<PAGE> 1
As Filed with the Securities and Exchange Commission on August 16, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File No. 0-22815
TCI MUSIC, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1380293
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
67 Irving Place North, 4th Floor
New York, NY 10003
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (212) 387-7700
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
The number of shares outstanding of the Registrant's Series A common
stock and Series B Common Stock as of July 31, 1999 were 24,112,615 and
62,500,000, respectively.
<PAGE> 2
PART I - FINANCIAL STATEMENTS
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 7,805 5,467
Trade receivables:
Unaffiliated 5,710 6,440
Related party (note 4) 2,636 2,185
Allowance for doubtful accounts (1,149) (818)
--------- ---------
7,197 7,807
Income tax receivable - related party (note 4) 70,609 --
Prepaid expenses and other current assets 2,585 1,811
Equipment inventory 4,390 5,556
--------- ---------
Total current assets 92,586 20,641
Net assets of discontinued operation (note 3) 75,500 69,908
Property and equipment, at cost:
Furniture and equipment 16,649 12,830
Leasehold improvements 237 95
Studio and other support equipment 3,690 3,285
--------- ---------
20,576 16,210
Less accumulated depreciation 5,655 3,523
--------- ---------
14,921 12,687
Intangible assets 122,306 118,519
Less accumulated amortization (22,625) (16,487)
--------- ---------
99,681 102,032
Deferred income taxes 18,722 --
Other assets, net of accumulated amortization 1,194 1,054
--------- ---------
Total assets $ 302,604 206,322
========= =========
</TABLE>
(continued)
I-1
<PAGE> 3
PART I - FINANCIAL STATEMENTS
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ---------
Liabilities and Stockholders' Equity (Deficiency)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 13,001 9,770
Accrued loss on disposal - DMX-Europe N.V. 1,117 1,117
Current portion of debt, including related party debt (notes 4 and 5) 1,505 1,723
Income tax payable, related party (note 4) -- 5,831
Stock appreciation rights payable, current (note 6) 196,015 797
--------- ---------
Total current liabilities 211,638 19,238
Related party debt (note 4) 5,357 226
Debt (note 5) 102,606 96,244
Negative investment in DMX-Europe N.V. 9,058 9,058
Other liabilities 1,871 2,332
Stock appreciation rights payable, long term (note 6) 49,857 --
--------- ---------
Total liabilities 380,387 127,098
--------- ---------
Redeemable convertible preferred stock, $.01 par value; Authorized 5,000,000
shares; 1,617,574 shares outstanding in 1998 (note 2) -- 34,322
Stockholders' equity (deficiency) (note 2):
Common stock, $.01 par value:
Series A;
Authorized 295,000,000 shares; Issued and outstanding
24,061,232 shares in 1999 and 18,876,867 shares in 1998 241 189
Series B;
Authorized 200,000,000 shares; Issued and outstanding
62,500,000 shares in 1999 and 1998 625 625
Paid-in capital 121,282 73,665
Accumulated deficit (199,812) (29,578)
Accumulated other comprehensive earnings (losses),
net of taxes (119) 1
--------- ---------
Total stockholders' equity (deficiency) (77,783) 44,902
--------- ---------
Commitments and contingencies (note 10)
Total liabilities and stockholders' equity (deficiency) $ 302,604 206,322
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statements of Operations and Comprehensive Loss
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June30, June 30,
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue
Unaffiliated $ 7,616 6,219 15,608 11,159
Related party (note 4) 7,587 8,271 15,320 16,080
Other revenue 2,800 -- 2,800 --
--------- --------- --------- ---------
18,003 14,490 33,728 27,239
Operating expenses:
Operating (note 4) 3,606 3,292 6,854 6,585
Selling, general and administrative 7,852 6,340 14,857 11,210
Stock compensation (note 6) 243,921 199 244,059 241
Writedown of inventories -- 1,102 -- 1,102
Depreciation and amortization 4,398 3,344 8,335 6,408
--------- --------- --------- ---------
259,777 14,277 274,105 25,546
--------- --------- --------- ---------
Net operating income (loss) (241,774) 213 (240,377) 1,693
Other expense:
Interest expense:
Unaffiliated, net (1,573) (1,259) (3,120) (2,281)
Related party (note 4) (84) (22) (105) (109)
--------- --------- --------- ---------
(1,657) (1,281) (3,225) (2,390)
Other, net 68 15 59 47
--------- --------- --------- ---------
Loss from continuing operations before
income taxes (243,363) (1,053) (243,543) (650)
Income tax benefit (expense) (note 4) 93,777 (494) 92,912 (1,431)
--------- --------- --------- ---------
Loss from continuing operations (149,586) (1,547) (150,631) (2,081)
--------- --------- --------- ---------
Loss from discontinued operations
(net of income tax benefit) (note 3) (14,269) (4,501) (19,603) (8,393)
--------- --------- --------- ---------
Net loss $(163,855) (6,048) (170,234) (10,474)
Accretion of redeemable convertible
preferred stock $ (231) (374) (609) (748)
--------- --------- --------- ---------
Net loss attributable to common stockholders $(164,086) (6,422) (170,843) (11,222)
========= ========= ========= =========
Basic and diluted loss from continuing
operations per common share (note 7) $ (1.81) (0.02) (1.84) (0.03)
========= ========= ========= =========
Basic and diluted loss attributable to common
stockholders per common share (note 7) $ (1.98) (0.08) (2.08) (0.14)
========= ========= ========= =========
Weighted average number of common shares 82,766 80,981 82,075 80,981
========= ========= ========= =========
Comprehensive loss $(163,895) (5,995) (170,354) (10,459)
========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statement of Stockholders' Equity (Deficiency)
(amounts in thousands)
<TABLE>
<CAPTION>
Accumulated other
Comprehensive
Common stock Paid in Accumulated losses,
Series A Series B capital deficit net of taxes Total
-------- ------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1999 $ 189 625 73,665 (29,578) 1 44,902
Conversion of preferred stock (note 2) 48 -- 34,734 -- -- 34,782
Sale of common stock for tandem stock
appreciation rights exercised 4 -- 13,241 -- -- 13,245
Stock compensation awards -- -- 251 -- -- 251
Accretion of redeemable convertible
preferred stock -- -- (609) -- -- (609)
Foreign currency translation adjustment -- -- -- -- (120) (120)
Net loss -- -- -- (170,234) -- (170,234)
-------- ------- -------- -------- -------- -------
Balance at June 30, 1999 $ 241 625 121,282 (199,812) (119) (77,783)
======== ======= ======== ======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Consolidated Statement of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities (note 8):
Net loss $(170,234) (10,474)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 14,216 10,807
Share of losses of affiliates 138 243
Stock compensation (note 6) 245,076 241
Provision for doubtful accounts 336 193
Deferred income tax expense (benefit) (note 4) (103,536) 138
Writedown of inventory -- 1,102
Other assets write off 160 112
Changes in operating assets and liabilities, net of the effect
of acquisitions:
Trade receivables 417 (2,585)
Prepaid expenses and other current assets 472 (1,731)
Accounts payable, accrued expenses and other current liabilities 2,837 (2,518)
Net current assets of discontinued operations (882) (1,658)
--------- ---------
Net cash used in operating activities (11,000) (6,130)
--------- ---------
Cash flows from investing activities:
Cash paid for acquisitions (2,285) (10,367)
Capital expended for property and equipment (6,715) (5,272)
Changes in other assets, net (159) (75)
--------- ---------
Net cash used in investing activities (9,159) (15,714)
--------- ---------
Cash flows from financing activities:
Sale of common shares for tandem stock appreciation
right payments (note 6) 13,496 --
Borrowing on note payable to bank 4,964 24,500
Borrowing on note payable to a related party 5,357 --
Repayment of notes payable to bank and others (869) (3,535)
Redemption of preferred shares (148) --
Repayment of principal (303) (3,413)
--------- ---------
Net cash provided by financing activities 22,497 17,552
--------- ---------
Net decrease in cash and cash equivalents 2,338 (4,292)
Cash and cash equivalents, beginning of period 5,467 7,915
--------- ---------
Cash and cash equivalents, end of period $ 7,805 3,623
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying interim consolidated financial statements are unaudited and,
in the opinion of management, reflect all adjustments necessary for a fair
presentation of the results for such periods. The results of operations for any
interim period are not necessarily indicative of results for the full year. The
accompanying financial information should be read in conjunction with the
audited consolidated financial statements and notes thereto included in the
Company's Annual report filed on Form 10-K for the year ended December 31,
1998.
The financial statements have been presented for the current period and
corresponding prior year periods to reflect the operation of the Company's
Audio segment (DMX) as a continuing operation, and the operations of the
Company's Video segment and Internet segment as discontinued operations as a
result of the transaction described in note 3.
Certain reclassifications of prior period amounts have been made to conform to
the current period's reporting format.
(2) Organization
TCI Music, Inc. ("TCI Music" or the "Company") has three classes of stock at
June 30, 1999, the TCI Music Series A Convertible Preferred Stock, $.01 par
value per share ("Series A Preferred Stock"), TCI Music Series A Common Stock,
$.01 par value per share ("Series A Common Stock") and TCI Music Series B
Common Stock ("Series B Common Stock"). The Series A Common Stock, the Series B
Common Stock, and the Series A Preferred Stock are collectively referred to as
the "TCI Music Stock".
On March 9, 1999 AT&T acquired Tele-Communications, Inc. ("TCI") in a merger
(the "AT&T Merger"). In the AT&T Merger, (1) TCI became a wholly owned
subsidiary of AT&T, (2) the businesses and assets of the Liberty Media Group
and TCI Ventures Group were combined and (3) the holders of TCI's Liberty Media
Group tracking stock and TCI Ventures Group tracking stock received in exchange
for their shares a new class of tracking stock of AT&T intended to reflect the
results of the combined Liberty Media Group and TCI Ventures Group. Following
the AT&T Merger, AT&T's "Liberty Media Group" consists of the assets and
businesses of TCI's Liberty Media Group and TCI Ventures Group. TCI Music is
included in AT&T's "Liberty Media Group".
AT&T applied purchase accounting and recorded the assets and liabilities of
Liberty Media Corporation ("Liberty") (including those of the Company) at fair
value. Liberty did not apply "push down" accounting to the Company in
connection with the AT&T Merger due to the significant level of minority
interests. Following the AT&T Merger, TCI became part of the AT&T Broadband and
Internet Services division of AT&T ("AT&T Broadband").
On May 17, 1999, the Company called for redemption on June 11, 1999 all of the
outstanding shares of its Series A Preferred Stock. In lieu of redemption,
holders could convert each share of Series A Preferred Stock into three shares
of Series A Common Stock. At June 11, 1999, all of the outstanding shares of
Series A Preferred Stock were converted into Series A Common Stock except for
6,404 shares of Series A Preferred Stock which were redeemed. Liberty converted
all of the shares of Series A Preferred Stock beneficially owned by it into
shares of Series A Common Stock prior to the redemption date.
After giving effect to the above redemption, Liberty beneficially owns
approximately 50% of the outstanding shares of TCI Music Series A Common Stock
and 100% of the outstanding shares of TCI Music Series B Stock, which
collectively represents approximately 86% of the outstanding shares of TCI
Music Stock and 98% of the voting power of the outstanding shares of TCI Music
Stock.
On April 23, 1999, the Company, Liberty and the wholly owned subsidiaries of
Liberty entered into a
I-6
<PAGE> 8
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
Contribution Agreement, subject to the approval by the Company's stockholders
in an annual meeting to be held on September 8, 1999, under which the following
transactions will occur: (i) a wholly owned subsidiary of Liberty will
contribute to the Company all of the outstanding stock of its wholly owned
subsidiaries that were formed solely to hold some of Liberty's investments in
interactive programming and content related assets; (ii) Liberty (through a
wholly owned subsidiary ) will assign to TCI Music its rights relating to
channel capacity on AT&T Broadband's cable television systems for the provision
of interactive video services under an agreement between Liberty and AT&T
entered into in connection with the AT&T Merger. (iii) Liberty (through a
wholly owned subsidiary) will contribute to TCI Music a combination of cash and
notes payable to Liberty or one or more of its wholly owned subsidiaries by the
contributed subsidiaries and TCI Music equal to $150 million. (vi) TCI Music
will adopt a deferred compensation and stock appreciation rights plan for key
executives of the Company; and (v) in consideration of all of the foregoing,
TCI Music will issue to a wholly owned subsidiary of Liberty, (1) 109,450,167
shares of Series B common stock and (2) 150,000 shares of a newly authorized
series of preferred stock, TCI Music Series B convertible preferred stock,
having an initial aggregate liquidation preference of $150 million.
Upon completion of the transactions under the Contribution Agreement: TCI Music
will change its name to Liberty Digital, Inc., Liberty will beneficially own
approximately 50.3% of the Series A Common Stock, 100% of the Series B Common
Stock, and 100% of the newly issued Series B convertible preferred stock. As a
result, Liberty will beneficially own shares representing approximately 99.4%
of the voting power of all outstanding capital stock of the Company. In
addition, Liberty will be able to acquire beneficial ownership of up to an
additional 25,751,100 shares of Series B Common Stock upon conversion of the
Series B convertible preferred stock.
These transactions are between related parties, and accordingly, will be
accounted for at predecessor costs in a manner similar to a pooling of
interests. At the completion of the transactions, Liberty will apply "push
down" accounting to the assets and liabilities of the Company. This adjustment
is for the fair value adjustments related to the Company which were recorded by
Liberty in the AT&T Merger. These "push down" adjustments will be reflected on
a retroactive basis to March 9, 1999, the date of the AT&T Merger.
(3) Discontinued Operations
Video Segment (The Box) and Internet Segment (SonicNet)
On July 15, 1999 MTV Networks, ("MTVN"), a division of Viacom International
Inc. and the Company formed MTVN Online L.P., a Delaware limited partnership
(the "MTVN Partnership") pursuant to various arrangements and agreements
entered into pursuant to a binding Letter Agreement dated May 19, 1999. MTVN
Partnership's business will be to develop, operate, manage, market, distribute
and license text, audio and video music, music-related and music-themed
services online and engage in reasonably related activities, including
e-commerce applications and consumer oriented commercial transactions (the
"MTVN Partnership Business"). With certain exceptions, the Company contributed
to the MTVN Partnership substantially all of the assets and businesses of
SonicNet and The Box, and the stock of their respective subsidiaries which
exclusively conduct their respective international businesses. MTVN contributed
to the MTVN Partnership the assets and businesses owned or controlled by it
that constituted all of its current or planned assets and businesses engaged,
or to be engaged, exclusively in the MTVN Partnership Business, including those
assets and businesses used exclusively in connection with their MTV.com,
VH1.com and Imagine Radio businesses, and all wholly owned international assets
and businesses engaged exclusively in the MTVN Partnership Business. For their
respective contributions, the Company received an aggregate 10% limited
partnership interest and MTVN received an aggregate 90% general and limited
partnership interest in the MTVN Partnership.
The Company and Liberty have each agreed not to, and to cause their respective
controlled affiliates
I-7
<PAGE> 9
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
not to, own, operate or make an investment in the MTVN Partnership Business
(other than the investment in the MTVN Partnership) or any cable or satellite
audio/video television services, digital or analog, that principally or, in
large part, are devoted to music-related or music-themed programming (the "MTVN
Partnership Television Business"), in each case subject to certain exceptions,
until the first to occur of (a) three years (in the case of the MTVN
Partnership Business) or five years (in the case of the MTVN Partnership
Television Business) after the closing of the MTVN Partnership transaction and
(b) such date as MTVN ceases to own the largest percentage of the equity in the
MTVN Partnership and to have the right to designate the most members of the
management committee or board of directors of the MTVN Partnership.
In connection with the negotiation of the Letter Agreement, the Company entered
into an agreement dated May 18, 1999, with AT&T Broadband, as an inducement to
AT&T Broadband to enter into a revised affiliation agreement with MTVN for the
distribution of MTVN's services on AT&T Broadband cable systems. AT&T
Broadband's entering into a revised affiliation agreement was a condition of
MTVN's entering into the Letter Agreement. Pursuant to this agreement, on the
first to occur of the closing of the MTVN Partnership's initial public offering
and the second anniversary of the closing under the Letter Agreement (or the
fifth anniversary of the closing, if extended by AT&T Broadband because the
public offering has not occurred by the second anniversary of the closing), the
Company will become obligated to pay AT&T Broadband an amount equal to 10% of
the Excess Value (as defined below) of its equity interest in the MTVN
Partnership, but in no event more than $30 million, nor less than $15 million.
The Excess Value means the amount by which (a) the average market price or
appraised fair market value of the Company's equity interest in the MTVN
Partnership exceeds (b) the sum of (x) the lesser of $175 million and the value
of the Company's interest in the MTVN Partnership as determined in accordance
with certain provisions of the Letter Agreement and (y) any additional capital
contributions made by the Company to MTVN Partnership. The Company may pay such
amount in cash or shares of its Series A common stock (at market value).
Giving consideration to the Company's ownership percentage and partnership
governance in the MTVN Partnership, the Company plans to account for its
investment under the cost method.
As a result of the above transaction, at June 30, 1999 the net assets of the
Company's Video and Internet segments were reflected as "net assets of
discontinued operations" in the consolidated balance sheet and its operating
results were reflected as "loss from discontinued operations" for the periods
presented in the consolidated statement of operations and comprehensive loss,
as follows (amounts in thousands):
<TABLE>
<CAPTION>
Video Internet
-------- --------
<S> <C> <C>
Current assets $ 6,589 1,050
Income tax receivable, related party 9,269 4,040
Property and equipment 10,597 731
Other assets 5,935 64
Intangible assets 25,251 20,453
Accounts payable and accrued liabilities (7,008) (964)
Long term liabilities (1,456) --
-------- --------
Total net assets of discontinued operations $ 49,177 25,374
======== ========
</TABLE>
I-8
<PAGE> 10
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Video Internet
---------------------- ----------------------
Six months ended June 30, 1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 13,426 11,483 1,146 1,545
======== ======== ======== ========
Loss from operations $(12,757) (6,252) (6,675) (5,041)
Cost of disposal (7,665) -- (2,862) --
Income tax benefit 7,425 1,644 2,931 1,256
-------- -------- -------- --------
$(12,997) (4,608) (6,606) (3,785)
======== ======== ======== ========
Three months ended June 30,
Revenue $ 7,156 6,144 551 985
======== ======== ======== ========
Loss from operations $ (9,182) (3,752) (3,610) (2,341)
Cost of disposal (7,665) -- (2,862) --
Income tax benefit 6,649 1,028 2,401 564
-------- -------- -------- --------
$(10,198) (2,724) (4,071) (1,777)
======== ======== ======== ========
</TABLE>
Paradigm Associated Labels
On December 21, 1998 the management of TCI Music decided to discontinue the
operations and sell the assets of Paradigm Associated Labels ("PAL"), which was
a separate operating entity acquired in the Paradigm Merger. The Company
executed a letter of intent with a purchaser for the purchaser to acquire all
the assets of PAL in exchange for assumption of all operating liabilities
starting March 1, 1999. The disposal of PAL was accounted for as a discontinued
operation in 1998 and the remaining assets of PAL shown as part of "net assets
of discontinued operations" in the consolidated balance sheets at June 30, 1999
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------- -------
<S> <C> <C>
Income tax receivable, related party $ 1,130 1,130
Accounts payable and accrued expenses (181) (998)
------- -------
$ 949 132
======= =======
</TABLE>
(4) Related Party Transactions
Pursuant to the Amended Contribution Agreement between the successor to TCI in
the AT&T Merger ("AT&T Sub") and TCI Music effective since July 1, 1997, AT&T
Sub is required to deliver, or cause certain of its subsidiaries to deliver to
TCI Music the annual payments, aggregating $18 million, adjusted annually
through 2017 (the "Annual AT&T Payments"). During the six months ended June 30,
1999 and 1998, the Company recognized revenue from AT&T Sub of $9.8 million and
$10.0 million, respectively, pursuant to the Amended Contribution Agreement.
AT&T Sub charged TCI Music $1,022,000 and $800,000 during the six months ended
June 30, 1999 and 1998, respectively, for certain services rendered in
connection with the Annual AT&T Payments. Such charges are included in
operating expenses in the accompanying consolidated statements of operations
and comprehensive losses.
Pursuant to an affiliation agreement between Satellite Services, Inc. ("SSI"),
a wholly-owned subsidiary of AT&T, and the Company (the "SSI Affiliation
Agreement"), effective as of July 1, 1997,
I-9
<PAGE> 11
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
SSI has the non-exclusive right to distribute and subdistribute DMX services to
commercial and residential customers for a 10-year period in exchange for
licensing fees paid by SSI to the Company. Under the SSI Affiliation Agreement,
SSI will pay an annual fee to the Company of $8.5 million subject to annual
adjustments. During the six months ended June 30, 1999 and 1998, the Company
recognized revenue of $4.3 million for each period, pursuant to the SSI
Affiliation Agreement. In addition, the Company received subscriber revenue
from AT&T Broadband of $1.2 million and $1.8 million during the six months
ended June 30, 1999 and 1998, respectively, in connection with the distribution
of DMX services through AT&T Broadband's digital business.
On March 19, 1999, the company signed a promissory note with Liberty allowing
the company to draw funds from time to time up to a total of $15 million. The
promissory note is due on or before June 30, 2006 with interest at 9.5% per
annum, payable quarterly starting March 31, 1999. At June 30, 1999, the company
had drawn funds amounting to $5,357,000 and has recorded this borrowing as
long-term related party debt in the consolidated balance sheet.
Also, the company has an outstanding debt obligation of $381,000 to National
Digital Television Center, Inc. (NDTC), a subsidiary of AT&T. Such obligation
extends through the year 2000 and bears interest at 9.5%. At June 30, 1999, the
debt is reflected as part of the current portion of debt, including related
party debt in the consolidated balance sheet.
The Company leases certain office space, uplinking and satellite services from
NDTC. Total expenses under such lease agreements are reflected in the
consolidated statements of operations and comprehensive loss as follows
(amounts in thousands):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
----- ----- ----- -----
<S> <C> <C> <C> <C>
Operating Expenses 1,256 1,110 2,416 2,243
Loss from discontinued operations 409 441 855 761
----- ----- ----- -----
1,665 1,551 3,271 3,004
===== ===== ===== =====
</TABLE>
TCI Music is included in the consolidated federal income tax return of TCI up
to February 28, 1999 and will be included with AT&T's starting March 1, 1999,
as a result of the AT&T Merger. 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 AT&T in relation
to their respective amounts of taxable earnings or losses.
(5) Debt
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 in the Revolving Loan
Agreement), for the preceding quarter or at the bank's base rate. 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. Included in accrued liabilities are $682,000 and $535,000 at June
30, 1999 and December 31, 1998, respectively, of accrued interest on the
revolving loan. The outstanding amounts of borrowings at June 30, 1999 and
December 31, 1998 are $100,000,000 and $95,036,000 respectively.
I-10
<PAGE> 12
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
The Company assumed debt and issued notes payable to former owners in
connection with acquisitions made in 1998 and during the six months ended June
30, 1999. The notes bear interest that range from 5% to the Prime Rate and have
a total balance of $3,731,000, of which $1,124,000 is classified as current in
the accompanying consolidated balance sheet as of June 30, 1999.
The fair market value of TCI Music's debt approximated its carrying value at
June 30, 1999.
(6) Stock Options and Stock Appreciation Rights
The Company's stock compensation expense included estimates of compensation
relating to options and options with tandem stock appreciation rights granted to
employees of TCI Music and members of the board under the TCI Music 1997 Stock
Incentive Plan.
Stock compensation expense also included the earned portion of
the estimated expense of the grants to be made to executives under the deferred
compensation and stock appreciation rights plan to be adopted by the Company
pursuant to the Contribution Agreement described in note 2. For accounting
purposes, the grants have been treated as though they were effective at the
time the executives covered by the plan began providing services to the
Company. Although the adoption of the plan is subject to shareholder approval,
this is considered appropriate despite the absence of formal shareholder
approval given Liberty's percentage ownership of the Company's voting
securities and its contractual obligation under the Contribution Agreement to
vote in favor of the adoption of the plan. The executives covered by the plan
have been performing services on behalf of the Company since the announcement
of the proposed contribution transaction on April 6, 1999. Accordingly the stock
compensation expense reflects the increase in the share price of the Series A
Common Stock since that time.
The stock compensation expense has been recorded in the accompanying financial
statements pursuant to APB Opinion No. 25. These estimates are subject to
future adjustments based upon vesting and the market value of TCI Music Series
A Common Stock and, ultimately, on the final determination of market value when
the rights are exercised. The consolidated statements of operations and
comprehensive loss for the six months ended and three months ended June 30,
1999 included tandem stock appreciation rights exercised for $12 million of
which $6.7 million was reflected as stock compensation expense and $5.3 million
was reflected as part of the loss from discontinued operations. In addition,
accruals for tandem stock appreciation rights based on the market price of the
Company's Series A Common Stock at June 30, 1999, amounted to $245.1 million of
which $237.3 million was reflected as stock compensation expense and $7.8
million as part of loss from discontinued operations. The total tandem stock
appreciation rights liability is $245.9 million of which $196.0 is reflected as
current in the consolidated balance sheet at June 30, 1999.
(7) Loss Per Common and Potential Common Share
Basic earnings per share ("basic EPS") is measured as the income or loss
available to common stockholders divided by the weighted average outstanding
common shares for the period. Diluted earnings per share ("diluted EPS") is
similar to basic EPS but presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning of the
periods presented. Potential common shares that have an anti-dilutive effect
are excluded from diluted EPS.
The basic and diluted loss attributable to TCI Music common stockholders per
common share for the six months and three months ended June 30, 1999 were
computed by dividing the net loss, including accretion of the redeemable
preferred stock by the weighted average number of common shares outstanding
during such periods. Potential common shares were not included in the
computation of weighted average shares outstanding because their inclusion
would be anti-dilutive.
At June 30, 1999, there were 9.1 million potential common shares, consisting of
director and employee stock options that could potentially dilute future EPS
calculations in periods of net income. Such potential common share amount does
not take into account the assumed number of shares
I-11
<PAGE> 13
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
that would be repurchased by TCI Music upon exercise of the director and
employee stock options.
(8) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $3,000,000 and $2,254,000 for the six months ended
June 30, 1999 and 1998, respectively. Cash paid for taxes for the periods
presented was not material.
Significant non-cash investing and related financing activities for the six
month periods ended June 30, are as follows (amounts in thousands):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------- -------
<S> <C> <C>
Cash paid for acquisitions:
Fair value of assets acquired $ 4,547 14,995
Liabilities assumed (136) (1,123)
Debt issued (2,126) (775)
Common stock issued in acquisitions -- (2,730)
------- -------
Cash paid for acquisitions $ 2,285 10,367
======= =======
</TABLE>
(9) Derivative Financial Instruments
The Financial Accounting Standards Board recently issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities," ("SFAS 133"), which is effective for all fiscal years
beginning after June 15, 1999. SFAS 133 establishes accounting and reporting
standards for derivative instruments and hedging activities by requiring that
all derivative instruments be reported as assets or liabilities and measured at
their fair values. Under SFAS 133, changes in the fair values of derivative
instruments are recognized immediately in earnings unless those instruments
qualify as hedges of the (1) fair values of existing assets, liabilities, or
firm commitments, (2) variability of cash flows of forecasted transactions, or
(3) foreign currency exposures on net investments in foreign operations. As of
June 30, 1999, the Company has not entered into any derivative contracts nor
does it hold any derivative financial instruments.
(10) Commitments and Contingencies
Parent Guarantees
The Company has guaranteed certain contracts of DMX-Europe N.V. ("DMX-E")
related to DMX-E's 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. 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 GmbH ("Selco"), and the
related side letter agreement (the "Selco Agreement"). The Company cannot
estimate the amount of any potential claims at this time under such guarantee.
However, the Company has received a letter from counsel for Selco requesting
that the Company make a proposal to settle claims alleged by Selco for damages
in the amount of approximately $2.5 million with respect to a guarantee by the
Company of obligations of DMX-E under the Selco Agreement. On April 8, 1999 the
Company made Selco a settlement offer in the amount of $250,000. Selco has
responded to the settlement offer by requesting an increase in the settlement
offer amount. The Company responded that it would not increase the settlement
offer amount in the absence of a counter offer from Selco. The Company has
accrued certain amounts based on the facts available as of the date of this
Form 10-Q. Notwithstanding the foregoing settlement offer, no assurance can be
given that Selco will not continue to pursue its claims and, if Selco elects to
initiate formal legal proceedings, whether the Company will be held liable for
any material amount.
I-12
<PAGE> 14
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Notes to Consolidated Financial Statements
(11) Legal Actions
On or about July 7, 1993, the American Society of Composers, Authors, and
Publishers ("ASCAP") initiated an action against the Company and others in the
United States District Court for the Southern District of New York. The action
is being brought by ASCAP for a determination of a reasonable license fee for
the right to use music in the ASCAP repertory. The Company entered into a
stipulation with ASCAP wherein the Company will not actively participate in the
proceedings, but will be bound by the District Court's findings.
On or about December 8, 1998, Broadcast Music, Inc. ("BMI") initiated an action
against the Company and others in the United States District Court for the
Southern District of New York. The action is being brought by BMI for a
determination of a reasonable license fee for the right to use music in the BMI
repertory. The parties are currently beginning the discovery process and will
be submitting briefs to determine the issues in the case.
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.
I-13
<PAGE> 15
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Company and should be read
in conjunction with the accompanying consolidated financial statements and
notes thereto of the Company. Additionally, the following discussion and
analysis should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations and financial
statements included in Part IV of the Company's Annual Report on Form 10-K for
the year ended December 31, 1998. The following discussion focuses on material
trends, risks and uncertainties affecting the results of operations and
financial condition of the Company.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In particular, some of the statements contained
under this caption are forward-looking. Such forward-looking statements involve
known and unknown risks, uncertainties and other important factors that could
cause the actual results, performance or achievements of the Company to differ
materially from future results, performance, or achievements expressed or
implied by such forward-looking statements. Such risks, uncertainties and other
factors include, among others: general economic and business conditions and
industry trends; the regulatory and competitive environment of the industries
in which the Company has interests or operations; uncertainties inherent in new
business strategies; uncertainties inherent in the changeover to year 2000,
including the Company's projected state of readiness, the projected cost of
remediation, the expected date of completion of each program or phase, the
projected worst case scenarios; and the expected contingency plans associated
with such worst case scenarios; new product launches and development plans;
rapid technological changes; development and provisions of programming for new
television and telecommunications technologies; future financial performance,
including availability, terms and deployment of capital; the ability of vendors
to deliver required equipment, software and services; availability of qualified
personnel; changes in, or failure or inability to comply with, government
regulations; changes in the nature of key strategic relationships with partners
and joint venturers; and competitor responses to the Company's products and
services, and the products and services of the entities in which the Company
has interests, and the overall market acceptance of such products and services.
These forward-looking statements (and such risks, uncertainties and other
factors) speak only as of the date of this Report, and the Company expressly
disclaims any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based. Any statement
contained within Management's Discussion and Analysis of Financial Condition
and Results of Operations related to year 2000 are hereby denominated as "Year
2000 Statements" within the meaning of the Year 2000 Information and Readiness
Disclosure Act.
Year 2000
During the six months ended June 30, 1999, TCI Music, in conjunction with AT&T,
continued its enterprise-wide comprehensive efforts to assess and remediate its
computer systems and related software and equipment to ensure such systems,
software and equipment recognize, process and store information in the year
2000 and thereafter. AT&T's year 2000 remediation efforts include an assessment
of TCI Music's most critical systems, equipment, and facilities. AT&T also
continued its effort to verify the year 2000 readiness of TCI Music's
significant suppliers and vendors and continued to communicate with significant
business partners to assess such partners year 2000 status.
AT&T has a year 2000 Program Management Office (the "PMO") to organize and
manage its year 2000 remediation efforts. The PMO is responsible for
overseeing, coordinating and reporting on TCI Music's year 2000 remediation
efforts. At June 30, 1999, it was comprised of a 340 member, full time staff
accountable to the executive management of AT&T. The PMO has defined a
four-phase approach to determining the year 2000 readiness of TCI Music's
systems, software and equipment. Such approach is expected to provide a
detailed method for tracking the evaluation, repair and testing of TCI Music's
critical systems, software and equipment. Phase 1, Assessment, involves the
inventory of all critical systems, software and equipment and
I-14
<PAGE> 16
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
the identification of any year 2000 issues. Phase 1 also includes the
preparation of the work plans needed for remediation. Phase 2, Remediation,
involves repairing, upgrading and/or replacing any non-compliant critical
equipment and systems. Phase 3, Testing involves testing TCI Music's critical
systems, software and equipment for year 2000 readiness, or in certain cases,
relying on test results provided to TCI Music. Phase 4, Implementation,
involves placing compliant systems, software and equipment into production or
service.
At June 30, 1999, TCI Music has completed all phases of its remediation
efforts.
TCI Music has also completed the inventory and assessment of critical systems
with embedded technologies that impact its operations and has determined the
correct remediation approach.
During the six months ended June 30, 1999, AT&T continued its survey of
significant third-party vendors and suppliers whose systems, services or
products are important to TCI Music's operations. The year 2000 readiness of
such vendors and suppliers is critical to continued provision of TCI Music's
services. AT&T has examined the public disclosures regarding compliance status
made by vendors of critical systems products utilized by TCI Music (such as
addressable controllers, accounting systems and other critical hardware and
software), and is in the process of examining the public disclosures regarding
compliance status made by critical suppliers (such as utilities, banking, and
similar critical operational services). The majority is either year 2000 ready,
requires the implementation of an adjustment to the company's systems, or is
expected to be year 2000 ready by third quarter 1999. Verification of the
survey results may include, as deemed necessary, conducting functionality
tests, reviewing vendors' test data certifications, engaging in regular
conferences with vendors' year 2000 teams, or re-examining public disclosures
for changes in statues. For those vendors and suppliers who do not expect to be
year 2000 ready by December 31, 1999, or are deemed to be critical to TCI
Music's operations, contingency planning efforts are underway to make such
changes as are required to continue critical operations.
Year 2000 expenses and capital expenditures incurred during the six months
ended June 30, 1999 were immaterial. Management of TCI Music currently
estimates the total cost associated with TCI Music's year 2000 remediation
efforts to be not less than $530,000 (including TCI Music's pro rata share of
AT&T's $33 million cost for replacement of noncompliant information technology
("IT") systems). Although no assurances can be given, management currently
expects that (i) cash flow from operations will fund the costs associated with
year 2000 compliance and (ii) the total projected cost associated with TCI
Music's year 2000 program will not be material to TCI Music's financial
position, results of operations or cash flows.
AT&T is a widely distributed enterprise in which allocation of certain
resources, including IT support is decentralized. Accordingly, neither AT&T nor
TCI Music consolidates an IT budget. Therefore, total estimated year 2000 costs
as a percentage of an IT budget are not available. There are currently no
planned IT projects being deferred due to year 2000 costs.
The failure to correct a material year 2000 problem could result in an
interruption or failure of certain important business operations. Management
believes that its year 2000 program will significantly reduce TCI Music's risks
associated with the changeover to the year 2000 and has implemented certain
contingency plans to minimize the effect of any potential year 2000 related
disruptions. The risks and the uncertainties discussed below and the associated
contingency plans relate to systems, software, equipment, and services that TCI
Music has deemed critical in regard to customer service, business operations,
financial impact or safety.
The failure of certain signal origination equipment or software could disrupt
the delivery of digital music services to customers and could necessitate
crediting customers for failure to receive such premium services. In this
event, management expects that it will transmit repetitive programming until
the problem is resolved. Further, a failure of certain hardware and software
could disrupt the delivery of music video programming services. Management
anticipates that it could resolve the issue by manual intervention until the
situation could be corrected.
A failure of the services provided by billing systems service providers could
result in a loss of customer
I-15
<PAGE> 17
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
records which could result in a disruption in the ability to bill customers for
a protracted period. TCI Music plans to prepare electronic backup records of
its customer billing information prior to the year 2000 to allow for data
recovery. In addition, TCI Music continues to monitor the year 2000 readiness
of its key customer billing suppliers.
In the event that the local public utility cannot supply power, TCI Music
expects to supply power for a limited time to its Denver studio through backup
generators.
The financial impact of any or all of the above worst-case scenarios has not
been and cannot be estimated by TCI Music due to the numerous uncertainties and
variables associated with such scenarios.
TCI Music does not presently anticipate that there will be material losses from
any claims of breach of contract due to year 2000 issues.
Summary of Operations
TCI Music's continuing operation represents the "Audio" segment (DMX) which is
engaged in programming, distributing and marketing a digital music service (DMX
Service) delivered to homes and businesses.
A principal amount of the Audio segment revenues are derived from certain
payments made by the successor to TCI in the AT&T Merger ("AT&T Sub") under a
Contribution Agreement, as amended, between AT&T Sub and the Company (the
"Amended Contribution Agreement"). Pursuant to the Amended Contribution
Agreement, AT&T Sub is required to deliver, or cause certain of its subsidiaries
to deliver to the Company monthly payments aggregating $18 million annually,
adjusted annually through 2017 (the "Annual AT&T Payments"). The adjusted
payments for the six months and three months ended June 30, 1999 were $9.8
million and $4.9 million respectively. The Annual AT&T Payments represent the
revenues received by AT&T Broadband affiliates from the sales of 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 the Company.
Revenue
Total revenue, increased $6.5 million or 23.8% and $3.5 million or 24.2% for
the six months ended and three months ended June 30, 1999 respectively,
compared to the corresponding periods in the prior year. Revenue increases of
$3.7 million for the six months ended and $700,000 for the three months ended
were attributable to the continued growth in DMX's commercial subscriber bases
contributed by the eight new markets added during 1998 and revenues from four
acquired markets completed during the first half of 1999. Revenue increases for
the six months ended and three months ended included a $2.8 million settlement
from Primestar for the loss of future revenues after the DMX Service was
terminated from distribution to Primestar customers on April 28, 1999 as a
result of the acquisition of Primestar by Hughes Electronics Corp.
Operating Expenses
Operating expenses increased $269,000 or 4.1% and $314,000 or 9.5% for the six
months ended and three months ended June 30, 1999 respectively, as compared to
the corresponding periods in the prior year. The increase for each period was
primarily attributable to higher music rights and royalty expenses by $600,000
and by $300,000 for the six months ended and three months ended June 30, 1999
respectively. Offsetting the increase in expenses during the six months ended
was sublease income of $300,000 from the sublease of satellite equipment, which
sublease terminated in April 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $3.6 million or 32.5%
and $1.5 million or 23.8% for the six months ended and three months ended June
30, 1999 respectively, compared to the corresponding periods in the prior year.
The increase for each period was as a result of increased personnel, occupancy
I-16
<PAGE> 18
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
and promotional expenses associated with DMX's expansion of its commercial
business in eight new markets added during 1998 and four acquired markets in
1999.
Stock Compensation
Stock compensation expense increased $244 million for the six months ended and
three months ended June 30, 1999 compared to the corresponding periods in the
prior year. This increase was primarily the result of expense accruals for
executive deferred compensation and tandem stock appreciation rights ("SARs")
earned under the deferred compensation and stock appreciation rights plan
pursuant to APB Opinion No. 25 for the six months ended and three months ended
June 30, 1999. This accrual was $245.1 million, of which $7.8 million was
reflected as part of the loss from discontinued operations. During the quarter,
the trading price of the TCI Music Series A Common Stock increased from $5.25 on
April 6, 1999 to $35.37 per share at June 30, 1999. Such increase in the share
price was due to the April 6, 1999 announcement of a proposed contribution
transaction between the Company, Liberty, and wholly owned subsidiaries of
Liberty that resulted in a definitive Contribution Agreement dated April 23,
1999 (as described in note 2 and 6 to the accompanying consolidated financial
statements), subject to the approval by the stockholders in an annual meeting to
be held on September 8, 1999.
As a result of this price increase, as at June 30, 1999, there were 341,625
SARs exercised at a weighted average price of $38.20 per share and there were
1,230,901 SARs that became vested and exercisable. Total cash payments for SARs
exercised amounted to approximately $12 million of which $5.3 million was
reflected as part of the loss from discontinued operations.
Inventory Writedown
During the second quarter of 1998, certain digital commercial tuners were
written down by $1.1 million as a result of physical inventory adjustments at
the field locations and pricing adjustments to lower of cost or market.
Depreciation and Amortization
Depreciation and amortization expense increased $1.9 million and $1.1 million
for the six months ended and three months ended June 30, 1999 respectively,
compared to the corresponding periods in the prior year. Such increase in each
period was primarily attributable to the additions of property and equipment
and intangibles resulting from acquired businesses made by DMX during the 1998
and the six months ending June 30, 1999.
Interest Expense
Interest expense and financing cost increased $835,000 and $376,000 for the six
months ended and three months ended June 30, 1999 respectively compared to the
corresponding periods in the prior year. At June 30, 1999 the Company had
outstanding borrowings from unrelated parties of $103,731,000 under
variable-rate debt agreements compared to $77,736,000 at June 30, 1998.
Losses from Discontinued Operations
The losses from discontinued operations represent the operating losses and
additional costs of disposal of the Video and Internet segments of the Company
as a result of the MTVN Partnership transaction as described in note 3 to the
accompanying consolidated financial statements. The components of these losses
are as follows (amounts in thousands):
<TABLE>
<CAPTION>
Three months ending Six months ending
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 7,707 7,129 14,572 13,028
Operating costs (20,312) (13,102) (33,720) (24,128)
Other revenue (expense) (187) (119) (284) (193)
Cost of disposal (10,527) -- (10,527) --
Income tax benefit 9,050 1,591 10,356 2,900
-------- -------- -------- --------
Loss from discontinued operations $(14,269) (4,501) (19,603) (8,393)
======== ======== ======== ========
</TABLE>
I-17
<PAGE> 19
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
Liquidity and Capital Resources
During the six months ended June 30, 1999, the Company's financing activities
generated funds of $22.5 million which were used for operating activities of
$11.0 million and investing activities of $9.2 million. Included in the net
funds of $11.0 million used for operating activities was $12 million used for
payment of tandem SARs exercised. The 9.2 million for investing activities were
used for new business acquisitions and purchases of property and equipment. The
net change of these activities resulted in a net increase in cash of $2.3
million.
As described in note 5 to the accompanying consolidated financial statements,
the Company is a party to a revolving loan agreement, which provides borrowings
of up to $100 million. At June 30, 1999, TCI Music had fully utilized its
credit facility of $100 million available under the revolving loan agreement.
On March 19, 1999 the Company signed a promissory note with Liberty, allowing
the Company to draw funds from time to time up to a total of $15 million. At
June 30, 1999, the Company had drawn funds of $5,357,000 against the promissory
note.
TCI Music believes that net cash provided by operating activities (including
the Annual AT&T Payments), and the contribution by Liberty to TCI Music, a
combination of cash and notes payable equal to $150 million, as a result of the
Contribution Agreement described in note 2 to the accompanying financial
statements, will provide adequate sources of liquidity for this year and
intermediate future. As previously described, TCI Music is entitled to receive
the Annual AT&T Payments through 2017. The stock options and tandem SARs vested
and reflected as current liabilities of $196.0 million in the accompanying
consolidated balance sheet at June 30, 1999 will be funded by the sales of
Series A Common Stock upon exercise by holders of stock options or tandem SARs.
Required Leverage Ratio under the Revolving Loan Agreement
As a result of the termination of the DMX service from distribution to Primestar
customers on April 28, 1999, the Company anticipates that its operations for the
third and fourth quarter of 1999 would fail to satisfy the required financial
leverage ratios in the $100 million credit facility under its Revolving Loan
Agreement, resulting in a default under the loan. Accordingly, the Company and
Liberty are negotiating with the Bank of America, the administrative agent for
the credit facility agreement, to make amendments to the required covenant
calculations to include the assets to be contributed by Liberty under the
Contribution Agreement as described in note 2 to the accompanying consolidated
financial statements. TCI Music believes that the covenants will be amended so
as not to cause the Company to be in default.
Contingencies
For additional information concerning other commitments and contingencies of
the company, see note 10 to the accompanying consolidated financial statements.
I-18
<PAGE> 20
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a.) Exhibits
o (27) TCI Music, Inc. Financial Data Schedule.
(b.) Reports on Form 8-K filed during the quarter ended June 30, 1999:
During the quarter ended June 30, 1999, the Company filed four reports on Form
8-K.
o Form 8-K dated April 16, 1999.
o Form 8-K dated April 28, 1999.
o Form 8-K dated May 24, 1999, as amended by Form 8-K/A filed June 1, 1999.
o Form 8-K dated June 7, 1999.
<PAGE> 21
TCI MUSIC, INC. AND SUBSIDIARIES
(A Subsidiary of Liberty Media Corporation)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TCI MUSIC, INC.
Date: August 16, 1999 By: /s/ Lee Masters
-----------------------------------
Lee Masters
President and
Chief Executive Officer
Date: August 16, 1999 By: /s/ Ralph J. Sorrentino
-----------------------------------
Ralph J. Sorrentino
Executive Vice President and
Chief Financial Officer
<PAGE> 22
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,805,000
<SECURITIES> 0
<RECEIVABLES> 78,955,000
<ALLOWANCES> 1,149,000
<INVENTORY> 4,390,000
<CURRENT-ASSETS> 92,586,000
<PP&E> 20,576,000
<DEPRECIATION> 5,655,000
<TOTAL-ASSETS> 302,604,000
<CURRENT-LIABILITIES> 211,638,000
<BONDS> 102,606,000
0
0
<COMMON> 866,000
<OTHER-SE> (78,649,000)
<TOTAL-LIABILITY-AND-EQUITY> 302,604,000
<SALES> 33,728,000
<TOTAL-REVENUES> 33,728,000
<CGS> 274,105,000
<TOTAL-COSTS> 274,105,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,225,000
<INCOME-PRETAX> (243,543,000)
<INCOME-TAX> (92,912,000)
<INCOME-CONTINUING> (150,631,000)
<DISCONTINUED> (19,603,000)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (170,234,000)
<EPS-BASIC> (2.08)
<EPS-DILUTED> (2.08)
</TABLE>
