UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: SEPTEMBER 30, 2002
Date of Earliest Event Reported: SEPTEMBER 30, 2002
LIBERTY MEDIA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
0-2042 84-1288730
(Commission File Number) (I.R.S. Employer Identification No.)
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (720) 875-5400
ITEM 5. OTHER EVENTS.
Liberty Media Corporation ("Liberty") adopted Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS
("Statement 142") effective January 1, 2002. Statement 142, among other
matters, requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized following the adoption of Statement
142. Liberty's interim financial statements included in its Form 10-Q
filings for the first and second quarters of 2002 reflect the application
of Statement 142.
Liberty's financial statements as of December 31, 2001 and 2000 and for
the years ended December 31, 2001 and 2000, the ten months ended
December 31, 1999 and the two months ended February 28, 1999, included in
its Annual Report on Form 10-K, (the "Most Recent Annual Financial
Statements") are incorporated by reference into certain registration
statements filed by Liberty prior to and subsequent to the issuance of
its interim financial statements reflecting the initial adoption of
Statement 142. In response to the SEC Staff's position regarding the
application of the transitional disclosures described in Paragraph 61
of Statement 142 to previously issued annual financial statements
included or incorporated by reference into registration statements,
Liberty is revising its Most Recent Annual Financial Statements to
include such transitional disclosures in note 3 of the Notes to
Consolidated Financial Statements under the heading "Recent Accounting
Pronouncements." The revised financial statements are included herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibit
23 Consent of KPMG LLP
1
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: September 30, 2002
LIBERTY MEDIA CORPORATION
By: /s/Charles Y. Tanabe
-------------------------------
Name: Charles Y. Tanabe
Title: Senior Vice President and
General Counsel
2
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
23 Consent of KPMG LLP
3
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited the accompanying consolidated balance sheets of Liberty Media
Corporation and subsidiaries ("New Liberty" or "Successor") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
comprehensive earnings, stockholders' equity, and cash flows for the years ended
December 31, 2001 and 2000 and the period from March 1, 1999 to December 31,
1999 (Successor periods) and from January 1, 1999 to February 28, 1999
(Predecessor period). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated financial statements
present fairly, in all material respects, the financial position of New Liberty
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the Successor periods, in conformity with accounting principles
generally accepted in the United States of America. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the results of their operations and their cash flows for
the Predecessor period, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in notes 3 and 8 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.
As discussed in note 1 to the consolidated financial statements, effective March
9, 1999, AT&T Corp., the former parent company of New Liberty, acquired
Tele-Communications, Inc., the former parent company of Liberty Media
Corporation, in a business combination accounted for as a purchase. As a result
of the acquisition, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
KPMG LLP
Denver, Colorado
March 8, 2002
1
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000 *
-------- --------
amounts in millions
Assets
Current assets:
Cash and cash equivalents $ 2,077 1,295
Short-term investments 397 500
Trade and other receivables, net 356 307
Prepaid expenses and program rights 352 283
Deferred income tax assets (note 9) 311 242
Other current assets 38 73
-------- -------
Total current assets 3,531 2,700
-------- -------
Investments in affiliates, accounted for using the equity method, and
related receivables (note 5) 10,076 20,464
Investments in available-for-sale securities and other cost investments
(note 6) 23,544 19,035
Property and equipment, at cost 1,190 976
Accumulated depreciation (249) (131)
-------- -------
941 845
-------- -------
Intangible assets:
Excess cost over acquired net assets 10,752 10,896
Franchise costs 190 190
-------- -------
10,942 11,086
Accumulated amortization (1,588) (998)
-------- -------
9,354 10,088
-------- -------
Other assets, at cost, net of accumulated amortization 1,093 1,136
-------- -------
Total assets $ 48,539 54,268
======== =======
(continued)
2
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000 *
-------- --------
amounts in millions
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 127 148
Accrued interest payable 159 105
Other accrued liabilities 278 401
Accrued stock compensation (note 11) 833 1,216
Program rights payable 240 179
Current portion of debt 1,143 1,094
-------- -------
Total current liabilities 2,780 3,143
-------- -------
Long-term debt (note 8) 4,764 5,269
Call option obligations (note 8) 1,320 --
Deferred income tax liabilities (note 9) 8,977 11,337
Other liabilities 442 62
-------- -------
Total liabilities 18,283 19,811
-------- -------
Minority interests in equity of subsidiaries 133 348
Stockholders' equity (note 10):
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no
shares issued and outstanding -- --
Series A common stock $.01 par value. Authorized 4,000,000,000
shares; issued and outstanding 2,378,127,544 shares at December 31,
2001 24 --
Series B common stock $.01 par value. Authorized 400,000,000 shares;
issued and outstanding 212,045,288 shares at December 31, 2001 2 --
Additional paid-in capital 35,996 35,042
Accumulated other comprehensive earnings (loss), net of taxes (note 13) 840 (397)
Accumulated deficit (6,739) (536)
-------- -------
Total stockholders' equity 30,123 34,109
-------- -------
Commitments and contingencies (note 14)
Total liabilities and stockholders' equity $ 48,539 54,268
======== =======
---------------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
New Liberty Old Liberty
---------------------------------------------------- -------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 * 1999 * 1999
------------ ------------ ------------ ------------
amounts in millions
(note 2)
Revenue:
Unaffiliated parties $ 1,849 1,283 549 192
Related parties (note 10) 210 243 180 43
---------- ---------- ---------- -----------
2,059 1,526 729 235
---------- ---------- ---------- -----------
Operating costs and expenses:
Operating 1,089 801 343 95
Selling, general and administrative ("SG&A") 573 348 229 87
Charges from related parties (note 10) 20 37 24 6
Stock compensation-SG&A (note 11) 132 (950) 1,785 183
Depreciation 209 122 19 7
Amortization 775 732 543 15
Impairment of long-lived assets (note 3) 388 -- -- --
---------- ---------- ---------- -----------
3,186 1,090 2,943 393
---------- ---------- ---------- -----------
Operating income (loss) (1,127) 436 (2,214) (158)
Other income (expense):
Interest expense (525) (399) (135) (26)
Dividend and interest income 272 301 242 10
Share of losses of affiliates, net (note 5) (4,906) (3,485) (904) (66)
Nontemporary declines in fair value of
investments (note 6) (4,101) (1,463) -- --
Realized and unrealized gains (losses) on
financial instruments, net (note 3) (174) 223 (153) --
Gains (losses) on dispositions, net (notes 5 and (310) 7,340 4 14
6)
Other, net (11) 3 (4) 363
---------- ---------- ---------- -----------
(9,755) 2,520 (950) 295
---------- ---------- ---------- -----------
Earnings (loss) before income taxes and
minority interest (10,882) 2,956 (3,164) 137
Income tax benefit (expense) (note 9) 3,908 (1,534) 1,097 (211)
Minority interests in losses of subsidiaries 226 63 46 4
---------- ---------- ---------- -----------
Earnings (loss) before cumulative effect of
accounting change (6,748) 1,485 (2,021) (70)
Cumulative effect of accounting change, net of taxes
(notes 3 and 8) 545 -- -- --
---------- ---------- ---------- -----------
Net earnings (loss) $ (6,203) 1,485 (2,021) (70)
========== ========== ========== ===========
Pro forma earnings (loss) per common share (note 3):
Pro forma basic and diluted earnings (loss)
before cumulative effect of accounting change $ (2.61) .57 (.78) (.03)
Cumulative effect of accounting change, net of
taxes .21 -- -- --
---------- ---------- ---------- -----------
Pro forma basic and diluted net earnings (loss) $ (2.40) .57 (.78) (.03)
========== ========== ========== ===========
Pro forma number of common shares outstanding 2,588 2,588 2,588 2,588
========== ========== ========== ===========
--------------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
New Liberty Old Liberty
---------------------------------------------------- ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 * 1999 * 1999
------------ ------------ ------------ ------------
amounts in millions
Net earnings (loss) $ (6,203) 1,485 (2,021) (70)
========== ========== ========== ===========
Other comprehensive earnings, net of taxes (note 13):
Foreign currency translation adjustments (359) (202) 60 (15)
Unrealized holding gains (losses) arising during
the period (1,013) (6,115) 6,488 885
Recognition of previously unrealized losses
(gains) on available-for-sale securities, net 2,696 (635) 7 --
Cumulative effect of accounting change (notes 3
and 8) (87) -- -- --
---------- ---------- ---------- -----------
Other comprehensive (loss) earnings 1,237 (6,952) 6,555 870
---------- ---------- ---------- -----------
Comprehensive earnings (loss) $ (4,966) (5,467) 4,534 800
========== ========== ========== ===========
--------------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional
Preferred Common stock paid-in
Stock Series A Series B Capital
--------- --------- -------- ----------
amounts in millions
Balance at January 1, 1999 $ -- -- -- 4,682
Net loss -- -- -- --
Other comprehensive earnings -- -- -- --
Other transfers from related parties, net -- -- -- 430
--------- --------- -------- ----------
Balance on February 28, 1999 $ -- -- -- 5,112
========= ========= ======== ==========
Balance at March 1, 1999 (as restated, see note 2) $ -- -- -- 33,500
Net loss -- -- -- --
Other comprehensive earnings -- -- -- --
Transfer from related party for redemption of debentures -- -- -- 354
Gains in connection with issuances of stock of affiliates and
subsidiaries, net of taxes (note 10) -- -- -- 108
Utilization of net operating losses of Liberty by AT&T (note 9) -- -- -- (88)
--------- -------- -------- ----------
Balance at December 31, 1999 -- -- -- 33,874
--------- -------- -------- ----------
Net earnings -- -- -- --
Other comprehensive loss -- -- -- --
Issuance of AT&T Class A Liberty Media Group common stock for
acquisitions (note 7) -- -- -- 1,064
Gains in connection with issuances of stock by affiliates and
subsidiaries, net of taxes (note 10) -- -- -- 355
Utilization of net operating losses of Liberty by AT&T (note 9) -- -- -- (38)
Other transfers to related parties, net -- -- -- (213)
--------- -------- -------- ----------
Balance at December 31, 2000 -- -- -- 35,042
--------- -------- -------- ----------
Net loss -- -- -- --
Other comprehensive earnings -- -- -- --
Issuance of common stock upon consummation of Split Off
Transaction (note 2) -- 24 2 (26)
Contribution from AT&T upon consummation of Split Off Transaction
(note 2) -- -- -- 803
Accrual of amounts due to AT&T for taxes on deferred intercompany
gains (note 2) -- -- -- (115)
Losses in connection with issuances of stock by subsidiaries and
affiliates, net of taxes (note 10) -- -- -- (8)
Utilization of net operating losses of Liberty by AT&T prior to
Split Off Transaction (note 9) -- -- -- (2)
Stock option exercises and issuance of restricted stock prior to
Split Off Transaction -- -- -- 302
--------- -------- -------- ----------
Balance at December 31, 2001 $ -- 24 2 35,996
========= ======== ======== ==========
Accumulated
other
comprehensive Accumulated Total
earnings, (deficit) stockholders'
net of taxes earnings equity
------------- ----------- -------------
amounts in millions
Balance at January 1, 1999 3,186 952 8,820
Net loss -- (70) (70)
Other comprehensive earnings 870 -- 870
Other transfers from related parties, net -- -- 430
----------- --------- -----------
Balance on February 28, 1999 4,056 882 10,050
=========== ========= ===========
Balance at March 1, 1999 (as restated, see note 2) -- -- 33,500
Net loss -- (2,021) (2,021)
Other comprehensive earnings 6,555 -- 6,555
Transfer from related party for redemption of debentures -- -- 354
Gains in connection with issuances of stock of affiliates and
subsidiaries, net of taxes (note 10) -- -- 108
Utilization of net operating losses of Liberty by AT&T (note 9) -- -- (88)
----------- --------- -----------
Balance at December 31, 1999 6,555 (2,021) 38,408
----------- --------- -----------
Net earnings -- 1,485 1,485
Other comprehensive loss (6,952) -- (6,952)
Issuance of AT&T Class A Liberty Media Group common stock for
acquisitions (note 7) -- -- 1,064
Gains in connection with issuances of stock by affiliates and
subsidiaries, net of taxes (note 10) -- -- 355
Utilization of net operating losses of Liberty by AT&T (note 9) -- -- (38)
Other transfers to related parties, net -- -- (213)
----------- --------- -----------
Balance at December 31, 2000 (397) (536) 34,109
----------- --------- -----------
Net loss -- (6,203) (6,203)
Other comprehensive earnings 1,237 -- 1,237
Issuance of common stock upon consummation of Split Off
Transaction (note 2) -- -- --
Contribution from AT&T upon consummation of Split Off Transaction
(note 2) -- -- 803
Accrual of amounts due to AT&T for taxes on deferred intercompany
gains (note 2) -- -- (115)
Losses in connection with issuances of stock by subsidiaries and
affiliates, net of taxes (note 10) -- -- (8)
Utilization of net operating losses of Liberty by AT&T prior to
Split Off Transaction (note 9) -- -- (2)
Stock option exercises and issuance of restricted stock prior to
Split Off Transaction -- -- 302
----------- --------- -----------
Balance at December 31, 2001 840 (6,739) 30,123
=========== ========= ===========
See accompanying notes to consolidated financial statements.
6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
New Liberty Old Liberty
----------------------------------------------- -------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 * 1999 * 1999
------------- ------------- ------------- -------------
amounts in millions
Cash flows from operating activities: (note 4)
Net earnings (loss) $ (6,203) 1,485 (2,021) (70)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Cumulative effect of accounting change, net of taxes (545) -- -- --
Depreciation and amortization 984 854 562 22
Impairment of long-lived assets 388 -- -- --
Stock compensation 132 (950) 1,785 183
Payments of stock compensation (244) (319) (111) (126)
Share of losses of affiliates, net 4,906 3,485 904 66
Nontemporary decline in fair value of investments 4,101 1,463 -- --
Realized and unrealized losses (gains) on financial
instruments, net 174 (223) 153 --
Losses (gains) on disposition of assets, net 310 (7,340) (4) (14)
Minority interests in losses of subsidiaries (226) (63) (46) (4)
Deferred income tax expense (benefit) (3,613) 1,821 (1,025) 212
Intergroup tax allocation (222) (294) (75) (1)
Payments from AT&T pursuant to tax sharing agreement 166 414 1 --
Other noncash charges (income) 40 15 3 (354)
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions:
Receivables 30 (116) 7 33
Prepaid expenses and program rights (148) (121) (119) (23)
Payables and other current liabilities (4) 88 119 (31)
----------- ----------- ----------- -----------
Net cash provided (used) by operating activities 26 199 133 (107)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Cash paid for acquisitions (113) (735) (109) --
Capital expended for property and equipment (358) (221) (40) (15)
Investments in and loans to equity affiliates (1,031) (1,568) (1,090) (30)
Investments in and loans to cost investments (1,548) (1,791) (1,506) (21)
Purchases of marketable securities (269) (848) (7,757) (3)
Sales and maturities of marketable securities 615 1,820 5,725 9
Cash proceeds from dispositions 471 456 130 43
Other investing activities, net (5) 21 (11) (62)
----------- ----------- ----------- -----------
Net cash used by investing activities (2,238) (2,866) (4,658) (79)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Borrowings of debt 1,639 4,597 3,187 155
Proceeds attributed to call option obligations upon issuance
of senior exchangeable debentures 1,028 -- -- --
Repayments of debt (1,048) (2,156) (2,211) (145)
Net proceeds from issuance of stock by subsidiaries -- 121 123 --
Premium proceeds from financial instruments 383 -- -- --
Proceeds from settlement of financial instruments, net 366 -- -- --
Payment from AT&T related to Split Off Transaction 803 -- -- --
Cash transfers (to) from related parties (157) (286) (159) 31
Other financing activities, net (20) (28) (20) (52)
----------- ----------- ----------- -----------
Net cash provided (used) by financing activities 2,994 2,248 920 (11)
----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 782 (419) (3,605) (197)
Cash and cash equivalents at beginning of period 1,295 1,714 5,319 228
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period $ 2,077 1,295 1,714 31
=========== =========== =========== ===========
-----------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
Liberty Media Corporation ("Liberty" or the "Company") and those of all
majority-owned and controlled subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Liberty's domestic subsidiaries generally operate or hold interests in
businesses which provide programming services including production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software. In addition, certain of Liberty's subsidiaries hold interests in
businesses engaged in wireless telephony, electronic retailing, direct
marketing and advertising sales relating to programming services,
infomercials and transaction processing. Liberty also has significant
interests in foreign affiliates which operate in cable television,
programming and satellite distribution.
(2) AT&T OWNERSHIP OF LIBERTY
On March 9, 1999, AT&T Corp. ("AT&T") acquired Tele-Communications, Inc.
("TCI"), the former parent company of Liberty, in a merger transaction
(the "AT&T Merger"). As a result of the AT&T Merger, each series of TCI
common stock was converted into a class of AT&T common stock subject to
applicable exchange ratios. The AT&T Merger was accounted for using the
purchase method. Accordingly, at the time of the AT&T Merger, Liberty's
assets and liabilities were recorded at their respective fair values
resulting in a new cost basis. For financial reporting purposes the AT&T
Merger is deemed to have occurred on March 1, 1999. Accordingly, for
periods prior to March 1, 1999 the assets and liabilities of Liberty and
the related consolidated financial statements are sometimes referred to
herein as "Old Liberty," and for periods subsequent to February 28, 1999
the assets and liabilities of Liberty and the related consolidated
financial statements are sometimes referred to herein as "New Liberty."
The "Company" and "Liberty" refer to both New Liberty and Old Liberty.
8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table represents the summary balance sheet of Old Liberty at
February 28, 1999, prior to the AT&T Merger and the opening summary
balance sheet of New Liberty subsequent to the AT&T Merger. Certain
pre-merger transactions occurring between March 1, 1999, and March 9,
1999, that affected Old Liberty's equity, gains on issuance of equity
securities by affiliates and subsidiaries, and stock compensation have
been reflected in the two-month period ended February 28, 1999.
New Liberty Old Liberty
------------- -------------
amounts in millions
ASSETS:
Cash and cash equivalents $ 5,319 31
Other current assets 434 1,011
Investments in affiliates 17,116 3,971
Investments in available-for-sale securities 13,094 11,974
Property and equipment, net 125 111
Intangibles and other assets 11,159 389
---------- ----------
$ 47,247 17,487
========== ==========
LIABILITIES AND EQUITY:
Current liabilities $ 1,872 1,051
Long-term debt 1,845 2,087
Deferred income taxes 9,972 4,147
Other liabilities 19 90
---------- ----------
Total liabilities 13,708 7,375
---------- ----------
Minority interests in equity of subsidiaries 39 62
Stockholder's equity 33,500 10,050
---------- ----------
$ 47,247 17,487
========== ==========
From March 9, 1999 through August 9, 2001, AT&T owned 100% of the
outstanding common stock of Liberty. During such time, the AT&T Class A
Liberty Media Group common stock and the AT&T Class B Liberty Media Group
common stock (together, the AT&T Liberty Media Group tracking stock) were
tracking stocks of AT&T designed to reflect the economic performance of
the businesses and assets of AT&T attributed to the Liberty Media Group.
Liberty was included in the Liberty Media Group.
On May 7, 2001, AT&T contributed to Liberty assets that were attributed to
the Liberty Media Group but not previously owned by Liberty (the
"Contributed Assets"). These assets included (i) preferred stock and
common stock interests in a subsidiary of IDT Corporation, a multinational
telecommunications services provider and (ii) an approximate 8% indirect
common equity interest in Liberty Digital, Inc. ("Liberty Digital").
Subsequent to these contributions, the businesses and assets of Liberty
and its subsidiaries constituted all of the businesses and assets of the
Liberty Media Group. The contributions have been accounted for in a manner
similar to a pooling of interests and, accordingly, the financial
statements of Liberty for periods prior to the contributions have been
restated to include the financial position and results of operations of
the Contributed Assets.
Effective August 10, 2001, AT&T effected the split-off of Liberty pursuant
to which Liberty's common stock was recapitalized, and each outstanding
share of AT&T Class A Liberty Media Group tracking stock was redeemed for
one share of Liberty Series A common stock and each outstanding share of
AT&T Class B Liberty Media Group tracking stock was redeemed for one share
of Liberty Series B common stock (the "Split Off Transaction"). Subsequent
to the Split Off Transaction, Liberty is no longer a subsidiary of AT&T
and no shares of AT&T Liberty Media Group tracking stock remain
outstanding. The Split Off Transaction has been accounted for at
historical cost.
In connection with the Split Off Transaction, Liberty has also been
deconsolidated from AT&T for federal income tax purposes. As a result,
AT&T was required to pay Liberty an amount equal to 35% of the amount of
the net operating loss carryforward reflected in TCI's final federal
income tax return that has not been used as an offset to Liberty's
obligations under the AT&T Tax Sharing Agreement and that has been,
9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
or is reasonably expected to be, utilized by AT&T. The $803 million
payment was received by Liberty prior to the Split Off Transaction and has
been reflected as an increase to additional paid-in-capital in the
accompanying consolidated statement of stockholders' equity. In addition,
certain deferred intercompany gains will be includible in AT&T's taxable
income as a result of the Split Off Transaction, and AT&T will be entitled
to reimbursement from Liberty for the resulting tax liability of
approximately $115 million. Such tax liability has been accrued as of
December 31, 2001 and has been reflected as a reduction in additional
paid-in-capital in the accompanying consolidated statement of
stockholders' equity.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of
acquisition.
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance at December 31, 2001 and 2000 was not material.
PROGRAM RIGHTS
Prepaid program rights are amortized on a film-by-film basis over the
anticipated number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated cost of the programs when the
film is available for airing less prepayments. These amounts are amortized
on a film-by-film basis over the anticipated number of exhibitions.
INVESTMENTS
All marketable equity and debt securities held by the Company are
classified as available-for-sale and are carried at fair value. Unrealized
holding gains and losses on securities that are classified as
available-for-sale ("AFS Securities") and are hedged with a derivative
financial instrument that qualifies as a fair value hedge under Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("Statement 133") are recognized in
the Company's consolidated statement of operations. Unrealized holding
gains and losses of AFS Securities that are not hedged pursuant to
Statement 133 are carried net of taxes as a component of accumulated other
comprehensive earnings in stockholder's equity. Realized gains and losses
are determined on an average cost basis. Other investments in which the
Company's ownership interest is less than 20% and are not considered
marketable securities are carried at the lower of cost or net realizable
value.
For those investments in affiliates in which the Company has the ability
to exercise significant influence, the equity method of accounting is
used. Under this method, the investment, originally recorded at cost, is
adjusted to recognize the Company's share of net earnings or losses of the
affiliates as they occur rather then as dividends or other distributions
are received, limited to the extent of the Company's investment in,
advances to and commitments for the investee. The Company's share of net
earnings or losses of affiliates includes the amortization of the
difference between the Company's investment and its share of the net
assets of the investee and also includes any nontemporary declines in fair
value recognized during the period.
Subsequent to the AT&T Merger, changes in the Company's proportionate
share of the underlying equity of a subsidiary or equity method investee,
which result from the issuance of additional equity securities by such
subsidiary or equity investee, are recognized as increases or decreases in
the Company's consolidated statements of stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The Company considers a number of factors in its
determination including (i) the financial condition, operating performance
and near term prospects of the
10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
investee; (ii) the reason for the decline in fair value, be it general
market conditions, industry specific or investee specific; (iii) analysts'
ratings and estimates of 12 month share price targets for the investee;
(iv) the length of time that the fair value of the investment is below the
Company's carrying value; and (v) the Company's intent and ability to hold
the investment for a period of time sufficient to allow for a recovery in
fair value. If the decline in fair value is deemed to be other than
temporary, the cost basis of the security is written down to fair value.
In situations where the fair value of an investment is not evident due to
a lack of a public market price or other factors, the Company uses its
best estimates and assumptions to arrive at the estimated fair value of
such investment. The Company's assessment of the foregoing factors
involves a high degree of judgment and accordingly, actual results may
differ materially from the Company's estimates and judgments. Writedowns
for cost investments and AFS Securities are included in the consolidated
statements of operations as nontemporary declines in fair values of
investments. Writedowns for equity method investments are included in
share of losses of affiliates.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, is stated at
cost. Depreciation is computed using the straight-line method using
estimated useful lives of 3 to 20 years for support equipment and 10 to 40
years for buildings and improvements.
EXCESS COST OVER ACQUIRED NET ASSETS
Excess cost over acquired net assets consists of the difference between
the cost of acquiring non-cable entities and amounts assigned to their
tangible assets. Such amounts are amortized using the straight-line method
over periods ranging from 5 to 20 years.
FRANCHISE COSTS
Franchise costs generally include the difference between the cost of
acquiring cable companies and amounts allocated to their tangible assets.
Such amounts are amortized using the straight-line method over 20 years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically reviews the carrying amounts of its property and
equipment and its intangible assets to determine whether current events or
circumstances indicate that such carrying amounts may not be recoverable.
If the carrying amount of the asset is greater than the expected
undiscounted cash flows to be generated by such asset, an impairment
adjustment is to be recognized. Such adjustment is measured by the amount
that the carrying value of such assets exceeds their fair value. The
Company generally measures fair value by considering sale prices for
similar assets or by discounting estimated future cash flows using an
appropriate discount rate. Considerable management judgment is necessary
to estimate the fair value of assets, accordingly, actual results could
vary significantly from such estimates. Assets to be disposed of are
carried at the lower of their financial statement carrying amount or fair
value less costs to sell.
11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
As a result of the weakness in the economy in 2001 certain subsidiaries of
the Company did not meet their 2001 operating objectives and have reduced
their 2002 expectations. Accordingly, the subsidiaries assessed the
recoverability of their property and equipment and intangible assets and
determined that impairment adjustments were necessary. In addition, in the
fourth quarter, a subsidiary made the decision to consolidate certain of
its operations and close certain facilities. In connection with these
initiatives, the subsidiary recorded a restructuring charge related to
lease cancellation fees and an additional impairment charge related to its
property and equipment. All of the foregoing charges are included in
impairment of long-lived assets in the Company's statement of operations.
MINORITY INTERESTS
Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable
portion of the common equity of those subsidiaries. Further, the minority
interests' share of losses is not recognized if the minority holders of
common equity of subsidiaries have the right to cause the Company to
repurchase such holders' common equity.
Preferred stock (and accumulated dividends thereon) of subsidiaries are
included in minority interests in equity of subsidiaries. Dividend
requirements on such preferred stocks are reflected as minority interests
in earnings of subsidiaries in the accompanying consolidated statements of
operations and comprehensive earnings.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the United States ("U.S.")
dollar. The functional currency of the Company's foreign operations
generally is the applicable local currency for each foreign subsidiary and
foreign equity method investee. Assets and liabilities of foreign
subsidiaries and foreign equity investees are translated at the spot rate
in effect at the applicable reporting date, and the consolidated
statements of operations and the Company's share of the results of
operations of its foreign equity affiliates are translated at the average
exchange rates in effect during the applicable period. The resulting
unrealized cumulative translation adjustment, net of applicable income
taxes, is recorded as a component of accumulated other comprehensive
earnings in stockholder's equity.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and
losses which are reflected in the accompanying consolidated statements of
operations and comprehensive earnings as unrealized (based on the
applicable period end exchange rate) or realized upon settlement of the
transactions.
Unless otherwise indicated, convenience translations of foreign currencies
into U.S. dollars are calculated using the applicable spot rate at
December 31, 2001, as published in The Wall Street Journal.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses various derivative instruments including equity collars,
put spread collars, bond swaps and foreign exchange contracts to manage
fair value and cash flow risk associated with many of its investments,
some of its variable rate debt and forecasted transactions to be
denominated in foreign currencies. Each of these derivative instruments is
executed with a counterparty, generally well known major financial
institutions. While Liberty believes these derivative instruments
effectively manage the risks highlighted above, they are subject to
counterparty credit risk. Counterparty credit risk is the risk that the
counterparty is unable to perform under the terms of the derivative
instrument upon settlement of the derivative instrument. To protect itself
against credit risk associated with these counterparties the Company:
- Executes its derivative instruments with several different
counterparties, and
- Executes derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of
the derivative instrument into a cash collateral account for the
12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Company's benefit, if the respective counterparty's credit rating were
to reach certain levels, generally a rating that is below Standard &
Poor's rating of A- or Moody's rating of A3.
Due to the importance of these derivative instruments to its risk
management strategy, Liberty actively monitors the creditworthiness of
each of these counterparties. Based on its analysis, the Company considers
nonperformance by any of its counterparties to be unlikely.
Effective January 1, 2001, Liberty adopted Statement 133, which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
for hedging activities. All derivatives, whether designated in hedging
relationships or not, are required to be recorded on the balance sheet at
fair value. If the derivative is designated as a fair value hedge, the
changes in the fair value of the derivative and of the hedged item
attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in other
comprehensive earnings and are recognized in the statement of operations
when the hedged item affects earnings. Ineffective portions of changes in
the fair value of cash flow hedges are recognized in earnings. If the
derivative is not designated as a hedge, changes in the fair value of the
derivative are recognized in earnings. Currently, the only instruments
designated as hedges are the Company's equity collars, which are
designated as fair value hedges.
The fair value of derivative instruments is estimated using the
Black-Scholes model. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected volatility
of the underlying security and an appropriate discount rate. The Company
selects a volatility rate at the inception of the derivative instrument
based on the historical volatility of the underlying security and on the
term of the derivative instrument. The volatility assumption is generally
not changed during the term of the derivative instrument unless there is
an indication that the historical volatility is no longer appropriate.
Considerable management judgment is required in estimating the
Black-Scholes variables. Actual results upon settlement or unwinding of
derivative instruments may differ materially from these estimates.
Derivative gains and losses included in other comprehensive earnings are
reclassified into earnings at the time the sale of the hedged item or
transaction is recognized.
Prior to the adoption of Statement 133, changes in the fair value of the
Company's equity collars were reported as a component of comprehensive
earnings (in unrealized gains) along with changes in the fair value of the
underlying securities. Changes in the fair value of put spread collars
were recorded as unrealized gains (losses) on financial instruments in the
consolidated statements of operations.
The adoption of Statement 133 on January 1, 2001, resulted in a cumulative
increase in net earnings of $545 million, or $0.21 per common share,
(after tax expense of $356 million) and an increase in other comprehensive
loss of $87 million. The increase in net earnings was mostly attributable
to separately recording the fair value of the embedded call option
obligations associated with the Company's senior exchangeable debentures.
The increase in other comprehensive loss relates primarily to changes in
the fair value of the Company's warrants and options to purchase certain
available-for-sale securities.
The Company assesses the effectiveness of equity collars by comparing
changes in the intrinsic value of the equity collar to changes in the fair
value of the underlying security. For derivatives designated as fair value
hedges, changes in the time value of the derivatives, which are excluded
from the assessment of hedge effectiveness, are recognized currently in
earnings as a component of realized and unrealized gains (losses) on
financial instruments. Hedge ineffectiveness, determined in accordance
with Statement 133, had no impact on earnings for the year ended December
31, 2001.
For the year ended December 31, 2001, realized and unrealized gains on
financial instruments included a $167 million unrealized gain related to
call option obligations, a $616 million unrealized net loss for changes in
the fair value of derivative instruments related to available-for-sale
securities and other derivatives not designed as hedging instruments, and
a $275 million unrealized net gain for changes in the time value of
options for fair value hedges. During the year ended December 31, 2001,
the Company received cash proceeds of $329 million as a result of
unwinding certain of its equity collars. Pursuant to
13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Statement 133, the proceeds received less the offsetting impact of hedge
accounting on the underlying securities resulted in $162 million of
realized and unrealized gains on financial instruments in the consolidated
statement of operations for the year ended December 31, 2001.
REVENUE RECOGNITION
Programming revenue is recognized in the period during which programming
is provided, pursuant to affiliation agreements. Advertising revenue is
recognized, net of agency commissions, in the period during which
underlying advertisements are broadcast. Revenue from post-production
services is recognized in the period the services are rendered. Cable and
other distribution revenue is recognized in the period that services are
rendered. Cable installation revenue is recognized in the period the
related services are provided to the extent of direct selling costs. Any
remaining amount is deferred and recognized over the estimated average
period that customers are expected to remain connected to the cable
distribution system.
ADVERTISING COSTS
Advertising costs generally are expensed as incurred. Advertising expense
aggregated $43 million, $35 million, $18 million and $4 million for the
years ended December 31, 2001 and 2000, the ten months ended December 31,
1999 and the two months ended February 28, 1999, respectively.
STOCK BASED COMPENSATION
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION ("Statement 123"), establishes financial
accounting and reporting standards for stock-based employee compensation
plans as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. As allowed by
Statement 123, Liberty continues to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25 ("APB Opinion No.
25").
Agreements that may require Liberty to reacquire interests in subsidiaries
held by officers and employees in the future are marked-to-market at the
end of each reporting period with corresponding adjustments being recorded
to stock compensation expense.
PRO FORMA EARNINGS (LOSS) PER COMMON SHARE
Pro forma basic earnings (loss) per common share is computed by dividing
net earnings (loss) by the pro forma number of common shares outstanding.
The pro forma number of outstanding common shares for periods prior to the
Split Off Transaction is based upon the number of shares of Series A and
Series B Liberty common stock issued upon consummation of the Split Off
Transaction. Pro forma diluted earnings (loss) per common share presents
the dilutive effect on a per share basis of potential common shares as if
they had been converted at the beginning of the periods presented.
Excluded from diluted earnings per share for the year ended December 31,
2001, are 76 million potential common shares because their inclusion would
be anti-dilutive.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparability with
the 2001 presentation.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from
those estimates.
14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 141, BUSINESS COMBINATIONS ("Statement 141"), and Statement
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement 142"). Statement
141 requires that the purchase method of accounting be used for all
business combinations. Statement 141 also specifies criteria that
intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. Statement 142 will
require that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of Statement 142. Statement 142
will also require that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS
Statement No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND
FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
The Company adopted the provisions of Statement 141 effective July 1,
2001, and is required to adopt Statement 142 effective January 1, 2002.
Statement 141 requires upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in
prior purchase business combinations, and make any necessary
reclassifications in order to conform with the new criteria in Statement
141 for recognition apart from goodwill. Upon adoption of Statement 142,
the Company will be required to reassess the useful lives and residual
values of all intangible assets acquired, and make any necessary
amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the company will be
required to test the intangible asset for impairment in accordance with
the provisions of Statement 142 within the first interim period. Any
impairment loss will be measured as of the date of adoption and recognized
as the cumulative effect of a change in accounting principle in the first
interim period.
In connection with Statement 142's transitional goodwill impairment
evaluation, Statement 142 will require the Company to perform an
assessment of whether there is an indication that goodwill and
equity-method goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The Company
will then have up to six months from the date of adoption to determine the
fair value of each reporting unit and compare it to the reporting unit's
carrying amount. To the extent a reporting unit's carrying amount exceeds
its fair value, an indication exists that the reporting unit's goodwill
may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare
the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any
transitional impairment loss will be recognized as the cumulative effect
of a change in accounting principle in the Company's statement of
earnings.
As of the date of adoption, the Company will have unamortized goodwill in
the amount of $9,191 million, unamortized identifiable intangible assets
in the amount of $831 million, and unamortized equity-method excess costs
in the amount of $7,766 million, all of which will be subject to the
transition provisions of Statements 141 and 142. Amortization expense
related to goodwill was $617 million and $587 million for the years ended
December 31, 2001 and 2000, respectively; and amortization of
equity-method excess costs (included in share of losses of affiliates)
aggregated $798 million and $1,058 million for the years ended December
31, 2001 and 2000, respectively. The Company currently estimates that upon
adoption of Statement 142, it will be required to recognize a $1.5 - $2.0
billion transitional impairment loss as the cumulative effect of a change
in accounting principle. The foregoing estimate does not include an
adjustment for the Company's proportionate share of any transition
adjustments that its equity method affiliates may record, as the Company
is currently unable to estimate the amount of such adjustment.
15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
As noted above, indefinite lived intangible assets are no longer
amortized. Adjusted net loss and loss per common share, exclusive of
amortization expense related to goodwill, franchise costs and equity
method goodwill are as follows (amounts in millions, except per share
amounts):
New Liberty Old Liberty
----------------------------------------------- --------------
Ten months Two months
Year ended Year ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------- ------------- ------------- -------------
Net earnings (loss), as reported $ (6,203) 1,485 (2,021) (70)
Adjustments:
Goodwill amortization 617 586 430 13
Franchise costs amortization 10 12 8 1
Equity method excess costs
amortization included in share
of losses of affiliates 798 1,058 463 9
Income tax effect (333) (426) (187) (4)
---------- ---------- ---------- ----------
Net earnings (loss), as adjusted $ (5,111) 2,715 (1,307) (51)
========== ========== ========== ==========
Basic and diluted earnings (loss)
per common share, as reported
$(2.40) 0.57 (0.78) (0.03)
Adjustments:
Goodwill amortization 0.24 0.23 0.17 0.01
Franchise costs amortization -- -- -- --
Equity method excess costs
amortization included in share
of losses of affiliates 0.31 0.41 0.18 --
Income tax effect (0.13) (0.16) (0.07) --
---------- ---------- ---------- ----------
Basic and diluted earnings (loss)
per common share, as adjusted $ (1.98) 1.05 (0.50) (0.02)
========== ========== ========== ==========
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supercedes
prior statements that address the disposal of a segment of a business, and
eliminates the exception to consolidation for subsidiaries for which
control is likely to be temporary. This statement retains the prior
statement's fundamental provisions for the recognition and measurement of
impairment of long-lived assets to be held and used, as well as the
measurement of long-lived assets to be disposed of by sale. The statement
is effective for fiscal years beginning after December 15, 2001. The
Company has not determined the impact that adoption of this statement will
have on its financial position, results of operations or cash flow.
16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(4) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
New Liberty Old Liberty
------------------------------------------------ ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
amounts in millions
Cash paid for acquisitions:
Fair value of assets acquired $ 264 3,733 122 --
Net liabilities assumed (136) (1,208) (13) --
Deferred tax liability (7) (281) -- --
Minority interest (8) (445) -- --
Contribution to equity for acquisitions -- (1,064) -- --
------------ ------------ ----------- -----------
Cash paid for acquisitions $ 113 735 109 --
============ ============ =========== ===========
Cash paid for interest $ 451 335 93 32
============ ============ =========== ===========
Cash paid for income taxes $ 9 2 1 --
============ ============ =========== ===========
During the ten months ended December 31, 1999, certain subsidiaries with a
carrying value of $135 million were exchanged for a cost method investment
in an online music venture.
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
Cash and cash equivalents prior to the AT&T Merger $ 31
Cash contribution in connection with the AT&T Merger 5,464
Cash paid to TCI for certain warrants (176)
--------
Cash and cash equivalents subsequent to the AT&T Merger $ 5,319
========
(5) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Liberty has various investments accounted for using the equity method. The
following table includes Liberty's carrying amount and percentage
ownership of the more significant investments in affiliates at December
31, 2001 and the carrying amount at December 31, 2000:
December 31, December 31,
2001 2000
----------------------------- ------------
Percentage Carrying Carrying
Ownership Amount Amount
----------- -------------- ------------
dollar amounts in millions
Discovery Communications, Inc. ("Discovery") 50% $ 2,900 3,133
QVC, Inc. ( "QVC ") 42% 2,543 2,508
USA Networks, Inc. ( "USAI ") and related investments
20% 2,857 2,824
UnitedGlobalCom, Inc. ("UnitedGlobalCom") 20% (418) 314
Telewest Communications plc ( "Telewest ") 25% 97 2,712
Jupiter Telecommunications Co., Ltd. ("Jupiter") 35% 407 575
Gemstar-TV Guide International, Inc. ("Gemstar") N/A -- 5,855
Other various 1,690 2,543
------------- ----------
$ 10,076 20,464
============= ==========
17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table reflects Liberty's share of earnings (losses) of
affiliates including excess basis amortization and nontemporary declines
in value:
New Liberty Old Liberty
------------------------------------------------ -----------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
----------- ----------- ----------- -----------
amounts in millions
Discovery $ (293) (293) (269) (8)
QVC 36 (12) (11) 13
USAI and related investments 35 (36) (20) 10
UnitedGlobalCom (751) (211) 23 --
Telewest (2,538) (441) (222) (38)
Jupiter (90) (114) (54) (7)
Cablevision S.A. ("Cablevision") (476) (49) (28) (3)
ASTROLINK International LLC
("Astrolink") (417) (8) -- --
Teligent, Inc. ("Teligent") (85) (1,269) -- --
Gemstar (133) (254) -- --
Other (194) (798) (323) (33)
---------- ---------- ---------- ----------
$ (4,906) (3,485) (904) (66)
========== ========== ========== ----------
At December 31, 2001, the aggregate carrying amount of Liberty's
investments in its affiliates exceeded Liberty's proportionate share of
its affiliates' net assets by $7,766 million. Such excess is being
amortized over estimated useful lives of up to 20 years. Such amortization
was $798 million, $1,058 million, $463 million and $9 million for the
years ended December 31, 2001 and 2000, the ten months ended December 31,
1999 and the two months ended February 28, 1999, respectively, and is
included in share of losses of affiliates.
Certain of Liberty's affiliates are general partnerships and, as such,
Liberty is liable as a matter of partnership law for all debts (other than
non-recourse debts) of that partnership in the event liabilities of that
partnership were to exceed its assets.
USAI
USAI owns and operates businesses in network and television production,
electronic retailing, ticketing operations, and internet services. At
December 31, 2001, Liberty held 74.4 million shares of USAI's common
stock. In addition, at December 31, 2001, Liberty held shares and other
equity interests in certain subsidiaries of USAI that are exchangeable for
an aggregate of 79.0 million shares of USAI common stock. The exchange of
such shares and interests is subject to certain conditions including that
Liberty's ownership of USAI's common stock issuable upon such exchange not
being restricted by Federal Communications Commission ("FCC") regulations.
On August 28, 2001, USAI gave Liberty notice that on August 21, 2001 USAI
had sold its television broadcast stations and associated broadcast
licenses and as a result of such sale, FCC regulations no longer
restricted Liberty's ownership of shares of USAI's common stock issuable
upon such exchange and, accordingly, that USAI was exercising its right to
require that Liberty exchange such stock and other interests of such
subsidiaries for shares of USAI common stock (the "USAI Exchange").
If the USAI Exchange had been completed at December 31, 2001, Liberty
would have owned 153.4 million shares or approximately 20% (on a
fully-diluted basis) of USAI common stock. The closing price of USAI's
common stock on December 31, 2001 was $27.31 per share.
18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In December 2001, Liberty entered into an agreement with USAI and Vivendi
Universal, S.A. ("Vivendi"), pursuant to which USAI will contribute
substantially all of its entertainment assets to a partnership controlled
by Vivendi. In connection with the transaction, Liberty entered into a
separate agreement with Vivendi, pursuant to which Vivendi will acquire
from Liberty 25 million shares of common stock of USAI, approximately 38.7
millions shares of USANi LLC, which are exchangeable, on a one-for-one
basis, for shares of USAI common stock, and all of its approximate 30%
interest in multiThematiques S.A., together with certain liabilities with
respect thereto, in exchange for ADSs representing approximately 37.4
million Vivendi ordinary shares, subject to adjustment. The closing of
Liberty's transaction with Vivendi and the closing of Vivendi's
transaction with USAI are conditioned on one another. Subsequent to the
Vivendi transaction with USAI, USAI will be renamed USA Interactive. The
Company anticipates that the Vivendi transaction will be consummated in
the second quarter of 2002. Upon completion Liberty will own approximately
3% of Vivendi and 20% of USA Interactive.
UNITEDGLOBALCOM
UnitedGlobalCom is a global broadband communications provider of video,
voice and data services with operations in over 25 countries throughout
the world. At December 31, 2001, Liberty owned an approximate 20% economic
ownership interest representing an approximate 40% voting interest in
UnitedGlobalCom. Liberty owns 9.9 million shares of UnitedGlobalCom Class
B common stock and 13.1 million shares of UnitedGlobalCom Class A common
stock. The UnitedGlobalCom Class B common stock is convertible, on a
one-for-one basis, into UnitedGlobalCom Class A common stock. The closing
price of UnitedGlobalCom's Class A common stock on December 31, 2001 was
$5.00 per share.
On January 30, 2002, the Company and UnitedGlobalCom completed a
transaction (the "New United Transaction") pursuant to which a new holding
company ("New United") was formed to own UnitedGlobalCom, and all shares
of UnitedGlobalCom common stock were exchanged for shares of common stock
of New United. In addition, the Company contributed (i) cash consideration
of $200 million; (ii) a note receivable from Belmarken Holding B.V., a
subsidiary of UnitedGlobalCom, with an accreted value of $892 million and
(iii) Senior Notes and Senior Discount Notes of United-Pan Europe
Communications N.V., a subsidiary of UnitedGlobalCom, comprised of U.S.
dollar denominated notes with a face amount of $1,435 million and euro
denominated notes with a face amount of euro 263 million to New United in
exchange for 281.3 million shares of Class C common stock of New United.
Upon consummation of the New United Transaction, Liberty owns an
approximate 72% economic interest and a 94% voting interest in New United.
Pursuant to certain voting and standstill arrangements entered into at the
time of closing, Liberty is unable to exercise control of New United, and
accordingly, Liberty will continue to use the equity method of accounting
for its investment. Due to the Company's commitment to increase its
investment in UnitedGlobalCom, as evidenced by the New United Transaction,
the Company recognized its share of UnitedGlobalCom's losses such that its
investment in UnitedGlobalCom was less than zero at December 31, 2001. As
the Company's investment in United Pan-Europe Communications, N.V., a
subsidiary of UnitedGlobalCom, has a carrying value of $718 million at
December 31, 2001, the Company continues to include the negative carrying
value of its UnitedGlobalCom investment in investments accounted for using
the equity method.
Also on January 30, 2002, New United acquired from Liberty its debt and
equity interests in IDT United, Inc. and $751 million principal amount at
maturity of UnitedGlobalCom's $1,375 million 10-3/4% senior secured
discount notes due 2008 (the "2008 Notes"), which had been distributed to
Liberty in redemption of a portion of its interest in IDT United. IDT
United was formed as an indirect subsidiary of IDT Corporation for
purposes of effecting a tender offer for all outstanding 2008 Notes at a
purchase price of $400 per $1,000 principal amount at maturity, which
tender offer expired on February 1, 2002. The aggregate purchase price for
the Company's interest in IDT United of approximately $449 million was
equal to the aggregate amount Liberty had invested in IDT United, plus
interest. Approximately $305 million of the purchase price was paid by the
assumption by New United of debt owed by Liberty to a subsidiary of
UnitedGlobalCom, and the remainder was credited against the $200 million
cash contribution by Liberty to New United described above. In connection
with the New United Transaction, a subsidiary of Liberty agreed to loan to
a subsidiary of New United up to $105 million. As of February 28, 2002,
such subsidiary of New United has borrowed $103 million from the Liberty
subsidiary to acquire additional shares of
19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
preferred stock and promissory notes issued by IDT United. The 2008 Notes
owned by IDT United, together with 2008 Notes acquired by New United
directly from Liberty referred to above, all of which remain outstanding,
represent approximately 98.2% of the outstanding 2008 Notes.
TELEWEST
Telewest currently operates and constructs cable television and telephone
systems in the UK. In April 2000, Telewest acquired Flextech p.l.c.
("Flextech") which develops and sells a variety of television programming
in the UK. Prior to the acquisition, Liberty owned an approximate 37%
equity interest in Flextech and a 22% equity interest in Telewest. As a
result of the acquisition, Liberty owns an approximate 25% equity interest
in Telewest. Liberty recognized a $649 million gain (excluding related tax
expense of $227 million) on the acquisition based on the difference
between the carrying value of Liberty's interest in Flextech and the fair
value of the Telewest shares received. At December 31, 2001 Liberty
indirectly owned 744.4 million of the issued and outstanding Telewest
ordinary shares. The closing price of Telewest's ordinary shares on
December 31, 2001 was $0.94 per share.
During the year ended December 31, 2001, Liberty determined that its
investment in Telewest experienced a nontemporary decline in value. As a
result, the carrying value of Telewest was adjusted to its estimated fair
value, and the Company recorded a charge of $1,801 million. Such charge is
included in share of losses of affiliates. Summarized financial
information for Telewest is as follows:
December 31,
---------------------
2001 2000
-------- --------
amounts in millions
FINANCIAL POSITION
Investments $ 795 377
Property and equipment, net 5,051 5,078
Intangibles, net 2,752 4,666
Other assets, net 611 586
-------- -------
Total assets $ 9,209 10,707
======== =======
Debt $ 7,122 6,360
Other liabilities 1,431 1,080
Owners' equity 656 3,267
-------- -------
Total liabilities and equity $ 9,209 10,707
======== =======
Years ended December 31,
---------------------------------------
2001 2000 1999
------- ------- ------
amounts in millions
RESULTS OF OPERATIONS
Revenue $ 1,811 1,623 1,064
Operating expenses (1,380) (1,293) (777)
------- ------- ------
Operating cash flow (as defined by Liberty) 431 330 287
Depreciation and amortization (941) (863) (475)
Impairment of long-lived assets (1,112) -- --
Interest expense (681) (585) (350)
Other, net (217) (27) (155)
------- ------- ------
Net loss $(2,520) (1,145) (693)
======= ======= ======
20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
GEMSTAR
Gemstar is a global technology and media company focused on consumer
entertainment. The common stock of Gemstar is publicly traded. On July 12,
2000, Gemstar acquired TV Guide, Inc. ("TV Guide"). TV Guide shareholders
received .6573 shares of Gemstar common stock in exchange for each share
of TV Guide. As a result of this transaction, 133 million shares of TV
Guide held by Liberty were exchanged for 87.5 million shares or 21% of
Gemstar common stock. Liberty recognized a $4,391 million gain (before
deferred tax expense of $1,737 million) on such transaction during the
third quarter of 2000 based on the difference between the carrying value
of Liberty's interest in TV Guide and the fair value of the Gemstar
securities received.
In May 2001, Liberty consummated a transaction ("Exchange Transaction")
with The News Corporation Limited ("News Corp.") whereby Liberty exchanged
70.7 million shares of Gemstar for 121.5 million News Corp. American
Depository Shares ("ADSs") representing preferred, limited voting,
ordinary shares of News Corp. Liberty recorded a loss of $764 million in
connection with the Exchange Transaction as the fair value of the
securities received by Liberty was less than the carrying value of the
Gemstar shares. In December 2001, Liberty exchanged its remaining Gemstar
shares for 28.8 million additional News Corp. ADSs and recorded an
additional loss of $201 million.
CABLEVISION
Cablevision provides cable television and high speed data services in
Argentina. At December 31, 2001, the Company has a 50% ownership in
Cablevision. The Argentine government has historically maintained an
exchange rate of one Argentine peso to one U.S. dollar (the "peg rate").
Due to deteriorating economic and political conditions in Argentina in
late 2001, the Argentine government eliminated the peg rate effective
January 11, 2002. The value of the Argentine peso dropped significantly on
the day the peg rate was eliminated. In addition, the Argentine government
placed restrictions on the payment of obligations to foreign creditors. As
a result of the devaluation of the Argentine peso, Cablevision recorded
foreign currency translation losses of $393 million in the fourth quarter
of 2001. At December 31, 2001, the Company determined that its investment
in Cablevision had experienced a nontemporary decline in value, and
accordingly, recorded an impairment charge of $195 million. Such charge is
included in share of losses of affiliates. The Company's share of losses
in 2001, when combined with foreign currency translation losses recorded
in other comprehensive loss at December 31, 2001, reduced the carrying
value of its investment in Cablevision to zero as of December 31, 2001.
Included in accumulated other comprehensive earnings at December 31, 2001
is $257 million of unrealized foreign currency translation losses related
to the Company's investment in Cablevision.
ASTROLINK
Astrolink, a developmental stage entity, originally intended to build a
global telecom network using Kaband geostationary satellites to provide
broadband data communications services. Astrolink's original business plan
required significant additional financing over the next several years.
During the fourth quarter of 2001, two of the members of Astrolink
informed Astrolink that they do not intend to provide any of Astrolink's
required financing. In light of this decision, Astrolink is considering
several alternatives with respect to its proposed business plan,
including, but not limited to, seeking alternative funding sources,
scaling back their proposed business plan, and liquidating the venture
entirely. There can be no assurance that Astrolink will be able to obtain
the necessary financing on acceptable terms, or that it will be able to
fulfill the business plan as originally proposed, or at all.
During the second quarter of 2001, the Company determined that its
investment in Astrolink experienced a nontemporary decline in value.
Accordingly, the carrying amount of such investment was adjusted to its
then estimated fair value resulting in a recognized loss of $155 million.
Such loss is included in share of losses of affiliates. Based on a fourth
quarter 2001 assessment of Astrolink's remaining sources of liquidity and
Astrolink's inability to obtain financing for its business plan, the
Company concluded that the carrying value of its investment in Astrolink
should be further reduced to reflect a fair value that assumes the
liquidation of Astrolink. Accordingly, the Company wrote-off all of its
remaining investment in Astrolink
21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
during the fourth quarter of 2001. The aggregate amount required to reduce
its investment in Astrolink to zero was $250 million. Including such
fourth quarter amount, the Company recorded losses and charges relating to
its investment in Astrolink aggregating $417 million during the year ended
December 31, 2001.
TELIGENT
In January 2000, the Company acquired a 40% equity interest in Teligent, a
full-service facilities based communications company. During the nine
months ended September 30, 2000, the Company determined that its
investment in Teligent experienced a nontemporary decline in value. As a
result, the carrying amount of this investment was adjusted to its
estimated fair value resulting in a charge of $839 million. This
impairment charge is included in share of losses of affiliates. In April
2001, the Company exchanged its investment in Teligent for shares of IDT
Investments, Inc., a subsidiary of IDT Corporation. As the fair value of
the consideration received in the exchange approximated the carrying value
of the Company's investment in Teligent, no gain or loss was recognized on
the transaction. The Company accounts for its investment in IDT
Investments, Inc. using the cost method.
Summarized unaudited combined financial information for affiliates other
than Telewest is as follows:
December 31,
---------------------
2001 2000
-------- --------
amounts in millions
COMBINED FINANCIAL POSITION
Investments $ 872 1,776
Property and equipment, net 7,060 8,294
Intangibles, net 15,183 26,763
Other assets, net 10,837 11,603
-------- --------
Total assets $ 33,952 48,436
======== ========
Debt $ 17,262 18,351
Other liabilities 14,075 15,904
Owners' equity 2,615 14,181
-------- --------
Total liabilities and equity $ 33,952 48,436
======== ========
Years ended December 31,
---------------------------------------------
2001 2000 1999
-------- -------- --------
amounts in millions
COMBINED OPERATIONS
Revenue $ 15,132 14,626 10,787
Operating expenses (13,381) (13,511) (9,401)
Depreciation and amortization (2,703) (2,718) (1,087)
Impairment charges (1,426) -- --
-------- -------- --------
Operating income (loss) (2,378) (1,603) 299
Interest expense (1,639) (1,616) (599)
Other, net (685) 174 (75)
-------- -------- --------
Net loss $ (4,702) (3,045) (375)
======== ======== ========
22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments
are summarized as follows:
December 31,
---------------------
2001 2000
-------- --------
amounts in millions
Sprint Corporation ("Sprint ") $ 5,697 5,192
AOL Time Warner Inc. ("AOL Time Warner") 6,236 --
News Corp. 6,118 2,342
Motorola, Inc. ("Motorola") 1,773 1,982
Viacom, Inc. ("Viacom") 670 --
United Pan-Europe Communications N.V. ("UPC") 718 203
Time Warner Inc. ("Time Warner") -- 6,325
Other available-for-sale securities 2,386 2,989
Other investments, at cost, and related receivables 343 502
-------- --------
23,941 19,535
Less short-term investments (397) (500)
-------- --------
$ 23,544 19,035
======== ========
SPRINT PCS
Liberty and certain of its consolidated subsidiaries collectively are the
beneficial owners of approximately 197 million shares of Sprint PCS Group
Stock and certain other instruments convertible into such securities (the
"Sprint Securities"). The Sprint PCS Group Stock is a tracking stock
intended to reflect the performance of Sprint's domestic wireless PCS
operations. Liberty accounts for its investment in the Sprint Securities
as an available-for-sale security.
Pursuant to a final judgment (the "Final Judgment") agreed to by Liberty,
AT&T and the United States Department of Justice (the "DOJ") on December
31, 1998, Liberty transferred all of its beneficially owned Sprint
Securities to a trustee (the "Trustee") prior to the AT&T Merger. The
Final Judgment, which was entered by the United States District Court of
the District of Columbia on August 23, 1999, requires the Trustee, on or
before May 23, 2002, to dispose of a portion of the Sprint Securities
sufficient to cause Liberty to beneficially own no more than 10% of the
outstanding Sprint PCS Group common stock - Series 1 on a fully diluted
basis on such date. On or before May 23, 2004, the Trustee must divest the
remainder of the Sprint Securities beneficially owned by Liberty. As of
December 31, 2001, Liberty beneficially owned approximately 19% of Sprint
PCS Group common stock - Series 2.
The Final Judgment requires that the Trustee vote the Sprint Securities
beneficially owned by Liberty and its consolidated subsidiaries in the
same proportion as other holders of Sprint Securities so long as such
securities are held by the trust. The Final Judgment also prohibits the
acquisition by Liberty of additional Sprint Securities, with certain
exceptions, without the prior written consent of the DOJ. At Liberty's
request, the Department of Justice has joined Liberty and AT&T in a joint
motion to terminate the Final Judgment which was filed in the District
Court in February 2002. Under the terms of the Final Judgment, the
obligation of the trustee to dispose of the first tranche of shares by May
23, 2002 will be stayed while the District Court considers the joint
motion. Liberty is also seeking the approval of the Federal Communications
Commission to the stay of the trustee's obligation to dispose of the first
tranche of shares pending the District Court's determination of the joint
motion.
23
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
AOL TIME WARNER
On January 11, 2001, America Online, Inc. completed its merger with Time
Warner to form AOL Time Warner. In connection with the merger, each share
of Time Warner common stock held by Liberty was converted into 1.5 shares
of an identical series of AOL Time Warner stock. Upon completion of this
transaction, Liberty holds a total of 171 million shares in AOL Time
Warner. Liberty recognized a $253 million gain (before deferred tax
expense of $100 million) based upon the difference between the carrying
value of Liberty's interest in Time Warner and the fair value of the AOL
Time Warner securities received.
NEWS CORP.
In May and December of 2001, Liberty acquired an aggregate of 154 million
News Corp. ADSs in exchange for its shares of Gemstar common stock and
another equity investment. Liberty recorded a loss of $965 million in
connection with these exchanges based on the difference between the fair
value of the News Corp. ADSs received and the carrying value of the
Gemstar investment. In connection with this transaction, the Company
agreed to restrictions on its ability to transfer certain of the ADSs
prior to May 2003. Liberty had previously acquired 51.8 million News Corp.
ADSs in 1999 in exchange for Liberty's 50% interest in Fox/Liberty
Networks, and had acquired 28.1 million ADSs for $695 million in cash.
Liberty recognized a $13 million gain on the 1999 exchange. At December
31, 2001, Liberty owned 236 million ADSs or approximately 18% of the
outstanding equity of News Corp. Liberty accounts for its investment in
News Corp. as an available-for-sale security.
MOTOROLA
On January 5, 2000, Motorola acquired General Instrument Corporation
("General Instrument"). In connection with such acquisition, Liberty
received 54 million shares of Motorola common stock and warrants to
purchase an additional 37 million shares in exchange for its holdings in
General Instrument. Liberty recognized a $2,233 million gain (before
deferred tax expense of $883 million) on such transaction during the first
quarter of 2000 based on the difference between the carrying value of
Liberty's interest in General Instrument and the fair value of the
Motorola securities received. At December 31, 2001 Liberty holds
approximately 71 million shares of Motorola common stock and vested
warrants to purchase an additional 18 million shares of such common stock
at $8.26 per share. Such warrants expire on June 30, 2002.
VIACOM
On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by Viacom
in exchange for shares of Class B common stock of Viacom. As a result of
the merger, Liberty received 15.2 million shares of Viacom's Class B
common stock (less than 1% of Viacom's common equity) in exchange for its
35% ownership interest in BET, which investment had been accounted for
using the equity method. Liberty accounts for its investment in Viacom as
an available-for-sale security. Liberty recognized a gain of $559 million
(before deferred tax expense of $221 million) in the first quarter of 2001
based upon the difference between the carrying value of Liberty's interest
in BET and the value of the Viacom securities received.
UPC
In May 2001, the Company entered into a loan agreement with UPC and
Belmarken Holding B.V. ("Belmarken"), a subsidiary of UPC, pursuant to
which the Company loaned Belmarken $857 million, which represented a 30%
discount to the face amount of the loan of $1,225 million (the "Belmarken
Loan"). UPC is a consolidated subsidiary of UnitedGlobalCom. The loan
accrues interest at 6% per annum, and all principal and interest are due
in May 2007. After May 29, 2002, the loan is exchangeable, at the option
of the Company, into shares of ordinary common stock of UPC at a rate of
$6.85 per share. At inception, Liberty recorded the conversion feature of
the loan at its estimated fair value of $420 million, and the $437 million
remaining balance as a loan receivable. Liberty accounts for the
convertible feature of the Belmarken Loan as a derivative security under
Statement 133, and records the convertible feature at fair value with
periodic market adjustments recorded in the statement of operations as
unrealized gains or
24
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
losses. The discounted loan receivable is being accreted up to the $1,225
million face amount over its term. Such accretion, which includes the
stated interest of 6%, is being recognized in interest income over the
term of the loan. Upon consummation of the New United Transaction, the
Company contributed the Belmarken Loan to New United in exchange for Class
C shares of New United. Liberty had previously purchased exchangeable
preferred stock and warrants of UPC in December 2000 for $203 million.
During 2001, the Company acquired certain outstanding senior notes and
senior discount notes of UPC. Liberty acquired approximately $1,435
million face amount of U.S. dollar denominated notes and euro 263 million
face amount of euro denominated notes for an aggregate purchase price of
$358 million. Such notes were contributed to New United in connection with
the New United Transaction on January 30, 2002.
NONTEMPORARY DECLINE IN FAIR VALUE OF INVESTMENTS
During the years ended December 31, 2001 and 2001, Liberty determined that
certain of its AFS Securities and cost investments experienced
nontemporary declines in value. As a result, the cost bases of such
investments were adjusted to their respective fair values based primarily
on recent quoted market prices. These adjustments are reflected as
nontemporary declines in fair value of investments in the consolidated
statements of operations. The following table identifies the realized
losses attributable to each of the individual investments as follows:
Year ended
December 31,
---------------------
2001 2000
-------- --------
INVESTMENTS amounts in millions
AOL Time Warner $ 2,052 --
News Corp. 915 --
Viacom 201 --
UPC preferred stock 195 --
Antec Corporation 127 --
Motorola 232 1,276
Primedia -- 103
Others 379 84
-------- -------
$ 4,101 1,463
======== =======
EQUITY COLLARS AND PUT SPREAD COLLARS
The Company has entered into equity collars, put spread collars and other
financial instruments to manage market risk associated with its
investments in certain marketable securities. These instruments are
recorded at fair value based on option pricing models. Equity collars
provide the Company with a put option that gives the Company the right to
require the counterparty to purchase a specified number of shares of the
underlying security at a specified price (the "Company Put Price") at a
specified date in the future. Equity collars also provide the counterparty
with a call option that gives the counterparty the right to purchase the
same securities at a specified price at a specified date in the future.
The put option and the call option generally are equally priced at the
time of origination resulting in no cash receipts or payments. The
Company's equity collars are accounted for as fair value hedges.
Put spread collars provide the Company and the counterparty with put and
call options similar to equity collars. In addition, put spread collars
provide the counterparty with a put option that gives it the right to
require the Company to purchase the underlying securities at a price that
is lower than the Company Put Price. The inclusion of the secondary put
option allows the Company to secure a higher call option price while
maintaining net zero cost to enter into the collar. The Company's put
spread collars have not been designated as fair value hedges.
Investments in available-for-sale securities at December 31, 2001 and 2000
are summarized as follows:
25
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
December 31, 2001
-------------------------------------------------------------
Put
Equity Equity spread Debt
Securities Collars Collars Securities Total
---------- ------- ------- ---------- ---------
amounts in millions
Cost basis $ 19,310 -- -- 1,457 20,767
Gross gains recognized in earnings 84 1,800 263 -- 2,147
Gross losses recognized in earnings (1,542) -- -- -- (1,542)
Gross unrealized holding gains 2,185 -- -- 94 2,279
Gross unrealized holding losses (500) -- -- (46) (546)
---------- ------- ------- ---------- ---------
Fair value $ 19,537 1,800 263 1,505 23,105
========== ======= ======= ========== =========
December 31, 2000
-------------------------------------------------------------
Put
Equity Equity spread Debt
Securities Collars Collars Securities Total
---------- ------- ------- ---------- ---------
amounts in millions
Cost basis $ 17,640 -- -- 1,533 19,173
Gross gains recognized in earnings -- -- 188 -- 188
Gross unrealized holding gains 1,003 1,080 -- 86 2,169
Gross unrealized holding losses (2,636) -- -- (64) (2,700)
---------- ------- ------- ---------- ---------
Fair value $ 16,007 1,080 188 1,555 18,830
========== ======= ======= ========== =========
Management estimates that the fair market value of all of its investments
in available-for-sale securities and others aggregated $23,760 million and
$19,664 million at December 31, 2001 and December 31, 2000, respectively.
Management calculates market values using a variety of approaches
including multiple of cash flow, per subscriber value, a value of
comparable public or private businesses or publicly quoted market prices.
No independent appraisals were conducted for those assets.
FORWARD FOREIGN EXCHANGE CONTRACTS
The Company does not hedge the majority of its foreign currency exchange
risk because of the long term nature of its interests in foreign
affiliates. During 2001, the Company entered into a definitive agreement
to acquire six regional cable television systems in Germany. A portion of
the consideration for such acquisition was to be denominated in euros. In
order to reduce its exposure to changes in the euro exchange rate, Liberty
had entered into forward purchase contracts with respect to euro 3,243
million as of December 31, 2001. Such contracts generally have terms
ranging from 90 to 120 days and can be renewed at their expiration at
Liberty's option. Liberty is not accounting for the forward purchase
contracts as hedges. At December 31, 2001, the Company had recorded a
liability of $24 million representing unrealized losses related to these
contracts due to a decrease in the value of the euro compared to the U.S.
dollar.
TOTAL RETURN DEBT SWAPS
From time to time the Company enters into total return debt swaps in
connection with its purchase of its own or third-party public and private
indebtedness. Under these arrangements, Liberty directs a counterparty to
purchase a specified amount of the underlying debt security for the
benefit of the Company. The Company posts collateral with the counterparty
equal to 10% of the value of the purchased securities. The Company earns
interest income based upon the face amount and stated interest rate of the
debentures, and pays interest expense at market rates on the amount funded
by the counterparty. In the event the fair value of the underlying
debentures declines, the Company is required to post cash collateral for
the decline, and the Company records an unrealized loss on financial
instruments. Liberty has the contractual right to net settle the total
return debt swaps, and currently, intends to do so. Accordingly, Liberty
records the net asset related to the total return debt swaps.
At December 31, 2001, the aggregate purchase price of debt securities
underlying Liberty's total return debt swap arrangements was $118 million.
As of such date, the Company had posted cash collateral equal to
26
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
$59 million. In the event the fair value of the purchased debt securities
were to fall to zero, the Company would be required to post additional
cash collateral of $59 million.
(7) ACQUISITIONS AND DISPOSITIONS
2000
ASSOCIATED GROUP, INC. ("ASSOCIATED GROUP")
On January 14, 2000, Liberty completed its acquisition of Associated Group
pursuant to a merger agreement among AT&T, Liberty and Associated Group.
Under the merger agreement, each share of Associated Group's Class A
common stock and Class B common stock was converted into 0.49634 shares of
AT&T common stock and 2.41422 shares of AT&T Class A Liberty Media Group
common stock. Prior to the merger, Associated Group's primary assets were
(1) 19.7 million shares of AT&T common stock, (2) 46.8 million shares of
AT&T Class A Liberty Media Group common stock, (3) 10.6 million shares of
AT&T Class B Liberty Media Group common stock, (4) 21.4 million shares of
common stock of Teligent, and (5) all of the outstanding shares of common
stock of TruePosition, Inc., which provides location services for wireless
carriers and users designed to determine the location of any wireless
transmitter, including cellular and PCS telephones. Immediately following
the completion of the merger, all of the assets and businesses of
Associated Group were transferred to Liberty. All of the shares of AT&T
common stock, AT&T Class A Liberty Media Group common stock and AT&T Class
B Liberty Media Group common stock previously held by Associated Group
were retired by AT&T.
The acquisition of Associated Group was accounted for as a purchase, and
the $17 million excess of the fair value of the net assets acquired over
the purchase price is being amortized over ten years. As a result of the
issuance of AT&T Class A Liberty Media Group common stock, net of the
shares of AT&T Class A Liberty Media Group common stock acquired in this
transaction, Liberty recorded a $778 million increase to additional
paid-in-capital, which represents the total purchase price of this
acquisition.
LIBERTY SATELLITE & TECHNOLOGY, INC.
On March 16, 2000, Liberty purchased shares of preferred stock in TCI
Satellite Entertainment, Inc. in exchange for Liberty's economic interest
in approximately 5 million shares of Sprint PCS Group stock, which had a
fair value of $300 million. During the third quarter of 2000, TCI
Satellite Entertainment, Inc. changed its name to Liberty Satellite &
Technology, Inc. ("LSAT"). Liberty received 150,000 shares of LSAT Series
A 12% Cumulative Preferred Stock and 150,000 shares of LSAT Series B 8%
Cumulative Convertible Voting Preferred Stock. The Series A preferred
stock does not have voting rights, while the Series B preferred stock
gives Liberty approximately 85% of the voting power of LSAT. In connection
with this transaction, Liberty realized a $211 million gain (before
related tax expense of $84 million) based on the difference between the
cost basis and fair value of the economic interest in the Sprint PCS Group
stock exchanged.
ASCENT ENTERTAINMENT GROUP, INC. ("ASCENT")
On March 28, 2000, Liberty completed its cash tender offer for the
outstanding common stock of Ascent at a price of $15.25 per share.
Approximately 85% of the outstanding shares of common stock of Ascent were
tendered in the offer and Liberty paid approximately $385 million. On June
8, 2000, Liberty completed its acquisition of 100% of Ascent for an
additional $67 million. The total purchase price for the acquisition was
$452 million. Such transaction was accounted for as a purchase, and the
$228 million excess of the purchase price over the fair value of the net
assets acquired is being amortized over five years.
27
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
LIBERTY LIVEWIRE CORPORATION ("LIBERTY LIVEWIRE")
On April 10, 2000, Liberty acquired all of the outstanding common stock of
Four Media Company ("Four Media") for total consideration of $462 million
comprised of $123 million in cash, $194 million of assumed debt, 6.4
million shares of AT&T Class A Liberty Media Group common stock and a
warrant to purchase approximately 700,000 shares of AT&T Class A Liberty
Media Group common stock at an exercise price of $23 per share. Four Media
provides technical and creative services to owners, producers and
distributors of television programming, feature films and other
entertainment products both domestically and internationally.
On June 9, 2000, Liberty acquired a controlling interest in The Todd-AO
Corporation ("Todd-AO"), in exchange for approximately 5.4 million shares
of AT&T Class A Liberty Media Group common stock valued at $106 million.
Todd-AO provides sound, video and ancillary post production and
distribution services to the motion picture and television industries in
the United States and Europe.
Immediately following the closing of such transaction, Liberty contributed
to Todd-AO 100% of the capital stock of Four Media, in exchange for
approximately 16.6 million shares of the Class B Common Stock of Todd-AO
increasing Liberty's ownership interest in Todd-AO to approximately 84% of
the equity and approximately 98% of the voting power. Following Liberty's
acquisition of Todd-AO, and the contribution by Liberty to Todd-AO of
Liberty's ownership in Four Media, Todd-AO changed its name to Liberty
Livewire.
On July 19, 2000, Liberty purchased all of the assets relating to the post
production, content and sound editorial businesses of SounDelux
Entertainment Group for $90 million in cash, and contributed such assets
to Liberty Livewire in exchange for approximately 8.2 million additional
shares of Liberty Livewire Class B Common Stock. Following this
contribution, Liberty's ownership in Liberty Livewire increased to
approximately 88% of the equity and approximately 99% of the voting power
of Liberty Livewire.
Each of the foregoing acquisitions was accounted for as a purchase. In
connection therewith, Liberty recorded an aggregate increase to additional
paid-in-capital of $251 million. The $452 million excess purchase price
over the fair value of the net assets acquired is being amortized over 20
years.
1999
TV GUIDE
On March 1, 1999, United Video Satellite Group, Inc. ("UVSG"), a
consolidated subsidiary of Liberty, and News Corp. completed a transaction
whereby UVSG acquired News Corp.'s TV Guide properties and UVSG was
renamed TV Guide. Upon completion of this transaction, and another
transaction completed by TV Guide on the same date, Liberty owned an
economic interest of approximately 44% and controlled approximately 49% of
the voting power of TV Guide. In connection with the increase in TV
Guide's equity, net of dilution of Liberty's ownership interest in TV
Guide, Liberty recognized a gain of $372 million (before deducting
deferred income taxes of $147 million). Upon consummation, Liberty began
accounting for its interest in TV Guide under the equity method of
accounting.
28
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
PRO FORMA INFORMATION
The following unaudited pro forma information for the year ended December
31, 2000 was prepared assuming the 2000 acquisitions discussed above
occurred on January 1, 2000. These pro forma amounts are not necessarily
indicative of operating results that would have occurred if the
acquisitions discussed above had occurred on January 1, 2000.
Revenue $1,769
Net earnings $1,413
Pro forma basic and
diluted earnings
per common share $ 0.55
(8) LONG-TERM DEBT
Debt is summarized as follows:
Weighted
average
interest December 31,
rate -------------------
2001 2001 2000
---------- -------- --------
amounts in millions
Parent company debt:
Senior notes 7.8% $ 982 742
Senior debentures 8.3% 1,486 1,486
Senior exchangeable debentures 3.7% 858 1,679
Bank credit facilities 2.6% 675 475
Other debt 8.0% 288 580
-------- --------
4,289 4,962
Debt of subsidiaries:
Bank credit facilities 4.3% 1,310 1,129
Senior notes N/A -- 179
Other debt, at varying rates 308 93
-------- --------
1,618 1,401
-------- --------
Total debt 5,907 6,363
Less current maturities 4.5% (1,143) (1,094)
-------- --------
Total long-term debt $ 4,764 5,269
======== ========
SENIOR NOTES AND DEBENTURES
In July 1999, Liberty issued $750 million of 7-7/8% Senior Notes due 2009
and issued $500 million of 8-1/2% Senior Debentures due 2029 for aggregate
cash proceeds of $741 million and $494 million, respectively. Interest on
both issuances is payable on January 15 and July 15 of each year.
In February 2000, Liberty issued $1 billion of 8-1/4% Senior Debentures
due 2030 for aggregate cash proceeds of $983 million. Interest on these
debentures is payable on February 1 and August 1 of each year.
In December 2001, the Company issued $237.8 million of 7-3/4% Senior Notes
due 2009 for cash proceeds of $238.4 million. Interest on these notes is
payable on January 15 and July 15 of each year.
The senior notes and debentures are stated net of an aggregate unamortized
discount of $19 million and $22 million at December 31, 2001 and 2000,
respectively, which is being amortized to interest expense in the
consolidated statements of operations.
29
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
SENIOR EXCHANGEABLE DEBENTURES
In November 1999, Liberty issued $869 million of 4% Senior Exchangeable
Debentures due 2029. Interest is payable on May 15 and November 15 of each
year. Each $1,000 debenture is exchangeable at the holder's option for the
value of 22.9486 shares of Sprint PCS Group stock. After the later of
December 31, 2001 or the date Liberty's ownership level in the Sprint PCS
Group falls below a specified level, Liberty may, at its election, pay the
exchange value in cash, Sprint PCS Group stock or a combination thereof.
Prior to such time, the exchange value must be paid in cash.
In February and March 2000, Liberty issued an aggregate of $810 million of
3-3/4% Senior Exchangeable Debentures due 2030. Interest is payable on
February 15 and August 15 of each year. Each $1,000 debenture is
exchangeable at the holder's option for the value of 16.7764 shares of
Sprint PCS Group stock. After the later of February 15, 2002 or the date
Liberty's ownership level in the Sprint PCS Group falls below a specified
level, Liberty may, at its election, pay the exchange value in cash,
Sprint PCS Group stock or a combination thereof. Prior to such time, the
exchange value must be paid in cash.
In January 2001, Liberty issued $600 million of 3-1/2% Senior Exchangeable
Debentures due 2031. Interest is payable on January 15 and July 15 of each
year. Each $1,000 debenture is exchangeable at the holder's option for the
value of 36.8189 shares of Motorola common stock. Such exchange value is
payable, at Liberty's option, in cash, Motorola stock or a combination
thereof. On or after January 15, 2006, Liberty, at its option, may redeem
the debentures for cash.
In March 2001, Liberty issued $817.7 million of 3-1/4% Senior Exchangeable
Debentures due 2031. Interest is payable on March 15 and September 15 of
each year. Each $1,000 debenture is exchangeable at the holder's option
for the value of 18.5666 shares of Viacom Class B common stock. After
January 23, 2003, such exchange value is payable at Liberty's option in
cash, Viacom stock or a combination thereof. Prior to such date, the
exchange value must be paid in cash. On or after March 15, 2006, Liberty,
at its option, may redeem the debentures for cash.
Prior to the adoption of Statement 133, the carrying amount of the senior
exchangeable debentures was adjusted based on the fair value of the
underlying security. Increases or decreases in the value of the underlying
security above the principal amount of the senior exchangeable debentures
were recorded as unrealized gains or losses on financial instruments in
the consolidated statements of operations. If the value of the underlying
security decreased below the principal amount of the senior exchangeable
debentures there was no effect on the principal amount of the debentures.
Upon adoption of Statement 133, the call option feature of the
exchangeable debentures is reported separately in the consolidated balance
sheet at fair value. Accordingly, at January 1, 2001, Liberty recorded a
transition adjustment to reflect the call option obligations at fair value
($459 million) and to recognize in net earnings the difference between the
fair value of the call option obligations at issuance and the fair value
of the call option obligations at January 1, 2001. Such adjustment to net
earnings aggregated $757 million (before tax expense of $299 million) and
is included in cumulative effect of accounting change. Changes in the fair
value of the call option obligations subsequent to January 1, 2001 are
recognized as unrealized gains (losses) on financial instruments in
Liberty's consolidated statements of operations. During the year ended
December 31, 2001, Liberty recorded unrealized gains of $167 million
related to the call option obligations.
Under Statement 133, the reported amount of the long-term debt portion of
the exchangeable debentures is calculated as the difference between the
face amount of the debentures and the fair value of the call option
feature on the date of issuance. The fair value of the call option
obligations related to the $1,418 million of exchangeable debentures
issued during the year ended December 31, 2001, aggregated $1,028 million
on the date of issuance. Accordingly, the long-term debt portion was
recorded at $390 million. The long-term debt is accreted to its face
amount over the term of the debenture using the effective interest method.
Such accretion aggregated $6 million during the year ended December 31,
2001, and is included in interest expense. The transition adjustment noted
above resulted in a decrease in the carrying value of the long-term debt
portion of the senior exchangeable debentures of $1,216 million on January
1, 2001.
30
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
BANK CREDIT FACILITIES
At December 31, 2001, Liberty and its subsidiaries had approximately $217
million in unused lines of credit under their respective bank credit
facilities. The bank credit facilities generally contain restrictive
covenants which require, among other things, the maintenance of certain
financial ratios, and include limitations on indebtedness, liens,
encumbrances, acquisitions, dispositions, guarantees and dividends. The
borrowers were in compliance with their debt covenants at December 31,
2001. Additionally, the bank credit facilities require the payment of fees
ranging from .15% to .375% per annum on the average unborrowed portions of
the total commitments.
The U.S. dollar equivalent of the annual maturities of Liberty's debt for
each of the next five years are as follows (amounts in millions):
2002 $1,143
2003 211
2004 121
2005 435
2006 589
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to
Liberty for debt of the same remaining maturities. The fair value of
Liberty's publicly traded debt at December 31, 2001 is as follows (amounts
in millions):
Senior notes of parent company $1,024
Senior debentures of parent company 1,438
Senior exchangeable debentures of parent company,
including call option liability 2,323
Liberty believes that the carrying amount of the remainder of its debt,
which is comprised primarily of variable rate debt, approximated its fair
value at December 31, 2001.
A reconciliation of the carrying value of the Company's debt to the face
amount at maturity is as follows (amounts in millions):
Carrying value at December 31, 2001 $5,907
Add:
Unamortized issue discount on Senior Notes
and Debentures 19
Unamortized discount attributable to call
option feature of exchangeable debentures 2,238
------
Face amount at maturity $8,164
======
(9) INCOME TAXES
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing
Agreement"). Liberty calculated its respective tax liability on a separate
return basis. The income tax provision for Liberty was calculated based on
the increase or decrease in the tax liability of the AT&T consolidated
group resulting from the inclusion of those items in the consolidated tax
return of AT&T which were attributable to Liberty.
Under the AT&T Tax Sharing Agreement, Liberty received a cash payment from
AT&T in periods when it generated taxable losses and such taxable losses
were utilized by AT&T to reduce the consolidated income tax liability.
This utilization of taxable losses was accounted for by Liberty as a
current federal
31
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
intercompany income tax benefit. To the extent such losses were not
utilized by AT&T, such amounts were available to reduce federal taxable
income generated by Liberty in future periods, similar to a net
operating loss carryforward, and were accounted for as a deferred federal
income tax benefit.
In periods when Liberty generated federal taxable income, AT&T agreed to
satisfy such tax liability on Liberty's behalf up to a certain amount.
Thereafter, Liberty was required to make cash payments to AT&T for federal
tax liabilities of Liberty. The reduction of such computed tax liabilities
was accounted for by Liberty as an increase to additional paid-in-capital.
To the extent AT&T utilized existing net operating losses of Liberty, such
amounts were accounted for by Liberty as a reduction of additional
paid-in-capital. Net operating losses of Liberty with a tax effected
carrying value of $2 million, $38 million and $88 million were recorded as
a reduction to additional paid-in-capital during the seven months ended
July 31, 2001, the year ended December 31, 2000 and the ten months ended
December 31, 1999, respectively.
Liberty generally made cash payments to AT&T related to states where it
generated taxable income and received cash payments from AT&T in states
where it generates taxable losses.
Prior to the AT&T Merger, Liberty was included in TCI's consolidated tax
return and was a party to the TCI tax sharing agreements.
Income tax benefit (expense) consists of:
New Liberty Old Liberty
---------------------------------------- ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
amounts in millions
Current:
Federal $ 297 277 75 1
State and local (2) 10 (3) --
------------ ------------ ------------ ----------
295 287 72 1
------------ ------------ ------------ ----------
Deferred:
Federal 3,166 (1,490) 873 (168)
State and local 447 (331) 152 (44)
------------ ------------ ------------ ----------
3,613 (1,821) 1,025 (212)
------------ ------------ ------------ ----------
Income tax benefit (expense) $ 3,908 (1,534) 1,097 (211)
------------ ------------ ------------ ----------
32
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Income tax benefit (expense) differs from the amounts computed by applying
the U.S. federal income tax rate of 35% as a result of the following:
New Liberty Old Liberty
--------------------------------------------------- ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
amounts in millions
Computed expected tax benefit
(expense) $ 3,809 (1,035) 1,107 (49)
Dividends excluded for income tax
purposes 18 22 11 2
Amortization not deductible for
income tax purposes (260) (187) (122) (4)
State and local income taxes, net
of federal income taxes 289 (204) 102 (29)
Recognition of difference in
income tax basis of
investments in subsidiaries 21 (69) -- (130)
Effect of change in estimated
state tax rate 91 -- -- --
Change in valuation allowance (71) (50) -- --
Other, net 11 (11) (1) (1)
------------ ------------ ------------ ------------
$ 3,908 (1,534) 1,097 (211)
============ ============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2001 and 2000 are presented below:
December 31,
---------------------
2001 2000
-------- -------
amounts in millions
Deferred tax assets:
Net operating and capital loss carryforwards $ 370 363
Accrued stock compensation 296 247
Other future deductible amounts 31 --
------- -------
Deferred tax assets 697 610
Valuation allowance (273) (202)
------- -------
Net deferred tax assets 424 408
------- -------
Deferred tax liabilities:
Investments 8,422 11,255
Intangible assets 164 218
Discount on exchangeable debentures 455 --
Other 49 30
------- -------
Deferred tax liabilities 9,090 11,503
------- -------
Net deferred tax liabilities $ 8,666 11,095
======= =======
At December 31, 2001, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $1,016
million which, if not utilized to reduce taxable income in future
periods, will expire as follows: 2004: $1 million; 2005: $16 million;
2006: $14 million; 2007: $16 million; 2008: $12 million; 2009: $27
million; 2010: $6 million; and beyond 2010: $924 million. These net
operating losses are subject to certain rules limiting their usage.
33
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
AT&T, as the successor to TCI, is the subject of an Internal Revenue
Service ("IRS") audit for the 1993-1995 tax years. The IRS has notified
AT&T and Liberty that it is considering proposing income adjustments and
assessing certain penalties in connection with TCI's 1994 tax return. The
IRS's position could result in recognition of up to approximately $305
million of additional income, resulting in as much as $107 million of
additional tax liability, plus interest. In addition, the IRS may assert
certain penalties. AT&T and Liberty do not agree with the IRS's proposed
adjustments and penalties, and AT&T and Liberty intend to vigorously
defend their position. Pursuant to the AT&T Tax Sharing Agreement, Liberty
may be obligated to reimburse AT&T for any tax that AT&T is ultimately
assessed as a result of this audit. Liberty is currently unable to
estimate a range of any such reimbursement, but believes that any such
reimbursement would not be material to its financial position.
(10) STOCKHOLDER'S EQUITY
PREFERRED STOCK
The Preferred Stock is issuable, from time to time, with such
designations, preferences and relative participating, option or other
special rights, qualifications, limitations or restrictions thereof, as
shall be stated and expressed in a resolution or resolutions providing for
the issue of such Preferred Stock adopted by the Board. As of December 31,
2001, no shares of preferred stock were issued.
COMMON STOCK
Prior to the Split Off Transaction, Liberty had 1,000 shares of each of
Class A, Class B and Class C common stock outstanding. In connection with
the Split Off Transaction, the Class A and Class B common stock were
reclassified into Series A common stock and the Class C common stock was
reclassified into Series B common stock. The Series A common stock has one
vote per share, and the Series B common stock has ten votes per share.
Each share of the Series B common stock is exchangeable at the option of
the holder for one share of Series A common stock.
As of December 31, 2001, there were 75 million shares of Liberty Series A
common stock reserved for issuance under exercise privileges of
outstanding stock options.
STOCK ISSUANCES OF SUBSIDIARIES AND EQUITY AFFILIATES
Certain consolidated subsidiaries and equity affiliates of Liberty have
issued shares of common stock in connection with acquisitions and the
exercise of employee stock options. In connection with the increase in the
issuers' equity, net of the dilution of Liberty's ownership interest, that
resulted from such stock issuances, Liberty recorded increases (decreases)
to additional paid-in-capital as follows:
Ten months
Year ended Year ended ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
amounts in millions
Stock issuances by consolidated
subsidiaries $ (8) 212 107
Stock issuances by equity affiliates
(net of deferred income taxes of $75
million and $1 million, respectively) -- 143 1
------------ ------------ ------------
$ (8) 355 108
============ ============ ============
TRANSACTIONS WITH OFFICERS AND DIRECTORS
During the second quarter of 2001, Liberty purchased 2,245,155 shares of
common stock of On Command Corporation ("On Command"), a consolidated
subsidiary of Liberty, from an executive officer and director
34
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
of On Command, who is also a director of Liberty, for aggregate cash
consideration of $25.2 million. Such purchase price represents a per share
price of $11.22. The closing market price for On Command common stock on
the day the transaction was signed was $7.77. The Company has included the
difference between the aggregate market value of the shares purchased and
the cash consideration paid in selling, general and administrative
expenses in the accompanying consolidated statement of operations.
In November 2000, Liberty granted certain officers, a director of Liberty
(the "Liberty Director"), and a board member of Liberty Livewire an
aggregate 4.0725% common stock interest in Liberty LWR, Inc. ("LWR"),
which owned a direct interest in Liberty Livewire. The common stock
interest granted to these individuals had a value of approximately
$400,000. LWR also awarded the Liberty Director a deferred bonus in the
initial total amount of approximately $3.4 million, which amount will
decrease by an amount equal to any increase over the five-year period from
the date of the award in the value of certain of the common shares granted
to the Liberty Director. Liberty and the individuals entered into a
stockholders' agreement in which the individuals could require Liberty to
repurchase, after five years, all or part of their common stock interest
in exchange for Series A Liberty stock at its then fair market value. In
addition, Liberty has the right to repurchase, in exchange for Series A
Liberty common stock, the common stock interests held by the individuals
at fair market value at any time.
In July 2001, LWR formed Liberty Livewire Holdings, Inc. ("Livewire
Holdings") as a wholly owned subsidiary. LWR then sold to certain officers
and the Liberty Director an aggregate 19.872% common stock interest in
Livewire Holdings with an aggregate value of $600. Liberty, LWR and these
individuals entered into a stockholders agreement pursuant to which the
individuals can require Liberty to purchase, after five years, all or part
of their common stock interest in Livewire Holdings, in exchange for
Liberty common stock, at its then-fair market value. In addition, Liberty
has the right to purchase, in exchange for its common stock, their common
stock interests in Livewire Holdings for fair market value at any time.
In August 2001, in connection with the termination of Liberty Livewire's
director and chief executive officer, LWR purchased his common stock
interest in LWR. In October 2001, LWR purchased from the Liberty officers
and the Liberty Director their respective common stock interests in LWR.
In connection with the purchase of his common stock interest in LWR, the
Liberty Director waived the right to receive his deferred bonus. Upon the
completion of these purchases, LWR became a wholly owned subsidiary of the
Company.
In October 2000, Liberty restructured its ownership interests in certain
assets into a new consolidated subsidiary. Liberty then sold a preferred
interest in such subsidiary to Liberty's Chairman of the Board of
Directors in exchange for approximately 540,000 shares of LSAT Series A
common stock, approximately 3.3 million shares of LSAT Series B common
stock and cash consideration of approximately $88 million. No gain or loss
was recognized due to the related party nature of such transaction. The
preferred interest has a liquidation value of $106 million and accrues
dividends at 9% per annum payable quarterly in cash.
In September 2000, certain officers of Liberty purchased a 6% common stock
interest in a subsidiary for $1.3 million. Such subsidiary owns an
indirect interest in an entity that holds certain of Liberty's investments
in satellite and technology related assets. Liberty and the officers
entered into a shareholders agreement in which the officers could require
Liberty to purchase, after five years, all or part of their common stock
interest in exchange for Series A Liberty stock at the then fair market
value. In addition, Liberty has the right to purchase, in exchange for
Series A Liberty common stock, the common stock interests held by the
officers at fair market value at any time. During 2001, two of the
officers resigned their positions with the Company, and the Company
purchased their respective interests in the subsidiary for the original
purchase price plus 6% interest.
In August 2000, a subsidiary of Liberty sold shares of such subsidiary's
Series A Convertible Participating Preferred Stock (the "Preferred
Shares") to a director of Liberty, who was also the Chairman and Chief
Executive Officer of such subsidiary, for a $21 million note. The
Preferred Shares are convertible into 1.4 million shares of the
subsidiary's common stock. The note is secured by the Preferred Shares or
the proceeds from the sale of such shares and the director's personal
obligations under such loan are limited.
35
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The note, which matures on August 1, 2005, may not be prepaid and interest
on the note accrues at a rate of 7% per annum.
In May 2000, Liberty's President and Chief Executive Officer, certain
officers of a subsidiary and another individual purchased an aggregate 20%
common stock interest in a subsidiary for $800,000. This subsidiary owns a
7% interest in Jupiter Telecommunications Co., Inc. Liberty and the
individuals entered into a shareholders agreement in which the individuals
could require Liberty to purchase, after five years, all or part of their
common stock interest in exchange for Series A Liberty common stock at its
then fair market value. In addition, Liberty has the right to purchase, in
exchange for Series A Liberty common stock, the common stock interests
held by the officers at fair market value at any time. Liberty recognized
$4 million and $3 million of compensation expense related to changes in
the market value of its contingent liability to reacquire the common stock
interests held by these officers during the years ended December 31, 2001
and 2000, respectively.
In connection with the AT&T Merger, Liberty paid two of its directors and
one other individual, all three of whom were directors of TCI, an
aggregate of $12 million for services rendered in connection with the AT&T
Merger. Such amount is included in operating, selling, general and
administrative expenses for the two months ended February 28, 1999 in the
accompanying consolidated statements of operations.
Liberty is party to a call agreement with certain shareholders of Series B
Liberty common stock, including the Chairman of the Board of Directors,
which grants Liberty a right to acquire all of the Series B Liberty common
stock held by such shareholders in certain circumstances. The price of
acquiring such shares is generally limited to the market price of the
Series A Liberty common stock, plus a 10% premium.
TRANSACTIONS WITH AT&T AND OTHER RELATED PARTIES
Certain subsidiaries of Liberty produce and/or distribute programming and
other services to cable distribution operators (including AT&T) and others
pursuant to long term affiliation agreements. Charges to AT&T are based
upon customary rates charged to others. Amounts included in revenue for
services provided to AT&T were $210 million, $243 million, $180 million
and $43 million for the seven months ended July 31, 2001, the year ended
December 31, 2000, the ten months ended December 31, 1999 and the two
months ended February 28, 1999, respectively.
Prior to the Split Off Transaction, AT&T allocated certain corporate
general and administrative costs to Liberty pursuant to an intergroup
agreement. Management believes such allocation methods were reasonable and
materially approximated the amount that Liberty would have incurred on a
stand-alone basis. In addition, there are arrangements between
subsidiaries of Liberty and AT&T and its other subsidiaries for satellite
transponder services, marketing support, programming, and hosting
services. These expenses aggregated $20 million, $37 million, $24 million
and $6 million during the seven months ended July 31, 2001 (the period
immediately prior to the Split Off Transaction), the year ended December
31, 2000, the ten months ended December 31, 1999 and the two months ended
February 28, 1999, respectively.
On April 8, 1999, Liberty redeemed all of its outstanding 4-1/2%
convertible subordinated debentures. The debentures were convertible into
shares of AT&T Liberty Media Group Class A common stock at a conversion
price of $11.77, or 84.96 shares per $1,000 principal amount. Certain
holders of the debentures had exercised their rights to convert their
debentures and 29.2 million shares of AT&T Liberty Media Group tracking
stock were issued to such holders. In connection with such issuance of
AT&T Liberty Media Group tracking stock, Liberty recorded an increase to
additional paid-in-capital of $354 million.
(11) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
LIBERTY
Effective with the Split Off Transaction, Liberty assumed from AT&T the
Amended and Restated AT&T Corp. Liberty Media Group 2000 Incentive Plan
and renamed it the Liberty Media Corporation 2000 Incentive Plan (the
"Liberty Incentive Plan"). Grants by TCI of options and options with
tandem stock
36
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
appreciation rights ("SARs") with respect to shares of Liberty Media Group
stock prior to 1999 were assumed by Liberty under the Liberty Incentive
Plan. Grants of free standing SARs made under the Plan in 2000 and in 2001
prior to the Split Off Transaction were converted into options upon
assumption by Liberty.
The Liberty Incentive Plan provides for awards to be made in respect of a
maximum of 160 million shares of common stock of Liberty. Awards may be
made as grants of stock options, SARs, restricted shares, stock units,
cash or any combination thereof.
Effective February 28, 2001 (the "Effective Date"), the Company
restructured the options and options with tandem SARs to purchase AT&T
common stock and AT&T Liberty Media Group tracking stock (collectively the
"Restructured Options") held by certain executive officers of the Company.
Pursuant to such restructuring, all Restructured Options became
exercisable on the Effective Date, and each executive officer was given
the choice to exercise all of his Restructured Options. Each executive
officer who opted to exercise his Restructured Options received
consideration equal to the excess of the closing price of the subject
securities on the Effective Date over the exercise price. The exercising
officers received (i) a combination of cash and AT&T Liberty Media Group
tracking stock for Restructured Options that were vested prior to the
Effective Date and (ii) cash for Restructured Options that were previously
unvested. The executive officers used the cash proceeds from the
previously unvested options to purchase restricted shares of AT&T Liberty
Media Group tracking stock. Such restricted shares are subject to
forfeiture upon termination of employment. The forfeiture obligation will
lapse according to a schedule that corresponds to the vesting schedule
applicable to the previously unvested options.
In addition, each executive officer was granted free-standing SARs equal
to the total number of Restructured Options exercised. The free-standing
SARs were tied to the value of AT&T Liberty Media Group tracking stock and
will vest as to 30% in year one and 17.5% in years two through five. The
free-standing SARs have an exercise price of $14.70 and had a fair value
of $9.56 on the date of the grant. Upon completion of the Split Off
Transaction, the free-standing SARs automatically converted to options to
purchase Liberty Series A common stock. Prior to the Effective Date, the
Restructured Options were accounted for using variable plan accounting
pursuant to APB Opinion No. 25. Accordingly, the above-described
transaction did not have a significant impact on Liberty's results of
operations.
37
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table presents the number and weighted average exercise price
("WAEP") of certain options and options with tandem SARs to purchase Liberty
Series A common stock granted to certain officers and other key employees of
the Company.
LIBERTY
SERIES A
COMMON
STOCK WAEP
-------------------- --------
AMOUNTS IN THOUSANDS, EXCEPT
FOR WAEP
Outstanding at January 1, 1999 78,158 $ 23.19
Granted 1,244 18.43
Exercised (7,510) 5.02
Adjustment for transfer of employees (1,158) 6.70
--------------------
Outstanding at December 31, 1999 70,734 6.97
Granted 2,341 21.73
Exercised (7,214) 5.69
Canceled (479) 9.45
Options issued in mergers 12,134 4.75
--------------------
Outstanding at December 31, 2000 77,516 7.20
Granted 49,087 14.72
Exercised (50,315) 7.62
Canceled (1,167) 16.88
--------------------
Outstanding at December 31, 2001 75,121 11.69
====================
Exercisable at December 31, 1999 14,341
====================
Exercisable at December 31, 2000 52,856
====================
Exercisable at December 31, 2001 23,494
====================
Vesting period 5 yrs
The following table provides certain information about the Company's
outstanding options at December 31, 2001.
NO. OF WEIGHTED NO. OF
OUTSTANDING RANGE OF WAEP OF AVERAGE EXERCISABLE WAEP OF
OPTIONS EXERCISE OUTSTANDING REMAINING OPTIONS EXERCISABLE
(000'S) PRICES OPTIONS LIFE (000'S) OPTIONS
---------- ---------------- ----------- --------- ----------- -----------
17,566 $ 1.08 - $ 5.00 $ 2.04 4.0 yrs 17,534 $ 2.04
1,180 $ 6.30 - $ 9.95 $ 7.05 5.1 yrs 1,043 $ 7.00
53,336 $10.81 - $14.75 $14.47 8.9 yrs 4,126 $12.25
3,039 $16.35 - $28.40 $20.59 8.6 yrs 791 $20.11
---------- ---------
75,121 23,494
========== =========
As permitted by Statement 123, the Company accounts for stock-based
compensation pursuant to the intrinsic value method prescribed by APB Opinion
No. 25 and its interpretations. In accordance with APB Opinion No. 25,
Liberty accounts for stock options with tandem SARs granted to its employees
as variable plan awards. Liabilities and the related compensation expense
under these awards are subject to future adjustment based upon vesting
provisions and the market value of the underlying security and, ultimately,
on the final determination of market value when the rights are exercised. The
Company accounts for stand-alone options as fixed plan awards, and
accordingly, no compensation is recognized for these awards. If the Company
had determined compensation expense based upon the grant-date fair value
method pursuant to Statement 123, the Company's 2001 net loss and pro forma
net loss per common share would have been $6,335 million and $2.45,
respectively. The Company's net earnings (loss) and pro forma net earnings
38
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(loss) per share for 2000 and 1999 would not have been significantly
different from what has been reflected in the accompanying consolidated
financial statements as substantially all of Liberty's stock option awards
had tandem SARs in 2000 and 1999.
In addition to the SARs issued in the aforementioned option restructuring,
during 2001 and pursuant to the Liberty Incentive Plan, Liberty awarded
2,104,000 options to purchase Liberty Series A common stock to certain
officers and key employees of the Company. Such options have exercise prices
ranging from $12.40 to $16.35, vest as to 25% in each of years 2 through 5
after the date of grant, and had a weighted-average grant date fair value of
$9.40.
The estimated fair values of the options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a present
value basis. The key assumptions used in the model for purposes of these
calculations generally include the following: (a) a discount rate equal to
the 10-year Treasury rate on the date of grant; (b) a 45% volatility factor,
(c) the 10-year option term; (d) the closing price of the respective common
stock on the date of grant; and (e) an expected dividend rate of zero.
LIBERTY DIGITAL, INC.
DEFERRED COMPENSATION AND STOCK OPTION PLAN. On September 8, 1999, Liberty
Digital adopted the Deferred Compensation and Stock Appreciation Rights Plan
for key executives. This plan is comprised of a deferred compensation
component and SARs grants. The deferred compensation component provides
participants with the right to receive an aggregate of nine and one half
percent of the appreciation in the Liberty Digital Series A common stock
market price over $2.46 subject to a maximum amount of $19.125. The SARs
provide participants with the appreciation in the market price of the Liberty
Digital Series A common stock above the maximum amount payable under the
deferred compensation component. Obligations to the executives under both the
deferred compensation and SAR elements of this plan are accounted for as
variable award plans.
There are 19,295,193 shares subject to this plan all of which were granted in
1999 at an effective exercise price of $2.46 and a weighted average remaining
life of 3 years at year end. The deferred compensation and SARs components
vest 20% annually beginning with the first vesting date of December 15, 1999.
Fully vested unexercised SARs total 3,046,188 at year-end. During the year
ended December 31, 1999, there were no exercises, cancellations or
expirations. During 2000 there were 3,859,038 options exercised, and
3,251,401 options cancelled. This plan terminates on December 15, 2003.
Subsequent to December 31, 2001, Liberty effected a short form merger with
Liberty Digital whereby Liberty Digital shareholders received 0.25 shares of
Liberty Series A common stock for each share of Liberty Digital Series A
common stock held. Subsequent to this merger Liberty owns 100% of Liberty
Digital. In connection with this merger, all outstanding Liberty Digital SARs
were converted to Liberty SARs at the rate of 0.25 for 1. In addition, all
amounts accrued under the deferred compensation plan were paid, and the
deferred compensation plan was terminated.
During the first quarter of 2000, an executive officer of Liberty Digital
elected to exercise certain of his SARs that had been granted by Liberty
Digital. In order to satisfy Liberty Digital's obligations under the stock
option agreement, LDIG and Liberty offered to issue, and the executive agreed
to accept, a combination of cash and AT&T Liberty Media Group tracking stock
in lieu of a cash payment. Accordingly, Liberty paid cash of $50 million and
issued 5.8 million shares to the executive officer in the first quarter of
2001.
STARZ ENCORE GROUP
STARZ ENCORE GROUP PHANTOM STOCK APPRECIATION RIGHTS PLAN. During 2000 and
1999 Starz Encore Group granted Phantom Stock Appreciation Rights (PSARS) to
certain of its officers under this plan. PSARS granted under the plan
generally vest over a five year period. Compensation under the PSARS is
computed based upon a formula derived from the appraised fair value of the
net assets of Starz Encore Group. All amounts earned under the plan are
payable in cash.
39
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
OTHER
Certain of the Company's subsidiaries have stock based compensation plans
under which employees and non-employees are granted options or similar stock
based awards. Awards made under these plans vest and become exercisable over
various terms. The awards and compensation recorded, if any, under these
plans is not significant to Liberty.
(12) EMPLOYEE BENEFIT PLANS
Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the "Liberty
401(k) Plan"), which provides employees an opportunity for ownership in the
Company and creates a retirement fund. The Liberty 401(k) Plan provides for
employees to contribute up to 10% of their compensation to a trust for
investment in Liberty common stock, as well as several mutual funds. The
Company, by annual resolution of the Board, generally contributes up to 100%
of the amount contributed by employees. Certain of the Company's subsidiaries
have their own employee benefit plans. Contributions to all plans aggregated
$10 million, $7 million, $3 million and $1 million for the years ended
December 31, 2001 and 2000, the ten months ended December 31, 1999 and the
two months ended February 28, 1999, respectively.
(13) OTHER COMPREHENSIVE EARNINGS
Accumulated other comprehensive earnings included in Liberty's consolidated
balance sheets and consolidated statements of stockholder's equity reflect
the aggregate of foreign currency translation adjustments and unrealized
holding gains and losses on securities classified as available-for-sale. The
change in the components of accumulated other comprehensive earnings, net of
taxes, is summarized as follows:
ACCUMULATED
FOREIGN OTHER
CURRENCY UNREALIZED COMPREHENSIVE
TRANSLATION GAINS ON EARNINGS (LOSS), NET
ADJUSTMENTS SECURITIES OF TAXES
----------- ---------- --------------------
AMOUNTS IN MILLIONS
Balance at January 1, 1999 $ 5 3,181 3,186
Other comprehensive earnings (loss) (15) 885 870
----------- ---------- --------------------
Balance at February 28, 1999 $ (10) 4,066 4,056
=========== ========== ====================
Balance at March 1, 1999 $ -- -- --
Other comprehensive earnings 60 6,495 6,555
----------- ---------- --------------------
Balance at December 31, 1999 60 6,495 6,555
Other comprehensive loss (202) (6,750) (6,952)
----------- ---------- --------------------
Balance at December 31, 2000 (142) (255) (397)
Other comprehensive loss (359) 1,596 1,237
----------- ---------- --------------------
Balance at December 31, 2001 $ (501) 1,341 840
=========== ========== ====================
40
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The components of other comprehensive earnings are reflected in Liberty's
consolidated statements of comprehensive earnings, net of taxes. The
following table summarizes the tax effects related to each component of other
comprehensive earnings.
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT BENEFIT AMOUNT
---------- --------- ----------
AMOUNTS IN MILLIONS
YEAR ENDED DECEMBER 31, 2001:
Foreign currency translation adjustments $ (588) 229 (359)
Unrealized holding losses on securities arising during period (1,661) 648 (1,013)
Reclassification adjustment for losses realized in net loss 4,420 (1,724) 2,696
Cumulative effect of accounting change (143) 56 (87)
---------- --------- ----------
Other comprehensive earnings $ 2,028 (791) 1,237
========== ========= ==========
YEAR ENDED DECEMBER 31, 2000:
Foreign currency translation adjustments $ (334) 132 (202)
Unrealized holding losses on securities arising during period (10,116) 4,001 (6,115)
Reclassification adjustment for gains realized in net earnings (1,050) 415 (635)
---------- --------- ----------
Other comprehensive loss $ (11,500) 4,548 (6,952)
========== ========= ==========
TEN MONTHS ENDED DECEMBER 31, 1999:
Foreign currency translation adjustments $ 99 (39) 60
Unrealized holding gains on securities arising during period 10,733 (4,245) 6,488
Reclassification adjustment for losses realized in net loss 12 (5) 7
---------- --------- ----------
Other comprehensive earnings $ 10,844 (4,289) 6,555
========== ========= ==========
TWO MONTHS ENDED FEBRUARY 28, 1999:
Foreign currency translation adjustments $ (25) 10 (15)
Unrealized holding gains arising during period 1,464 (579) 885
---------- --------- ----------
Other comprehensive earnings $ 1,439 (569) 870
========== ========= ==========
(14) COMMITMENTS AND CONTINGENCIES
Starz Encore Group LLC, a wholly owned subsidiary of Liberty, provides
premium programming distributed by cable, direct satellite, TVRO and other
distributors throughout the United States. Starz Encore Group is obligated to
pay fees for the rights to exhibit certain films that are released by various
producers through 2014 (the "Film Licensing Obligations"). The aggregate
amount of the Film Licensing Obligations under these license agreements is
not currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture studios as
well as the domestic theatrical exhibition receipts upon the release of such
qualifying films. Nevertheless, required aggregate payments under the Film
Licensing Obligations could prove to be significant. Starz Encore Group's
estimate, based on customer levels at December 31, 2001, of the future
minimum obligation related to the Film Licensing Obligations for the five
years after 2001 and thereafter are as follows (amounts in millions):
2002 .................................. $405
2003 .................................. 224
2004 .................................. 154
2005 .................................. 88
2006 .................................. 103
Thereafter ............................ 388
41
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Liberty has guaranteed $619 million of the bank debt of Jupiter, an equity
affiliate that provides broadband services in Japan. Approximately $343
million of such guaranteed amount is due and payable by Jupiter during the
first quarter of 2002. Jupiter is currently negotiating the refinancing of
substantially all of its long-term and short-term debt. Liberty anticipates
that it and the other Jupiter shareholders will make equity contributions to
Jupiter in connection with such refinancing, and that Liberty's share of such
equity contributions will be approximately $450 million. Upon such
refinancing, Liberty anticipates that its guarantee of Jupiter debt would be
cancelled.
Liberty has also guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At December 31, 2001, the Guaranteed Obligations aggregated
approximately $170 million. Currently, Liberty is not certain of the
likelihood of being required to perform under such guarantees.
Liberty leases business offices, has entered into pole rental and transponder
lease agreements and uses certain equipment under lease arrangements. Rental
expense under such arrangements amounts to $76 million, $50 million, $30
million and $9 million for the years ended December 31, 2001 and 2000, for
the ten months ended December 31, 1999 and the two months ended February 28,
1999, respectively.
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 2001 follows (amounts in millions):
YEARS ENDING DECEMBER 31:
-------------------------
2002 ................. $ 70
2003 ................. 63
2004 ................. 52
2005 ................. 40
2006 ................. 31
Thereafter ........... 115
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus, it
is anticipated that future minimum lease commitments will not be less than
the amount shown for 2001.
STARZ ENCORE GROUP LLC V. AT&T BROADBAND LLC AND SATELLITE SERVICES, INC.
Starz Encore Group entered into a 25-year affiliation agreement in 1997 with
TCI. TCI cable systems subsequently acquired by AT&T in the TCI merger
operate under the name AT&T Broadband. Starz Encore Group receives fixed
monthly payments in exchange for unlimited access to all of the existing
Encore and STARZ! services. The payment from AT&T Broadband can be adjusted
if AT&T acquires or disposes of cable systems. The affiliation agreement
further provides that to the extent Starz Encore Group's programming costs
increase above or decrease below amounts specified in the agreement, then
AT&T Broadband's payments under the affiliation agreement will be increased
or decreased in an amount equal to a proportion of the excess or shortfall.
Starz Encore Group requested payment from AT&T Broadband of its proportionate
share of excess programming costs during the first quarter of 2001 (which
amount aggregated approximately $32 million for the year 2001). Excess
programming costs payable by AT&T Broadband could be significantly larger in
future years.
By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability
of the excess programming costs pass through provisions of the affiliation
agreement and questioned whether the affiliation agreement, as a whole, is
"voidable." In addition, AT&T Broadband raised certain issues concerning
interpretations of the contractual requirements associated with the treatment
of acquisitions and dispositions. Starz Encore Group believes the position
expressed by AT&T Broadband to be without merit. On July 10, 2001, Starz
Encore Group initiated a lawsuit against AT&T Broadband and Satellite
Services, Inc., a subsidiary of AT&T Broadband that is also a party to the
affiliation agreement, in Arapahoe County District Court, Colorado for breach
of contract. Starz Encore Group is seeking a judgment of specific performance
of the contract, damages and costs.
42
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
On October 19, 2001, Starz Encore Group entered into a standstill and tolling
agreement whereby the parties agreed to move the court to stay the lawsuit
until August 31, 2002 to permit the parties an opportunity to resolve their
dispute. This agreement provides that either party may unilaterally petition
the court to lift the stay after April 30, 2002 and proceed with the
litigation. The court granted the stay on October 30, 2001. In conjunction
with this agreement, AT&T Broadband and the Company entered into various
agreements whereby Starz Encore Group will indirectly receive payment for
AT&T Broadband's proportionate share of the programming costs pass through
for 2001.
Liberty has contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the
accompanying consolidated financial statements.
(15) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS
Liberty is a holding company with a variety of subsidiaries and investments
operating in the media, communications and entertainment industries. Each of
these businesses is separately managed. Liberty identifies its reportable
segments as those consolidated subsidiaries that represent 10% or more of its
combined revenue and those equity method affiliates whose share of earnings
or losses represent 10% or more of its pre-tax earnings or loss. Subsidiaries
and affiliates not meeting this threshold are aggregated together for segment
reporting purposes. The segment presentation for prior periods has been
conformed to the current period segment presentation.
For the year ended December 31, 2001, Liberty had five operating segments:
Starz Encore Group, Liberty Livewire, On Command Corporation ("On Command"),
Telewest and Other. Starz Encore Group provides premium programming
distributed by cable, direct-to-home satellite and other distribution media
throughout the United States and is wholly owned and consolidated by Liberty.
Liberty Livewire provides sound, video and ancillary post production and
distribution services to the motion picture and television industries in the
United States and Europe and is majority owned and consolidated by Liberty.
On Command provides in-room, on-demand video entertainment and information
services to hotels, motels and resorts primarily in the United States and is
majority owned and consolidated by Liberty. Telewest, an equity method
affiliate, operates and constructs cable television and telephone systems in
the UK. Other includes Liberty's non-consolidated investments, corporate and
other consolidated businesses not representing separately reportable segments.
The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of significant
accounting policies. Liberty evaluates performance based on the measures of
revenue and operating cash flow (as defined by Liberty), appreciation in
stock price and non-financial measures such as average prime time rating,
prime time audience delivery, subscriber growth and penetration, as
appropriate. Liberty believes operating cash flow is a widely used financial
indicator of companies similar to Liberty and its affiliates, which should be
considered in addition to, but not as a substitute for, operating income, net
income, cash flow provided by operating activities and other measures of
financial performance prepared in accordance with generally accepted
accounting principles. Liberty generally accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, that is, at
current prices.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different technology, distribution channels and marketing
strategies.
43
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Liberty utilizes the following financial information for purposes of making
decisions about allocating resources to a segment and assessing a segment's
performance:
CONSOLIDATED SUBSIDIARIES
-------------------------------- EQUITY
STARZ METHOD
ENCORE LIBERTY ON AFFILIATE
GROUP LIVEWIRE COMMAND OTHER TELEWEST ELIMINATIONS TOTAL
------ -------- ------- ------ --------- ------------ ------
AMOUNTS IN MILLIONS
PERFORMANCE MEASURES:
Year ended December 31, 2001
Revenue $ 863 593 239 364 1,811 (1,811) 2,059
Operating cash flow 313 89 44 (69) 431 (431) 377
Year ended December 31, 2000
Revenue 733 295 200 298 1,623 (1,623) 1,526
Operating cash flow 235 44 49 12 330 (330) 340
Ten months ended December 31, 1999
Revenue 539 -- -- 190 857 (857) 729
Operating cash flow 124 -- -- 9 235 (235) 133
Two months ended February 28, 1999
Revenue 101 -- -- 134 207 (207) 235
Operating cash flow 41 -- -- 6 52 (52) 47
BALANCE SHEET INFORMATION:
As of December 31, 2001
Total assets 2,861 915 433 44,330 9,209 (9,209) 48,539
Investments in affiliates 138 -- -- 9,938 795 (795) 10,076
As of December 31, 2000
Total assets 2,754 1,141 439 49,934 10,707 (10,707) 54,268
Investments in affiliates 155 8 2 20,299 377 (377) 20,464
44
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table provides a reconciliation of segment operating cash flow
to earnings before income taxes:
NEW LIBERTY OLD LIBERTY
--------------------------------------------------- ------------
YEAR YEAR TEN MONTHS TWO MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
AMOUNTS IN MILLIONS
Segment operating cash flow $ 377 340 133 47
Stock compensation (132) 950 (1,785) (183)
Depreciation and amortization (984) (854) (562) (22)
Impairment of long-lived assets (388) -- -- --
Interest expense (525) (399) (135) (26)
Share of losses of affiliates (4,906) (3,485) (904) (66)
Nontemporary declines in fair
value of investments (4,101) (1,463) -- --
Gains (losses) on dispositions,
net (310) 7,340 4 14
Other, net 87 527 85 373
------------ ------------ ------------ ------------
Earnings (loss) before income
taxes and minority interest $ (10,882) 2,956 (3,164) 137
============ ============ ============ ============
During the year ended December 31, 2001, Liberty derived 13.6% its total
revenue from a single customer. Such revenue is attributable to the Starz
Encore Group segment and the Other segment.
(16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
AMOUNTS IN MILLIONS
2001:
Revenue $ 504 513 521 521
======= ======= ======= =======
Operating loss $ (207) (195) (51) (674)
======= ======= ======= =======
Loss before cumulative effect of
accounting change $ (697) (2,125) (215) (3,711)
======= ======= ======= =======
Net loss $ (152) (2,125) (215) (3,711)
======= ======= ======= =======
Pro forma basic and diluted loss
before cumulative effect of
accounting change per common
share $ (.27) (.82) (.08) (1.43)
======= ======= ======= =======
Pro forma basic and diluted net
loss per common share $ (.06) (.82) (.08) (1.43)
======= ======= ======= =======
2000:
Revenue $ 235 382 436 473
======= ======= ======= =======
Operating income (loss) $ (83) 67 147 305
======= ======= ======= =======
Net earnings (loss) $ 939 267 1,756 (1,477)
======= ======= ======= =======
Pro forma basic and diluted net
earnings (loss) per common
share $ .36 .10 .68 (.57)
======= ======= ======= =======
45