<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 September 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)
1100 Glendon Avenue
Los Angeles, CA 90024
---------------------------------------- -----------------------------------
(Address of principal executive offices) (Zip Code)
(310) 209-3600
(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 October 31, 2000 were 31,008,878 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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 14,480 2,176
Trade receivables:
Unaffiliated 11,558 8,162
Related party (note 7) 4,305 2,839
Allowance for doubtful accounts (2,133) (1,342)
------------ ------------
13,730 9,659
------------ ------------
Prepaid expenses and other current assets 4,279 3,411
Equipment inventory 6,863 5,080
------------ ------------
Total current assets 39,352 20,326
Investments in affiliates, accounted for under the equity method 27,366 34,345
Investments in available for sale securities: (notes 6 and 7)
Investment in ACTV, Inc. 126,829 516,088
Investment in Open TV 69,025 175,243
Investment in Priceline.com, Inc. 91,578 148,047
Other available for sale investments 83,998 90,670
Other investments, accounted for under the cost method:
Investment in MTVN Partnership 136,350 135,975
Other 142,593 81,482
Property and equipment, at cost:
Furniture and equipment 22,521 17,246
Leasehold improvements 1,984 1,087
Studio and other support equipment 6,481 4,158
------------ ------------
30,986 22,491
Less: accumulated depreciation (9,116) (4,072)
------------ ------------
21,870 18,419
Intangible assets, net of accumulated amortization (note 5) 484,232 512,502
Other assets 14,316 765
------------ ------------
Total assets $ 1,237,509 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>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 12,566 10,455
Accrued liabilities on disposal - DMX-Europe N.V. 140 1,116
Current portion of debt 5,932 5,327
Note payable - related party (note 7) -- 23,347
Accrued stock compensation, current (note 8) 259,288 537,364
------------ ------------
Total current liabilities 277,926 577,609
Note payable - related party (note 7) 188,800 --
Debt 2,945 97,813
Negative investment in DMX-Europe N.V. 1,358 1,358
Accrued stock compensation, long term (note 8) 86,857 101,846
Deferred income tax liability (note 7) 129,820 375,818
Other liabilities 15,550 16,854
------------ ------------
Total liabilities 703,256 1,171,298
------------ ------------
Redeemable preferred stock, $.01 par value, authorized 5,000,000
shares (note 7)
Series C redeemable convertible preferred stock, $.01 par value,
150,000 shares issued and outstanding in 2000, liquidation
preference and redemption value of $150,000 in 2000 150,000 --
Series D redeemable preferred stock, non-convertible, $.01 par
value, 8,106 shares issued and outstanding in 2000,
liquidation preference and redemption value of $8,106 in 2000 8,106 --
Series B redeemable convertible preferred stock, $.01 par value,
150,000 shares issued and outstanding in 1999, liquidation
preference and redemption value of $153,308 in 1999 -- 153,308
Stockholders' equity:
Common stock, $.01 par value:
Series A;
Authorized 1,000,000,000 shares; issued and outstanding
30,981,174 shares in 2000 and 26,507,489 shares in 1999 310 265
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 818,480 617,013
Accumulated deficit (378,446) (463,010)
Deferred tax asset to be utilized by parent (note 7) (146,407) (210,277)
Executive stock compensation adjustment by parent, net of taxes -- (4,615)
Accumulated other comprehensive earnings, net of taxes 80,490 468,160
------------ ------------
Total stockholders' equity 376,147 409,256
------------ ------------
Commitments and contingencies (note 9)
Total liabilities and stockholders' equity $ 1,237,509 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 Three Nine Seven | Two
months months months months | months
ended ended ended ended | ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, | Feb. 28,
---------- ---------- ---------- ---------- | ----------
2000 1999 2000 1999 | 1999
---------- ---------- ---------- ---------- | ----------
<S> <C> <C> <C> <C> | <C>
|
Revenue: |
Unaffiliated $ 11,968 7,887 30,904 20,932 | 5,364
Related party (note 7) 7,815 7,775 23,142 17,912 | 5,183
---------- ---------- ---------- ---------- | ----------
|
19,783 15,662 54,046 38,844 | 10,547
Operating expenses: |
Operating 3,708 3,925 11,181 8,586 | 2,191
Selling, general and administrative 11,092 8,988 34,971 20,088 | 4,580
Stock compensation (note 8) (78,794) (49,454) (224,534) 190,283 | 85
Depreciation and amortization 13,969 13,380 41,939 30,071 | 2,502
Merger costs -- 1,067 -- 1,067 | --
---------- ---------- ---------- ---------- | ----------
|
(50,025) (22,094) (136,443) 250,095 | 9,358
|
Operating income (loss) 69,808 37,756 190,489 (211,251) | 1,189|
|
Other expense: |
Interest expense, net: |
Unaffiliated (2,306) (1,544) (6,165) (3,610) | (1,036)
Related party (note 7) (2,400) (148) (5,625) (254) | --
---------- ---------- ---------- ---------- | ----------
|
(4,706) (1,692) (11,790) (3,864) | (1,036)
|
Loss on sale of investments, net of |
dividend income (10,332) -- (9,351) -- | --
Share of losses of affiliates (4,257) (404) (16,789) (1,198) | (6)
Impairment of investment -- -- (2,204) -- | --
Other, net 1,719 26 1,735 2 | (2)
---------- ---------- ---------- ---------- | ----------
Income (loss) from continuing |
operations before income taxes 52,232 35,686 152,090 (216,311) | 145
|
Income tax benefit (expense) (21,783) (12,552) (67,526) 82,713 | (1,049)
---------- ---------- ---------- ---------- | ----------
|
Income (loss) from continuing |
operations 30,449 23,134 84,564 (133,598) | (904)
---------- ---------- ---------- ---------- | ----------
|
Discontinued operations: |
Income(loss) from operations, net of |
income taxes -- 39 -- (15,822) | (3,440)
---------- ---------- ---------- ---------- | ----------
|
Income (loss) before extraordinary item 30,449 23,173 84,564 (149,420) | (4,344)
|
Extraordinary Item -- 7,700 -- 7,700 | --
---------- ---------- ---------- ---------- | ----------
|
Net income (loss) 30,449 30,873 84,564 (141,720) | (4,344)
---------- ---------- ---------- ---------- | ----------
|
Other comprehensive earnings, net of taxes: |
|
Foreign currency translation -- 170 -- 99 | (49)
Unrealized holding gains (losses) |
arising during the period, net of tax (84,226) (94,914) (387,670) 149,788 | --
---------- ---------- ---------- ---------- | ----------
Other comprehensive earnings (loss) (84,226) (94,744) (387,670) 149,887 | (49)
---------- ---------- ---------- ---------- | ----------
|
Comprehensive earnings (loss) $ (53,777) (63,871) (303,106) 8,167 | (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 Three Nine Seven | Two
months months months months | months
ended ended ended ended | ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30, | Feb. 28,
---------- ---------- ---------- ---------- | ----------
2000 1999 2000 1999 | 1999
---------- ---------- ---------- ---------- | ----------
<S> <C> <C> <C> <C> | <C>
|
Basic earnings (loss) per share |
(note 3): |
|
Income (loss) from continuing operations $ 0.26 0.14 0.68 (0.99) | (0.01)
Discontinued operations 0.00 0.00 0.00 (0.08) | (0.05)
Extraordinary item 0.00 0.04 0.00 0.04 | (0.00)
---------- ---------- ---------- ---------- | ----------
Income (loss) per share $ 0.26 0.18 0.68 (1.03) | (0.06)
========== ========== ========== ========== | ==========
|
Weighted average common shares and |
equivalent shares 202,800 196,132 201,116 189,368 | 81,377
========== ========== ========== ========== | ==========
|
|
Diluted earnings (loss) per |
share (note 3): |
|
Income (loss) from continuing operations $ 0.23 0.12 0.61 (0.99) | (0.01)
Discontinued operations 0.00 0.00 0.00 (0.08) | (0.05)
Extraordinary item 0.00 0.04 0.00 0.04 | (0.00)
---------- ---------- ---------- ---------- | ----------
Income (loss) per share $ 0.23 0.16 0.61 (1.03) | (0.06)
========== ========== ========== ========== | ==========
|
Weighted average common shares and |
equivalent shares 240,366 229,252 238,100 189,368 | 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>
Deferred Executive
tax stock Accumulated
asset compensation other
Common stock to be adjustment comprehensive
------------------- Paid in Accumulated utilized by by parent, earnings,
Series A Series B capital deficit parent net of taxes net of taxes Total
-------- -------- -------- ----------- ----------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ 265 1,720 617,013 (463,010) (210,277) (4,615) 468,160 409,256
Accretion of redeemable
convertible preferred stock -- -- (7,136) -- -- -- -- (7,136)
Forgiveness of preferred
dividend due to parent -- -- 2,339 -- -- -- -- 2,339
Shares issued for
acquisitions and investments 27 -- 111,062 -- -- -- -- 111,089
Shares issued for exercise of
stock appreciation rights
(note 8) 12 -- 69,628 -- -- -- -- 69,640
Sale of Series A common shares 6 -- 24,994 -- -- -- -- 25,000
Capital contributions from
related parties for
iBEAM/Priceline
transactions (note 7) -- -- 1,904 -- -- -- -- 1,904
Initial value of put/call
option contribution by
related party, net of taxes
(note 7) -- -- 7,439 -- -- -- -- 7,439
Settlement of stock
appreciation awards by
parent -- -- (4,615) -- -- 4,615 -- --
Deferred tax on executive
stock appreciation rights
(notes 6 and 8) -- -- -- -- 63,870 -- -- 63,870
Deferred tax benefit
transferred to parent (note 7) -- -- (4,148) -- -- -- -- (4,148)
Unrealized loss on available
for sale securities -- -- -- -- -- -- (387,670) (387,670)
Net income -- -- -- 84,564 -- -- -- 84,564
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2000 $ 310 1,720 818,480 (378,446) (146,407) -- 80,490 376,147
======== ======== ======== ======== ======== ======== ======== ========
</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
------------------------------- | ------------
Nine months Seven months | Two months
ended ended | ended
September 30, September 30, | February 28,
------------- ------------- | ------------
2000 1999 | 1999
------------- ------------- | ------------
<S> <C> <C> | <C>
|
Cash flows from operating activities: |
|
Net income (loss) $ 84,564 (141,720) | (4,344)
|
Add: Loss from discontinued operations, net of |
taxes -- 15,822 | 3,440
Less: Extraordinary item -- (7,700) | --
------------ ------------ | ------------
Income (loss) from continuing operations 84,564 (133,598) | (904)
|
Adjustments to reconcile net income (loss) to net cash provided |
by (used in) operating activities: |
|
Loss on sale of investments, net of dividend |
income 9,351 -- | --
Depreciation and amortization 41,939 30,071 | 2,502
Share of losses of affiliates 16,789 1,198 | 6
Stock compensation (224,533) 190,283 | 85
Provision for doubtful accounts 791 388 | 153
Impairment of investments at cost 2,204 -- | --
Deferred income tax expense (benefit) 67,526 (82,713) | 1,049
Reversal of prior period royalty expense (1,773) -- | --
|
Changes in operating assets and liabilities, net of the effect of |
acquisitions and discontinued operations: |
|
Accounts receivable (2,918) (1,000) | (510)
Prepaid and other current assets (2,292) (1,763) | 1,190
Accounts payable, accrued expenses and other |
liabilities (15) 4,219 | (1,872)
------------ ------------ | ------------
Net cash provided by (used in) continuing operating |
activities (8,367) 7,085 | 1,699
Net cash used in discontinued operating activities -- (12,199) | (2,739)
------------ ------------ | ------------
Net cash used in operating activities (8,367) (5,114) | (1,040)
------------ ------------ | ------------
</TABLE>
(continued)
I-6
<PAGE> 8
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(amounts in thousands)
<TABLE>
<CAPTION>
Liberty Digital TCI Music
-------------------------------- | -------------
Nine months Seven months | Two months
ended ended | ended
September 30, September 30, | February 28,
------------- ------------- | -------------
2000 1999 | 1999
------------- ------------- | -------------
<S> <C> <C> | <C>
|
Cash flows from investing activities: |
Investments in and advances to affiliates and |
others, net of distributions (72,357) (89,426) | --
Proceeds from sale of investments 14,241 -- | --
Cash paid for business acquisitions, net of |
cash acquired (5,749) (3,877) | (155)
Capital expended for property and equipment (8,296) (3,772) | (2,053)
Other investing activities (244) (58) | (92)
------------- ------------- | -------------
Net cash used in investing activities (72,405) (97,133) | (2,300)
------------- ------------- | -------------
|
Cash flows from financing activities: |
|
Borrowings from a related party 283,750 9,637 | --
Payments on related party note (118,685) (9,223) | (85)
Capital contributions from related parties 1,904 -- | --
Proceeds from sale of series A common shares 25,000 -- | --
Proceeds from exercise of stock options 1,106 4,334 | --
Redemption of preferred shares -- (148) | --
Borrowings of debt -- 464 | 4,500
Repayment of debt (99,999) (4,196) | (157)
------------- ------------- | -------------
Net cash provided by financing activities 93,076 868 | 4,258
------------- ------------- | -------------
|
Net (decrease) increase in cash and cash equivalents 12,304 (101,379) | 918
|
Cash and cash equivalents, beginning of period 2,176 126,214 | 5,467
------------- ------------- | -------------
|
Cash and cash equivalents, end of period $ 14,480 24,835 | 6,385
============= ============= | =============
</TABLE>
I-7
<PAGE> 9
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000
(1) Basis of Presentation
The accompanying interim consolidated balance sheet at September 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.
As a result of the AT&T Merger and Contribution Agreement, 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
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 a material impact on the Company's
financial statements.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 ("Interpretation No. 44"), an interpretation of Accounting
Principles Board ("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, 1998, 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 does
not have a material impact on the Company's financial statements.
(3) Earnings (Loss) Per Common and Potential Common Share
The Company computes earnings (loss) per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". 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.
I-8
<PAGE> 10
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Nine Seven | Two
months months months months | months
ended ended ended ended | ended
September 30, September 30, September 30, September 30, | February 28,
2000 1999 2000 1999 | 1999
------------- ------------- ------------- ------------- | -------------
|
<S> <C> <C> <C> <C> | <C>
Net income (loss) $ 30,449 30,873 84,564 (141,720) | (4,344)
|
Deferred tax assets to be utilized by |
parent 25,253 4,815 59,722 (52,944) | --
Accretion of redeemable preferred stock (2,759) (472) (7,136) (829) | (252)
------------- ------------- ------------- ------------- | -------------
Net income (loss) attributable to common |
shareholders 52,943 35,216 137,150 (195,493) | (4,596)
Accretion of redeemable preferred stock 2,759 472 7,136 -- | --
------------- ------------- ------------- ------------- | -------------
Net income (loss) attributable to common |
shareholders - dilutive 55,702 35,688 144,286 (195,493) | (4,596)
============= ============= ============= ============= | =============
|
Weighted average shares outstanding - |
basic 202,800 196,132 201,116 189,368 | 81,377
Redeemable preferred stock 25,751 25,751 25,751 -- | --
Stock appreciation rights 11,815 7,369 11,233 -- | --
------------- ------------- ------------- ------------- | -------------
Weighted average shares outstanding - |
dilutive 240,366 229,252 238,100 189,368 | 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 Nine months ended September 30, 2000 6,188
Seven months ended September 30,1999 4,002
---------------------------------------------------------------------------------------------------
TCI Music Two months ended February 28, 1999 1,184
</TABLE>
Cash paid for taxes for the periods presented are not material.
I-9
<PAGE> 11
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
-------------------------------- | -------------
Nine Seven | Two
months months | months
ended ended | ended
September 30, September 30, | February 28,
2000 1999 | 1999
------------- ------------- | -------------
<S> <C> <C> | <C>
|
Fair value of investment in MTVN Partnership $ -- 135,000 | --
Less: Net assets of discontinued operations contributed -- (120,000) | --
Related party liability assumed -- (15,000) | --
Investments, net of distributions 179,771 -- | --
Fair value of other businesses acquired 16,663 6,475 | 221
Other liabilities assumed (1,502) -- | (6)
Debt issued (5,737) (2,598) | (60)
Common stock issued for investments and acquisitions (111,089) -- | --
------------- ------------- | -------------
Cash paid for investments and acquisitions $ 78,106 3,877 | 155
============= ============= | =============
|
Accretion of redeemable convertible preferred stock $ 7,136 829 | 252
============= ============= | =============
|
Conversion of Series A Preferred Stock to common stock $ -- 34,782 | --
============= ============= | =============
|
Contribution of put/call option by related party $ 12,306 -- | --
============= ============= | =============
</TABLE>
(5) Intangible Assets
The following is a summary of the intangible assets as of the following periods
(amounts in thousands):
<TABLE>
<CAPTION>
September 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 105,780 97,829
Other 2,315 1,822
------------- -------------
557,274 548,830
Accumulated amortization (73,042) (36,328)
------------- -------------
$ 484,232 512,502
============= =============
</TABLE>
I-10
<PAGE> 12
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Derivative Instruments and Hedging Activities
The Company has entered into a "cashless" collar transaction with respect to
certain securities held by the Company. The cashless collar provides the Company
with a put option that gives it the right to require the counterparty to buy
designated shares at a designated price per share and simultaneously provides
the counterparty a call option giving it the right to buy the same number of
shares at a designated price per share. As the Company's cashless collar is
designated to specific shares of stock held by the Company and the changes in
the fair value of the cashless collar are correlated with changes in the fair
value of the underlying securities, the cashless collar functions as a hedge.
Accordingly, changes in the fair value of the cashless collar are designated to
specific shares which are accounted for as available-for-sale securities is
reported as a component of comprehensive earnings as unrealized gains along with
the changes in the fair value of the underlying securities.
During 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, ("Statement 133"), as amended by SFAS No. 137, which is
effective for all fiscal years beginning after June 15, 2000. Statement 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 Statement 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 exposure of net investments
in foreign operations. Although the Company's management has not completed its
assessment of the impact of Statement 133 on its consolidated results of
operations and financial position, management does not expect that the impact of
Statement 133 will be significant, however, there can be no assurances that the
impact will not be significant.
(7) Related Party Transactions
Pursuant to the AT&T Amended Contribution Agreement between 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 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.
I-11
<PAGE> 13
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Nine Seven | Two
months months months months | months
ended ended ended ended | ended
September 30, September 30, September 30, September 30, | February 28,
2000 1999 2000 1999 | 1999
------------- ------------- ------------- ------------- | -------------
<S> <C> <C> <C> <C> | <C>
|
Revenue from AT&T Broadband Annual |
Payments $ 4,807 4,867 14,461 11,406 | 3,296
Operating charges paid to AT&T |
Broadband (307) (367) (961) (906) | (296)
Revenue from SSI 2,125 2,125 6,375 4,958 | 1,417
Revenue from AT&T Broadband 883 783 2,306 1,548 | 470
</TABLE>
On October 21, 1999, the Company signed a promissory note in favor of a
subsidiary of Liberty which allowed the Company to draw funds up 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%. On
September 29, 2000, the Company repaid this note in full, including accrued
interest thereon in the amount of $93.5 million.
On September 29, 2000, the Company signed two promissory notes totaling $188.5
million in favor of Liberty. These notes bear interest at 9% compounded annually
and are secured by the Company's 99% preferred interest in two entities as
described below, to which the Company has transferred certain assets. The only
obligors on the notes are the subsidiaries which hold the respective preferred
interests in the two entities. The accrued interest and principal on the notes
are payable upon the sale of the Company's preferred interests or on the due
date of the notes, whichever is earlier. These entities are consolidated in the
Company's financial statements as of September 30, 2000. The transactions
("iBEAM/Priceline transactions") with these entities are detailed as follows:
o The Company transferred its interest in 3,125,000 shares of
Priceline.com Incorporated ("Priceline") valued at $40.0625 per share
or $125.2 million and its interest in the net value of a put and call
on the Priceline shares which the Company has entered into, as a five
year cashless collar, with a financial services institution prior to
the transfer of these shares, into a newly formed subsidiary LLC
("Priceline LLC"). In conjunction with this transfer, the Company
maintained a 99% preferred interest in Priceline LLC, which earns a 9%
preferred return and a preferred right to its ultimate liquidation
value of $123.9 million, and sold a 1% common interest to a subsidiary
of Liberty. The Company received $1.3 million on September 29, 2000 for
the 1% common interest, which amount is reflected in our financial
statements as a capital contribution from Liberty. At September 30,
2000, the Company marked to market the value of Priceline shares and
the accompanying put and call option, and has reflected the unrealized
gain/loss (net of deferred taxes) as part of "accumulated other
comprehensive earnings, net of taxes", in the consolidated statement of
stockholders equity. The promissory note of $123.9 million related to
this transaction is due on September 28, 2010.
o The Company transferred its interest in 3,623,684 shares of iBEAM
Broadcasting Corporation ("iBEAM") valued at $18.00 per share or $65.2
million into a newly formed subsidiary LLC ("iBEAM LLC"). In
conjunction with this transfer, the Company maintained a 99% preferred
interest in iBEAM LLC, which earns a 9% preferred return and a
preferred right to its ultimate liquidation value of $64.5 million, and
sold 1% common interest to a related party. The preferred interest has
attached a put and call option in which the counterparty is the 1%
common interest holder in the entity. The Company received $652,000 on
September 29, 2000 for the 1% common interest, which amount is
reflected in the Company's financial statements as a capital
contribution from a subsidiary of Liberty. At September 30, 2000, the
Company marked to market the value of iBEAM shares and recorded the
unrealized gain/loss (net of deferred taxes) as part of "accumulated
other comprehensive earnings,
I-12
<PAGE> 14
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
net of taxes", within the consolidated statement of stockholders'
equity. At September 30, 2000, the Company recorded the fair value of
the put and call option on the iBEAM shares of $12.3 million as other
assets and reflected this asset as a capital contribution (net of tax)
from Liberty since the put and call transaction was among related
subsidiaries of Liberty. The change in the value of the put and call
option in future periods will be recorded in the income statement. The
promissory note of $64.6 million related to this transaction is due on
September 28, 2008.
On September 29, 2000, Liberty exchanged the outstanding shares of Series B
Redeemable Convertible Preferred Stock for two new series of preferred stock,
Series C and Series D. The Series C preferred stock has substantially the same
terms as the Series B preferred stock, except that dividends on the new Series C
are payable in cash or shares of the new Series D preferred stock. The dividend
rate is 5% per annum, and 7% in the event of a default under the terms of the
agreement. The Series D preferred stock is not convertible and bears dividends
at the rate of 12% of its 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. As a result of this transaction, the Company issued 8,106
shares of Series D preferred stock as payment of dividends due on the Series B
preferred stock up to September 29, 2000, and exchanged the Series B and C
Redeemable Preferred Stock on a one-for-one basis.
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 Nine Seven | Two
months months months months | months
ended ended ended ended | ended
September 30, September 30, September 30, September 30, | February 28,
2000 1999 2000 1999 | 1999
------------- ------------- ------------- ------------- | -------------
<S> <C> <C> <C> <C> | <C>
|
Operating expenses $ 1,610 1,300 4,126 2,942 | 773
|
Loss from discontinued operations -- 82 -- 656 | 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 was 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.
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 nine months ended September 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 September 30, 2000, the Company had recorded $146.4 million of deferred
tax benefits related to this plan as a separate component of stockholders'
equity.
I-13
<PAGE> 15
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) Deferred Compensation and Stock Option Plan
Certain officers and key employees of the Company are parties 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. During the nine months ended September 30,
2000, the Company paid deferred compensation to the former executive 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.
Additionally, Liberty made $10 million in cash payments related to a guarantee
on the value of the common stock granted to settle the awards, and such amount
was recorded as expense in the Company's financial statements.
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 nine months ended September 30,
2000 reflect credit adjustments of $78.8 million and $224.5 million,
respectively, due to the decline in the stock price underlying the 1997 Options
and 1999 SARs, as well as for the effect of the resignation of a former key
executive on February 15, 2000, a portion of whose options were forfeited. The
accrued expense for earned 1997 Options at December 31, 1999 and still
outstanding and unexercised at September 30, 2000 was based on a closing price
at September 30, 2000 of $20.25 per share. Such accrual for earned 1997 Options
was based on closing stock prices of $74.25 per share at December 31, 1999 and
$30.00 at June 30, 2000. The accrued expense for earned 1999 SARs at December
31, 1999 and still outstanding and unexercised at September 30, 2000 was based
on the average market price in accordance with the 1999 SARs terms of $21.70 per
share at September 30, 2000. Such accrual for earned 1999 SARs was based on an
average price of $62.30 per share at December 31, 1999 and $35.78 per share at
June 30, 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 $346.1 million of which $86.9 million is
reflected as long term in the consolidated balance sheet at September 30, 2000.
(9) Commitments and Contingencies
The Company 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 paid Selco $950,000 for settlement and mutual release from any and
all claims.
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 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 being
negotiated 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 these negotiations will have a
material effect on the financial statements as the matter is still in
negotiations.
I-14
<PAGE> 16
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED 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 judgement 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
from 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 Recording Industry Association of America 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 the second half of 2001. 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. All discovery must be completed by May
15, 2001. 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. All discovery must be
completed by May 15, 2001. 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 sought a permanent injunction based upon claims of
breach of contract, unfair business practices and copyright infringements. On
August 24, 2000, in a
I-15
<PAGE> 17
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
separate transaction, company acquired a 50% interest in XTRA. As part of that
separate transaction, the suit by XTRA was dismissed with prejudice.
(10) Subsequent Event
On August 18, 2000, the Company entered into a letter of intent to acquire from
Sony Pictures Entertainment Inc. ("SPE") a 50% interest in The Game Show
Network, L.P. ("GSN") for $225 million in cash and $50 million in stock. This
transaction is subject to the execution of definitive agreements and customary
conditions to closing. At the closing, SPE and the Company will each commit to
provide up to $37.5 million in cash to GSN as additional capital contribution.
This transaction is anticipated to close in the fourth quarter of 2000.
(11) 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
September 30, 2000 September 30, 1999
--------------------------- ---------------------------
Interactive Interactive
Audio Media Audio Media
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue $ 19,783 -- 15,662 --
Income (loss) from continuing operations, excluding
stock-based compensation and before income taxes $ (4,880) (21,682) 699 (14,467)
Income (loss) from continuing
operations before income taxes $ 46,758 5,474 (45,077) 80,763
Capital expended for property and
equipment and investments $ 8,597 104,623 3,200 46,484
</TABLE>
I-16
<PAGE> 18
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Liberty Digital TCI Music
------------------------------------------------------------- | -----------------
Nine months Seven months | Two months
ended ended | ended
September 30, 2000 September 30, 1999 | February 28, 1999
---------------------------- ---------------------------- | -----------------
Interactive Interactive |
Audio Media Audio Media | Audio
----------- ----------- ----------- ----------- | -----------
<S> <C> <C> <C> <C> | <C>
|
Revenue $ 54,046 -- 38,844 -- | 10,547
|
Income (loss) from continuing |
operations, excluding stock-based |
compensation and before income taxes $ (26,362) (46,082) (11,233) (14,795)| 230
|
Income (loss) from continuing |
operations before income taxes $ 47,122 104,968 (77,369) (138,942)| 145
|
Capital expended for property and |
equipment and investments $ 12,943 59,218 7,610 89,465 | 2,300
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -------------
<S> <C> <C>
Segment Assets
Audio $ 250,295 321,115
Interactive Media 987,214 1,412,747
------------- -------------
1,237,509 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-17
<PAGE> 19
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 diversified new media company focused on the development of interactive
television programming with interests in interactive media technology and
Internet e-commerce and content 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 nine months ended
September 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 seven months ended September 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.
I-18
<PAGE> 20
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
In order to provide a meaningful basis for comparing the nine months ended
September 30, 2000 and 1999, and for purposes of the following table and
discussion, the operating results of Liberty Digital, Inc. for the seven months
ended September 30, 1999 have been combined with the operating results of TCI
Music, Inc. for the two months ended February 28, 1999, and the resulting
nine-month operating results are compared to the operating results for the nine
months ended September 30, 2000. Depreciation, amortization and certain other
line items included in the operating results are not comparable between the nine
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 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 nine months ended September 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 Nine Seven | Two
months months months months | months
ended ended ended ended | ended
September 30, September 30, September 30, September 30, | February 28,
2000 1999 2000 1999 | 1999
------------- ------------- ------------- ------------- | -------------
<S> <C> <C> <C> <C> | <C>
|
Revenue from AT&T Broadband Annual |
Payments $ 4,807 4,867 14,461 11,406 | 3,296
Operating charges paid to AT&T |
Broadband (307) (367) (961) (906) | (296)
Revenue from SSI 2,125 2,125 6,375 4,958 | 1,417
Revenue from AT&T Broadband 883 783 2,306 1,548 | 470
</TABLE>
I-19
<PAGE> 21
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Our total revenue from the Audio segment increased $4.1 million, or 26.3%, from
$15.7 million for the three months ended September 30, 1999 to $19.8 million for
the three months ended September 30, 2000 and increased $4.7 million or 9.4%
from $49.4 million for the nine months ended September 30, 1999 to $54.0 million
for the nine months ended September 20, 2000. Our revenue for the nine months
ended September 30, 1999 included $4.2 million 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 $8.9 million or 19.6% from $45.2 million for the nine months ended
September 30, 1999 to $54.0 million for the nine months ended September 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 twelve new markets since September 30, 1999 .
Operating Expenses
Our operating expenses decreased $217,000, or 5.5%, from $3.9 million for the
three months ended September 30, 1999 to $3.7 million for the three months ended
September 30, 2000 due to sublease income from our C-3 satellite which we did
not have during the three months ended September 30, 1999. Our operating
expenses increased $404,000, or 3.7%, from $10.8 million for the nine months
ended September 30, 1999 to $11.2 million for the nine months ended September
30, 2000 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 twelve markets since September 30, 1999.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses increased $2.1 million, or
23.4%, from $9.0 million for the three months ended September 30, 1999 to $11.1
million for the three months ended September 30, 2000 and increased $10.3
million, or 41.7%, from $24.7 million for the nine months ended September 30,
1999 to $35.0 million for the nine months ended September 30, 2000.
Of the increase, our Audio segment expenses increased $2.7 million, or 39.4%,
from $6.7 million for the three months ended September 30, 1999 to $9.4 million
for the three months ended September 30, 2000 and increased $7.2 million, or
37.8%, from $19.0 million for the nine months ended September 30, 1999 to $26.1
million for the nine months ended September 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 twelve new
markets since September 30, 1999.
Of the increase, our Interactive Media segment decreased $600,000, or 24.7%,
from $2.3 million for the three months ended September 30, 1999 to $1.7 million
for the three months ended September 30, 2000 and increased $3.1 million, or
55.2%, from $5.7 million for the nine months ended September 30,1999 to $8.8
million for the nine months ended September 30, 2000. The decrease for the
three-month period was primarily due to the savings in personnel and occupancy
costs resulting from the closing of our New York office on June 30, 2000 upon
the relocation of the Company's headquarters to Los Angeles. The increase for
the nine 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"). Offsetting these
were savings in personnel and occupancy costs resulting from the closing of our
New York office on June 30, 2000.
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<PAGE> 22
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
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 nine months ended September 30, 2000, we recorded stock
compensation credits of $78.8 million and $224.5 million, respectively, compared
to our recorded stock compensation credit of $49.5 million and stock
compensation expense of $190.2 million for the comparable periods in the prior
year. These stock compensation credits for the three months ended September 30,
2000 and 1999 and the nine months ended September 30, 2000 resulted from the
decline in the stock price underlying the 1997 Options and 1999 SARs.
Additionally, the credit for the nine months ended September 30, 2000 was also a
result of the resignation of an executive of the Company on February 15, 2000.
The stock compensation expense for the nine months ended September 30, 1999 was
due to an increase in the trading price of the Series A common stock over that
period. The accrued expense for earned 1997 Options at December 31, 1999 and
still outstanding and unexercised at September 30, 2000 was based on a closing
price at September 30, 2000 of $20.25 per share. Such accrual for earned 1997
Options was based on a stock price of $74.25 per share at December 31, 1999 and
$30.00 per share at June 30, 2000. The accrued expense for earned 1999 SARs at
December 31, 1999 and still outstanding and unexercised at September 30, 2000
was based on the average market price in accordance with the 1999 SARs terms of
$21.70 per share at September 30, 2000. Such accrual for earned 1999 SARs was
based on an average price of $62.30 per share at December 31, 1999 and $35.78
per share at June 30, 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.
Depreciation and Amortization
Our depreciation and amortization expense increased $589,000, or 4.4%, from
$13.4 million for the three months ended September 30, 1999 to $14.0 million for
the three months ended September 30, 2000 and increased $9.4 million, or 28.8%,
from $32.6 million for the nine months ended September 30, 1999 to $41.9 million
for the nine months ended September 30, 2000. The increase for these periods was
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 September 30, 1999. The increase for the nine
months ended September 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 to us reflect a
full nine month period for 2000 compared to seven months of amortization in
1999.
Interest Expense
Our unaffiliated interest expense and financing costs increased $762,000, or
49.4%, from $1.5 million for the three months ended September 30, 1999 to $2.3
million for the three months ended September 30, 2000 and increased $1.5 million
or 32.7% from $4.6 million for the nine months ended September 30, 1999 to $6.2
million for the nine months ended September 30, 2000. Such increase was
primarily attributable 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 $8.9 million at
September 30, 2000, compared to $3.8 million at September 30, 1999.
Related party interest expense increased $2.3 million from $148,000 for the
three months ended September 30, 1999 to $2.4 million for the three months ended
September 30, 2000 and increased $5.4 million from $254,000 for the nine months
ended September 30, 1999 to $5.6 million for the nine months ended September 30,
2000. These
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<PAGE> 23
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
increases for both periods were primarily due to increased borrowings from
Liberty, which had an outstanding balance of $188.5 million at September 30,
2000 compared to $775,000 at September 30, 1999. The proceeds of our borrowing
of $188.8, which was drawn from our promissory notes dated September 29, 2000,
was used to pay in full the balance of $93.5 of our promissory note dated
October 29, 1999 with a subsidiary of Liberty, and to pay in full the balance of
$95.8 million of our revolving bank loan agreement.
Loss from Sales of Investments, net of Dividend Income
Our loss from sales of investments for the three months and nine months ended
September 30, 2000 resulted from the sale of certain available for sale
securities for proceeds of $14.2 million which is less than our recorded costs
for these investments of $30.5 million. Our recorded costs for these investments
sold include $19.5 million in fair value adjustments on investments transferred
to us retroactively on March 1, 1999 as a result of the contribution transaction
with Liberty. Offsetting these losses were dividend income of $6.0 and $6.9
million for the three months and nine months ended, respectively, September 30,
2000 which resulted from distributions received from our interests in KPCB Java
Fund Limited Partners. These distributions received were in the form of
marketable securities recorded at the market value at the date of distribution,
and were subsequently sold during the nine months ended September 30, 2000.
Share of Losses of Affiliates
Our share of losses of affiliates increased $3.9 million from $404,000 for the
three months ended September 30, 1999 to $4.3 million for the three months ended
September 30, 2000 and increased $15.6 million from $1.2 million for the nine
months ended September 30, 1999 to $16.8 million for the nine months ended
September 30, 2000. These losses were primarily attributable to our share in
pogo.com losses of $746,000 and $4.0 million for the three months and nine
months, respectively, ended September 30, 2000 and Online Retail Partners, Inc.
losses of $3.3 million and $12.2 million for the three months and nine months,
respectively, ended September 30, 2000. We did not have interests in pogo.com
and Online Retail Partners during the entire comparable periods in the prior
year. Our share of losses of affiliates for the three months and nine months
ended September 30, 1999 primarily represent our share in losses of Kaleidoscope
Interactive LLC of $424,000 and $1.3 million, respectively.
On August 30, 2000, At Home Corporation (also known as Excite@Home) and Pogo.com
Inc. entered into a merger agreement pursuant to which each share of Pogo common
stock and Pogo preferred stock then outstanding will be converted into shares of
Excite@Home Series A Common Stock determined by multiplying the number of shares
of Pogo capital stock held by the stockholders by an exchange ratio. If the
merger had been completed as of October 27, 2000, the exchange ratio would have
been .5231 per share or the equivalent of $5.15 per share. The actual exchange
ratio and number of shares to be issued to Pogo stockholders cannot be
established until the closing since it is based on the average trading price of
the Excite@Home common stock for a period prior to the closing date. In
addition, each Pogo stockholder may be entitled to receive additional pro rata
payments in the form of additional shares of Excite@Home series stock upon the
satisfaction of certain performance requirements during the six months following
the closing and the continuation of employment of specified key executives until
October 15, 2001. At September 30, 2000, we owned 3,750,000 shares of common
stock of Pogo.com.
Subsequent Event
On August 18, 2000, we entered into a letter of intent to acquire from Sony
Pictures Entertainment Inc.("SPE") a 50% interest in The Game Show Network,
L.P.("GSN") for $225 million in cash and $50 million in stock. This transaction
is subject to the execution of definitive agreements and customary conditions to
closing. At the closing, our company and SPE will each commit to provide up to
$37.5 million in cash to GSN as additional capital contribution. This
transaction is anticipated to close in the fourth quarter of 2000.
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 as of September 30,
2000.
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<PAGE> 24
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Other, net
During the three months ended September 30, 2000, we reversed prior period
accruals for royalty expenses of $1.7 million as we believe that there is no
further obligation.
Losses from Discontinued Operations
The gain from discontinued operations for the three months ended September 30,
1999 of $39,000 and the loss from discontinued operations for the nine months
ended September 30, 1999 of $19.3 million (net of income tax benefit of $10.6
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 a 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 nine months ended September 30, 2000, our financing activities
generated funds of $93.1 million which were used for funding our operating
activities of $8.4 million and purchases of Interactive Media investments, net
of $14.2 million proceeds from sale of investments, business acquisitions and
purchases of property and equipment totaling $72.4 million, resulting in a net
increase in cash of $12.3 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 nine month period
or (ii) the bank's base rate. On September 29, 2000, proceeds from the
iBEAM/Priceline transactions (see below) were used to pay down the Company's
revolving credit facility resulting in current availability under the credit
facility of approximately $96 million.
On October 21, 1999, we signed a promissory note amounting to $100 million in
favor of a subsidiary of Liberty. On September 29, 2000, we paid our outstanding
balance of $93.5 million in full, extinguishing this promissory note. We paid
interest of $5.6 million on this note based on an interest rate that is the
greater of the prime rate plus 1% or Federal Funds rate plus 2.25%.
On September 29, 2000, we signed two promissory notes totaling $188.5 million in
favor of Liberty. These notes bear interest at 9% compounded annually and are
secured by our 99% preferred interest in two entities as described below, to
which we have transferred certain of our assets. The only obligors on the notes
are the subsidiaries which hold the respective preferred interests in the two
entities. The accrued interest and principal on the notes are payable upon the
sale of our preferred interests or on the due dates of the notes, whichever is
earlier. These entities are consolidated with our financial statements as of
September 30, 2000. Our transactions ("iBEAM/Priceline Transactions") with these
entities are detailed as follows:
o We transferred our interest in 3,125,000 shares of Priceline.com
Incorporated valued at $40.0625 per share or $125.2 million and our
interest in the net value of a put and call option on the Priceline
shares which we have entered into, as a five year cashless collar, with
a financial services institution prior to the transfer of these shares,
into a newly formed subsidiary LLC ("Priceline LLC"). In conjunction
with this transfer, we maintained a 99% preferred interest in Priceline
LLC, which earns a 9% preferred return and a preferred right to its
initial liquidation value of $123.9 million, and sold a 1% common
interest to a subsidiary of Liberty. We received $1.3 million on
September 29, 2000 and reflected in our financial statements as a
capital contribution from Liberty. At September 30, 2000, we have
marked to market the value of Priceline shares and the accompanying put
and call option, and have reflected our unrealized loss of $34.1
million (net of deferred taxes of $22.2 million) as part of
"accumulated other comprehensive earnings, net of taxes", in the
consolidated statement of stockholders equity. The promissory note of
$123.9 million related to this transaction is due on September 28,
2010.
o We transferred our interest in 3,623,684 shares of iBEAM Broadcasting
Corporation valued at $18.00 per share or $65.2 million into a newly
formed subsidiary LLC ("iBEAM LLC"). We also transferred our
interest in the net
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<PAGE> 25
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
value of our put and call option, which we entered into with a
subsidiary of Liberty, as part of this transaction. In conjunction with
this transfer, we maintained a 99% preferred interest in iBEAM LLC,
which earns a 9% preferred return and a preferred right to its initial
liquidation value of $64.5 million, and sold 1% common interest to a
related party. We received $652,000 on September 29, 2000 which amount
is reflected in our financial statements as a capital contribution from
a subsidiary of Liberty. At September 30, 2000, we have marked to
market the value of iBEAM shares and recorded our unrealized gain of
$13.8 million (net of deferred taxes of $9.0 million) as part of
"accumulated other comprehensive earnings, net of taxes", within the
consolidated statement of stockholders' equity. At September 30, 2000,
recorded the fair value of the put and call options on the iBEAM shares
of $12.3 million as other assets and reflected this asset as a capital
contribution from Liberty since the put and call transaction was among
related subsidiaries of Liberty. The promissory note of $64.6 million
related to this transaction is due on September 28, 2008.
On September 29, 2000, Liberty exchanged its shares of Series B Redeemable
Convertible Preferred Stock for two new series of preferred stock, Series C and
Series D. The Series C preferred stock has substantially the same terms as the
Series B preferred stock, except that dividends on the new Series C are payable
in cash or shares of the new Series D preferred stock. The dividend rate is 5%
per annum, and 7% in the event of a default under the terms of the agreement.
The Series D preferred stock is not convertible and bears dividends at the rate
of 12% of its 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 Liberty Digital. As a result of this transaction, we issued 8,106
shares of Series D preferred stock as payment of dividends due on the Series B
Preferred Stock up to September 29, 2000, and exchanged the Series B and C
Redeemable Preferred Stock on a one-for-one basis.
At September 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 of $371.4 million. Included in this amount are unrealized
holding gains of $132.9 million before deferred income taxes of $52.6 million.
The net unrealized holding gain of $80.4 million is included in "accumulated
other comprehensive earnings, net of taxes" within the consolidated statement of
stockholders' equity.
Our sources of funds include our available cash balances, cash provided by the
AT&T Broadband Annual Payments 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 interactive
media technology and Internet e-commerce and content 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 $259.3 million
reflected as a current liability and $86.9 million reflected as a long term
liability in the accompanying consolidated balance sheet at September 30, 2000,
may be satisfied by the issuance of Series A Common Stock.
For information concerning our other commitments and contingencies, see note 9
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 September 30, 2000, the value of such securities would have been lower by
approximately $21 million.
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<PAGE> 26
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
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. 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. The market value of the
collar at September 30, 2000 was $54.5 million.
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<PAGE> 27
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 September 30, 2000, we
sold unregistered securities as follows:
On July 1, 2000, we issued 68,408 shares of our Series A
common stock pursuant to merger agreements by and between DMX
Music, Inc. ("DMX"), our wholly-owned subsidiary,
Entertainment & Media Network LLC ("EMN") and Fore Story Music
LLC pursuant to which DMX acquired EMN and Fore Story. All
shares issued to the members of EMN and Fore Story 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 therefore to be exempt from registration
under Section 4(2) of the Securities Act.
On July 19, 2000, we issued 105,645 shares of our Series A
common stock pursuant to an exchange purchase agreement
between the Company and RespondTV, Inc. All shares issued to
RespondTV, Inc., in exchange for 1,072,386 shares of
RespondTV, Inc.'s Series C Preferred Stock, were issued
subject to investment covenants and restrictions on transfer
and no underwriter was retained in connection with that offer
and sale. The transaction was considered not to involve any
public offering and therefore to be exempt from registration
under Section 4(2) of the Securities Act.
On July 25, 2000, we issued 17,046 shares of our Series A
common stock pursuant to an asset purchase agreement by and
between us, Pacific Rim Design Group and the owner of Pacific
Rim pursuant to which we acquired Pacific Rim. All shares
issued to the owner of Pacific Rim were issued subject to
investment covenants and restrictions on transfer and no
underwriter was retained in connection with that offer and
sale. The transaction was considered not to involve any public
offering and therefore to be exempt from registration under
Section 4(2) of the Securities Act.
On September 29, 2000, we issued two new series of preferred
stock, 150,000 shares of Series C and 8,106 shares of Series
D, in exchange for the 150,000 outstanding shares of Series B
Preferred Stock held by Liberty. The transactions were
considered not to involve any public offering and therefore to
be exempt from registration under Section 4(2) of the
Securities Act.
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<PAGE> 28
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
27. Financial Data Schedule
(a) One report on Form 8-K was filed during the quarter ended September 30,
2000.
o Form 8-K dated 9-13-2000.
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<PAGE> 29
LIBERTY DIGITAL, 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.
LIBERTY DIGITAL, INC.
Date: November 14, 2000 By: /s/ Lee Masters
--------------------------------
Lee Masters
President and
Chief Executive Officer
Date: November 14, 2000 By: /s/ Mark Rozells
--------------------------------
Mark Rozells
Executive Vice President and
Chief Financial Officer
I-28
<PAGE> 30
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
