-----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, ENGTZ3BokZOSufEYeY5Hpq0djCd8FFxSWC12N9tcCI//cYQr4Z/h5ei+EiaCn8rq UQoi/KYFmQrWCmoO6TmKVA== 0000950148-98-001114.txt : 19980504 0000950148-98-001114.hdr.sgml : 19980504 ACCESSION NUMBER: 0000950148-98-001114 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980501 SROS: NASD 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/A SEC ACT: SEC FILE NUMBER: 000-22815 FILM NUMBER: 98608865 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/A 1 FORM 10-K405 AMENDMENT #1 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A-1 (AMENDMENT NO. 1) (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ________________ to ________________. COMMISSION FILE NUMBER 0-22815 TCI MUSIC, INC. (Exact name of registrant as specified in its charter) 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 $87,469,509. Number of shares of Common Stock of TCI Music, Inc. outstanding as of January 31, 1998: 18,237,356 shares. 2
TABLE OF CONTENTS Page ---- 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 PART I (pages 3-16) HAS BEEN OMITTED BECAUSE THERE WERE NO CHANGES TO THIS PART. 4 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 5 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 6
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 2,357 2,082 1,773 1,252 713 268 Capital lease obligation -- 23 1,401 1,446 1,503 -- Notes payable 53,236 -- -- -- 201 382 Related party debt 4,359 3,887 -- -- -- -- Deferred income tax 2,811 -- -- -- -- -- Investment in and advances to DMX-Europe 9,058 6,591 -- 15,886 8,175 3,429 ---------------------------------------------------------------------------------- Total liabilities 94,901 27,288 20,106 22,210 14,416 7,794 Convertible preferred stock 35,588 -- -- -- -- -- Stockholders' (deficit) equity 64,238 (16,302) (1,354) (5,128) 184 (920) ---------------------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $ 194,727 10,986 18,752 17,082 14,600 6,874 ==================================================================================
19 7 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 8 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 9 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 10 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 11 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 12 The net loss from DMX-E operations increased to $16.8 million for the fiscal year ended September 30, 1996 from $13.3 million for 1995. The increase of $3.5 million was attributed to DMX recording 100% of DMX-E net loss for the fiscal year ended September 30, 1996 as compared to recording 100% of DMX-E loss for the fourth quarter of the fiscal year ended September 30, 1995 and 51% for the first three quarters of the fiscal year 1995. In the fiscal year ended September 30, 1995, DMX-E fully utilized all funds available under the $25 million credit facility provided by TCI Euromusic, Inc., an indirect affiliate of TCI. In the fourth quarter of the fiscal year ended September 30, 1995, DMX funded operating losses of DMX-E and accordingly the equity in loss of DMX-E included operating losses funded by DMX in excess of its guaranteed portion of the debt. INTEREST EXPENSE AND INTEREST INCOME. TCI Music incurred related party interest expense of $385,000 for the six months ended December 31, 1997 which related to intercompany debt, a $3.5 million equipment loan, capital lease obligation and amounts borrowed related to the purchase of DMX, The Box and Paradigm. Other interest income represents earnings on funds held in a money market account and interest on notes receivable. LIQUIDITY AND CAPITAL RESOURCES. On December 31, 1997, TCI Music entered into a revolving loan agreement with several banks to provide up to $100 million. The agreement provides for interest charges at LIBOR or at the banks base rate. $53.2 million was drawn to pay related party debts and costs associated with the DMX Merger, the Box Merger and the Paradigm Merger. At December 31, 1997, TCI Music had approximately $47 million available under the revolving loan agreement. For additional information concerning TCI Music's debt see note 10 to the accompanying consolidated financial statements. In connection with the Box Merger, TCI Music issued the TCI Music Preferred Stock. For additional information concerning the terms of the TCI Music Preferred Stock, see notes 4 and 11 to the accompanying consolidated financial statements. The increase in cash of $7.9 million for the six months ended December 31, 1997 was the net results of funds provided by operating activities of $3.2 million and net funds provided by financing activities of $13.7 million offset by cash used in investing activities of $9.0 million. During the six months ended December 31, 1997, the Annual TCI Payments were a primary source of the net cash generated by operating activities of $3.3 million. Together, with the funds provided by financing activities of $13.7 million, which was initially provided by intercompany debt and subsequently replaced with the revolving loan agreement, the Company funded its inventory activities of $9.1 million which primarily consisted of the cash used for the acquisitions of the DMX Merger, the Box Merger and the Paradigm Merger. TCI Music believes that net cash provided by operating activities (including the Annual TCI Payments) and available capacity pursuant to the revolving loan agreement will provide adequate sources of liquidity for the next year and intermediate future. As previously described, TCI Music is entitled to receive the Annual TCI Payments through 2017. As described in notes 5 and 11 to DMX's consolidated financial statements and in the disposal of DMX-E above, DMX-E has ceased operations on July 1, 1997. DMX-E UK was placed into receivership on July 1, 1997 and into liquidation proceedings on July 18, 1997. DMX-E NV, has entered into liquidation proceedings in December 1997. In such circumstances, claims may be filed under the guarantees. Such adjustments could have a material adverse effect upon the financial position and results of operations of DMX. 25 13 INFLATION. Management believes that the effect of inflation has not been material to the Company. However, inflation in the costs of personnel, marketing, programming or certain other operating expenses could significantly affect the Company's future operations. Current economic conditions indicate a relatively low inflationary period and as a result, inflation is not expected to materially affect the Company in 1998. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K for TCI Music, Inc.'s Consolidated Financial Statements, the notes thereto and Schedules filed as part of this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 26 14 PART III. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The following lists the directors and executive officers of TCI Music, Inc. ("TCI Music" or the "Company"), their birth dates, and a description of their business experience and positions held with the Company as of March 1, 1998. Directors of TCI Music are elected to staggered three year terms with approximately one-third elected annually. The date the present term of office expires for each director is the date of the Annual Meeting of the Company's stockholders held during the year footnoted opposite their names. All officers are appointed for an indefinite term, serving at the pleasure of the Board of Directors. Directors of TCI Music
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.
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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.
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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 17 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 18 ITEM 11. EXECUTIVE COMPENSATION. (a) Summary Compensation Table The following table shows, for the period from July 1, 1997 (the beginning of the month in which the Company became a public company) through December 31, 1997 (the "Reporting Period"), a summary of certain information regarding all forms of compensation for the Chief Executive Officer and the only other executive officer (the "named executive officers") whose total annual salary and bonus exceeded $100,000 during the Reporting Period.
Annual Compensation Long Term ------------------- Compensation Awards ---------------- Securities Underlying Name and Stock All Other Principal Salary Bonus Other Annual Options/ Compensation Compensation SARs(1) Position Year ($) ($) $ (#) $ - ------------ ---- --------- --------- ---------------- ------------ --------------- 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 $50,000 or 10% of the total amounts reported in the Salary and Bonus columns during the Reporting Period. 31 19 (b) Option/SAR Grants in Last Fiscal Year The following table shows all individual grants of stock options and stock appreciation rights ("SARs") by the Company to each of the named executive officers during the Reporting Period.
Number of Securities Underlying % of Total Options/ Options/SARs to Exercise SARs Employees Price Expiration Name Granted(1) in Fiscal Year ($/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 20 and (d) the closing market price of a unit consisting of one share of TCI Music Series A Common Stock and its associated TCI Right (which trade together on the Nasdaq SmallCap Market under the symbol "TUNE") on December 31, 1997, or $7.625, resulting in a fair value of the options granted during the Reporting Period of $3.38. The actual value the executive may realize will depend upon the extent to which the stock price exceeds the exercise price on the date the option is exercised. Accordingly, the value, if any, realized by the executive will not necessarily be the value determined by the model. (c) Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values The following table shows certain information with respect to the exercise of stock options/SARs by the named executive officers during the Reporting Period and year-end value of unexercised stock options/SARs at December 31, 1997.
Number of Unexercised Value of Unexercised In Securities Underlying the Money Options/SARs Shares Valued Options/SARs at at FY-End ($)(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 21 Stock at a price of $6.25 per share, (ii) to Mr. Troxel, options to purchase 200,000 shares of TCI Music Series A Common Stock at a price of $6.25 per share, (iii) to each of Messrs. Sparkman, Bennett and Koff, options to purchase 100,000 shares of TCI Music Series A Common Stock at a price of $6.25 per share. Such options will vest in 20% cumulative increments, with the first increment vesting as of July 11, 1997, and each additional increment vesting on each anniversary date thereafter, and will be exercisable for up to ten years following July 11, 1997. No TCI Rights will be issued in connection with any TCI Music Series A Common Stock issued upon exercise of any such option. (e) Employment Agreements, Termination of Employment and Change of Control Arrangements In connection with the merger of Paradigm and a subsidiary of TCI Music (the "Paradigm Merger"), TCI Music agreed to appoint Mr. McPartland as TCI Music's President and Chief Executive Officer pursuant to the terms of Mr. McPartland's Employment Agreement with Paradigm at a compensation level to be determined between Mr. McPartland and TCI Music (but not to be less than $375,000 per annum). TCI Music also agreed that Mr. McPartland is entitled to participate in bonus, incentive stock option and other benefit programs on a basis consistent with the practice of TCI Music in compensating senior executives. Mr. McPartland's Employment Agreement with Paradigm is for a three-year period terminating on December 31, 1998. The Employment Agreement provides that if Paradigm terminates Mr. McPartland's employment agreement other than for cause (as defined in the Employment Agreement), Mr. McPartland is entitled to receive his base annual salary for the unexpired term of the agreement, plus benefits and bonus, if any, along with any salary accrued to the date of his termination. DMX and Lon A. Troxel are parties to an Employment Agreement dated October 1, 1991, as amended, pursuant to which Mr. Troxel receives annual salary of $300,000 from June 1, 1998 through May 31, 1999 and $325,000 during the years ending May 31, 2000, 2001 and 2002. Pursuant to the Employment Agreement Mr. Troxel has agreed not to acquire more than a 10% direct or indirect ownership in any cable company, other than DMX, without the prior written consent of DMX. Mr. Troxel receives basic and extended benefits commensurate with other senior management employees such as vacation pay and other fringe benefits. If Mr. Troxel becomes disabled during the term of the agreement, he will receive the same compensation he is entitled to under the Employment Agreement for a time period not exceeding six months. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. (a) Security Ownership of TCI Music The following table sets forth information with respect to the beneficial ownership of the common and preferred stock of TCI Music as of December 31, 1997 by: (i) each person who is known by TCI Music to be the beneficial owner of more than five percent of any class of the outstanding shares of the TCI Music Series A Common Stock, the Series B Common Stock, $.01 par value per share, of TCI Music ("TCI Music Series B Common Stock") and the Series A Convertible Preferred Stock, $.01 par value per share, of TCI Music ("TCI Music Preferred Stock"); (ii) each director of TCI Music; (iii) the named executive officers; and (iv) all of TCI Music's directors and executive officers as a group. Shares issuable upon exercise or conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of persons beneficially owning such convertible securities, but have not been deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Voting power in the table is computed with respect to a general election of directors. So far as is known to TCI Music, the persons indicated below 34 22 have sole voting and investment power with respect to the shares indicated as owned by them, except as otherwise stated in the notes to the table. All information is taken from or based upon ownership filings made by such persons with the SEC or upon information provided by such persons to the Company. The address of the directors and named executive officers of TCI Music is 8101 East Prentice Avenue, Suite 500, Englewood, Colorado 80111.
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 23
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 24 Shaw. Shaw is a public company whose non-voting securities are listed on the Toronto Stock Exchange and the Alberta Stock Exchange. Mr. Shaw, members of his family and members of Leslie E. Shaw's (Mr. Shaw's brother) family hold directly and indirectly, a majority of the voting shares of Shaw and such shares are governed by the terms of a voting trust. Mr. Shaw and members of his family do not, directly or indirectly, hold a majority of the publicly traded non-voting shares of Shaw. (4) Includes the following shares of TCI Music Series A Common Stock, of which Mr. Shaw disclaims beneficial ownership: 1,900,000 shares held by Shaw, 69,020 shares held by James R. Shaw Securities Limited, 32,145 shares held by Brasha Holdings Ltd., 29,670 shares held by Jay-Shaw Holdings Ltd., 32,145, shares held by Julmar Holdings Ltd., 32,145 shares held by Shawana Estates Ltd. Mr. Shaw holds a majority of the shares of Jay-Shaw Holdings Ltd., Brasha Holdings Ltd. and Shawana Estates Ltd. The remaining shares of each such entities, other than certain preferred shares held by Julmar Holdings Ltd., a corporation wholly owned by Mr. Shaw, are held by children of Mr. Shaw. Each of the children has reached the age of majority. Mr. Shaw holds 48% of the voting shares of James R. Shaw Securities Limited. The balance of voting shares are held by and for the benefit of Mr. Shaw's family members. (5) StarNet Interactive Entertainment, Inc., a Delaware corporation ("StarNet Interactive"), is a wholly-owned subsidiary of StarNet, Inc. ("StarNet"), which is a wholly-owned subsidiary of Lenfest Communications, Inc. ("LCI"). H.F. Lenfest (together with his children) and TCI each beneficially own 50% of the common stock of LCI. Mr. Lenfest is the sole director of StarNet and StarNet Interactive and President, Chief Executive Officer and a director of LCI. Through contractual arrangements among the stockholders of LCI, Mr. Lenfest has the exclusive right to control a majority of the Board of Directors of LCI and the management and business affairs of LCI, StarNet and StarNet Interactive. TCI has disclaimed beneficial ownership of the shares of TCI Music Preferred Stock beneficially owned by Mr. Lenfest, LCI, StarNet and StarNet Interactive (the "StarNet Group"). The StarNet Group has disclaimed beneficial ownership of the shares of capital stock of TCI Music beneficially owned by TCI. (6) CEA Investors, Inc. ("CEA Investors"), a Florida corporation, is the sole general partner of CEA Investors Partnership II, Ltd. ("CEA II"). J. Patrick Michaels, Jr. ("Michaels") is the sole director and the President of CEA Investors. Michaels is the sole trustee of The J. Patrick Michaels, Jr. Family Trust, the sole stockholder of CEA Investors. Michaels has sole power to vote or direct the vote of 320,496 shares of TCI Music Preferred Stock, shared power to vote or direct the vote of 883 shares of TCI Music Preferred Stock, sole power to dispose or direct the disposition of 320,496 shares of TCI Music Preferred Stock, and shared power to dispose or direct the disposition of 883 shares of TCI Music Preferred Stock. Michaels shares voting and dispositive power with the Kimberly Lynn Michaels Trust with respect to 883 shares. Michaels disclaims beneficial ownership of any shares of TCI Music Preferred Stock held by CEA II, CEA Investors or The Kimberly Lynn Michaels Trust, except to the extent of his pecuniary interest therein. (7) Island Trading Company ("Island") is a wholly-owned subsidiary of Island International Limited, the capital stock of which is held in trust by The Island Settlement, both of which have disclaimed beneficial ownership of the shares of TCI Music Preferred Stock beneficially owned by Island. Mr. Blackwell has shared voting power and shared dispositive power with respect to such shares. (8) Assumes the exercise in full of stock options to acquire 833,334 shares of TCI Music Series A Common Stock, 166,667 of which are currently exercisable. (9) Assumes the exercise in full of stock options to acquire 100,000 shares of TCI Music Series A Common Stock, 20,000 of which are currently exercisable. (10) Assumes the exercise in full of options to acquire 200,000 shares of TCI Music Series A Common Stock, 40,000 of which are currently exercisable. (11) Assumes the exercise in full of options held by such persons to acquire 3,050,002 shares of TCI Music Series A Common Stock, 610,001 of which are currently exercisable. (b) Security Ownership of TCI The following table sets forth, as of December 31, 1997, the ownership of Tele-Communications, Inc. Series A TCI Group Common Stock, par value $.01 per share ("TCI Group Series A Stock"), Tele-Communications, Inc. Series B TCI Group Common Stock, par value $.01 per share ("TCI Group Series B Stock"), Liberty 37 25 Group Series A Stock, Liberty Group Series B Stock, Tele-Communications, Inc. Series A TCI Ventures Group Common Stock, par value $.01 per share ("Ventures Group Series A Stock"), Tele-Communications, Inc. Series B TCI Ventures Group Common Stock, par value $.01 per share ("Ventures Group Series B Stock"), Class B 6% Cumulative Redeemable Exchangeable Junior Preferred Stock, par value $.01 per share, of TCI ("Class B Preferred Stock"), Convertible Preferred Stock, Series C - TCI Group ("TCOMA Series C Preferred Stock"), Convertible Preferred Stock, Series C - Liberty Media Group ("LBTYA Series C Preferred Stock"), Redeemable Convertible TCI Group Preferred Stock, Series G, par value $.01 per share ("Series G Preferred Stock") and Redeemable Convertible Liberty Media Group Preferred Stock, Series H, par value $.01 per share ("Series H Preferred Stock"), held by (i) each person known by TCI Music to own beneficially more than 5% of any such class or series outstanding on that date, (ii) each person who is a director or named executive officer of TCI Music and (iii) all of the directors and executive officers of TCI Music as a group. Shares issuable upon exercise or conversion of convertible securities are deemed to be outstanding for the purpose of computing the percentage ownership of persons beneficially owning such convertible securities, but have not been deemed to be outstanding for the purpose of computing the percentage ownership of any other person. Voting power in the table is computed with respect to a general election of directors and, therefore, the Class B Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock are included in the calculation notwithstanding the fact that the Class B Preferred Stock, the Series G Preferred Stock and the Series H Preferred Stock do not generally vote with respect to matters submitted to a vote of stockholders. So far as is known to TCI Music, the persons indicated below have sole voting and investment power with respect to the shares indicated as owned by them except as otherwise stated in the notes to the table and except for the shares held by the trustee of TCI's Employee Stock Purchase Plan (the "TCI ESPP") for the benefit of such person, which shares are voted at the discretion of the trustee. Effective February 6, 1998, TCI issued a stock dividend to holders of Liberty Group Series A Stock and Liberty Group Series B Stock consisting of one share of Liberty Group Series A Stock for every two shares of Liberty Group Series A Stock owned and one share of Liberty Group Series B Stock for every two shares of Liberty Group Series B Stock owned (the "1998 Liberty Group Stock Dividend"). As a result of the 1998 Liberty Group Stock Dividend, the number of shares underlying options granted to purchase Liberty Group Series A Stock and the price to purchase such shares have been adjusted. Effective February 6, 1998, TCI issued a stock dividend to holders of Ventures Group Series A Stock and Ventures Group Series B Stock consisting of one share of Ventures Group Series A Stock for each share of Ventures Group Series A Stock owned and one share of Ventures Group Series B Stock for each share of Ventures Group Series B Stock owned (the "1998 Ventures Group Stock Dividend"). As a result of the 1998 Ventures Group Stock Dividend, the number of shares underlying options granted to purchase Ventures Group Series A Stock and Ventures Group Series B Stock and the price to purchase such shares have been adjusted. The information in the table has been adjusted for the 1998 Liberty Group Stock Dividend and the 1998 Ventures Group Stock Dividend. All information is taken from or based upon ownership filings made by such persons with the SEC Commission or upon information provided by such persons to the Company. 38 26
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 27
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 28
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 29 (5) Includes 1,684,775 shares of TCI Group Series B Stock and 1,721,360 shares of Ventures Group Series B Stock held by trusts, to which Mr. Hindery is the trustee and over which Dr. Malone has the power to direct the voting. Dr. Malone also has a right of first refusal with respect to any proposed transfer of such shares. Such right of first refusal may be exercised by Dr. Malone either by the payment of cash or, subject to certain exceptions, by the exchanging of shares of TCI Group Series A Stock for such TCI Group Series B Stock or Ventures Group Series A Stock for such Ventures Group Series B Stock. If not exercised by Dr. Malone, such right of first refusal may be exercised by TCI. (6) Assumes the exercise in full of stock options to acquire 70,000 shares of TCI Group Series A Stock and 60,000 shares of Ventures Group Series A Stock, none of which were exercisable as of December 31, 1997. (7) All of these shares are held in a series of trusts of which Mr. Hindery is the trustee. (8) Assumes the exercise in full of stock options granted in tandem with stock appreciation rights in November 1994 to acquire 17,500 shares of TCI Group Series A Stock and 14,063 shares of Liberty Group Series A Stock and 15,000 shares of Ventures Group Series A Stock, 10,500 shares, 8,437 shares and 9,000 shares of which, respectively, were exercisable as of December 31, 1997. Additionally assumes the exercise of stock options granted in tandem with stock appreciation rights in December 1995 to acquire 180,000 shares of Liberty Group Series A Stock, 72,000 shares of which were exercisable as of December 31, 1997. Also assumes the exercise in full of stock options granted in tandem with stock appreciation rights in July 1997 to acquire 75,000 shares of Liberty Group Series A Stock, none of which were exercisable as of December 21, 1997. Excludes 1,312 shares of Liberty Group Series A Stock and 200 shares of Class B Preferred Stock beneficially owned by Judith R. Koff, Mr. Koff's wife, of which Mr. Koff disclaims beneficial ownership. (9) Assumes the exercise in full of stock options granted in tandem with stock appreciation rights to acquire 70,000 shares of TCI Group Series A Stock, 30,000 shares of Liberty Group Series A Stock and 60,000 shares of Ventures Group Series A Stock, all of which were exercisable as of December 31, 1997. Also assumes the exercise in full of stock options granted in tandem with stock appreciation rights in December 1996 to acquire 50,000 shares of TCI Group Series A Stock and 28,125 shares of Liberty Group Series A Stock, 10,000 shares and 5,625 shares of which, respectively, were exercisable as of December 31, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS TCI beneficially owns approximately 37.6% of the outstanding shares of TCI Music Series A Common Stock, 100% of the outstanding shares of TCI Music Series B Common Stock, and 4.8% of the outstanding shares of the TCI Music Preferred Stock, collectively representing 97.5% of the aggregate voting power related to the outstanding shares of the TCI Music Series A Common Stock, the TCIM Series B Common Stock and the TCIM Preferred Stock. TCI acquired such shares of TCI Music Series A Common Stock and TCI Music Series B Common Stock upon the consummation of the DMX Merger on July 11, 1997 and the TCI Music Preferred Stock upon consummation of the merger of The Box Worldwide, Inc. ("The Box") with a subsidiary of TCI Music (the "Box Merger") on December 16, 1997. DMX, under an agreement with National Digital Television Center, Inc., a wholly-owned subsidiary of TCI ("NDTC"), has a capital lease to lease equipment at NDTC's studio and uplinking facility in Littleton, Colorado, with terms which extend to 2000 at an interest rate of 9.5%. DMX is also obligated to NDTC under various operating leases for uplinking and satellite services. On December 10, 1996, DMX entered into a letter agreement with Sky Entertainment Services in Latin America ("Sky-LA") pursuant to which Sky-LA was granted the right to carry up to 40 DMX music formats on the Mexican, Brazilian, North South American and South American platforms of Sky-LA. Sky Entertainment Services is the brand name for the direct-to-home service offered by the strategic alliance formed by Organzacoes Globo, Brazil's leading entertainment group; Mexico's Grupo Televisa S.A.; The News Corporation Limited; and Tele-Communications International, Inc., a subsidiary of TCI. Shaw beneficially owns approximately 10.5% of the outstanding shares of TCI Music Series A Common Stock, which it acquired upon the consummation of the DMX Merger on July 11, 1997, in exchange for the shares of common stock of DMX it owned prior to the DMX Merger. JR Shaw, President and Chief Executive Officer of Shaw, was a director of DMX prior to the DMX Merger. Mr. Shaw beneficially owns 11.6% of TCI Music Series A Common Stock, which he acquired upon the consummation of the DMX Merger 42 30 in exchange for the shares of common stock of DMX he beneficially owned prior to the DMX Merger. Mr. Sparkman, a former director of DMX and a director of TCI Music, is a director of Shaw. In addition, a subsidiary of Shaw and a subsidiary of DMX, 450714 B.C. Ltd., each own a 50% interest in DMX-Canada, Ltd. In March 1992, Shaw, the second largest cable operator in Canada, entered into a licensing and distribution agreement with DMX which grants to DMX-Canada Ltd. the exclusive license and right to distribute DMX's premium service in Canada, which was amended on November 1, 1994 by the Commercial License and Distribution Agreement and on April 14, 1997 by the Residential License and Distribution Agreement. Such licensing and distribution agreement, as amended, provides DMX with a monthly, per subscriber programming royalty for both residential and commercial distribution. During 1995, DMX and Shaw entered into a series of agreements to accomplish a reorganization by which Shaw could take full advantage of the Canadian tax losses incurred in Canada during the market development period and based on Shaw's commitment to fund such development costs. This was accomplished through the transfer of each company's respective equity interests and the formation of a new Canadian partnership (also referred to herein as "DMX-Canada"). DMX continues to hold an equity interest in the new partnership through its wholly-owned subsidiary, a British Columbia corporation, 450714 B.C. Ltd. There is no impact from the reorganization on the operations of DMX-Canada, other than to accomplish the tax structure as outlined above. After Shaw recoups its initial funding, each company will share in the profits based on their respective equity interests. In April 1996, DMX entered into two capital leases with DMX-Canada the proceeds of which were used to purchase DMX Disc equipment leased to two DMX customers, Nine West and Coach. The obligation under the capital lease was for a term which extended to May 2001 at an effective interest rate of 27.21%. In May 1997, the lease balance of $268,625 was paid in full through an offset of license fees due to DMX totaling $220,714 and cash for the balance of $47,911. In August 1994, the Canadian Radio - Television and Telecommunications Commission ("CRTC") which regulates the broadcast industry in Canada, revoked the license previously granted to DMX-Canada for Canadian distribution of DMX. DMX-Canada reapplied to the CRTC during 1995 for a license to distribute DMX to Canadian residential cable subscribers. The CRTC issued a favorable ruling in December 1995 and requires a one to one ratio of Canadian content to non-Canadian content. DMX-Canada and DMX have negotiated an agreement to distribute DMX's digital music services (the "DMX Services") to the Canadian residential cable market. The service will include a total of 30 formats and will be distributed through Shaw Cable Systems and their affiliates. DMX-Canada will also license other Canadian third party distributors such as Star Choice. The launch of the DMX Service for residential distribution was July 1997. The CRTC does not regulate programming delivered to commercial establishments by direct broadcast satellite, and DMX-Canada has been distributing the DMX Service to the commercial sector since 1994. DMX and DMX-Canada have negotiated a new license and distribution agreement which grants an exclusive license and right to distribute the DMX Service to commercial establishments in Canada. The term of the new agreement coincides with the original agreement dated March 9, 1992, and terminates March 31, 2012. DMX received total license fees of approximately $212,000 for the six months ended December 31, 1997 under the agreements. On April 21, 1994, The Box entered into a Lease Agreement with Island, pursuant to which The Box leased from Island approximately 16,000 square feet of space for its principal executive offices. Payment of rent commenced on July 15, 1995 at a base rental of $22.00 per square foot for the first year of the lease term, increasing to $39.00 per square foot for the seventh and final year of the lease term. The base rental rate does 43 31 not include certain operating expenses to be borne by The Box for the entire term of the lease and capped for the first three years of the lease term. The Box has the right to renew the lease subject to the negotiation of a new rental rate, based upon the then-current market rate. On August 13, 1997, The Box paid Communications Equity Associates, Inc. ("CEA"), a company controlled by Mr. Michaels, a fee of $250,000 for investment banking services provided to The Box. Upon the closing of the Box Merger, CEA was paid an additional fee of $250,000. CEA agreed to accept these payments as satisfaction of The Box's obligation to pay CEA a fee of approximately $1.9 million in connection with the Box Merger pursuant to the Domestic Financing Agreement between The Box and CEA dated as of October 8, 1996. The Box is a party to a program affiliation agreement with Satellite Services, Inc., an wholly-owned subsidiary of TCI ("SSI"), pursuant to which The Box pays SSI affiliate fees. The Box is a party to a program affiliation agreements with Lenfest Communications, Inc., and Suburban Cable TV Co., Inc., companies controlled by H.F. Lenfest. TCI Music and TCI have entered into a number of intercompany agreements more fully described below covering matters such as the provision of services and allocation of tax liabilities. TCI also provides certain administrative, financial, legal, treasury, accounting, tax and other services to TCI Music and makes available certain of its employee benefit plans to TCI Music's employees. The terms of these arrangements were established by TCI in consultation with TCI Music and are not the result of arm's-length negotiations. Accordingly, although TCI Music believes that the terms of these arrangements are reasonable, there is no assurance that the terms and conditions of these agreements, or the terms of any future arrangements between TCI and TCI Music, are as favorable to TCI Music as could be obtained from unaffiliated third parties. In addition, TCI Music and TCI and their respective subsidiaries and affiliates may from time to time do business with one another in areas not governed by any of the following agreements. Amended Contribution Agreement. In connection with the DMX Merger, TCI Music and TCI entered into a Contribution Agreement dated July 11, 1997, pursuant to which TCI agreed to cause certain of its affiliates to assign and contribute to TCI Music the right to receive the revenue from sales of the DMX Service net of an amount equal to 10% of the revenue from such sales to residential subscribers and net of license fees otherwise payable to DMX for a 10-year period beginning July 1, 1997, and to transfer certain equipment to DMX useful in DMX's business. In consideration of such agreement, in connection with the consummation of the DMX Merger, TCI Music delivered to TCI, as designee for certain TCI affiliates, 62,500,000 shares of TCI Music Series B Common Stock and a note in the principal amount of $40,000,000. Pursuant to the Agreement and Plan of Merger dated as of August 12, 1997 (the "Box Merger Agreement"), TCI Music and TCI entered into the Amended Contribution Agreement, as amended, effective as of July 1, 1997 (the "Contribution Agreement"), which provides, among other things, for TCI to deliver, or cause certain of its subsidiaries to deliver, in lieu of TCI's obligation to cause its affiliates to make contributions to TCI Music under the Contribution Agreement, to TCI Music payments aggregating $18 million, increased annually by the percentage increase, if any, in CPI for the prior year, for a term of 20 years. Affiliation Agreement. In connection with the Box Merger Agreement, effective as of July 1, 1997, DMX and SSI entered into an Affiliation Agreement (the "Affiliation Agreement") pursuant to which DMX granted to SSI and certain of its affiliates the non-exclusive right to distribute and subdistribute the DMX Service to commercial and residential customers for a 10-year period in exchange for licensing fees paid by SSI to DMX. 44 32 Under the Affiliation Agreement, SSI will pay an annual fee to DMX of $8,500,000 for the initial three years, subject to adjustment annually (beginning July 1, 1998) by the percentage change in the CPI for the prior year and for changes in the number of subscribers as a result of divestiture or acquisition of cable systems. During the fourth through tenth years of the term of the Affiliation Agreement, the annual fee will be further adjusted on a monthly basis upward or downward, as the case may be, based on an increasing percentage of the increase or decrease in the actual number of subscribers above or below a specified number of residential and commercial subscribers, provided that such fees cannot be reduced below a specified minimum license fee, which minimum fee is decreased each year in years four through ten. During the six months ended December 31, 1997, TCI Music recognized $4.2 million pursuant to the Affiliation Agreement. The Affiliation Agreement between DMX and SSI dated July 6, 1989 (the "Old Affiliation Agreement"), provides for distribution by SSI-affiliated cable systems of the DMX Service and the Superaudio service (a basic analog music service provided through a joint venture between DMX and an affiliate of Jones Intercable, Inc.). Although the Affiliation Agreement supersedes the Old Affiliation Agreement with respect to the DMX Service, the Old Affiliation Agreement remains in effect through June 30, 1999, with respect to the Superaudio service. TCI Music Note. On July 11, 1997, in connection with the DMX Merger, the Company entered into a $2 million revolving credit note with TCI Communications, Inc., a subsidiary of TCI, and pursuant to the Amended Contribution Agreement entered into a $40 million promissory note with TCI. The interest rate on the notes was 10% per annum. On December 30, 1997, the Company paid in full $900,000 drawn under the $2 million revolving credit note and related accrued interest of $24,000 and the $40 million note. The accrued interest on the $40 million note of $1.9 million was forgiven pursuant to the terms of the note agreement. TCI Rights. In connection with the DMX Merger, pursuant to a Rights Agreement dated July 11, 1997, by and among TCI Music, TCI and The Bank of New York, as rights agent, TCI issued one TCI Right with each share of TCI Music Series A Common Stock issued to DMX stockholders in connection with the DMX Merger. Each TCI Right entitles the holder to require TCI to purchase from such holder the related share of TCI Music Series A Common Stock for $8.00 per share (subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders) payable at the election of TCI in cash, a number of shares of TCI Group Series A Stock having an equivalent value or a combination thereof, if, during the one year period beginning July 11, 1997, the price of TCI Music Series A Common Stock (trading together with associated TCI Rights) does not equal or exceed $8.00 per share for a period of at least 20 consecutive trading days. If the TCI Rights have not terminated prior to July 11, 1998, they will become exercisable for a 30-day period following such date and will expire on the last day of such 30-day period, unless extended by their terms. TCI Loan. On February 6, 1997, the Company entered into a loan and security agreement with TCI which provided $3.5 million. The loan proceeds were used to purchase equipment and pay certain costs related to obtaining commercial customers. The outstanding balance at December 31, 1997 was $3.1 million which was payable in 34 equal monthly installments, which commenced September 1, 1997 at an interest rate of 12.5% per annum. Interest expense for the six months ended December 31, 1997, was $207,000. The loan was paid in full on March 2, 1998. Liberty Loans. On September 19, 1997, the Company entered into a $2.18 million note payable with Liberty. The proceeds were issued to Paradigm as a note receivable pursuant to the letter of intent in contemplation of 45 33 the Paradigm Merger. Interest on the note was 10% per annum. The Company paid in full principal and related accrued interest of $62,000 on December 30, 1997. On December 16, 1997, the Company entered into a $3.75 million note payable with Liberty. The proceeds were used to purchase the outstanding preferred stock of The Box in connection with the Box Merger. The Company paid in full the principal and related accrued interest of $15,000 on December 30, 1997. Services Agreement. Pursuant to a Services Agreement between TCI and TCI Music (the "Services Agreement"), TCI shall provide services to TCI Music for administration and operation of the businesses of TCI Music and its subsidiaries as requested by TCI Music from time to time. These services can include: (i) tax reporting, financial reporting, payroll, employee benefit administration, workers' compensation administration, telephone, package delivery, management information systems, billing, lock box, remittance processing and risk management services, (ii) other services typically performed by TCI's accounting, finance, treasury, corporate, legal, tax, benefits, insurance, facilities, purchasing, and advanced information technology department personnel, (iii) use of telecommunications and data facilities and of systems and software developed, acquired or licensed by TCI from time to time for financial forecasting, budgeting and similar purposes, including without limitation any such software for use on personal computers, in any case to the extent available under copyright law or any applicable third-party contract, (iv) technology support and consulting services and (v) such other management, supervisory, strategic planning and other services as TCI Music may from time to time request. Pursuant to the Services Agreement, TCI also provides TCI Music access to any volume discounts that may be available to TCI for the purchase of certain equipment. The Services Agreement also provides that TCI, for so long as TCI continues to beneficially own at least a majority of the voting power of the outstanding shares of the TCI Music Series A Common Stock, TCI Music Series B Common Stock and the TCI Music Preferred Stock, will continue to provide, in the same manner and on the same basis as generally provided from time to time to other participating TCI subsidiaries, benefits and administrative services to TCI Music's employees. In this regard, TCI Music will be allocated that portion of TCI's compensation expense attributable to benefits extended to employees of TCI Music. Pursuant to the Services Agreement, TCI Music from time to time will reimburse TCI for all direct expenses incurred by TCI in providing such services and a pro rata share of all indirect expenses incurred by TCI in connection with the rendering of such services, including a pro rata share of the salary and other compensation of TCI employees performing services for TCI Music, general overhead expenses and rental expense for any physical facilities of TCI utilized by TCI Music. In this regard, it is anticipated that TCI Music will, for the foreseeable future, share office space with, or sublease office space from, TCI. The Services Agreement will continue in effect until terminated by (i) TCI Music upon 60 days' prior written notice to TCI, (ii) TCI at any time after three years upon not less than six months' prior notice to TCI Music, and (iii) either party if the other party is the subject of certain bankruptcy or insolvency-related events. 46 34 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8K. (a) Consolidated Financial Statements and Schedules. Reference is made to the Index to Consolidated Financial Statements of TCI Music, Inc. and Subsidiaries and Schedules for the six month period ended December 31, 1997, for a list of financial statements and schedules filed as part of this report at page F-1. (b) Reports on Form 8-K. During the quarter ended December 31, 1997, the Company filed one report on Form 8-K. On December 31, 1997, the Company disclosed the consummation of the December 16, 1997 merger with The Box Worldwide, Inc. (c) Exhibits. Following is a list of Exhibits filed with this report.
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 (previously filed) 3.1 Certificate of Incorporation of TCI Music, Inc. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 3.2 Bylaws of TCI Music, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.1 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (with TCI Rights) (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.2 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (without TCI Rights) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 4.3 Specimen Stock Certificate for the Series B Common Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 33-28613-01)) 4.4 Specimen Stock Certificate for the Series A Convertible Preferred Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
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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 (previously filed) 10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment dated January 27, 1998 (previously filed) 10.4 Letter Agreement between TCI Music, Inc. and Tele-Communications, Inc., dated November 7, 1997, extending Promissory Note dated July 11, 1997 (attached as Exhibit A) (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.5 Promissory Note dated July 11, 1997 between TCI Music, Inc. and Tele-Communications, Inc. (previously filed) 10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation (previously filed) 10.7 Services Agreement between Tele-Communications, Inc. and TCI Music, Inc. (Incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997) 10.8 Loan and Security Agreement by and between DMX Inc. and Tele-Communications, Inc., dated as of February 6, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 10.9**** TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.83 to the Transition Report of TCI Music, Inc. on Form 10-K filed with the Securities and Exchange Commission on October 9, 1997) (previously filed) 10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff, dated July 11, 1997 (previously filed) 10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel, dated July 11, 1997 (previously filed) 10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C. Sparkman, dated July 11, 1997 (previously filed)
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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 (previously filed) 10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R. Bennett, dated July 11, 1997 (previously filed) 10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F. Fisher, dated July 11, 1997 (previously filed) 10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J. Kern, dated July 11, 1997 (previously filed) 10.17**** Form of TCI Music, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.18*** Employment Agreement between DMX Inc. and Lon Troxel, dated October 1, 1991, as amended August 22, 1997 (Incorporated by reference to Exhibit 10.64 to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994, and to Exhibit 10.82 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.19*** Employment Agreement dated January 1, 1996 between Paradigm Music Entertainment Company, Inc. and Thomas McPartland (previously filed) 10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland, Attorney in fact (previously filed) 10.21** Affiliation Agreement between International Cablecasting Technologies Inc. and Satellite Services, Inc., dated July 6 1989 (Incorporated by reference to Exhibit 10.2 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.22** Affiliation Agreement between International Cablecasting Technologies Inc. and Viacom Cable, dated May 4, 1990 (Incorporated by reference to Exhibit 10.3 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.23** Affiliation Agreement between International Cablecasting Technologies Inc. and KBLCOM Incorporated, dated June 20, 1990 (Incorporated by reference to Exhibit 10.4 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.24 National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., Security Agreement and Promissory Note, dated March 26, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No 33-35690)) 10.25** Uplink Services Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated March 16, 1991 (Incorporated by reference to Exhibit 10.15 to DMX Inc.'s Post-Effective Amendment No. 3 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 15, 1991 (Commission File No. 33-35690)) 10.26** License and Distribution Agreement between International Cablecasting Technologies Inc. and Broadcom International Holdings, dated March 31, 1992, as amended (Incorporated by reference to Exhibit 10.34 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
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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 38
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 39
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 (previously filed) 21 Subsidiaries of TCI Music, Inc. (previously filed) 23 Consent of KPMG Peat Marwick LLP (previously filed) 27 Financial Data Schedule (previously filed)
_____________ * 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 40 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND JUNE 30, 1997 (WITH INDEPENDENT AUDITORS' REPORT THEREON) 41 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 42 INDEPENDENT AUDITORS' REPORT We have audited the consolidated financial statements of TCI Music, Inc. and subsidiaries as listed in the accompanying index. These consolidated financial statements are the responsibility of TCI Music, Inc.'s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We have conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TCI Music, Inc. and subsidiaries as of December 31, 1997 and of DMX Inc. and subsidiaries (Predecessor) as of June 30, 1997 and the results of their operations and their cash flows for the six months ended December 31, 1997, nine months ended June 30, 1997 and the years ended September 30, 1996 and 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective July 11, 1997, TCI Music, Inc. acquired all of the outstanding stock of DMX Inc. in a business combination accounted for as a purchase. As a result of the acquisition the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG Peat Marwick LLP Los Angeles, California February 20, 1998 F-2 43 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 44 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 2,357 2,082 Related party debt and accrued interest (note 6) 4,359 3,887 Debt (note 10) 53,236 -- Deferred income taxes (note 13) 2,811 -- --------- --------- Total liabilities 94,901 27,288 TCI Music, Inc. redeemable convertible preferred stock, $.01 par value; Authorized 5,000,000 shares; Issued 1,742,484 shares; $39,154 liquidation preference and redemption value 35,588 -- Stockholders' equity (deficit): DMX Inc. common stock, $.01 par value; Authorized 100,000,000 shares; Issued 59,672,224 shares -- 597 TCI Music, Inc. common stock: Series A Common Stock, $.01 par value; Authorized 295,000,000 shares; Issued 18,098,983 shares 181 -- Series B Common Stock, $.01 par value; Authorized 200,000,000 shares; Issued 62,500,000 shares 625 -- Paid-in capital 63,899 136,896 Accumulated deficit (465) (152,787) Foreign currency translation adjustment (2) (430) Treasury stock, 85,630 shares at cost -- (578) --------- --------- Total stockholders' equity (deficit) 64,238 (16,302) --------- --------- Commitments and contingencies (note 12) $ 194,727 10,986 ========= =========
See accompanying notes to consolidated financial statements F-4 45 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED STATEMENTS OF OPERATIONS SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 46 CONSOLIDATED STATEMENTS OF OPERATIONS, CONTINUED SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 47 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) SIX MONTHS ENDED DECEMBER 31, 1997, NINE MONTHS ENDED JUNE 30, 1997 AND YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
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 Accretion of put option (note 8) -- -- 2,425 -- -- -- 2,425 Eliminate investment and advances to subsidiary -- -- (252) -- -- -- (252) Issuance of common stock 32 -- 22,304 -- -- -- 22,336 Accretion of redeemable convertible preferred stock -- -- (124) -- -- -- (124) Foreign currency translation adjustment -- -- -- -- -- (2) (2) Net loss -- -- -- (465) -- -- (465) -------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 181 625 63,899 (465) -- (2) 64,238 ================================================================================
See accompanying notes to consolidated financial statements F-7 48 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
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 49 CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED SIX MONTHS ENDED DECEMBER 31, 1997 AND 1996, NINE MONTHS ENDED JUNE 30, 1997 AND 1996 AND FISCAL YEARS ENDED SEPTEMBER 30, 1996 AND 1995 (AMOUNTS IN THOUSANDS)
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 50 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (1) ORGANIZATION. TCI Music, Inc. ("TCI Music" or "the Company") was incorporated on January 21, 1997, and on January 24, 1997 one share of TCI Music Series B common stock, $.01 par value per share ("TCI Music Series B Common Stock"), was issued to Tele-Communications, Inc. ("TCI") for a capital contribution of $1. On July 11, 1997, DMX Inc. ("DMX") and TCI Music, consummated a merger pursuant to an Agreement and Plan of Merger, dated February 6, 1997, as amended by Amendment One to Merger Agreement dated May 29, 1997 (the "DMX Merger Agreement"), among DMX, TCI, TCI Music, and TCI Merger Sub ("Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby Merger Sub was merged with and into DMX (the "DMX Merger"), with DMX as the surviving corporation and TCI Music became the successor registrant to DMX. The DMX Merger was deemed effective July 1, 1997 for accounting purposes. See note 4. Effective December 16, 1997, The Box Worldwide, Inc., ("The Box") and TCI Music consummated a merger pursuant to an Agreement and Plan of Merger, dated August 12, 1997 (the "Box Merger Agreement"), among The Box, TCI Music, and TCI Music Acquisition Sub, Inc., a wholly-owned subsidiary of TCI Music, whereby TCI Music Acquisition Sub, Inc. was merged into The Box (the "Box Merger"), with The Box as the surviving Corporation and a wholly-owned subsidiary of TCI Music. See note 4. Effective December 31, 1997, Paradigm Music Entertainment Company ("Paradigm") and TCI Music consummated a merger pursuant to an Agreement and Plan of Merger, dated December 9, 1997 (the "Paradigm Merger Agreement"), among Paradigm, TCI Music and TCI Para Merger Sub, Inc., ("TCI Para Merger Sub"), a wholly-owned subsidiary of TCI Music, whereby TCI Para Merger Sub was merged into Paradigm (the "Paradigm Merger"), with Paradigm the surviving corporation and a wholly-owned subsidiary of TCI Music. See note 4. TCI Music has three classes of stock outstanding at December 31, 1997, the TCI Music Series A Convertible Preferred Stock, $.01 par value per share ("TCI Music Preferred Stock"), TCI Music Series A Common Stock, $.01 par value per share ("TCI Music Series A Common Stock") and TCI Music Series B Common Stock (collectively the "TCI Music Stock"). TCI beneficially owns approximately 5% of the outstanding TCI Music Preferred Stock, 37.77% of the outstanding shares of TCI Music Series A Common Stock and 100% of the outstanding shares of TCI Music Series B Common Stock, which collectively represents approximately 81.1% of the outstanding shares of TCI Music Stock, assuming conversion of the TCI Music Preferred Stock, representing 97.5% of the voting power of the outstanding shares of TCI Music Stock. For the six months ended December 31, 1997, TCI Music's business consisted principally of the business of DMX, which is primarily engaged in programming, distributing and marketing a digital music service; Digital Music Express(R), providing continuous 24-hours-per-day commercial free, compact disc quality music programming. The merger with The Box was effective December 16, 1997 and was accounted for under the purchase method for accounting purposes. Therefore, results from operations of The Box for the 15 days ended December 31, 1997 have been included in the accompanying consolidated financial statements. The Box is primarily engaged in programming, distributing and marketing an interactive music video television programming service known as THE BOX (the Box Service) operating 24 hours-per-day, seven days a week. Additionally, the Paradigm Merger was accounted for under the purchase method of accounting effective December 31, 1997. Paradigm is a broad based music entertainment company utilizing traditional and non-traditional marketing and distribution channels to exploit music entertainment products. PRINCIPLES OF CONSOLIDATION. In the accompanying financial statements and in the following text, references are made to DMX, The Box, Paradigm and TCI Music. The financial statements as of June 30, 1997 and for the six months ended December 31, 1996, the nine months ended June 30, 1997 and 1996 and the years ended September 30, 1996 and 1995 reflect the consolidated results of operations and financial condition of DMX and are referred to as "DMX" (the predecessors' operations). The financial statements as of December 31, 1997 and for the six months then ended reflect the consolidated results of operations F-10 51 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 and financial condition of TCI Music. The accompanying consolidated financial statements include the accounts of the Company and those of all wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated for all periods presented. As a result of the DMX Merger, the consolidated financial information for the periods after the DMX Merger is presented on a different cost basis than that for the periods before the DMX Merger and, therefore, is not comparable. Effective July 11, 1997, TCI Music as the successor registrant to DMX, changed its fiscal year end from September 30 to December 31, and reported the nine month transition period ended June 30, 1997 on Form 10-K. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. CASH EQUIVALENTS. Cash equivalents consist of investments which are readily convertible into cash and maturities of three months or less at the time of acquisition. REVENUE RECOGNITION. Subscriber revenue is recognized based upon subscriber levels for affiliate sales and the contract terms for its direct sales. The calculation of subscriber levels for affiliate sales is based on billing and sales information provided by its affiliates. Direct sales revenue is recognized beginning at inception of service ratably over the contract terms. Viewer revenue is recognized when the viewer-requested music video has aired net of estimated, probable denial calls and other billing charges. Advertising revenue is recognized when the commercials have aired. For the six months ended December 31, 1997, approximately, 72% of subscriber fee revenue is derived from services provided to subscribers of TCI and its affiliates. Total subscriber fee revenue from TCI for the six months ended December 31, 1996, the nine months ended June 30, 1997 and 1996 and the fiscal years ended September 30, 1996 and 1995 represented approximately 55%, 50%, 56%, 56% and 61%, respectively, of total subscriber fee revenue. CONCENTRATION OF CREDIT RISK. The Company's accounts receivable balance is comprised primarily of amounts due from cable system operators, with the majority due from its largest customer, TCI, advertisers and telephone company partners. INVENTORY. Inventory consisted of receivers, amplifiers, compact disc players, compact discs, packaging material and finished product and is valued at the lower of cost (determined on a first-in, first-out method) or estimated net realizable value. PROPERTY AND EQUIPMENT. Property and equipment is carried at cost and is depreciated over the estimated useful lives of three to ten years using the straight-line method. Leasehold improvements are carried at cost and are amortized over the shorter of the estimated five-year useful life of the related asset or the term of the lease. INVESTMENTS IN EQUITY INTERESTS. Investments in equity interests consists of investments in companies in which the Company has an equity interest of at least 20% but not more than 50% and are accounted for under the equity method. F-11 52 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 INTANGIBLE ASSETS. Intangible assets primarily consists of the excess cost over the fair value of net assets acquired in the DMX, The Box and Paradigm Mergers and are being amortized over 10 years. (See note 4.) INCOME TAXES. The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109), whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. STOCK OPTIONS. As permitted under the Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123), the Company accounts for its stock option plan in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". As such, compensation expense is recorded on the date of grant when the current market price of the underlying stock exceeded the exercise price and the required pro forma net income (loss) and earnings (loss) per share disclosures for employee stock option grants made as if the fair-value-based method defined in SFAS No. 123 had been applied. FOREIGN CURRENCY TRANSLATION ADJUSTMENT. Unrealized gains and losses resulting from the translation of financial statements are reflected as a separate component of stockholders' equity. EARNINGS (LOSS) PER COMMON AND POTENTIAL COMMON SHARE. The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings Per Share, ("SFAS 128") in February of 1997. SFAS 128 establishes new computation, presentation and disclosure requirements for earnings per share ("EPS"). SFAS 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, etc.) as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from diluted EPS. The Company adopted SFAS 128 as of December 31, 1997 and has restated all prior period EPS data, as required. SFAS 128 did not have a material impact on EPS for any periods presented. See note 11. USE OF ESTIMATES. In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, including the accrual of music rights and royalties, and the disclosures of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. F-12 53 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 IMPAIRMENT OF LONG-LIVED ASSETS. The Company periodically assesses the recoverability of the carrying amount of long-lived assets, including intangible assets. A loss is recognized when expected future cash flows (undiscounted and without interest) are less than the carrying amount of the asset. The impairment loss is determined as the difference by which the carrying amount of the asset exceeds its fair value. Assets to be disposed of are carried at the lower of their financial statement carrying amounts or fair value less costs to sell. FAIR VALUES OF FINANCIAL INSTRUMENTS. Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments", requires the Company to disclose estimated fair values for its financial instruments. The carrying amounts of cash, other current assets, trade accounts payable, and accrued expenses and debt approximate fair value because of the short maturity of those instruments and the short term repricing structure of the debt. RECLASSIFICATIONS. Certain reclassifications of prior period amounts have been made to conform to the current year's reporting format. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS Cash paid for interest was $411,000, $114,000, $247,000 $191,000, $246,000 and $209,000 for the six months ended December 31, 1997 and 1996, nine months ended June 30, 1997 and 1996 and fiscal years ended September 30, 1996 and 1995, respectively. Cash paid for taxes for all periods presented was not material. Significant noncash investing and financing activities are as follows for the period ended December 31, 1997 (in thousands): 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 54 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (3) ALLOWANCE FOR DOUBTFUL ACCOUNTS. A summary of the activity of the allowance for doubtful accounts for the six months ended December 31, 1997, nine months ended June 30, 1997 and fiscal years ended September 30, 1996 and 1995 follows (amounts in thousands):
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 55 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 associated with the TCI Music Series A Common Stock represented by such certificate. The DMX Merger was effective July 1, 1997 and was accounted for under the purchase method of accounting. The estimated aggregate fair value of the TCI Music Series A Common Stock and associated TCI Rights (the "DMX Merger Consideration") issued to entities not controlled by TCI ("Unaffiliated Stockholders") and the carryover basis of the DMX Merger Consideration issued to entities controlled by TCI aggregated approximately $73.9 million. The Company performed an allocation of the purchase price to excess cost over the fair value of net assets acquired as the net book values of DMX assets and liabilities were estimated to approximate their respective fair values and affiliate agreements of commercial contracts. The number of shares of TCI Music Series A Common Stock and TCI Rights issued were based upon DMX Common Stock ownership as of June 30, 1997. The estimated fair value of the DMX Merger Consideration issued to Unaffiliated Stockholders is being accreted to the value of $8.00 per share (the equivalent of $2.00 per share of DMX Common Stock), subject to reduction by the aggregate amount per share of any dividend and certain other distributions, if any, made by TCI Music to its stockholders during the one-year period beginning on the effective date of the DMX Merger. Such accretion is reflected as an increase in excess cost with a corresponding increase to additional paid-in capital. Additional information concerning the valuation of the TCI Music Series A Common Stock is set forth below (dollar amounts in thousands): 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 56 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The following table represents the summary balance sheet of DMX at June 30, 1997 prior to the consummation of the DMX Merger and the opening summary balance sheet of TCI Music subsequent to the consummation of the DMX Merger (amounts in thousands):
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 57 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The Box Merger was effective December 16, 1997 and was accounted for under the purchase method of accounting. Accordingly, the results of operations for The Box have been included in the accompanying consolidated financial statements for the fifteen day period ended December 31, 1997. The estimated aggregate fair value of the TCI Music Preferred Stock (the Box Merger Consideration) issued to Unaffiliated Stockholders and the carryover basis of the Box Merger Consideration issued to entities controlled by TCI aggregated approximately $35.5 million. The Company has performed a preliminary allocation of the purchase price to excess cost over the fair value of net assets acquired as the net book values of The Box's assets and liabilities were estimated to approximate their respective fair values, and is awaiting information and evaluation at which point it will finalize such allocation. The number of shares issued was based upon Box Common Stock ownership as of December 15, 1997. Excess cost is being amortized over ten years. Additional information concerning the valuation of the TCI Music Preferred Stock is set forth below (dollar amounts in thousands): 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 58 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 (3,202,335 shares) $ 22,336 Cash payment at closing 5,332 Merger costs incurred by TCI Music 137 Paradigm's historical stockholders' deficit at December 31, 1997 1,434 --------------- Excess of cost over fair value of net assets acquired $ 29,239 ===============
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 $ 34,897 44,190 ================= ================= Net loss $ (11,150) (18,328) ================= ================== Pro forma net loss per common share $ (0.14) (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 59 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 music service in Europe, the former Soviet Union and in the Middle East and the right to use DMX's trademarks for two years. The music service is currently not being distributed by XTRA as Mr. Jerold H. Rubinstein is seeking financial partners. The Company has accounted for the effects of the loss on disposal of DMX-E and has estimated the loss on the disposal of DMX-E in the consolidated statements of operations. The loss on disposal of DMX-Europe N.V. reflected a write down of the assets to their estimated net realizable value at June 30, 1997. The loss on disposal for 1996 was estimated as the net investment of $5,720,000 and the incurrence of certain potential liabilities of $1,469,000 in conjunction with such disposal activities. (6) RELATED PARTY TRANSACTIONS. Pursuant to an Amended and Restated Contribution Agreement between TCI and TCI Music to be effective as of July 1, 1997 (the "Amended Contribution Agreement") TCI is required to deliver, or cause certain of its subsidiaries to deliver to TCI Music monthly payments aggregating $18 million annually, adjusted annually through 2017 (the "Annual TCI Payments"). Pursuant to the Amended Contribution Agreement, the Annual TCI payments will represent (i) revenue of certain subsidiaries of TCI that is attributable to the distribution and sale of the DMX service to certain cable subscribers (net of an amount equal to 10% of such revenue derived from residential customers and license fees otherwise payable to DMX pursuant to the Affiliation Agreement) and (ii) compensation to TCI Music and DMX for various other rights. During the six months ended December 31, 1997, TCI Music recognized $9.9 million pursuant to the Amended Contribution Agreement. Pursuant to an affiliation agreement (the "Affiliation Agreement") between Satellite Services, Inc., a wholly-owned subsidiary of TCI ("SSI") and DMX, effective as of July 1, 1997, SSI has the non-exclusive right to distribute and subdistribute the DMX Service to commercial and residential customers for a 10-year period in exchange for licensing fees paid by SSI to DMX. Under the Affiliation Agreement, SSI will pay an annual fee to DMX of $8,500,000 for the initial three years, subject to adjustment annually (beginning July 1, 1998) by the percentage change in the CPI for the prior year and for changes in the number of subscribers, a result of divestiture or acquisition of cable systems. During the fourth through tenth years of the term of the Affiliation Agreement, the annual fee will be further adjusted on a monthly basis upward or downward, as the case may be, based on an increasing percentage of the increase in actual number of subscribers above or below a specified number of residential and commercial subscribers, provided that such fees cannot be reduced below a specified minimum license fee, which minimum fee is decreased each year in years four through ten. See note 13 for the intercompany tax allocation policy. On February 6, 1997 the Company entered into a loan and security agreement with TCI which provided $3.5 million. The loan proceeds were used to purchase equipment and pay certain costs related to obtaining commercial customers. The outstanding balance at December 31, 1997 was $3.1 million which was payable in 34 equal monthly installments which commenced September 1, 1997 at an interest rate of 12.5% per annum. Interest expense for the six months ended December 31, 1997 was $207,000. The loan was paid in full on March 2, 1998. On July 11, 1997 in connection with the DMX Merger, the Company entered into a $2 million revolving credit note with TCI Communications, Inc., a subsidiary of TCI, and pursuant to the Amended Contribution Agreement entered into a $40 million promissory note with TCI. The interest rate on the notes was 10% per annum. On December 30, 1997, the Company paid in full $900,000 drawn under the $2 million revolving credit note and related accrued interest of $42,000 and the $40 million note. The accrued interest on the $40 million note of $1.9 million was forgiven pursuant to the terms of the note agreement. F-19 60 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 On September 19, 1997, the Company entered into a $2.18 million note payable with Liberty Media Corporation, a wholly owned subsidiary of TCI ("Liberty"). The proceeds were issued to Paradigm as a note receivable pursuant to the letter of intent in contemplation of the Paradigm Merger. See note 4. Interest on the note was 10% per annum. The Company paid in full the principal and related accrued interest of $62,000 on December 30, 1997. On December 16, 1997 the Company entered into a $3.75 million note payable with Liberty Media Corporation. The proceeds were used to purchase the outstanding preferred stock of The Box in connection with the Box Merger. The Company paid in full the principal and related accrued interest of $15,000 on December 30, 1997. The Company has an equipment lease with the National Digital Television Center, Inc. ("NDTC"), a subsidiary of TCI, for the equipment at the studio and uplinking facility in Littleton, Colorado. The outstanding balance of the capital lease obligation at December 31, 1997 was approximately $1.2 million with terms that extend through the year 2000, at an interest rate of 9.5%. Total interest expense for the six months ended December 31, 1997 was $59,000. The related studio equipment had a net book value of approximately $728,000 at December 31, 1997 and is included in Property and Equipment, in the accompanying consolidated balance sheets. Additionally the Company leases certain office space and uplinking and satellite services from the NDTC. (see note 12) The components of related party debt at December 31, 1997 and June 30, 1997 were as follows (amounts in thousands):
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 61 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (8) INTANGIBLE ASSETS. The balance of intangible assets as of December 31, 1997 principally consists of the excess of cost over the fair value of the net assets acquired in the DMX, The Box and Paradigm acquisitions (see note 4). Such intangibles are being amortized over a 10 year period. The balance at December 31, 1997 is comprised of the following items (amounts in thousands): 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 62 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (10) DEBT AND OTHER PAYABLES. On December 30, 1997 the Company entered into a revolving loan agreement (the Revolving Loan Agreement) with several banks which provides for borrowings up to $100 million. Interest on borrowings under the agreement is tied to London Interbank Offered Rate ("LIBOR"), plus an applicable margin dependent upon the Company's leverage ratio, as defined, for the preceding quarter or at the banks base rate. The first advance of $53.2 million was used to payoff related party debt and amounts paid in connection with the close of the Paradigm Merger (see notes 4 and 6). The Revolving Loan Agreement matures on June 30, 2005 with principal, reductions beginning semi-annually on June 30, 2000 based on a scheduled percentage of the total commitment. A commitment fee is charged on the unborrowed portion of the Revolving Loan Agreement commitment ranging from .25% to .375% based upon the leverage ratio for the preceding quarter. The balance of outstanding draws at March 2, 1998 was $72 million bearing interest at 30 day LIBOR plus .7% or average rate of 6.4%. In connection with the Paradigm Merger, the Company assumed debt consisting of two bridge loans and a note payable to an individual. As of December 31, 1997 the balance outstanding on the bridge loans was $2,944,900 and accrued interest of $256,600. The notes bear interest at 10% per annum and were paid in full, including accrued interest, in January 1998. The note payable to an individual bears interest at prime with $25,000 due April 1, 1998 and the remaining balance is being paid monthly through August 15, 1998. The following debt payment schedules includes related party debt and capital lease (see note 6) and the third party debt described above as of December 31, 1997 (amounts in thousands):
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 63 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (11) STOCKHOLDERS' EQUITY (DEFICIT). STOCK OPTIONS. Upon consummation of the DMX Merger, the Company granted stock options with tandem Stock Appreciation Rights ("SARs") to the board of directors to purchase 3,000,002 shares of TCI Music Series A Common Stock at a price of $6.25 per share. The options vest in 20% cumulative increments, with the first increment vested on the effective day of the DMX Merger, and each additional increment vesting on the anniversary date. The options will be exercisable for up to ten years with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. Additionally, the Company granted stock options with tandem SARs to employees to purchase 496,800 shares of TCI Music Series A Common Stock at a price of $6.25 per share under the TCI Music, Inc. 1997 Stock Incentive Plan which is authorized to issue up to 4,000,000 shares. The options will vest annually in 20% cumulative increments beginning on the first anniversary date of the DMX Merger. The options will be exercisable for up to ten years with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. Upon consummation of the Box Merger, the Company granted options to employees under the TCI Music, Inc. 1997 Stock Incentive Plan to purchase 92,060 shares of TCI Music Series A Common Stock at $6.25 per share. The vesting schedules vary with expirations ranging between April 1, 1998 and March 31, 2002 with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. Two former employees were granted options under no plan, to purchase 9,630 shares of TCI Music Series A Common Stock each at $6.25 per share. These options vested on the effective day of the Box Merger and expire on December 31, 1998 with no TCI Rights being issued in connection with TCI Music Series A Common Stock issued upon exercise of any such options. A former employee was granted options to purchase 1,400 shares of TCI Music Preferred Stock at an exercise price of $18.75 per share. The options vested on the effective day of the Box Merger and expire on March 16, 1998. The Company issued awards of stock options with tandem SARs to directors and employees and recorded compensation of $294,000 pursuant to APB Opinion No. 25 for the six months ended December 31, 1997. Had the Company determined compensation expense under SFAS No. 123 by calculating the fair value at the grant date using the Black-Scholes option-pricing model, the Company's net loss and loss per share would have been increased to the pro forma amount for the six months ended December 31, 1997: 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 64 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 At June 30, 1997, options to purchase 3,584,583 shares were exercisable at prices ranging from $2.063 to $6.25 per share and include accelerated options to purchase 400,000 shares that were exercisable prior to the DMX Merger, July 11, 1997. By terms of the DMX Inc. 1993 Stock Option Plan, options issued, outstanding and unexercised were terminated upon consummation of the DMX Merger. Exercisable options held by officers and directors of DMX at June 30, 1997 totaled 3,373,333. DMX had issued options to purchase DMX Common Stock to certain directors, officers and employees under various stock option plans. The option prices represent fair market values at the date of grant. Transactions in stock options under these plans are summarized as follows:
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 65 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 Pro forma net income reflects only options granted during the years ended September 30, 1996 and 1995. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options vesting period and compensation cost for options granted prior to January 1, 1995 is not considered. Stock bonus expense included in stock compensation in the accompanying financial statements of $137,427 for the nine months ended June 30, 1997 and $549,708 of compensation for each of the years ended September 30, 1996 and 1995, related to the 1992 extension of the exercise date of an option issued in October 1990. The exercise date was extended from 1993 to December 31, 1996 and represented an option to purchase 350,000 shares of common stock granted to Jerold H. Rubinstein, the former Chairman and Chief Executive Officer of DMX. During the fiscal year ended September 30, 1996, options to purchase 150,000 shares were exercised and at December 31, 1996 the remaining options to purchase 200,000 shares expired. CAPITAL STOCK. The Company has the authority to issue 500 million shares of Capital Stock consisting of (i) 295 million shares of TCI Music Series A Common Stock; (ii) 200 million shares of TCI Music Series B Common Stock; and (iii) 5 million shares of TCI Music preferred stock. The TCI Music Series A Common Stock and TCI Music Series B Common Stock are identical except for voting and conversion rights. Each share of TCI Music Series A Common Stock entitles the holder to one vote and each share of TCI Music Series B Common Stock entitles the holder to ten votes. Each share of TCI Music Series B Common Stock is convertible, at the option of the holder, at any time into one share of TCI Music Series A Common Stock. The TCI Music Series A Common Stock is not convertible into TCI Music Series B Common Stock. REDEEMABLE PREFERRED STOCK. The TCI Music preferred stock may be divided and issued in one or more series from time to time as determined by the board of directors of TCI Music, without further shareholder approval. As of December 31, 1997, the board of directors of TCI Music has authorized the issuance of 2,250,000 shares of TCI Music Preferred Stock in connection with the Box Merger. The TCI Music Preferred Stock may be converted by the holder at any time in whole or in part into shares of TCI Music Series A Common Stock at the conversion rate of three shares of TCI Music Series A Common Stock for one share of TCI Music Preferred Stock, subject to certain adjustments for antidilution, dividends and distributions, as defined. Subject to the rights of holders of senior securities and to any restrictions set forth in any security or debt instrument, the holders of TCI Music Preferred Stock will be entitled to receive cash dividends on each share of TCI Music Preferred Stock in amount equal to the product of (i) the amount of the cash dividend declared on one share of TCI Music Series A Common Stock or any other security into which the shares of TCI Music Preferred Stock are then convertible and (ii) the number of shares of TCI Music Series A Common Stock or other security into which one share of TCI Music Preferred Stock may be converted as of the date such dividend is declared. Such dividends shall be payable to holders of TCI Music Preferred Stock only if, and when the board of directors of TCI Music declares cash dividends on TCI Music Series A Common Stock. If TCI Music is prohibited from paying the full dividends which have been declared to holders of TCI Music Preferred Stock, the amount that is available will be distributed among the holders of TCI Music Preferred Stock ratably in proportion to the full amounts to which they would otherwise be entitled. Each share of TCI Music Preferred Stock is entitled to vote on all matters submitted to a vote of the holders of TCI Music Series A Common Stock and the number of votes equal to the number of shares of TCI Music Series A Common Stock into which such shares are convertible as of the record date in the matters to be voted upon. F-25 66 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 Upon any liquidation, dissolution or winding up (or deemed liquidation by virtue of a change in control or a sale of all or substantially all of the assets of TCI Music) of TCI Music subject to the prior payment in full of amounts to which any senior securities are entitled, holders of TCI Music Preferred Stock are entitled only to the liquidation value of their shares to be paid pari passu with payments to holders of parity securities. The liquidation value of TCI Music Preferred Stock at December 31, 1997 is equal to $39.2 million, to be increased each year by the greater of (i) the percentage increase in the CPI over the prior year (but not to exceed 5%) or (ii) 3%. The Company may, at its option, redeem, at the liquidation value, all or part of the shares of TCI Music Preferred Stock ratably among the holders of such shares by giving written notice to such holders (i) during the 30 day periods immediately following the fourth, sixth and eighth anniversaries of the issue date of the TCI Music Series A Preferred Stock, (ii) at any time after the closing price of the TCI Music Series A Common Stock exceeds 125% of the purchase price benchmark for a period of at least 30 consecutive business days and (iii) at any time after the tenth anniversary of the issue date. Holders of TCI Music Preferred Stock may require TCI Music to redeem, at the liquidation value, all or part of their shares any time after the tenth anniversary of the issue date by giving written notice to TCI Music stating the number of shares such holder elects to redeem. If there are insufficient funds available for redemption purposes, all available funds will be used to redeem the maximum possible number of shares ratably among those holders requiring shares to be redeemed, including shares of parity securities required to be redeemed. As of December 31, 1997, the Company has recorded approximately $124,000 for the accretion to the liquidation value of the TCI Music Preferred Stock using the effective interest method over a ten year period at a 3% effective rate. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE. Basic and diluted loss per share was calculated by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the periods presented. Potential common shares, consisting of TCI Music Preferred Stock convertible into TCI Music Series A Common Stock, and employee stock options were not included in the computation of weighted average shares outstanding for diluted loss per share because their inclusion would be anti-dilutive. Dilutive securities and stock options at December 31, 1997 and 1996 were 3,602,592 and 3,659,583, respectively; at June 30, 1997 were 3,584,583; and at September 30, 1996 and 1995 were 4,115,833 and 4,395,833, respectively. (12) COMMITMENTS AND CONTINGENCIES. VENDOR COMMITMENTS. DMX and Scientific-Atlanta, Inc. ("S-A"), had an agreement with respect to the manufacture, distribution and servicing of the DM-2000 tuners and DMX*DJ's. DMX was not obligated to purchase or guarantee the purchase of any minimum number of tuners or DMX*DJ's, and S-A was the exclusive tuner manufacturer in the United States and Canada and earned a royalty of approximately five percent (5%) of DMX's premium audio service revenues until August 1996. No payments are required until DMX achieves "operating breakeven", as defined in the agreement. ACCRUED MUSIC RIGHT ROYALTIES. DMX licenses rights to re-record and distribute music from a variety of sources and pays royalties to songwriters and publishers through contracts negotiated with performing rights societies such as the American Society of Composers, Authors and Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and the Society of European Stage Authors and Composers F-26 67 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 ("SESAC"). DMX has separate agreements with ASCAP, BMI and SESAC for residential and commercial distribution. Certain of the agreements are being negotiated on an industrywide basis mainly over new rate structures that may require retroactive rate increases. DMX has continued to accrue royalties that are under negotiations based on its best estimate, after consultation with counsel and consideration of the terms and rates of the expired contracts. The Digital Performance Right in Sound Recordings Act of 1995 ("1995 Act") was signed into law on November 1, 1995. The 1995 Act establishes the right of owners of the performance rights, such as the performers and record companies, to control digital transmission of sound recordings by means of subscription service digital transmissions. The 1995 Act provides a compulsory license for noninteractive subscription services. An arbitration panel rendered a decision before the United States Copyright Office in late November 1997 that determined the statutory license royalty rate of 5% to be paid under the 1995 Act by DMX and other digital music residential subscription services on services transmitted on non-business subscribers, and required back payments be made on a forward basis amortized over approximately thirty months, without interest. As of December 31, 1997, the Company's accrued music royalties include the license royalty at the assessed rate of 5% pursuant to this decision. On January 28, 1998, the United States Copyright office issued a brief order noting that it would not adopt the arbitrators' decision in its entirety and has not specified what provisions would be adopted or not. OPERATING LEASE COMMITMENTS. The Company is obligated under various operating leases for office space, uplinking and satellite services. Certain leases are cancelable subject to penalties. Total expenses under these leases were approximately $2,741,000 and $2,538,000 for the six months ended December 31, 1997 and 1996, respectively, $4,023,000 for the nine months ended June 30, 1997, and $5,324,000 and $5,097,000 for the fiscal years ended September 30, 1996 and 1995, respectively. Minimum lease payments under non cancelable operating leases for each of the next five years are summarized as follows (amounts in thousands):
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 68 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The Company has guaranteed certain contracts of DMX-E related to their uplink services agreement and subscriber management services agreement. To the extent DMX-E is unable to perform under the agreements, certain creditors of DMX-E may pursue claims against the Company under the guarantees. A claim under the guaranty of DMX-E's obligation to indemnify British Sky Broadcasting under the uplink services agreement could potentially approximate $1.3 million which is included in the loss on disposal of DMX-E in the accompanying consolidated statement of operations. The Company has also guaranteed certain other obligations of DMX-E under the Subscriber Management Services Agreement between DMX-E and Selco Servicegesellschaft fur elektronische Kommunikation mbH ("Selco"), and the related side letter agreement. The Company cannot estimate the amount of any potential claims at this time under such guarantee. (See "Legal Action" below.) DMX has received a letter from counsel for Selco Servicegesellschaft fur elektronische Kommunikation mbH ("Selco") requesting that DMX make a proposal to settle claims alleged by Selco for damages in the amount of approximately $3.5 million with respect to a guaranty by DMX of obligations of DMX-E N.V. under a Subscriber Management Services Agreement between DMX-E N.V. and Selco. TCI Music does not believe that DMX has any liability to Selco under that guaranty. Nevertheless, TCI Music cannot estimate, based on the facts available as of the date of this Form 10-K, whether Selco will continue to pursue its claims and, if Selco elects to initiate formal legal proceedings, whether DMX will be held liable for any material amount. LEGAL ACTIONS. On September 8, 1996, a purported class action lawsuit entitled Brickell Partners v. Jerold H. Rubinstein, Donne F. Fisher, Leo J. Hindery, Jr., James R. Shaw, Sr., Kent Burkhart, J.C. Sparkman, Bhaskar Menon, DMX Inc., and Tele-Communications, Inc. (Civil Action No. 15206) was filed in the Delaware Chancery Court alleging, among other things, that the proposed acquisition of DMX by TCI is wrongful, unfair and harmful to DMX's public stockholders and seeking to enjoin the consummation of the Merger. DMX believes that this action is without merit and intends to defend it vigorously. On July 23, 1997, Jeri L. Amstutz, a former employee of DMX, filed a complaint in Superior Court of California, County of Los Angeles seeking compensatory damages for lost wages and benefits, foreseeable consequential and incidental damages in an unspecified amount, as well as attorneys' fees, costs and prejudgment interest in connection with alleged wrongful employment practices. The plaintiff also seeks punitive damages and damages for emotional distress (and similar harm) in unspecified amounts which the plaintiff claims to believe will exceed $2,000,000. On July 23, 1997, Marnie Tenden a former employee of DMX, filed a complaint in Superior Court of California, County of Los Angeles, which alleges sex discrimination and retaliatory harassment. The plaintiff seeks compensatory damages for lost wages and benefits, foreseeable consequential and incidental damages, as well as attorneys' fees, costs and prejudgment interest. The plaintiff also seeks punitive damages and damages for emotional distress (and similar harm) in unspecified amounts which the plaintiff claims to believe will exceed $500,000. From time to time the Company may be a party to legal actions arising in the ordinary course of business, including claims by former employees. In the opinion of the Company's management, after consultation with counsel, disposition of such matters are not expected to have a material adverse effect upon the financial position, results of operations or liquidity of the Company. F-28 69 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 (13) INCOME TAXES. TCI Music is included in the consolidated federal income tax return of TCI. Income tax expense or benefit for TCI Music is based on those items in the consolidated calculation applicable to TCI Music. Intercompany tax allocation represents an apportionment of tax expense or benefit (other than deferred taxes) among the subsidiaries of TCI in relation to their respective amounts of taxable earnings or losses. The payable or receivable arising from the intercompany tax allocation is recorded as an increase or decrease in amounts due to related parties. Income tax (benefit) expense consists of (amounts in thousands):
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 70 TCI MUSIC, INC. AND SUBSIDIARIES (A SUBSIDIARY OF TELE-COMMUNICATIONS, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax (liabilities) at December 31, 1997 are presented below (amounts in thousands): 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 71 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, TCI Music, Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TCI MUSIC, INC. (Registrant) By: /s/ JOANNE WENDY KIM -------------------------------- Date: May 1, 1998 Joanne Wendy Kim Vice President-Finance 72 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 (previously filed) 3.1 Certificate of Incorporation of TCI Music, Inc. (Incorporated by reference to Exhibit 3.1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 3.2 Bylaws of TCI Music, Inc. (Incorporated by reference to Exhibit 3.2 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.1 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (with TCI Rights) (Incorporated by reference to Exhibit 4.1 to Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc., filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 4.2 Specimen Stock Certificate for Series A Common Stock, par value $.01 per share, of TCI Music, Inc. (without TCI Rights) (Incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 4.3 Specimen Stock Certificate for the Series B Common Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Amendment No. 1 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 12, 1997 (Commission File Nos. 333-28613 and 33-28613-01)) 4.4 Specimen Stock Certificate for the Series A Convertible Preferred Stock, par value $.01 per share, of TCI Music, Inc. (Incorporated by reference to Exhibit 4.2 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943))
73
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 (previously filed) 10.3* Affiliation Agreement between Satellite Services, Inc. and DMX Inc., dated July 1, 1997, and letter amendment dated January 27, 1998 (previously filed) 10.4 Letter Agreement between TCI Music, Inc. and Tele-Communications, Inc., dated November 7, 1997, extending Promissory Note dated July 11, 1997 (attached as Exhibit A) (Incorporated by reference to Exhibit 10.3 to the Registration Statement on Form-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.5 Promissory Note dated July 11, 1997 between TCI Music, Inc. and Tele-Communications, Inc. (previously filed) 10.6 Promissory Note, dated September 19, 1997, between TCI Music, Inc. and Liberty Media Corporation (previously filed) 10.7 Services Agreement between Tele-Communications, Inc. and TCI Music, Inc. (Incorporated by reference to Exhibit 10.2 to the Report on Form 8-K of TCI Music, Inc., filed with the Securities and Exchange Commission on July 24, 1997) 10.8 Loan and Security Agreement by and between DMX Inc. and Tele-Communications, Inc., dated as of February 6, 1997, as amended (Incorporated by reference to Exhibit 10.7 to the Registration Statement on Form S-4 of TCI Music, Inc. and Tele-Communications, Inc. filed with the Securities and Exchange Commission on June 6, 1997 (Commission File Nos. 333-28613 and 333-28613-01)) 10.9**** TCI Music, Inc. 1997 Stock Incentive Plan (Incorporated by reference to Exhibit 10.83 to the Transition Report of TCI Music, Inc. on Form 10-K filed with the Securities and Exchange Commission on October 9, 1997) (previously filed) 10.10**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and David Koff, dated July 11, 1997 (previously filed) 10.11**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Lon Troxel, dated July 11, 1997 (previously filed) 10.12**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and J.C. Sparkman, dated July 11, 1997 (previously filed)
74
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 (previously filed) 10.14**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Robert R. Bennett, dated July 11, 1997 (previously filed) 10.15**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Donne F. Fisher, dated July 11, 1997 (previously filed) 10.16**** Non-Qualified Stock Option and Stock Appreciation Rights Agreement between TCI Music, Inc. and Peter J. Kern, dated July 11, 1997 (previously filed) 10.17**** Form of TCI Music, Inc. Employee Stock Option Agreement (Incorporated by reference to Exhibit 10.16 to the Registration Statement on Form S-4 of TCI Music, Inc. filed with the Securities and Exchange Commission on November 12, 1997 (Commission File No. 333-39943)) 10.18*** Employment Agreement between DMX Inc. and Lon Troxel, dated October 1, 1991, as amended August 22, 1997 (Incorporated by reference to Exhibit 10.64 to DMX Inc.'s 1994 Report on Form 10-K, filed with the Securities and Exchange Commission on December 29, 1994, and to Exhibit 10.82 to TCI Music, Inc.'s Transition Report on Form 10-K for the transition period October 1, 1996 through June 30, 1997, filed with the Securities and Exchange Commission on October 9, 1997) 10.19*** Employment Agreement dated January 1, 1996 between Paradigm Music Entertainment Company, Inc. and Thomas McPartland (previously filed) 10.20 Registration Rights Agreement dated December 31, 1997 between TCI Music, Inc. and Thomas McPartland, Attorney in fact (previously filed) 10.21** Affiliation Agreement between International Cablecasting Technologies Inc. and Satellite Services, Inc., dated July 6 1989 (Incorporated by reference to Exhibit 10.2 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.22** Affiliation Agreement between International Cablecasting Technologies Inc. and Viacom Cable, dated May 4, 1990 (Incorporated by reference to Exhibit 10.3 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.23** Affiliation Agreement between International Cablecasting Technologies Inc. and KBLCOM Incorporated, dated June 20, 1990 (Incorporated by reference to Exhibit 10.4 to DMX Inc.'s Amendment No. 1 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 31, 1990 (Commission File No. 33-35690)) 10.24 National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., Security Agreement and Promissory Note, dated March 26, 1991 (Incorporated by reference to Exhibit 10.14 to DMX Inc.'s Post-Effective Amendment No. 2 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on May 24, 1991 (Commission File No 33-35690)) 10.25** Uplink Services Agreement between National Digital Television Center, Inc., formerly known as Western Tele-Communications, Inc., and International Cablecasting Technologies Inc., dated March 16, 1991 (Incorporated by reference to Exhibit 10.15 to DMX Inc.'s Post-Effective Amendment No. 3 to Registration Statement on Form S-1, filed with the Securities and Exchange Commission on August 15, 1991 (Commission File No. 33-35690)) 10.26** License and Distribution Agreement between International Cablecasting Technologies Inc. and Broadcom International Holdings, dated March 31, 1992, as amended (Incorporated by reference to Exhibit 10.34 to DMX Inc.'s 1993 Report on Form 10-K, filed with the Securities and Exchange Commission on December 23, 1993)
75
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)
76
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)
77
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 (previously filed) 21 Subsidiaries of TCI Music, Inc. (previously filed) 23 Consent of KPMG Peat Marwick LLP (previously filed) 27 Financial Data Schedule (previously filed)
_____________ * 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-4.7 2 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 an other provision therein or to make any other provisions in regard or manner or questions arising thereunder that the Company and the Rights Agent may deem necessary or desirable and that shall not be inconsistent with the provisions of the Rights and shall not adversely affect the interest of the Holders. Accordingly, the parties wish to amend the initial Rights Agreement as provided herein. Agreement In consideration of the foregoing, and of the provisions of the Rights Agreement permitting amendments of the kind contemplated hereby, the parties agree as follows: 1. Definitions. As used in this Amendment, the terms with initial capital letters will have the meanings assigned to them in the Rights Agreement. 2. Definition of Fair Market Value. There shall be added as the last sentence of the definition of Fair Market Value the following: Notwithstanding the foregoing, the Fair Market Value of one share of stock of an Applicable Entity (including, in the case of MusicCo Series A Common Stock, one share of MusicCo Series A Common Stock and each Right, if any, relating thereto) means, as of any date, (i) the highest sale price of such stock on such date (A) if such stock is listed on a securities exchange, as reported by the principal securities exchange on which such stock is traded, or (B) if such stock is quoted on the automated quotation system of the National Association of Securities Dealers, Inc. or any reputable successor entity ("NASDAQ") as reported by NASDAQ or (ii) if on any such date there is no such reported sale, the average of the high bid and low asked prices of such stock on such date, as reported by NASDAQ or, if no such price is reported by NASDAQ on such date, as determined by such New York Stock Exchange member firm as may be selected by MusicCo. 2 3. Current Market Price of a TCI Series A Share. The first sentence of the last paragraph of Section 4.05 of the Rights Agreement shall be deleted in its entirety and the following substituted therefor: As used herein, the "Current Market Price" of a TCI Series A Share shall be the average of the daily closing prices for a share of TCI Series A Common Stock for 30 consecutive trading days commencing 45 trading days before the date that the Notice to Rights Holders described in Section 4.07 is first published as provided in Section 4.07. 4. Certification by the Company. The Company has delivered to the Rights Agent a certificate from an officer of the Company which states that this Amendment is in compliance of the terms of Section 8.03 of the Rights Agreement, and the Rights Agent is relying on such certificate in executing this Amendment. 5. No Other Amendment. Except as amended hereby, the Rights Agreement will continue in full force and effect without any amendment or modification thereof. 6. Counterparts. This Amendment may be executed in any number of counterparts and each of such counterpart shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. TELE-COMMUNICATIONS, INC. By: /s/ Stephen M. Brett ------------------------------------ Name: Stephen M. Brett Title: Executive Vice President TCI MUSIC, INC. By: /s/ Stephen M. Brett ------------------------------------ Name: Stephen M. Brett Title: Vice President THE BANK OF NEW YORK, as Rights Agent By: /s/ Joseph Varca ------------------------------------ Name: Joseph Varca Title: Vice President 2 -----END PRIVACY-ENHANCED MESSAGE-----