owner or holder of any primary obligation of the ability of the primary obligor with respect to such primary obligation to make payment thereof or (iv) otherwise to assure or hold harmless the owner or holder of such primary obligation against loss in respect thereof excluding, however, general indemnifications for breach of contract entered into in the ordinary course of business. For purposes hereof, the amount of any Guaranty of (i) a -6- 11 contract of another Person for the purchase or acquisition of programming by such other Person in the ordinary course of business shall be the maximum amount payable under such guaranty in the twelve (12) month period immediately succeeding the calculation date and (ii) in connection with a permitted sale hereunder shall be an amount reasonably determined by the Borrower. "Indebtedness" shall mean, with respect to any Person, (a) all items, except items of owners', shareholders' and partners' equity or capital stock or surplus or general contingency or deferred tax reserves, which in accordance with GAAP would be included in determining total liabilities as shown on the liability side of a balance sheet of such Person, (b) all direct or indirect obligations secured by any Lien to which any property or asset owned by such Person is subject, whether or not the obligation secured thereby shall have been assumed, (c) to the extent not otherwise included, all Capitalized Lease Obligations of such Person, (d) all reimbursement obligations with respect to outstanding letters of credit, and (e) all obligations of such Person to pay the deferred purchase or acquisition price of property or services. "Indebtedness for Money Borrowed" shall mean, with respect to any Person, all money borrowed by such Person and Indebtedness represented by notes payable by such Person, all obligations of such Person evidenced by bonds, debentures, notes, or other similar instruments, and all Indebtedness of such Person upon which interest charges are customarily paid, all Capitalized Lease Obligations, all reimbursement obligations with respect to outstanding letters of credit, all Indebtedness issued or assumed as full or partial payment for property or services (other than trade payables arising in the ordinary course of business), whether or not any such notes, drafts, obligations or Indebtedness represent Indebtedness for money borrowed, and, without duplication, Guaranties of any of the foregoing. For purposes of this definition, interest which is accrued but not paid on the original due date or within any applicable cure or grace period as provided by the underlying contract for such interest shall be deemed Indebtedness for Money Borrowed. For purposes of this Agreement, Indebtedness for Money Borrowed shall not include (i) any bond obligation of, or any Guaranty of or letter of credit securing performance by, either Borrower or any Restricted Subsidiary undertaken or incurred in the ordinary course of its or their business (other than in connection with the borrowing of money or obtaining of credit) as presently conducted for or on behalf of either Borrower or a Restricted Subsidiary and (ii) a guaranty or other obligation consisting of a pledge of such Person's interest in any Unrestricted Subsidiary equity, provided that recourse under any such guaranty or obligation secured by such pledge shall be limited solely to such Person's interest in such Unrestricted Subsidiary equity so pledged. "Interest Hedge Agreement" shall mean the obligations of any Person pursuant to (a) any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such Person calculated by applying a fixed or a floating rate of interest on -7- 12 the same notional amount or (b) interest rate swaps, caps, floors, collars and similar agreements. "Interest Period" shall mean, (a) in connection with any Base Rate Advance, each calendar quarter; provided, however, that for any Base Rate Advance made after the first day of any calendar quarter the first Interest Period with respect thereto shall be the period beginning on the date such Advance is made and ending on the last day of the calendar quarter in which such Advance is made; provided, further, however, that if a Base Rate Advance is made on the last day of any calendar quarter, it shall have an initial Interest Period ending on, and its initial Payment Date shall be, the last day of the following calendar quarter; and, (b) in connection with any LIBOR Advance, the term of such Advance selected by the Borrower or otherwise determined in accordance with this Agreement. Notwithstanding the foregoing, however, (i) any applicable Interest Period which would otherwise end on a day which is not a Business Day shall be extended to the next succeeding Business Day unless, with respect to LIBOR Advances only, such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day; (ii) with respect to LIBOR Advances only, any applicable Interest Period which begins on a day for which there is no numerically corresponding day in the calendar month during which such Interest Period is to end shall (subject to clause (i) above) end on the last day of such calendar month; and (iii) no Interest Period shall extend beyond the Maturity Date or such earlier date as would interfere with the repayment obligations of the Borrower under Section 2.7 hereof. Interest shall be due and payable with respect to any Advance as provided in Section 2.3 hereof. "Interest Rate Basis" shall mean the Base Rate or the LIBOR Basis, as appropriate. "Investment" shall mean, with respect to the Borrower or any of its Subsidiaries, (a) any loan, advance or extension of credit (other than to customers in the ordinary course of business) by such Person to, or any Guaranty or other contingent liability with respect to the capital stock, indebtedness or other obligations of, or any contributions to the capital of, any other Person, or any ownership, purchase or other acquisition by such Person of any interest in any capital stock, limited partnership interests, general partnership interest, or other securities of such other Person, other than an Acquisition, and (b) all expenditures by the Borrower or any of its Subsidiaries relating to the foregoing. "Leverage Ratio" shall mean, as of any date of determination, the ratio of (a) Total Debt as of such date to (b) Annualized Operating Cash Flow. "Liberty" shall mean Liberty Media Corporation, a Delaware corporation. "LIBOR" shall mean, for any Interest Period, the interest rate per annum equal to the offered rate for deposits in United States Dollars for an amount approximately equal to the principal amount of, and for a length of time approximately equal to the Interest Period for, -8- 13 the LIBOR Advance sought by the Borrower, which rate appears on the Reuter's Screen LIBO Rate Page (or such other page as may replace that page in that service) at approximately 11:00 a.m. (London time) two (2) Business Days before the first day of such Interest Period; provided, that (i) if more than one such offered rate appears on the Reuter's Screen, LIBOR shall be the arithmetic average (rounded upward to the nearest one-sixteenth (1/16) of one percent (1%)) of such offered rates, or (ii) if the Reuter's Screen is not available, LIBOR shall be the average offered to the Administrative Agent (or an affiliate thereof) by two (2) leading banks (rounded upward to the nearest one-sixteenth (1/16) of one percent (1%)) of the interest rates per annum at which deposits in United States Dollars for such Interest Period are offered to the Administrative Agent in the London eurodollar interbank borrowing market at approximately 11:00 a.m. (London time) two (2) Business Days before the first day of such Interest Period, in an amount approximately equal to the principal amount of, and for a length of time approximately equal to the Interest Period for, the LIBOR Advance sought by the Borrower. "LIBOR Advance" shall mean an Advance which bears interest at the LIBOR Basis which the Borrower requests to be made as a LIBOR Advance or which is reborrowed as a LIBOR Advance, in accordance with the provisions of Section 2.2 hereof, and which shall be in a principal amount of at least $500,000 and in an integral multiple of $250,000, except for a LIBOR Advance which is in an amount equal to the unused amount of the Commitment, which Advance may be in such amount. "LIBOR Basis" shall mean a simple per annum interest rate equal to the sum of (a) LIBOR plus (b) the Applicable Margin. The LIBOR Basis shall be rounded upward to the nearest one-hundredth of one percent (1/100%) and shall apply to Interest Periods of one (1), two (2), three (3), and six (6) months, and, once determined, shall be subject to Article 10 hereof and shall remain unchanged during the applicable Interest Period. The Borrower may not select an Interest Period for a LIBOR Advance in excess of six (6) months unless the Administrative Agent has notified the Borrower (i) that each of the Banks has available to it funds for such Bank's share of the proposed Advance which are not required for other purposes and (ii) that such funds are available to each Bank at a rate (exclusive of reserves and other adjustments) at or below LIBOR for such proposed Advance and Interest Period. Interest on LIBOR Advances shall also be subject to adjustment to reflect changes in the Applicable Margin as provided in Section 2.3(f) hereof. "LIBOR Reserve Percentage" shall mean the percentage which is in effect from time to time under Regulation D of the Board of Governors of the Federal Reserve System, as such regulation may be amended from time to time, as the actual reserve requirement applicable with respect to Eurocurrency Liabilities (as that term is defined in Regulation D), to the extent any Bank has any Eurocurrency Liabilities subject to such reserve requirement at that time. -9- 14 "Licenses" shall mean any rights, whether based upon any agreement, statute, order, ordinance, or otherwise, granted by any governmental authority to the Borrower or its Restricted Subsidiaries to operate its business, together with any amendment, modification or replacement with respect thereto. "Lien" shall mean, with respect to any property, any mortgage, lien, pledge, assignment, charge, security interest, title retention agreement, levy, execution, seizure, attachment, garnishment, or other encumbrance of any kind in respect of such property, whether or not choate, vested, or perfected. "Loan Documents" shall mean this Agreement, the Notes, any Subsidiary Guaranty, the Fee Agreements, all Requests for Advance, all Affiliate Debt Subordination Agreements and all Interest Hedge Agreements between the Borrower and the Administrative Agent, the Banks, or any of them and all other documents and agreements executed or delivered in connection with or contemplated by this Agreement. "Loans" shall mean, collectively, amounts advanced by the Banks to the Borrower under the Commitment. "Majority Banks" shall mean, at any time, Banks the total of whose Commitment Ratios equals or exceeds fifty-one percent (51%). "Materially Adverse Effect" shall mean any materially adverse effect upon the business, assets, financial condition or results of operations of the Borrower and its Restricted Subsidiaries, on a consolidated basis in accordance with GAAP, taken as a whole, or upon the ability of the Borrower and its Restricted Subsidiaries, taken as a whole, to perform their obligations under this Agreement or any other Loan Document. "Maturity Date" shall mean June 30, 2005, or such earlier date as payment of the Loans shall be due (whether by acceleration or otherwise). "Maximum Permitted Indebtedness" shall mean, as of any date, the maximum amount of Indebtedness that the Borrower could incur on such date and remain in compliance with Section 7.8 hereof. "MSO Agreement" shall mean any agreement between the Borrower or any of its Restricted Subsidiaries and a cable television operator pursuant to which such operator agrees, among other things, to distribute and exhibit to its subscribers programming of the Borrower or such Restricted Subsidiary and shall include, without limitation, the Affiliation Agreement. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) of ERISA. -10- 15 "Necessary Authorizations" shall mean all authorizations, consents, permits, approvals, licenses, and exemptions from, and all filings and registrations with, and all reports to, any governmental or other regulatory authority whether federal, state, or local, and all agencies thereof necessary for the conduct of the businesses and the ownership (or lease) of the properties and assets of the Borrower or its Restricted Subsidiaries, including, without limitation, the Licenses. "Notes" shall mean, collectively, those certain promissory notes in the aggregate principal amount of up to $100,000,000, one such note issued to each of the Banks by the Borrower, each one substantially in the form of Exhibit C attached hereto, and any extensions, renewals or amendments to any of the foregoing. "Obligations" shall mean (a) all payment and performance obligations of every kind, nature and description of the Borrower and all other obligors to the Banks and the Administrative Agent under this Agreement and the other Loan Documents (including any interest, fees and other charges on the Loans or otherwise under the Loan Documents that would accrue but for the filing of a bankruptcy action with respect to the Borrower, whether or not a claim for such amounts is allowed in such bankruptcy action and including Obligations to the Banks pursuant to Section 5.11 hereof), as they may be amended from time to time, or as a result of making the Loans, whether such Obligations are direct or indirect, absolute or contingent, due or not due, contractual or tortious, liquidated or unliquidated, arising by operation of law or otherwise, now existing or hereafter arising, and (b) the obligation to pay an amount equal to the amount of any and all damages which the Banks and the Administrative Agent, or any of them, may suffer by reason of a breach by the Borrower or any other obligor of any obligation, covenant, or undertaking with respect to this Agreement or any other Loan Document. "Operating Cash Flow" shall mean, with respect to the Borrower and its Restricted Subsidiaries on a consolidated basis in respect of any period, the sum of (a) operating income for such period, plus (b) to the extent deducted in determining operating income, the sum of the following for such period (i) depreciation, (ii) amortization, and (iii) all other non-cash items and all extraordinary and non-recurring items; provided, the calculation is made after giving effect to acquisitions and dispositions of assets of the Borrower or any Restricted Subsidiary (including designations of Subsidiaries as Restricted or Unrestricted) during such period as if such transactions had occurred on the first day of such period. "Payment Date" shall mean the last day of each Interest Period. "Permitted Asset Sales" shall mean sales, transfers, exchanges or other dispositions of assets by the Borrower or any of its Restricted Subsidiaries in bona fide arms' length transactions in which the Operating Cash Flow for the most recently completed fiscal quarter of such assets sold, transferred, exchanged, or disposed of do not exceed in the aggregate -11- 16 (when added to amounts for prior sites, transfers, exchanges or other dispositions) (i) during any period of one year (or shorter period commencing on the Agreement Date), 30% of the Operating Cash Flow of the Borrower and Restricted Subsidiaries ending as of the most recently completed fiscal quarter, and (ii) during any period of five years (or shorter period commencing on the Agreement Date), 50% of the Operating Cash Flow of the Borrower and Restricted Subsidiaries ending as of the most recently completed fiscal quarter; provided that, in the case of exchanges, Operating Cash Flow shall be the net effect of such exchanges and the following conditions shall have been satisfied: (v) the assets received by the Borrower or the Restricted Subsidiary are free of any Liens except for Permitted Liens; (w) the Borrower or such Restricted Subsidiary receives assets which have comparable value; (x) no Event of Default shall have occurred and be continuing either before or after the consummation of such transaction; (y) such trade or exchange shall not have a Materially Adverse Effect; and (z) the Borrower promptly notifies the Administrative Agent (and the Administrative Agent shall promptly notify the Banks) of such trade or exchange (such notice to include information comparing the assets being traded or exchanged and the methodology used to establish fair and comparable value). "Permitted Liens" shall mean, as applied to any Person: (a) any Lien in favor of the Administrative Agent or the Banks given to secure the Obligations or the obligations under the Loan Agreement; (b) (i) Liens on real estate for real estate taxes not yet delinquent and (ii) Liens for taxes, assessments, judgments, governmental charges or levies, or claims the non-payment of which is being contested in good faith by appropriate proceedings and for which adequate reserves as required by GAAP have been set aside on such Person's books, but only so long as no foreclosure, distraint, sale, or similar proceedings have been commenced with respect thereto and which remain unstayed for a period of thirty (30) days after their commencement; (c) Liens of carriers, warehousemen, mechanics, laborers, and materialmen incurred in the ordinary course of business for sums not yet due or being contested in good faith, if such reserve or appropriate provision, if any, as shall be required by GAAP shall have been made therefor; (d) Liens incurred in the ordinary course of business in connection with worker's compensation and unemployment insurance; (e) restrictions on the transfer of assets imposed by any agreement, or by any federal, state or local statute, regulation or ordinance applicable to such person; (f) easements, rights-of-way, restrictions, and other similar encumbrances on the use of real property which do not interfere with the ordinary conduct of the business of -12- 17 such Person, or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which were not incurred in connection with Indebtedness or other extensions of credit and which do not in the aggregate materially detract from the value of such properties or materially impair their use in the operation of the business of such Person; (g) purchase money mortgages or security interests, conditional sale arrangements and other similar security interests, on any property or assets hereinafter acquired by the Borrower (hereafter referred to individually as a "Purchase Money Security Interest"); provided, however, that: (i) the transaction in which any Purchase Money Security Interest is proposed to be created is not otherwise prohibited by this Agreement; (ii) any Purchase Money Security Interest shall attach only to the property or asset acquired in such transaction and shall not extend to or cover any other assets or properties of the Borrower; (iii) the Indebtedness secured or covered by any Purchase Money Security Interest shall not exceed the cost of the property or asset acquired and shall not be renewed or extended by the Borrower; (iv) the aggregate outstanding amount of all Indebtedness secured by Purchase Money Security Interests and Capitalized Lease Obligations shall not at any time exceed the amounts permitted pursuant to Section 7.1 hereof; and (h) other Liens; provided that (i) no Default or Event of Default exists prior to or after giving effect to the incurrence thereof; and (ii) the aggregate amount of all Indebtedness secured by such other Liens does not exceed the amounts permitted pursuant to Section 7.1 hereof. "Person" shall mean an individual, corporation, partnership, limited liability company, trust, or unincorporated organization, or a government or any agency or political subdivision thereof. "Plan" shall mean an employee benefit plan within the meaning of Section 3(3) of ERISA maintained by or contributed to by the Borrower or any ERISA Affiliate. "Prime Rate" shall mean, at any time, the rate of interest adopted by Bank of America National Trust and Savings Association, as its reference rate for the determination of interest rates for loans of varying maturities in United States dollars to United States residents of varying degrees of creditworthiness and being quoted at such time by such bank as its "prime rate." The Prime Rate is not necessarily the lowest rate of interest charged to borrowers of The Bank of America National Trust and Savings Association. -13- 18 "Pro Forma Debt Service" shall mean for any period the sum of (a) Total Pro Forma Interest Expense during such period (b) Pro Forma Scheduled Principal Payments with respect to the Loans during such period; and (c) all payments of principal on Indebtedness for Money Borrowed of the Borrower and the Restricted Subsidiaries (other than the Loans) scheduled to be paid during such period. "Pro Forma Scheduled Principal Payments" shall mean for any period (a) Loans as of the date of determination minus (b) the Commitment scheduled to be available on the last day of such period after giving effect to the Commitment reductions set forth in Section 2.5 hereof. "Regulatory Change" shall mean, with respect to any Bank, any change on or after the date of this Agreement in United States Federal, state or foreign laws or regulations (including the LIBOR Reserve Percentage under Regulation D) or the adoption or making on or after such date of any interpretations, directives or requests applying to a class of banks including such Bank of or under any United States Federal or state, or any foreign, laws or regulations (whether or not having the force of law) by any court or governmental or monetary authority charged with the interpretation or administration thereof. "Reportable Event" shall have the meaning set forth in Section 4043(c) of ERISA. "Request for Advance" shall mean any certificate signed by an Authorized Signatory requesting an Advance hereunder which will increase the aggregate amount of the Loans outstanding, which certificate shall be denominated a "Revolver Status Advice," and shall be in substantially the form of Exhibit D attached hereto. Each Request for Advance shall, among other things, (a) specify the date of the Advance, which shall be a Business Day, the amount of the Advance, the type of Advance, and, with respect to LIBOR Advances, the Interest Period selected by the Borrower and (b) state that the requirements of Section 3.2 hereof have been satisfied. "Restricted Payment" shall mean, (a) any direct or indirect distribution, dividend, or other payment to any Person (other than to the Borrower or any wholly-owned Subsidiary of the Borrower) on account of any general or limited partnership interest in, or other securities of, the Borrower, or any of its Subsidiaries (other than dividends payable solely in stock of the Borrower or such Subsidiary, as applicable, and stock splits), including, without limitation, any direct or indirect distribution, dividend or other payment to any Person (other than to the Borrower or any Subsidiary of the Borrower) on account of any warrants or other rights or options to acquire shares of capital stock of the Borrower or any of its Subsidiaries; and (b) any consulting, management or other similar fees, or any interest thereon, payable by the Borrower or its Subsidiaries, to any Affiliate, other than reimbursement of overhead and employee costs in the ordinary course of business which are directly attributable to the Borrower and its Subsidiaries. -14- 19 "Restricted Purchase" shall mean any payment (including, without limitation, any sinking fund payment, prepayment or installment payment) on account of the purchase, redemption, or other acquisition or retirement of any general or limited partnership interest in, or shares of capital stock or other securities of, the Borrower or any of the Subsidiaries, including, without limitation, any warrants or other rights or options to acquire shares of capital stock of the Borrower or any of the Subsidiaries or any loan, advance, release or forgiveness of Indebtedness by the Borrower or its Subsidiaries to any partner, shareholder or Affiliate of any such Person. "Restricted Subsidiaries" shall mean DMX Inc. and shall include any other Subsidiary of the Borrower which the Borrower designates (and the Majority Banks accept) as a "Restricted Subsidiary," and "Restricted Subsidiary" shall mean any one of the foregoing. "Significant Default" shall mean a Default described in Sections 8.1(b), (f) or (g) hereof. "Subordinated Affiliate Debt" shall mean Indebtedness (a) owed by Borrower to any Affiliate; (b) which is unsecured; and (c) which has been subordinated in right of payment to the prior payment of the Obligations, pursuant to an Affiliate Debt Subordination Agreement. "Subsidiary" shall mean, as applied to any Person, (a) any corporation of which greater than fifty percent (50%) of the outstanding stock (other than directors' qualifying shares) having ordinary voting power to elect a majority of its board of directors, regardless of the existence at the time of a right of the holders of any class or classes of securities of such corporation to exercise such voting power by reason of the happening of any contingency, or any partnership of which greater than fifty percent (50%) of the outstanding partnership interests is at the time owned by such Person, or by one or more Subsidiaries of such Person, or by such Person and one or more Subsidiaries of such Person, and (b) any other entity the majority of whose equity interests having ordinary voting power is at the time owned by such Person. "Subsidiary Guaranty" shall mean each Subsidiary Guaranty in favor of the Administrative Agent on behalf of itself and the Banks, given by a Restricted Subsidiary of the Borrower, each substantially in the form of Exhibit E attached hereto, including that certain Master Subsidiary Guaranty dated as of the Agreement Date. "Syndication Agents" shall mean Credit Lyonnais New York Branch and Royal Bank of Canada; and "Syndication Agent" shall mean any one of the foregoing Syndication Agents. "TCI" shall mean Tele-Communications, Inc., a Delaware corporation. -15- 20 "TCI Revenue Agreement" shall mean, collectively, (a) that certain Amended and Restated Contribution Agreement, dated as of November 10, 1997, between the Borrower and TCI, and (b) the Affiliation Agreement. "Total Debt" shall mean on a consolidated basis, as of any date, without duplication (a) all outstanding Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries (other than Subordinated Affiliate Debt) and (b) the aggregate of all Guarantees by the Borrower and its Restricted Subsidiaries (provided, however, that the amount of any Guaranty by the Borrower or any of its Restricted Subsidiaries of (i) a contract of another Person for the purchase or acquisition of programming by such other Person in the ordinary course of business shall be the maximum amount payable under such guaranty in the twelve (12) month period immediately succeeding the calculation date and (ii) in connection with a permitted sale shall be an amount reasonably determined by the Borrower). "Total Interest Expense" shall mean, for any period, an amount equal to the sum of (a) the interest paid during such period with respect to Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries and (b) commitment fees paid with respect to the Loans during such period. "Total Pro Forma Interest Expense" shall mean, for any period, an amount equal to the sum of (a) the interest to be paid during such period with respect to Indebtedness for Money Borrowed of the Borrower and its Restricted Subsidiaries and (b) commitment fees to be paid with respect to the Loans during such period. For purposes of clause (a) of this definition only, interest payable in respect of the Loans, to the extent that interest payments on the Loans are not fixed by way of a LIBOR Advance or an Interest Hedge Agreement, shall be calculated using the weighted average of the Interest Rate Bases in effect on the calculation date. "Trademarks" shall mean all registered trademarks and pending applications for trademarks of the Borrower and its Restricted Subsidiaries which are more fully described on Schedule 1 attached hereto. "Transponder Lease Agreement" shall mean any agreement by and between the Borrower (or any of its Restricted Subsidiaries) and any other Person for the license, lease or other agreement to use the telecommunications satellites for purposes of broadcasting the programming of the Borrower and its Restricted Subsidiaries and any other agreement related to the transmission, origination and production of such programming and the related technical services. "Unrestricted Subsidiary" shall mean any Subsidiary of the Borrower which is not a Restricted Subsidiary and shall include, as of the Agreement Date, The Box Worldwide, Inc. and Paradigm Entertainment Group. -16- 21 Each definition of an agreement in this Article 1 shall include such agreement as modified, amended, or supplemented from time to time with the prior written consent of the Majority Banks, except as provided in Section 11.12 hereof, and except where the context otherwise requires, definitions imparting the singular shall include the plural and vice versa. Except where otherwise specifically restricted, reference to a party to a Loan Document includes that party and its successors and assigns. All terms used herein which are defined in Article 9 of the Uniform Commercial Code in effect in the State of New York on the date hereof and which are not otherwise defined herein shall have the same meanings herein as set forth therein. All accounting terms used herein without definition shall be used as defined under GAAP. All references to financial information and results of the Borrower shall be determined on a consolidated basis with the Borrower's Restricted Subsidiaries as appropriate. ARTICLE 2 - Loans Section 2.1 The Loans. The Banks agree, severally in accordance with their respective Commitment Ratios and not jointly, upon the terms and subject to the conditions of this Agreement, to lend and relend to the Borrower, on or prior to the Maturity Date, amounts which in the aggregate at any one time outstanding do not exceed the Commitment (as it may be reduced from time to time pursuant to the terms hereof). Section 2.2 Manner of Borrowing and Disbursement. (a) Choice of Interest Rate, etc. Any Advance shall, at the option of the Borrower, be made as a Base Rate Advance or a LIBOR Advance; provided, however, that (i) if the Borrower fails to give the Administrative Agent written notice specifying whether an Advance is to be repaid or reborrowed on a Payment Date, such Advance shall be repaid and then reborrowed as a Base Rate Advance on the Payment Date and (ii) the Borrower may not select a LIBOR Advance if, at the time of such selection, a Default has occurred and is continuing. LIBOR Advances shall in all cases be subject to Section 2.3(e) and Article 10 hereof. (b) Base Rate Advances. (i) Advances. The Borrower shall give the Administrative Agent in the case of Base Rate Advances irrevocable written notice in the form of a Request for Advance, or notice by telephone or telecopy followed immediately by a Request for Advance not later than 12:00 noon (Eastern time) on the date the Advance is requested; provided, however, that the failure by the Borrower to confirm any notice by telephone or telecopy with a Request for Advance shall not invalidate any -17- 22 notice so given. Upon receipt of such notice from the Borrower, the Administrative Agent shall promptly notify each Bank by telephone or telecopy of the contents thereof. (ii) Repayments and Reborrowings. Subject to the provisions of Section 2.3(e) hereof, the Borrower may repay or prepay a Base Rate Advance without regard to its Payment Date and (a) upon irrevocable written notice in accordance with Section 2.2(b)(i) hereof, reborrow all or a portion of the principal amount thereof as one or more Base Rate Advances, (b) upon at least three (3) Business Days' irrevocable prior written notice, reborrow all or a portion of the principal thereof as one or more LIBOR Advances, or (c) upon at least one (1) Business Day's irrevocable prior written notice and subject to Section 2.6 hereof, not reborrow all or any portion of such Base Rate Advance. On the date indicated by the Borrower, such Base Rate Advance shall be so repaid and, as applicable, reborrowed. (c) LIBOR Advances. (i) Advances. The Borrower shall give the Administrative Agent in the case of LIBOR Advances at least three (3) Business Days' irrevocable written notice in the form of a Request for Advance, or notice by telephone or telecopy followed immediately by a Request for Advance; provided, however, that the failure of the Borrower to confirm any notice by telephone or telecopy with a Request for Advance shall not invalidate any notice so given. The Administrative Agent, whose determination shall be conclusive absent manifest error, shall determine the available LIBOR Bases and shall notify the Borrower of such LIBOR Bases. The Borrower shall promptly notify the Administrative Agent by telecopy or by telephone, and shall immediately confirm any such telephonic notice in writing, of its selection of a LIBOR Basis and Interest Period for such Advance. Upon receipt of such notice from the Borrower, the Administrative Agent shall promptly notify each Bank by telephone or telecopy of the contents thereof. (ii) Repayments and Reborrowings. At least three (3) Business Days prior to each Payment Date for a LIBOR Advance, subject to Sections 2.3(e) and 2.2(a) hereof, the Borrower shall give the Administrative Agent written notice specifying whether all or a portion of any LIBOR Advance outstanding on the Payment Date (a) is to be repaid and then reborrowed in whole or in part as a LIBOR Advance, (b) is to be repaid and then reborrowed in whole or in part as one or more Base Rate Advances or (c) subject to Section 2.6 hereof, is to be repaid and not reborrowed. Upon such Payment Date such LIBOR Advance will, subject to the provisions hereof, be so repaid and, as applicable, reborrowed. (d) Notification of Banks. Upon receipt of a Request for Advance or a written notice under this Section 2.2 from the Borrower with respect to a reborrowing of any -18- 23 then outstanding Advance on the Payment Date for such Advance, the Administrative Agent shall promptly notify each Bank by telephone or telecopy of the contents thereof and the amount of such Bank's portion of the applicable Advance. Each Bank shall, not later than 2:00 p.m. (Eastern time) on the date specified in such notice, make available to the Administrative Agent at the Administrative Agent's Office, or at such account as the Administrative Agent shall designate, the amount of its portion of the applicable Advance in immediately available funds. (e) Disbursement. (i) Prior to 2:00 p.m. (Eastern time) on the date of an Advance hereunder, the Administrative Agent shall, subject to the satisfaction of the conditions set forth in this Section 2.2 and in Article 3, disburse the amounts made available to the Administrative Agent by the Banks in immediately available funds by (A) transferring the amounts so made available by wire transfer pursuant to the instructions of the Borrower, or (B) in the absence of such instructions, crediting the amounts so made available to the account of the Borrower maintained with the Administrative Agent or an affiliate of the Administrative Agent. (ii) Unless the Administrative Agent shall have received notice from a Bank prior to the date of any Advance that such Bank will not make available to the Administrative Agent such Bank's ratable portion of such Advance, and so long as notice has been given as provided in Section 2.2(d) hereof, the Administrative Agent may assume that such Bank has made such portion available to the Administrative Agent on the date of such Advance and the Administrative Agent may, in its sole discretion and in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent such Bank shall not have so made such ratable portion available to the Administrative Agent, such Bank agrees to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at the Federal Funds Rate. (iii) If such Bank shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Bank's portion of the applicable Advance for purposes of this Agreement. The failure of any Bank to fund its portion of any Advance shall not relieve any other Bank of its obligation, if any, hereunder to fund its respective portion of the Advance on the date of such borrowing, but no Bank shall be responsible for any such failure of any other Bank. (iv) In the event that, at any time when the Borrower is not in Default, a Bank for any reason fails or refuses to fund its portion of an Advance, then, -19- 24 until such time as such Bank has funded its portion of such Advance, or all other Banks have received payment in full (whether by repayment or prepayment) of the principal and interest due in respect of such Advance, such non-funding Bank shall (A) have no right to vote regarding any issue on which voting is required or advisable under this Agreement or any other Loan Document, and (B) not be entitled to receive payments of principal, interest or fees from the Borrower in respect of such Loans which such Bank failed to make. Section 2.3 Interest (a) On Base Rate Advances. Interest on each Base Rate Advance shall be computed on the basis of a year of 365/366 days for the actual number of days elapsed and shall be payable at the Base Rate for such Advance in arrears on the applicable Payment Date. Interest on Base Rate Advances then outstanding shall also be due and payable on the Maturity Date. (b) On LIBOR Advances. Interest on each LIBOR Advance shall be computed on the basis of a 360-day year for the actual number of days elapsed and shall be payable at the LIBOR Basis for such Advance in arrears on the applicable Payment Date, and, in addition, if the Interest Period for a LIBOR Advance exceeds three (3) months, interest on such LIBOR Advance shall also be due and payable in arrears on each three (3) month anniversary of the making of such Advance. Interest on LIBOR Advances then outstanding shall also be due and payable on the Maturity Date. (c) If No Notice of Selection of Interest Rate Basis. If the Borrower fails to give the Administrative Agent timely notice of (i) its selection of a LIBOR Basis or (ii) an election to reborrow a Base Rate Advance as a Base Rate Advance or if for any reason a determination of a LIBOR Basis for any Advance is not timely concluded, the Base Rate shall apply to such Advance, and if the Borrower shall fail to elect to reborrow any LIBOR Advance then outstanding prior to the last Payment Date applicable thereto in accordance with the provisions of Section 2.2(c)(ii) hereof, as applicable, the Base Rate shall apply to such Advance commencing on and after such Payment Date. (d) Upon Default. Upon the occurrence and during the continuance of an Event of Default, the Majority Banks shall have the option (but shall not be required) to give prior notice thereof to the Borrower, to accelerate the maturity of the Loans, or exercise any other rights or remedies hereunder in connection with the exercise of this right, to charge interest on the outstanding principal balance of the Loans at the Default Rate from the date of such Event of Default. Such interest shall be payable on the earlier of DEMAND or the Maturity Date and shall accrue until the earlier of (i) waiver or cure (to the satisfaction of the Majority Banks) of the applicable Event of Default, (ii) agreement by the Majority Banks to rescind the charging of interest at the Default Rate, or (iii) payment in full of the Obligations. -20- 25 (e) LIBOR Advances; Conversions. At no time may the number of outstanding LIBOR Advances under the Commitment exceed six (6). (f) Applicable Margin. The Applicable Margin shall be subject to reduction or increase, as applicable, and as set forth in the table below, based upon the Leverage Ratio of the Borrower as reflected in the financial statements required to be delivered for the fiscal quarter most recently ended pursuant to Section 6.1 or Section 6.2 hereof. The adjustment provided for in this Section 2.3(f) shall be effective (a) with respect to an increase of the Applicable Margin, as of the second (2nd) Business Day after the day on which financial statements are required to be delivered to the Administrative Agent pursuant to Sections 6.1 and 6.2 hereof, as the case may be, and (b) with respect to a decrease in the Applicable Margin, as of the second (2nd) Business Day after except with respect to Interest Periods ending (or other payments of interest occurring) before the date that such financial statements are actually delivered to the Administrative Agent, the day on which such financial statements are required to be delivered to the Administrative Agent pursuant to Section 6.1 or 6.2 hereof, as the case may be. If the Borrower shall fail to deliver financial statements within seventy-five (75) days after the end of any of the first three fiscal quarters of the Borrower's fiscal year (or within one hundred twenty (120) days after the end of the last fiscal quarter of the Borrower's fiscal year), as required by Sections 6.1 or 6.2 hereof, it shall be conclusively presumed that the Applicable Margin is based upon a Leverage Ratio of 4.00:1 for the period from and including the seventy-sixth (76th) day (or one hundred twenty-first (121st) day, in the case of the last quarter) after the end of such fiscal quarter, as the case may be, to the fifth day following the delivery by the Borrower to the Administrative Agent of such financial statements. The Applicable Margin in effect on the Agreement Date shall be based upon a certificate, dated the Agreement Date, by the Borrower's Authorized Signatory showing the Leverage Ratio on a pro forma basis (after giving effect to initial Advances hereunder) and delivered to the Administrative Agent on the Agreement Date.
Base Rate Advance LIBOR Advance Leverage Ratio Applicable Margin Applicable Margin -------------- ----------------- ----------------- Greater than or equal to 4.00:1 0.000% 1.250% 3.50:1 or greater, but less than 4.00:1 0.000% 1.125% 3.00:1 or greater, but less than 3.50:1 0.000% 0.875% less than 3.00:1 0.000% 0.700%
Section 2.4 Fees. The Borrower agrees to pay to the Administrative Agent for the benefit of the Banks, in accordance with their respective Commitment Ratios, a commitment fee on the average daily amount of the unborrowed Commitment for each day from the Agreement Date through the Maturity Date, (A) at all times during which the Leverage Ratio -21- 26 is greater than or equal to 3.5:1, at the rate of three-eighths of one percent (0.375%) per annum, and (B) at all times during which the Leverage Ratio is less than 3.5:1, at the rate of one-quarter of one percent (0.250%) per annum. The commitment fee shall be subject to reduction or increase, as applicable, based upon the Leverage Ratio of the Borrower for the fiscal quarter most recently ended as reflected in the financial statements required to be delivered for such quarter pursuant to Section 6.1 or Section 6.2 hereof. Any adjustment provided for in this Section 2.4(a)(i) shall be effective (1) with respect to an increase of the commitment fee, as of the second (2nd) Business Day after the day on which financial statements are required to be delivered to the Administrative Agent pursuant to Sections 6.1 and 6.2 hereof, as the case may be, and (2) with respect to a decrease in the commitment fee, as of the second (2nd) Business Day after which such financial statements are required to be delivered to the Administrative Agent pursuant to Section 6.1 or 6.2 hereof, as the case may be, except with respect to any payment of the commitment fee hereunder occurring prior to the date such financial statements are actually delivered to the Administrative Agent. The commitment fee in effect on the Agreement Date shall be based upon a certificate, dated the Agreement Date, by a senior financial officer of the Borrower showing the Leverage Ratio on a pro forma basis (after giving effect to initial Advances hereunder) and delivered to the Administrative Agent on the Agreement Date. Such commitment fee shall be computed on the basis of a year of 365/366 days for the actual number of days elapsed, shall be payable quarterly in arrears on the last day of each calendar quarter, commencing on March 31, 1998 (for the period from the Agreement Date through March 31, 1998), and continuing on the last day of each successive calendar quarter and on the Maturity Date, and shall be fully earned when due and non-refundable when paid. Section 2.5 Reduction of Commitment. (a) Optional. The Borrower shall have the right, at any time and from time to time after the Agreement Date and prior to the Maturity Date, upon at least three (3) Business Days' prior written notice to the Administrative Agent, without premium or penalty, to cancel or reduce permanently all or a portion of the Commitment on a pro rata basis among the Banks, provided that any such partial reduction shall be made in an amount not less than $5,000,000 and in integral multiples of not less than $1,000,000. As of the date of cancellation or reduction set forth in such notice, the Commitment shall be permanently reduced to the amount stated in the Borrower's notice for all purposes herein, and the Borrower shall, subject to Section 2.10 hereof, pay to the Administrative Agent for the account of the Banks the amount necessary to reduce the principal amount of the Loans then outstanding under the Commitment to not more than the amount of the Commitment as so reduced, together with accrued interest on the amount so prepaid. Reductions hereunder shall be applied to the reductions under Section 2.5(b) hereof on a pro rata basis with respect to the remaining reductions. (b) Scheduled Reductions. The Commitment (based upon the Commitment as of June 29, 2000) shall be reduced automatically and permanently on a semi-annual -22- 27 basis (i.e., each June 30 and December 31) commencing on June 30, 2000 and ending on the Maturity Date (which percentage reduction shall be in addition to reductions under Section 2.5(a) hereof during such quarter) in the amounts set forth below:
Semi-Annual Percentage of Reduction of Dates of Commitment as of Commitment Reduction June 29, 2000 -------------------- ------------------------- June 30, 2000 and December 31, 2000 1.50% June 30, 2001 and December 31, 2001 5.00% June 30, 2002 and December 31, 2002 9.00% June 30, 2003 and December 31, 2003 10.00% June 30, 2004 and December 31, 2004 12.00% June 30, 2005 25.00%
Section 2.6 Prepayment. LIBOR Advances may be prepaid prior to the applicable Payment Date, upon two (2) Business Days' prior written notice to the Administrative Agent, provided that the Borrower shall reimburse the Banks and the Administrative Agent, on the earlier of demand or the Maturity Date, for any loss or out-of-pocket expense incurred by the Banks or the Administrative Agent in connection with such prepayment, as set forth in Section 2.10 hereof. Base Rate Loans may be prepaid in full or in part at any time without penalty upon written notice to the Administrative Agent on the date of such prepayment. Each notice of prepayment shall be irrevocable, and all amounts prepaid on the Loans shall be applied first to interest and fees and other amounts due and payable hereunder as of such date, and then to principal. Partial prepayments shall be in a principal amount of not less than $1,000,000 and in an integral multiple of $1,000,000. Upon receipt of any notice of prepayment, the Administrative Agent shall promptly notify each Bank. Section 2.7 Repayment. (a) Loans Exceeding Commitment. If, at any time, the amount of the Loans then outstanding shall exceed the Commitment, the Borrower shall on such date make a repayment of the principal amount of the Loans in an amount equal to such excess. (b) Maturity. In addition to the foregoing, a final payment of all Obligations then outstanding shall be due and payable on the Maturity Date. -23- 28 Section 2.8 Notes; Loan Accounts. (a) The Loans shall be repayable in accordance with the terms and provisions set forth herein, and shall be evidenced by the Notes. One of the Notes shall be payable to the order of each Bank in accordance with the respective Commitment Ratio of the Bank. The Notes shall be issued by the Borrower to the Banks and shall be duly executed and delivered by an Authorized Signatory. (b) Each Bank may open and maintain on its books in the name of the Borrower a loan account with respect to the Loans and interest thereon. Each Bank which opens such loan account or accounts shall debit the applicable loan account for the principal amount of each Advance made by it and accrued interest thereon, and shall credit such loan account for each payment on account of principal of or interest on the Loans. The records of each Bank with respect to the loan accounts maintained by it shall be, absent manifest error, prima facie evidence of the Loans and accrued interest thereon, but the failure to maintain such records shall not impair the obligation of the Borrower to repay Indebtedness hereunder. (c) Each Advance from the Banks under this Agreement shall be made pro rata on the basis of their respective Commitment Ratios. Section 2.9 Manner of Payment. (a) Each payment (including any prepayment) by the Borrower on account of the principal of or interest on the Loans, fees, and any other amount owed to the Banks or the Administrative Agent under this Agreement, the Notes, or the other Loan Documents shall be made not later than 1:00 p.m. (Eastern time) on the date specified for payment under this Agreement or such other Loan Document to the Administrative Agent to an account designated by the Administrative Agent for the account of the Banks or the Administrative Agent, as the case may be, in lawful money of the United States of America in immediately available funds. The failure of the Borrower to make any such payment by such time shall not constitute a Default hereunder, provided that such payment is received by the Administrative Agent in immediately available funds by 4:00 p.m. (Eastern time) on such due date, but any such payment made after 1:00 p.m. (Eastern time) on such due date shall be deemed to have been made on the next Business Day for the purpose of calculating interest on amounts outstanding on the Loans, unless the Administrative Agent, in fact, was able to remit to such Bank its pro rata share of such payment by 4:00 p.m. (Eastern time) on such due date. In the case of a payment for the account of a Bank, the Administrative Agent will promptly thereafter distribute the amount so received in like funds to such Bank. If the Administrative Agent shall not have received any payment from the Borrower as and when due, the Administrative Agent will promptly notify the Banks accordingly. -24- 29 (b) If any payment under this Agreement or any of the Notes shall be specified to be made upon a day which is not a Business Day, it shall be made on the next day which is a Business Day, and such extension of time shall in such case be included in computing interest and fees, if any, in connection with such payment. (c) So long as the applicable Bank has complied with Section 2.13 hereof, the Borrower agrees to pay principal, interest, fees and all other amounts due hereunder, under the Notes or under any other Loan Document without set-off or counterclaim or any deduction whatsoever and free and clear of all taxes, levies and withholding. So long as the applicable Bank has complied with Section 2.13 hereof, if the Borrower is required by Applicable Law to deduct any taxes from or in respect of any sum payable to the such Bank hereunder, under any Note or under any other Loan Document: (i) the sum payable hereunder or thereunder, as applicable, shall be increased to the extent necessary to provide that, after making all required deductions (including deductions applicable to additional sums payable under this Section 2.9(c)), the Administrative Agent or such Bank, as applicable, receives an amount equal to the sum it would have received had no such deductions been made; (ii) the Borrower shall make such deductions from such sums payable hereunder or thereunder, as applicable, and pay the amount so deducted to the relevant taxing authority as required by Applicable Law; and (iii) the Borrower shall provide the Administrative Agent or such Bank, as applicable, with evidence satisfactory to the Administrative Agent or such Bank, as applicable, that such deducted amounts have been paid to the relevant taxing authority. Before making any such deductions, such Bank shall designate a different lending office and may take such alternative courses of action if such designation or alternative courses of action will avoid the need for such deductions and will not in the good faith judgment of such Bank be otherwise disadvantageous to such Bank. Section 2.10 Reimbursement. (a) Whenever any Bank shall actually incur any losses or reasonable out-of-pocket expenses (other than losses associated with a reduction in the interest rate margin) in connection with (i) failure by the Borrower to borrow any LIBOR Advance after having given notice of its intention to borrow in accordance with Section 2.2 hereof (whether by reason of the election of the Borrower not to proceed or the non-fulfillment of any of the conditions set forth in Article 3) other than a failure to borrow resulting from an unavailability which occurs after notice from the Administrative Agent to the Borrower pursuant to Section 10.1 or 10.2 hereof, or (ii) prepayment of any LIBOR Advance in whole or in part (including a prepayment pursuant to Sections 10.2 and 10.3(b) hereof), the Borrower agrees to pay to such Bank, upon the earlier of such Bank's demand or the Maturity Date, an amount sufficient to compensate such Bank for all such losses and reasonable out-of-pocket expenses. Such Bank's good faith determination of the amount of such losses and reasonable out-of-pocket expenses, absent manifest error, shall be binding and conclusive. Upon request of the Borrower, any Bank seeking reimbursement under this -25- 30 Section 2.10 shall provide a certificate setting forth the amount to be paid to it by the Borrower hereunder and calculations therefor. (b) Losses subject to reimbursement hereunder shall include, without limiting the generality of the foregoing, but without duplication, expenses incurred by any Bank or any participant of such Bank permitted hereunder in connection with the re-employment of funds prepaid, paid, repaid, not borrowed, not converted or not paid, as the case may be, and will be payable whether the Maturity Date is changed by virtue of an amendment hereto (unless such amendment expressly waives such payment) or as a result of acceleration of the Obligations and whether such Bank has a "matched funding" of such Advance. 2.11 Application of Proceeds. Payments made to the Administrative Agent or the Banks, or any of them, or otherwise received by the Administrative Agent or the Banks, or any of them (from realization on collateral for the Obligations or otherwise), shall be distributed as follows: First, to the reasonable costs and expenses, if any, incurred by the Administrative Agent or the Banks, or any of them, to the extent permitted by Section 11.2 hereof in the collection of such amounts under this Agreement or any of the other Loan Documents, including, without limitation, any reasonable costs incurred in connection with the sale or disposition of any collateral for the Obligations; Second, pro rata among the Administrative Agent and the Banks based on the total amount of fees then due and payable hereunder or under any other Loan Document to any Administrative Agent's fees then due and payable hereunder or under any other Loan Document and to such fees then due and payable to the Banks; Third, pro rata among the Banks based on the outstanding principal amount of the Loans outstanding immediately prior to such payment, to any unpaid interest which may have accrued on the Loans; Fourth, pro rata among the Banks based on the outstanding principal amount of the Loans outstanding immediately prior to such payment, to any unpaid principal of the Loans; Fifth, to any other Obligations not otherwise referred to in this Section 2.11 until all such Obligations are paid in full; Sixth, to damages incurred by the Administrative Agent or the Banks, or any of them, by reason of any breach hereof or of any other Loan Documents; and Seventh, upon satisfaction in full of all Obligations, to the Borrower or as otherwise required by law. If any Bank shall obtain any payment (whether involuntary or otherwise) on account of the Loans made by it in excess of its ratable share of the Loans then outstanding and such Bank's share of any expenses, fees and other items due and payable to it hereunder, such Bank shall forthwith purchase a participation in the Loans from the other Banks as shall be necessary to cause such purchasing Bank to share the excess payment ratably with each of them; provided, however, that if all or any portion of such excess payment is thereafter recovered from such purchasing Bank, such purchase from each Bank shall be rescinded and such Bank shall repay to the purchasing Bank the purchase price to the extent of such recovery. The Borrower agrees that any Bank so purchasing a participation from another Bank pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment with respect to such participation as fully as if such Bank were the direct creditor of the Borrower in the amount of such participation so long as the Borrower's Obligations are not increased. -26- 31 2.12 Capital Adequacy. In the event that a Regulatory Change does or shall have the effect of reducing the rate of return on such Bank's capital as a consequence of its obligations hereunder to a level below that which such Bank could have achieved but for such adoption, change or compliance (taking into consideration such Bank's policies with respect to capital adequacy) by an amount deemed by such Bank to be material, then from time to time, ten (10) days after submission by such Bank to the Borrower (with a copy to the Agent) of a written request therefor, together with a certificate (which shall be conclusive absent manifest error), setting forth the calculations evidencing such requested additional amount, and the law or regulation with respect thereto and certifying that such request is consistent with such Bank's treatment of other similar customers having similar provisions generally in their agreements with such Bank, and that such request is being made on the basis of a reasonable allocation of the costs resulting from such law or regulation, the Borrower shall pay to such Bank such additional amount or amounts as will compensate such Bank for such reduction. Allocations shall not be deemed reasonable unless made ratably, to the extent practicable, to all affected assets, commitments, activities or other relevant aspects of such Bank's business, whether or not the Bank is entitled to compensation with respect thereto. Notwithstanding the foregoing, the Borrower shall only be obligated to compensate such Bank for any amount under this subsection arising or occurring during (i) in the case of each such request for compensation, any time or period commencing not more than sixty (60) days prior to the date on which such Bank submits such request and (ii) any other time or period during which, because of the unannounced retroactive application of such law, regulation, interpretation, request or directive, such Bank could not have known that the resulting reduction in return might arise. Each Bank will notify the Borrower that it is entitled to compensation pursuant to this subsection as promptly as practicable after it determines to request such compensation; provided, however, that the failure to provide such notice shall not restrict the ability of such Bank to be reimbursed under this Section 2.12 except as provided in clause (i) above. 2.13 Bank Tax Forms. On or prior to the Agreement Date, each Bank which is organized in a jurisdiction other than the United States shall provide each of the Administrative Agent and the Borrower with properly executed originals of Forms 4224 or 1001 (or any successor form) prescribed by the Internal Revenue Service or other documents satisfactory to the Borrower and the Administrative Agent, and each such Bank shall provide properly executed Internal Revenue Service Forms W-8 or W-9, as the case may be, certifying (i) as to such Bank's status for purposes of determining exemption from United States withholding taxes with respect to all payments to be made to such Bank hereunder and under the Notes or (ii) that all payments to be made to such Bank hereunder and under the Notes are subject to such taxes at a rate reduced to zero by an applicable tax treaty. Each such Bank agrees to provide the Administrative Agent and the Borrower with new forms prescribed by the Internal Revenue Service upon the expiration or obsolescence of any previously delivered form, or after the occurrence of any event requiring a change in the most recent forms delivered by it to the Administrative Agent and the Borrower. -27- 32 ARTICLE 3 - Conditions Precedent. Section 3.1 Conditions Precedent to Effectiveness of Agreement and Initial Advance. The obligation of the Banks to undertake the Commitment and to make the initial Advance hereunder is subject to the prior fulfillment of each of the following conditions: (a) The Administrative Agent shall have received each of the following, in form and substance satisfactory to the Administrative Agent: (i) duly executed Notes; (ii) duly executed Subsidiary Guaranty; (iii) evidence satisfactory to the Administrative Agent that the Borrower and its Subsidiaries have a Transponder Lease Agreement providing for unqualified access to a non-preemptable transponder; (iv) the loan certificate of the Borrower dated as of the Agreement Date, including a certificate of incumbency with respect to the signature of each Authorized Signatory, which loan certificate shall be in substantially the form of Exhibit F attached hereto, together with appropriate attachments thereto; (v) a loan certificate from each of the Restricted Subsidiaries dated as of the Agreement Date, in substantially the form attached hereto as Exhibit G, including a certificate of incumbency with respect to each Authorized Signatory of such Person; (vi) legal opinion of (i) Sherman & Howard L.L.C., special counsel to the Borrower and its Subsidiaries, and (ii) Stephen M. Brett, Esq., in-house counsel to the Borrower and its Subsidiaries, each dated as of the Agreement Date addressed to each Bank and the Administrative Agent and dated as of the Agreement Date substantially in the form of Exhibits H-1 and H-2, respectively, attached hereto; (vii) receipt by the Administrative Agent and the Banks of all appropriate fees to be paid to them by the Borrower on or prior to the Agreement Date; (viii) any required consents to the closing of this Agreement or to the execution, delivery and performance of this Agreement and the other Loan Documents, each of which shall be in form and substance satisfactory to the Administrative Agent and the Banks; -28- 33 (ix) duly executed Fee Agreements; (x) duly executed Leverage Ratio Certificate in substantially the form of Exhibit I attached hereto; and (xi) all such other documents as the Administrative Agent may reasonably request, certified by an appropriate governmental official or Authorized Signatory if so requested. (b) The Administrative Agent shall have received evidence satisfactory to it that all material Necessary Authorizations, including all necessary consents to the closing of this Agreement, have been obtained or made, are in full force and effect and are not subject to any pending or, to the knowledge of the Borrower, threatened reversal or cancellation, and the Administrative Agent shall have received a certificate of an Authorized Signatory so stating. (c) The Borrower shall certify to the Administrative Agent and the Banks that each of the representations and warranties in Article 4 hereof are true and correct in all material respects as of the Agreement Date, that no Default then exists or is continuing. (d) No material adverse change from the financial condition and operations as reflected in the pro forma financial statements as of June 30, 1997 and the unaudited financial statements as of September 30, 1997 of the Borrower. Section 3.2 Conditions Precedent to Each Advance. The obligation of the Banks to make each Advance, including the initial Advance hereunder, other than an Advance which does not increase the principal amount outstanding hereunder, is subject to the fulfillment of each of the following conditions immediately prior to or contemporaneously with such Advance: (a) All of the representations and warranties of the Borrower under this Agreement and the other Loan Documents, which, in accordance with Section 4.2 hereof, are made at and as of the time of such Advance, shall be true and correct at such time, both before and after giving effect to the application of the proceeds of the Advance; (b) There shall not exist, on the date of the making of the Advance and after giving effect thereto, a Default hereunder and the Administrative Agent and each of the Banks shall have received a Request for Advance so certifying; (c) The Administrative Agent and each of the Banks shall have received all such other certificates, reports, statements, opinions of counsel or other documents as any of them may reasonably request; and -29- 34 (d) With respect to any Advance relating to any Acquisition or the formation of any Subsidiary which is permitted hereunder, the Administrative Agent and the Banks shall have received such documents and instruments relating to such Acquisition or formation of a new Subsidiary as are described in Section 5.14 hereof or otherwise required herein. The acceptance of the proceeds of any Loans which would increase the aggregate Dollar amount of the Loans outstanding shall be deemed to be a representation and warranty by the Borrower as to compliance with this Section 3.2 on the date any such Loan is made. ARTICLE 4 - Representations and Warranties. Section 4.1 Representations and Warranties. The Borrower hereby agrees, represents, and warrants that: (a) Organization; Power; Qualification. (i) The Borrower is a corporation duly organized and validly existing under the laws of the State of Delaware. The Borrower has the power and authority to own or lease and operate its properties and to carry on its business as now being and hereafter proposed to be conducted, and is duly qualified and authorized to do business, in each jurisdiction in which such qualification is necessary in view of the character of its properties or the nature of its business requires such qualification or authorization, except for qualifications and authorizations, the lack of which, singly or in the aggregate, has not had and is not likely to have a Materially Adverse Effect. (ii) Each Restricted Subsidiary of the Borrower is a corporation, partnership or a limited liability company duly organized and validly existing under the laws of its state of formation. Each Restricted Subsidiary of the Borrower has the power and the authority to own or lease and operate its properties and to carry on its business as now being and hereafter proposed to be conducted, and is duly qualified and authorized to do business in each jurisdiction in which such qualification is necessary in view of the character of its properties or the nature of its business requires such qualification or authorization, except for qualifications and authorizations, the lack of which, singly or in the aggregate, has not had and is not likely to have a Materially Adverse Effect. (b) Authorization; Enforceability. The Borrower has the necessary power and has taken all necessary action to authorize it to execute, deliver, and perform this Agreement and each of the other Loan Documents to which it is a party in accordance with the terms thereof and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by the Borrower, and is, and each of the other Loan Documents to which the Borrower is a party is, a legal, valid and binding obligation of the Borrower, enforceable in accordance with its terms, subject to limitations on enforceability -30- 35 under bankruptcy, reorganization, insolvency and similar laws affecting creditors' rights generally and limitations on the availability of the remedy of specific performance imposed by the application of general equity principles. (c) Subsidiaries Authorization; Enforceability. The Subsidiaries and the Borrower's direct and indirect ownership thereof as of the Agreement Date are as set forth on Schedule 3 attached hereto, and to the extent such Subsidiaries are Restricted Subsidiaries and are corporations, the Borrower has the unrestricted right to vote the issued and outstanding shares of the Subsidiaries shown thereon and such shares of such Subsidiaries have been duly authorized and issued and are fully paid and nonassessable. Each Restricted Subsidiary has the necessary power and has taken all necessary action to authorize it to execute, deliver and perform each of the Loan Documents to which it is a party in accordance with their respective terms and to consummate the transactions contemplated by this Agreement and by such Loan Documents. Each of the Loan Documents to which any Restricted Subsidiary is party is a legal, valid and binding obligation of such Restricted Subsidiary enforceable against such Restricted Subsidiary in accordance with its terms, subject, to limitations on enforceability under bankruptcy, reorganization, insolvency and similar laws affecting creditors' rights generally and limitations on the availability of the remedy of specific performance imposed by the application of general equity principles. The Borrower's ownership interest in each of the Restricted Subsidiaries represents a direct or indirect controlling interest of such Restricted Subsidiary for purposes of directing or causing the direction of the management and policies of each Restricted Subsidiary. (d) Compliance with Laws, Other Loan Documents, and Contemplated Transactions. The execution, delivery, and performance by the Borrower and its Restricted Subsidiaries of this Agreement and each of the other Loan Documents in accordance with the terms thereof and the consummation of the transactions contemplated hereby and thereby do not and will not (i) violate any Applicable Law, (ii) result in a breach of, or constitute a default under, the certificate or articles of incorporation or by-laws or partnership agreements, as the case may be, as amended, of the Borrower or of any Restricted Subsidiary of the Borrower or under any indenture, agreement, or other instrument to which the Borrower or any of its Restricted Subsidiaries is a party or by any of them or any of their respective properties may be bound, or (iii) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by the Borrower or any of its Restricted Subsidiaries except Permitted Liens; except where such violations, breaches, defaults or Liens, if any, singly or in the aggregate, has not had and is not likely to have a Materially Adverse Effect. (e) Necessary Authorizations. No approval or consent of, or filing or registration with, any federal, state or local commission or other regulatory authority is required in connection with the execution, delivery and performance by the Borrower or any of its Restricted Subsidiaries of such of this Agreement, the Notes, and the other Loan Documents to which any of them is a party. -31- 36 (f) Title to Properties. The Borrower has good, marketable, and legal title to, or a valid leasehold interest in, all of its respective material tangible properties and assets free and clear of all Liens, except Permitted Liens. Except for financing statements evidencing Permitted Liens, no financing statement under the Uniform Commercial Code as in effect in any jurisdiction and no other filing which names the Borrower or any of the Restricted Subsidiaries as debtor or which covers or purports to cover any of the assets of the Borrower or any of its Restricted Subsidiaries is currently effective and on file in any state or other jurisdiction, and neither the Borrower nor any of its Restricted Subsidiaries has signed any such financing statement or filing or any security agreement authorizing any secured party thereunder to file any such financing statement or filing. (g) Collective Bargaining. There are no collective bargaining agreements between the Borrower or any of its Restricted Subsidiaries and any trade or labor union or other employee collective bargaining agent. (h) Taxes. All federal, state, and other tax returns of the Borrower and each Subsidiary of the Borrower required by law to be filed have been duly filed, and all federal, state, and other taxes, assessments, and other governmental charges or levies upon the Borrower or any of the Subsidiaries of the Borrower or any of their respective properties, income, profits, and assets, which are due and payable, have been paid, except any such tax payment (i) of which the Borrower or any Subsidiary of the Borrower is diligently contesting in good faith by appropriate proceedings, (ii) for which adequate reserves as required by GAAP have been provided on the books of the Borrower or any Subsidiary of the Borrower and (iii) as to which neither any Lien other than a Permitted Lien has attached nor any foreclosure, distraint, sale, or similar proceedings have been commenced. The charges, accruals, and reserves on the books of the Borrower or any of its Subsidiaries in respect of taxes are, in the reasonable judgment of the Borrower, adequate. (i) Financial Statements. The Borrower has furnished, or caused to be furnished, to the Banks unaudited pro forma financial statements for the Borrower and its Subsidiaries which present fairly in accordance with GAAP the financial position of the Borrower and its Subsidiaries as at December 1, 1996, and the results of operations for the periods then ended. Except as disclosed in the financial statements most recently furnished to the Banks pursuant to Section 6.2 hereof (or until such financial statements are delivered hereunder, the audited financial statement referred to in the preceding sentence), none of the Borrower or any of its Subsidiaries had any material liabilities, contingent or otherwise, and there are no material unrealized or anticipated losses of the Borrower which have not heretofore been disclosed in writing to the Banks. (j) Licenses, etc. The material Licenses have been duly issued and are in full force and effect. The Borrower and its Restricted Subsidiaries are in compliance in all material respects with all of the provisions thereof. The Borrower and its Restricted -32- 37 Subsidiaries have secured all material Necessary Authorizations and all such Necessary Authorizations are in full force and effect. Neither any material License nor any material Necessary Authorization is the subject of any pending or, to the best of the Borrower's knowledge, threatened revocation. (k) No Adverse Change. There has occurred no event since June 30, 1997 which has or could reasonably be expected to have a Materially Adverse Effect. (l) Investments and Guaranties. The Borrower has not made material investments, advances to, or guaranties of, the obligations of any Person, except as reflected in the financial statements referred to in Section 4.1(i) above or as otherwise permitted by the terms of this Agreement. (m) Liabilities, Litigation, etc. Except for liabilities incurred in the normal course of business, neither the Borrower nor any of its Restricted Subsidiaries has any material (individually or in the aggregate) liabilities, direct or contingent, except as disclosed or referred to in the financial statements referred to in Section 4.1(i) above. Except as set forth on Schedule 4 attached hereto, there is no material litigation, legal or administrative proceeding, investigation, or other action of any nature pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower, any of its Restricted Subsidiaries or any of its properties which involves the possibility of any material judgment or liability not fully covered by insurance. (n) ERISA. The Borrower and each ERISA Affiliate and each of their respective Plans are in substantial compliance with ERISA and the Code and neither the Borrower nor any of its ERISA Affiliates has incurred any accumulated funding deficiency with respect to any such Plan within the meaning of ERISA or the Code. The Borrower and each of its ERISA Affiliates have complied with all requirements of ERISA Sections 601 through 608 and Code Section 4980B in all material respects. The Borrower has incurred no material liability to the Pension Benefit Guaranty Corporation in connection with any Plan. The assets of each Plan which is subject to Title IV of ERISA are sufficient to provide the benefits under such Plan, the payment of which the Pension Benefit Guaranty Corporation would guarantee if such Plan were terminated, and such assets are also sufficient to provide all other "benefit liabilities" (as defined in ERISA Section 4001(a)(16)) due under the plan upon termination. No Reportable Event has occurred and is continuing with respect to any Plan which could reasonably be likely to have a Materially Adverse Effect. No Plan or trust created thereunder, or party in interest (as defined in Section 3(14) of ERISA, or any fiduciary (as defined in Section 3(21) of ERISA), has engaged in a "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) which would subject the Borrower or any ERISA Affiliate to a material penalty or tax on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code. Neither the Borrower nor any of its ERISA Affiliates is a participant in or is obligated to make any payment to a Multiemployer Plan which has or is expected to have any withdrawal liability if such Plan were terminated or -33- 38 if such Person were to withdraw from such Plan which could reasonably be likely to have a Materially Adverse Effect. (o) Patents, Trademarks, etc. The Borrower and each of its Restricted Subsidiaries owns, possesses or has the right to use all licenses and rights to all patents, Trademarks, trademark rights, trade names, trade name rights, service marks, and copyrights, and rights with respect thereto, necessary to conduct its business in all material respects as now conducted, without known conflict with any patent, Trademark, trade name, service mark, license or copyright of any other Person, and in each case, with respect to patents, Trademarks, trademark rights, trade names, trade name and copyrights and licenses with respect thereto owned by Borrower or its Restricted Subsidiaries, subject to no mortgage, pledge, lien, lease, encumbrance, charge, security interest, title retention agreement or option. All such licenses and rights with respect to patents, Trademarks, trademark rights, trade names, trade name rights, service marks and copyrights are in full force and effect, and to the extent applicable, the Borrower and its Restricted Subsidiaries are in full compliance in all material respects with all of the provisions thereof. No such patent, Trademark, trademark rights, trade names, trade name rights, service marks, copyrights or licenses is subject to any pending or, to the best of the Borrower's knowledge, threatened attack or revocation. Neither the Borrower nor any of its Restricted Subsidiaries owns any registered copyrights or patents (other than general business licenses and permits). (p) Compliance with Law; Absence of Default. The Borrower and each of its Restricted Subsidiaries is in compliance with all Applicable Laws, and no event has occurred or has failed to occur which has not been remedied or waived, the occurrence or non-occurrence of which constitutes (i) a Default or (ii) a default by the Borrower or any of its Restricted Subsidiaries under any other indenture, agreement, or other instrument, or any judgment, decree, or order to which the Borrower or any of its Restricted Subsidiaries is a party or by which the Borrower or any of its Restricted Subsidiaries or any of its or their properties may be bound, which default could reasonably be considered to have a Materially Adverse Effect. (q) Compliance with Regulations G, U, and X. The Borrower is neither engaged principally in, nor as one of its important activities in the business of, extending credit for the purpose of purchasing or carrying any "margin security" or "margin stock" as defined in Regulations G, U, and X (12 C.F.R. Parts 221 and 224) of the Board of Governors of the Federal Reserve System (herein called "margin stock"). None of the proceeds of the Loans will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry margin stock or for any other purpose which might constitute this transaction a "purpose credit" within the meaning of said Regulations G, U, and X. Neither the Borrower nor any bank acting on its behalf has taken or will take any action which might cause this Agreement or the Notes to violate Regulation G, U, or X or any other regulation of the Board of Governors of the Federal Reserve System or to violate the Securities Exchange -34- 39 Act of 1934, in each case as now in effect or as the same may hereafter be in effect. If so requested by the Bank, the Borrower will furnish the Bank with (i) a statement or statements in conformity with the requirements of Federal Reserve Forms G-3 and/or U-1 referred to in Regulations G and U of said Board of Governors and (ii) other documents evidencing its compliance with the margin regulations, including without limitation an opinion of counsel in form and substance satisfactory to the Banks. Neither the making of the Loans nor the use of proceeds thereof will violate, or be inconsistent with, the provisions of Regulation G, U, or X of said Board of Governors. (r) Broker's or Finder's Commissions. No broker's or finder's fee or commission will be payable with respect to the issuance of the Notes, and no other similar fees or commissions will be payable by the Borrower for any other services rendered to the Borrower ancillary to the transactions contemplated herein. (s) Governmental Regulation. Neither the Borrower nor any of its Restricted Subsidiaries is required to obtain any consent, approval, authorization, permit or license which has not already been obtained from, or effect any filing or registration which has not already been effected with, any federal, state or local regulatory authority in connection with the performance, in accordance with their respective terms, of this Agreement or any other Loan Document the failure of which to obtain could have a Materially Adverse Effect. (t) Accuracy and Completeness of Information. All information, reports, prospectuses and other papers and data relating to the Borrower or any of its Subsidiaries and furnished by or on behalf of the Borrower or any of its Subsidiaries to the Administrative Agent or the Banks were, at the time furnished, true, complete and correct in all material respects to the extent necessary to give the Administrative Agent and the Banks true and accurate knowledge of the subject matter. (u) Payment of Wages. The Borrower and each of its Restricted Subsidiaries are in compliance with the Fair Labor Standards Act, as amended, in all material respects, and to the knowledge of the Borrower and each of its Restricted Subsidiaries, such Persons have paid all minimum and overtime wages required by law to be paid to their respective employees. (v) Business. The Borrower's business and the business of its Restricted Subsidiaries include distributing and acquiring music programming, distributing and selling such programming to cable and other non-broadcast delivery systems, and directly related media activities. (w) Investment Company Act. Neither the Borrower nor any of its Restricted Subsidiaries is required to register under the provisions of the Investment Company Act of 1940, as amended, and neither the entering into or performance by the Borrower and its Restricted Subsidiaries of this Agreement and the Loan Documents to which they are -35- 40 respectively party nor the issuance of the Notes violates any provision of such Act or requires any consent, approval, or authorization of, or registration with, the Securities and Exchange Commission, any governmental or public body or authority pursuant to any of the provisions of such Act. Section 4.2 Survival of Representations and Warranties, etc. All representations and warranties made under this Agreement shall be deemed to be made, and shall be true and correct, at and as of the Agreement Date and the date of each Advance hereunder, except to the extent previously fulfilled in accordance with the terms hereof and to the extent subsequently inapplicable. All representations and warranties made under this Agreement shall survive, and not be waived by, the execution hereof by the Banks and the Administrative Agent, any investigation or inquiry by any Bank or the Administrative Agent, or the making of any Advance under this Agreement. ARTICLE 5 - General Covenants. So long as any of the Obligations is outstanding and unpaid or the Borrower shall have the right to borrow hereunder (whether or not the conditions to borrowing have been or can be fulfilled), and unless the Majority Banks shall otherwise consent in writing: Section 5.1 Preservation of Existence and Similar Matters. The Borrower will, and, except as permitted by Section 7.5 hereof, will cause each of its Restricted Subsidiaries to, (a) preserve and maintain its existence, rights, licenses, and privileges in its jurisdiction of formation and (b) qualify and remain qualified and authorized to do business in each jurisdiction in which such qualification is necessary in view of the character of its properties or the nature of its business requires such qualification or authorization, except for qualifications and authorizations, the lack of which, singly or in the aggregate, has not had and is not likely to have a Materially Adverse Effect. Section 5.2 Business; Compliance with Applicable Law. The Borrower will, and will cause each of its Restricted Subsidiaries to, (a) engage primarily in the business described in Section 4.1(w) hereof and related businesses and (b) comply with the requirements of all Applicable Law, including environmental laws, the non-compliance with which could have a Materially Adverse Effect. Section 5.3 Maintenance of Properties. The Borrower will, and will cause each of its Restricted Subsidiaries to, maintain or cause to be maintained in the ordinary course of business in good repair, working order, and condition all properties necessary in its business (whether owned or held under lease). Section 5.4 Accounting Methods and Financial Records. The Borrower will, and will cause each of its Restricted Subsidiaries to, maintain a system of accounting established -36- 41 and administered in accordance with GAAP, and keep adequate records and books of account in which complete entries will be made in accordance with GAAP reflecting all transactions required to be reflected by GAAP and keep accurate and complete records of their respective properties and assets. The Borrower and its Restricted Subsidiaries will maintain a fiscal year ending on December 31. Section 5.5 Insurance. The Borrower will, and will cause each of its Restricted Subsidiaries to maintain insurance on its assets and properties and on its operations including, but not limited to, public liability, business interruption, property and crime, from responsible insurance companies in such amounts and against such risks as shall be customary for similar businesses. The Borrower and each of its Restricted Subsidiaries shall at all times maintain insurance coverage comparable to that in place on the Agreement Date, taking into account the growth of the Borrower's and the Restricted Subsidiaries' business and operations after the Agreement Date. Section 5.6 Payment of Taxes and Claims. The Borrower will, and will cause each of its Restricted Subsidiaries to, pay and discharge all taxes, assessments, and governmental charges or levies imposed upon it or upon its incomes or profits or upon any properties belonging to it prior to the date on which penalties attach thereto, and all lawful claims for labor, materials, and supplies which, if unpaid, might become a Lien other than a Permitted Lien upon any of its properties; except that, no such tax, assessment, charge, levy, or claim need be paid which is being contested in good faith by appropriate proceedings and for which adequate reserves as required by GAAP shall have been set aside on the appropriate books, but only so long as such tax, assessment, charge, levy, or claim does not become a Lien or charge other than a Permitted Lien and no foreclosure, distraint, sale, or similar proceedings shall have been commenced and remain unstayed for a period of thirty (30) days after such commencement. The Borrower will, and will cause each of its Restricted Subsidiaries to, timely file all information returns required by federal, state or local tax authorities. Section 5.7 Visits and Inspections. The Borrower will permit, and will cause each of its Restricted Subsidiaries to permit, representatives of the Administrative Agent and each Bank to (a) visit and inspect the properties of the Borrower and each of its Restricted Subsidiaries at reasonable times during normal business hours, (b) inspect and make extracts from and copies of their respective books and records, and (c) discuss with their respective principal officers its businesses, assets, liabilities, financial positions, results of operations, and business prospects relating to the Borrower and each of its Restricted Subsidiaries. The Borrower and each of its Restricted Subsidiaries will also permit representatives of the Administrative Agent to discuss with their respective accountants the Borrower's and its Restricted Subsidiaries' businesses, assets, liabilities, financial positions, results of operations and business prospects. Section 5.8 Payment of Indebtedness. The Borrower will pay, and will cause each of its Restricted Subsidiaries to pay, subject to any provisions therein regarding -37- 42 subordination, any and all of their respective Indebtedness when and as the same becomes due, other than Indebtedness the non-payment of which will not have a Materially Adverse Effect, and which the Borrower is contesting in good faith and has established adequate reserves on its books and records. Section 5.9 Use of Proceeds. The Borrower will use the proceeds of the Loans solely for (a) Acquisitions permitted hereunder, (b) Capital Expenditures, (c) refinancing existing Indebtedness owed to Affiliates of the Borrower and (d) general corporate purposes. Section 5.10 ERISA. The Borrower shall (a) notify the Banks as soon as practicable of any Reportable Event for which the Pension Benefit Guaranty Corporation has not waived the thirty (30) day notice requirement and of any additional act or condition arising in connection with any such Plan which the Borrower believes might constitute grounds for the termination thereof by the Pension Benefit Guaranty Corporation or for the appointment by the appropriate United States District Court of a trustee to administer such Plan and (b) furnish to the Banks, promptly upon the Banks' request therefor, such additional information concerning any such Plan as may be reasonably requested by the Banks. Section 5.11 Indemnity. The Borrower agrees to indemnify and hold harmless each Bank and the Administrative Agent, and each of their respective affiliates, employees, representatives, shareholders, officers and directors (any of the foregoing shall be an "Indemnitee") from and against any and all claims, liabilities, losses, damages, actions, reasonable attorneys' fees and expenses (as such fees and expenses are incurred) and demands by any party (other than the Borrower), including the costs of investigating and defending such claims, whether or not the Borrower, any Subsidiary or the Person seeking indemnification is the prevailing party (a) resulting from any breach or alleged breach by the Borrower or any Restricted Subsidiary of the Borrower of any representation or warranty made hereunder; or (b) otherwise arising out of (i) the Commitment or otherwise under this Agreement, any Loan Document or any transaction contemplated hereby or thereby, including, without limitation, the use of the proceeds of Loans hereunder in any fashion by the Borrower or the performance of their respective obligations under the Loan Documents by the Borrower, (ii) allegations of any participation by the Banks or the Administrative Agent, or any of them, in the affairs of the Borrower or any of its Subsidiaries, or allegations that any of them has any joint liability with the Borrower or any of its Subsidiaries for any reason, (iii) any claims against the Banks or the Administrative Agent, or any of them, by any shareholder or other investor in or lender to the Borrower or any Subsidiary, by any brokers or finders or investment advisers or investment bankers retained by the Borrower or by any other third party, arising out of the Commitment or otherwise under this Agreement or any other Loan Document; or (c) in connection with taxes (not including federal or state income taxes or other taxes based solely upon the revenues of such Persons), fees, and other charges payable in connection with the Loans, or the execution, delivery, and enforcement of this Agreement, the other Loan Documents, and any amendments thereto or waivers of any of the provisions thereof; unless the Person seeking indemnification hereunder is determined in such -38- 43 case to have acted with gross negligence or willful misconduct, in any case, by a final, non-appealable judicial order. The obligations of the Borrower under this Section 5.11 are in addition to, and shall not otherwise limit, any liabilities which the Borrower might otherwise have in connection with any warranties or similar obligations of the Borrower in any other Loan Document. Section 5.12 Further Assurances. The Borrower will promptly cure, or cause to be cured, defects in the creation and issuance of the Notes and the execution and delivery of the Loan Documents (including this Agreement), resulting from any act or failure to act by the Borrower or any of its Restricted Subsidiaries or any employee or officer thereof. The Borrower at its expense will promptly execute and deliver to the Administrative Agent and the Banks, or cause to be executed and delivered to the Administrative Agent and the Banks, all such other and further documents, agreements, and instruments in compliance with or accomplishment of the covenants and agreements of the Borrower in the Loan Documents, including this Agreement, or to correct any omissions in the Loan Documents, or more fully to state the obligations set out herein or in any of the Loan Documents, or to obtain any consents, all as may be necessary or appropriate in connection therewith as may be reasonably requested. Section 5.13 Broker's Claims. The Borrower hereby indemnifies and agrees to hold the Administrative Agent and each of the Banks harmless from and against any and all losses, liabilities, damages, costs and expenses which may be suffered or incurred by the Administrative Agent and each of the Banks in respect of any claim, suit, action or cause of action now or hereafter asserted by a broker or any Person acting in a similar capacity arising from or in connection with the execution and delivery of this Agreement or any other Loan Document or the consummation of the transactions contemplated herein or therein. Section 5.14 Covenants Regarding Formation of Subsidiaries and Acquisitions. At the time of (a) any Acquisition by a Restricted Subsidiary of the Borrower, (b) any Acquisition of a Person which becomes a Restricted Subsidiary of the Borrower, or (c) the formation of any new Restricted Subsidiary of the Borrower which is permitted under this Agreement, the Borrower will, and will cause its Subsidiaries, as appropriate, to (i) provide to the Administrative Agent an executed Subsidiary Guaranty for such new Restricted Subsidiary, in substantially the form of Exhibit E attached hereto, which shall constitute a Loan Document for purposes of this Agreement, as well as a loan certificate for such new Restricted Subsidiary, substantially in the form of Exhibit G attached hereto, together with appropriate attachments; and (ii) all other documentation, including one or more opinions of counsel, reasonably satisfactory to the Administrative Agent which in its reasonable opinion is appropriate with respect to such Acquisition or the formation of such Restricted Subsidiary. Any document, agreement or instrument executed or issued pursuant to this Section 5.14 shall be a "Loan Document" for purposes of this Agreement. -39- 44 ARTICLE 6 - Information Covenants. So long as any of the Obligations is outstanding and unpaid or the Borrower has a right to borrow hereunder (whether or not the conditions to borrowing have been or can be fulfilled) and unless the Majority Banks shall otherwise consent in writing, the Borrower will furnish or cause to be furnished to each Bank and to the Administrative Agent at their respective offices: Section 6.1 Quarterly Financial Statements and Information. Within seventy-five (75) days after the last day of each of the first three (3) quarters in each calendar year, the unaudited balance sheet of the Borrower and its Restricted Subsidiaries as at the end of such quarter, and the related unaudited statement of operations and related unaudited statement of cash flows of the Borrower and its Restricted Subsidiaries for the elapsed portion of the year ended with the last day of such quarter, certified by an Authorized Signatory of the Borrower to have been prepared in accordance with GAAP and, in his or her opinion, present fairly in all material respects the financial position of the Borrower and its Restricted Subsidiaries, as at the end of such period and the results of operations for such period, and for the elapsed portion of the year ended with the last day of such period, subject only to normal year-end adjustments. Section 6.2 Annual Financial Statements and Information; Certificate of No Default. Within one hundred twenty (120) days after the end of each calendar year the audited consolidated balance sheet of the Borrower and its Restricted Subsidiaries and the related audited consolidated statements of operations and related audited consolidated statements of cash flows of the Borrower and its Restricted Subsidiaries for such calendar year and set forth in comparative form such figures as at the end of and for the previous calendar year, all in reasonable detail, and in each case prepared in accordance with GAAP throughout the periods involved and shall be certified by independent certified public accountants of recognized national standing which certification shall (a) be accompanied by the opinion of such accountants without reservation or exception as to the scope of their audit, (b) state that the examination by such accountants in connection with the financial statements has been made in accordance with generally accepted auditing standards, (c) include the opinion of such accountants that such financial statements have been prepared in accordance with GAAP, except as otherwise specified in such opinion, (d) include an expression of their opinion that the computations by the Borrower in connection with the certificate delivered pursuant to Section 6.3 hereof show compliance with Sections 7.8, 7.9 and 7.10 hereof; and (e) stating that, in making the examination necessary for their audit of the financial statements of the Borrower for such year, nothing came to their attention of a financial or accounting nature that caused them to believe that the Borrower was not in compliance with the terms, covenants, provisions or conditions of this Agreement, or that there shall have occurred any condition or event which would constitute a Default or, if so, specifying all such instances of non-compliance and the nature and status thereof. -40- 45 Section 6.3 Performance Certificates. At the time the financial statements are furnished pursuant to Sections 6.1 and 6.2 hereof, a certificate of an Authorized Signatory of the Borrower in form and substance satisfactory to the Majority Banks: (a) Setting forth as at the end of such quarter or calendar year, as the case may be, the arithmetical calculations required to establish (i) adjustments to the Applicable Margin, as provided for in Section 2.3(f) hereof, and (ii) whether or not the Borrower was in compliance with the requirements of Sections 7.8, 7.9 and 7.10 hereof; and (b) Stating that the signer has reviewed the terms of this Agreement and that in the course of the performance of his or her duties, he or she would normally have knowledge of any condition or event which would constitute a Default and certifying that, to the best of his or her knowledge, no Default has occurred as at the end of such quarter or year, as the case may be, or, if a Default has occurred, disclosing each such Default and its nature, when it occurred, whether it is continuing, and the steps being taken by the Borrower with respect to such Default. Section 6.4 Copies of Other Reports. (a) Promptly upon receipt thereof, copies of all reports, if any, submitted to the Borrower by its independent public accountants including, without limitation, any management report prepared in connection with the annual financial statements referred to in Section 6.2 hereof. (b) Within sixty (60) days after the end of each year of the Borrower, the annual budget for the Borrower for the next succeeding year. (c) Promptly after the preparation of the same, copies of all material reports or financial information filed with any governmental agency, department, bureau, division or other governmental authority or regulatory body evidencing facts or containing information which could have a Materially Adverse Effect. (d) From time to time and promptly upon each request, such data, certificates, reports, statements, documents, or further information regarding the business, assets, liabilities, financial position, projections, results of operations of the Borrower or any of its Subsidiaries as the Administrative Agent, upon request of the Majority Banks, may reasonably request. Section 6.5 Notice of Litigation and Other Matters. Prompt notice of the following events as to which the Borrower has received notice or otherwise become aware thereof: (a) The commencement of all proceedings and investigations by or before any governmental body and all actions and proceedings in any court or before any arbitrator -41- 46 against or in any other way relating adversely and directly to the Borrower or any of its Restricted Subsidiaries or any of its properties, assets, or businesses, or which calls into question the validity of this Agreement or any other Loan Document, which, if determined adversely to the Borrower or such Subsidiary, could reasonably be expected to have a Materially Adverse Effect. (b) Any material adverse change with respect to the business, assets, liabilities, financial position, or results of operations of the Borrower or any of its Restricted Subsidiaries, other than changes in the ordinary course of business which have not had and are not likely to have a Materially Adverse Effect; (c) Any Default or the occurrence or non-occurrence of any event (i) which constitutes, or which with the passage of time or giving of notice or both would constitute a default by the Borrower or any Restricted Subsidiary of the Borrower under any material agreement other than this Agreement and the other Loan Documents to which the Borrower or any Restricted Subsidiary of the Borrower is party or by which any of their respective properties may be bound, and (ii) which could reasonably be expected to have a Materially Adverse Effect, giving in each case the details thereof and specifying the action proposed to be taken with respect thereto; (d) The occurrence of any Reportable Event for which the PBGC has not waived the 30-day notice request or a "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) that is not subject to an individual, class, or statutory prohibited transaction exemption with respect to any Plan of the Borrower or any of its ERISA Affiliates or the institution or threatened institution by the Pension Benefit Guaranty Corporation of proceedings under ERISA to terminate or to partially terminate any such Plan or the commencement or threatened commencement of any litigation regarding any such Plan or naming it or the trustee of any such Plan with respect to such Plan if such occurrence would reasonably be expected to result in a Materially Adverse Effect; and (e) The occurrence of any event subsequent to the Agreement Date which, if such event had occurred prior to the Agreement Date, would have constituted an exception to the representation and warranty in Section 4.1(n) of this Agreement. Section 6.6 Loss of Agreements. The Borrower shall notify the Administrative Agent and the Banks within fifteen (15) days of the occurrence of any termination of any MSO Agreement or DBS Agreement which results in a reduction of ten percent (10%) or more of the total revenue of the Borrower and its Restricted Subsidiaries in any calendar quarter when added to all other terminations and after giving effect to any additions in such quarter. In addition, the Borrower shall notify the Administrative Agent and the Banks promptly upon receipt of any notice that a Transponder Lease Agreement is in default. -42- 47 ARTICLE 7 - Negative Covenants. So long as any of the Obligations is outstanding and unpaid or the Borrower has a right to borrow hereunder (whether or not the conditions to borrowing have been or can be fulfilled) and unless the Majority Banks shall otherwise give their prior consent in writing: Section 7.1 Indebtedness for Borrowed Money. The Borrower shall not create, assume, incur or otherwise become or remain obligated in respect of, or permit to be outstanding, and the Borrower shall not permit any of its Restricted Subsidiaries to create, assume, incur or otherwise become or remain obligated in respect of or permit to be outstanding, any Indebtedness for Money Borrowed except: (a) the Obligations; (b) Indebtedness existing as of the Agreement Date as described on Schedule 6 attached hereto; (c) obligations under Interest Hedge Agreements in respect of the Loans; (d) Capitalized Lease Obligations, Purchase Money Security Interests and other Indebtedness for Money Borrowed of the Borrower and the Restricted Subsidiaries (including, without duplication, Guarantees); provided, that (i) no Default or Event of Default exists prior to or after giving effect to the occurrence thereof, and (ii) the aggregate amount of all such other Capitalized Lease Obligations, Purchase Money Security Interests and Indebtedness for Money Borrowed does not at the time of the incurrence in the aggregate exceed fifteen percent (15%) of Maximum Permitted Indebtedness; (e) Indebtedness owed to the Borrower or any Restricted Subsidiary; and (f) Subordinated Affiliate Debt. Section 7.2 Investments. The Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, make any loan, advance, or otherwise acquire evidences of Indebtedness, capital stock or other securities of any Person, except that the Borrower and its Restricted Subsidiaries may: (a) purchase or otherwise acquire and own: (i) marketable, direct obligations of the United States of America maturing within three hundred sixty-five (365) days of the date of purchase; (ii) commercial paper issued by any Bank as of the Agreement Date or by corporations, which conduct a substantial part of their business in the United States of -43- 48 America, maturing within one hundred eighty (180) days from the date of the original issue thereof, and carrying the highest rating by Moody's Investor's Service, Inc. or Standard and Poor's Ratings Group, a division of McGraw-Hill, Inc.; (iii) repurchase agreements in such amounts and with such financial institutions having the highest rating from Moody's Investor's Service, Inc. or the highest rating from Standard and Poor's Ratings Group, a division of McGraw-Hill, Inc., as the Borrower may select from time to time; (iv) certificates of deposit maturing within three hundred sixty-five (365) days of the date of purchase which are issued by any Bank or by a United States national or state bank or foreign bank having capital, surplus and undivided profits totaling more than $100 million, and having a rating of Baa or better from Moody's Investors Service, Inc.; and (v) money market mutual funds substantially invested in obligations of the United States of America. (b) so long as no Significant Default then exists or would be caused thereby and the Borrower has not delivered a Cash Management Suspension Notice, make investments in and loans to a Subsidiary or make advances to any Unrestricted Subsidiary in the course of its normal cash management practices; (c) the Borrower and its Restricted Subsidiaries may make other advances to and investments in the Borrower's Affiliates, provided that the aggregate amount of all such advances to and investment in the Borrower's Affiliates does not exceed (i) during calendar year 1997, $19,000,000, (ii) during calendar year 1998, $25,000,000, and (iii) during calendar year 1999, $25,000,000, and (iv) each calendar year thereafter, $15,000,000; provided, further, that amounts not invested in any calendar year may be carried forward to the immediately succeeding calendar year, with such amounts being deemed to be the first dollars spent in such succeeding year; (d) make investments permitted under Section 7.5 hereof; and (e) the Borrower and its Restricted Subsidiaries may make investments in Restricted Subsidiaries. Section 7.3 Limitation on Liens. The Borrower shall not create, assume, incur or permit to exist or to be created, assumed, incurred or permitted to exist, directly or indirectly, and the Borrower shall not permit any Restricted Subsidiary to create, assume, incur or permit to exist, or to be created, assumed or incurred or permitted to exist, directly or indirectly, any Lien on any of its properties or assets, whether now owned or hereafter acquired, except for Permitted Liens. -44- 49 Section 7.4 Amendment and Waiver. The Borrower shall not, without the prior written consent of the Majority Banks, enter into any material amendment of, or agree to or accept any material waiver of the certificate or articles of incorporation and bylaws of the Borrower or its Restricted Subsidiaries, in each case which would have or could reasonably be expected to have an adverse effect upon the rights and remedies of the Banks hereunder or under any Loan Document. Section 7.5 Liquidation; Disposition or Acquisition of Assets. The Borrower shall not and shall not at any time permit any of its Restricted Subsidiaries to: (a) (i) liquidate or dissolve itself (or suffer any liquidation or dissolution) or otherwise wind up, or (ii) enter into any merger or consolidation, or (iii) sell, lease, abandon, transfer or otherwise dispose of any assets (other than contract rights) or business other than Permitted Asset Sales; provided, however, that (x) the Borrower may merge or consolidate with a wholly-owned Restricted Subsidiary of the Borrower (so long as the Borrower is the surviving entity), and (y) wholly-owned Restricted Subsidiaries of the Borrower may merge or consolidate with other wholly-owned Restricted Subsidiaries of the Borrower; or (b) acquire assets, property, stock or business of any other Person, except so long as no Default exists or would be caused thereby, the Borrower and its Restricted Subsidiaries may (i) make expenditures or advances (A) in the ordinary course of the Borrower's and its Restricted Subsidiaries' businesses and (B) for expansion into related businesses (including Acquisitions by the Borrower and its Restricted Subsidiaries) and (ii) make Capital Expenditures. Section 7.6 Limitation on Guaranties. The Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, at any time Guaranty, or assume, be obligated with respect to, or permit to be outstanding any Guaranty of, any obligation of any other Person other than (a) as may be contained in any Loan Document, (b) obligations under agreements to indemnify Persons who have issued bid or performance bonds or letters of credit issued in lieu of such bonds in the ordinary course of business of the Borrower or its Subsidiaries, as the case may be, securing other performance by the Borrower or any of its Subsidiaries of activities otherwise permissible hereunder, (c) a guaranty by endorsement of negotiable instruments for collection in the ordinary course of business, and (d) Guarantees permitted under Section 7.1(d) hereof. Section 7.7 Restricted Payments and Purchases. The Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, directly or indirectly declare or make any Restricted Payment or Restricted Purchase, provided, that so long as no Default then exists or would be caused thereby, (a) and so long as on such date, the Borrower confirms that its Leverage Ratio is less than 3.50 to 1.0, before and after giving effect to such Restricted Payment, the Borrower may make Restricted Payments to its shareholders, and (b) any -45- 50 Subsidiary of the Borrower may make distributions to the Borrower or a Restricted Subsidiary of the Borrower. Section 7.8 Leverage Ratio. (a) As of the end of any calendar quarter and (b) at the time of any Advance increasing the principal amount of the Loans hereunder (after giving effect to such Advance), the Borrower shall not permit the ratio of (x) Total Debt to (y) Annualized Operating Cash Flow to exceed the ratios set forth below during the periods indicated:
Period Ratio ------ ----- Agreement Date through December 31, 2000 4.50:1 January 1, 2001 through December 31, 2002 4.00:1 January 1, 2003 and thereafter 3.50:1
Section 7.9 Pro Forma Debt Service Coverage Ratio. (a) As of the end of any calendar quarter and (b) at the time of any Advance increasing the Obligations hereunder (after giving effect to such Advance), the Borrower shall not permit the ratio of (x) Annualized Operating Cash Flow to (y) Pro Forma Debt Service as of such date, to be less than 1.20:1. Section 7.10 Interest Coverage Ratio. (a) As of the end of any calendar quarter and (b) at the time of any Advance increasing the principal amount of the Loans hereunder (after giving effect to such Advance), the Borrower shall not permit the ratio of (x) Annualized Operating Cash Flow to (y) its Total Interest Expense for the same period, to be less than the amounts set forth for such date in the table below:
Period Ratio ------ ----- Agreement Date through December 31, 2000 1.75:1 January 1, 2001 and thereafter 2.00:1
Section 7.11 Affiliate Transactions. Except for transactions pursuant to any Transponder Lease Agreement between the Borrower and an Affiliate, agreements which are direct cost or direct revenue pass through in nature and any renewals or extensions of any of the foregoing, the Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, at any time engage in any transaction with an Affiliate (other than the Borrower or a -46- 51 Restricted Subsidiary of the Borrower), nor make an assignment or other transfer of any of its assets to any Affiliate (other than the Borrower or a Restricted Subsidiary of the Borrower), on terms less advantageous than would be the case if such transaction had been effected with a non-Affiliate. Section 7.12 ERISA Liabilities. The Borrower shall not, and shall not permit any of its Restricted Subsidiaries to, fail to meet all of the applicable minimum funding requirements of ERISA and the Code, without regard to any waivers thereof, and, to the extent that the assets of any of its Plans would be less than an amount sufficient to provide all accrued benefits payable under such Plans, shall make the maximum deductible contributions allowable under the Code. The Borrower shall not, and shall not permit any of its Subsidiaries to, become a participant in any Multiemployer Plan. Section 7.13 Limitation on Upstream Dividends by Subsidiaries. The Borrower shall not permit any of its Restricted Subsidiaries to enter into or agree, or otherwise become subject, to any agreement, contract or other arrangement with any Person pursuant to the terms of which (a) such Restricted Subsidiary is or would be prohibited from declaring or paying any cash dividends or distributions on any class of its stock or any partnership interests owned directly or indirectly by the Borrower or from making any other distribution on account of any class of any such stock or any such partnership interests owned directly or indirectly by the Borrower (herein referred to as "Upstream Dividends") or (b) the declaration or payment of Upstream Dividends by a Restricted Subsidiary to the Borrower or to another Restricted Subsidiary of the Borrower, on an annual or cumulative basis, is or would be otherwise limited or restricted. Section 7.14 TCI Revenue Agreement. The Borrower shall not, and shall not permit its Subsidiaries to, terminate or make any material amendment to the TCI Revenue Agreement without the prior written consent of the Majority Banks, except that the Borrower may enter into amendments or modifications of the TCI Revenue Agreement provided that the contracted revenues to be received through the Maturity Date are not less than ninety percent (90%) of the revenues that would have been derived under the TCI Revenue Agreement as of the Agreement Date. Section 7.15 Designation of Restricted and Unrestricted Subsidiary. The Borrower shall not, and shall not permit its Restricted Subsidiaries to, designate a Restricted Subsidiary as an Unrestricted Subsidiary or an Unrestricted Subsidiary as a Restricted Subsidiary except in accordance herewith. The Borrower and its Subsidiaries are permitted to designate a Restricted Subsidiary as an Unrestricted Subsidiary (other than DMX, Inc.) and an Unrestricted Subsidiary as a Restricted Subsidiary by the delivery to the Administrative Agent and the Banks of a written notice, not later than twenty (20) Business Days after such designation, certifying that all conditions set forth in this Section 7.17 are satisfied as of the effective date of such designation, which certification shall state the effective date of such designation and shall be signed by a Authorized Signatory, provided that: (a) no Event of De- -47- 52 fault shall exist immediately before or after the effective date of such designation; (b) after giving effect to such designation, there shall not be a Materially Adverse Effect, and such designation shall not render the Borrower and its Restricted Subsidiaries on a consolidated basis insolvent or generally unable to pay its or their respective debts as they become due; and (c) in the case of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary, such notice shall also serve as the certification of the Borrower that, with respect to such Restricted Subsidiary, the representations and warranties made in Article 4 hereto are true and correct on and as of the effective date of such designation to the extent applicable (provided that, together with such notice, the Borrower may submit a revised Schedules to be attached hereto to make revisions to such Schedules attached hereto with respect to the Subsidiary to be so designated as may be necessary for the representations in Article 4 to be true and correct with respect to such Subsidiary). ARTICLE 8 - Default Section 8.1 Events of Default. Each of the following shall constitute an Event of Default, whatever the reason for such event and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment or order of any court or any order, rule, or regulation of any governmental or non-governmental body: (a) Any representation or warranty made under this Agreement shall prove incorrect or misleading in any material respect when made or deemed to have been made pursuant to Section 4.2 hereof; (b) The Borrower shall default in the payment of (i) any interest, fees and other amounts payable hereunder or under the Notes, or any of them, or under the other Loan Documents and such default shall continue unremedied for a period of five (5) days or (ii) any principal when due hereunder or under the Notes, or any of them; (c) The Borrower shall default in the performance or observance of any agreement or covenant contained in Article 7, Sections 6.1, 6.2 or 6.3 hereof; (d) The Borrower shall default in the performance or observance of any other agreement or covenant contained in this Agreement not specifically referred to elsewhere in this Section 8.1, and such default shall not be cured to the Majority Banks' satisfaction within a period of thirty (30) days from the date of the occurrence of such default; (e) There shall occur any default in the performance or observance of any agreement or covenant or breach of any representation or warranty contained in any of the Loan Documents (other than this Agreement or as otherwise provided in this Section 8.1 of -48- 53 this Agreement), which shall not be cured to the Majority Banks' satisfaction within a period of thirty (30) days from the occurrence of such default; (f) There shall be entered a decree or order for relief in respect of any of the Borrower or any Subsidiary of the Borrower under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator, or similar official of any of the Borrower or any Subsidiary of the Borrower or of any substantial part of their respective properties, or ordering the winding-up or liquidation of the affairs of any of the Borrower and its Subsidiaries or an involuntary petition shall be filed against any of the Borrower and its Subsidiaries and a temporary stay entered, and (i) such petition and stay shall not be diligently contested, or (ii) any such petition and stay shall continue undismissed for a period of sixty (60) consecutive days; (g) The Borrower or any Subsidiary of the Borrower shall file a petition, answer, or consent seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy law or other similar law, or the Borrower or any Subsidiary of the Borrower shall consent to the institution of proceedings thereunder or to the filing of any such petition or to the appointment or taking of possession of a receiver, liquidator, assignee, trustee, custodian, sequestrator, or other similar official of the Borrower or any Subsidiary of the Borrower or of any substantial part of their respective properties, or the Borrower or any Subsidiary of the Borrower shall fail generally to pay its respective debts as they become due, or the Borrower or any Subsidiary of the Borrower shall take any action in furtherance of any such action; (h) A final judgment shall be entered by any court against any of the Borrower or any Subsidiary of the Borrower for the payment of money which exceeds $1,000,000, which judgment is not covered by insurance or a warrant of attachment or execution or similar process shall be issued or levied against property of any of the Borrower or any Subsidiary of the Borrower which, together with all other such property of the Borrower and its Subsidiaries subject to other such process, exceeds in value $1,000,000 in the aggregate, and if, within thirty (30) days after the entry, issue, or levy thereof, such judgment, warrant, or process shall not have been paid or discharged or stayed pending appeal, or if, after the expiration of any such stay, such judgment, warrant, or process shall not have been paid or discharged; (i) (i) There shall be at any time any "accumulated funding deficiency," as defined in ERISA or in Section 412 of the Code, with respect to any Plan; or (ii) a trustee shall be appointed by a United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall institute proceedings to terminate any Plan; or (iii) any of the Borrower and its ERISA Affiliates shall incur any liability to the Pension Benefit Guaranty Corporation in connection with the termination of any Plan; or (iv) any Plan or trust created under any Plan of any of the Borrower and its ERISA Affiliates shall engage in a -49- 54 non-exempt "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) which would subject the Borrower or any ERISA Affiliate to the tax or penalty on "prohibited transactions" imposed by Section 502 of ERISA or Section 4975 of the Code; and by reason of any or all of the events described in clauses (i) through (iv), as applicable, the Borrower shall have waived (and/or is likely to incur) and/or incurred liability in excess of $1,000,000 in the aggregate; (j) There shall occur any default under any material indenture, agreement, or instrument evidencing or relating to Indebtedness for Money Borrowed of the Borrower or any of its Subsidiaries having an aggregate principal amount in excess of $10,000,000, which default is not cured or waived within any applicable cure period which default shall give the holder thereof the right to accelerate the obligations thereunder; (k) All or any portion of any Loan Document shall at any time and for any reason be declared by a court of competent jurisdiction in a suit with respect to such Loan Document to be null and void, or a proceeding shall be commenced by any governmental authority involving a legitimate dispute or by the Borrower or any of its Subsidiaries having jurisdiction over the Borrower or any of its Subsidiaries seeking to establish the invalidity or unenforceability thereof (exclusive of questions of interpretation of any provision thereof); (l) There shall occur any default by the Borrower under or a cancellation of, without replacement, any Transponder Lease Agreement which results (or is reasonably likely to result in) a termination of the Borrower's access to a transponder thereunder; or (m) There shall occur any Change of Control. Section 8.2 Remedies. If an Event of Default shall have occurred and shall be continuing: (a) With the exception of an Event of Default specified in Sections 8.1(f) or (g), the Administrative Agent, shall at the request, or may with the consent, of the Majority Banks, (A) terminate the Commitment, and/or (B) declare the principal of and interest on the Loans and the Notes and all other Obligations to be forthwith due and payable, without presentment, demand, protest, or notice of any kind, all of which are hereby expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding, or both. (b) Upon the occurrence an Event of Default under Sections 8.1(f) or (g) hereof, such principal, interest, and other obligations shall thereupon and concurrently therewith become due and payable, and the Commitment shall forthwith terminate, all without any action by the Administrative Agent or the Banks or the holders of the Notes, all without presentment, demand, protest, or other notice of any kind, all of which are expressly waived, anything in this Agreement or in the Notes to the contrary notwithstanding. -50- 55 (c) The Administrative Agent, with the concurrence of the Majority Banks, shall exercise all of the post-default rights granted to it and to them under the Loan Documents or under Applicable Law. (d) Upon acceleration of the Notes, as provided in subsection (a) or (b) of this Section 8.2, the Administrative Agent, upon request of the Majority Banks shall have the right to the appointment of a receiver for the properties and assets of the Borrower and its Subsidiaries, and the Borrower, for itself and on behalf of its Subsidiaries, hereby consents to such rights and such appointment and hereby waives any objection the Borrower or any Subsidiary of the Borrower may have thereto or the right to have a bond or other security posted by the Administrative Agent on behalf of the Banks, in connection therewith. The rights of the Administrative Agent under this Section 8.2(d) shall be subject to its prior compliance with the Communications Act and the FCC rules and policies promulgated thereunder to the extent applicable to the exercise of such rights. (e) The rights and remedies of the Administrative Agent and the Banks hereunder shall be cumulative, and not exclusive. ARTICLE 9 - The Administrative Agent. Section 9.1 Appointment and Authorization. Each Bank hereby irrevocably appoints and authorizes, and hereby agrees that it will require any transferee of any of its interest in its Loans and in its Notes irrevocably to appoint and authorize, the Administrative Agent to take such actions as its agent on its behalf and to exercise such powers hereunder as are delegated by the terms hereof, together with such powers as are reasonably incidental thereto. Neither the Administrative Agent nor any of its directors, officers, employees, or agents shall be liable for any action taken or omitted to be taken by it or them hereunder or in connection herewith, except for its or their own gross negligence or willful misconduct as determined by a final non-appealable judicial order of a court of competent jurisdiction. Section 9.2 Delegation of Duties. The Administrative Agent may execute any of its duties under the Loan Documents by or through agents or attorneys selected by it using reasonable care and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible to any Bank for the negligence or misconduct of any agents or attorneys selected by it with reasonable care. Section 9.3 Interest Holders. The Administrative Agent may treat each Bank, or the Person designated in the last notice filed with the Administrative Agent under this Section 9.3, as the holder of all of the interests of such Bank in its Loans and in its Notes until written notice of transfer, signed by such Bank (or the Person designated in the last notice filed with the Administrative Agent) and by the Person designated in such written -51- 56 notice of transfer, substantially in the form of Exhibit A attached hereto or in another form and substance satisfactory to the Administrative Agent, shall have been filed with the Administrative Agent. Section 9.4 Consultation with Counsel. The Administrative Agent may consult with legal counsel selected by it and shall not be liable for any action taken or suffered by it in good faith in reliance thereon. Section 9.5 Documents. The Administrative Agent shall not be under any duty to examine, inquire into, or pass upon the validity, effectiveness, or genuineness of this Agreement, any Note, or any instrument, document, or communication furnished pursuant hereto or in connection herewith, and the Administrative Agent shall be entitled to assume that they are valid, effective, and genuine, have been signed or sent by the proper parties, and are what they purport to be. Section 9.6 Agents and Affiliates. With respect to the Commitment and the Loans, the Bank which is an Affiliate of the Administrative Agent shall have the same rights and powers hereunder as any other Bank, and the Administrative Agent and its other affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Affiliates of, or Persons doing business with, the Borrower, as if it were not affiliated with the Administrative Agent and without any obligation to account therefor. Section 9.7 Responsibility of the Agent. The duties and obligations of the Administrative Agent under this Agreement are only those expressly set forth in this Agreement. The Administrative Agent shall be entitled to assume that no Default or Event of Default has occurred and is continuing unless it has actual knowledge, or has been notified by the Borrower, of such fact, or has been notified by a Bank in writing that such Bank considers that a Default or an Event of Default has occurred and is continuing, and such Bank shall specify in detail the nature thereof. The Administrative Agent shall not be liable hereunder for any action taken or omitted to be taken except for its own gross negligence or willful misconduct as determined by a final, non-appealable judicial order of a court of competent jurisdiction. The Administrative Agent shall provide each Bank with copies of such documents received from the Borrower as such Bank may reasonably request. Section 9.8 Action by Administrative Agent. (a) The Administrative Agent shall be entitled to use its discretion with respect to exercising or refraining from exercising any rights which may be vested in it by, and with respect to taking or refraining from taking any action or actions which it may be able to take under or in respect of, this Agreement, unless the Administrative Agent shall have been instructed by the Majority Banks to exercise or refrain from exercising such rights or to take or refrain from taking such action, provided that the Administrative Agent shall not exercise any rights under Section 8.2(a) of this Agreement without the request of the -52- 57 Majority Banks unless time is of the essence, in which case, such action can be taken. The Administrative Agent shall incur no liability under or in respect of this Agreement with respect to anything which it may do or refrain from doing in the reasonable exercise of its judgment or which may seem to it to be necessary or desirable in the circumstances, except for its gross negligence or willful misconduct as determined by a final, non-appealable judicial order of a court of competent jurisdiction. (b) The Administrative Agent shall not be liable to the Banks or to any Bank in acting or refraining from acting under this Agreement in accordance with the instructions of the Majority Banks, and any action taken or failure to act pursuant to such instructions shall be binding on all Banks. The Administrative Agent shall not be obligated to take any action which is contrary to law or which would in its reasonable opinion subject it to liability. Section 9.9 Notice of Default. In the event that the Administrative Agent or any Bank shall acquire actual knowledge, or shall have been notified in writing, of any Default, the Administrative Agent or such Bank shall promptly notify the Banks and the Administrative Agent (provided failure to give such notice shall not result in any liability on the part of such Bank or Administrative Agent), and the Administrative Agent shall take such action and assert such rights under this Agreement as the Majority Banks shall request in writing, and the Administrative Agent shall not be subject to any liability by reason of its acting pursuant to any such request. If the Majority Banks shall fail to request the Administrative Agent to take action or to assert rights under this Agreement in respect of any Default or Event of Default within ten (10) days after their receipt of the notice of any Default or Event of Default from the Administrative Agent, or shall request inconsistent action with respect to such Default or Event of Default, the Administrative Agent may, but shall not be required to, take such action and assert such rights (other than rights under Article 8 hereof) as it deems in its discretion to be advisable for the protection of the Banks, except that, if the Majority Banks have instructed the Administrative Agent not to take such action or assert such right, in no event shall the Administrative Agent act contrary to such instructions unless time is of the essence, in which case, the Administrative Agent may act in accordance with its reasonable discretion. Section 9.10 Responsibility Disclaimed. The Administrative Agent shall not have any liability or responsibility whatsoever in its capacity as Administrative Agent: (a) To the Borrower or any other Person or entity as a consequence of any failure or delay in performance by or any breach by, any Bank or Banks of any of its or their obligations under this Agreement; (b) To any Bank or Banks, as a consequence of any failure or delay in performance by, or any breach by, (i) the Borrower of any of its obligations under this -53- 58 Agreement or the Notes or any other Loan Document (ii) any Subsidiary or any other obligor under any other Loan Document; (c) To any Bank or Banks for any statements, representations, or warranties in this Agreement, or any other document contemplated by this Agreement or any information provided pursuant to this Agreement, any other Loan Document, or any other document contemplated by this Agreement, or for the validity, effectiveness, enforceability, or sufficiency of this Agreement, the Notes, any other Loan Document, or any other document contemplated by this Agreement; or (d) To any Person for any act or omission other than that arising from gross negligence or willful misconduct of the Administrative Agent as determined by a final, non-appealable judicial order of a court of competent jurisdiction. Section 9.11 Indemnification. The Banks agree to indemnify the Administrative Agent (to the extent not reimbursed by the Borrower) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses (including fees and expenses of experts, agents, consultants, and counsel), or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against the Administrative Agent in any way relating to or arising out of this Agreement, any other Loan Document, or any other document contemplated by this Agreement or any action taken or omitted by the Administrative Agent under this Agreement, any other Loan Document, or any other document contemplated by this Agreement, except that no Bank shall be liable to the Administrative Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements resulting from the gross negligence or willful misconduct of the Administrative Agent as determined by a final, non-appealable judicial order of a court of competent jurisdiction. The provisions of this Section 9.11 shall survive the termination of this Agreement. Section 9.12 Credit Decision. Each Bank represents and warrants to each other and to the Administrative Agent that: (a) In making its decision to enter into this Agreement and to make Advances it has independently taken whatever steps it considers necessary to evaluate the financial condition and affairs of the Borrower and that it has made an independent credit judgment, and that it has not relied upon information provided by the Administrative Agent; and (b) So long as any portion of the Loans remains outstanding, it will continue to make its own independent evaluation of the financial condition and affairs of the Borrower. -54- 59 Section 9.13 Successor Administrative Agent. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by giving written notice thereof to the Banks and the Borrower and may be removed at any time for cause by the Majority Banks. Upon any such resignation or removal, the Majority Banks shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Majority Banks, and shall have accepted such appointment within thirty (30) days after the retiring Administrative Agent's giving of notice of resignation or the Majority Banks' removal of the retiring Administrative Agent, then the retiring Administrative Agent may, on behalf of the Banks, appoint a successor Administrative Agent which shall be any Bank or a commercial bank organized under the laws of the United States of America or any political subdivision thereof which has combined capital and reserves in excess of $250,000,000. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges, duties, and obligations of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent's resignation or removal hereunder as Administrative Agent, the provisions of this Section 9.13 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as the Administrative Agent. Section 9.14 Syndication Agents and Co-Agents. None of the Syndication Agents or Co-Agents shall have any duties or obligations under this Agreement or the other Loan Documents in their capacities as Syndication Agents and Co-Agents. ARTICLE 10 - Change in Circumstances Affecting LIBOR Advances. Section 10.1 LIBOR Basis Determination Inadequate. Notwithstanding anything contained herein which may be construed to the contrary, if with respect to any proposed LIBOR Advance for any Interest Period, the Administrative Agent determines after consultation with the Banks that deposits in dollars (in the applicable amount) are not being offered to each of the Banks in the relevant market for such Interest Period, the Administrative Agent shall forthwith give notice thereof to the Borrower and the Banks, whereupon until the Administrative Agent notifies the Borrower that the circumstances giving rise to such situation no longer exist, the obligations of the Banks to make such types of LIBOR Advances shall be suspended. Section 10.2 Illegality. If after the date hereof, the adoption of any Applicable Law, or any change in any Applicable Law, or any change in interpretation or administration thereof by any governmental authority, central bank, or -55- 60 comparable agency charged with the interpretation or administration thereof, or compliance by any Bank with any request or directive (whether or not having the force of law) of any such authority, central bank, or comparable agency, shall make it unlawful or impossible for any Bank to make, maintain, or fund its LIBOR Advances, such Bank shall so notify the Administrative Agent, and the Administrative Agent shall forthwith give notice thereof to the other Banks and the Borrower. Before giving any notice to the Administrative Agent pursuant to this Section 10.2, such Bank shall designate a different lending office and shall take such alternative courses of action if such designation or courses of action will avoid the need for giving such notice and will not, in the good faith judgment of such Bank, be otherwise disadvantageous to such Bank. Upon receipt of such notice, notwithstanding anything contained in Article 2 hereof, the Borrower shall repay in full the then outstanding principal amount of each affected LIBOR Advance of such Bank so affected, together with accrued interest thereon, either (a) on the last day of the then current Interest Period applicable to such Advance if such Bank may lawfully continue to maintain and fund such Advance to such day or (b) immediately if such Bank may not lawfully continue to fund and maintain such Advance to such day. Concurrently with repaying each affected LIBOR Advance of such Bank, notwithstanding anything contained in Article 2 hereof, the Borrower shall borrow a Base Rate Advance (or other LIBOR Advance, if available) from such Bank, and such Bank shall make such Base Rate Advance in an amount such that the outstanding principal amount of the Note held by such Bank shall equal the outstanding principal amount of such Note immediately prior to such repayment. Section 10.3 Increased Costs. (a) If any Regulatory Change: (i) Shall subject any Bank to any tax, duty, or other charge with respect to its share of the Commitment or its obligation to make LIBOR Advances, or its LIBOR Advances, or shall change the basis of taxation of payments to any Bank of the principal of or interest on its LIBOR Advances or in respect of any other amounts due under this Agreement in respect of its LIBOR Advances or its share of the Commitment or its obligation to make LIBOR Advances (except for changes in the rate of tax on the overall net income of such Bank); or (ii) Shall impose, modify, or deem applicable any reserve (including, without limitation, any imposed by the Board of Governors of the Federal Reserve System and any change in the LIBOR Reserve Percentage), special deposit, capital adequacy, assessment, or other requirement or condition against assets of, deposits with or for the account of, or commitments or credit extended by any Bank, or shall impose on any Bank or the eurodollar interbank borrowing market any other condition affecting its obligation to make such LIBOR Advances or its LIBOR Advances; and the result of any of the foregoing is to increase the cost to such Bank of maintaining its share of the Commitment or making or maintaining any such LIBOR Advances, or to reduce -56- 61 the amount of any sum received or receivable by such Bank under this Agreement or under its Notes with respect thereto, then, on the earlier of demand by such Bank or the Maturity Date, the Borrower agrees to pay to such Bank such additional amount or amounts as will compensate such Bank for such increased costs. Each Bank will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Bank to compensation pursuant to this Section 10.3 and will designate a different lending office and shall take alternative courses of action if such designation or courses of action will avoid the need for, or reduce the amount of, such compensation and will not, in the good faith judgment of such Bank, be otherwise disadvantageous to such Bank. (b) A certificate of any Bank claiming compensation under this Section 10.3 and setting forth the additional amount or amounts to be paid to it hereunder and calculations therefor shall be conclusive in the absence of manifest error. In determining such amount, such Bank may use any reasonable averaging and attribution methods. If any Bank demands compensation under this Section 10.3, the Borrower may at any time, upon at least five (5) Business Days' prior notice to such Bank, prepay in full the then outstanding affected LIBOR Advances of such Bank, together with accrued interest thereon to the date of prepayment, along with any reimbursement required under Section 2.9 hereof. Concurrently with prepaying such LIBOR Advances, the Borrower shall borrow a Base Rate Advance (or other type of LIBOR Advance, if available) from such Bank, and such Bank shall make such Base Rate Advance in an amount such that the outstanding principal amount of the Notes held by such Bank shall equal the outstanding principal amount of such Notes immediately prior to such prepayment. Section 10.4 Effect On Other Advances. If notice has been given pursuant to Section 10.1, 10.2 or 10.3 hereof suspending the obligation of any Bank to make any type of LIBOR Advance, or requiring LIBOR Advances of any Bank to be repaid or prepaid, then, unless and until such Bank notifies the Borrower that the circumstances giving rise to such repayment no longer apply, all Advances which would otherwise be made by such Bank as to the LIBOR Advances shall, at the option of the Borrower, be made instead as Base Rate Advances or, if available, the other type of LIBOR Advance, as specified by the Borrower. ARTICLE 11 - Miscellaneous. Section 11.1 Notices. (a) All notices and other communications under this Agreement shall be in writing and shall be deemed to have been given three (3) days after deposit in the mail, designated as certified mail, return receipt requested, post-prepaid, or one (1) day after being entrusted to a reputable commercial overnight delivery service, or telecopy addressed to the party to which such notice is directed at its address determined as provided in this -57- 62 Section 11.1 All notices and other communications under this Agreement shall be given to the parties hereto at the following addresses: (i) If to the Borrower, to it at: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue Suite 500 Englewood, Colorado 80111 Attn: President Telecopy No.: (303) 721-5445 with a copy to: Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attn: Treasury Department Telecopy No.: (303) 488-3216 (ii) If to the Administrative Agent, to it at: Bank of America National Trust and Savings Association 555 South Flower Street 11th Floor Los Angeles, California 90071 Attn: Janice Hammond Telecopy No.: (213) 228-2299 with a copy to: Powell, Goldstein, Frazer & Murphy LLP 191 Peachtree Street, N.E. Suite 1600 Atlanta, Georgia 30303 Attn: Douglas S. Gosden, Esq. Telecopy No.: (404) 572-6999 -58- 63 (iii) If to the Banks, to them at the addresses set forth below: Bank of America National Trust and Savings Association 555 South Flower Street, 11th Floor Los Angeles, California 90071 Attn: Shannon T. Ward Telecopy No.: (213) 228-2641 Royal Bank of Canada USA Headquarters One Financial Square, 24th Floor New York, New York 10005-3531 Attn: Barbara Meijer Telecopy No.: (212) 428-6460 Credit Lyonnais New York Branch Credit Lyonnais Building 1301 Avenue of the Americas New York, New York 10019 Attn: John Judge Telecopy No.: (212) 261-3288 Fleet National Bank One Federal Street 3rd Floor Boston, Massachusetts 02110 Attn: Stephen J. Healey Telecopy No.: (617) 346-4346 Banque Paribas 2029 Century Park East Suite 3900 Los Angeles, California 90067 Attn: David Pastre Telecopy No.: (310) 556-3762 Copies shall be provided to persons other than parties hereto only in the case of notices under Article 8 hereof and failure to provide such copies shall not affect the validity of the notice given to the primary recipient. -59- 64 (b) Any party hereto may change the address to which notices shall be directed under this Section 11.1 by giving ten (10) days' written notice of such change to the other parties. Section 11.2 Expenses. The Borrower agrees to promptly pay: (a) All reasonable out-of-pocket expenses of the Administrative Agent in connection with the preparation, negotiation, execution, and delivery of this Agreement and the other Loan Documents executed on the Agreement Date, the transactions contemplated hereunder and thereunder, and the making of the initial Advance hereunder (whether or not such Advance is made) including, but not limited to, the fees and disbursements of counsel for the Administrative Agent; (b) All reasonable out-of-pocket expenses of the Administrative Agent in connection with the preparation, negotiation, execution and delivery of any waiver, amendment, or consent by the Administrative Agent and Banks, or any of them, relating to this Agreement or the other Loan Documents whether or not executed, including, but not limited to, the fees and disbursements of counsel for the Administrative Agent; and (c) All reasonable out-of-pocket costs and expenses of enforcement of rights and collection if an Event of Default occurs in the payment of the Notes, which in each case shall include fees and out-of-pocket expenses of counsel (including the allocated cost of in-house counsel) for the Administrative Agent and each of the Banks, and the reasonable fees and out-of-pocket expenses of counsel and of any experts, agents, or consultants of the Administrative Agent and each of the Banks. Section 11.3 Waivers. The rights and remedies of the Administrative Agent and the Banks under this Agreement and the other Loan Documents shall be cumulative and not exclusive of any rights or remedies which they would otherwise have. No failure or delay by the Administrative Agent, the Majority Banks, or the Banks in exercising any right shall operate as a waiver of such right. The Administrative Agent and the Banks expressly reserve the right to require strict compliance with the terms of this Agreement in connection with any funding of a request for an Advance. In the event the Banks decide to fund a request for an Advance at a time when the Borrower is not in strict compliance with the terms of this Agreement, such decision by the Banks shall not be deemed to constitute an undertaking by the Banks to fund any further requests for Advances or preclude the Banks from exercising any rights available to the Banks under the Loan Documents or at law or equity. Any waiver or indulgence granted by the Banks or by the Majority Banks shall not constitute a modification of this Agreement, except to the extent expressly provided in such waiver or indulgence, or constitute a course of dealing by the Banks at variance with the terms of the Agreement such as to require further notice by the Banks of the Banks' intent to require strict adherence to the terms of the Agreement in the future. -60- 65 Section 11.4 Set-Off. In addition to any rights now or hereafter granted under Applicable Law and not by way of limitation of any such rights, the Administrative Agent and the Banks and any subsequent holder or holders of the Notes are hereby authorized by the Borrower at any time or from time to time after the Maturity Date (whether by acceleration or otherwise), without notice to the Borrower or to any other Person, any such notice being hereby expressly waived, to set-off and to appropriate and apply any and all deposits (general or special, time or demand, including, but not limited to, Indebtedness evidenced by certificates of deposit, in each case whether matured or unmatured) and any other Indebtedness at any time held or owing by the Banks or such holder to or for the credit or the account of the Borrower, against and on account of the obligations and liabilities of the Borrower, to the Banks or such holder under this Agreement, the Notes, and any other Loan Document, including, but not limited to, all Obligations and any other claims of any nature or description arising out of or connected with this Agreement, the Notes, or any other Loan Document, irrespective of whether or not (a) the Administrative Agent and the Banks or the holder of the Notes shall have made any demand hereunder or (b) the Administrative Agent and the Banks shall have declared the principal of and interest on the Loans and Notes and other amounts due hereunder to be due and payable as permitted by Section 8.2 hereof and although said obligations and liabilities, or any of them, shall be contingent or unmatured. Any sums obtained by the Administrative Agent, any Bank or any subsequent holder of the Notes shall be subject to the application of payments provisions of Article 2 hereof. Upon direction by the Administrative Agent, with the consent of the Majority Banks, after the Maturity Date (whether by reason of acceleration or otherwise) each Bank holding deposits of the Borrower shall exercise its set-off rights as so directed. Section 11.5 Assignment. (a) The Borrower may not assign or transfer any of its rights or obligations hereunder or under the Notes without the prior written consent of each Bank. (b) Each of the Banks may at any time enter into assignment agreements or participations with respect to its interest hereunder and under the other Loan Documents with one or more other banks or other Persons, provided, that (i) all assignments (other than assignments described in clause (ii) hereof) shall be in minimum principal amounts of $5,000,000, (ii) each Bank may sell assignments and participations of up to one hundred percent (100%) of its interest hereunder to (A) one or more affiliates of such Bank, (B) any Federal Reserve Bank as collateral security pursuant to Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank (no such assignment or participation shall relieve such Bank from its obligations hereunder) or (C) one or more Banks, and (iii) all assignments and participations (other than assignments and participations described in clause (ii) hereof) hereunder shall be subject to the following additional terms and conditions: -61- 66 (A) No such assignment shall be sold without the consent of the Administrative Agent, and prior to the occurrence of a Default, the Borrower, which consents to assignments comprising in the aggregate up to fifty percent (50%) of any Bank's Commitment as of the Agreement Date shall not be unreasonably withheld. (B) Any Person purchasing a participation or an assignment of the Loans from any Bank shall be required to represent and warrant that its purchase shall not constitute a "prohibited transaction" (as defined in Section 4.1(n) hereof). (C) The Borrower, the Banks, and the Administrative Agent agree that assignments permitted hereunder (including the assignment of any Advance or portion thereof) may be made with all voting rights and shall be made pursuant to an Assignment and Assumption Agreement. An administrative fee of $3,000 shall be payable to the Administrative Agent by the assigning Bank at the time of any assignment hereunder. (D) No participation agreement shall confer any rights under this Agreement or any other Loan Document to any purchaser thereof, or relieve any issuing Bank from any of its obligations under this Agreement, and all actions hereunder shall be conducted as if no such participation had been granted; provided, however, that any participation agreement may confer on the participant the right to approve or disapprove decreases in the interest rate, increases or forgiveness of the principal amount of the Loans participated in by such participant, decreases in fees, releases of the collateral or guarantors, except for collateral the sale or disposition of which is permitted hereunder, and extensions of the Maturity Date or other principal payment date for the Loans or of the scheduled reduction of the Commitment. (E) Each Bank agrees to provide the Administrative Agent and the Borrower with prompt written notice of any issuance of participations or assignments of its interests hereunder. (F) No assignment, participation or other transfer of any rights hereunder or under the Notes shall be effected that would result in any interest requiring registration under the Securities Act of 1933, as amended, or qualification under any state securities law. (G) No such assignment may be made to any bank or other financial institution (x) with respect to which a receiver or conservator (including, without limitation, the Federal Deposit Insurance Corporation, the Resolution Trust Corporation or the Office of Thrift Supervision) has been appointed or (y) that has failed to meet any of the capital requirements of its primary regulator or insurer. -62- 67 (H) If applicable, each Bank shall, and shall cause each of its assignees to provide to the Administrative Agent on or prior to the Agreement Date or effective date of any assignment, as the case may be, an appropriate Internal Revenue Service form as required by Applicable Law supporting such Bank's position that no withholding by the Borrower or the Administrative Agent for U.S. income tax payable by the Bank in respect of amounts received by it hereunder is required on the effective date of such assignment. For purposes of this Agreement, an appropriate Internal Revenue Service form shall mean Form 1001 (Ownership Exemption or Reduced Rate Certificate of the U.S. Department of Treasury), or Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the United States), or any successor or related forms adopted by the relevant U.S. taxing authorities. (c) Except specifically set forth in Section 11.5(b) hereof, nothing in this Agreement or the Notes, expressed or implied, is intended to or shall confer on any Person other than the respective parties hereto and thereto and their successors and assignees permitted hereunder and thereunder any benefit or any legal or equitable right, remedy or other claim under this Agreement or the Notes. (d) In the case of any participation, all amounts payable by the Borrower under the Loan Documents shall be calculated and made in the manner and to the parties hereto as if no such participation had been sold. Section 11.6 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but all such separate counterparts shall together constitute but one and the same instrument. Section 11.7 Governing Law. This Agreement and the Notes shall be construed in accordance with and governed by the internal laws of the State of New York applicable to agreements made and to be performed in New York. If any action or proceeding shall be brought by the Administrative Agent or any Bank hereunder or under any other Loan Document in order to enforce any right or remedy under this Agreement or under any Note or any other Loan Document, the Borrower hereby consents and will, and the Borrower will cause each Subsidiary to, submit to the jurisdiction of any state or federal court of competent jurisdiction sitting within the area comprising the Southern District of New York on the date of this Agreement. The Borrower, for itself and on behalf of its Subsidiaries, hereby agrees that service of the summons and complaint and all other process which may be served in any such suit, action or proceeding may be effected by mailing by registered mail a copy of such process to the offices of the Borrower at the address given in Section 11.1 hereof and that personal service of process shall not be required. Nothing herein shall be construed to prohibit service of process by any other method permitted by law, or the bringing of any suit, action or proceeding in any other jurisdiction. The Borrower agrees that final judgment in -63- 68 such suit, action or proceeding shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment or in any other manner provided by Applicable Law. Section 11.8 Severability. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof in that jurisdiction or affecting the validity or enforceability of such provision in any other jurisdiction. Section 11.9 Headings. Headings used in this Agreement are for convenience only and shall not be used in connection with the interpretation of any provision hereof. Section 11.10 Interest. (a) In no event shall the amount of interest due or payable hereunder or under the Notes exceed the maximum rate of interest allowed by Applicable Law, and in the event any such payment is inadvertently made by the Borrower or is inadvertently received by any Bank, then such excess sum shall be credited as a payment of principal, unless the Borrower shall notify such Bank in writing that it elects to have such excess sum returned forthwith. It is the express intent hereof that the Borrower not pay and the Banks not receive, directly or indirectly in any manner whatsoever, interest in excess of that which may legally be paid by the Borrower under Applicable Law. (b) Notwithstanding the use by the Banks of the Prime Rate, the LIBOR Rate and the Federal Funds Rate as reference rates for the determination of interest on the Loans, the Banks shall be under no obligation to obtain funds from any particular source in order to charge interest to the Borrower at interest rates tied to such reference rates. Section 11.11 Entire Agreement. Except as otherwise expressly provided herein, this Agreement, the Notes, and the Loan Documents to which the Borrower is a party embody the entire Agreement and understanding among the parties hereto and thereto and supersede all prior agreements, understandings, and conversations relating to the subject matter hereof and thereof. Section 11.12 Amendment and Waiver. Neither this Agreement nor any term hereof nor any Loan Document may be amended orally, nor may any provision hereof be waived orally, but only by an instrument in writing signed by the Majority Banks or the Borrower, as the case may be, and, in the case of an amendment, by the Borrower and the Majority Banks, except that in the event of (a) any increase or decrease (other than pro rata) in the amount of the Commitment, (b) any change in the timing of, or reduction of the amount of, payments of principal, interest, and fees due hereunder, (c) any release or impairment of collateral or any guaranty issued in favor of the Administrative Agent and the Banks, (d) any waiver of any Event of Default due to the failure by the Borrower to pay any sum due hereunder, (e) any amendment of this Section 11.12, Section 11.5(a) or of the definition of Majority Banks, or -64- 69 (f) any waiver of any condition precedent specified in Section 3.1 to the initial Advance hereunder, any amendment or waiver may be made only by an instrument in writing signed by each of the Banks and, in the case of an amendment, also by the Borrower. Any amendment to any provision hereunder governing the rights, obligations, or liabilities of the Administrative Agent in its capacity as such, may be made only by an instrument in writing signed by such affected Person and by each of the Banks. Section 11.13 Other Relationships. No relationship created hereunder or under any other Loan Document shall in any way affect the ability of the Administrative Agent and each Bank to enter into or maintain business relationships with the Borrower, or any of its Affiliates, beyond the relationships specifically contemplated by this Agreement and the other Loan Documents. Section 11.14 Confidentiality. Each Bank and the Administrative Agent agrees (on behalf of itself and each of its affiliates, directors, officers, employees and representatives) to use reasonable precautions to keep confidential, in accordance with their customary procedures for handling confidential information of the same nature and in accordance with safe and sound banking practices, any non-public information supplied to it by the Borrower pursuant to this Agreement, provided that (a) nothing herein shall limit the disclosure of any such information (i) to the extent required by statute, rule, regulation or judicial process, (ii) to counsel for any of the Banks or the Administrative Agent, (iii) to bank examiners, auditors or accountants, (iv) to the Administrative Agent or any other Bank, (v) in connection with any litigation to which any one or more of the Banks or the Administrative Agent is a party, or (vi) to any assignee or participant (or prospective assignee or participant) so long as such assignee or participant (or prospective assignee or participant) shall have agreed to keep such information confidential as set forth herein, and (b) in no event shall any Bank or the Administrative Agent be obligated or required to return any materials furnished by the Borrower. Section 11.15 Survival of Various Provisions. Notwithstanding anything herein which may be construed to the contrary, rights pursuant to Sections 2.9(c), 2.10, 2.14(f), 5.11, 9.11 and 10.3 hereof shall survive the termination of this Agreement and the payment and performance of all other Obligations. ARTICLE 12 - Waiver of Jury Trial. Section 12.1 Waiver of Jury Trial. THE BORROWER, FOR ITSELF AND ON BEHALF OF THE SUBSIDIARIES, THE ADMINISTRATIVE AGENT AND THE BANKS HEREBY AGREE TO WAIVE AND HEREBY WAIVE THE RIGHT TO A TRIAL BY JURY IN ANY COURT AND IN ANY ACTION OR PROCEEDING OF ANY TYPE IN WHICH THE BORROWER, ANY OF THE SUBSIDIARIES, ANY OF THE BANKS, THE ADMINISTRATIVE AGENT OR ANY OF THEIR RESPECTIVE -65- 70 SUCCESSORS OR ASSIGNS IS A PARTY, AS TO ALL MATTERS AND THINGS ARISING DIRECTLY OR INDIRECTLY OUT OF THIS AGREEMENT, ANY OF THE NOTES OR THE OTHER LOAN DOCUMENTS AND THE RELATIONS AMONG THE PARTIES LISTED IN THIS SECTION 12.1. EXCEPT AS PROHIBITED BY LAW, EACH PARTY TO THIS AGREEMENT WAIVES ANY RIGHTS IT MAY HAVE TO CLAIM OR RECOVER IN ANY LITIGATION REFERRED TO IN THIS SECTION, ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES OR ANY DAMAGES OTHER THAN, OR IN ADDITION TO, ACTUAL DAMAGES. EACH PARTY TO THIS AGREEMENT (i) CERTIFIES THAT NEITHER ANY REPRESENTATIVE, AGENT OR ATTORNEY OF THE ADMINISTRATIVE AGENT OR ANY BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT THE ADMINISTRATIVE AGENT OR ANY BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS AND (ii) ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND EACH OTHER LOAN DOCUMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCLOSED BY AND TO THE PARTIES AND THE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES. [Remainder of Page Intentionally Left Blank] -66- 71 IN WITNESS WHEREOF, the parties hereto have executed this Agreement or caused it to be executed by their duly authorized officers, all as of the day and year first above written. BORROWER: TCI MUSIC, INC., a Delaware corporation By: /s/ ELISABETH C. SHELTON ---------------------------------------- Title: Authorized Officer ----------------------------------- ADMINISTRATIVE AGENT, SYNDICATION AGENTS, CO-AGENTS and BANKS: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as Administrative Agent By: /s/ JANICE HAMMOND ---------------------------------------- Its: Janice Hammond Vice President Agency Specialist ----------------------------------- BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as a Bank By: /s/ SHANNON T. WARD ---------------------------------------- Its: SHANNON T. WARD VICE PRESIDENT ----------------------------------- ROYAL BANK OF CANADA, as a Syndication Agent and a Bank By: /s/ BARBARA MEYIR ---------------------------------------- Its: Senior Manager ----------------------------------- REVOLVING LOAN AGREEMENT TCI MUSIC, INC. Signature Page 1 72 CREDIT LYONNAIS NEW YORK BRANCH, as a Syndication Agent and a Bank By: [ ] CAPELLONE ---------------------------------------- Its: Authorized Officer ----------------------------------- FLEET NATIONAL BANK, as a Co-Agent and a Bank By: /s/ SUE ANDERSON ---------------------------------------- Its: Vice President ----------------------------------- BANQUE PARIBAS, as a Co-Agent and a Bank By: /s/ DAVID J. PASTRE ---------------------------------------- David J. Pastre Its: Vice President ----------------------------------- By: /s/ STANLEY P. BERKMAN ---------------------------------------- Stanley P. Berkman Its: General Manager, Western Region ---------------------------------- REVOLVING LOAN AGREEMENT TCI MUSIC, INC. Signature Page 2 EX-10.3 5 EXHIBIT 10.3 1 EXHIBIT 10.3 AFFILIATION AGREEMENT THIS AGREEMENT, made as of the 1st day of July, 1997 (the "Effective Date"), is by and between DMX Inc., a Delaware corporation ("Network"), and Satellite Services, Inc., a Delaware corporation ("Affiliate"), regarding the cable digital audio programming service currently known as "DMX" (whether in its current format or in any other format) (the "Service"). The parties hereby mutually agree as follows: 1. RIGHTS: (a) Grant of Rights. Network grants to Affiliate, any TCI O&O System (as defined below), and any Electing Affiliate (as defined below), the non-exclusive right, but not the obligation, to distribute and subdistribute the Service by any cable, SMATV, or wireline technolog(ies) or platform(s), whether now existing or developed in the future. An Electing Affiliate shall mean any affiliate of Affiliate which owns Systems that are not managed under the authority of Tele-Communications, Inc. but which affiliate elects to be governed by this Agreement not later than one hundred twenty (120) days after the later of (1) the date hereof or (2) the date such affiliate of Affiliate first met the definition of an affiliate of Affiliate after the date of this Agreement. An "affiliate of Affiliate" shall include any entity meeting the requirements of paragraphs I.1, II or III of Exhibit A hereto. (b) Add and Delete Rights. Affiliate shall have the right, upon written notice to Network within thirty (30) days thereof, to elect to include under this Agreement any system or enterprise that meets the system qualifications of Exhibit A hereto. Any such system or enterprise that Affiliate elects to include under this Agreement shall be referred to as a "System" or "Systems", as set forth on Schedule 1 hereto, as such Schedule 1 may added to or deleted from, from time to time. Upon the addition of a System to this Agreement, any then-existing agreement between or among Network and any one or more third parties applicable to such System for distribution of the Service shall terminate and cease to be effective. Affiliate shall have the right to delete the Service from any or all Systems, by providing Network with written notice within thirty (30) days of such deletion. 2. TERM: (a) Unless earlier terminated pursuant to the terms of this Agreement, the "Initial Term" of this Agreement shall be for ten (10) years, commencing as of the Effective Date. (b) After the expiration of the Initial Term, this Agreement shall automatically renew for successive five (5) year renewal terms, unless (i) this Agreement is earlier terminated in accordance with its terms, or (ii) Affiliate provides notice of termination to Network no later than sixty (60) days before the end of the Initial Term or any Renewal Term. 3. CONTENT OF THE SERVICE: (a) Throughout the Term the programming on the Service shall consist exclusively of 2 at least 30 channels of commercial-free, digital-quality audio services programmed across a broad array of customer preferences and tastes, similar to the programming on the program schedule attached hereto as Exhibit B. 4. DELIVERY AND DISTRIBUTION OF THE SERVICE: (a) During the Term, Network, at its expense, shall deliver a signal of the Service to each system, and, for purposes of Section 4(h) hereof, to other locations within the continental United States designated by Affiliate, in its discretion, by transmitting such signal via a domestic satellite commonly used for transmission of cable television programming or such other delivery mechanism as shall be agreeable between Network and Affiliate. (b) Each System or other video distribution system or enterprise may distribute all or any number of the audio channels which are part of the Service. Each System or other video distribution system or enterprise may carry the Service (or any or all channels comprising the Service) on the basic level of service, on any tier, in a package or packages of other services, a la carte, or in any combination thereof. (c) Affiliate shall have the right to digitize, compress and reuplink any or all channels included within the Service for redistribution to Systems, and to other affiliated and unaffiliated distributors so long as any such other distributor is authorized by Network (pursuant to a written agreement or otherwise) to distribute the Service. Network shall not interfere with Affiliate's (or its affiliates') ability to digitize and compress the Service. (d) Affiliate shall have the right to transmit the signal of the Service as received by any System to unaffiliated distributors so long as any such distributor is authorized by Network (pursuant to a written agreement or otherwise) to distribute the Service. Affiliate shall have the right to receive the signal of the Service from any other distributor of the Service. 5. FEES: (a) Definitions. (i) "Commercial Per Sub Fee" shall mean, for any month, the following amounts: YEAR AMOUNT ------------------------------------ Contract Year 1 [*] ------------------------------------ Contract Year 2 CPI Adjusted Fee ------------------------------------ Contract Year 3 CPI Adjusted Fee ------------------------------------ Contract Year 4 CPI Adjusted Fee ------------------------------------ Contract Year 5 CPI Adjusted Fee ------------------------------------ Contract Year 6 CPI Adjusted Fee ------------------------------------ Contract Year 7 CPI Adjusted Fee ------------------------------------ - -------------- * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. -2- 3 Contract Year 8 CPI Adjusted Fee ------------------------------------ Contract Year 9 CPI Adjusted Fee ------------------------------------ Contract Year 10 CPI Adjusted Fee ------------------------------------ (ii) A "Commercial Subscriber" shall mean a Service Subscriber which is either a "Class A Commercial Establishment" or a "Class B Commercial Establishment." A "Class A Commercial Establishment" shall mean each of the following: the common areas, open to the public, of hotels and motels; night clubs; restaurants; bars; grills; taverns; cocktail lounges and other establishments in which food or beverages are served; stores; shops, supermarkets; automobile showrooms; gasoline service stations and other establishments where goods or services are sold or offered to the public at retail; and each of such premises located in a shopping center. A "Class B Commercial Establishment" shall mean each of the following: an office, factory or plant; a bank; an office or professional building; a doctor's, dentist's or other professional office; the common areas, open to the public, or a hospital, clinic, nursing or rest home or rehabilitation center; a funeral home or mortuary; a library, school, college or university; a church; a private club owned and operated by the members as a non-commercial venture; the common areas, open to the public, of an apartment house, residence, dormitory, sorority house or fraternity house; a government office; a park or recreation area owned and operated by the government excluding private or commercial concessions or leased areas, a garage; a security or commodity broker; an insurance or real estate agency; a finance or loan office; a savings and loan association; a warehouse; a trucking terminal, access to which is limited to operators of such trucks and maintenance men and to which other members of the public are not generally admitted; a research organization or laboratory; a room in a commercial establishment occupied solely as a rest room (or lounge); a room occupied solely as a reception or information area or an employee's cafeteria in such respective premises; and each such premises located in a shopping center. (iii) "Contract Year" shall mean any of the consecutive twelve (12) month periods commencing on the Effective Date and each anniversary of the Effective Date. (iv) The "CPI Adjusted Fee" for any twelve (12)-month period shall be the pertinent fee for the immediately preceding twelve (12)-month period (the immediately preceding period shall be referred to herein as the "Base Year") multiplied by a fraction, the numerator of which is the CPI as of April 1 of the Base Year and the denominator of which is the CPI as of April 1 of the twelve (12)-month period immediately preceding the Base Year. "CPI" shall mean the Consumer Price Index, Urban, U.S. City Average of "All Items", as published by the Bureau of Labor Statistics of the United States Department of Labor (or any successor thereto). (v) "Electing Affiliate Systems" shall mean all cable television systems that meet the System Qualifications of Exhibit A hereto and are managed under the authority of any Electing Affiliate. -3- 4 (vi) "Multiple" shall mean [*] in Contract Years four (4) and five (5), [*] in Contract Years six (6) and seven (7), and [*] in Contract Years eight (8) through ten (10). (vii) "Original Commercial Subscribers" shall mean the number of all Commercial Subscribers in TCI O&O Systems on the Effective Date, as adjusted pursuant to the terms of this Agreement. (viii) "Original Residential Subscribers" shall mean the number of all Residential Subscribers in TCI O&O Systems on the Effective Date, as adjusted pursuant to the terms of this Agreement. (ix) "Residential Baseline" shall mean 2,000,000, as adjusted pursuant to the terms of this Agreement. (x) "Residential Per Subscriber Fee" shall mean, for any month, the following amounts:
- -------------------------------------------------- YEAR AMOUNT - -------------------------------------------------- CONTRACT YEAR 1 [*] - -------------------------------------------------- CONTRACT YEAR 2 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 3 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 4 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 5 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 6 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 7 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 8 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 9 CPI Adjusted Fee - -------------------------------------------------- CONTRACT YEAR 10 CPI Adjusted Fee - --------------------------------------------------
(xi) A "Residential Subscriber" shall mean any Service Subscriber which is not a Commercial Subscriber. (xii) "Service Subscriber(s)" shall mean each location which Affiliate intentionally authorizes the Service by cable reception. Service Subscribers shall include each occupied residential or commercial location where the Service is received. If Affiliate provides the Service to multiple unit complexes on a bulk-rate basis, then the number of Service Subscribers attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate the complex is charged for the Service or for the level or package of services in which the Service is distributed, divided by the standard monthly retail rate a non-bulk rate subscriber is charged for the Service or for such level or package of services; provided, however, in no event will the number of Service Subscribers calculated for any such complex exceed the actual number of occupied dwelling units receiving the Service in such complex. Service Subscriber shall not include - -------------- * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. -4- 5 (i) subscribers who do not pay any monies to Affiliate to receive the level of service on which the Service is carried, (ii) public officials, administrative personnel or public buildings that are not charged for the Service; (iii) subscribers who have not paid their monthly rate for a given month; or (iv) any customer who receives the Service, either commercially or residentially, through any medium other than through cable television delivery, including without limitation, OVS, DBS, TVRO, or MMDS. Notwithstanding any other provision of this Agreement to the contrary, neither Affiliate nor any affiliate of Affiliate shall owe any Fees or pay any charge for the delivery or distribution of the Service, or any part thereof, through any medium other than through cable television delivery. (xiii) "System Original Commercial Subscribers" shall mean, with respect to each TCI O&O System, the number of Commercial Subscribers in such System as of the later of the Effective Date or the date such System first met the System Qualifications of Exhibit A. (xiv) "System Original Residential Subscribers" shall mean, with respect to each TCI O&O System, the number of Residential Subscribers in such System as of the later of the Effective Date or the date such System first met the System Qualifications of Exhibit A. (xv) A "TCI O&O System" shall mean a System which is managed under the authority of one of the operating divisions of Tele-Communications, Inc. (b) Fees for Commercial Subscribers in TCI O&O Systems. (i) Each month during Contract Years One through Three, Affiliate shall pay a Fee to Network for the Commercial Subscribers in all TCI O&O Systems equal to the following amounts:
- -------------------------------------------------- CONTRACT YEAR FEE - -------------------------------------------------- 1 [*] - -------------------------------------------------- 2 CPI Adjusted Fee - -------------------------------------------------- 3 CPI Adjusted Fee - --------------------------------------------------
(ii) If during any month in Contract Years One through Three a TCI O&O System is sold, divested or otherwise fails to meet the definition of a TCI O&O System, the Fee for Commercial Subscribers in TCI O&O Systems shall be reduced by an amount equal to such Fee multiplied by a fraction, the numerator of which is the number of System Original Commercial Subscribers in such divested system (the "Divested Commercial Subscribers") and the denominator of which is the number of Original Commercial Subscribers; provided, however, that the Fees shall be reduced only to the extent that the acquiror of such System agrees to assume the obligation for paying the amount of such reduction to Network through the expiration of Contract Year Three and agrees to pay a - -------------- * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. -5- 6 proportionate share of the rate set forth in Section 5(b)(iv) hereof for such System for the time period following the expiration of Contract Year Three through the end of the Initial Term. If the Fees are so reduced as set forth in the preceding sentence, the number of Original Commercial Subscribers shall be reduced by the number of Divested Commercial Subscribers. Any adjustment to the Fee set forth herein shall be effective as of the effective date of the divestiture or other disposition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of such month. (iii) If during any month in Contract Years One through Three a TCI O&O System is acquired, the Fee for Commercial Subscribers in TCI O&O Systems for Contract Years One through Three shall be increased by an amount equal to the number of Commercial Subscribers in such acquired TCI O&O System as of the effective date of acquisition (the "Acquisition Subscribers") multiplied by the Commercial Per Subscriber Fee. The number of Original Commercial Subscribers shall be increased by the number of Acquisition Subscribers as of the effective date of acquisition. Any adjustment to the Fee set forth herein shall be effective as of the effective date of the divestiture or other disposition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of such month. (iv) Fees for Contract Years Four through Ten. Each month during Contract Years Four through Ten, the Fee for TCI O&O Systems shall be determined in accordance with the following formula: (A+(BxC))xD Where: A = the number of Original Commercial Subscribers. B = an amount, which may be negative, equal to the number of Commercial Subscribers in TCI O&O Systems in the month for which Fees are determined minus the number of Original Commercial Subscribers. C = the Multiple. D = the Commercial Per Subscriber Fee. (v) If during any month in Contract Years Four through Ten a TCI O&O System is sold, divested or otherwise fails to meet the definition of a TCI O&O System, Affiliate shall cease to be liable for Fees for such System, and the number of Original Commercial Subscribers shall be reduced by the number of System Original Commercial Subscribers in such divested system. Any such adjustment shall be effective as of the effective date of the divestiture or other disposition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of -6- 7 such month. (vi) If during any month in Contract Years Four through Ten a TCI O&O System is acquired, the number of System Original Commercial Subscribers for such System shall be the number of Commercial Subscribers in such system as of the effective date of such acquisition, and the number of System Original Commercial Subscribers shall be added to the number of Original Commercial Subscribers. Any such adjustment shall be effective as of the effective date of the acquisition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of such month. (c) Fees for Residential Subscribers in TCI O&O Systems. (i) Each month during Contract Years One through Three, Affiliate shall pay a Fee to Network for Residential Subscribers in TCI O&O Systems as follows:
CONTRACT YEAR FEE ---------------------------------------------------- 1 [*] ---------------------------------------------------- 2 CPI Adjusted Fee ---------------------------------------------------- 3 CPI Adjusted Fee ----------------------------------------------------
(ii) If during any month in Contract Years One through Three a TCI O&O Systems is sold, divested or otherwise fails to meet the definition of a TCI O&O System, the Fee for Residential Subscribers in TCI O&O Systems shall be reduced by an amount equal to such Fee multiplied by a fraction, the numerator of which is the number of System Original Residential Subscribers in such divested System (the ""Divested Residential Subscribers") and the denominator of which is the number of Original Residential Subscribers (the "Reduction Percentage"); provided, however, that the Fees shall be reduced only to the extent that the acquiror of such System agrees to assume the obligation for paying the amount of such reduction to Network through the expiration of Contract Year Three and agrees to pay a proportionate share of the rate set forth in Section 5(c)(iv) for such System for the time period following the expiration of Contract Year Three through the end of the Initial Term. If the Fees are so reduced as set forth in the preceding sentence, the number of Original Residential Subscribers shall be reduced by the number of Divested Residential Subscribers, and the Residential Baseline shall be reduced by an amount equal to the Reduction Percentage multiplied by 2,000,000. Any adjustment to the Fee set forth herein shall be effective as of the effective date of the divestiture or other disposition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of such month. (iii) If during any month in Contract Years One through Three a TCI O&O System is acquired, the Fee for Residential Subscribers in TCI O&O Systems for Contract Years One through Three shall be increased by an amount equal to the number of Residential Subscribers in such acquired TCI O&O System as of the effective date of such - -------------- * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. -7- 8 acquisition multiplied by the Residential Per Subscriber Fee. The number of Original Residential Subscribers and the Residential Baseline shall be increased by the number of Residential Subscribers in such acquired system as of the effective date of such acquisition. Any adjustment to the Fee set forth herein shall be effective as of the effective date of the acquisition, prorated in the month of acquisition based on the number of days following such effective date to the end of such month. (iv) Fees for Contract Years Four through Ten. Each month during Contract Years Four through Ten, the Fee for Residential Subscribers shall be determined on a System by System basis for TCI O&O Systems in accordance with the following formula: (A + (B x C)) x D Where: A = Residential Baseline. B = an amount, which may be negative, equal to the number of Residential Subscribers in TCI O&O Systems in the month for which Fees are determined minus the Residential Baseline. C = the Multiple. D = the Residential Per Subscriber Fee. (v) If during any month in Contract Years Four through Ten a TCI O&O System is sold, divested or otherwise fails to meet the definition of a TCI O&O System, Affiliate shall cease to be liable for Fees for such divested Systems, the number of Original Residential Subscribers shall be reduced by an amount equal to the number of System Original Residential Subscribers in such divested System, and the Residential Baseline shall be reduced by an amount equal to Residential Baseline multiplied by a fraction, the numerator of which is the number of System Original Residential Subscribers and the denominator of which is the number of Original Residential Subscribers, as adjusted. Any such adjustment shall be effective as of the effective date of the divestiture or other disposition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of such month. (vi) If during any month in Contract Years Four through Ten a TCI O&O System is acquired, the number of Original Residential Subscribers and the Residential Baseline shall be increased by the number of Residential Subscribers in such system as of the effective date of such acquisition. In addition, the number of Residential Subscribers in such system as of the effective date of such acquisition shall be the number of System Original Residential Subscribers for such system. Any such adjustment shall be effective as of the effective date of the acquisition, prorated in the month of divestiture or disposition based on the number of days following such effective date to the end of such month. 8 9 (d) Minimum License Fee Payment. Notwithstanding Sections 5(a) through 5(c) hereof, the sum total of all license fee payments for commercial and residential subscribers paid by Affiliate hereunder with respect to TCI O&O Systems, or by any third party with respect to TCI O&O Systems which are divested, sold or otherwise fail to meet the definition of a TCI O&O System during the Initial Term hereof, shall equal or exceed in any month during Contract Years Four through Ten an amount determined in accordance with the following formula: (A x B x C) + (D x E x C), where A = the number of Original Commercial Subscribers as June 30, 2000 B = the Commercial Per Sub Fee C = a factor determined in accordance with the following schedule:
------------------------------ CONTRACT YEAR FACTOR ------------------------------ 4 [*] ------------------------------ 5 [*] ------------------------------ 6 [*] ------------------------------ 7 [*] ------------------------------ 8 [*] ------------------------------ 9 [*] ------------------------------ 10 [*] ------------------------------
D = The Residential Baseline as of June 30, 2000. E = The Residential Per Subscriber Fee. (e) Electing Affiliate Systems. Each month, Affiliate shall pay Fees to Network for Electing Affiliate Systems as follows:
- ------------------------------------------------------------------------------ ACCOUNT TYPE MONTHLY FEE - ------------------------------------------------------------------------------ Commercial Subscribers Commercial Per Subscriber Fee - ------------------------------------------------------------------------------ Residential Subscribers who [*] receive the Service solely on an a la carte basis - ------------------------------------------------------------------------------ Residential Subscribers who Residential Per Subscriber Fee receive the Service on a basis other than a la carte basis - ------------------------------------------------------------------------------
(f) Lump Sum Adjustment for Programming Cost Changes. If in any month licensing fees payable by Network to ASCAP, BMI and SESAC, in the aggregate (the "License Fees") for distribution of the Service in Systems increase or decrease after the Effective Date as a percentage of Fees, the Fees payable by Affiliate for Systems shall likewise be increased or decreased by an amount equal to such percentage increase or decrease. For example, if License Fees increase - -------------- * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. -9- 10 from ten percent (10%) to eleven percent (11%) as a percentage of the Fees, the Fees shall be increased by one percent (1%). (g) Network shall have the right to negotiate the Fee(s) applicable to any Renewal Term ("Renewal Fees"). The Fees in effect for the last year of the Initial Term, or any Renewal Term for which Renewal Fees were agreed to by the parties, shall remain in effect until the parties agree on the new Renewal Fees. In the event that at least ninety (90) days prior to the expiration of the Initial Term or any Renewal Term, Affiliate and Network have failed to agree on the Renewal Fees and either party notifies the other party that it chooses to cease negotiations of the Renewal Fees, then Network shall give Affiliate notice of the rates to be paid per Residential Subscriber and per Commercial Subscriber and such rate shall be deemed the Renewal Fee per Service Subscriber to be paid during the succeeding Renewal Term. Affiliate shall then have the right, but not the obligation, to terminate this Agreement as provided in Section 2(b) hereof or to continue to provide the Service pursuant to this Agreement, except that Affiliate shall have unlimited packaging flexibility notwithstanding the restrictions, if any, contained in Section 4(e) hereof. 6. REPORTS: (a) No later than forty-five (45) days after the end of each calendar month for which Fees or Renewal Fees are payable, Affiliate shall send Network a mutually acceptable statement (together with Fees owed hereunder) setting forth the total number of Residential Subscribers and Commercial Subscribers and any other information that is necessary to compute the amount due to Network for such calendar month. Notwithstanding the foregoing, each Electing Affiliate may elect to report and pay separately from Affiliate's reports and payments hereunder. (b) In order to verify the compliance with or determine whether full effect has been given to the provisions of this Agreement (including without limitation paragraphs 5(e) and 13(f)), each party, at its expense, shall have the right, during the Term and for one (1) year thereafter, to inspect and audit at the offices of the audited party during normal business hours all relevant books and records, upon reasonable notice to the audited party. Each party's right to perform such audit shall be limited to once in any consecutive twelve (12)-month period. Any audit shall be limited to an audit with respect to amounts to be paid in the current and prior calendar years only and any claim, which must relate to the then-current calendar year or the immediately preceding calendar year, must be made within the earlier of three (3) months after the auditing party leaves the audited party's offices, or twenty-four (24) months after the close of the earliest month that is the subject of a claim or the auditing party will be deemed to have waived its right, whether known or unknown, to collect any shortfalls from the audited party for the period(s) audited. 7. PROMOTION: (a) Affiliate acknowledges that the names and marks Digital Music Express and DMX are the exclusive property of Network and its suppliers and that Affiliate has not and will not acquire any proprietary rights therein by reason of this Agreement. Network shall have the right -10- 11 to approve any use of such names or marks by Affiliate in publicity about Network or the Service or the products or programming included in the Service. Use of such names and marks in routine promotional materials such as program guides, program listings and bill stuffers shall be deemed approved unless Network specifically notifies Affiliate to the contrary prior to such use by Affiliate. (b) Network and Affiliate hereby acknowledge that Network could cause Affiliate significant harm by the nature of Network's communications to Affiliate's subscribers, governmental entities or franchise or licensing authorities whose opinions and actions could adversely affect Affiliate. Therefore, Network shall not engage in any communications with subscribers, governmental entities or franchise or licensing authorities in the areas served by Affiliate and it affiliate without Affiliate's prior written approval, if such communications could reasonably be expected to adversely interfere with Affiliate's relations with the subscribers, governmental entities or franchise or licensing authorities in such areas. This provision shall not apply (i) to any national advertising by Network in connection with the Service, (ii) to any proceeding before any judicial body, or (iii) to communications with Congress or with any other branch or agency of the Federal government. This Section 7(f) shall survive termination of this Agreement for two (2) years. 8. WARRANTIES AND INDEMNITIES: (a) Each party represents and warrants to the other that (i) it is duly organized, validly existing and in good standing under the laws of the state under which it is organized, (ii) it has the power and authority to enter into this Agreement and to perform fully its obligations hereunder; (iii) it is under no contractual or other legal obligation that shall in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on its behalf has the authority to do so; and (v) the obligations created by this Agreement, insofar as they purport to be binding on it, constitute legal, valid and binding obligations enforceable in accordance with their terms. (b) Affiliate and Network shall each indemnify, defend and forever hold harmless the other, the other's affiliated companies and each of the other's (and the other's affiliated companies') respective present and former officers, shareholders, directors, employees, partners and agents ("Network Indemnities" and "Affiliate Indemnities," respectively), against and from any and all losses, liabilities, claims, costs, damages and expenses, including, without limitation, fines, forfeitures, reasonable attorneys' fees, disbursements and court or administrative costs (collectively, "Costs"), arising out of any breach of any term of this Agreement or any warranty, covenant or representation contained herein. (c) Without limiting Section 8(c) hereof, Network shall indemnify, defend and forever hold harmless the Affiliate Indemnities against and from any and all Costs, arising directly or indirectly out of (i) the content of the Service or the use and delivery of the Service hereunder, including, without limitation, any Cost based upon any suit, lien, encumbrance, charge, lis pendens, administrative proceeding, governmental investigation, or litigation pending or threatened (provided that Affiliate shall, to like extent, indemnify the Network Indemnities for -11- 12 Costs arising from any deletion or addition of material by Affiliate to the Service; (ii) Network's failure to comply with all laws, rules, regulations and court and administrative decrees to which it is subject or any other failure on Network's part that causes Affiliate to violate any law, rule, regulation or court or administrative decree; and (iii) Network's failure to have acquired at the pertinent time when all or part of the Service is made available to Affiliate, good title to, and/or each and every property right or other right necessary for it to satisfy the obligations imposed on it pursuant to this Agreement. (d) A party claiming indemnity under this Section 8 must give the indemnifying party prompt notice of any claim, and the indemnifying party shall have the right to assume the full defense of any claims to which its indemnity applies. The indemnified party, at the indemnifying party's cost, will cooperate fully with the indemnifying party in such defense of any such claim. If the indemnified party compromises or settles any such claim without the prior written consent of the indemnifying party, then the indemnifying party shall be released from its indemnity obligations with respect to the claim so settled. (e) The representations, warranties and indemnities contained in this Section 8 shall continue throughout the Term and the indemnities shall survive the termination of this Agreement, regardless of the reason for such termination. 9. EARLY TERMINATION RIGHTS: (a) In addition to Network's other rights to terminate this Agreement, Network may, by notifying Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of this Agreement and Affiliate has not cured such breach within thirty (30) days of Network's written notice of such breach, unless a shorter cure period is specified elsewhere in this Agreement for a specific breach, in which case such shorter cure period will apply; provided, however, if such breach is confined to a System or to a limited number of Systems, Network shall have the right to terminate this Agreement only as to such System or Systems; (ii) if Affiliate has filed a petition in bankruptcy, is insolvent, or has sought relief under any law related to Affiliate's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Affiliate, or any relief under any such law has been sought by any creditor(s) of Affiliate, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought. (b) In addition to Affiliate's other rights to terminate this Agreement, Affiliate may, by notifying Network, terminate this Agreement: (i) if Network is in material breach of this Agreement and Network has not cured such breach within thirty (30) days of Affiliate's written notice of such breach, unless a shorter cure period is specified elsewhere in this Agreement for a specific breach, in which case such shorter cure period will apply; provided, however, if such breach is confined to a System or to a limited number of Systems, Network shall have the right to terminate this Agreement only as to such System or Systems; (ii) if Network has filed a petition in bankruptcy, is insolvent or has sought relief under any law related to Network's financial condition or its ability to meet its payment obligations; (iii) if any involuntary petition in bankruptcy has been filed against Network, or any relief under any such law has been sought by -12- 13 any creditor(s) of Network, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought; or (iv) on at least fifteen (15) days' notice in the event that delivery of the Service is discontinued or interrupted for a continuous period of fifteen (15) days. 10. FORCE MAJEURE: Neither Affiliate nor Network shall have any rights against the other party hereto for the non-operation of facilities or the non-furnishing of the Service if such non-operation or non-furnishing is due to an act of God or other cause (financial inability excepted) beyond such party's reasonable control (a "Force Majeure Event"). If the Service is interrupted or discontinued as a result of a Force Majeure Event, Affiliate shall have the right, immediately, to insert programming of its choice on the channel otherwise identified with the Service until the Service is fully operational again. Credit will be given to Affiliate on that portion of the Service that is affected by any interruption during any month equal to the product of (x) the Fees or any Renewal Fees that would be due for such month, assuming no interruption of Service during such month, multiplied by (y) a fraction, the numerator of which is the total number of hours that the Service is interrupted during such month and the denominator of which is the total number of hours of that the Service would have been distributed absent such interruption(s). 11. NOTICES: Any notice or report to be given under this Agreement shall be in writing, shall be sent postage prepaid by certified mail, return receipt requested, or by hand delivery, or by Federal Express or similar overnight delivery service, or by facsimile transmission, to the other party, at the following address (unless either party at any time or times designates another address for itself by notifying the other party by certified mail, in which case all notices to such party thereafter shall be given at its most recently so designated address): To Network: DMX, Inc. 11400 West Olympic Boulevard, Suite 1100 Los Angeles, CA 90064.1506 Facsimile: Attention: President cc: Peter Laird, Esq. Edelstein, Laird & Sobel, L.P. 9255 Sunset Boulevard, Suite 800 Los Angeles, CA 60069 Facsimile: (310) 271-2664 -13- 14 To Affiliate: Terrace Tower II 5619 DTC Parkway Englewood, Colorado 80111 Facsimile Number: (303) 488-3218 Attention: President cc: Legal Department Notice or report given by hand delivery shall be deemed given on delivery. Notice or report given by mail shall be deemed given on the earlier to occur of actual receipt or on the fifth day following mailing if sent in accordance with the notice requirements of this Section 11. Notice or report given by Federal Express or similar overnight delivery service shall be deemed given on the next business day following delivery of the notice or report to such service with instructions or overnight delivery. Notice or report given by facsimile transmission shall be deemed given on the day of transmission if a business day, or on the next business day after the day of transmission if not transmitted on a business day, provided that the delivery of such facsimile is confirmed either telephonically or be electronic confirmation. 12. CONFIDENTIALITY: The terms and conditions, including the existence and duration, of this Agreement shall be kept confidential, except for disclosure as may be required by law, regulation, court or government agency of competent jurisdiction (redacted to the greatest extent possible). This confidentiality provision shall survive the termination of this Agreement. 13. MISCELLANEOUS: (a) Assignment; Binding Effect; Reorganization. This Agreement shall be binding on the respective transferees and successors of the parties hereto, except that neither this Agreement nor either party's rights or obligations hereunder shall be assigned or transferred by either party without the prior written consent of the other party; provided, however, no consent is necessary in the event of an assignment to a successor entity resulting from a merger, acquisition or consolidation by either party or assignment to an entity under common control, controlled by or in control of either party. For purposes of this Section 13(a), the term "control" means the power to direct the management and policies of an entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. (b) Service Combinations. In the event that the Service is acquired by or merged or combined with, or Network acquires control of, any other programming service(s), if Affiliate has (at the time of such merger, combination or acquisition) an affiliation agreement regarding distribution of such other service(s), Affiliate has the option to choose to continue distribution of the Service and of such other service, and/or of any surviving service after such merger, combination or acquisition, under either this Agreement or under such other affiliation agreement. If Affiliate does not have an affiliation agreement regarding distribution of such other service, Affiliate shall have the option to elect to have this Agreement continue to apply to the Service - 14 - 15 after such merger, combination or acquisition, and/or to any surviving service after such merger, combination or acquisition. (c) Entire Agreement; Amendments; Waivers; Cumulative Remedies. This Agreement, including the Schedule and Exhibits attached hereto, contains the entire understanding of the parties hereto and supersedes all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof. This Agreement may not be modified except in a writing executed by both parties hereto. Any waiver of any provision of this Agreement must be in writing and signed by the party whose rights are being waived. No waiver of any breach of any provision hereof shall be or be deemed to be a waiver of any preceding or subsequent breach of the same or any other provision of this Agreement. The failure of Affiliate or Network to enforce or seek enforcement of the terms of this Agreement following any breach shall not be construed as a waiver of such breach. All remedies, whether at law, in equity or pursuant to this Agreement shall be cumulative. Notwithstanding any provision of this Agreement to the contrary, in the event of a conflict between this Agreement and the Term Sheet dated as of September 15, 1997 between TCI Music, Inc., DMX, Inc., and Tele-Communications, Inc. (the "Term Sheet"), the Term Sheet shall control. (d) Governing Law. The obligations of Affiliate and Network under this Agreement are subject to all applicable federal, state and local laws, rules and regulations, and this Agreement and all matters or issues collateral thereto shall be governed by the laws of the State of New York, without regard to choice of law rules. (e) Relationship. Neither party shall be, or hold itself out as, the agent of the other or as joint venturers under this Agreement. No subscriber of Affiliate shall be deemed to have any privity of contract or direct contractual or other relationship with Network and no supplier of advertising or programming or anything else included in the Service by Network shall be deemed to have any privity of contract or direct contractual or other relationship with Affiliate by virtue of this Agreement. Network disclaims any present or future right, interest or estate in or to the transmission facilities of Affiliate and its affiliates, such disclaimer being to acknowledge that neither Affiliate nor the transmission facilities of the Systems (nor the owners thereof) are common carriers. (f) Favorable Terms. (i) Network agrees that if it gives or offers to, has given or offered to or accepts or has accepted from any third party (regardless of whether such third party is affiliated with Network or Affiliate) at any time with respect to Electing Affiliates and after the expiration of the Initial Term with respect to TCI O&O Systems (A) a lower net effective rate per subscriber for the Service than Affiliate is paying per Subscriber hereunder, (B) any marketing or advertising support or reimbursements, launch support or reimbursements, free or discounted marketing materials or any other support, credits, reimbursements, rebates, contributions, adjustments or incentives related to the marketing of the Service, whether given directly or indirectly to such third party, or (C) any other economic or non-economic term, provision, covenant or consideration, which are or is -15- 16 more favorable to such third party than Affiliate is receiving hereunder ((A), (B) and (C) above, individually and collectively, shall be referred to herein as "More Favorable Provision"). Network will promptly offer such More Favorable Provision to Affiliate for the same amount of time that such More Favorable Provision is or was available to such third party. A More Favorable Provision shall include any pertinent term, provision, covenant or consideration, regardless of whether there is a term, provision, covenant or consideration concerning the subject matter of such More Favorable Provision in this Agreement or whether such term, provision, covenant or consideration relates to such third party's entire subscriber base or less than the entire base (e.g., a More Favorable Provision relating to a "test" or "sample" group of subscribers). (ii) Network agrees to provide to Affiliate a written certification on each annual anniversary date of this Agreement, signed by a duly authorized officer of Network, stating that Network has satisfied its obligations under this Section 13(f). (g) Severability. The invalidity under applicable law of any provision of this Agreement shall not affect the validity of any other provision of this Agreement, and in the event that any provision hereof is determined to be invalid or otherwise illegal, this Agreement shall remain effective and shall be construed in accordance with its terms as if the invalid or illegal provision were not contained herein. (h) No Inference Against Author. Network and Affiliate each acknowledge that this Agreement was fully negotiated by the parties and, therefore, no provision of this Agreement shall be interpreted against any party because such party or its legal representative drafted such provision. (i) No Third Party Beneficiaries. The provisions of this Agreement are for the exclusive benefit of the parties hereto and their permitted assigns, and no third party shall be a beneficiary of, or have any rights by virtue of, this Agreement. (j) Headings. The titles and headings of the sections in this Agreement are for convenience only and shall not in any way affect the interpretation of this Agreement. (k) Non-Recourse. Notwithstanding anything contained in this Agreement to the contrary, it is expressly understood and agreed by the parties hereto that each and every representation, warranty, covenant, undertaking and agreement made in this Agreement was not made or intended to be made as a personal representation, undertaking, warranty, covenant, or agreement on the part of any individual, and any recourse, whether in common law, in equity, by statute or otherwise, against any individual is hereby forever waived and released. -16- 17 (l) Taxes. To the extent required by applicable law, Affiliate shall have the right to withhold any portion of any amounts payable by Affiliate to Network and to pay any such amounts over to any appropriate governmental authority. Network shall provide such assistance as is necessary to enable Affiliate to discharge its obligation to withhold and/or pay taxes on Network's behalf and shall indemnify Affiliate as provided in Section 8 hereof from and against any and all Costs arising directly or indirectly out of any tax or other amount withheld, paid or otherwise collected by Affiliate on Network's behalf, or owed or paid by Network to any governmental entity. The parties hereto have executed this Agreement as of the date first above written.
AFFILIATE: NETWORK: By: /s/ LEO J. HINDERY, JR. By: /s/ JOANNE WENDY KIM ---------------------------- ---------------------------- Leo J. Hindery, Jr. Joanne Wendy Kim Title: Chief Executive Officer and Title: Executive Vice President and Chairman of the Board Chief Financial Officer ---------------------------- ----------------------------
- 17 - 18 [SATELLITE SERVICES INC. LOGO] January 27, 1998 DMX, Inc. 11400 West Olympic Boulevard, Suite 1100 Los Angeles, CA 90064-1506 RE: Affiliation Agreement between DMX, Inc. and Satellite Services, Inc. ("SSI") dated July 1, 1997 To Whom It May Concern: This letter will confirm our agreement regarding the timing of elections into the Affiliation Agreement by affiliates of Affiliate. Notwithstanding the terms of the Affiliation Agreement, any affiliate of Affiliate may elect into the Affiliation Agreement by the later of (1) May 31, 1998 or (2) 120 days after the date such affiliate of Affiliate first met the definition of an affiliate of Affiliate. Except as expressly stated in this letter, the terms and conditions of the Affiliation Agreement shall remain in effect. In the event of a conflict between this letter agreement and the Affiliation Agreement, this letter agreement shall control. Please indicate your agreement with the terms and conditions provided herein by executing this letter agreement where provided below. Sincerely, SATELLITE SERVICES, INC. By: /s/ MATT BOND ------------------------------------------------- AGREED TO AND ACCEPTED THIS 3 DAY OF FEBRUARY, 1998: DMX, INC. By: /s/ LON TROXEL ------------------------------------------------ EX-10.5 6 EXHIBIT 10.5 1 EXHIBIT 10.5 REVOLVING CREDIT LINE $2,000,000 Denver, Colorado July 31, 1997 FOR VALUE RECEIVED, the undersigned, TCI MUSIC, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of TCI COMMUNICATIONS, INC., a Delaware corporation (the "Company"), no later than 180 days after the date of this Note (the "Maturity Date"), the lesser of (i) the principal sum of Two Million Dollars ($2,000,000) or (ii) the aggregate unpaid principal amount of all loans made by the Company to the Borrower pursuant to this Revolving Credit Note. The Borrower further promises to pay to the order of the Company interest on the unpaid principal hereof from time to time outstanding at the rate of 10 percent per annum compounded annually and calculated based on actual days elapsed. Accrued interest shall be payable on or before the first day of each calendar quarter, beginning with the calendar quarter commencing on October 1, 1997. Principal of and interest accruing on this Note shall be prepayable at any time without penalty or premium. Prepayments shall be applied first to accrued interest, then to outstanding principal. All payments (including prepayments of principal and interest hereunder) shall be due and payable in United States Dollars at 1:00 p.m., Denver, Colorado time, on the day when due. All payments shall be made to the Company at its office located at 5619 DTC Parkway, Englewood, Colorado, or at such other office as the Company may designate, in immediately available funds without setoff, counterclaim or other deduction of any nature. If any payment or principal or interest hereunder shall become due and payable on a day which is not a Business Day (defined as any day on which commercial banks located in New York City are not authorized or required to close), such payment shall be made on the next following Business Day and such extension of time shall be included in computing interest in connection with such payment. So long as the Company is the holder of this Note, the unpaid principal balance hereof and the interest accrued hereto shall be determined from the records of the Company, absent manifest error. In the event Borrower fails timely to pay any amount due, payment of the entire amount of principal and interest may be accelerated at the option of the Company. If the Company takes any action to collect such amounts, then Borrower shall pay on demand all costs and expenses of the Company and its agents connected with such action, including but not limited to reasonable legal fees. To the extent permitted by law, the Borrower hereby expressly waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default, or enforcement of the Note and an action for amounts due hereunder or thereunder shall immediately accrue. The Company intends to conform to all applicable laws in effect from time to time limiting the maximum rate of interest that may be charged or collected. Accordingly, notwithstanding any other provision of this Note, the Borrower shall not be required to make any payment to the Company, and the Company shall refund any payment made by the Borrower, to the extent that such requirement or such failure to refund would violate applicable laws limiting the maximum amount of interest which may be charged or collected by the Company. 2 This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Colorado without regard to principals of conflict of laws. TCI MUSIC, INC. By: /s/ David B. Koff ------------------------------ Title: CEO --------------------------- By: /s/ Barney Schotters ------------------------------ Title: Executive Vice President --------------------------- EX-10.6 7 EXHIBIT 10.6 1 PROMISSORY NOTE EXHIBIT 10.6 $2,183,169 September 19, 1997 Englewood, Colorado FOR VALUE RECEIVED, TCI Music, Inc., a Delaware corporation (the "Borrower"), unconditionally promises to pay to the order of Liberty Media Corporation, a Delaware corporation (the "Lender"), the principal amount of $2,183,169 Dollars, with simple interest accruing on the outstanding principal balance from the date of this Note at the rate of 10% per annum. Interest shall be computed for the actual number of days elapsed on the basis of a year consisting of 365 (or 366, if applicable) days. Accrued interest on this Note shall be due and payable on December 31, 1997 and on the last day of each March, June, September and December thereafter until all principal and interest is paid in full. The entire principal amount of this Note shall be due and payable in full on December 31, 1998. All payments of principal and interest shall be paid in lawful money of the United States in immediately available funds at 8101 E. Prentice Ave., Suite 500, Englewood, Colorado 80111 or such place as may hereafter be designated by written notice from the Lender to the Borrower. All payments made on this Note shall be credited first to interest due on the outstanding principal balance of this Note and, second, to reduce the principal balance of this Note. The Borrower may prepay amounts owed under this Note, in whole or in part, at any time without premium or penalty. Any partial prepayment shall first be applied to any unpaid interest accrued at the time of prepayment on the outstanding principal and then to principal. The Borrower waives presentment, demand, protest and notice of any kind. Upon any failure by the Borrower to pay any amount due under this Note within three days after notice from the Lender of such failure, the Lender may at its option declare all principal and accrued interest hereon immediately due and payable and the principal balance shall from the date of such declaration bear simple interest at the rate of 11% per annum until this Note is paid in full. In the event of any action at law or suit in equity with respect to this Note, the Borrower, in addition to all other sums which it may be required to pay hereunder, will pay a reasonable sum for attorneys' fees and expenses incurred by the Lender in connection with such action or suit and all other costs and expenses of collection. In the absence of manifest error, the unpaid principal balance and unpaid accrued interest from time to time applicable to such balance shall be determined from the records of the Lender or the holder of this Note. 2 This Note is executed and delivered in, and shall in all respects be governed by and construed in accordance with, the laws of the State of Colorado, including all matters of construction, validity and performance, shall bind the Borrower, its successors and assigns, and shall inure to the benefit of any holder hereof, its successors and assigns. TCI MUSIC, INC. By: /s/ DAVID B. KOFF --------------------------- Name: David B. Koff Title: President -2- EX-10.10 8 EXHIBIT 10.10 1 EXHIBIT 10.10 TCI MUSIC, INC. 1997 STOCK INCENTIVE PLAN NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and David B. Koff ("Grantee"). The Company has adopted the TCI Music, Inc. 1997 Stock Incentive Plan (the "Plan"), a copy of which is attached to this Agreement as Exhibit A and by this reference made a part hereof, for the benefit of certain eligible persons as set forth in the Plan. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed thereto in the Plan. Pursuant to the Plan, the Board has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to encourage Grantee to remain as a director of the Company and to increase Grantee's personal interest in the continued success and progress of the Company by providing a method whereby Grantee is encouraged to invest in the capital stock of the Company. The Company and Grantee therefore agree as follows: 1. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 8 and 12(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 12 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 8 and 12(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 6 below, make payment as follows: 2 (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made in the sole discretion of the Committee in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 3. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 4. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. (a) Except as otherwise provided in paragraphs 8 and 12(b) below and in this paragraph 4, the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase ---- ----------------------------- Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, subject to the provisions of paragraph 8 of this Agreement, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's directorship with the Company shall cease for any reason other than voluntary termination by Grantee. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be -2- 3 exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Committee, in its discretion and as contemplated by Section 7.5 of the Plan, (i) at any time before complete termination of the Series A Stock Option, may accelerate the time or times at which the Series A Stock Option may be exercised in whole or in part (without reducing the term of such Option) and (ii) may adopt rules and regulations from time to time after the date hereof with respect to the exercise of any Award and that the exercise by Grantee of such Award will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Committee may determine are applicable thereto. 5. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: (a) Written notice, in such form as the Committee may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised; the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being made; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in cash or in such other form, or combination of forms, as the Committee, in its sole discretion, may permit, including (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Series A Stock or Series B Stock that the Grantee has owned for a period of at least six months prior to the date of exercise, (v) the withholding of shares of Series A Stock issuable upon such exercise of the Series A Stock Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law; (c) Payment of, or other provision acceptable to the Committee for, any and all withholding taxes required to be withheld by the Company upon such exercise in accordance with paragraph 6 hereof; and -3- 4 (d) Any other documentation that the Committee may reasonably require (including, without limitation, proof satisfactory to the Committee that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 6. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company and in accordance with the Plan for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 7. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 5, and subject to the withholding referred to in paragraph 6, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Committee in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee voluntarily elects to terminate his directorship during the Option Term, then the Series A Stock Option and Series A Stock Tandem SARs shall cease to vest as of the date of termination of Grantee's directorship and shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's directorship. (b) If Grantee ceases to be a director of the Company during the Option Term for any reason other than voluntary termination, including, but not limited to the death of Grantee, the Series A Stock Option and Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death or date of termination of Grantee's directorship. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's directorship as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised -4- 5 during such period of time only to the extent the same were exercisable as provided in paragraph 4 above on such date of termination of Grantee's directorship. Notwithstanding any period of time referenced in this paragraph 8 or any other provision of this paragraph to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. 9. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 8 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 10. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Committee on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Committee, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 11. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Committee with respect hereto, shall confer or be construed to confer on Grantee any right to continue as a director of the Company. 12. ADJUSTMENTS. -5- 6 (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Committee and in such manner as the Committee may deem equitable and appropriate in connection with the occurrence of any of the events described in, and in accordance with the provisions of, Section 4.2 of the Plan following the Effective Grant Date. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 4(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate, unless otherwise determined by the Board, upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 8 hereof. Notwithstanding the foregoing, the Committee may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Committee is equitable and appropriate to substitute a new Award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Committee), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 13. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. Without limiting the generality of Section 11.9 of the Plan, the Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate -6- 7 any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 14. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: Legal Department Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 15. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Committee as contemplated by Section 11.8 of the Plan. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the -7- 8 Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to Section 11.8 of the Plan and any required approval of the Company's stockholders, the Award evidenced by this Agreement may be canceled by the Committee and a new Award made in substitution therefor, provided that the Award so substituted shall satisfy all of the requirements of the Plan as of the date such new Award is made and no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 16. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 17. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto, including the Plan. This Agreement is entered into, and the Award evidenced hereby is granted, pursuant to the Plan and shall be governed by and construed in accordance with the Plan and the administrative interpretations adopted by the Committee thereunder. All decisions of the Committee upon questions regarding the Plan or this Agreement shall be conclusive. Unless otherwise expressly stated herein, in the event of any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan shall control. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 18. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 19. RULES BY COMMITTEE. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Committee may adopt from time to time hereafter. 20. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and -8- 9 replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM ------------------------------------- Name: Joanne Wendy Kim ------------------------------------ Title: Vice President-Finance ----------------------------------- ACCEPTED: /s/ DAVID B. KOFF ----------------------------------------- Name: David B. Koff, Grantee ------------------------------------ -9- 10 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. 1997 INCENTIVE PLAN Grantee: David B. Koff Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 100,000 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. -10- EX-10.11 9 EXHIBIT 10.11 1 EXHIBIT 10.11 TCI MUSIC, INC. 1997 STOCK INCENTIVE PLAN NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and the person signing adjacent to the caption "Grantee" on the signature page hereof (the "Grantee"). The Company has adopted the TCI Music, Inc. 1997 Stock Incentive Plan (the "Plan"), a copy of which is attached to this Agreement as Exhibit A and by this reference made a part hereof, for the benefit of certain eligible persons as set forth in the Plan. Capitalized terms used and not otherwise defined herein shall have the meaning ascribed thereto in the Plan. Pursuant to the Plan, the Committee has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to provide Grantee with additional remuneration for services rendered, to encourage Grantee to remain in the employ of the Company or its Subsidiaries and/or to increase Grantee's personal interest in the continued success and progress of the Company by providing a method whereby Grantee is encouraged to invest in the capital stock of the Company. The Company and Grantee therefore agree as follows: 1. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 8 and 12(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 12 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 2. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 8 and 12(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and 1 2 collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 6 below, make payment as follows: (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made in the sole discretion of the Committee in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 3. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 4. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. (a) Except as otherwise provided in paragraph 12(b) below or in the last sentence of this subparagraph (a), the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase ---- ----------------------------------- Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's employment with the Company and its Subsidiaries (i) shall terminate by reason of (x) termination by the Company or any Subsidiary without cause (as defined in Section 11.2(b) of the Plan), (y) termination by Grantee for good reason (as defined herein) or (z) Disability, (ii) shall terminate pursuant to provisions of a written employment agreement, if any, between the Grantee and the Company which expressly permits the Grantee to terminate such employment upon the occurrence of specified 2 3 events (other than the giving of notice and passage of time), or (iii) shall terminate because Grantee dies while employed by the Company or a Subsidiary. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Committee may, in its discretion and as contemplated by Section 7.5 of the Plan, adopt rules and regulations from time to time after the date hereof with respect to the exercise of Series A Stock Tandem SARs and that the exercise by Grantee of the Series A Tandem SARs will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Committee may determine are applicable thereto. 5. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: (a) Written notice, in such form as the Committee may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the date of exercise, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised; the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being paid; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in cash or in such other form, or combination of forms, of payment contemplated by Section 6.6(a) of the Plan as the Committee, in its sole discretion, may permit; (c) Payment of, or other provision acceptable to the Committee for, any and all withholding taxes required to be withheld by the Company upon such exercise in accordance with paragraph 6 hereof; and 3 4 (d) Any other documentation that the Committee may reasonably require (including, without limitation, proof satisfactory to the Committee that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 6. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company and in accordance with the Plan for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 7. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 5, and subject to the withholding referred to in paragraph 6, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 8. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Committee, in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee's employment with the Company and its Subsidiaries terminates (i) other than (x) by the Company for "cause" (as defined in Section 11.2(b) of the Plan) (see (d) below), (y) by the Grantee with "good reason" (as defined herein) (see (e) below) or (z) by the Company without cause (see (e) below), and (ii) other than (x) by reason of death or Disability (see (b) and (c) below), (y) with the written consent of the Company or the applicable Subsidiary (see (e) below) or (z) without such consent if such termination is pursuant to provisions of a written employment agreement (see (e) below), if any, between the Grantee and the Company which expressly permit the Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), then the Series A Stock Option and all Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's employment; (b) If Grantee dies while employed by the Company or a Subsidiary, or prior to the expiration of a period of time following termination of Grantee's employment during which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable as 4 5 provided in paragraph (a), the Series A Stock Option and all Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death; (c) If Grantee's employment with the Company and its Subsidiaries terminates by reason of Disability, then the Series A Stock Option and all Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of termination of Grantee's employment; (d) If Grantee's employment with the Company and its Subsidiaries is terminated by the Company for "cause" (as defined in Section 11.2(b) of the Plan), then the Series A Stock Option and all Series A Stock Tandem SARs shall terminate immediately upon such termination of Grantee's employment; or (e) If Grantee's employment (i) is terminated by Grantee (x) with "good reason" (as defined herein), (y) with the written consent of the Company or the applicable Subsidiary or (z) pursuant to provisions of a written employment agreement, if any, between the Grantee and the Company which expressly permit the Grantee to terminate such employment upon the occurrence of specified events (other than the giving of notice and passage of time), or (ii) by the Company without "cause" (as defined in Section 11.2(b) of the Plan), then the Series A Stock Option Term shall terminate early only as provided for in paragraph 8(b) above or 12(b) below or as provided pursuant to the terms of any such written employment agreement. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's employment as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised during such period of time only to the extent the same were exercisable as provided in paragraph 4 above on such date of termination of Grantee's employment. A change of employment is not a termination of employment within the meaning of this paragraph 8 provided that, after giving effect to such change, the Grantee continues to be an employee of the Company or any Subsidiary. Notwithstanding any period of time referenced in this paragraph 8 or any other provision of this paragraph to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. "Good reason" for purposes of the Agreement shall be deemed to have occurred upon the happening of any of the following: (i) any reduction in Grantee's annual rate of salary; (ii) either (x) a failure of the Company to continue in effect any employee benefit plan in which Grantee was participating or (y) the taking of any action by the Company that would adversely affect Grantee's participation in, or materially reduce Grantee's benefits under, any such employee benefit plan, unless such failure or such 5 6 taking of any action, adversely affects the senior members of the corporate management of the Company generally; (iii) the assignment to Grantee of duties and responsibilities that are materially more oppressive or onerous than those attendant to Grantee's position immediately after the date hereof; (iv) the relocation of the office location as assigned to Grantee by the Company to a location more than 20 miles from Grantee's then current location without Grantee's consent; or (v) the failure of the Company to obtain, prior to the time of any reorganization, merger, consolidation, disposition of all or substantially all of the assets of the Company or similar transaction effective after the date hereof, in which the Company is not the surviving person, the unconditional assumption in writing or by operation of law of the Company's obligations to Grantee under this Agreement by each direct successor to the Company in any such transaction. 9. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 8 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 10. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Committee on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Committee, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 11. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF EMPLOYMENT. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to 6 7 which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act, including, without limitation, the acts referred to in Section 11.17 of the Plan. (b) Nothing contained in this Agreement, and no action by the Company or the Committee with respect hereto, shall confer or be construed to confer on Grantee any right to continue in the employ of the Company or any Subsidiary or interfere in any way with the right of the Company or any employing Subsidiary to terminate Grantee's employment at any time, with or without "cause." 12. ADJUSTMENTS. (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Committee and in such manner as the Committee may deem equitable and appropriate in connection with the occurrence of any of the events described in Section 4.2 of the Plan following the Effective Grant Date; provided, however, that adjustments shall be made to the Series A Stock Option if, and in the same manner that, adjustments are being made in connection with the occurrence of any such event to any other option granted under the Plan. Adjustments to the Option Price shall be made on a per share basis so that the aggregate remaining Series A Stock Option Price is unchanged. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 4(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 8 hereof. Notwithstanding the foregoing, the Committee may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Committee is equitable and appropriate to substitute a new Award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Committee), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7 8 13. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. Without limiting the generality of Section 11.9 of the Plan, the Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 14. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attention: Legal Department 8 9 Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 15. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Committee as contemplated by Section 11.8 of the Plan. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to Section 11.8 of the Plan and any required approval of the Company's stockholders, the Award evidenced by this Agreement may be cancelled by the Committee and a new Award made in substitution therefor, provided that the Award so substituted shall satisfy all of the requirements of the Plan as of the date such new Award is made and no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 16. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 17. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto, including the Plan. This Agreement is entered into, and the Award evidenced hereby is granted, pursuant to the Plan and shall be governed by and construed in accordance with the Plan and the administrative interpretations adopted by the Committee thereunder. All decisions of the Committee upon questions regarding the Plan or this Agreement shall be conclusive. Unless otherwise expressly stated herein, in the event of any inconsistency between the terms of the Plan and this Agreement, the terms of the Plan shall control. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 9 10 18. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 19. RULES BY COMMITTEE. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Committee may adopt from time to time hereafter. 20. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 21. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM -------------------------------------------- Name: Joanne Wendy Kim ------------------------------------------ Title: Vice President - Finance ----------------------------------------- ACCEPTED: /s/ LON A. TROXEL ----------------------------------------------- Name: Lon A. Troxel ------------------------------------------ 10 11 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. 1997 INCENTIVE PLAN Grantee: Lon A. Troxel Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 200,000 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. 11 EX-10.12 10 EXHIBIT 10.12 1 Exhibit 10.12 TCI MUSIC, INC. NONEMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and J.C. Sparkman ("Grantee"). The Board has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to encourage Grantee to serve in the capacity as a director of the Company and to increase Grantee's personal interest in the continued success and progress of the Company. The Company and Grantee therefore agree as follows: 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Agreement shall have the following meanings (whether used in the singular or plural): "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company, or binding share exchange, pursuant to which shares of Common Stock would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the holders of the Common Stock immediately prior to such transaction have the same proportionate ownership of the Common Stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Company is a party as a result of which the persons who are holders of the Common Stock immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. "Award" means the grant of Series A Stock Options and Series A Stock Tandem SARs under this Agreement. "Board" means the Board of Directors of the Company. "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a 1 2 vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. "Common Stock" means the Series A Stock and the Series B Stock. "Control Purchase" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person (as defined below)) shall purchase any common stock of the Company (or securities convertible into common stock of the Company) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) any person (as so defined), corporation or other entity (other than TCI, the Company, any Subsidiary, any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities), other than in a transaction (or series of related transactions) approved by the Board or the board of TCI. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Company as of the Effective Date of this Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family members, estates and heirs of each of the persons referred to in clauses (a) through (c) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. "Fair Market Value" of a share of Series A Stock or Series B Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Series A Stock or Series B Stock, as applicable, on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Series A Stock or Series B Stock is listed on an exchange, on the principal exchange on which the Series A Stock or Series B Stock, as applicable, is listed. If for any day the Fair Market Value of a share of Series A Stock or Series B Stock, as applicable, is not determinable by any of the foregoing means, then the 2 3 Fair Market Value for such day shall be determined in good faith by the Board on the basis of such quotations and other considerations as the Board deems appropriate. "NASDAQ" means the NASDAQ Stock Market. "Nonqualified Stock Option" means a stock option that is not an incentive stock option under Section 422 of the Code. 2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 9 and 13(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 9 and 13(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 7 below, make payment as follows: (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made, in the sole discretion of the Board, in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 4. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. 3 4 (a) Except as otherwise provided in paragraphs 9 and 13(b) below and in this paragraph 5, the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase ---- ----------------------------------- Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, subject to the provisions of paragraph 9 of this Agreement, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's status as a director of the Company shall cease for any reason other than voluntary termination by Grantee. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Series A Stock Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Board, in its discretion, (i) at any time before complete termination of the Series A Stock Option, may accelerate the time or times at which the Option may be exercised in whole or in part (without reducing the term of such Option) and (ii) may adopt rules and regulations from time to time after the date hereof with respect to the exercise of any Award and that the exercise by Grantee of such Award will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Board may determine are applicable thereto. 6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: 4 5 (a) Written notice, in such form as the Board may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised, the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being made; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in such form, or combination of forms, as the Board, in its sole discretion, may permit, including (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Series A Stock or Series B Stock that the Grantee has owned for a period of at least six months prior to the date of exercise, (v) the withholding of shares of Series A Stock issuable upon such exercise of the Series A Stock Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law; (c) Payment of, or other provision acceptable to the Board for, any and all withholding taxes required to be withheld by the Company upon exercise of such Award in accordance with paragraph 7 hereof; and (d) Any other documentation that the Board may reasonably require (including, without limitation, proof satisfactory to the Board that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 6, and subject to the withholding referred to in paragraph 7, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 5 6 9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Board in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee voluntarily elects to terminate his directorship during the Option Term, then the Series A Stock Option and Series A Stock Tandem SARs shall cease to vest as of the date of termination of Grantee's directorship and shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's directorship. (b) If Grantee ceases to be a director of the Company during the Option Term for any reason other than voluntary termination, including, but not limited to, the death of Grantee, the Series A Stock Option and Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death or date of termination of Grantee's directorship. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's directorship as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised during such period of time only to the extent the same were exercisable as provided in paragraph 5 above on such date of termination of Grantee's directorship. Notwithstanding any period of time referenced in this paragraph 9 or any other provision of this paragraph that may be construed to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. 10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 9 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Board on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, 6 7 may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue as a director of the Company. 13. ADJUSTMENTS. (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Board and in such manner as the Board may deem equitable and appropriate. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 5(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate, unless otherwise determined by the Board, upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9 hereof. Notwithstanding the foregoing, the Board may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Board is equitable and appropriate to substitute a new award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new award or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7 8 14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. The Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 15. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue, Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attn: Legal Department Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 8 9 16. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Board. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to any required approval of the Company's stockholders, the Award evidenced by this Agreement may be canceled by the Board and a new Award made in substitution therefor, provided that no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 18. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto. All decisions of the Board upon questions regarding this Agreement shall be conclusive. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 20. RULES BY BOARD. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Board may adopt from time to time hereafter. 21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between 9 10 the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM -------------------------------------------- Name: Joanne Wendy Kim ------------------------------------------ Title: Vice President - Finance ----------------------------------------- ACCEPTED: /s/ J.C. Sparkman ----------------------------------------------- J.C. Sparkman, Grantee 10 11 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT Grantee: J.C. Sparkman Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 100,000 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. 11 EX-10.13 11 EXHIBIT 10.13 1 Exhibit 10.13 TCI MUSIC, INC. NONEMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and Leo J. Hindery, Jr. ("Grantee"). The Board has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to encourage Grantee to serve in the capacity as a director of the Company and to increase Grantee's personal interest in the continued success and progress of the Company. The Company and Grantee therefore agree as follows: 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Agreement shall have the following meanings (whether used in the singular or plural): "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company, or binding share exchange, pursuant to which shares of Common Stock would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the holders of the Common Stock immediately prior to such transaction have the same proportionate ownership of the Common Stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Company is a party as a result of which the persons who are holders of the Common Stock immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. "Award" means the grant of Series A Stock Options and Series A Stock Tandem SARs under this Agreement. "Board" means the Board of Directors of the Company. "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a 1 2 vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. "Common Stock" means the Series A Stock and the Series B Stock. "Control Purchase" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person (as defined below)) shall purchase any common stock of the Company (or securities convertible into common stock of the Company) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) any person (as so defined), corporation or other entity (other than TCI, the Company, any Subsidiary, any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities), other than in a transaction (or series of related transactions) approved by the Board or the board of TCI. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Company as of the Effective Date of this Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family members, estates and heirs of each of the persons referred to in clauses (a) through (c) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. "Fair Market Value" of a share of Series A Stock or Series B Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Series A Stock or Series B Stock, as applicable, on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Series A Stock or Series B Stock is listed on an exchange, on the principal exchange on which the Series A Stock or Series B Stock, as applicable, is listed. If for any day the Fair Market Value of a share of Series A Stock or Series B Stock, as applicable, is not determinable by any of the foregoing means, then the 2 3 Fair Market Value for such day shall be determined in good faith by the Board on the basis of such quotations and other considerations as the Board deems appropriate. "NASDAQ" means the NASDAQ Stock Market. "Nonqualified Stock Option" means a stock option that is not an incentive stock option under Section 422 of the Code. 2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 9 and 13(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 9 and 13(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 7 below, make payment as follows: (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made, in the sole discretion of the Board, in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 4. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. 3 4 (a) Except as otherwise provided in paragraphs 9 and 13(b) below and in this paragraph 5, the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase ---- ----------------------------------- Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, subject to the provisions of paragraph 9 of this Agreement, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's status as a director of the Company shall cease for any reason other than voluntary termination by Grantee. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Series A Stock Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Board, in its discretion, (i) at any time before complete termination of the Series A Stock Option, may accelerate the time or times at which the Option may be exercised in whole or in part (without reducing the term of such Option) and (ii) may adopt rules and regulations from time to time after the date hereof with respect to the exercise of any Award and that the exercise by Grantee of such Award will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Board may determine are applicable thereto. 6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: 4 5 (a) Written notice, in such form as the Board may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised, the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being made; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in such form, or combination of forms, as the Board, in its sole discretion, may permit, including (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Series A Stock or Series B Stock that the Grantee has owned for a period of at least six months prior to the date of exercise, (v) the withholding of shares of Series A Stock issuable upon such exercise of the Series A Stock Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law; (c) Payment of, or other provision acceptable to the Board for, any and all withholding taxes required to be withheld by the Company upon exercise of such Award in accordance with paragraph 7 hereof; and (d) Any other documentation that the Board may reasonably require (including, without limitation, proof satisfactory to the Board that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 6, and subject to the withholding referred to in paragraph 7, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 5 6 9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Board in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee voluntarily elects to terminate his directorship during the Option Term, then the Series A Stock Option and Series A Stock Tandem SARs shall cease to vest as of the date of termination of Grantee's directorship and shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's directorship. (b) If Grantee ceases to be a director of the Company during the Option Term for any reason other than voluntary termination, including, but not limited to, the death of Grantee, the Series A Stock Option and Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death or date of termination of Grantee's directorship. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's directorship as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised during such period of time only to the extent the same were exercisable as provided in paragraph 5 above on such date of termination of Grantee's directorship. Notwithstanding any period of time referenced in this paragraph 9 or any other provision of this paragraph that may be construed to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. 10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 9 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Board on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, 6 7 may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue as a director of the Company. 13. ADJUSTMENTS. (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Board and in such manner as the Board may deem equitable and appropriate. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 5(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate, unless otherwise determined by the Board, upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9 hereof. Notwithstanding the foregoing, the Board may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Board is equitable and appropriate to substitute a new award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new award or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7 8 14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. The Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 15. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue, Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attn: Legal Department Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 8 9 16. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Board. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to any required approval of the Company's stockholders, the Award evidenced by this Agreement may be canceled by the Board and a new Award made in substitution therefor, provided that no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 18. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto. All decisions of the Board upon questions regarding this Agreement shall be conclusive. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 20. RULES BY BOARD. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Board may adopt from time to time hereafter. 21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between 9 10 the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM -------------------------------------------- Name: Joanne Wendy Kim ------------------------------------------ Title: Vice President - Finance ----------------------------------------- ACCEPTED: /s/ LEO J. HINDERY, JR. ----------------------------------------------- Leo J. Hindery, Jr., Grantee 10 11 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT Grantee: Leo J. Hindery, Jr. Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 833,334 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. 11 EX-10.14 12 EXHIBIT 10.14 1 EXHIBIT 10.14 TCI MUSIC, INC. NONEMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and Robert R. Bennett ("Grantee"). The Board has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to encourage Grantee to serve in the capacity as a director of the Company and to increase Grantee's personal interest in the continued success and progress of the Company. The Company and Grantee therefore agree as follows: 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Agreement shall have the following meanings (whether used in the singular or plural): "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company, or binding share exchange, pursuant to which shares of Common Stock would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the holders of the Common Stock immediately prior to such transaction have the same proportionate ownership of the Common Stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Company is a party as a result of which the persons who are holders of the Common Stock immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. "Award" means the grant of Series A Stock Options and Series A Stock Tandem SARs under this Agreement. "Board" means the Board of Directors of the Company. "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a 1 2 vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. "Common Stock" means the Series A Stock and the Series B Stock. "Control Purchase" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person (as defined below)) shall purchase any common stock of the Company (or securities convertible into common stock of the Company) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) any person (as so defined), corporation or other entity (other than TCI, the Company, any Subsidiary, any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities), other than in a transaction (or series of related transactions) approved by the Board or the board of TCI. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Company as of the Effective Date of this Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family members, estates and heirs of each of the persons referred to in clauses (a) through (c) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. "Fair Market Value" of a share of Series A Stock or Series B Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Series A Stock or Series B Stock, as applicable, on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Series A Stock or Series B Stock is listed on an exchange, on the principal exchange on which the Series A Stock or Series B Stock, as applicable, is listed. If for any day the Fair Market Value of a share of Series A Stock or Series B Stock, as applicable, is not determinable by any of the foregoing means, then the 2 3 Fair Market Value for such day shall be determined in good faith by the Board on the basis of such quotations and other considerations as the Board deems appropriate. "NASDAQ" means the NASDAQ Stock Market. "Nonqualified Stock Option" means a stock option that is not an incentive stock option under Section 422 of the Code. 2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 9 and 13(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 9 and 13(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 7 below, make payment as follows: (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made, in the sole discretion of the Board, in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 4. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. 3 4 (a) Except as otherwise provided in paragraphs 9 and 13(b) below and in this paragraph 5, the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, subject to the provisions of paragraph 9 of this Agreement, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's status as a director of the Company shall cease for any reason other than voluntary termination by Grantee. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Series A Stock Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Board, in its discretion, (i) at any time before complete termination of the Series A Stock Option, may accelerate the time or times at which the Option may be exercised in whole or in part (without reducing the term of such Option) and (ii) may adopt rules and regulations from time to time after the date hereof with respect to the exercise of any Award and that the exercise by Grantee of such Award will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Board may determine are applicable thereto. 6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: 4 5 (a) Written notice, in such form as the Board may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised, the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being made; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in such form, or combination of forms, as the Board, in its sole discretion, may permit, including (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Series A Stock or Series B Stock that the Grantee has owned for a period of at least six months prior to the date of exercise, (v) the withholding of shares of Series A Stock issuable upon such exercise of the Series A Stock Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law; (c) Payment of, or other provision acceptable to the Board for, any and all withholding taxes required to be withheld by the Company upon exercise of such Award in accordance with paragraph 7 hereof; and (d) Any other documentation that the Board may reasonably require (including, without limitation, proof satisfactory to the Board that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 6, and subject to the withholding referred to in paragraph 7, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 5 6 9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Board in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee voluntarily elects to terminate his directorship during the Option Term, then the Series A Stock Option and Series A Stock Tandem SARs shall cease to vest as of the date of termination of Grantee's directorship and shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's directorship. (b) If Grantee ceases to be a director of the Company during the Option Term for any reason other than voluntary termination, including, but not limited to, the death of Grantee, the Series A Stock Option and Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death or date of termination of Grantee's directorship. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's directorship as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised during such period of time only to the extent the same were exercisable as provided in paragraph 5 above on such date of termination of Grantee's directorship. Notwithstanding any period of time referenced in this paragraph 9 or any other provision of this paragraph that may be construed to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. 10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 9 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Board on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, 6 7 may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue as a director of the Company. 13. ADJUSTMENTS. (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Board and in such manner as the Board may deem equitable and appropriate. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 5(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate, unless otherwise determined by the Board, upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9 hereof. Notwithstanding the foregoing, the Board may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Board is equitable and appropriate to substitute a new award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new award or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7 8 14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. The Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 15. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue, Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attn: Legal Department Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 8 9 16. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Board. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to any required approval of the Company's stockholders, the Award evidenced by this Agreement may be canceled by the Board and a new Award made in substitution therefor, provided that no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 18. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto. All decisions of the Board upon questions regarding this Agreement shall be conclusive. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 20. RULES BY BOARD. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Board may adopt from time to time hereafter. 21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between 9 10 the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM --------------------------------- Name: Joanne Wendy Kim -------------------------------- Title: Vice President - Finance ------------------------------- ACCEPTED: /s/ ROBERT R. BENNETT ------------------------------------ Robert R. Bennett, Grantee 10 11 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT Grantee: Robert R. Bennett Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 100,000 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. 11 EX-10.15 13 EXHIBIT 10.15 1 EXHIBIT 10.15 TCI MUSIC, INC. NONEMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and Donne F. Fisher ("Grantee"). The Board has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to encourage Grantee to serve in the capacity as a director of the Company and to increase Grantee's personal interest in the continued success and progress of the Company. The Company and Grantee therefore agree as follows: 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Agreement shall have the following meanings (whether used in the singular or plural): "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company, or binding share exchange, pursuant to which shares of Common Stock would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the holders of the Common Stock immediately prior to such transaction have the same proportionate ownership of the Common Stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Company is a party as a result of which the persons who are holders of the Common Stock immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. "Award" means the grant of Series A Stock Options and Series A Stock Tandem SARs under this Agreement. "Board" means the Board of Directors of the Company. "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a 1 2 vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. "Common Stock" means the Series A Stock and the Series B Stock. "Control Purchase" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person (as defined below)) shall purchase any common stock of the Company (or securities convertible into common stock of the Company) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) any person (as so defined), corporation or other entity (other than TCI, the Company, any Subsidiary, any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities), other than in a transaction (or series of related transactions) approved by the Board or the board of TCI. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Company as of the Effective Date of this Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family members, estates and heirs of each of the persons referred to in clauses (a) through (c) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. "Fair Market Value" of a share of Series A Stock or Series B Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Series A Stock or Series B Stock, as applicable, on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Series A Stock or Series B Stock is listed on an exchange, on the principal exchange on which the Series A Stock or Series B Stock, as applicable, is listed. If for any day the Fair Market Value of a share of Series A Stock or Series B Stock, as applicable, is not determinable by any of the foregoing means, then the 2 3 Fair Market Value for such day shall be determined in good faith by the Board on the basis of such quotations and other considerations as the Board deems appropriate. "NASDAQ" means the NASDAQ Stock Market. "Nonqualified Stock Option" means a stock option that is not an incentive stock option under Section 422 of the Code. 2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 9 and 13(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 9 and 13(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 7 below, make payment as follows: (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made, in the sole discretion of the Board, in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 4. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. 3 4 (a) Except as otherwise provided in paragraphs 9 and 13(b) below and in this paragraph 5, the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase ---- ----------------------------------- Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, subject to the provisions of paragraph 9 of this Agreement, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's status as a director of the Company shall cease for any reason other than voluntary termination by Grantee. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Series A Stock Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Board, in its discretion, (i) at any time before complete termination of the Series A Stock Option, may accelerate the time or times at which the Option may be exercised in whole or in part (without reducing the term of such Option) and (ii) may adopt rules and regulations from time to time after the date hereof with respect to the exercise of any Award and that the exercise by Grantee of such Award will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Board may determine are applicable thereto. 6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: 4 5 (a) Written notice, in such form as the Board may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised, the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being made; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in such form, or combination of forms, as the Board, in its sole discretion, may permit, including (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Series A Stock or Series B Stock that the Grantee has owned for a period of at least six months prior to the date of exercise, (v) the withholding of shares of Series A Stock issuable upon such exercise of the Series A Stock Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law; (c) Payment of, or other provision acceptable to the Board for, any and all withholding taxes required to be withheld by the Company upon exercise of such Award in accordance with paragraph 7 hereof; and (d) Any other documentation that the Board may reasonably require (including, without limitation, proof satisfactory to the Board that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 6, and subject to the withholding referred to in paragraph 7, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 5 6 9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Board in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee voluntarily elects to terminate his directorship during the Option Term, then the Series A Stock Option and Series A Stock Tandem SARs shall cease to vest as of the date of termination of Grantee's directorship and shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's directorship. (b) If Grantee ceases to be a director of the Company during the Option Term for any reason other than voluntary termination, including, but not limited to, the death of Grantee, the Series A Stock Option and Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death or date of termination of Grantee's directorship. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's directorship as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised during such period of time only to the extent the same were exercisable as provided in paragraph 5 above on such date of termination of Grantee's directorship. Notwithstanding any period of time referenced in this paragraph 9 or any other provision of this paragraph that may be construed to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. 10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 9 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Board on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, 6 7 may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue as a director of the Company. 13. ADJUSTMENTS. (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Board and in such manner as the Board may deem equitable and appropriate. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 5(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate, unless otherwise determined by the Board, upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9 hereof. Notwithstanding the foregoing, the Board may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Board is equitable and appropriate to substitute a new award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new award or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7 8 14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. The Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 15. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue, Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attn: Legal Department Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 8 9 16. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Board. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to any required approval of the Company's stockholders, the Award evidenced by this Agreement may be canceled by the Board and a new Award made in substitution therefor, provided that no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 18. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto. All decisions of the Board upon questions regarding this Agreement shall be conclusive. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 20. RULES BY BOARD. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Board may adopt from time to time hereafter. 21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between 9 10 the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM -------------------------------------------- Name: Joanne Wendy Kim ------------------------------------------ Title: Vice President - Finance ----------------------------------------- ACCEPTED: /s/ DONNE F. FISHER ----------------------------------------------- Donne F. Fisher, Grantee 10 11 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT Grantee: Donne F. Fisher Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 833,334 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. 11 EX-10.16 14 EXHIBIT 10.16 1 EXHIBIT 10.16 TCI MUSIC, INC. NONEMPLOYEE DIRECTOR NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT THIS AGREEMENT (this "Agreement") is made as of the 11th day of July, 1997 (the "Effective Grant Date"), by and between TCI MUSIC, INC., a Delaware corporation (the "Company"), and Peter M. Kern ("Grantee"). The Board has determined that it is in the interests of the Company and its stockholders to grant the options and rights provided herein in order to encourage Grantee to serve in the capacity as a director of the Company and to increase Grantee's personal interest in the continued success and progress of the Company. The Company and Grantee therefore agree as follows: 1. DEFINITIONS. Capitalized terms not defined elsewhere in the Agreement shall have the following meanings (whether used in the singular or plural): "Approved Transaction" means any transaction in which the Board (or, if approval of the Board is not required as a matter of law, the stockholders of the Company) shall approve (i) any consolidation or merger of the Company, or binding share exchange, pursuant to which shares of Common Stock would be changed or converted into or exchanged for cash, securities or other property, other than any such transaction in which the holders of the Common Stock immediately prior to such transaction have the same proportionate ownership of the Common Stock of, and voting power with respect to, the surviving corporation immediately after such transaction, (ii) any merger, consolidation or binding share exchange to which the Company is a party as a result of which the persons who are holders of the Common Stock immediately prior thereto have less than a majority of the combined voting power of the outstanding capital stock of the Company ordinarily (and apart from the rights accruing under special circumstances) having the right to vote in the election of directors immediately following such merger, consolidation or binding share exchange, (iii) the adoption of any plan or proposal for the liquidation or dissolution of the Company, or (iv) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, of the assets of the Company. "Award" means the grant of Series A Stock Options and Series A Stock Tandem SARs under this Agreement. "Board" means the Board of Directors of the Company. "Board Change" means, during any period of two consecutive years, individuals who at the beginning of such period constituted the entire Board cease for any reason to constitute a majority thereof unless the election, or the nomination for election, of each new director was approved by a 1 2 vote of at least two-thirds of the directors then still in office who were directors at the beginning of the period. "Code" means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute or statutes thereto. "Common Stock" means the Series A Stock and the Series B Stock. "Control Purchase" means any transaction (or series of related transactions) in which (i) any person (as such term is defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity (other than Tele-Communications, Inc. ("TCI"), the Company, any Subsidiary or any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person (as defined below)) shall purchase any common stock of the Company (or securities convertible into common stock of the Company) for cash, securities or any other consideration pursuant to a tender offer or exchange offer, without the prior consent of the Board, or (ii) any person (as so defined), corporation or other entity (other than TCI, the Company, any Subsidiary, any employee benefit plan sponsored by the Company or any Subsidiary, or any Controlling Person) shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 20% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors (calculated as provided in Rule 13d-3(d) under the Exchange Act in the case of rights to acquire the Company's securities), other than in a transaction (or series of related transactions) approved by the Board or the board of TCI. For purposes of this definition, "Controlling Person" means each of (a) the Chairman of the Board, the President and each of the directors of the Company as of the Effective Date of this Agreement, (b) John C. Malone, (c) Bob Magness, (d) the respective family members, estates and heirs of each of the persons referred to in clauses (a) through (c) above and any trust or other investment vehicle for the primary benefit of any of such persons or their respective family members or heirs and (e) Kearns-Tribune Corporation, a Delaware corporation. As used with respect to any person, the term "family member" means the spouse, siblings and lineal descendants of such person. "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor statute or statutes thereto. Reference to any specific Exchange Act section shall include any successor section. "Fair Market Value" of a share of Series A Stock or Series B Stock on any day means the last sale price (or, if no last sale price is reported, the average of the high bid and low asked prices) for a share of Series A Stock or Series B Stock, as applicable, on such day (or, if such day is not a trading day, on the next preceding trading day) as reported on NASDAQ or, if not reported on NASDAQ, as quoted by the National Quotation Bureau Incorporated, or if the Series A Stock or Series B Stock is listed on an exchange, on the principal exchange on which the Series A Stock or Series B Stock, as applicable, is listed. If for any day the Fair Market Value of a share of Series A Stock or Series B Stock, as applicable, is not determinable by any of the foregoing means, then the 2 3 Fair Market Value for such day shall be determined in good faith by the Board on the basis of such quotations and other considerations as the Board deems appropriate. "NASDAQ" means the NASDAQ Stock Market. "Nonqualified Stock Option" means a stock option that is not an incentive stock option under Section 422 of the Code. 2. GRANT OF OPTION; OPTION TERM. Subject to the terms and conditions herein, the Company grants to the Grantee during the period commencing on the Effective Grant Date and expiring at 5:00 p.m., Denver, Colorado time ("Close of Business") on July 11, 2007, the tenth anniversary of the Effective Grant Date (the "Option Term"), subject to earlier termination as provided in paragraphs 9 and 13(b) below, an option to purchase from the Company, at the price per share set forth on Schedule 1 hereto (the "Series A Stock Option Price"), the number of shares of Series A Common Stock of the Company ("Series A Stock") set forth on said Schedule 1 (the "Series A Stock Option Shares"). The Series A Stock Option Price and Series A Stock Option Shares are subject to adjustment pursuant to paragraph 13 below. This option is as a "Nonqualified Stock Option" and is hereinafter referred to as the "Series A Stock Option". 3. GRANT OF STOCK APPRECIATION RIGHTS. Subject to the terms and conditions herein and in tandem with the Series A Stock Option, the Grantee shall also have, during the Option Term, subject to earlier termination as provided in paragraphs 9 and 13(b) below, a stock appreciation right with respect to each Series A Stock Option Share (individually, a "Series A Stock Tandem SAR" and collectively, the "Series A Stock Tandem SARs"). Upon exercise of a Series A Stock Tandem SAR in accordance with this Agreement, the Company shall, subject to paragraph 7 below, make payment as follows: (a) the amount of payment shall equal the amount by which the Fair Market Value of the Series A Stock Option Share on the date of exercise of the Series A Stock Tandem SAR exceeds the Series A Stock Option Price; and (b) payment of the amount determined in accordance with clause (a) shall be made, in the sole discretion of the Board, in shares of Series A Stock (valued at their Fair Market Value as of the date of exercise of such Series A Stock Tandem SAR), in cash, or partly in cash and partly in shares of Series A Stock. 4. REDUCTION UPON EXERCISE. The exercise of any number of Series A Stock Tandem SARs shall cause a corresponding reduction in the number of Series A Stock Option Shares which shall apply against the Series A Stock Option Shares then available for purchase. The exercise of the Series A Stock Option to purchase any number of Series A Stock Option Shares shall cause a corresponding reduction in the number of Series A Stock Tandem SARs. 5. CONDITIONS OF EXERCISE; VESTING. The Series A Stock Option and Series A Stock Tandem SARs are exercisable only in accordance with the conditions stated in this paragraph. 3 4 (a) Except as otherwise provided in paragraphs 9 and 13(b) below and in this paragraph 5, the Series A Stock Option may only be exercised to the extent the Series A Stock Option Shares have become available for purchase in accordance with the following schedule:
Percentage of Series A Stock Option Date Shares Available for Purchase ---- ----------------------------------- Effective Grant Date 20% First Anniversary of Effective Grant Date 40% Second Anniversary of Effective Grant Date 60% Third Anniversary of Effective Grant Date 80% Fourth Anniversary of Effective Grant Date 100%
Notwithstanding the foregoing, subject to the provisions of paragraph 9 of this Agreement, all Series A Stock Option Shares shall become available for purchase if during the Option Term Grantee's status as a director of the Company shall cease for any reason other than voluntary termination by Grantee. (b) A Series A Stock Tandem SAR with respect to a Series A Stock Option Share shall be exercisable only if the Series A Stock Option Share is then available for purchase in accordance with subparagraph (a). (c) To the extent the Series A Stock Option or Series A Stock Tandem SARs become exercisable, such Series A Stock Option or Series A Stock Tandem SARs may be exercised in whole or in part (at any time or from time to time, except as otherwise provided herein) until expiration of the Series A Stock Option Term or earlier termination thereof. (d) Grantee acknowledges and agrees that the Board, in its discretion, (i) at any time before complete termination of the Series A Stock Option, may accelerate the time or times at which the Option may be exercised in whole or in part (without reducing the term of such Option) and (ii) may adopt rules and regulations from time to time after the date hereof with respect to the exercise of any Award and that the exercise by Grantee of such Award will be subject to the further condition that such exercise is made in accordance with all such rules and regulations as the Board may determine are applicable thereto. 6. MANNER OF EXERCISE. The Series A Stock Option or a Series A Stock Tandem SAR may be exercised only by delivering to the Company all of the following and shall be considered exercised (as to the number of Series A Stock Option Shares or Series A Stock Tandem SARs specified in the notice referred to in subparagraph (a) below) on the later of (i) the date of exercise designated in the written notice referred to in subparagraph (a) below (or if the date so designated is not a business day, the first business day following such date) or (ii) the first business day on which the Company has received all of the following: 4 5 (a) Written notice, in such form as the Board may require, stating that Grantee is exercising the Series A Stock Option and/or the Series A Stock Tandem SAR, setting forth the date of such exercise and designating, among other things, the number of Series A Stock Option Shares to be purchased and/or the number of Series A Stock Tandem SARs to be exercised, the aggregate purchase price to be paid by Grantee (in the case of the exercise of Series A Stock Option Shares) and the manner in which such payment is being made; (b) If the Series A Stock Option is to be exercised, payment of the Series A Stock Option Price for each Series A Stock Option Share to be purchased in such form, or combination of forms, as the Board, in its sole discretion, may permit, including (i) cash, (ii) check, (iii) promissory note, (iv) whole shares of Series A Stock or Series B Stock that the Grantee has owned for a period of at least six months prior to the date of exercise, (v) the withholding of shares of Series A Stock issuable upon such exercise of the Series A Stock Option, (vi) the delivery, together with a properly executed exercise notice, of irrevocable instructions to a broker to deliver promptly to the Company the amount of sale or loan proceeds required to pay the purchase price, (vii) any combination of the foregoing methods of payment, or (viii) such other consideration and method of payment as may be permitted for the issuance of shares under the Delaware General Corporation Law; (c) Payment of, or other provision acceptable to the Board for, any and all withholding taxes required to be withheld by the Company upon exercise of such Award in accordance with paragraph 7 hereof; and (d) Any other documentation that the Board may reasonably require (including, without limitation, proof satisfactory to the Board that the Award is then exercisable for the number of Series A Stock Option Shares or Series A Stock Tandem SARs). 7. MANDATORY WITHHOLDING FOR TAXES. It shall be a condition precedent to any exercise of the Series A Stock Option Shares or the Series A Stock Tandem SARs that Grantee make provision acceptable to the Company for the payment or withholding of any and all federal, state and local taxes and other amounts required to be withheld by the Company to satisfy the tax liability associated with such exercise, as determined by the Board. 8. DELIVERY BY THE COMPANY. As soon as practicable after receipt of all items referred to in paragraph 6, and subject to the withholding referred to in paragraph 7, the Company shall deliver to the Grantee certificates issued in Grantee's name for the number of Series A Stock Option Shares purchased by exercise of the Series A Stock Option and for the number of shares of Series A Stock to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs and any cash payment to which the Grantee is entitled by the exercise of Series A Stock Tandem SARs. If delivery is by mail, delivery of shares of Series A Stock shall be deemed effected for all purposes when a stock transfer agent of the Company shall have deposited the certificates in the United States mail, addressed to the Grantee, and any cash payment shall be deemed effected when a Company check, payable to Grantee and in an amount equal to the amount of the cash payment, shall have been deposited in the United States mail, addressed to the Grantee. 5 6 9. EARLY TERMINATION OF OPTION AND TANDEM SARS. Unless otherwise determined by the Board in its sole discretion, the Series A Stock Option and Series A Stock Tandem SARs shall terminate, prior to the expiration of the Series A Stock Option Term, at the time specified below: (a) If Grantee voluntarily elects to terminate his directorship during the Option Term, then the Series A Stock Option and Series A Stock Tandem SARs shall cease to vest as of the date of termination of Grantee's directorship and shall terminate at the Close of Business on the first business day following the expiration of the 90-day period which began on the date of termination of Grantee's directorship. (b) If Grantee ceases to be a director of the Company during the Option Term for any reason other than voluntary termination, including, but not limited to, the death of Grantee, the Series A Stock Option and Series A Stock Tandem SARs shall terminate at the Close of Business on the first business day following the expiration of the one-year period which began on the date of death or date of termination of Grantee's directorship. In any event in which the Series A Stock Option and Series A Stock Tandem SARs remain exercisable for a period of time following the date of termination of Grantee's directorship as provided above, the Series A Stock Option and Series A Stock Tandem SARs may be exercised during such period of time only to the extent the same were exercisable as provided in paragraph 5 above on such date of termination of Grantee's directorship. Notwithstanding any period of time referenced in this paragraph 9 or any other provision of this paragraph that may be construed to the contrary, the Series A Stock Option and all Series A Stock Tandem SARs shall in any event terminate upon the expiration of the Option Term. 10. AUTOMATIC EXERCISE OF SERIES A STOCK TANDEM SARS. Immediately prior to the termination of the Series A Stock Option, as provided in paragraph 9 above, or the expiration of the Option Term, all remaining Series A Stock Tandem SARs shall be deemed to have been exercised by the Grantee. 11. NONTRANSFERABILITY OF SERIES A STOCK OPTION AND SERIES A STOCK TANDEM SARS. During Grantee's lifetime, the Series A Stock Option and Series A Stock Tandem SARs are not transferable (voluntarily or involuntarily) other than pursuant to a domestic relations order and, except as otherwise required pursuant to a domestic relations order, are exercisable only by the Grantee or Grantee's court appointed legal representative. The Grantee may designate a beneficiary or beneficiaries to whom the Series A Stock Option and Series A Stock Tandem SARs shall pass upon Grantee's death and may change such designation from time to time by filing a written designation of beneficiary or beneficiaries with the Board on the form annexed hereto as Exhibit B or such other form as may be prescribed by the Board, provided that no such designation shall be effective unless so filed prior to the death of Grantee. If no such designation is made or if the designated beneficiary does not survive the Grantee's death, the Series A Stock Option and Series A Stock Tandem SARs shall pass by will or the laws of descent and distribution. Following Grantee's death, the Series A Stock Option and any Series A Stock Tandem SARs, if otherwise exercisable, 6 7 may be exercised by the person to whom such option or right passes according to the foregoing and such person shall be deemed the Grantee for purposes of any applicable provisions of this Agreement. 12. NO SHAREHOLDER RIGHTS; NO GUARANTEE OF DIRECTORSHIP. (a) The Grantee shall not be deemed for any purpose to be, or to have any of the rights of, a stockholder of the Company with respect to any shares of Series A Stock as to which this Agreement relates until such shares shall have been issued to Grantee by the Company. Furthermore, the existence of this Agreement shall not affect in any way the right or power of the Company or its stockholders to accomplish any corporate act. (b) Nothing contained in this Agreement, and no action by the Company or the Board with respect hereto, shall confer or be construed to confer on Grantee any right to continue as a director of the Company. 13. ADJUSTMENTS. (a) The Series A Stock Option and Series A Stock Tandem SARs shall be subject to adjustment (including, without limitation, as to the number of Series A Stock Option Shares and the Series A Stock Option Price per share) in the sole discretion of the Board and in such manner as the Board may deem equitable and appropriate. (b) In the event of any Approved Transaction, Board Change or Control Purchase, the Series A Stock Option and all Series A Stock Tandem SARs shall become exercisable in full without regard to paragraph 5(a); provided, however, that to the extent not theretofore exercised the Series A Stock Option and all Series A Stock Tandem SARs shall terminate, unless otherwise determined by the Board, upon the first to occur of the consummation of the Approved Transaction, the expiration of the Series A Stock Option Term or the earlier termination of the Series A Stock Option and Series A Stock Tandem SARs pursuant to paragraph 9 hereof. Notwithstanding the foregoing, the Board may, in its discretion, determine that the Series A Stock Option and Series A Stock Tandem SARs will not become exercisable on an accelerated basis in connection with an Approved Transaction and/or will not terminate if not exercised prior to consummation of the Approved Transaction, if the Board or the surviving or acquiring corporation, as the case may be, shall have taken or made effective provision for the taking of such action as in the opinion of the Board is equitable and appropriate to substitute a new award for the Award evidenced by this Agreement or to assume this Agreement and the Award evidenced hereby and in order to make such new award or assumed Award, as nearly as may be practicable, equivalent to the Award evidenced by this Agreement as then in effect (but before giving effect to any acceleration of the exercisability hereof unless otherwise determined by the Board), taking into account, to the extent applicable, the kind and amount of securities, cash or other assets into or for which the Series A Stock may be changed, converted or exchanged in connection with the Approved Transaction. 7 8 14. RESTRICTIONS IMPOSED BY LAW. Grantee acknowledges that neither the Series A Stock Option nor any of the Series A Stock Option Shares has been registered under the Securities Act of 1933 and that the Series A Stock Option Shares may not be transferred in the absence of such registration or the availability of an exemption therefrom under such Act or the rules and regulations of the Securities and Exchange Commission promulgated thereunder. Neither the Company nor any other person shall have any obligation to register any Series A Stock Option Shares, or any transfer of Series A Stock Option Shares, under the Securities Act of 1933, the Securities Exchange Act of 1934 or any other state or federal securities law. Certificates representing Series A Stock Option Shares purchased by Grantee hereunder may bear such restrictive and other legends as counsel for the Company shall require in order to insure compliance with any such law or any rule or regulation promulgated thereunder. The Grantee agrees that Grantee will not exercise the Series A Stock Option or any Series A Stock Tandem SAR and that the Company will not be obligated to deliver any shares of Series A Stock or make any cash payment, if counsel to the Company determines that such exercise, delivery or payment would violate any applicable law or any rule or regulation of any governmental authority or any rule or regulation of, or agreement of the Company with, any securities exchange or association upon which the Series A Stock is listed or quoted. The Company shall in no event be obligated to take any affirmative action in order to cause the exercise of the Series A Stock Option or any Series A Stock Tandem SAR or the resulting delivery of shares of Series A Stock or other payment to comply with any such law, rule, regulation or agreement. 15. NOTICE. Unless the Company notifies the Grantee in writing of a different procedure, any notice or other communication to the Company with respect to this Agreement shall be in writing and shall be: (a) delivered personally to the following address: TCI Music, Inc. c/o Liberty Media Corporation 8101 East Prentice Avenue, Suite 500 Englewood, Colorado 80111 or (b) sent by first class mail, postage prepaid and addressed as follows: TCI Music, Inc. c/o Tele-Communications, Inc. 5619 DTC Parkway Englewood, Colorado 80111 Attn: Legal Department Any notice or other communication to the Grantee with respect to this Agreement shall be in writing and shall be delivered personally, or shall be sent by first class mail, postage prepaid, to Grantee's address as listed in the records of the Company on the Effective Grant Date, unless the Company has received written notification from the Grantee of a change of address. 8 9 16. AMENDMENT. Notwithstanding any other provisions hereof, this Agreement may be supplemented or amended from time to time as approved by the Board. Without limiting the generality of the foregoing, without the consent of the Grantee, (a) this Agreement may be amended or supplemented (i) to cure any ambiguity or to correct or supplement any provision herein which may be defective or inconsistent with any other provision herein, or (ii) to add to the covenants and agreements of the Company for the benefit of Grantee or surrender any right or power reserved to or conferred upon the Company in this Agreement, subject, however, to any required approval of the Company's stockholders and, provided, in each case, that such changes or corrections shall not adversely affect the rights of Grantee with respect to the Award evidenced hereby, or (iii) to make such other changes as the Company, upon advice of counsel, determines are necessary or advisable because of the adoption or promulgation of, or change in or of the interpretation of, any law or governmental rule or regulation, including any applicable federal or state securities laws; and (b) subject to any required approval of the Company's stockholders, the Award evidenced by this Agreement may be canceled by the Board and a new Award made in substitution therefor, provided that no such action shall adversely affect the Series A Stock Option or any Series A Stock Tandem SAR to the extent then exercisable. 17. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of Delaware. 18. CONSTRUCTION. References in this Agreement to "this Agreement" and the words "herein," "hereof," "hereunder" and similar terms include all Exhibits and Schedules appended hereto. All decisions of the Board upon questions regarding this Agreement shall be conclusive. The headings of the paragraphs of this Agreement have been included for convenience of reference only, are not to be considered a part hereof and shall in no way modify or restrict any of the terms or provisions hereof. 19. DUPLICATE ORIGINALS. The Company and the Grantee may sign any number of copies of this Agreement. Each signed copy shall be an original, but all of them together represent the same agreement. 20. RULES BY BOARD. The rights of the Grantee and obligations of the Company hereunder shall be subject to such reasonable rules and regulations as the Board may adopt from time to time hereafter. 21. ENTIRE AGREEMENT. This Agreement is in satisfaction of and in lieu of all prior discussions and agreements, oral or written, between the Company and Grantee regarding the subject matter hereof. Grantee and the Company hereby declare and represent that no promise or agreement not herein expressed has been made and that this Agreement contains the entire agreement between 9 10 the parties hereto with respect to the Series A Stock Options and Series A Stock Tandem SARs and replaces and makes null and void any prior agreements between Grantee and the Company regarding the Series A Stock Options. 22. GRANTEE ACCEPTANCE. Grantee shall signify acceptance of the terms and conditions of this Agreement by signing in the space provided at the end hereof and returning a signed copy to the Company. TCI MUSIC, INC. By: /s/ JOANNE WENDY KIM -------------------------------------------- Name: Joanne Wendy Kim ------------------------------------------ Title: Vice President - Finance ----------------------------------------- ACCEPTED: /s/ PETER M. KERN ----------------------------------------------- Peter M. Kern, Grantee 10 11 Schedule 1 to Non-Qualified Stock Option and Stock Appreciation Rights Agreement dated as of July 11, 1997 TCI MUSIC, INC. NON-QUALIFIED STOCK OPTION AND STOCK APPRECIATION RIGHTS AGREEMENT Grantee: Peter M. Kern Grant Date: July 11, 1997 Option Price: $6.25 per share Option Shares: 833,334 shares of Series A TCI Music Common Stock ("Series A Stock"), $.01 par value per share. 11 EX-10.19 15 EXHIBIT 10.19 1 EXHIBIT 10.19 PARADIGM MUSIC ENTERTAINMENT COMPANY, INC. 67 Irving Place, 4th Floor New York, New York 10003 January 1, 1996 Mr. Thomas McPartland 145 Glenlawn Avenue Sea Cliff, New York 11579 Dear Tom: Paradigm Music Entertainment Corporation, Inc., a New York corporation (hereinafter referred to as "Paradigm"), agrees to employ you and you agree to accept such employment under the following terms and conditions: 1. TERM OF EMPLOYMENT. Except for earlier termination as provided in this Agreement, your employment under this Agreement shall be for a term of three (3) years commencing on the date hereof and terminating on December 31, 1998 (hereinafter referred to as the "Term"). 2. COMPENSATION. (a) You shall be compensated for all services rendered by you under this Agreement at the rate of Three Hundred Seventy-five Thousand Dollars ($375,000) per annum (your "base salary"), payable in such manner as is consistent with Paradigm's payroll practices for its most senior executive employees. Paradigm currently pays its employees on a bi-weekly basis. Prior to December 31 of each year during your employment with Paradigm, commencing with December 31, 1997, the Board of Directors shall review your performance, the earnings of Paradigm during the prior year and Paradigm's economic prospects for the coming year and shall consider in its good faith business judgment and discretion whether to increase the base salary payable to you hereunder. (b) During the Term of your employment hereunder at such time as determined by the Board following the completion of the audit of Paradigm's financial statements for the fiscal year of Paradigm ending during such year of employment, but in no case later than March 31, you shall receive additional compensation in the form of a cash bonus based upon such performance goals and objectives as shall be mutually determined, in good faith, by you and the Board. 2 (c) Notwithstanding subparagraphs 2(a) and (b) hereinabove, you hereby acknowledge and agree that your base salary shall not be increased during the first thirteen (13) months of the Term. (d) In addition to your salary, you shall be entitled to receive bonus compensation for each of the calendar years, commencing February 1997, during the Term, which will be based upon the measurement of performance against reasonable objectives, mutually determined by you and the Board, in accordance with the Paradigm incentive plan, as same may be amended from time to time. 3. EMPLOYMENT OF EXECUTIVE, ACCEPTANCE OF EMPLOYMENT; TIME AND ATTENTION. (a) Paradigm hereby employs you as President, Chief Executive Officer and Chairman of the Board of Paradigm to perform such duties and responsibilities incident to such office, subject at all times to the reasonable control and reasonable direction of the Board of Directors of Paradigm (hereinafter referred to as the "Board"). You may be elected to such other offices as may, from time to time, be determined by the mutual agreement of you and the Board. (b) You hereby accept such employment and agree that throughout the period of your employment hereunder, you will devote such time, attention, knowledge and skills, faithfully, diligently, and to the best of your ability, in furtherance of the business of Paradigm as is necessary to perform your duties and responsibilities herein. As Chief Executive Officer, you shall be the principal Executive Officer of Paradigm and shall in general, manage and control all of the day-to-day operations of Paradigm. You shall have the responsibility for and control of the day-to-day operations of the Paradigm, including, but not limited to, developing and reviewing Paradigm's business plans and its profit and cash budgets, formulating policies and marketing strategies, setting inventory levels, selecting product manufacturers evaluating personnel and subject to the reasonable approval of the Board, the selection of operating officers and managers of Paradigm. You shall also perform such specific duties and shall exercise such specific authority related to the management of the day-to-day operations of Paradigm consistent with your position of Chief Executive Officer as may be reasonably assigned to you from time to time by the Board. You shall be President and Chief Executive Officer of Paradigm. Promptly after the execution hereof you will be appointed a Director of the Corporation. Notwithstanding the foregoing in this paragraph, you shall not be precluded from engaging in recreational, eleemosynary, educational and other activities which do not materially interfere with his duties hereunder. -2- 3 4. BENEFITS. You shall be entitled to four (4) weeks vacation during each year of your employment with Paradigm you shall be entitled to any other employee benefits which are provided to senior executives of Paradigm. For example, you will be eligible to participate in life and medical insurance, 401 (k), stock option and other similar plans as the Board may have approved or may from time to time hereafter approve for its senior executive employees and in accordance with the terms of such plans. The foregoing, however, shall not be construed to require Paradigm to establish any such plans or to prevent Paradigm from modifying or terminating any such plans, and no such action or failure thereof shall affect this Agreement. 5. EXPENSES. Paradigm will promptly reimburse you for reasonable expenses, including traveling expenses, actually incurred by you in connection with the business of Paradigm upon the presentation by you of appropriate substantiation for such expenses. 6. RESTRICTIVE COVENANTS. (a) During such time as you shall be employed by Paradigm (the "Restricted Period"), you shall not, without the consent of the Board, directly or indirectly, become associated with, render services to, invest in, represent, advise or otherwise participate in as an officer, employee, director, stockholder, partner, promoter, agent of, consultant for or otherwise, any business which is conducted in any of the jurisdictions in which Paradigm's business is conducted and which is competitive with the business in which Paradigm is engaged or plans to be engaged at the time your employment with Paradigm ceases; provided, however, that nothing contained herein will prevent you from owning less than five percent (5%) of any class of equity or debt securities listed on a national securities exchange or traded in any established over-the-counter securities market, so long as such involvement with the issuer of any such securities is solely that of a passive investor. (b) During the Restricted Period, you shall not employ or otherwise engage, or offer to employ or otherwise engage, or solicit, entice or induce for you or any other person, entity or corporation, the services or employment of any person who is or has been an employee, sales representative, consultant to or agent of Paradigm at the time of, or at any time during the year prior to, the termination of your employment with Paradigm. (c) The parties hereto intend that the covenants contained in this Section 6 shall be deemed a series of separate covenants for each country, state, county and city. If, in any judicial -3- 4 proceeding, a court shall refuse to enforce all the separate covenants deemed included in this Section 6 because, taken together, they cover too extensive a geographic area the parties intend that those of such covenants (taken in order of the cities, counties, states and countries therein which are least populous) which if eliminated would permit the remaining separate covenants to be enforced in such proceeding shall, for the purpose of such proceeding, be deemed eliminated from the provisions of this Section 6. (d) The provisions of this Section 6 shall survive your employment hereunder and the termination of this Agreement for any reason whatsoever. 7. CONFIDENTIALITY, NON-INTERFERENCE AND PROPRIETARY INFORMATION. (a) Confidentiality. In the course of your employment by Paradigm, you will have access to and possession of valuable and important confidential or proprietary data or information of Paradigm and its operations. You will not at any time divulge or communicate to any person nor shall you direct any of Paradigm's employees to divulge or communicate to any person (other than to a person bound by confidentiality obligations similar to those contained herein and other than as necessary in performing your duties hereunder) or use to the detriment of Paradigm or for the benefit of any other person, any of such confidential or proprietary data or information or make or remove any copies thereof, whether or not marked or otherwise identified as confidential or secret. You shall take all reasonable precautions in handling the confidential or proprietary data or information, shall limit the use and circulation of the confidential or proprietary data or information within Paradigm to a strict need-to-know basis and shall comply with any and all security systems and measures adopted from time to time by Paradigm to protect the confidentiality of the confidential or proprietary data or information, however, you may disclose such information when you are required to do so pursuant to a court or governmental order. (b) Confidential or Proprietary Data or Information. The term "confidential or proprietary data or information" as used in this Agreement shall mean information not generally available within industry or received from a non-affiliated third party who is not bound by confidentiality, including, without limitation, personnel information, financial information, customer lists, supplier lists, trade secrets, information regarding operations, systems, services, know how, computer and any other processed or collated data, computer programs, pricing, marketing and advertising data. -4- 5 (c) Non-Interference. You agree that, for the period one (1) year after the termination or expiration of your employment hereunder, you will not at any time after the termination of your employment with Paradigm, for your own account or for the account of any other person, unduly interferes with Paradigm's relationship with any of its suppliers, customers or employees. However, this sub-paragraph is not intended to prevent you from pursuing the professional services of performing artists which are not and have not been under contract to Paradigm. (d) Return of Property. All written materials, records and documents made by you or coming into your possession during your employment concerning any products, processes or equipment manufactured, used, developed, investigated or considered by Paradigm or otherwise concerning the business or affairs of Paradigm shall be the sole property of Paradigm, and upon termination of your employment, or upon request of Paradigm during your employment, you shall promptly deliver the same to Paradigm. In addition, upon termination of your employment, or upon request of Paradigm during your employment, you will deliver to Paradigm all other property belonging to Paradigm in your possession or under your control, including, but not limited to, financial statements, marketing and sales data, customer and supplier lists and other documents, and all Paradigm credit cards. (e) Paradigm. For purposes of this Section 7,"Paradigm" shall mean the Company and any subsidiaries or affiliates of Paradigm. (f) Survival. The provisions of this Section 7 shall survive your employment hereunder and the termination of this Agreement for any reason whatsoever. 8. EQUITABLE RELIEF. With respect to the covenants contained in Sections 6 and 7 of this Agreement, you agree that any remedy at law for any breach or threatened or attempted breach of such covenants may be inadequate and that Paradigm shall be entitled to seek specific performance or any other mode of injunctive and/or other equitable relief to enforce its rights hereunder or any other relief to enforce its rights hereunder or any other relief a court might award. 9. EARLIER TERMINATION. (a) Your employment under this Agreement shall terminate on the following terms and conditions: (i) Your employment under this Agreement shall terminate automatically on the date of your death. -5- 6 ii) Your employment under this Agreement shall terminate immediately upon a determination in the sole judgment of a third party physician that you have been unable by reason of physical or mental disability to adequately perform fully your duties hereunder for an aggregate of 90 calendar days (whether or not continuous) during any period of 360 consecutive calendar days. iii) Your employment under this Agreement shall terminate immediately upon Paradigm sending your written notice terminating your employment hereunder for just cause. For purposes of this Agreement, "just cause" shall include, but not be limited to, (A) action by you involving dishonesty, fraud or misconduct, (B) your conviction of a felony, or your willful refusal or any material failure by you to perform your duties in accordance with this Agreement. A written notice of termination in reasonable detail given to you by Paradigm shall specify the reason(s) for such termination, and in the case where a cause for termination shall be susceptible of cure, and such notice of termination is the first notice of termination given to you for such reason, if you fail to cure such cause for termination within fifteen (15) business days after the date of such notice, termination shall be effective upon the expiration date of such fifteen (15) day period, and if you cure such cause within said period, such notice of termination shall be ineffective. iv) If your employment is terminated during the Term pursuant to Paragraph 9(a)(i), (ii) or (iii) herein above, Paradigm will pay you, in lieu of any other payments hereunder, your base salary, bonus and vacation pay that has accrued to that date and is payable under Paradigm's standard policies. You acknowledge that upon receipt of such payment, Paradigm will have no further obligations to you under this agreement. (b) If Paradigm terminates this Agreement other than for cause, you shall have the right to receive, for the unexpired Term, your base salary, benefits and bonus, plus any base salary that has actually accrued to the date of termination without regard to mitigation or offset by you. 10. ENTIRE AGREEMENT; MODIFICATION. This Agreement constitutes the full and complete understanding of the parties hereto and supersedes all prior agreements and understandings, oral or written, with respect to the subject matter hereof, and as to any such prior agreements and understandings you hereby acknowledge that you have no outstanding or contingent rights or claims of any nature. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements oral or otherwise, have been made by either party, or anyone acting on behalf of either party, which are not embodied herein and that no other agreement, -6- 7 statement or promise not contained in this Agreement shall be valid or binding. This Agreement may not be modified or amended except by an instrument in writing signed by the party against which enforcement may be sought. 11. SEVERABILITY. Any term or provision of this Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability without rendering invalid or unenforceable the remaining terms and provisions of this Agreement or affecting the validity or enforceability of any of the terms or provisions of this Agreement in any other jurisdiction. 12. WAIVER OF BREACH. The waiver by either party of a breach of any provision of this Agreement, which waiver must be in writing to be effective, shall not operate as or be construed as a waiver of any subsequent breach. 13. NOTICES. All notices hereunder shall be in writing and shall be sent by express mail or by certified or registered mail, postage prepaid, return receipt requested, if to you, to your residence as listed in Paradigm's records; and if to Paradigm, to Paradigm Music Entertainment Company, 62 Irving Place, 4th floor, New York, NY 10003 and to Olshan Grundman Frome & Rosenzweig LLP, 505 Park Avenue, New York, New York 10022, Attention: Barry H. Platnick, Esq. 13. ASSIGNABILITY: BINDING EFFECT This Agreement shall not be assignable by you. This Agreement shall be binding upon and inure to the benefit of you, your legal representatives, heirs and distributees, and shall be binding upon and inure to the benefit of Paradigm, its successors and assigns. 14. THIRD PARTIES Except as specifically set forth or referred to herein, nothing in this Agreement, expressed or implied, is intended or shall be construed to confer upon or give to any person or corporation other than the parties hereto and their successors or permitted assigns any rights or remedies under or by reason of this Agreement. 15. GOVERNING LAW. - 7 - 8 This Agreement shall be construed and governed in accordance with the laws of the State of New York, without giving effect to the conflicts or choice of law provisions thereof. 16. HEADINGS. The headings in this Agreement are intended solely for convenience of reference and shall be given no effect in the construction or interpretation of this Agreement. 17. REVIEW OF THIS AGREEMENT: NO CONFLICTING AGREEMENTS. The parties hereto hereby acknowledge that they have carefully read this Agreement and each hereby represents and warrants to each other that they are entering into this Agreement, and the respective obligations and duties undertaken by them hereunder, will not conflict with, constitute a breach of or otherwise violate the terms of any employment or other agreement to which they are a party and that each party is not required to obtain the consent of any person, firm, corporation or other entity in order to enter into this Agreement. If this letter correctly sets forth our understanding, please sign the duplicate original in the space provided below and return it to Paradigm, whereupon this shall constitute the Employment Agreement between you and Paradigm effective for the term as stated herein. PARADIGM MUSIC ENTERTAINMENT COMPANY, INC. By: /s/ LOUIS A. FALCIGNO --------------------------- Louis A. Falcigno Agreed as of the date first above written: /s/ THOMAS MCPARTLAND - --------------------- THOMAS MCPARTLAND -8- EX-10.20 16 EXHIBIT 10.20 1 EXHIBIT 10.20 REGISTRATION RIGHTS AGREEMENT This Registration Rights Agreement (this "Agreement"), dated as of December 31, 1997, is made by and between the undersigned stockholder or warrantholder (the "Stockholder") of Paradigm Music Entertainment Company, a Delaware corporation (the "Company"), and TCI Music, Inc., a Delaware corporation ("TCI Music"). PRELIMINARY STATEMENTS The Company and TCI Music have entered into an Agreement of Merger dated as of December 8, 1997 (as the same may be amended from time to time, the "Merger Agreement"), providing for the merger (the "Merger") of TCI Para Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of TCI Music, with and into the Company pursuant to the terms and conditions of the Merger Agreement. Upon consummation of the Merger, the stockholders of the Company will be entitled to receive shares of TCI Music Common Stock in exchange for shares of Company Common Stock owned by them, and certain holders of warrants to acquire Company Common Stock ("Warrants"), in consideration of their agreement to cancel such Warrants prior to the Effective Time, will be entitled to receive shares of TCI Music Common Stock, in each case in amounts as set forth in the Merger Agreement. Pursuant to the terms of the Merger Agreement, TCI Music has agreed to prepare and file with the SEC a Registration Statement (the "Registration Statement") on Form S-3, or other appropriate form selected by TCI Music, with respect to the public resale by those persons who are stockholders of the Company as of the Effective Time or warrantholders who agree to cancel their Warrants prior to the Effective Time, in each case who have executed and delivered to TCI Music an agreement in the form of this Agreement and who receive shares of TCI Music Common Stock in the Merger. The Stockholder desires to have the shares of TCI Music Common Stock to be issued to the Stockholder in the Merger (the "Shares") covered by the Registration Statement. NOW, THEREFORE, for good and valuable consideration, the receipt, sufficiency and adequacy of which are hereby acknowledged, the parties to this Agreement agree as follows: 1. Defined Terms. Capitalized terms used in this Agreement and not otherwise defined herein have the meanings assigned to them in the Merger Agreement. 2. Registration. (a) Registration. TCI Music shall file and shall use commercially reasonable efforts to cause to become effective, on or before September 1, 1998, or, if earlier, as soon as reasonably -1- 2 practicable after expiration of the TCI Rights, a Registration Statement under the Securities Act registering the sale of all the Shares issued in the Merger. Any Shares required to be registered pursuant to this Agreement are referred to herein as "Registrable Shares." The Stockholder may elect not to include all or any portion of the Stockholder's Shares in the Registration Statement by giving notice to TCI Music to that effect at any time before the Registration Statement becomes effective, but thereafter shall not be entitled to any further rights to have Shares registered pursuant to this Agreement. Registrable Shares sold pursuant to the Registration Statement will be sold only in accordance with a plan of distribution substantially to the effect set forth in Appendix A, which plan of distribution will be set forth in the Prospectus included as part of the Registration Statement. The Stockholder's registration rights under this Agreement will terminate automatically at such time as the Stockholder is able to sell without registration all of the Stockholder's Shares in a single transaction pursuant to any exemption under the Securities Act. TCI Music shall cease to have any obligation to effect a registration of the Registrable Shares pursuant to this Agreement after one Registration Statement is declared effective and remains effective for the period prescribed in Section 2(b)(i). (b) Preparation and Filing of Registration Statement. In connection with its obligation pursuant to this Agreement to use commercially reasonable efforts to effect a registration of Registrable Shares, TCI Music shall, as expeditiously as practicable: (i) use commercially reasonable efforts to cause a Registration Statement to become and remain effective for a period of 120 days or until all of the Registrable Shares have been disposed of (if earlier); (ii) furnish, at least five business days before filing the Registration Statement, a draft of the prospectus to be included therein ("Prospectus") and any amendments or supplements relating to such Registration Statement or Prospectus, to one legal counsel selected by a majority of the holders of the Registrable Shares (the "Stockholders' Counsel"), and copies of all other documents proposed to be filed (it being understood that such five-business-day period need not apply to successive drafts of the same document proposed to be filed so long as such successive drafts are supplied to such Stockholders' Counsel in advance of the proposed filing by a period of time that is reasonable under the circumstances); (iii) prepare and file with the SEC such amendments and supplements to such Registration Statement and Prospectus as may be necessary to keep such Registration Statement effective for at least a period of 120 days or until all of the Registrable Shares have been disposed of (if earlier) and to comply with the provisions of the Securities Act with respect to the sale or other disposition of the Registrable Shares; (iv) notify the Stockholders' Counsel promptly in writing (A) of any comments by the SEC with respect to such Registration Statement or Prospectus, or any request by the SEC for the amending or supplementing thereof, or for additional information with respect thereto, (B) of the issuance by the SEC of any stop order suspending the effectiveness of such -2- 3 Registration Statement or Prospectus or any amendment or supplement thereto or the initiation of any proceedings for that purpose and (C) of the receipt by TCI Music of any notification with respect to the suspension of the qualification of the Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purposes; (v) use commercially reasonable efforts to register or qualify the Registrable Shares under the securities or blue sky laws of such jurisdictions as any seller of Registrable Shares reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition of Registrable Shares in such jurisdictions; provided, however, that TCI Music will not be required to qualify generally to do business, subject itself to general taxation or consent to general service of process in any jurisdiction where it otherwise would not be required to do so but for this clause; (vi) furnish to each seller of Registrable Shares such number of copies of the Prospectus, including a preliminary Prospectus, in conformity with the requirements of the Securities Act, and such other documents as such seller of Registrable Shares may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Shares; (vii) use commercially reasonable efforts to cause the Registrable Shares to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of TCI Music to enable the seller or sellers thereof to consummate the disposition of the Registrable Shares; (viii) notify on a timely basis each seller of Registrable Shares at any time when a Prospectus relating to the Registrable Shares is required to be delivered under the Securities Act within the appropriate period mentioned in clause (i) of this Section of the happening of any event as a result of which the Prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and, at the request of such seller, prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such Prospectus as may be necessary so that, as thereafter delivered to the offerees of such Registrable Shares, such Prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (ix) make available for inspection by any seller of Registrable Shares, and any attorney, accountant or other agent retained by any such seller (collectively, the "Inspectors"), all pertinent financial, business or other records, corporate documents and properties of TCI Music (collectively, the "Records") as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause TCI Music's officers, directors and employees to supply all information (together with the Records, the "Information") reasonably requested by any such Inspector in connection with such Registration Statement (and any of the Information which TCI Music determines in good faith to be confidential, and of which determination the Inspectors are so -3- 4 notified, shall not be disclosed by the Inspectors unless (A) the disclosure of such Information is necessary to avoid or correct a misstatement or omission in the Registration Statement, (B) the release of such Information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (C) such Information has been made generally available to the public, and the seller of Registrable Shares agrees that it will, upon learning that disclosure of such Information is sought in a court of competent jurisdiction, give notice to TCI Music and allow TCI Music, at TCI Music's expense, to undertake appropriate action to prevent disclosure of the Information deemed confidential); (x) provide a transfer agent and registrar (which may be the same entity and which may be TCI Music) for the Registrable Shares; (xi) use commercially reasonable efforts to list Registrable Shares on any national securities exchange on which any shares of the Common Stock of TCI Music are listed, or if TCI Music Common Stock is not listed on a national securities exchange, use commercially reasonable efforts to qualify the Registrable Shares for quotation on the NASDAQ or such other national securities exchange as the holders of a majority of the Registrable Shares shall request; (xii) use commercially reasonable efforts to comply with all applicable rules and regulations of the SEC, and make available to its stockholders, as soon as reasonably practicable, earnings statements (which need not be audited) covering a period of 12 months beginning within three months after the effective date of the Registration Statement, which earnings statements shall satisfy the provisions of Section 11(a) of the Securities Act; and (xiii) use commercially reasonable efforts to take all other steps necessary to effect the registration of the sale of the Registrable Shares contemplated hereby and to keep such registration effective during the period prescribed by Section 2(b)(i), except as provided in Section 2(c). (c) Blackout Rights. Notwithstanding any other provision of this Agreement to the contrary, if at any time after the 15th day after the Registration Statement is declared effective by the SEC, TCI Music determines, in its reasonable business judgment, that the registration and offering to be effected pursuant to the Registration Statement could interfere with or otherwise adversely affect any financing, acquisition, sale, merger, consolidation or other material transaction or development involving TCI Music or any of its affiliates or require TCI Music to disclose any matter that otherwise would not be required to be disclosed at such time, then TCI Music may require the suspension by the Stockholder of the distribution of any of the Registrable Shares by giving notice to the Stockholder. Any such notice need not specify the reasons for such suspension if TCI Music determines, in its reasonable judgment, that doing so would interfere with or adversely affect such transaction or development or would result in the disclosure of material non-public information. Subject to the following sentence, until TCI Music has determined, in its reasonable judgment, that such suspension is no longer necessary and has given notice of that determination to the Stockholder, TCI Music's obligations to use commercially reasonable efforts to cause the Registration Statement -4- 5 to remain effective and the Stockholder's right to sell Registrable Shares under the Registration Statement will be suspended. TCI Music may exercise its right to suspend the Stockholder's registration rights pursuant to this subparagraph (c) on only one occasion and then for a period not to exceed 30 days, and the period during which TCI Music is required to cause the Registration Statement to remain effective will be extended by a period equal to the period of such suspension. In addition, TCI Music's right to suspend the Stockholder's registration rights pursuant to this subparagraph (c) is subject to the condition that such suspension shall apply similarly to all other Stockholders who acquire Shares in the Merger and to each other holder of TCI Music Common Stock having registration rights reasonably comparable to those granted under this Agreement. 3. Information and Compliance with Legal Requirements. The Stockholder agrees to cooperate fully with TCI Music in the preparation and filing of a Registration Statement pursuant to this Agreement and further covenants that all information supplied or to be supplied in writing to TCI Music by the Stockholder or any of the Stockholder's representatives expressly for inclusion in the Registration Statement, any Prospectus and any amendment or supplement thereto will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4. Expenses. TCI Music will be responsible for all expenses incurred by TCI Music in complying with Section 2, including, without limitation, all registration and filing fees, fees and expenses of complying with securities and blue sky laws, printing expenses and fees and expenses of TCI Music's counsel and accountants. The Stockholder will be responsible for all underwriting or broker's discounts and commissions and transfer taxes, if any, relating to the resale by the Stockholder of the Stockholder's Shares, as well as all fees and expenses of counsel and of any other advisor to the Stockholder. 5. Indemnification. (a) Indemnification by TCI Music. TCI Music agrees to indemnify and hold harmless the Stockholder and each person (if any) who controls such Stockholder within the meaning of either the Securities Act or the Exchange Act (collectively, the "Seller Indemnified Parties") from and against any losses, claims, damages or liabilities (collectively "Losses"), joint or several, to which such Seller Indemnified Parties may become subject, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and, subject to Section 5(c), TCI Music will reimburse such Seller Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Losses; provided, however, that TCI Music will not indemnify or hold harmless any Seller Indemnified Party from or against any such Losses (i) that arise out of or are based upon any violation of any federal or state securities laws, rules or regulations committed by any of the Seller Indemnified -5- 6 Parties (or any person who controls any of them or any agent, broker-dealer or underwriter engaged by them) or in the case of a non-underwritten offering, any failure by such Stockholder to give any purchaser of Registrable Shares, at or prior to the written confirmation of such sale, a copy of the most recent Prospectus or (ii) if the untrue statement, omission or allegation thereof upon which such Losses or expenses are based (x) was made in reliance upon and in conformity with the information provided by or on behalf of any Seller Indemnified Party specifically for use or inclusion in the Registration Statement or any Prospectus, or (y) was made in any Prospectus used after such time as TCI Music advised such Stockholder that the filing of a post-effective amendment or supplement thereto was required, except the Prospectus as so amended or supplemented, or (z) was made in any Prospectus used after such time as the obligation of TCI Music hereunder to keep the Registration Statement effective and current has expired or been suspended hereunder. (b) Indemnification by Stockholder. The Stockholder, severally and not jointly, agrees to indemnify and hold harmless TCI Music, its directors and officers and each person, if any, who controls TCI Music within the meaning of either the Securities Act or the Exchange Act (the "TCI Music Indemnified Parties"), from and against any Losses, joint or several, to which the TCI Music Indemnified Parties may become subject, insofar as such Losses (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or the Prospectus, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, if the statement or omission was made in reliance upon and in conformity with the information provided by or on behalf of such Stockholder or any person who controls such Stockholder specifically for use or inclusion in the Registration Statement or any Prospectus, (ii) the use of any Prospectus after such time as TCI Music has advised such Stockholder that the filing of a post-effective amendment or supplement thereto is required, except the Prospectus as so amended or supplemented, (iii) the use of any Prospectus after such time as the obligation of TCI Music hereunder to keep the Registration Statement effective and current has expired or been suspended hereunder or (iv) any violation by such Stockholder or any person who controls such Stockholder within the meaning of either the Securities Act or the Exchange Act (or any agent, broker-dealer or underwriter engaged by such Stockholder or any such controlling person) of any federal or state securities law or rule or regulation thereunder or any failure by such Stockholder to give any purchaser of Registrable Shares at or prior to the written confirmation of such sale a copy of the most recent Prospectus; and, subject to Section 5(c), such Stockholder will reimburse such TCI Music Indemnified Parties for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such Losses. For purposes of this Agreement, including but not limited to clause (i) of the preceding sentence and clause (ii) of the last sentence of Section 5(a), any information concerning any Seller Indemnified Party or plan of distribution included in any Registration Statement or Prospectus which is provided to the Stockholder for his review within a reasonable period before filing or use thereof and as to which such Stockholder has not promptly provided written notice of objection or correction to TCI Music will be deemed to have been provided by such Stockholder specifically for use in such Registration Statement or Prospectus. -6- 7 (c) Indemnification Procedure. Each party entitled to indemnification under this Section 5 (the "Indemnified Party") will give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and the Indemnifying Party may participate at its own expense in the defense, or if it so elects, to assume the defense of any such claim and any action or proceeding resulting therefrom, including the employment of counsel and the payment of all expenses. The failure of any Indemnified Party to give notice as provided herein will not relieve the Indemnifying Party from its obligations to indemnify such Indemnified Party, except to the extent the Indemnified Party's failure to so notify actually prejudices the Indemnifying Party's ability to defend against such claim, action or proceeding. If the Indemnifying Party elects to assume the defense in any action or proceeding, the Indemnified Party will have the right to employ separate counsel in any such action or proceeding and to participate in the defense thereof, but the fees and expenses of such separate counsel will be such Indemnified Party's expense unless (i) the Indemnifying Party has agreed to pay such fees and expenses or (ii) the named parties to any such action or proceeding (including any impleaded parties) include an Indemnified Party and the Indemnifying Party, and such Indemnified Party will have been advised by counsel that there may be a conflict of interest between such Indemnified Party and the Indemnifying Party in the conduct of the defense of such action (in which case, if such Indemnified Party notifies the Indemnifying Party in writing that it elects to employ separate counsel at the expense of the Indemnifying Party, the Indemnifying Party will not assume the defense of such action or proceeding on such Indemnified Party's behalf, it being understood, however, that the Indemnifying Party will not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for all Indemnified Parties, which firm will be designated in writing by the Stockholder or TCI Music, as the case may be). No Indemnifying Party, in the defense of any such claim or litigation, will, except with the consent of the Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim or litigation. The Indemnifying Party will not be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Indemnifying Party will indemnify and hold harmless the Indemnified Party from and against any loss or liability by reason of such settlement or judgment. (d) Allocation and Contribution. If the indemnification provided for under this Section 5 is unavailable to or insufficient to hold the Indemnified Party harmless in respect of any Losses referred to in subparagraphs (a) or (b) above for any reason other than as specified therein, then the Indemnifying Party will contribute to the amount paid or payable by such Indemnified Party as a result of such losses, claims, damages or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Indemnifying Party on the one -7- 8 hand and such Indemnified Party on the other from the subject offering or distribution or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Indemnifying Party on the one hand and such Indemnified Party on the other in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. The relative benefits received by the Indemnifying Party on the one hand and the Indemnified Party on the other hand will be deemed to be in the same proportion as the net proceeds of the offering or other distribution (after deducting expenses) received by the Indemnifying Party bears to the net proceeds of the offering or other distribution (after deducting expenses) received by the Indemnified Party. The relative fault will be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by (or omitted to be supplied by) TCI Music or the Stockholder, the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission, the relative benefits received by each party from the sale of the Registrable Shares and any other equitable considerations appropriate under the circumstances. The amount paid or payable by an Indemnified Party as a result of the Losses referred to above in this subsection (d) will be deemed to include any legal or other expenses reasonably incurred by such Indemnified Party in connection with investigating or defending any such action or claim. No person who was guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 6. Further Assurances. For one year after the Closing Date, the Stockholder will take such other actions and enter into such other agreements as may be deemed reasonably necessary or advisable by TCI Music in connection with any resale by the Stockholder of the Shares. 7. Miscellaneous. (a) Entire Agreement. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior written and oral, and all contemporaneous oral, agreements and understandings with respect to the subject matter of this Agreement. (b) Notices. All notices and other communications hereunder will be in writing and will be deemed to have been duly given when delivered in person, by telecopy, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties as follows: If to TCI Music: TCI Music, Inc. 8101 East Prentice Avenue, Suite 500 Englewood, Colorado 80111 Telecopy: (303) 721-5443 Attention: President -8- 9 With a copy to: Legal Department Terrace Tower II 5619 DTC Parkway Englewood, Colorado 80111-3000 Telecopy: (303) 488-3217 And a copy to: Sherman & Howard L.L.C. 633 Seventeenth Street, Suite 3000 Denver, Colorado 80202 Telecopy: (303) 298-0940 Attention: Charles Y. Tanabe, Esq. If to Stockholder: To the address or telecopy number set forth for the Stockholder on the signature page hereof or to such other address as the party to whom notice is given may have previously furnished to the others in writing in the manner set forth above. Any notice or communication delivered in person will be deemed effective on delivery. Any notice or communication sent by telecopy will be deemed effective when confirmed. Any notice or communication sent by registered or certified mail, return receipt requested, will be deemed effective when received, as evidenced by the return receipt. (c) GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE REGARDLESS OF THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER PRINCIPLES OF CONFLICTS OF LAWS APPLICABLE THERETO. (d) Rules of Construction. The descriptive headings in this Agreement are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. Words used in this Agreement, regardless of the gender and number specifically used, will be deemed and construed to include any other gender, masculine, feminine, or neuter, and any other number, singular or plural, as the context requires. As used in this Agreement, the word "including" is not limiting, and the word "or" is not exclusive. (e) Parties in Interest. This Agreement will be binding upon and inure solely to the benefit of the parties to this Agreement and their legal successors-in-interest, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. (f) Counterparts. This Agreement may be executed in counterparts, each of which will be deemed to be an original, but all of which will constitute one and the same agreement. (g) Assignment. This Agreement may not be assigned by either party to this Agreement. -9- 10 (h) Amendment. This Agreement may not be amended except by an instrument in writing signed on behalf of both the parties. (i) Extension; Waiver. Either party to this Agreement may (a) agree to extend the time for the performance of any of the obligations or other acts of the other party to this Agreement, (b) waive any inaccuracies in the representations and warranties of the other party contained herein or in any document, certificate, or writing delivered pursuant to this Agreement by the other party, or ( c) waive compliance by the other party with any of the agreements or conditions contained herein or any breach thereof. Any agreement on the part of either party to any such extension or waiver will be valid only if set forth in an instrument in writing signed on behalf of such party. (j) Legal Fees; Costs. If either party to this Agreement institutes any action or proceeding, whether before a court or arbitrator, to enforce any provision of this Agreement, the prevailing party therein will be entitled to receive from the losing party reasonable attorneys' fees and costs incurred in such action or proceeding, whether or not such action or proceeding is prosecuted to judgment. IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first written above. TCI MUSIC, INC. By: /s/ DAVID B. KOFF ---------------------------------------- David B. Koff, President STOCKHOLDER By: /s/ THOMAS MCPARTLAND, ATTORNEY-IN-FACT ---------------------------------------- Thomas McPartland, Attorney-in-Fact -10- 11 APPENDIX A The Registrable Shares may be sold by the selling stockholders directly or through agents designated from time to time or to or through broker-dealers designated from time to time. To the extent required, the name of any such agent or broker-dealer involved in the offer and sale of the Registrable Shares and any applicable commissions, discounts or other items constituting compensation to such agents or broker-dealers will be set forth in a Prospectus Supplement. The distribution of the Registrable Shares may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at prices determined on a negotiated or competitive bid basis. Registrable Shares may be sold through a broker-dealer acting as agent or broker for selling stockholders, or to a broker-dealer acting as principal. In the latter case, the broker-dealer may then resell such Registrable Shares to the public at varying prices to be determined by such broker-dealer at the time of resale. -11- EX-10.58 17 EXHIBIT 10.58 1 EXHIBIT 10.58 Execution Agreement AFFILIATION AGREEMENT THIS AGREEMENT made as of the 27th day of February, 1997 is by and between THE BOX Worldwide, Inc., a Florida corporation ("Network"), and Satellite Services, Inc., a Delaware corporation ("Affiliate"), regarding the cable television programming services collectively and currently known as "The Box" (whether in their current analog format or in any other digitized, compressed, modified, replaced or otherwise manipulated format; whether satellite-delivered [the "Satellite Service"] and/or locally individualized, constituted and delivered [the "Primary Service"] via a music video server/jukebox [an "Earthbox"], which programming services may be referred to hereinafter together or singly as the "Services" or the "Service", and which references shall all be interpreted, whether in the singular or plural form, in the way most favorable to Affiliate). The parties hereby mutually agree as follows: 1. RIGHTS: (a) Grant of Rights. Network hereby grants to Affiliate and its affiliates, and Affiliate hereby accepts on behalf of itself and its affiliates, (i) the non-exclusive right, but not the obligation, to exhibit, distribute and authorize the reception of each Service by cable or other wire or fiber optic transmission system or any other transmission path provided by a material substance, whether now existing or developed in the future, ("Cable") in the Operating Areas (as defined herein) of Cable Systems (as defined herein); (ii) the non-exclusive right, but not the obligation, to exhibit, distribute and authorize the reception of each Service by any satellite master antenna television system ("SMATV"), multipoint distribution service ("MDS"), multichannel multipoint distribution service ("MMDS"), any system or enterprise (regardless of whether such system or enterprise is affiliated with the owner and/or operator of any required distribution equipment) that distributes audio/visual signals and/or programming over the distribution facilities of a common carrier by means of a video dialtone connection or other common carrier arrangement, whether now existing or developed in the future ("OVS/VDT"), and/or any other system or enterprise that distributes audio/visual signals and/or programming by any other means of distribution, whether 1 2 now existing or developed in the future, that meets the System Qualifications of Exhibit A hereto; (iii) the non-exclusive right, but not the obligation, to exhibit and subdistribute each Service to, and authorize the reception of each Service by, any MDS, MMDS and/or any other system or enterprise that distributes audio/visual signals and/or programming by any other means of distribution (other than Cable and OVS/VDT), whether now existing or developed in the future, that does not meet the System Qualifications of Exhibit A hereto, but that is located within and/or serving customers located within the Distribution Areas (as defined herein) of Cable Systems or any other video distribution system or enterprise that meets the System Qualifications of Exhibit A hereto; (iv) the non-exclusive right, but not the obligation, to exhibit and subdistribute the Service to, and authorize the reception of the Service by, any SMATV that does not meet the System Qualifications of Exhibit A hereto; and (iv) the non-exclusive right, but not the obligation, to exhibit, distribute, subdistribute and authorize the reception of each Service nationwide (including, collectively, the United States, the District of Columbia and the territories, possessions and commonwealths of the United States) to any person or entity that receives the signal of either or both of the Services by means of equipment capable of receiving audio/visual signals and/or programming directly from any satellite, whether now existing or developed in the future, including, without limitation, C-Band and Ku-Band signals, whether or not such signals are digitized, compressed, modified, replaced or otherwise manipulated, including tier-bit access rights and tier-addressed messaging rights ("Satellite"). The rights granted to Affiliate in this Section 1(a) and elsewhere in this Agreement are also granted hereby to any affiliate of Affiliate. As used in this Agreement, an "affiliate of Affiliate" shall include any entity meeting the requirements of paragraphs I.1, II or III of Exhibit A hereto as if such entity were a Cable television system or other video distribution system or enterprise. "Operating Area" of a Cable television system or other video distribution system or enterprise shall mean that geographic area where the owner or operator of the system or enterprise is authorized by appropriate governmental authority to operate an audio or video distribution facility and is operating an audio or video distribution facility within such area; provided, however, that if a franchise or license is not required for the distribution of television services in a particular geographic 2 3 area, then the Operating Area of a system or enterprise shall mean that geographic area where the system or enterprise is operating regardless of the presence or absence of a franchise or license. "Distribution Area" of a Cable television system or other video distribution system or enterprise shall mean (A) the Operating Area of such system or enterprise, (B) other areas of counties in which the Operating Area of such system or enterprise is wholly or partially located but which areas are not the subject of a Cable television franchise or license or, if a Cable television franchise or license exists in such areas, the owner or operator of such franchise or license is not distributing the Services, and (C) areas of counties (which areas are contiguous to counties where an Operating Area of a system or enterprise is wholly or partially located) that are not the subject of a Cable television franchise or license or, if a Cable television franchise or license exists in such areas, the owner or operator of such franchise or license is not distributing the Services within such areas. "Cable System(s)" shall mean any audio and/or video distribution system or enterprise that (1) meets the System Qualifications of Exhibit A hereto, and (2) provides television services, which may include other audio/visual services, by Cable. "Subdistribute" or "subdistribution" shall mean the distribution of a Service by Affiliate, or an affiliate of Affiliate, to an unaffiliated third party who in turn sells such Service to a viewing customer, where such third party pays Affiliate, or an affiliate of Affiliate, fees for licensing of such Service, as opposed to only transport fees, some portion of which is then paid to Network by Affiliate pursuant to the terms of this Agreement. "Alternative Technology(ies)" shall mean SMATV, MDS, MMDS, OVS/VDT, Satellite and/or any other means of distribution (other than Cable) whether now existing or developed in the future. (b) Affiliate shall have the right, upon written notice to Network within thirty (30) days thereof, to elect to include under this Agreement, and to demand authorization from Network, if necessary, and if elected by Affiliate, to launch, relaunch, or to continue to distribute (x) the Satellite Service and/or (y) subject to the provisions of Section 4(b) hereof, the Primary Service on any Cable television system or other video distribution system or enterprise (regardless of whether such system or enterprise is affiliated with the owner of any required distribution equipment) that meets the System Qualifications of Exhibit A hereto (or for which Affiliate has and exercises subdistribution rights as provided in Sections 1(a)(iii) through (v) hereof and regardless of whether such system or enterprise is a Cable television system. Any Cable television system or other video distribution system or enterprise that Affiliate elects to include under this Agreement shall be referred to in this Agreement, individually, as a "System" or, collectively, as 3 4 "Systems". Upon receipt of such a notice, Schedule 1 hereof shall be deemed to include such System, and such System shall be included as a System under this Agreement as of the later of: (i) the launch or relaunch date of a Service on such System, (ii) the date such System first meets the qualifications of Exhibit A hereto, or (iii) the date for inclusion specified in such notice if such notice is properly given pursuant to Section 11 hereof. Any then-existing agreement between or among Network and any one or more third parties applicable to any such System for carriage of such Service shall terminate and cease to be effective with respect to such System as of the effective date of the addition or deemed addition of such System to Schedule 1. Affiliate shall have the right, in Affiliate's sole and absolute discretion, to discontinue carriage of either or both Services on any or all Systems, and to delete any or all Systems from Schedule 1 hereto, by providing Network with written notice within forty-five (45) days of such deletion. 2. TERM: (a) Unless earlier terminated pursuant to the terms of this Agreement, the "Term" of this Agreement shall consist of, collectively, the Initial Term and any number of Renewal Terms (each as defined herein). The "Initial Term" of this Agreement shall be for seven (7) years commencing as of the date hereof. (b) This Agreement shall automatically renew for successive five (5) year periods (each a "Renewal Term" and the first such Renewal Term, if any, shall be referred to herein as the "First Renewal Term") after the expiration of the Initial Term, and each Renewal Term, unless either, (i) this Agreement is terminated earlier in accordance with the terms hereof, or (ii) Affiliate provides written notice to Network of its intent to terminate this Agreement, in Affiliate's sole and absolute discretion, a minimum of forty-five (45) days prior to the end of the Initial Term or any Renewal Term. 3. CONTENT OF THE SERVICES: (a) Based upon a weekly average, during the Term the programming on the Primary Service shall contain not less than [ * ] music videos. Based upon a weekly average, during the Term the programming on the Satellite Service shall contain not less than [ * ] music videos. Neither advertising announcements (for which Network is compensated by a third party, not including affiliated entities), nor marketing and promotional announcements (for which Network is not compensated by a third party, including affiliated entities) shall be deemed to be programming for the purpose of calculating the percentages set forth in the first two sentences of this Section 3(a). Network shall, during each month of the Term, send one (1) copy of its monthly program schedule for each Service (if any) to Affiliate, in care of: Programming Department. Network agrees that neither of the Services shall contain (i) programming that has received, or had it been rated would have received, an MPAA "X" or "NC-17" * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 4 5 rating; (ii) religious programming; (iii) a sufficient quantity of children's programming such that either Service could be characterized as a children's programming service; (iv) live or taped excerpts or entire portions of actual courtroom trials, hearings or other similar proceedings as a substantial component of the programming; (v) pay-per-view movies or events; (vi) financial news; (vii) blackouts; or (viii) direct on air sales programming (as defined herein). Notwithstanding the foregoing, each Service may include direct on-air sales programming (not to exceed [ * ] in length) in the commercial announcement time allotted to Network pursuant to Section 3(b) hereof; and up to [ * ] in each hour for the marketing of Network products and Network licensed merchandise ("Network Merchandising") as provided in Section 3(b) hereof. (b) Network shall make available to Affiliate not less than [ * ] of commercial announcement time per hour of each Service, to be used at Affiliate's option and control. All such commercial announcement time shall be equally distributed throughout each and every hour of the applicable Service. Furthermore, at any time the programming on either Service is anything other than music videos, none of the commercial announcement time provided to Affiliate in connection with such programming shall occur during a terminal break. For purposes of this Section 3(b), "terminal break" shall mean the period between the actual or apparent end of one program and the actual or apparent beginning of another program. Affiliate shall have the right to retain for itself all of the proceeds derived from the sale of the commercial announcement time furnished to it hereunder. Network commercial announcement time on either Service shall not exceed ten (10) minutes in any hour; provided, however, that Network Merchandising shall not be included for purposes of determining the number of commercial announcement minutes allotted to Network under this Section 3(b). If, in any System, Affiliate is not using the commercial announcement time allotted to it hereunder, then Network may use Affiliate's unused commercial announcement time in such System for its own promotional (but not commercial) announcements. If, pursuant to the immediately preceding sentence, Network is using any or all of Affiliate's commercial announcement minutes for promotional announcements on either Service, such announcements may be pre-empted by such System at any time to insert its own commercial or promotional announcements. Network shall properly "tone-switch", using industry-recognized equipment, via audible or inaudible signals, all commercial announcement minutes contained within the programming of the Satellite Service to enable Affiliate to insert its commercial announcements. At Affiliate's sole option, Network shall either (x) properly program each Earthbox with the necessary switching cues to enable Affiliate to insert its commercial announcements in the Primary Service or (y) insert Affiliate's commercial announcements in a manner to be mutually agreed on by the parties hereto. If Network fails properly to "tone-switch" (or, in the case of an Earthbox, otherwise to identify such commercial announcement minutes) to enable Affiliate to insert its commercial announcements as provided herein then, in addition to * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 5 6 Affiliate's other remedies hereunder or at law or in equity, Affiliate shall have the right, without first notifying Network, to preempt the applicable Service to insert its commercial announcements. Network shall reimburse Affiliate for all costs incurred by Affiliate or any affiliate of Affiliate associated with any change by Network in the method of identifying such commercial announcement minutes in either Service. (c) If for any reason, including, without limitation, causes beyond the control of Network, Affiliate, in good faith, determines that either or both Service(s) include(s) programming prohibited in Section 3(a) hereof and/or does not include programming of at least the quantity, quality, type and content as required in Section 3(a) hereof, Affiliate may, in addition to any and all remedies available to Affiliate hereunder, at law or in equity, at its option, either (i) discontinue carriage of the applicable Service(s) on any or all Systems and delete such System or Systems from Schedule 1 hereof, effective at any time by giving notice to Network within ten (10) days thereof; or (ii) receive a credit against the Fees (as defined herein) or any Renewal Amounts (as defined herein) payable by Affiliate to Network pursuant to this Agreement in the proportion that the hours of programming each day that either is prohibited by Section 3(a) hereof or deviates from the programming required in Section 3(a) hereof bears to the total hours the applicable Service(s) are transmitted each day; such credit to be applied against the Fees payable in any month. (d) No less than once per day in alternating day parts, but including each and every day part, each Service shall include the following audible message: "This programming is brought to you through the cooperation and support of your local cable company." (e) During the Term, Network shall provide the Satellite Service in its entirety to Affiliate. When the phrase "in its entirety" is used in this Section 3(e), it means that each Service Subscriber receiving the Satellite Service (a "Satellite Subscriber") shall be able to receive, at all points in time, programming received at each such point in time by any other subscriber to the Satellite Service, and if any other subscriber to the Satellite Service is receiving, at a given point in time, programming that is different from the programming received by any Satellite Subscriber at such point in time, Affiliate shall have the unconditional right (in addition to any other remedies available to Affiliate at law or in equity) to elect which programming it desires to receive and utilize at any System, which programming it desires to subdistribute hereunder, and/or which programming it will authorize for reception by Satellite Subscribers. (f) In the event that any System, in its sole and absolute judgment, notifies Network it is unsatisfied with the playlist format of music videos installed in such System's Earthbox, Network shall, within fifteen (15) days of such notice, furnish such System with copies of the playlist formats in all of 6 7 Network's other Earthboxes. If such System then notifies Network of its desire to select any of such playlist formats (a "Reprogram System"), then Network shall duplicate such playlist format in the designated Earthboxes in such Reprogram System no later than thirty (30) days after notification of such selection. Such Reprogram System shall guarantee to Network [ * ] percent [ * ] of the per-subscriber revenue received by Network from Primary Subscribers (as defined herein) served by the applicable Earthbox in such Reprogram System in the month immediately prior to the month that it became a Reprogram System. Any Reprogram System may terminate its obligation to guarantee such revenue to Network by subsequently agreeing to allow Network to resume selection of the programming for the applicable Earthboxes. A Reprogram System shall have no obligation to guarantee such revenue to Network if it notifies Network that it wishes to review the playlist formats of any other distributor of the Primary Service that is operating in any area with reasonably similar demographics in two categories: [ * ] and [ * ] . Network shall, within fifteen (15) days of such notice, furnish such Reprogram System with copies of such playlist formats and such Reprogram System may then notify Network of its selection of any such playlist format, which Network shall duplicate in the designated Earthboxes no later than thirty (30) days after notification of such selection. Furthermore, Network agrees that the price it charges Primary Subscribers who call Network to program the music videos provided by an Earthbox shall not be more than the price it charges any subscriber receiving the Primary Service who is served by a distributor of the Primary Service operating in any part of Affiliate's Distribution Area; provided that Network shall not be required to equalize such prices in such Distribution Area until Affiliate or any System so requests in a written notice to Network. Furthermore, notwithstanding any other provision of this Agreement to the contrary, if Affiliate's Cable television subscribers constitute not less than fifty percent (50%) of the multi-channel video programming subscribers in a given community, then Affiliate shall be entitled to "genre exclusivity" in such community; that is, no other distributor in such community shall be permitted by Network to operate any playlist format the genre of which is substantially similar to any playlist format operated by Affiliate in such community hereunder. (g) Network agrees that it shall not authorize the terrestrial broadcast television exhibition of either Service, any portion thereof, or any programming derived therefrom within the Distribution Areas of any System; provided, however, that Network may authorize the terrestrial broadcast television exhibition of either Service within the Distribution Area of any System on any terrestrial broadcast television station (i) that is owned and operated either by Network or an affiliate of Network and (ii) that is located within the Distribution Area of any System in which either (A) less than twenty-five percent (25%) of the cable television households in the Designated Marketing Area ("DMA") (the "Minimum Distribution") of such station are subscribers of such System, or (B) neither Service is carried on a level of * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 7 8 service that is the first or second most highly penetrated level of service on a sufficient number of headends in such System to meet the Minimum Distribution. In the event Network authorizes the terrestrial broadcast television exhibition of either Service in an area that is also served by a Cable television system that (x) becomes a System hereunder after the date of such broadcast authorization, (y) either has or subsequently attains the requisite Minimum Distribution and (z) carries a Service on a level of service that is the first or second most highly penetrated level of service on a sufficient number of headends in such System to meet the Minimum Distribution, then Network shall permanently cease such exhibition no later than twelve (12) months after the date the applicable Service is first launched in such System. Notwithstanding the foregoing provisions of this Section 3(g), Network may authorize the terrestrial broadcast television exhibition of the Primary Service in the DMAs of Chicago, Illinois, and/or St. Louis, Missouri, and/or within the political boundaries of New York City, New York; provided that such terrestrial broadcast may only be through a low-power television transmitter, as that term is defined by the rules and regulations of the Federal Communications Commission. (h) For purposes of this Agreement, "direct on-air sales programming" shall mean any programming that includes the direct on-air marketing, offering for sale and/or sales of products and/or services, including, without limitation, home-shopping, infomercials and direct response advertising, regardless of the length of such programming, which may include product or service demonstrations, promotions, testimonials and/or referrals and may be in a documentary, talk-show, news, information or other disguised format. Direct on-air sales programming shall not include Network's regularly scheduled commercial announcement time (i.e., the commercial announcements distributed throughout the Services during other programming that are generally less than thirty (30) seconds in length and primarily used for promotional announcements or third party advertising of products and services that are not directly sold to the viewer during such commercial announcements). 4. DELIVERY AND DISTRIBUTION OF THE SERVICES: (a) During the Term, Network shall, at its own expense, deliver a signal of the Satellite Service to the earth station of each System designated by Affiliate or an affiliate of Affiliate to receive the Satellite Service (a "Satellite System"), to each Satellite Subscriber and, for the purposes of Section 4(h) hereof, to other locations within the continental United States designated by Affiliate (in its sole and absolute discretion), by transmitting such signal via a domestic satellite commonly used for transmission of Cable television programming. No later than the date upon which the aggregate number of subscribers (including Service Subscribers) to the Satellite Service first exceeds [ * ] , Network shall fully encrypt the satellite signal of the Satellite Service utilizing scrambling technology commonly used in the domestic Cable television industry. Except * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 8 9 as otherwise provided in this Section 4(a), Affiliate shall, at its own expense, furnish an earth station and all other facilities necessary for the receipt of such satellite transmission and the delivery of the signal of the Satellite Service to the Satellite Subscribers in such Satellite Systems. In the event Network either (i) changes the satellite to which the Satellite Service is transmitted to a satellite or other transmission medium not susceptible to viewing by a Satellite System's or Satellite Systems' then-existing earth station equipment without affecting the receipt of the signals of any other programming or other services then received or committed to being received by such Satellite System(s), (ii) changes the technology used by Network to encrypt the signal of the Satellite Service to a technology not compatible with a Satellite System's or Satellite Systems' then existing descrambling equipment, or (iii) compresses, digitizes, or otherwise modifies the signal of the Satellite Service in such a manner that it cannot be received or utilized by a Satellite System(s), then Affiliate shall have the right to delete from Schedule 1 of this Agreement, immediately, any such Satellite System(s), and to discontinue carriage of the Satellite Service, immediately, in any such Satellite System(s); provided that this right of deletion and discontinuance shall not apply to any Satellite System(s) if: (1) Network agrees, unconditionally, to reimburse promptly such Satellite System(s), as the case may be, for (A) the cost to such Satellite System(s) to acquire and install equipment necessary to receive the signal of the Satellite Service from such new satellite, and/or (B) the cost to such Satellite System(s) to acquire and install equipment necessary for them to descramble, receive and/or utilize the signal of the Satellite Service; (2) physical space exists at the then-existing headend or earth station site to accommodate the necessary equipment; and (3) current zoning and other restrictions permit such additional equipment. Network agrees to provide Affiliate with at least 120 days' prior written notice of a satellite or technology change as set forth in subsections (i) through (iii) above; provided, however, that if a satellite change is the result of a force majeure event as set forth in Section 10 hereof, no prior written notice shall be required. (b) Each System that carries the Primary Service is set forth on Schedule 1 hereto. During the Term, Affiliate shall notify Network of any additional System or Systems that will carry the Primary Service. Within forty-two (42) days of such notification, Network shall deliver and install a number of Earthboxes in each such System or Systems as set forth below. The number of Earthboxes Network shall be required to deliver and install shall be determined by the aggregate number of subscribers in each such System or Systems that receive the level or levels of service on which the Primary Service is to be carried ("Primary Subscribers"), as set forth below, for a minimum of eighteen (18) hours per day. Network shall not be required to deliver and install any Earthbox in any System (x) with fewer than [ * ] subscribers or (y) the largest headend of which serves fewer than [ * ] subscribers, unless mutually agreed to by Affiliate and Network; provided that Affiliate may purchase, * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 9 10 install and maintain the requisite equipment for systems serving fewer than [ * ] subscribers and Network shall provide all assistance Affiliate reasonably requires to program and operate such equipment.
If the number of Primary then, the number of Earthboxes Subscribers in a System is: required to be installed shall be: - --------------------------- ---------------------------------- [ * ] [ * ] [ * ] [ * ]
In addition to the foregoing requirements, Network shall be required to deliver and install one (1) additional Earthbox for each incremental [ * ] Primary Subscribers over [ * ] Primary Subscribers in each System. Each Earthbox delivered and installed by Network hereunder shall (i) include all programming and equipment ("Earthbox Systems") necessary and appropriate for Network to fulfill its obligations under this Agreement, (ii) be in good working condition (including the Earthbox Systems), and (iii) be maintained in good working condition (including the Earthbox Systems). In the event of a total failure of any Earthbox or Earthbox System, Network shall (A) deliver a "DigiCipher" receiver (or equivalent equipment) within twenty-four (24) hours of Affiliate's or an affiliate of Affiliate's notification of such failure to Network, to enable the affected System to receive and temporarily cablecast the Satellite Service in lieu of the Primary Service, and (B) deliver and install replacements for the failed Earthbox or Earthbox Systems at such System within seven (7) days of Affiliate's or an affiliate of Affiliate's first notification of such failure to Network. In the event of a partial failure of any Earthbox or Earthbox System, Network shall deliver and install replacement parts at such System within twenty-four (24) hours of Affiliate's or an affiliate of Affiliate's notification of such failure to Network. Network shall be responsible for all costs and liabilities arising from or relating to: (1) the delivery, installation, maintenance and repair of the Earthboxes and Earthbox Systems, and (2) the delivery of the requisite DigiCipher receivers (or equivalent equipment), unless such costs or liabilities result from the negligence of Affiliate or an affiliate of Affiliate, in which case Affiliate shall be responsible only for the direct costs and liabilities arising from such negligence. In addition, Network shall have a technical staff available to Affiliate and any affiliate of Affiliate via telephone twenty-four (24) hours per day throughout the Term hereof to assist with any problems or questions relating to the Earthboxes or Earthbox Systems. This Agreement does not convey, sell, or assign to Affiliate or any affiliate of Affiliate any right or interest in or to the Earthboxes or the Earthbox Systems. In the event of the expiration or termination of this Agreement as to any or all Systems, each such System shall use commercially reasonable efforts to make the Earthbox(es) and Earthbox System(s) in such System(s) available to Network for the orderly removal of the same in a timely manner. * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 10 11 (c) Network shall provide to each Satellite System, to each Primary System, to each Satellite Subscriber and to each Primary Subscriber a video and audio signal of the applicable Service of a technical quality equivalent to the greater of the following: (i) comparable to the technical quality of audio and video signals delivered by other Cable television programming services, or (ii) the analog technical standards set forth in Exhibit B hereof for a Cable television programming service delivered in an analog format. Each System, if any, shall deliver to its Service Subscribers a principal video and audio signal of each Service of a technical quality at least comparable to other Cable television programming services, but in no event shall Affiliate be obligated to deliver a signal of either Service of a quality that is higher than the technical quality of such Service as provided by Network hereunder. In the event Network commences delivery of a Service in a digital or other non-analog format, Network and Affiliate shall negotiate in good faith to establish applicable technical standards, which standards shall result in a signal of such Service that is at least as high in quality, as perceived by a typical viewer of such Service, as the analog standards set forth in Exhibit B hereto. (d) Affiliate and each System shall have the right to exhibit, distribute, subdistribute and authorize the reception of either or both Services pursuant to this Agreement as full-time or part-time services in an analog form, a digital or modified format, or in any combination thereof. Except as otherwise provided herein, the Systems, if any, shall distribute the Services during the hours each such Service is carried by such Systems, without alteration, editing or delay. Network agrees that Affiliate shall have complete authority to control, to designate and to change the channel(s) over which each Service is to be carried on each System. (e) Network retains and reserves any and all rights in and to all signal distribution capacity contained within the bandwidth of the signal of the Satellite Service, including, without limitation, the vertical blanking interval ("VBI"), audio subcarriers and all other distribution capacity contained within the bandwidth of the signal of the Satellite Service between Network's uplink facilities and the Systems or Affiliate's other first downlink facilities. In addition, Network shall have the right to use the signal distribution capacity contained within the bandwidth of the signal that Network uses to communicate with the Earthboxes solely for the purposes of programming, controlling and updating the Earthbox Systems to facilitate distribution of the Primary Service hereunder. Affiliate retains and reserves any and all rights in and to, and may use in its sole discretion, all signal distribution capacity contained within the bandwidth of the signal of the Services, including, without limitation, the VBI, audio subcarriers or channels and any other portions of the bandwidth that may be created or made usable as a result of the conversion of the signal of one or both of the Services to a compressed, digital or other non-analog format as received at each System or Affiliate's other first downlink facilities from such 11 12 System or other first downlink facility (or, in the case of the Primary Service, the System headend or other location of the Earthbox) to the Service Subscribers served by such System or other first downlink facility. Nothing herein shall preclude Affiliate from exercising and exploiting the rights retained and reserved by Affiliate pursuant to this Section 4(e) by any means and in any locations freely and without restriction; provided, however, that any such use by Affiliate or the Systems shall not materially degrade, or otherwise materially interfere with, the picture quality of the Services or the audio portion of the signal of the Services that is the principal audio carriage frequency of the Services. In the event Network uses the signal distribution capacity of either Service as permitted hereunder, including, without limitation, the VBI or audio subcarriers, for the transmission of any other service, programming, material or product, Network shall not promote such service, programming, material or product on the Service without the prior written consent of Affiliate. Furthermore, Network covenants that no other information, service, programming, data, material or product shall be contained on the same line(s) of the VBI as any closed-captioning service and/or identification rating data. (f) Each System or other distribution system or enterprise may carry either or both of the Services on the basic level of service, on any tier, in a package of other services, a la carte, or in any combination thereof. (g) Except as otherwise permitted herein, Affiliate shall not itself, and shall not authorize others to, copy, tape or otherwise reproduce any part of either Service without Network's prior written authorization and in each of the Systems shall take reasonable and practical security measures to prevent the unauthorized or otherwise unlawful copying, taping or other reproduction of either Service by others through the facilities of a System. Neither Network nor its affiliates shall make any claim against Affiliate or its affiliates for any home taping by anyone viewing either Service and Affiliate may promote home taping as part of Affiliate's marketing efforts. Network acknowledges that this Section 4(g) does not restrict Affiliate's practice of connecting its subscribers' videocassette recorders or other devices susceptible to use for home duplication of video programming to the facilities of a System. (h) Network hereby grants Affiliate, and any affiliate of Affiliate, the right to receive the signals of the Services, to digitize, compress, modify, replace or otherwise technologically manipulate the signals, and to transmit the signals (one or more times) as so altered (the "Altered Signals") to a satellite(s), or to a location(s) within the continental United States designated by Affiliate (in its sole and absolute discretion), for redistribution to terrestrial or other reception sites capable of receiving and utilizing the Altered Signals, provided that no such alteration, transmission, redistribution, reception or other use shall cause a material change in a viewer's perception of the principal video or principal audio presentation of the Services. 12 13 Network hereby grants Affiliate, any affiliate of Affiliate, and any System (i) the right to transmit the Altered Signals for the uses set forth in Section 1(a) of this Agreement or for any other purpose consistent with the intent of the parties hereto, and (ii) the right to transmit the Altered Signals to any third party, provided that such third party is authorized by Network pursuant to a written agreement or otherwise to receive and or distribute the Services. In addition, Network grants Affiliate the right to receive the signals of the Services, to digitize, compress or modify the signal of the Services into a three-dimensional or other augmented or enhanced version, and to distribute such version to a System(s) or to any other party on the same terms and conditions set forth herein with respect to distribution of the Services. Furthermore, Network shall not change the signals of the Services in such a way as to interfere with, or technically or technologically to defeat, Affiliate's, any affiliate of Affiliate's, or any System's rights under this Section 4(h). In the event Network interferes with or otherwise prevents receipt, digitization, compression, modification, replacement, utilization or manipulation of the signals of either or both of the Services by Affiliate, any affiliate of Affiliate, or any System or any location pursuant to the terms of this Section 4(h), then Affiliate shall have the right, in addition to any and all remedies available to Affiliate at law or in equity, to delete any or all Systems from Schedule 1 of this Agreement, immediately, and to discontinue carriage, immediately, of such Service in any or all Systems. (i) Network hereby grants to Affiliate the right to transmit the signals of the Services as received or generated at the headend of any System to the Cable television system(s) of one or more unaffiliated third parties, the physical facilities of which are connected by Cable or microwave transmission to the physical facilities of the headend of such System, provided that such third party is authorized by Network pursuant to a written agreement or otherwise to receive and/or distribute the signal of an applicable Service. Network also hereby grants Affiliate the right to receive the signals of the Services from any unaffiliated third party, the physical facilities of which are connected by Cable or microwave transmission to the physical facilities of the headend of a System. (j) Notwithstanding anything herein to the contrary, and provided the Satellite Service is programmed by Network and is not programmed interactively by viewers of the Satellite Service, Affiliate shall have the right, but not the obligation, to preempt the Satellite Service on the Systems for up to: [ * ] each day during the Term of this Agreement to insert other programming (the "Affiliate Inserts"). Affiliate shall provide Network with at least thirty (30) days' prior written notice of the time periods during which Affiliate will preempt the Satellite Service for the Affiliate Inserts; provided, however, that Affiliate may preempt the Satellite Service for the Affiliate Inserts up to [ * ] without prior notice to Network. Affiliate may preempt the Satellite Service * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 13 14 for an Affiliate Insert only during a terminal break. Affiliate's preemption of the Satellite Service for the exhibition of the Affiliate Inserts shall be subject to the following limitations: (i) Affiliate shall not preempt the Satellite Service for more than one (1), thirty (30) minute period during the time period from 8:00 p.m. to 11:00 p.m., Eastern Time ("Prime Time"); (ii) the Affiliate Inserts shall not comprise a simulcast or tape-delayed segment of programming from any other cable television service, other than a news, informational, or political service created for Affiliate or an affiliate of Affiliate; (iii) the Affiliate Inserts shall be spaced at least one (1) hour apart; provided, however, that Affiliate may preempt the Satellite Service for one (1) continuous hour during any time period other than Prime Time, with Network's consent, which consent shall not be unreasonably withheld or delayed by Network; (iv) the editorial and production quality of the Affiliate Inserts, as measured by the average viewer, shall be materially similar or better than the editorial and production quality of the Satellite Service, taking into account any differences in content and format; (v) during any hour of the Satellite Service that is preempted for one (1), thirty (30) minute Affiliate Insert, Affiliate shall be entitled to only fifty percent (50%) of the commercial announcement time to which Affiliate would otherwise be entitled during such hour pursuant to Section 3(b) hereof; and (vi) during any hour of the Satellite Service that is preempted for one (1) continuous hour, Affiliate shall not be entitled to the commercial announcement time for such hour to which Affiliate would otherwise be entitled during such hour pursuant to Section 3(b) hereof. k) Upon request by Affiliate, Network and Affiliate shall negotiate in good faith regarding the joint creation, development and distribution of multimedia, interactive and/or computer applications related to or based on either Service or either Service's programming; provided, however, that neither Network nor Affiliate shall have such an obligation to negotiate regarding any such application if Network is the sole owner of such application and if Network is creating, developing and distributing such application itself without the involvement of any third party, except for a third party that is assisting Network solely as an employee or independent contractor. Network further agrees that if it grants or offers, or has granted or offered, to any third party (including an affiliate of Network) the rights to exhibit, distribute, subdistribute and/or authorize the reception of any multimedia, interactive or computer application(s) relating to or based on either Service or either Service's programming, whether or not such application is to be offered in conjunction with or separate from such Service, Network shall promptly offer such rights to Affiliate upon terms and conditions, each of which is at least as favorable as that contained in any such third party grant or offer of rights. Affiliate shall be entitled to exhibit, distribute, subdistribute and/or authorize the reception of any such multimedia, interactive or computer application(s) at a rate no greater than [ * ] of the lower of (i) Network's then current cable television industry average rate for such rights or (ii) Network's then-current cable television * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 14 15 industry rate card for such rights, if such rate card then exists. 5. FEES: In consideration of the terms and conditions set forth herein, Affiliate and Network shall, subject to Sections 5(b) (i), (ii), (iii) and (iv), each pay the following amounts: (a) For each calendar month during the Initial Term and the First Renewal Term (if any), each of the parties hereto shall pay to the other party, if applicable, the following amounts calculated on a System-by-System basis: i. DISTRIBUTION OF THE PRIMARY SERVICE ON A FULL-TIME BASIS Affiliate shall elect, for each System carrying the Primary Service full-time, to be governed by either subsection i.A or i.B of this Section 5(a). Affiliate shall notify Network of its election no more than two (2) times each calendar year, and each election shall be effective until notification of a subsequent election. A. Affiliate shall pay [*] Fee (as defined below) for the Primary Service. Network shall pay Affiliate the greater of either (x) [ * ] of the net telephone collections (i.e., total revenues received from AT&T or a similar telephone service, less only any applicable sales taxes) received by Network from calls from viewers ho request specific music videos offered by such System on the Primary Service via an Earthbox located at such System's headend (or other location of such Earthbox) each month during the Term and the First Renewal Term (if any) (the "Affiliate Share"), plus any amounts payable by Network to Affiliate pursuant to Section 7(e) hereof, or (y) the amount obtained by multiplying, each month during the pertinent calendar quarter, [*] times the number of Service Subscribers served by such System (the "Guaranteed Amount"). B. Affiliate shall pay Network a per Service Subscriber fee of [*] multiplied each month by the number of Service Subscribers in the System who receive the Primary Service during such month (the "Fee"), which number shall be calculated pursuant to Section (5)(e) hereof. Network shall pay Affiliate for promotional support of the Primary Service (the "Promotional Payment") a monthly amount equal to [*] multiplied by the number of Service Subscribers in the applicable System who receive the Primary Service during such month. Affiliate and Network hereby agree that each System may use the Promotional Payment for, among other things, cross-channel promotional announcements, which shall be valued at the applicable System's then-current commercial advertising rate card. * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 15 16 ii. DISTRIBUTION OF THE PRIMARY SERVICE ON A PART-TIME BASIS Affiliate shall elect, for each System carrying the Primary Service part-time, to be governed by either subsection ii.A or ii.B of this Section 5(a). Affiliate shall notify Network of its election no more than two (2) times each calendar year, and each election shall be effective until notification of a subsequent election. A. Affiliate shall pay [*] Fee for the Primary Service. Network shall pay Affiliate the Affiliate Share for each System that elects this option. Network shall have no obligation to pay Affiliate a Guaranteed Amount for any such System; or B. Affiliate shall pay Network the Fee for each such System that elects this option. Network shall pay Affiliate the Promotional Payment for each such System. iii. DISTRIBUTION OF THE SATELLITE SERVICE ON EITHER A FULL-TIME BASIS OR A PART-TIME BASIS Except as provided in Section 5(a)(iv) below, Affiliate shall pay Network the Fee for each System distributing the Satellite Service; provided, however, that the Satellite Service shall be [ * ] following the initial launch of the Satellite Service in such System, regardless of when the Satellite Service is first launched in such System. iv. DISTRIBUTION OF BOTH THE PRIMARY SERVICE ON A FULL-TIME BASIS AND THE SATELLITE SERVICE ON EITHER A FULL-TIME BASIS OR A PART-TIME BASIS In the event a System is carrying both (x) the Primary Service on a full-time basis and on the first or second most highly penetrated level of service in such System, and (y) the Satellite Service on either a full-time basis or a part-time basis then, regardless of whether Affiliate is receiving payment pursuant to Section 5(a)(i)(A) or Section 5(a)(i)(B), Affiliate shall be entitled to carry the Satellite Service in such System and free of any obligation to pay a Fee therefor. (b) "Service Subscriber(s)" shall mean each location to which Affiliate, pursuant to this Agreement, intentionally authorizes a Service directly, through an affiliate, or through the subdistribution of such Service to an unaffiliated third party. Service Subscribers shall include each occupied single family dwelling, each occupied dwelling in a multiple unit building and each bar, restaurant and other residential or commercial location where such Service is received. If Affiliate provides such Service to multiple unit complexes, including, * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 16 17 without limitation, apartments, hotels and motels, on a bulk-rate basis, then the number of Service Subscribers attributable to each such bulk-rate subscriber shall be equal to the total monthly retail rate the complex is charged in the applicable System for such Service or for the level or package of services in which such Service is carried, as the case may be, divided by Affiliate's, or the pertinent affiliate of Affiliate's, standard monthly retail rate a non-bulk rate subscriber is charged in the applicable System for such Service or for such level or package of services, as the case may be; provided, that if any such multiple-unit complex is situated outside a System's Distribution Area, then the number of Service Subscribers attributable to such bulk-rate subscriber shall be equal to the total monthly retail rate such complex is charged for such Service or for the level or package of services in which such Service is carried, as the case may be, divided by the monthly retail rate a non-bulk rate subscriber is charged for such Service or for a substantially similar level or package of services, as the case may be, in the System that is geographically nearest to such complex, provided, however, that in no event will the number of Service Subscribers calculated for any such complex exceed the actual number of occupied dwelling units receiving such Service in such complex. Service Subscriber shall not include (i) employees of Affiliate or any affiliated party who are not charged for such Service; (ii) public officials, administrative personnel or public buildings that are not charged for such Service; (iii) subscribers who have not paid their monthly rate to Affiliate, or an affiliate of Affiliate, for a given month and are subsequently disconnected; or (iv) any location to which Affiliate or an affiliate of Affiliate indirectly provides such Service through an unaffiliated third party pursuant to the rights granted in Sections 4(h) and 4(i) hereof. Any subscriber who receives such Service in more than one package of services or on more than one basis from any System shall be included in the Service Subscriber count as only one Service Subscriber. (c) Network shall have the right to negotiate the Fee or Fees, Affiliate Share, Guaranteed Amount and/or Promotional Payment applicable to any Renewal Term after the First Renewal Term (if any) upon written notice to Affiliate at least twelve (12) months prior to the end of the First Renewal Term (if any) or any succeeding Renewal Term. Any such revised amount (collectively, "Renewal Amounts") shall be effective upon the later of the commencement of such Renewal Term or the January 1 following agreement of the parties as to the Renewal Amounts. The amounts provided for herein for the last year of the First Renewal Term (or any succeeding Renewal Term for which the parties have agreed to Renewal Amounts) shall remain in effect after the expiration of such earlier Term until the Renewal Amounts become effective as provided in the immediately preceding sentence. Such Renewal Amounts shall be effective for the remainder of such five (5) year Renewal Term. (d) Notwithstanding any provision of this Agreement to the contrary, in the event that at any time during the Initial Term or 17 18 during any Renewal Term, Network proposes and Affiliate accepts any surcharge for any programming on a Service, any increase in the Fees or Renewal Amounts due during a Renewal Term and otherwise payable hereunder or any reduction in the Affiliate Share, the Guaranteed Amount or the Promotional Payment, Affiliate shall have the right, but not the obligation, to carry the applicable Service in any or all Systems on the basic level of service, on any tier, in a package of other services, a la carte, or in any combination thereof. Likewise, notwithstanding any provision of this Agreement to the contrary, in the event that at least sixty (60) days prior to the expiration of the First Renewal Term (if any) hereunder, Affiliate and Network have failed to agree on the Renewal Amounts and either Affiliate or Network notifies the other party that such first party chooses to cease negotiations of the Renewal Amounts, Network shall give Affiliate notice of the Renewal Amounts to be paid hereunder and such Renewal Amounts shall be deemed the Renewal Amounts to be paid during such succeeding Renewal Term. Affiliate shall then have the right, but not the obligation, in its sole and absolute discretion, to continue to provide the applicable Service pursuant to this Agreement, on the basic level of service, on any tier, in any package of other services, a la carte or in any combination thereof. (e) Any undisputed Fees or undisputed Renewal Amounts payable by Affiliate to Network shall be due and payable forty-five (45) days after the end of the pertinent calendar month during the Term. In the event of a good faith dispute regarding any such Fees or Renewal Amounts, no such disputed Fees or Renewal Amounts shall be due or payable by Affiliate to Network nor subject to the recovery of prejudgment interest or the terms or conditions of Section 5(f) below, unless and until such dispute has been resolved to the satisfaction of Affiliate and Network. Any undisputed amounts payable by Network to Affiliate hereunder shall be due and payable no later than forty-five (45) days after the end of each quarter calendar year during the Term. Notwithstanding the foregoing provisions of this Section 5(e), in the event Affiliate is distributing the Service to not fewer than [ * ] Service Subscribers on February 28, 1997, then Affiliate shall pay such amounts to Affiliate as set forth in the succeeding sentence. Any amounts payable by Network to Affiliate hereunder shall first be estimated and then shall be due and payable not later than on the twelfth calendar day after the end of the pertinent month in the following manner: all such amounts shall be estimated based on the average monthly payment for the preceding twelve (12) months for such payment in such System (the "Estimated Payments"); where there have been fewer than twelve (12) such payments for such System, then the monthly average for all Affiliate's Systems receiving a similar payment shall instead be used, until such time as there have been twelve Corrected Payments (as defined below) for the applicable kind of payment in the applicable System; as soon as Network has complete actual data in respect of such payment and such System, Network shall submit a report, in a form reasonably acceptable to Affiliate, detailing such actual data (the "Corrected Payment"); and the variance * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 18 19 between the Corrected Payment and the Estimated Payment shall be accounted for as an adjustment to the next Estimated Payment for such System. For each calendar quarter during the Term for which Fees or Renewal Amounts are payable, the number of Service Subscribers shall be equal to the number of Service Subscribers as of the first day of each calendar year, adjusted quarterly for launches, acquisitions, deletions and divestitures. Service Subscribers in launched or acquired Systems shall be added in the calendar quarter following completion of the launch or acquisition. Service Subscribers in divested or deleted Systems shall be deducted from the Service Subscribers count effective in the calendar quarter of the completion of the divestiture or deletion. Notwithstanding the foregoing, in no event shall Affiliate be required to pay Fees or Renewal Amounts on a number of Service Subscribers in any calendar quarter greater than the average of the actual number of Service Subscribers as of the first day of the applicable quarter and the actual number of Service Subscribers as of the last day of the applicable quarter. For each month during the Term for which amounts are payable by Network to Affiliate hereunder, the number of Service Subscribers shall be equal to the number of Service Subscribers as of the first day of each month. (f) Any undisputed Fees or undisputed Renewal Amounts, and any amounts payable by Network to Affiliate hereunder that are unpaid after they are due and payable shall accrue interest at one and one-half percent (1.5%) per month or the highest lawful rate, whichever is less, from the due date until payment is received by Network or Affiliate, respectively. The party that is late in making such payments shall be liable to the other party for all reasonable costs and expenses (including, but not limited to, fines, forfeitures, attorneys' fees, disbursements and administrative or court costs) in connection with the collection of any such overdue amounts. (g) Affiliate shall have the right to preview the Satellite Service in any system or enterprise that meets the System Qualifications of Exhibit A hereto, on a full-time or part-time basis free of any obligation to pay Fees therefor for periods of up to one (1) month (which such periods may not be continuous) in order to determine subscriber preferences; provided, however, that no system or enterprise may preview the Satellite Service more often than twice per year. Any System or other enterprise that meets the System Qualifications of Exhibit A hereto and that provides programming services to a number of subscribers at least equal to the minimums set forth in Sections 4(b)(x) and (y) hereof, shall have the right to preview the Primary Service, on a full-time or part-time basis, free of any obligation to pay Fees or Renewal Amounts therefor for periods of up to one (1) month; provided, however, that no such system or enterprise may preview the Primary Service more than once during the Term hereof. 6. REPORTS: (a) Affiliate shall send to Network, as soon as is 19 20 reasonably practicable after the beginning of each calendar month for which a payment from Network to Affiliate is to be made hereunder, a statement on a form mutually acceptable to Affiliate and Network. Each statement shall set forth the total number of Service Subscribers and such other information pertinent hereunder that relates to the computation of the amount(s) due from Network for such calendar month. Affiliate shall send to Network, not later than forty-five (45) days after the end of each calendar quarter during the Term, a statement on a form mutually acceptable to Affiliate and Network. Each statement shall set forth the total number of Primary Subscribers and Satellite Subscribers and such other information as Network may reasonably request that is pertinent hereunder and which relates directly to the computation of the amount due to Network for such calendar quarter. Affiliate shall deliver such statement to Network prior to or along with the amount payable to Network as provided in this Agreement. (b) Affiliate and Network each agree to keep and maintain accurate books and records of all matters directly relating to this Agreement in accordance with generally accepted accounting principles. During the Term and for one (1) year after the termination of this Agreement, such books and records of each party shall be available to the other party for inspection and audit, during normal business hours, at the inspecting party's expense, at the other party's offices upon reasonable notice to the other party. Each party's right to perform such audit shall be limited to once in any twelve (12) month period during the Term and shall be limited to an audit with respect to amounts to be paid in the current and prior calendar years only. If either party audits the other party's books hereunder, the inspecting party must make any claim against the other party within the earlier of three (3) months after the inspecting party or the inspecting party's representative leaves the other party's offices, or twenty-four (24) months after the close of the earliest month that is the subject of such claim. In addition, any such claim, if and when made, must relate to the then-current calendar year or the immediately preceding calendar year only. If a claim is not made within any limitation set forth herein, then the Fees, any Renewal Amounts, and all reports required hereunder shall be deemed final and incontestable, and the inspecting party shall be deemed to have forever and conclusively waived its right, whether known or unknown, to collect any shortfalls from the other party for the period(s) audited. Notwithstanding the foregoing, Affiliate shall have the unconditional right, at any time during the Term, and for one (1) year after the expiration or termination of this Agreement (regardless of the reason for such expiration or termination) to audit Network's books and records to ascertain whether Network has complied with the provisions of Section 13(f) hereof; and Affiliate shall have the unconditional right, at any time during the Term and for one (1) year after the expiration or termination of this Agreement (regardless of the reason for such expiration or termination) to make a claim against Network if Affiliate determines, based upon such audit, that Network has not complied with the provisions of Section 13(f) hereof. 20 21 7. PROMOTION: (a) Affiliate shall use reasonable efforts to promote the Services within the Operating Areas of the Systems. Network shall provide promotional, marketing and sales material to Affiliate, as available and at Network's cost. Network agrees (i) to spend television and radio broadcast advertising monies in DMAs that include substantial portions of the Operating Areas of the Systems therein and (ii) to spend other marketing monies (i.e., other than broadcast advertising monies) within the Operating Areas of the Systems to maximize sales of the Services to Affiliate's cable television subscribers and satellite subscribers and to Affiliate's potential cable television subscribers and satellite subscribers in an amount, in both cases, relative to all advertising and marketing monies spent by Network that is equal to or greater than the ratio of the number of Affiliate's cable television subscribers (in the Systems) to the total number of cable television subscribers in cable television systems carrying a Service, including Affiliate's cable television subscribers (in the Systems); provided, however, that Network's spending on advertising and marketing monies in DMAs where neither Service is distributed except by terrestrial broadcast television authorized by Network pursuant to the terms of Section 3(g) hereof. (b) Except to the extent prohibited by any bona fide agreement negotiated at arm's length between Network and any third party rights holder of the programming on the Services regarding distribution of the programming comprising the Services, Affiliate may create, edit, reproduce, distribute and exhibit promotional segments or clips of the programming of the Services for purposes of promoting such Services, including, without limitation, use of such promotional segments or clips on any pay-per-view preview service or any on-screen programming guide service. Affiliate may tape or otherwise reproduce any portion of either Service in the exercise of the rights granted herein. Network agrees to use its best efforts to obtain all the rights necessary for Affiliate to utilize the programming comprising each Service in the manner set forth in this Section 7(b). (c) Network may not undertake marketing tests, surveys, rating polls and/or other research targeted and/or focused on the Systems or the Systems' subscribers in connection with a Service without Affiliate's prior written consent, which consent may be withheld or delayed in Affiliate's sole and absolute discretion. Network shall provide Affiliate, without cost to Affiliate, with the results of such research to the extent it applies to a System or Systems or the subscribers therein. With respect to any tests, surveys, rating polls and/or other research that apply to a System or Systems for which Network seeks Affiliate's cooperation, Network shall notify Affiliate of the nature and scope of each such project and, upon Affiliate's prior written consent to such project (which consent may be withheld in Affiliate's sole and absolute discretion), Affiliate shall, to the extent permitted by applicable law and company policy, cooperate in such research by rendering such assistance as Network may reasonably request and as 21 22 Affiliate can reasonably provide, the cost of which assistance shall be borne by Network. Network shall otherwise keep the results of all research relating to a System or Systems confidential under the provisions of Section 12 hereof and shall retain the results of such research in an aggregate form only, which results do not identify any subscriber, Cable television system, Alternative Technology system, Cable television operator, or Alternative Technology Operator. (d) Affiliate acknowledges that the names and marks "THE BOX", "THE BOX" (with design), "THE BOX, MUSIC TELEVISION YOU CONTROL" (with design), "MUSIC TELEVISION YOU CONTROL", "XPOSURE" (with design), "BOXtalk", "BOXtunes", and "THE BOX Worldwide", (and the names of certain programs that appear in the Services) are the exclusive property of Network and its suppliers and that Affiliate has not and will not acquire any proprietary rights therein by reason of this Agreement. Network shall have the right to approve any use of such names or marks by Affiliate in publicity about Network or the products or programming included in the Services. Use of such names and marks in routine promotional materials such as program guides, program listings and bill stuffers shall be deemed approved unless Network specifically notifies Affiliate to the contrary prior to such use by Affiliate. (e) In addition to the amounts Network may become obligated to pay to Affiliate pursuant to the other provisions of this Agreement, Network agrees that, in the event Network includes any direct on-air sales programming on either of the Services, Network shall pay to Affiliate the greater of (i) [*] of Net Sales (as defined herein) or (ii) the then prevailing industry average home shopping service rebate (the greater of the rebates described in clauses (i) and (ii) of this Section 7(e) is referred to herein as the "Prevailing Rebate") on all products and services sold to respondents in the Systems' zip code areas by such direct on-air sales programming on the Services. Furthermore, Network shall pay Affiliate the Prevailing Rebate on all products and services sold to respondents in the Systems' zip code areas who call Network or its agent to program music videos within the Primary Service. "Net Sales" means gross sales less taxes, fees, returns and allowances, freight out and cash discounts. Network agrees that, in the event Network includes any direct on air sales programming on either of the Services, Network shall, to the extent not prohibited by applicable law, provide Affiliate with lists of the names and addresses of respondents from within the zip code areas of the Systems who respond to such direct on-air sales programming or who purchase products or services after calling Network to program music videos within the Primary Service, for use by Affiliate, any affiliate of Affiliate, or any System or Systems. For the purposes of calculating all of the commissions payable to Affiliate by Network pursuant to this Section 7(e), where a zip code area is occupied by a System and one or more distributors of a Service, Affiliate shall receive a pro rata share of the Net Sales as set forth above, but based on the ratio of Service Subscribers to total subscribers (including Service Subscribers) to such Service in the zip code. * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 22 23 (f) Network and Affiliate hereby acknowledge that (i) their interests are often in direct conflict, (ii) their relationship is often adversarial, and (iii) Network could cause Affiliate significant harm by the nature of Network's communications to Affiliate's subscribers or to the governmental entities or franchise or licensing authorities whose opinions and actions could adversely affect Affiliate's cable television systems or other video distribution systems or enterprises. Therefore, Network shall not initiate communications with any subscribers or franchise or licensing authorities or governmental entities in the Operating Area of any cable television system or other video distribution systems or enterprises that meet the System Qualifications of Exhibit A hereto without Affiliate's prior written approval, and under no circumstances shall Network engage in any communications with any subscribers or franchise or licensing authority or governmental entity in the Operating Area of any such system or enterprise that would, or could, adversely interfere with Affiliate's relations with subscribers, or Affiliate's relations with any governmental entity or community in any such Operating Area. This provision shall not apply, (A) to any national advertising by Network in connection with a Service, (B) to any proceeding before any judicial body, or (C) to communications with Congress or with any other branch or agency of the Federal government. This Section 7(f) shall survive the expiration or termination of this Agreement (regardless of the reason for such expiration or termination) for a period of two (2) years. (g) Network shall not include in a Service any advertisements for "888", "800," "900," or "976" telephone services, or other telephone services or similar services that bill a caller for placing or confirming the call (other than for the telephone company's cost of the call), that relate directly or indirectly to gambling, astrological, psychic, occult, sexual or romantic activities, or adults-only services, or that are directed at children; provided, however, that notwithstanding the foregoing, Network may include in a Service advertisements for dating, psychic and astrological services until the earlier to occur of: (i) the date on which the number of subscribers receiving the signal of a Service nationwide (including Service Subscribers but excluding terrestrial broadcast television exhibition of such Service) first exceeds [ * ] ; (ii) the date on which Network first reports [ * ] dollars [ * ] or more in gross advertising revenue for any twelve-month period; or (iii) the date on which the number of Service Subscribers exceeds [ * ] . (h) In addition to any other amounts Network may be obligated to pay to Affiliate hereunder, Affiliate agrees to pay, for ongoing marketing and promotional support of the Services in the Systems, the amount of [ * ] per Service Subscriber in Systems where a Service was launched between and including January 1, 1996 and July 1, 1997. Affiliate shall not be required to submit to Network affidavits or any other proof of performance relating to * Indicates that material has been omitted and confidential treatment has been requested therefor. All such omitted material has been filed separately with the Commission pursuant to Rule 24b-2. 23 24 the expenditure of such payments. 8. WARRANTIES AND INDEMNITIES: (a) Network represents and warrants to Affiliate that (i) Network is a corporation duly organized, validly existing and in good standing under the laws of the State of Florida; (ii) Network has the power and authority to enter into this Agreement and to perform its obligations hereunder fully; (iii) Network is under no contractual or other legal obligation that will in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Network has the authority to do so; (v) Network is in compliance with all laws, rules, regulations and court and administrative decrees to which it is subject including, without limitation, all applicable rules and regulations of the Federal Communications Commission (the "FCC"); (vi) Network has, or will have acquired at the pertinent time when all or part of a Service is made available to Affiliate, good title to, and/or each and every property right (whether relative to tangible or intangible property), or license, usage or other right necessary or appropriate whatsoever to effectuate the acts or performances contemplated by, or satisfy the obligations imposed on it pursuant to, this Agreement, including all permits, rights, licenses and approvals necessary, required or appropriate for any and all performances through to the premises and to the listeners frequenting the premises of Service Subscribers; (vii) neither the Services, any program related thereto, or any component thereof is subject to, or the subject of, any lien, encumbrance, charge, lis pendens, administrative proceeding, governmental investigation, or litigation pending or threatened; (viii) the use and exhibition of the Services by Affiliate, as contemplated by this Agreement, will not cause Affiliate to violate any law, rule, regulation or court or administrative decree; and (ix) the obligations created by this Agreement, insofar as they purport to be binding on Network, constitute legal, valid and binding obligations of Network enforceable in accordance with their terms. (b) Affiliate represents and warrants to Network that (i) Affiliate is a corporation duly organized and validly existing under the laws of the State of Delaware; (ii) Affiliate has the power and authority to enter into this Agreement and to perform its obligations hereunder fully; (iii) Affiliate is under no contractual or other legal obligation that will in any way interfere with its full, prompt and complete performance hereunder; (iv) the individual executing this Agreement on behalf of Affiliate has the authority to do so; and (v) the obligations created by this Agreement, insofar as they purport to be binding on Affiliate, constitute legal, valid and binding obligations of Affiliate enforceable in accordance with their terms. (c) Network represents, warrants and covenants that (i) the Services comply, and will continue to comply, in all respects with the commercial matter limitations of the Children's Television Act of 1990, Public Law 101-437 (October 18, 1990) and 24 25 the regulations of the FCC promulgated thereunder, as the same may apply to cable television systems and cable operators, including 47 C.F.R. Section 76.225, 76.305, and as the same may be amended from time to time ("Children's Television Regulations") and that Network shall provide Affiliate with all records demonstrating such compliance under the Children's Television Regulations as are necessary for Affiliate to demonstrate its timely compliance as a cable operator with the commercial matter limitations and record keeping requirements of the Children's Television Regulations; and (ii) the Services comply, and will continue to comply, in all respects with all origination cablecasting regulations of the FCC, including but not limited to 47 C.F.R. Sections 76.205 - 76.221 (political equal time, personal attack, lotteries and sponsorship identification), as the same may be amended from time to time ("Origination Cablecasting Requirements"), and that Network shall provide Affiliate with all necessary documentation required thereunder for Affiliate to meet its documentation and public file requirements under the Origination Cablecasting Requirements in a timely manner. In the event that any other programming offered by the Services is among the kind of programming that is regulated by federal, state or local law, as the same may apply to cable television systems and cable operators, or other non-broadcast television distributors, then Network shall provide Affiliate with all statements, records or other documents reasonably necessary for Affiliate to demonstrate timely compliance as a cable operator or distributor with such laws and regulations. (d) Affiliate and Network shall each indemnify, defend and forever hold harmless the other, the other's affiliated companies and each of the other's (and the other's affiliated companies') respective present and former officers, shareholders, directors, employees, partners and agents, against and from any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and court or administrative costs) arising out of any breach of any term of this Agreement or any warranty, covenant or representation contained herein. (e) Without limiting the provisions of Section 8(d) hereof, Network shall indemnify, defend and forever hold Affiliate and Affiliate's affiliated companies and each of Affiliate's and Affiliate's affiliated companies' respective present and former officers, shareholders, directors, employees, partners and agents harmless from and against any and all losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and court or administrative costs) arising directly or indirectly out of: (i) the content of the Services, or the use and delivery of the Services hereunder (including, but not limited to, sponsorship, promotional and advertising spots, any background music and anything else inserted by Network or any party other than Affiliate), including, without limitation, any losses, liabilities, claims, costs, damages and expenses based upon any suit, lien, encumbrance, charge, lis pendens, administrative proceeding, government investigation or litigation relating to the 25 26 Services, any program included therein or any component thereof, or based upon alleged or proven libel, slander, defamation, invasion of the right of privacy or publicity, or violation or infringement of copyright (including music performance rights for any and all performances through to Affiliate's subscribers), literary or music synchronization rights, obscenity, indecency, or any other form or forms of speech (whether or not protected by the Constitution of the United States or any State) or otherwise arising out of the content of the Services as furnished by Network hereunder or caused by or arising out of any breach of any of Network's representations or warranties hereunder (provided that Affiliate shall, to like extent, indemnify Network and Network's affiliated companies and each of Network's and Network's affiliated companies' respective present and former officers, shareholders, directors, employees, partners and agents for any deletion or addition of material by Affiliate to a Service which deletion from, or addition to, such Service gives rise to losses, liabilities, claims, costs, damages and expenses (including, without limitation, fines, forfeitures, attorneys' fees, disbursements and court or administrative costs)); or (ii) the sale or marketing of any products or services by, through or on the Services, including, without limitation, claims related to product liability, patent, trademark, copyright infringement, right of privacy or publicity, express or implied warranties, warranties relating to compliance with any applicable governmental laws or regulations, obscenity and personal injuries (physical, economic or otherwise), to any person who may use, consume or be affected by the products and services sold or marketed by, through or on the Services. (f) In connection with any indemnification provided for in this Section 8, each party shall so indemnify the other only if the party claiming the indemnity shall give the indemnifying party prompt notice of any claim or litigation to which its indemnity applies; it being agreed that the indemnifying party shall have the right to assume the full defense of any or all negotiations, claims or litigation to which its indemnity applies. The indemnified party shall cooperate fully (at the cost of the indemnifying party) with the indemnifying party in such defense and in the settlement of such claim or litigation, and the indemnified party shall make no compromise or settlement of any such claim without the prior written consent of the indemnifying party. The settlement of any claim or action by the indemnified party without the prior written consent of the indemnifying party shall release the indemnifying party from its obligations hereunder with respect to such claim or action so settled. (g) Network represents, warrants and covenants that (i) it has procured and shall maintain during the Term, general liability insurance covering the Service, the Programming and all elements thereof from a nationally recognized insurance carrier and in accordance with industry standards; (ii) such insurance shall have minimum limits of at least $1,000,000 per occurrence and a $3,000,000 annual aggregate for all claims, and shall carry a deductible of not more than $10,000 for any single claim; (iii) 26 27 such insurance shall provide coverage not only with respect to claims asserted during the term of the insurance policy, but also with respect to claims that are asserted during a period of not less than three (3) years following expiration of such term; (iv) Affiliate shall be named as an additional insured and loss payee on the insurance policy and such policy shall provide that the proceeds thereof shall be payable to Affiliate; (v) Network shall provide Affiliate with documentation to such effect upon the execution hereof; (vi) at least thirty (30) days' prior to the expiration of such policy, Network shall provide Affiliate with appropriate proof of issuance of a policy that continues in force and effect the insurance coverage of the insurance so expiring; and (vii) Network shall provide Affiliate with thirty (30) days' written notice of any changes in such policy; provided, however, that Network shall not make any revisions to such policy that could adversely affect Affiliate's rights without Affiliate's prior written consent. (h) The representations, warranties and indemnities contained in this Section 8 shall continue throughout the Term and the indemnities shall survive the expiration or termination of this Agreement, regardless of the reason for such expiration or termination. 9. EARLY TERMINATION RIGHTS: (a) In addition to Network's other rights at law or in equity or pursuant to other provisions of this Agreement, Network may, by so notifying Affiliate, terminate this Agreement: (i) if Affiliate is in material breach of this Agreement; provided, however, that if such breach is of the type that is curable, then Network shall not exercise its termination or other rights at law or in equity hereunder unless Network has, by so notifying Affiliate in writing, given Affiliate at least thirty (30) days from the time such notice is received by Affiliate to cure such material breach fully and to demonstrate to Network that such material breach has been cured, and provided further, that if such breach is confined to a System or to a limited number of Systems, Network shall have the right to terminate this Agreement only as to such System or Systems; or (ii) if Affiliate has filed a petition in bankruptcy, is insolvent, or has sought relief under any law related to Affiliate's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Affiliate, or any relief under any such law has been sought by any creditor(s) of Affiliate, unless such involuntary petition is dismissed, or such relief is denied within thirty (30) days after it has been filed or sought. (b) In addition to Affiliate's other rights at law or in equity or pursuant to other provisions of this Agreement, and in addition to any other right to terminate provided hereunder, Affiliate may, by so notifying Network, terminate this Agreement: (i) if Network is in material breach of this Agreement, provided, however, if such breach is of the type that is curable, then 27 28 Affiliate shall not exercise its termination or other rights at law or in equity hereunder unless Affiliate has, by so notifying Network, given Network at least thirty (30) days from the time such notice is sent, to cure such material breach fully and to demonstrate to Affiliate that such material breach has been cured, unless a shorter cure period is specified elsewhere in this Agreement for a specific breach, in which case such shorter cure period shall apply; or (ii) if Network has filed a petition in bankruptcy, is insolvent or has sought relief under any law related to Network's financial condition or its ability to meet its payment obligations; or (iii) if any involuntary petition in bankruptcy has been filed against Network, or any relief under any such law has been sought by any creditor(s) of Network, unless such involuntary petition is dismissed, or such relief is denied, within thirty (30) days after it has been filed or sought; or (iv) on at least fifteen (15) days' notice in the event that delivery of a Service is discontinued or interrupted for a continuous period of fifteen (15) days. 10. FORCE MAJEURE: Except as herein provided to the contrary, neither Affiliate nor Network shall have any rights against the other party hereto for the non-operation of facilities or the non-furnishing of a Service if such non-operation or non-furnishing is due to an act of God; inevitable accident; fire; lockout; flood; tornado; hurricane; strike or other labor dispute; riot or civil commotion; earthquake; war; act of government or governmental instrumentality (whether federal, state or local); failure of performance by a common carrier; failure in whole or in part of technical facilities; or other cause (financial inability excepted) beyond such party's reasonable control. In the event of non-operation or non-furnishing of a Service, Affiliate shall have the right, immediately, to insert programming of its choice on the channel otherwise identified with such Service until such time as such Service is fully operational again. If such non-operation or non-furnishing of a Service is caused by any incapacity in Network's distribution facilities, then credit shall be given or payment made to Affiliate on that portion of such Service that is affected by any interruption during any month equal to the product of (x) the Fees, any Renewal Amounts, Affiliate Share, Guaranteed Amount and/or Promotional Payment, respectively, for the applicable Service that would be due for such month, calculated in accordance with this Agreement, assuming no interruption of such Service during such month, multiplied by (y) a fraction, the numerator of which is the total number of hours of interruption of such Service during such month and the denominator of which is the total number of hours of such Service that would have been provided and carried by a System or Systems during such month absent such interruption(s). If such non-operation or non-furnishing of a Service is caused by any incapacity in Affiliate's distribution facilities, then, if Affiliate is paying Fees for the receipt of such Service, Affiliate shall receive a credit on Fees on that portion of such Service that is affected by any such interruption during any month, to be calculated as set forth in the immediately 28 29 preceding sentence; and if Network is paying Affiliate the Affiliate Share, Guaranteed Amount and/or Promotional Payment for carriage of such Service, Network shall not be required to make such payments to Affiliate during the period of such interruption. 11. NOTICES: Any notice or report given under this Agreement shall be in writing, shall be sent postage prepaid by registered or certified mail return receipt requested or by hand or messenger delivery, or by Federal Express or similar overnight delivery service, or by facsimile transmission, to the other party, at the following address (unless either party at any time or times designates another address for itself by notifying the other party thereof by certified mail, in which case all notices to such party thereafter shall be given at its most recently so designated address): To Network: THE BOX Worldwide, Inc. 1221 Collins Avenue Miami Beach, Florida 33139 Attention: Chief Financial Officer To Affiliate: Terrace Tower II 5619 DTC Parkway Englewood, Colorado 80111 Facsimile Number: (303) 488-3218 Attention: Senior Vice President, Programming cc: Legal Department Notice or report given by personal delivery shall be deemed given on delivery. Notice or report given by mail shall be deemed given on the earlier to occur of actual receipt thereof or on the fifth day following mailing thereof in accordance with the notice requirements of this Section 11. Notice or report given by Federal Express or similar overnight delivery service shall be deemed given on the next business day following delivery of the notice or report to such service with instructions for overnight delivery. Notice or report given by facsimile transmission shall be deemed given on the day of transmission if a business day, or on the next business day after the day of transmission if not transmitted on a business day. 12. CONFIDENTIALITY; PRESS RELEASES: Neither Affiliate nor Network shall disclose (whether orally or in writing, or by press release or otherwise) to any third party (other than each party's respective officers, directors and employees, in their capacity as such, and their respective auditors and attorneys; provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such officers, directors, employees, auditors or attorneys), any information with respect to the terms and provisions of this Agreement, any information obtained in any inspection and/or audit of the other party's books and records, 29 30 any information contained in any data or report required or delivered hereunder or any materials related thereto; and Network shall not use or disclose to any third party any information regarding Affiliate's promotion of a Service, including, but not limited to, Affiliate's promotional or marketing plans, programs or strategies, as well as the results therefrom, and any information regarding Affiliate's, any affiliate of Affiliate's or any System's subscribers, or Alternative Technology subscribers including, but not limited to, the number of such subscribers, including Alternative Technology subscribers except (as to all of the preceding): (i) to the extent necessary (but redacted to the greatest extent possible) to comply with law or with the valid order of an administrative agency or a court of competent jurisdiction, in which event the party making such disclosure shall so notify the other as promptly as practicable (and, if possible, prior to making such disclosure) and shall seek confidential treatment of such information; (ii) as part of its normal reporting or review procedure to its parent company, its auditors or its attorneys; provided, however, that the disclosing party agrees to be responsible for any breach of the provisions of this Section 12 by such parent company, its auditors or attorneys; (iii) in order to enforce its rights or perform its obligations pursuant to this Agreement provided that prior to such disclosure such party shall seek confidential treatment of such information; and (iv) if mutually agreed by Affiliate and Network, in advance of such disclosure, in writing. Network shall not use or disclose information (whether personally identifiable information or not) to any third party regarding Affiliate's or any affiliate of Affiliate's cable television subscribers or Alternative Technology subscribers (unless such information is obtained from the subscribers themselves in a communication that does not violate the provisions of Section 7(f) hereof) and shall not engage in any direct mailing or telephone solicitation, for any purpose, to cable television subscribers or Alternative Technology subscribers of Affiliate or any affiliate of Affiliate. This Section 12 shall survive, indefinitely, the expiration or termination of this Agreement regardless of the reason for such expiration or termination. 13. MISCELLANEOUS: (a) Assignment; Binding Effect; Reorganization. This Agreement, including both its obligations and benefits, shall redound to the benefit of, and be binding on the respective transferees and successors of the parties, except that neither this Agreement nor either party's rights or obligations hereunder shall be assigned or transferred by either party without the prior written consent of the other party; provided, however, no consent shall be necessary in the event of an assignment to a successor entity resulting from a merger, acquisition or consolidation by either party or assignment to an entity under common control, controlled by or in control of either party. Notwithstanding the foregoing, Network shall give Affiliate thirty (30) days' prior written notice of a change in the control or ownership of a Service or Network. In such event, this Agreement shall continue 30 31 but, upon the date of such change of control, at Affiliate's option, (i) Affiliate may carry such Service on the basic level of service, on any tier, in any package or packages, or on an a la carte basis in any or all Systems; or (ii) any or all of the Systems may be deemed deleted from Schedule 1 hereto and carriage of such Service may be discontinued on any or all of the Systems; provided, however, that Affiliate shall have the option to continue or restore carriage of such Service in any or all Systems at any time during the Term. For purposes of this paragraph, the term "control" means the power to direct the management and policies of an entity, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. (b) Service Combinations. In the event that a Service(s) is(are) merged with, or Network acquires control of, or Network is acquired by or merges with, or control of Network is acquired by, or such Service(s) is(are) acquired by, any other programming service or the owner of any other programming service, if Affiliate has (at the time of such merger or acquisition) an affiliation agreement with any such other service or entity, Affiliate shall have the option to choose to continue carriage of such Service(s) and of such other service, as the case may be, under either this Agreement or under such other affiliation agreement. If Affiliate does not have an affiliation agreement with such other service or entity, Affiliate shall have the option to elect to have this Agreement continue to apply to such Service(s) after such merger or acquisition, or to any surviving service after such merger or acquisition. (c) Entire Agreement; Amendments; Waivers. This Agreement contains the entire understanding of the parties and supersedes and abrogates all contemporaneous and prior understandings of the parties, whether written or oral, relating to the subject matter hereof, including in particular the letter agreement between Network and Affiliate dated March 7, 1995. This Agreement may not be modified except in writing executed by both parties hereto. Any waiver of any provision of, or right included in, this Agreement must be in writing and signed by the party whose rights are being waived. No waiver by either Affiliate or Network of any breach of any provision hereof shall be or be deemed to be a waiver of any preceding or subsequent breach of the same or any other provision of this Agreement. The failure of Affiliate or Network to enforce or seek enforcement of the terms of this Agreement following any breach shall not be construed as a waiver of such breach. (d) Governing Law. The obligations of Affiliate and Network under this Agreement are subject to all applicable federal, state and local laws, rules and regulations (including, but not limited to, the Communications Act of 1934, as the same may be amended from time to time, and the rules and regulations of the FCC promulgated thereunder), and this Agreement and all matters or issues collateral thereto shall be governed by the laws of the State of New York (except for issues of perpetuity which shall be governed by the laws of the State of Colorado), without 31 32 regard to choice of law rules. (e) Relationship. Neither Affiliate nor Network shall be, or hold itself out as, the agent of the other under this Agreement. No subscriber of Affiliate shall be deemed to have any privity of contract or direct contractual or other relationship with Network by virtue of this Agreement or Network's delivery of a Service to Affiliate hereunder. Likewise, no supplier of advertising or programming or anything else included in a Service by Network shall be deemed to have any privity of contract or direct contractual or other relationship with Affiliate by virtue of this Agreement or Affiliate's carriage of such Service hereunder. Nothing contained herein shall be deemed to create, and the parties do not intend to create, any relationship of partners, joint venturers or agents, as between Affiliate and Network, and neither party is authorized to or shall act toward third parties or the public in any manner that would indicate any such relationship with the other. Network disclaims any present or future right, interest or estate in or to the transmission facilities of Affiliate and any affiliate of Affiliate and the parents, subsidiaries, partnerships or joint venturers controlling the Systems on which a Service is transmitted, such disclaimer being to acknowledge that neither Affiliate nor the transmission facilities of the Systems (nor the owners thereof) are common carriers. (f) Favorable Terms. Network agrees that if it gives or offers, or has given or offered, to any third party (i) a lower net effective rate per subscriber for a Service than Affiliate is paying per Service Subscriber hereunder, (ii) the right to demand an Earthbox with fewer subscribers to the Primary Service in a Cable television system than is provided herein, (iii) a more favorable Promotional Payment, (iv) a more favorable Affiliate Share, (v) a more favorable Guaranteed Amount, or (vi) any other economic or non-economic term, provision, covenant or consideration, that are or is more favorable to such third party than Affiliate is receiving hereunder (clauses (i) through (vi) above, individually and collectively, shall be referred to herein as a "More Favorable Provision"), then Network shall promptly offer such More Favorable Provision to Affiliate for the same amount of time such More Favorable Provision is or was available to such third party. A More Favorable Provision shall not include any pertinent term, provision, covenant or consideration given or offered to any third party, provided it is the identical term, provision, covenant or consideration offered and granted to Affiliate the same number of times at one or more previous points in time. A More Favorable Provision shall include any term, provision, covenant or consideration, regardless of whether there is a corresponding term, provision, covenant or consideration concerning the subject matter of such More Favorable Provision in this Agreement or whether such term, provision, covenant or consideration relates to such third party's entire subscriber base or less than the entire base (e.g., a More Favorable Provision relating to a "test" of "sample" group of subscribers). The calculation of net effective rate shall include all economic and 32 33 non-economic terms and provisions of an agreement that involve financial or other outlays (excluding contingent liabilities) by either party for the benefit of the other or in direct or indirect connection with the rates for the Services, or that involve direct or indirect consideration payable by either party to the other, such as discounts, credits, marketing support or adjustments of any kind including, but not limited to, actual per subscriber rates, launch reimbursements, advertising support, volume or other discounts, reimbursements, channel position fees, discounts, credits or rebates, pre-payment of loans, deductions for uncollected accounts, market contributions and other incentives, cash payments (whether conditional or not), sales or leases of equipment, studio facility discounts, free or discounted marketing materials, payment terms and other financings. In determining "net effective rates," the actual number of subscribers to each Service (rather than projected or expected subscribers or the number of such third party's subscribers who are not actually subscribers to such Service) will be considered. When comparing the "net effective rates" of Affiliate and any third party distributor of the Services, all subscribers to the Services of Affiliate and each distributor shall first be divided into six (6) classes, and then the "net effective rates" for the subscribers in each class shall be separately compared; the six (6) classes of subscribers to the Services shall be: (A) all subscribers to whom the Primary Service is available full-time but for whom no Fee is paid; (B) all subscribers to whom the Primary Service is available full-time and for whom a Fee is paid; (C) all subscribers to whom the Primary Service is available part-time but for whom no Fee is paid; (D) all subscribers to whom the Primary Service is available part-time and for whom a Fee is paid; (E) all subscribers to whom the Satellite Service (but not the Primary Service) is available; and (F) all subscribers to whom the Primary Service is available full-time and the Satellite Service is also available either full-time or part time, provided only that both Services are available on the first or second most highly penetrated levels of service. Without limiting the foregoing, and for purposes of comparing the actual rate per subscriber to a Service payable by Affiliate to the actual rate per subscriber to such Service payable by a third party distributor of such Service distributing such Service through the use of any television distribution system or enterprise, the penetration of such Service for such third party distributor shall be calculated as if the denominator includes all recipients of any television service through such system or enterprise, regardless of the number of parties distributing television services through such system or enterprise. Network agrees to provide to Affiliate a written certification on each annual anniversary date of this Agreement, signed by a duly authorized officer of Network, stating that Network has satisfied its obligations under this Section 13(f). Notwithstanding the foregoing, the provisions of this Section 13(f) shall not apply to any agreement between Network and any 33 34 distributor that has expired prior to the date hereof. (g) Severability. The invalidity under applicable law of any provision of this Agreement shall not affect the validity of any other provision of this Agreement, and in the event that any provision hereof is determined to be invalid or otherwise illegal, this Agreement shall remain effective and shall be construed in accordance with its terms as if the invalid or illegal provision were not contained herein; provided, however, that both parties shall negotiate in good faith with respect to an equitable modification of the provision, or application thereof, held to be invalid and provisions logically related thereto. (h) No Inference Against Author. Network and Affiliate each acknowledge that this Agreement was fully negotiated by the parties and, therefore, no provision of this Agreement shall be interpreted against any party because such party or its legal representative drafted such provision. (i) No Third Party Beneficiaries. The provisions of this Agreement are for the exclusive benefit of the parties hereto and their permitted assigns, and no third party shall be a beneficiary of, or have any rights by virtue of, this Agreement. (j) Headings. The titles and headings of the sections in this Agreement are for convenience only and shall not in any way affect the interpretation of this Agreement. (k) Non-Recourse. Notwithstanding anything contained in this Agreement to the contrary, it is expressly understood and agreed by the parties hereto that each and every representation, warranty, covenant, undertaking and agreement made in this Agreement was not made nor intended to be made as a personal representation, undertaking, warranty, covenant, or agreement on the part of any incorporator, stockholder, director, officer, partner, employee or agent, past, present or future, or any of them, and any recourse, whether at common law, in equity, by statute or otherwise, against any of them is hereby forever waived and released. (l) Taxes. Affiliate shall have the right to withhold any portion of any amounts payable by Affiliate to Network that Affiliate is required to withhold by applicable law, and to pay any such amounts over to any appropriate governmental authority. Network shall provide such assistance as is necessary to enable Affiliate to discharge its obligation to withhold and/or pay taxes on Network's behalf. Network shall indemnify, defend and forever hold harmless Affiliate and any affiliate of Affiliate from and against any and all liabilities, claims, costs (including attorneys' fees), damages, liens, encumbrances, charges, suits or actions arising directly or indirectly out of any tax or other amount withheld, paid or otherwise collected by Affiliate on Network's behalf, or owed or paid by Network to any governmental entity. 34 35 The parties hereto have executed this Agreement as of the date first above written. AFFILIATE: NETWORK: By:/s/ DAVID A. JENSEN By:/s/ STANLEY H. GREEN ------------------------------ ----------------------------- Title: Vice President-Programming Title: President, The Box U.S.A -------------------------- ------------------------- 35 EX-21 18 EXHIBIT 21 1 EXHIBIT 21 List of Subsidiaries DMX Inc. a Delaware Corporation TEMPO Sound, Inc., an Oklahoma Corporation 450714 B.C., a British Columbia, Canada Corporation DMX-Europe N.V., a Netherlands Corporation Paradigm Music Entertainment Company a Delaware Corporation SonicNet, Inc. a Delaware Corporation Purple Demon, Inc. a New York Corporation The Box Worldwide, Inc. a Florida Corporation The Box Worldwide - USA, Inc., a Delaware Corporation VJN LPTV CORP., a Delaware Corporation The Box Worldwide - Europe, B.V., A Netherlands Corporation The Box Worldwide - Latin America, Inc., a British Virgin Islands Corporation VJN Management Services, Inc., a British Virgin Islands Corporation Video Jukebox Network Europe, Ltd., a United Kingdom Corporation The Box Holland, B.V., a Netherlands Corporation The Box Argentina, Sri., an Argentina Corporation The Box Italy, Srl., an Italy Corporation EX-23 19 EXHIBIT 23 1 The Board of Directors TCI Music, Inc. We consent to incorporation by reference in the registration statement (No 333-44245) on Form S-8 of TCI Music, Inc. of our report dated February 20, 1998, relating to the consolidated balance sheets of TCI Music, Inc. and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholders' equity and cash flows for the six month period ended December 31, 1997, and relating to the consolidated balance sheets of DMX Inc. and subsidiaries (Predecessor) as of June 30, 1997 and the related consolidated statement of operations, stockholders' equity (deficit) and cash flows for the nine months ended June 30, 1997 and the years ended September 30, 1996 and 1995, which report appears in the December 31, 1997 annual report of Form 10-K of TCI Music, Inc. KPMG Peat Marwick LLP Los Angeles, California March 30, 1998 EX-27 20 FINANCIAL DATA SCHEDULE
5 6-MOS DEC-31-1997 JUL-01-1997 DEC-31-1997 7,915,439 0 8,765,414 523,914 6,713,487 25,863,124 14,601,273 1,113,641 194,727,178 32,138,246 0 805,992 35,588,068 0 63,725,458 194,727,178 22,954,908 22,954,908 0 20,610,340 0 0 280,573 1,917,436 2,382,581 465,145 0 0 0 465,145 .01 .01
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