<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2000
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
LIBERTY DIGITAL, 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)
12312 West Olympic Blvd.
Los Angeles, CA 90064
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
(310) 979-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
The number of shares outstanding of the Registrant's Series A Common Stock
and Series B Common Stock as of July 31, 2000 were 30,929,336 and 171,950,167,
respectively.
<PAGE> 2
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 4,074 2,176
Trade receivables:
Unaffiliated 9,865 8,162
Related party (note 6) 2,954 2,839
Allowance for doubtful accounts (2,037) (1,342)
----------- -----------
10,782 9,659
----------- -----------
Prepaid expenses and other current assets 4,178 3,411
Equipment inventory 5,856 5,080
----------- -----------
Total current assets 24,890 20,326
Investment in affiliates, accounted for under the equity method 27,503 34,345
Investment in available for sale securities:
Investment in ACTV, Inc. 142,304 516,088
Investment in Open TV 95,664 175,243
Investment in Priceline.com, Inc. 118,700 148,047
Other available-for-sale investments 178,331 90,670
Other investments:
Investment in MTVN Partnership 136,350 135,975
Other 139,554 81,482
Property and equipment, at cost:
Furniture and equipment 20,809 17,246
Leasehold improvements 1,706 1,087
Studio and other support equipment 5,711 4,158
----------- -----------
28,226 22,491
Less: accumulated depreciation (7,618) (4,072)
----------- -----------
20,608 18,419
Intangible assets, net of accumulated amortization (note 5) 493,135 512,502
Other assets 1,075 765
----------- -----------
Total assets $ 1,378,114 1,733,862
=========== ===========
</TABLE>
(continued)
I-1
<PAGE> 3
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED BALANCE SHEETS, CONTINUED
(amounts in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- -----------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 14,414 10,455
Accrued liabilities on disposal - DMX-Europe N.V 1,090 1,116
Current portion of debt 8,246 5,327
Note payable - related party (note 6) 87,459 23,347
Accrued stock compensation, current (note 7) 315,776 537,364
----------- -----------
Total current liabilities 426,985 577,609
Debt 93,395 97,813
Negative investment in DMX-Europe N.V 1,358 1,358
Accrued stock compensation, long term (note 7) 110,102 101,846
Deferred income tax liability (note 6) 183,734 375,818
Other liabilities 17,154 16,854
----------- -----------
Total liabilities 832,728 1,171,298
----------- -----------
Series B redeemable convertible preferred stock, $.01 par value,
authorized 5,000,000 shares; 150,000 shares issued and
outstanding in 2000, liquidation preference and redemption
value of $157,685 in 2000 and $153,308 in 1999 157,685 153,308
Stockholders' equity:
Common stock, $.01 par value:
Series A;
Authorized 1,000,000,000 shares; issued and outstanding
30,742,438 shares in 2000 and 26,507,489 shares in 1999 307 265
Series B;
Authorized 750,000,000 shares; issued and outstanding
171,950,167 shares in 2000 and 1999 1,720 1,720
Paid-in capital 801,513 617,013
Accumulated deficit (408,895) (463,010)
Deferred tax asset to be utilized by parent (note 6) (171,660) (210,277)
Executive stock compensation adjustment by parent, net of taxes -- (4,615)
Accumulated other comprehensive earnings, net of taxes 164,716 468,160
----------- -----------
Total stockholders' equity 387,701 409,256
----------- -----------
Commitments and contingencies (note 8)
Total liabilities and stockholders' equity $ 1,378,114 1,733,862
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
I-2
<PAGE> 4
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Liberty Digital TCI Music
----------------------------------------------------------------- ------------
Three months Three months Six months Four months Two months
ended ended ended ended ended
June 30, June 30, June 30, June 30, February 28,
------------ ------------ ---------- ----------- ------------
2000 1999 2000 1999 1999
------------ ------------ ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Revenue: |
Unaffiliated $ 10,065 10,416 18,936 13,044 | 5,364
Related party (note 6) 7,621 7,587 15,327 10,137 | 5,183
--------- --------- --------- --------- | ---------
|
17,686 18,003 34,263 23,181 | 10,547
Operating expenses: |
Operating 3,700 3,606 7,473 4,662 | 2,191
Selling, general and administrative 11,153 8,637 23,879 11,304 | 4,580
Stock compensation (note 7) (13,769) 239,814 (145,740) 239,531 | 85
Depreciation and amortization 14,390 13,273 27,970 16,691 | 2,502
--------- --------- --------- --------- | ---------
|
15,474 265,330 (86,418) 272,188 | 9,358
|
Operating income (loss) 2,212 (247,327) 120,681 (249,007) | 1,189
|
Other expense: |
Interest expense, net: |
Unaffiliated (1,614) (1,560) (3,859) (2,066) | (1,036)
Related party (note 6) (2,099) (85) (3,225) (105) | --
--------- --------- --------- --------- | ---------
|
(3,713) (1,645) (7,084) (2,171) | (1,036)
|
Share of losses of affiliates (5,328) (607) (12,532) (794) | (6)
Impairment of investment (2,204) -- (2,204) -- | --
Dividend income 380 -- 981 -- | --
Other, net 2 (12) 16 (24) | (2)
--------- --------- --------- --------- | ---------
Income (loss) from continuing |
operations before income taxes (8,651) (249,591) 99,858 (251,996) | 145
|
Income tax benefit (expense) (1,025) 95,620 (45,743) 95,265 | (1,049)
--------- --------- --------- --------- | ---------
|
Income (loss) from continuing |
operations (9,676) (153,971) 54,115 (156,731) | (904)
--------- --------- --------- --------- | ---------
|
Discontinued operations: |
Loss from operations, net of income |
taxes -- (15,062) -- (15,861) | (3,440)
--------- --------- --------- --------- | ---------
|
Net income (loss) (9,676) (169,033) 54,115 (172,592) | (4,344)
--------- --------- --------- --------- | ---------
|
Other comprehensive earnings, net of taxes: |
|
Foreign currency translation -- 9 -- (22) | (49)
Unrealized holding gains (losses) |
arising during the period, net of tax (346,773) 66,915 (303,444) 244,702 | --
--------- --------- --------- --------- | ---------
Other comprehensive earnings (loss) (346,773) 66,924 (303,444) 244,680 | (49)
--------- --------- --------- --------- | ---------
|
Comprehensive earnings (loss) $(356,449) (102,109) (249,329) 72,088 | (4,393)
========= ========= ========= ========= | =========
</TABLE>
(continued)
I-3
<PAGE> 5
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE EARNINGS, CONTINUED
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Liberty Digital TCI Music
----------------------------------------------------------- ------------
Three months Three months Six months Four months Two months
ended ended ended ended ended
June 30, June 30, June 30, June 30, February 28,
------------ ------------ ----------- ----------- ------------
2000 1999 2000 1999 1999
------------ ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Basic earnings (loss) per share (note 3): |
Income (loss) from continuing operations $ (0.05) (1.10) 0.42 (1.17) | (0.02)
Discontinued operations 0.00 (0.08) 0.00 (0.09) | (0.04)
----------- =========== ----------- ----------- | -----------
Net income (loss) per share $ (0.05) (1.18) 0.42 (1.26) | (0.06)
=========== =========== =========== =========== | ===========
|
Weighted average common shares and |
equivalent shares 201,714 192,216 200,264 183,722 | 81,377
=========== =========== =========== =========== | ===========
|
|
Diluted earnings (loss) per share (note 3): |
Income (loss) from continuing operations $ (0.05) (1.10) 0.38 (1.17) | (0.02)
Discontinued operations 0.00 (0.08) 0.00 (0.09) | (0.04)
----------- =========== ----------- ----------- | -----------
Net income (loss) per share $ (0.05) (1.18) 0.38 (1.26) | (0.06)
=========== =========== =========== =========== | ===========
|
Weighted average common shares and |
equivalent shares 201,714 192,216 234,300 183,722 | 81,377
=========== =========== =========== =========== | ===========
</TABLE>
See accompanying notes to consolidated financial statements
I-4
<PAGE> 6
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands)
<TABLE>
<CAPTION>
Common stock
------------------ Paid in Accumulated
Series A Series B capital deficit
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 $ 265 1,720 617,013 (463,010)
Accretion of redeemable
convertible preferred stock -- -- (4,377) --
Shares issued for
acquisitions and investments 24 -- 104,136 --
Shares issued for exercise of
stock appreciation rights
(note 7) 12 -- 68,510 --
Sale of Series A common shares 6 -- 24,994 --
Settlement of stock
appreciation awards by
parent -- -- (4,615) --
Deferred tax on executive
stock appreciation rights
(notes 6 and 7) -- -- -- --
Deferred tax benefit
transferred to parent (note 6) -- -- (4,148) --
Unrealized loss on available
for sale securities -- -- -- --
Net income -- -- -- 54,115
-------- -------- -------- -----------
Balance at June 30, 2000 $ 307 1,720 801,513 (408,895)
======== ======== ======== ===========
</TABLE>
<TABLE>
<CAPTION>
Deferred Executive
tax stock Accumulated
asset compensation other
to be adjustment comprehensive
utilized by by parent, earnings,
parent net of taxes net of taxes Total
----------- ------------- ------------- --------
<S> <C> <C> <C> <C>
Balance at January 1, 2000 (210,277) (4,615) 468,160 409,256
Accretion of redeemable
convertible preferred stock -- -- -- (4,377)
Shares issued for
acquisitions and investments -- -- -- 104,160
Shares issued for exercise of
stock appreciation rights
(note 7) -- -- -- 68,522
Sale of Series A common shares -- -- -- 25,000
Settlement of stock
appreciation awards by
parent -- 4,615 -- --
Deferred tax on executive
stock appreciation rights
(notes 6 and 7) 38,617 -- -- 38,617
Deferred tax benefit
transferred to parent (note 6) -- -- -- (4,148)
Unrealized loss on available
for sale securities -- -- (303,444) (303,444)
Net income -- -- -- 54,115
----------- ------------- ------------- --------
Balance at June 30, 2000 (171,660) -- 164,716 387,701
=========== ============= ============= ========
</TABLE>
See accompanying notes to consolidated financial statements
I-5
<PAGE> 7
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
<TABLE>
<CAPTION>
Liberty Digital TCI Music
---------------------------- ------------
Six months Four months Two months
ended ended ended
June 30, June 30, February 28,
------------ ------------ ------------
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities: |
|
Net income (loss) $ 54,115 (172,592) | (4,344)
|
Add: Loss from discontinued operations, net of taxes -- 15,861 | 3,440
------------ ------------ | ------------
Income (loss) from continuing operations 54,115 (156,731) | (904)
|
Adjustments to reconcile net income (loss) to net cash provided |
by (used in) operating activities: |
Depreciation and amortization 27,970 16,691 | 2,502
Share of losses of affiliates 12,532 794 | 6
Marketable securities received as dividends (981) -- | --
Stock compensation (145,740) 239,531 | 85
Provision for doubtful accounts 1,347 179 | 153
Impairment of investments at cost 2,204 -- | --
Deferred income tax expense (benefit) 45,743 (95,265) | 1,049
Interest expense payable to parent 3,209 77 | --
|
Changes in operating assets and liabilities, net of the effect of |
acquisitions and discontinued operations: |
Accounts receivable (1,682) 818 | (510)
Prepaid and other current assets (589) (757) | 1,190
Accounts payable, accrued expenses and other liabilities 2,518 3,979 | (1,872)
------------ ------------ | ------------
Net cash provided by continuing operating activities 646 9,316 | 1,699
Net cash used in discontinued operating activities -- (9,864) | (2,739)
------------ ------------ | ------------
Net cash provided by (used in) operating activities 646 (548) | (1,040)
------------ ------------ | ------------
|
Cash flows from investing activities: |
Investments in and advances to affiliates and |
others, net of distributions (73,203) (42,424) | --
Cash paid for acquisitions (3,724) (2,123) | (155)
Capital expended for property and equipment (5,512) (2,287) | (2,053)
Other investing activities (105) (557) | (92)
------------ ------------ | ------------
Net cash used in investing activities (82,544) (47,391) | (2,300)
------------ ------------ | ------------
|
Cash flows from financing activities: |
Proceeds from sale of series A common shares 25,000 -- | --
Proceeds from exercise of stock options 929 1,366 | --
Redemption of preferred shares -- (148) | --
Borrowing from related party 85,903 5,356 | --
Repayment of related party debt (25,143) (229) | (85)
Borrowings of debt -- 464 | 4,500
Repayment of debt (2,893) (713) | (157)
------------ ------------ | ------------
Net cash provided by financing activities 83,796 6,096 | 4,258
------------ ------------ | ------------
|
Net (decrease) increase in cash and cash equivalents 1,898 (41,843) | 918
|
Cash and cash equivalents, beginning of period 2,176 127,731 | 5,467
------------ ------------ | ------------
|
Cash and cash equivalents, end of period $ 4,074 85,888 | 6,385
============ ============ | ============
</TABLE>
(continued)
I-6
<PAGE> 8
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000
(1) Basis of Presentation
The accompanying interim consolidated balance sheet at June 30, 2000 and
consolidated statements of operations and comprehensive earnings, stockholders'
equity and cash flows for the periods presented are unaudited. The results of
operations for the two months ended February 28, 1999 reflect the operations of
the Company before AT&T Corp. ("AT&T") acquired Tele-Communications Inc. ("TCI")
in a merger ("AT&T Merger") and before the "Contribution Agreement" between
Liberty Media Corporation ("Liberty") and the Company retroactive to March 1,
1999.
As a result of the AT&T Merger, Liberty applied "push down" accounting and
recorded in the accounts of the Company the fair value adjustments relating to
the assets of the Company as recorded by Liberty upon completion of the AT&T
Merger. In connection with the Contribution Agreement with Liberty, the Company
recorded related party transactions at predecessor cost in a manner similar to
pooling of interests. For financial statement purposes, the fair value
adjustments and the transactions under the Contribution Agreement were reflected
retroactive to March 1, 1999.
Certain reclassifications of prior period amounts have been made to conform to
the current period's reporting format.
(2) Accounting Standards
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 periods beginning after
June 15, 2000 (as amended by SFAS 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective date of FASB Statement No.
133" and SFAS 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133"). 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, 2000, the Company has not entered into any
derivative contracts nor does it hold any derivative financial instruments.
Therefore, SFAS 133 would not have had a material impact on the Company's
consolidated results of operations, financial position, or cash flows. The
Company has entered into a hedging transaction subsequent to June 30, 2000.
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin ("SAB") 101, Revenue Recognition in Financial Statements.
SAB 101 provides guidance on the recognition, presentation, and disclosure of
revenue in financial statements of all public registrants. Any change in the
Company's revenue recognition policy resulting from the implementation of SAB
101 would be reported as a change in accounting principle. In June 2000, the SEC
issued SAB 101B, which delays the implementation date of SAB 101 until the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. The
adoption of SAB 101 is not expected to have material impact on the financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44 ("Interpretation No.
44"), an interpretation of APB Opinion No. 25, Accounting for Certain
Transactions involving Stock Compensation. Interpretation No. 44 is effective
after July 1, 2000, but certain conclusions in Interpretation No. 44 cover
specific events that occur after either December 15, 1998, or January 12, 2000.
To the extent that Interpretation No. 44 covers events occurring during the
period after December 15, 1999, or January 12, 2000, but before the effective
date of July 1, 2000, the effects of applying Interpretation No. 44 are
recognized on a prospective basis from July 1, 2000. The adoption of
Interpretation no. 44 is not expected to have a material impact on the financial
statements.
I-7
<PAGE> 9
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Earnings (Loss) Per Common and Potential Common Share
The Company computes earnings (loss) per share in accordance with SFAS No. 128,
"Earnings per Share" and Securities and Exchange Commission Staff Accounting
Bulletin No. 98 (SAB 98). SFAS No. 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, or at original issuance date, if later.
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 following table sets forth the computation of basic and diluted net income
(loss) attributable to common shareholders and weighted average outstanding
common shares used in the computation of basic and diluted earnings (loss) per
share in the accompanying consolidated statements of operations and
comprehensive earnings (amounts in thousands):
<TABLE>
<CAPTION>
Liberty Digital TCI Music
------------------------------------------------------------ ------------
Three Three Six Four Two
months months months months months
ended ended ended ended ended
June 30, June 30, June 30, June 30, February 28,
2000 1999 2000 1999 1999
------------ ------------ ------------ ------------ | ------------
<S> <C> <C> <C> <C> | <C>
Net income (loss) $ (9,676) (169,033) 54,115 (172,592) | (4,344)
|
Deferred tax assets to be utilized by |
parent 1,819 (57,759) 34,469 (57,759) | --
Accretion of redeemable preferred stock (1,759) (231) (4,377) (357) | (252)
------------ ------------ ------------ ------------ | ------------
Net income (loss) attributable to common |
shareholders (9,616) (227,023) 84,207 (230,708) | (4,596)
Accretion of redeemable preferred stock -- -- 4,377 -- | --
------------ ------------ ------------ ------------ | ------------
Net income (loss) attributable to common |
shareholders - dilutive (9,616) (227,023) 88,584 (230,708) | (4,596)
============ ============ ============ ============ | ============
|
Weighted average shares outstanding - |
basic 201,714 192,216 200,264 183,722 | 81,377
Series B Preferred Stock -- -- 25,751 -- | --
Stock appreciation rights -- -- 8,285 -- | --
------------ ------------ ------------ ------------ | ------------
Weighted average shares outstanding - |
dilutive 201,714 192,216 234,300 183,722 | 81,377
============ ============ ============ ============ | ============
</TABLE>
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest during the periods presented was as follows (amounts in
thousands):
<TABLE>
<S> <C> <C>
Liberty Digital Three months ended June 30, 2000 $ 1,614
Three months ended June 30, 1999 1,778
Six months ended June 30, 2000 3,881
Four months ended June 30,1999 1,772
----------------------- ----------------------------------------------------- ---------------------
TCI Music Two months ended February 28, 1999 1,184
</TABLE>
Cash paid for taxes for the periods presented are not material.
I-8
<PAGE> 10
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant noncash investing and financing activities are reflected in the
following table (amounts in thousands):
<TABLE>
<CAPTION>
Liberty Digital TCI Music
---------------------------- ------------
Six Four Two
months months months
ended ended ended
June 30, June 30, February 28,
2000 1999 1999
------------ ------------ ------------
<S> <C> <C> | <C>
Investments, net of distributions $ 172,273 42,424 | --
Fair value of other businesses acquired 11,695 4,319 | 221
Other liabilities assumed (1,486) (130) | (66)
Debt issued (1,395) (2,066) | --
Common stock issued for investments and acquisitions (104,160) -- | --
------------ ------------ | ------------
Cash paid for investments and acquisitions 76,927 44,547 | 155
============ ============ | ============
|
Accretion of redeemable convertible preferred stock 4,377 357 | 252
============ ============ | ============
|
Conversion of Series A Preferred Stock to common stock -- 34,782 | --
============ ============ | ============
</TABLE>
(5) Intangible Assets
The following is a summary of the intangible assets as of the following periods
(amounts in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------ ------------
<S> <C> <C>
Access agreement $ 250,000 250,000
Goodwill from AT&T Merger 199,179 199,179
Excess of acquisition costs over net assets acquired 102,513 97,829
Other 2,077 1,822
------------ ------------
553,769 548,830
Accumulated amortization (60,634) (36,328)
------------ ------------
493,135 512,502
============ ============
</TABLE>
(6) Related Party Transactions
Pursuant to the AT&T Amended Contribution Agreement between the AT&T Broadband,
LLC ("AT&T Broadband") and the Company effective since July 1, 1997, AT&T
Broadband is required to deliver, or cause certain of its subsidiaries to
deliver, to the Company the AT&T Broadband Annual Payments, aggregating $18
million, adjusted annually through 2017. Such payments represent the revenues
received by AT&T Broadband from sales of DMX services. The agreement also
requires the Company to pay AT&T Broadband charges for certain services rendered
in connection with the AT&T Broadband Annual Payments. Such charges are included
in operating expenses in the accompanying consolidated statements of operations
and comprehensive earnings.
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, 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
I-9
<PAGE> 11
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to the Company. Under the SSI Affiliation Agreement, SSI pays an annual fee to
the Company of $8.5 million subject to annual adjustments. In addition, the
Company receives subscriber revenue from AT&T Broadband affiliates for the
distribution of DMX services through AT&T Broadband's digital business.
The following table summarizes the related party transactions as described above
for the periods reflected in the accompanying consolidated statements of
operations and comprehensive earnings (amounts in thousands):
<TABLE>
<CAPTION>
Liberty Digital TCI Music
------------------------------------------------------------ ------------
Three Three Six Four Two
months months months months months
ended ended ended ended ended
June 30, June 30, June 30, June 30, February 28,
2000 1999 2000 1999 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> | <C>
Revenue from AT&T Broadband Annual |
Payments $ 4,818 4,901 9,654 6,540 | 3,296
Operating charges paid to AT&T |
Broadband (318) (401) (654) (540) | (296)
Revenue from SSI 2,125 2,125 4,250 2,833 | 1,417
Revenue from AT&T Broadband 678 561 1,423 764 | 470
</TABLE>
On October 21, 1999, the Company signed a promissory note in favor of a
subsidiary of Liberty amounting to $100 million, with a maturity date of
December 31, 2000 and an interest rate that is the greater of the prime rate
plus 1% or federal funds rate plus 2.25%. Interest is payable quarterly and
compounded semi-annually. In addition, a commitment fee of 0.5% is charged on
the unused portion of the promissory note. At June 30, 2000, the note balance of
$87,459,000, which includes accrued interest and commitment fees of $3,209,000,
is reflected as "note payable - related party" in the accompanying consolidated
balance sheet.
The Company leases certain office space, uplinking and satellite services from
National Digital Television Center, Inc. ("NDTC"). Total expenses under such
lease agreements are reflected in the accompanying consolidated statements of
operations and comprehensive earnings as follows (amounts in thousands):
<TABLE>
<CAPTION>
Liberty Digital TCI Music
--------------------------------------------------------- ------------
Three Three Six Four Two
months months months months months
ended ended ended ended ended
June 30, June 30, June 30, June 30, February 28,
2000 1999 2000 1999 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> | <C>
Operating expenses $ 1,796 1,256 2,516 1,643 | 773
|
Loss from discontinued operations -- 441 -- 574 | 281
</TABLE>
The Company was included in the consolidated federal income tax return of TCI up
to February 28, 1999. Starting March 1, 1999, the Company is included in the
consolidated tax return of AT&T and is party to a Tax Liability Allocation and
Indemnification Agreement with its parent, Liberty, dated September 9, 1999 (the
"Tax Sharing Agreement"). The income tax provision for the Company is calculated
based on a hypothetical tax liability determined as if the Company filed a
separate tax return.
I-10
<PAGE> 12
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Tax Sharing Agreement, the Company will record a current intercompany
tax benefit from Liberty in periods when it generates taxable losses and such
losses are utilized by Liberty to reduce its income tax liability. In periods
when the Company generates taxable income, the Company will record current
intercompany tax expense. To the extent that the cumulative intercompany tax
expense is greater than the cumulative benefit, the Company will settle such
excess liability in cash to Liberty.
During the six months ended June 30, 2000, Liberty utilized tax benefits of $4.1
million related to net operating losses incurred by the Company in previous
periods.
Further, the Company has agreed to pay Liberty for any income tax benefits
realized with respect to the Deferred Compensation and Stock Appreciation Rights
Plan. At June 30, 2000, the Company has recorded $171.7 million of deferred tax
benefits related to this plan as a separate component of stockholders' equity.
(7) Deferred Compensation and Stock Option Plan
Certain officers and key employees of the Company are party to stock-based
compensation arrangements, as described below:
Participants under the Company's 1997 Stock Incentive Plan hold options with
tandem stock appreciation rights ("1997 Options"), which base compensation on
the performance of the Company's stock.
A key employee is the sole participant in the Deferred Compensation and Stock
Appreciation Rights Plan ("1999 SARs"), approved on September 9, 1999, which
bases compensation on the market value of the Company's stock using a
combination of deferred compensation and stock appreciation rights ("SARs"). A
former key executive held vested 1999 SARs, which were exercised prior to his
resignation on February 15, 2000. In addition, during the six months ended June
30, 2000, the Company paid his deferred compensation in the form of common stock
of the Company and cancelled his unvested deferred compensation rights and 1999
SARs in accordance with the provisions of the plan.
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 the Company's 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 earnings for the three months and six months ended June 30, 2000
reflect credit adjustments of $13.8 million and $145.8 million, respectively,
due to the decline in the stock price underlying the 1997 Options and 1999 SARs,
as well as the resignation of a former key executive on February 15, 2000. The
accrued expense for earned 1997 Options at December 31, 1999 and still
outstanding and unexercised at June 30, 2000 was based on a closing price at
June 30, 2000 of $30.00 per share. Such accrual for earned 1997 Options was
based on closing stock prices of $74.25 per share at December 31, 1999 and at
$38.50 at March 31, 2000. The accrued expense for earned 1999 SARs at December
31, 1999 and still outstanding and unexercised at June 30, 2000 was based on the
average market price in accordance with the 1999 SARs terms of $35.78 per share
at June 30, 2000. Such accrual for earned 1999 SARs was based on an average
price of $62.30 per share at December 31, 1999 and at $45.19 per share at March
31, 2000. The changes in the expense accrual were reflected as expense
reversals. Offsetting these credits were additional stock compensation expenses
for 1997 Options and 1999 SARs earned after December 31, 1999. The combined 1997
Options and 1999 SARs liability is $425.9 million of which $110.1 million is
reflected as long term in the consolidated balance sheet at June 30, 2000.
(8) Commitments and Contingencies
The Company has guaranteed certain obligations of DMX-E under the Subscriber
Management Services Agreement between DMX-E and Selco Servicegesellschaft fur
elektronische Kommunikation GmbH ("Selco"), and a related side letter agreement
(the "Selco Agreement"). On July 10, 2000, the Company signed a settlement
agreement and mutual release whereby the Company will pay Selco $950,000 for
settlement and mutual release from any and all claims. This settlement is
reflected as a liability in the accompanying balance sheet at June 30, 2000.
The Company 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
I-11
<PAGE> 13
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Publishers ("ASCAP"), Broadcast Music, Inc. ("BMI") and the Society of European
Stage Authors and Composers ("SESAC"). The Company has separate agreements with
ASCAP, BMI and SESAC for residential and commercial distribution. Certain of the
agreements are being negotiated on an industry-wide basis including new rate
structures that may require retroactive rate increases. The Company has
continued to accrue royalties under agreements 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 Company is unable to determine
whether the outcome of this matter will have a material effect on the financial
statements.
On or about July 7, 1993, ASCAP initiated an action against the Company and
others in the United States District Court for the Southern District of New York
for a determination of a reasonable license fee for the right to use music in
the ASCAP repertory distributed to residential customers. 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. The
Company is unable to determine whether the outcome of this matter will have a
material effect on the financial statements.
On or about December 8, 1998, BMI initiated an action against the Company and
others in the United States District Court for the Southern District of New York
for a determination of a reasonable license fee for the right to use music in
the BMI repertory distributed to commercial customers. The parties are currently
in the discovery process and a preliminary issue in the case which was ruled on
by the judge, has been appealed by other music service providers. The Company is
unable to determine whether the outcome of this matter will have a material
effect on the financial statements.
The residential agreement with BMI expired in September 1999. Other members of
the industry are currently in rate court with BMI, and the Company will be bound
by the outcome of those proceedings. The Company is operating under an interim
agreement, and does not expect the ultimate rate to exceed the rate in the
previous contract. The Company is unable to determine whether the outcome of
this matter will have a material effect on the financial statements.
As a result of the 1995 Copyright Act, there is a performance right payable to
the record companies on residential services. Commercial distribution is exempt
form this royalty. A copyright arbitration royalty panel ("CARP") determined
that the residential performance right royalty will be 6.5% of residential
revenues, commencing February 1, 1996. As a result of the 1998 Digital
Millennium copyright Act, the Company will be required to pay an ephemeral
reproduction royalty to RIAA for commercial and residential distribution, and a
performance royalty for webcasting. A CARP proceeding has been initiated to
determine webcasting and digital ephemeral reproduction rates. The outcome of
this proceeding is unknown and will be determined, at the earliest, in late
2000. The Company is unable to determine whether the outcome of this matter will
have a material effect on the financial statements.
On August 25, 1999, Ground Zero Entertainment Corporation ("Ground Zero")
commenced an action against the Company in the Supreme Court of the State of New
York for breach of contract, tortious interference with contract, tortious
interference with prospective business relations, fraudulent concealment, and
fraudulent misrepresentation, and to rescind a February 1999 transaction between
Ground Zero and the Company pursuant to which the Company transferred certain
assets of Paradigm Associated Labels ("PAL") to Ground Zero. The court has
dismissed all claims except for the fraudulent misrepresentation allegations.
The Company's motion for clarification and reargument regarding the fraudulent
allegations is pending. On May 23, 2000, the court established a schedule for
discovery, which is presently underway. Discovery must be completed by December
31, 2000. The Company believes that Ground Zero's claims are without merit and
intends to defend the action vigorously. The Company believes that the outcome
of this matter will not have a material effect on the financial statements.
In December 1999, David Wolin ("Wolin"), a former employee of PAL, commenced an
action against the Company in the Supreme Court of the State of New York. The
complaint asserts, among other things, that the Company breached obligations to
Wolin under his employment agreement. On April 7, 2000 the Wolin and Ground Zero
actions were consolidated. On May 23, 2000, the court established a schedule for
discovery, which is presently underway. The Company believes the claim is
without merit and intends to defend such action vigorously. The Company believes
that the outcome of this matter will not have a material effect on the financial
statements.
On September 29, 1999, XTRA Music, Limited ("Xtra") commenced an action against
the Company in the U.S. District Court, in Los Angeles, California. The
complaint in this action seeks a permanent injunction based upon claims of
breach of contract, unfair
I-12
<PAGE> 14
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
business practices and copyright infringements. The contract granted to Xtra an
exclusive license to distribute DMX's music channels via satellite and cable to
"Subscribers" in a defined "Territory" of over 60 countries in Europe and the
Middle East. Xtra alleges that the Company breached the agreement by entering
into an agreement with Lycos, Inc. ("Lycos") to "audio stream" music content
from DMX over the Internet, which is accessible in the Territory. On April 10,
2000, the court granted in part Xtra's motion for partial summary judgment on
its breach of contract claim, finding that by entering into the Lycos contract
the Company had breached the non-competition provisions of the agreement, but
denied Xtra's request for a preliminary injunction, finding that there was no
irreparable injury to Xtra. Xtra is currently seeking summary judgment regarding
a similar agreement subsequently entered into with BET.com and the Company
seeking to dismiss Xtra's copyright infringement claims. The Company
counterclaimed against Xtra seeking damages for breach of a subsequent written
agreement, executed on June 22, 1998 by which the Company supplied system
components, including a digital file server studio, to Xtra. It is expected that
the court will set a trial date in September 2000. The Company believes that
Xtra's claims are without merit and intends to defend such action vigorously.
The Company believes that the outcome of this matter will not have a material
effect on the financial statements.
(9) Information about the Company's Segments
The Company has two reportable business segments: "Audio", which represents the
operations of DMX, a company engaged in programming, distributing and marketing
a digital and audio music service delivered to homes and businesses via cable or
satellite; and "Interactive Media", a segment engaged in the development of
interactive television and investments in businesses that take advantage of the
opportunities of interactive programming content and interactive television.
Summarized financial information by business segment for continuing operations
is as follows (amounts in thousands):
<TABLE>
<CAPTION>
Liberty Digital
---------------------------------------------------
Three months Three months
ended ended
June 30, 2000 June 30, 1999
------------------------ ----------------------
Interactive Interactive
Audio Media Audio Media
-------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Revenue $ 17,686 -- 18,003 --
Income (loss) from continuing operations, excluding
stock-based compensation and before income taxes $ (8,919) (13,501) (10,989) 1,212
Income (loss) from continuing
operations before income taxes $ (9,489) 838 (31,326) (218,265)
Capital expended for property and
equipment and investments $ 6,035 12,900 2,366 23,483
</TABLE>
I-13
<PAGE> 15
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Liberty Digital TCI Music
---------------------------------------------------- -----------------
Six months Four months Two months
ended ended ended
June 30, 2000 June 30, 1999 February 28, 1999
------------------------ ----------------------- -----------------
Interactive Interactive
Audio Media Audio Media Audio
-------- ----------- ------- ----------- -----------------
<S> <C> <C> <C> <C> <C>
Revenue $ 34,263 -- 23,181 -- | 10,547
|
Income (loss) from continuing |
operations, excluding stock-based |
compensation and before income taxes $(21,482) (24,400) (11,902) (563) | 230
|
Income (loss) from continuing |
operations before income taxes $ 364 99,494 (32,292) (219,704) | 145
|
Capital expended for property and |
equipment and investments $ 8,688 73,856 4,410 42,981 | 2,300
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---------- -----------
<S> <C> <C>
Segment Assets
Audio $ 259,202 321,115
Interactive Media 1,118,912 1,412,747
---------- ----------
1,378,114 1,733,862
========== ==========
</TABLE>
Our Interactive Media segment was added as a result of the contribution
transaction completed on September 9, 1999 as discussed in note 1.
I-14
<PAGE> 16
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis provides information concerning our
results of operations and financial condition and should be read in conjunction
with the accompanying consolidated financial statements and notes. 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 our Annual Report on
Form 10-K for the year ended December 31, 1999. The following discussion focuses
on material trends, risks and uncertainties affecting our results of operations
and financial condition.
Some of the statements in this Quarterly Report on Form 10-Q are forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act of 1934. They include statements about our
expectations, beliefs, plans, objectives, assumptions or future events or
performance. These statements are often, but not always, made through the use of
words or phrases such as "will likely result," "expect," "will continue,"
"anticipate," "estimate," "intend," "plan," "projection," "would," and
"outlook." These forward-looking statements are based on our expectations and
are subject to a number of risks and uncertainties. Certain of these risks and
uncertainties are beyond our control. Our actual results may differ materially
from those suggested by these forward-looking statements for various reasons,
including, the fact that our interactive media business, which is in a
preliminary state of development, may not succeed, general economic and business
conditions and industry trends; the continued strength of the satellite services
industry; uncertainties inherent in proposed business strategies and development
plans; rapid technological changes; future financial performance, including
availability, terms and deployment of capital; availability of qualified
personnel; changes in, or the failure or the inability to comply with,
government regulation, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners and joint
venturers; competitor responses to our products and services, and the overall
market acceptance of such products and services, including acceptance of the
pricing of such products and services. These forward-looking statements speak
only as of the date of this Report. We expressly disclaim any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in our expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
Summary of Operations
We are a new media company with interests in Internet e-commerce and content and
interactive media technology businesses. Through our wholly owned subsidiary,
DMX Music, Inc. (formerly DMX, LLC) ("DMX"), we also own and operate a
subscription music business, which provides continuous, commercial free music
programming to homes and businesses. We view our operations as two business
segments, interactive media ("Interactive Media") and audio ("Audio"). As of the
date of this report, our interactive media business is in an early development
stage and has not generated any revenues. We are a majority-owned subsidiary of
Liberty Media Corporation ("Liberty"), which in turn is a wholly owned
subsidiary of AT&T Corp. ("AT&T"). We were incorporated in Delaware on January
21, 1997 as a wholly owned subsidiary of Tele-Communications, Inc. ("TCI") for
the purpose of acquiring DMX. On July 17, 1997, we acquired DMX. In this
transaction, we became a publicly held, majority-owned subsidiary of TCI. On
March 9, 1999, TCI transferred its majority interest in our company to Liberty,
which at that time was a wholly owned subsidiary of TCI. AT&T acquired TCI on
March 9, 1999 in a merger. On March 10, 2000, TCI was converted into a Delaware
limited liability company and renamed AT&T Broadband, LLC ("AT&T Broadband") of
which AT&T is the sole member.
For purposes of the following analysis and discussion, the six months ended June
30, 1999 represents the operations of our Audio segment for the two months ended
February 28, 1999 and the combined operations of our Audio and Interactive Media
segments for the four months ended June 30, 1999. Our Interactive Media segment
was added as a result of the contribution transaction completed on September 9,
1999 as discussed in note 1 to the accompanying financial statements. The
addition of our Interactive Media segment was accounted for as an "as-if"
pooling of interest, since the transaction was between entities under common
control. Accordingly the operations of our Interactive Media segment were
recorded retroactive to March 1, 1999.
In order to provide a meaningful basis for comparing the six months ended June
30, 2000 and 1999, and for purposes of the following table and discussion, the
operating results of Liberty Digital, Inc. for the four months ended June 30,
1999 have been combined with the operating results of TCI Music, Inc. for the
two months ended February 28, 1999, and the resulting six-month operating
results are compared to the operating results for the six months ended June 30,
2000. Depreciation, amortization and certain other line items included in the
operating results are not comparable between the six month periods as the
two-month period ended February 28, 1999 does not include the effects of
purchase accounting adjustments related to the AT&T merger, and subsequent
periods do include the effects of purchase accounting adjustments related to the
AT&T merger. The combining of the accounting
I-15
<PAGE> 17
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
periods before and after the purchase accounting adjustments related to the
merger is not acceptable under generally accepted accounting principles. Our
Interactive Media segment, which is in the development stage, did not have any
revenue during 1999 and for the six months ended June 30, 2000.
Revenue
Our Audio segment's revenues consist primarily of subscriber revenues derived
from the distribution of our music services to homes and businesses. In
addition, our Audio segment derives revenues from the rental of tuner boxes,
sales and installations of sound system products and the provision of in-store
audio marketing systems and custom messaging systems.
A significant amount of our Audio segment revenues are derived from related
party transactions in accordance with certain agreements as follows:
o In connection with the acquisition of DMX, we are to receive payments from
AT&T Broadband, which is obligated under an agreement ("AT&T Amended
Contribution Agreement") to pay monthly revenue payments to us aggregating
$18.0 million each year and adjusted annually through 2017 ("AT&T Broadband
Annual Payment"). The AT&T Broadband Annual Payments represent the revenues
received by AT&T Broadband affiliates from sales of DMX services net of an
amount equal to 10% of the revenue from such sales to residential
subscribers and net of license fees otherwise payable to us.
o Pursuant to our affiliation agreement with Satellite Services, Inc.
("SSI"), a wholly-owned subsidiary of AT&T (the "SSI Affiliation
Agreement"), effective as of July 1, 1997, 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 to us by
SSI. Under the SSI Affiliation Agreement, we receive annual payments from
SSI in the amount of $8.5 million subject to annual adjustments. In
addition, we receive subscriber revenue from AT&T Broadband affiliates for
the distribution of DMX services through AT&T Broadband's digital business.
o The following table summarizes our related party transactions as described
above for the periods reflected in our accompanying consolidated statements
of operations and comprehensive earnings (amounts in thousands):
<TABLE>
<CAPTION>
Liberty Digital TCI Music
---------------------------------------------------- ------------
Three Three Six Four Two
months months months months months
ended ended ended ended ended
June 30, June 30, June 30, June 30, February 28,
2000 1999 2000 1999 1999
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Revenue from AT&T Broadband Annual Payments $ 4,818 4,901 9,654 6,540 | 3,296
Operating charges paid to AT&T Broadband (318) (401) (654) (540) | (296)
Revenue from SSI 2,125 2,125 4,250 2,833 | 1,417
Revenue from AT&T Broadband 678 561 1,423 764 | 470
</TABLE>
Our total revenue from the Audio segment decreased $317,000, or 1.8%, from $18.0
million for the three months ended June 30, 1999 to $17.7 million for the three
months ended June 30, 2000 and increased $535,000 or 1.6% from $33.7 million for
the six months ended June 30, 1999 to $34.3 million for the six months ended
June 20, 2000. Our revenue for the three months and six months ended June 30,
1999 included $3.1 million and $4.2 million, respectively, of residential
subscriber revenues from Primestar, a direct broadcast satellite provider, which
terminated the DMX service following Primestar's acquisition by Hughes
Electronics Corp. on April 28, 1999. Excluding such revenue from Primestar, our
Audio segment increased its revenue by $2.8 million, or 19.0%, from $14.9
million for the three months ended June 30, 1999 to $17.7 million for the six
months ended June 30, 2000, and $4.7 million, or 15.9%, from $29.6 million for
the six months ended June 30, 1999 to $34.3 million for the six months ended
June 30, 2000. These increases in both periods primarily resulted from the
continued growth of our commercial subscriber base due to our acquisition and
establishment of sales offices in ten new markets since June 30, 1999.
I-16
<PAGE> 18
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Operating Expenses
Our operating expenses increased $94,000, or 2.6%, from $3.6 million for the
three months ended June 30, 1999 to $3.7 million for the three months ended June
30, 2000 and increased $620,000, or 9.0%, from $6.9 million for the six months
ended June 30, 1999 to $7.5 million for the six months ended June 30, 2000. Our
operating expense increases for the periods were primarily attributable to
higher music rights and royalty expenses as a result of the increases in our
commercial subscriber revenue. In addition, our operating personnel expense in
the Audio segment increased due to our addition of new employees as a result of
our acquisition and establishment of sales offices in ten markets since June 30,
1999.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $2.5 million, or
29.1%, from $8.6 million for the three months ended June 30, 1999 to $11.1
million for the three months ended June 30, 2000 and increased $8.0 million, or
50.3%, from $15.9 million for the six months ended June 30, 1999 to $23.9
million for the six months ended June 30, 2000.
Of the increase, our Audio segment expenses increased $2.3 million, or 35.9%,
from $6.5 million for the three months ended June 30, 1999 to $8.8 million for
the three months ended June 30, 2000 and increased $4.3 million, or 34.6%, from
$12.4 million for the six months ended June 30, 1999 to $16.7 million for the
six months ended June 30, 2000. These increases consist primarily of higher
commissions attributed to our increased subscriber fee revenue and our higher
personnel, occupancy and promotional expense associated with our Audio segment's
expansion of our commercial business in ten markets since June 30, 1999.
Of the increase, our Interactive Media segment increased $192,000, or 8.9%, from
$2.2 million for the three months ended June 30, 1999 to $2.4 million for the
three months ended June 30, 2000 and increased $3.7 million, or 106.9%, from
$3.5 million for the six months ended June 30,1999 to $7.2 million for the six
months ended June 30, 2000. The increase for the three-month period primarily
represents $300,000 in severance expenses for employees associated with the
closing of our New York office upon the relocation of the Company's headquarters
to Los Angeles and the hiring of new employees. The increase for the six month
period primarily represents $3.4 million of payroll taxes associated with
options exercised by our employees under the 1997 Stock Incentive Plan ("1997
Options") and stock appreciation rights exercises and deferred compensation
payments made to our executives under the Deferred Compensation and Stock
Appreciation Rights Plan ("1999 SARs").
Stock Compensation
Stock compensation expense accruals relating to our deferred compensation and
stock appreciation rights plan and our stock incentive plan are based on the
trading price of our Series A Common Stock at the end of each fiscal quarter. An
increase in the trading price of our Series A Common Stock over the previous
quarter will result in an increase in stock compensation expense accruals,
thereby decreasing our income from continuing operations (or increasing our loss
from continuing operations) to the extent of the accrual. Conversely, a decrease
in the price of our Series A Common Stock over the previous quarter will result
in the reversal of a portion of the expense accrued for the previous quarter or
quarters, thereby increasing our income from continuing operations (or reducing
our loss from continuing operations) to the extent of the reversal.
For the three months and six months ended June 30, 2000, we recorded stock
compensation credits of $13.8 million and $145.7 million, respectively, compared
to our recorded stock compensation expenses of $239.8 million and $239.5 million
for the comparable periods in the prior year. These stock compensation credits
resulted from the decline in the stock price underlying the 1997 Options and
1999 SARs as well as the resignation of an executive on February 15, 2000. The
accrued expense for earned 1997 Options at December 31, 1999 and still
outstanding and unexercised at June 30, 2000 was based on a closing price at
June 30, 2000 of $30.00 per share. Such accrual for earned 1997 Options was
based on a stock price of $74.25 per share at December 31, 1999 and at $38.50
per share at March 31, 2000. The accrued expense for earned 1999 SARs at
December 31, 1999 and still outstanding and unexercised at June 30, 2000 was
based on the average market price in accordance with the 1999 SARs terms of
$35.78 per share at June 30, 2000. Such accrual for earned 1999 SARs was based
on an average price of $62.30 per share at December 31, 1999 and at $45.19 per
share at March 31, 2000. The changes in the expense accrual were reflected as
expense reversals. Offsetting these credits were additional stock compensation
expenses for 1997 Options and 1999 SARs earned after December 31, 1999.
I-17
<PAGE> 19
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Depreciation and Amortization
Our depreciation and amortization expense increased $1.1 million, or 8.4%, from
$13.3 million for the three months ended June 30, 1999 to $14.4 million for the
three months ended June 30, 2000 and increased $8.8 million, or 45.7%, from
$19.2 million for the six months ended June 30, 1999 to $28.0 million from for
the six months ended June 30, 2000. The increase for these periods is primarily
attributable to the increase in depreciation and amortization expense relating
to the additions to property and equipment and intangibles resulting from
businesses acquired after June 30, 1999. The significant increase for the six
months ended June 30, 2000 is primarily attributable to the amortization of the
fair value adjustments resulting from the AT&T merger with TCI and the access
agreement transferred to us under the contribution agreement with Liberty on
September 9, 1999, but recorded retroactive to March 1, 1999. Our amortization
expense for these intangible assets transferred reflect a full six month period
for 2000 compared to four months of amortization in 1999.
Interest Expense
Our unaffiliated interest expense and financing costs increased $757,000, or
24.4%, from $3.1 million for the six months ended June 30, 1999 to $3.9 million
for the six months ended June 30, 2000. Such increase was attributed to higher
interest rates on outstanding borrowings under the revolving bank loan agreement
as described below. Additionally, the balance of debt under various notes
payable relating to business acquisitions has increased. These notes had a total
outstanding balance of $5.9 million at June 30, 2000, compared to $4.1 million
at June 30, 1999. The increase in unaffiliated interest expense and financing
costs for the three months ended June 30, 2000 is comparable to the
corresponding period in the prior year.
Related party interest expense increased $2.0 million from $85,000 for the three
months ended June 30, 1999 to $2.1 million for the three months ended June 30,
2000 and increased $3.1 million from $105,000 for the six months ended June 30,
1999 to $3.2 million for the six months ended June 30, 2000. These increases for
both periods were due to borrowings from Liberty of $87.5 million at June 30,
2000 compared to $5.4 million at June 30, 1999.
Share of Losses of Affiliates
Our share of losses of affiliates increased $4.7 million from $607,000 for the
three months ended June 30, 1999 to $5.3 million for the three months ended June
30, 2000 and increased $11.7 million from $800,000 for the six months ended June
30, 1999 to $12.5 million for the six months ended June 30, 2000. These losses
were primarily attributable to our share in pogo.com losses of $2.1 million and
$3.2 million for the three months and six months, respectively, ended June 30,
2000 and Online Retail Partners, Inc. losses of $2.8 million and $8.9 million
for the three months and six months, respectively, ended June 30, 2000. We did
not have interests in pogo.com and Online Retail Partners prior to June 30,
1999.
Dividend Income
The dividend income of $380,000 and $981,000 for the three months and six months
ended, respectively, June 30, 2000, resulted from distributions received from
our interests in KPCB Java Fund Limited Partners ("Java Fund"). These
distributions were made in the form of shares of common stock of Viant Corp. and
Intraware, Inc. recorded at the market value on the distribution date. We did
not have any distributions from Java fund prior to June 30, 1999.
Investment Impairment
We wrote down our original investments and advances in Kaleidoscope Network,
Inc. of $2.7 million to an estimated fair value of $450,000 at June 30, 2000.
I-18
<PAGE> 20
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Losses from Discontinued Operations
The losses from discontinued operations for the three months and six months
ended June 30, 1999 of $15.1 million (net of income tax benefits of $9.3
million) and $19.3 million (net of income tax benefits of $11.8 million)
represent the operating losses of our former Video and Internet segments,
substantially all the assets of which were contributed for a 10% limited
partnership interest in the MTVN Partnership. The partnership was formed on July
15, 1999 by us and MTV Networks, a division of Viacom International, Inc. As a
result of this contribution, the operations of our Video and Internet segments
were discontinued effective July 15, 1999.
Liquidity and Capital Resources
During the six months ended June 30, 2000, our net cash from operations and
financing activities generated funds of $646,000 and $83.8 million,
respectively, which were used for purchases of Interactive Media investments,
business acquisitions and purchases of property and equipment totaling $82.5
million, resulting in a net increase in cash of $1.9 million.
We are a borrower under a revolving loan agreement dated December 30, 1997, as
amended, which provides for current borrowings of up to $98.5 million. Our
borrowings under this agreement bear interest at a rate per annum equal to
either (i) the London Interbank Offering Rate (LIBOR) plus an applicable margin
depending on our leverage ratio, as defined, for the preceding six month period
or (ii) the bank's base rate. At June 30, 2000, we had fully utilized our
availability under this revolving credit agreement and had an outstanding debt
balance of $95.8 million and a $2.7 million letter of credit.
On October 21, 1999, we signed a promissory note amounting to $100 million in
favor of a subsidiary of Liberty. The note matures on December 31, 2000 and
bears an interest rate at the greater of the prime rate plus 1% or Federal Funds
rate plus 2.25%. At June 30, 2000, we had drawn funds totaling $84.3 million and
had recorded accrued interest totaling $3.2 million, which resulted in a note
balance of $87.5 million at the end of the period. We have signed a non-binding
letter of intent with Liberty to modify the terms of and increase the maximum
principal amount of the note to approximately $190 million. The note would be
secured by our interests in entities to which we would transfer our interests in
Priceline.com Incorporated and iBEAM Broadcasting Corporation valued for that
purpose at $40.0625 per share for Priceline.com and $18.0 per share for iBEAM,
for a total of approximately $190 million. The proposed transaction would result
in our receiving approximately $103 million in cash.
As part of the proposed transaction Liberty will exchange its shares of Series B
Convertible Preferred Stock for two new series of preferred stock, Series C and
Series D. The Series C preferred stock will have substantially the same terms as
the Series B preferred stock, except that dividends on the new Series C will be
payable in cash or shares of the new Series D preferred stock. The Series D
preferred stock will be on a parity with the Series C preferred stock, will not
be convertible, and will bear dividends at the rate of 12% of their liquidation
value per annum, payable quarterly in cash or additional shares of Series D
preferred stock. The Series C and Series D preferred stock will be redeemable
after June 30, 2006 at the option of the holder or the company.
At June 30, 2000, we had available-for-sale securities consisting of common
stock and common stock equivalent investments, carried at fair value based on
quoted market prices. As of June 30, 2000, we had recorded an unrealized holding
gain of $164.7 million, net of deferred income taxes of $107.7 million, which is
included in "accumulated other comprehensive earnings" within the consolidated
statement of stockholders' equity.
Our sources of funds include our available cash balances, net cash provided by
our operating activities (including the AT&T Broadband Annual Payments), the
available balance of the Liberty promissory note, and proceeds from our asset
sales and financing activities. We will continue to evaluate investment and
acquisition opportunities and expect to acquire additional equity interests in
Internet e-commerce and content and interactive media technology businesses, and
make business acquisitions related to the Audio segment. Should additional
capital be needed to fund future investment and acquisition activity, we may
seek to raise additional capital through public or private offerings of our
stock or through debt financing. There can be no assurance, however that we will
be able to raise additional capital on terms that are favorable to us.
The earned and unexercised 1997 Options and 1999 SARs of $315.8 million
reflected as a current liability and $110.1 million reflected as a long term
liability in the accompanying consolidated balance sheet at June 30, 2000, may
be funded by the issuance of Series A Common Stock.
I-19
<PAGE> 21
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
For information concerning our other commitments and contingencies, see note 8
to the accompanying consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to changes in stock prices primarily as a result of our
significant holdings in publicly traded securities. We continually monitor
changes in the stock markets, in general, and changes in the stock price of our
significant holdings, specifically. Changes in stock prices can be expected to
vary as a result of general market conditions, technological changes, specific
to industry changes and other factors.
In order to illustrate the effect of changes in stock prices on our investments
accounted for as available for sale securities, we provide the following
sensitivity analysis. Had the stock prices of these investments been 10% lower
at June 30, 2000, the value of such securities would have been lower by
approximately $53 million.
In July 2000, we entered into a five-year "cashless collar" with a financial
services institution with respect to 3.125 million shares of Priceline.com
common stock owned by us. In effect, we purchased a put option that gives us the
right to require the counterparty to buy 3.125 million Priceline.com shares from
us in approximately five years for $37.2114 per share. We simultaneously sold a
call option giving the counterparty the right to buy the same shares from
Liberty Digital in approximately five years for $91.501 per share. Since the
purchase price of the put option was equal to the proceeds from the sale of the
call option, the collar transaction was at no cost to us.
I-20
<PAGE> 22
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
(C). Recent Sales of Unregistered Securities
During the three month period ended June 30, 2000, we sold
unregistered securities as follows:
On March 16, 2000, we issued 185,536 shares of our Series A
Common Stock pursuant to an Exchange Agreement by and between
us and Kozmo.com, Inc. pursuant to which we received in
exchange for our shares, 1,323,977 shares of Kozmo's 8% Series
F Convertible Preferred Stock. All shares issued to Kozmo were
issued subject to investment covenants and restrictions on
transfer and no underwriter was retained in connection with
that offer and sale. The transactions were considered not to
involve any public offering and to be exempt from registration
under Section 4(2) of the Securities Act of 1933, as amended
(the "Securities Act").
On April 14, 2000, we issued 837,740 shares of our Series A
Common Stock pursuant to an Exchange Agreement by and between
us and Alloy Online, Inc. pursuant to which we received in
exchange for our shares 2,922,694 shares of Alloy's common
stock. All shares issued to Alloy were issued subject to
investment covenants and restrictions on transfer and no
underwriter was retained in connection with that offer and
sale. The transactions were considered not to involve any
public offering and to be exempt from registration under
Section 4(2) of the Securities Act.
On May 25, 2000, we issued 137,861 shares of our Series A
Common Stock pursuant to a Merger Agreement by and between DMX
Music, Inc., our wholly owned subsidiary, RCI Systems, Inc.
and the sole shareholder of RCI pursuant to which DMX acquired
RCI. All shares issued to the sole shareholder of RCI were
issued subject to investment covenants and restrictions on
transfer and no underwriter was retained in connection with
that offer and sale. The transactions were considered not to
involve any public offering and to be exempt from registration
under Section 4(2) of the Securities Act.
On June 7, 2000, we issued 8,973 shares of our Series A Common
Stock pursuant to a Purchase and Sale of Stock Agreement by
and between DMX, Westwind Communications, Ltd. and the
shareholders of Westwind pursuant to which DMX acquired
Westwind. All shares issued to the shareholders of Westwind
were issued subject to investment covenants and restrictions
on transfer and no underwriter was retained in connection with
that offer and sale. The transactions were considered not to
involve any public offering and to be exempt from registration
under Section 4(2) of the Securities Act.
On June 9, 2000, we issued 121,419 shares of our Series A
Common Stock pursuant to a Series C Stock Purchase Agreement
by and between us, Entera, Inc. and other investors in
consideration of the purchase of 800,000 shares of Entera's
Series C Convertible Preferred Stock. All shares issued to
Entera were issued subject to investment covenants and
restrictions on transfer and no underwriter was retained in
connection with that offer and sale. The transactions were
considered not to involve any public offering and to be exempt
from registration under Section 4(2) of the Securities Act.
On June 16, 2000, we issued 316,612 shares of our Series A
Common Stock pursuant to a Series C Preferred Stock, Series D
Preferred Stock and Series E Preferred Stock Purchase
Agreement by and between us, ICTV, Inc. and other investors in
consideration of the purchase of 4,065,041 shares of ICTV's
Series E Convertible Preferred Stock. All shares issued to
ICTV were issued subject to investment covenants and
restrictions on transfer and no underwriter was retained in
connection with that offer and sale. The transactions were
considered not to involve any public offering and to be exempt
from registration under Section 4(2) of the Securities Act.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
27. Financial Data Schedule
(a) No Reports on Form 8-K were filed during the quarter ended June 30,
2000.
I-21
<PAGE> 23
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.
LIBERTY DIGITAL, INC.
Date: August 14, 2000 By: /s/ Lee Masters
------------------------------------------
Lee Masters
President and
Chief Executive Officer
Date: August 14, 2000 By: /s/ Mark Rozells
------------------------------------------
Mark Rozells
Executive Vice President and
Chief Financial Officer
<PAGE> 24
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
27. Financial Date Schedule
</TABLE>
