1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
F O R M 10-Q/A
(Amendment No. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-20421
LIBERTY MEDIA CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1288730
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9197 So. Peoria Street
Englewood, Colorado 80112
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-5400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY MEDIA CORPORATION
Date: June 20, 2001 By: /s/ Charles Y. Tanabe
------------------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel
Date: June 20, 2001 By: /s/ Christopher W. Shean
------------------------------------
Christopher W. Shean
Vice President and Controller
(Principal Accounting Officer)
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Assets
Current assets:
Cash and cash equivalents $ 2,089 1,295
Short-term investments 444 500
Trade and other receivables, net 335 307
Prepaid expenses and program rights 682 537
Deferred income tax assets 86 242
Other current assets 84 73
------- -------
Total current assets 3,720 2,954
------- -------
Investments in affiliates, accounted for using the equity method, and
related receivables (note 4) 19,222 20,379
Investments in available-for-sale securities and others (note 5) 19,681 19,035
Property and equipment, at cost 1,072 976
Less accumulated depreciation 161 131
------- -------
911 845
------- -------
Intangible assets:
Excess cost over acquired net assets 11,213 11,138
Franchise costs 190 190
------- -------
11,403 11,328
Less accumulated amortization 1,209 1,047
------- -------
10,194 10,281
------- -------
Other assets, at cost, net of accumulated amortization 667 682
------- -------
Total assets $54,395 54,176
======= =======
(continued)
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable and accrued liabilities $ 412 473
Accrued stock compensation 819 1,216
Program rights payable 227 179
Current portion of debt 1,416 1,094
-------- --------
Total current liabilities 2,874 2,962
-------- --------
Long-term debt (note 7) 4,621 5,269
Call option obligations (note 7) 1,154 --
Deferred income tax liabilities 11,323 11,311
Other liabilities 62 62
-------- --------
Total liabilities 20,034 19,604
-------- --------
Minority interests in equity of subsidiaries 329 348
Stockholder's equity (note 8):
Preferred stock, $.0001 par value. Authorized 100,000 shares; no
shares issued and outstanding -- --
Class A common stock $.0001 par value. Authorized 1,000,000 shares;
issued and outstanding 1,000 shares -- --
Class B common stock $.0001 par value. Authorized 1,000,000 shares;
issued and outstanding 1,000 shares -- --
Class C common stock, $.0001 par value. Authorized 1,000,000
shares; issued and outstanding 1,000 shares -- --
Additional paid-in capital 34,464 34,169
Accumulated other comprehensive loss, net of taxes (579) (397)
Retained earnings 495 594
-------- --------
34,380 34,366
Due from related parties (348) (142)
-------- --------
Total stockholder's equity 34,032 34,224
-------- --------
Commitments and contingencies (note 9)
Total liabilities and stockholder's equity $ 54,395 54,176
======== ========
See accompanying notes to consolidated financial statements.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statements of Operations and Comprehensive Earnings (Loss)
(unaudited)
Three months ended
March 31,
-----------------------
2001 2000
------- -------
amounts in millions
Revenue:
Unaffiliated parties $ 418 183
Related parties (note 8) 86 52
------- -------
504 235
------- -------
Operating costs and expenses:
Operating, selling, general and
administrative 392 167
Charges from related parties (note 8) 7 7
Stock compensation 63 (23)
Depreciation and amortization 249 167
------- -------
711 318
------- -------
Operating loss (207) (83)
Other income (expense):
Interest expense (133) (439)
Dividend and interest income 57 79
Share of losses of affiliates, net (note 4) (1,217) (311)
Other-than-temporary decline in fair value
of investments (note 5) (304) --
Gains on dispositions, net (notes 4 and 5) 810 2,441
Unrealized gains on financial instruments, net (notes 2 and 7) 44 --
Other, net 8 4
------- -------
(735) 1,774
------- -------
Earnings (loss) before income taxes and minority interest (942) 1,691
Income tax benefit (expense) 268 (702)
Minority interests in losses (earnings) of subsidiaries 30 (12)
------- -------
Earnings (loss) before cumulative effect of accounting change (644) 977
Cumulative effect of accounting change, net of taxes (notes 2 and 7) 545 --
------- -------
Net earnings (loss) (99) 977
------- -------
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments (149) (31)
Recognition of previously unrealized losses (gains) on
available-for-sale securities, net 4 (1,476)
Unrealized gains on available-for-sale securities 50 3,256
Cumulative effect of accounting change (notes 2 and 7) (87) --
------- -------
Other comprehensive earnings (loss) (182) 1,749
------- -------
Comprehensive earnings (loss) $ (281) 2,726
======= =======
See accompanying notes to consolidated financial statements.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statement of Stockholder's Equity
(unaudited)
Three months ended March 31, 2001
Accumulated
Common stock Additional other Due from Total
Preferred ------------------------- paid-in comprehensive Retained related stockholder's
stock Class A Class B Class C capital loss, net of taxes earnings parties equity
--------- ------- ------- ------- ---------- ------------------ -------- -------- -------------
amounts in millions
Balance at January 1, 2001 $-- -- -- -- 34,169 (397) 594 (142) 34,224
Net loss -- -- -- -- -- -- (99) -- (99)
Issuances of common stock
by subsidiaries -- -- -- -- 8 -- -- -- 8
Utilization of net operating
losses of Liberty by AT&T -- -- -- -- (2) -- -- -- (2)
Other comprehensive loss -- -- -- -- -- (182) -- -- (182)
Other transfers (to) from
related parties, net -- -- -- -- 289 -- -- (206) 83
--- --- --- --- ------- ------- ------- ------- -------
Balance at March 31, 2001 $-- -- -- -- 34,464 (579) 495 (348) 34,032
=== === === === ======= ======= ======= ======= =======
See accompanying notes to consolidated financial statements.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statements of Cash Flows
(unaudited)
Three months ended
March 31,
-----------------------
2001 2000
------- -------
amounts in millions
(see note 3)
Cash flows from operating activities:
Net earnings (loss) $ (99) 977
Adjustments to reconcile net earnings (loss) to net cash used by
operating activities:
Cumulative effect of accounting change, net of taxes (545) --
Depreciation and amortization 249 167
Stock compensation 63 (23)
Payments of stock compensation (202) (183)
Share of losses of affiliates, net 1,217 311
Deferred income tax expense (benefit) (87) 751
Intergroup tax allocation (181) (49)
Cash payment from (to) AT&T pursuant to tax sharing agreement (25) 33
Minority interests in earnings (losses) of subsidiaries (30) 12
Gains on disposition of assets, net (810) (2,441)
Other-than-temporary decline in fair value of investments 304 --
Noncash interest 6 364
Unrealized gains on financial instruments (44) --
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions:
Change in receivables (10) (3)
Change in prepaid expenses and program rights (145) (89)
Change in payables and accruals (21) 10
------- -------
Net cash used by operating activities (360) (163)
------- -------
Cash flows from investing activities:
Cash paid for acquisitions (109) (344)
Capital expended for property and equipment (77) (12)
Investments in and loans to affiliates and others (310) (808)
Purchases of marketable securities (431) (337)
Sales and maturities of marketable securities 229 511
Cash proceeds from dispositions 52 --
Other investing activities, net 3 15
------- -------
Net cash used by investing activities (643) (975)
------- -------
Cash flows from financing activities:
Borrowings of debt 1,429 1,820
Increase in call option obligations due to issuance of senior
exchangeable debentures 1,028 590
Repayments of debt (662) (772)
Cash transfers from (to) related parties, net 28 (13)
Other financing activities, net (26) (24)
------- -------
Net cash provided by financing activities 1,797 1,601
------- -------
Net increase in cash and cash equivalents 794 463
Cash and cash equivalents at beginning of period 1,295 1,714
------- -------
Cash and cash equivalents at end of period $ 2,089 2,177
======= =======
See accompanying notes to consolidated financial statements.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements
March 31, 2001
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Liberty Media Corporation ("Liberty" or the "Company") and those of
all of its majority-owned subsidiaries. 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) are
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 is included in the Liberty Media Group, and the
businesses and assets of Liberty and its subsidiaries constitute
substantially all of the businesses and assets of the Liberty Media
Group. All significant intercompany accounts and transactions have been
eliminated in consolidation. AT&T Corp. ("AT&T") owns 100% of the
outstanding common stock of Liberty.
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 technology and Internet businesses, as well as 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.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in Liberty's Annual Report on Form 10-K for the year
ended December 31, 2000.
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.
Certain prior period amounts have been reclassified for comparability
with the 2001 presentation.
(2) Accounting Change
Effective January 1, 2001, Liberty adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("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 designed as a hedge, changes in the
fair value of the derivative are recognized in earnings.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
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.
The adoption of Statement 133 on January 1, 2001, resulted in a
cumulative increase in net earnings of $545 million (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 uses various derivative instruments including equity
collars, put spread collars, interest rate swaps, and forward foreign
exchange contracts to manage fair value risk associated with certain
investments, interest rate risk on certain indebtedness, and foreign
exchange rate risk. Derivative instruments are generally not used for
speculative purposes. The derivative instruments may involve elements
of credit and market risk in excess of amounts recognized in the
financial statements. The Company monitors its positions and the credit
quality of counter-parties, consisting primarily of major financial
institutions and does not anticipate nonperformance by any
counter-party.
For derivatives designed either as fair value or cash flow hedges,
changes in the time value of the derivatives are excluded from the
assessment of hedge effectiveness and are recognized in earnings. Hedge
ineffectiveness, determined in accordance with Statement 133, had no
impact on earnings for the three months ended March 31, 2001. No fair
value hedges or cash flow hedges were derecognized or discontinued
during the three months ended March 31, 2001.
For the three months ended March 31, 2001, unrealized gains on
financial instruments included a $333 million gain related to call
option obligations, a $258 million net loss for changes in the fair
value of derivative instruments related to available-for-sale
securities and other derivatives not designated as hedging instruments,
and a $31 million net loss for changes in the time value of options for
fair value hedges.
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
Three months ended
March 31,
---------------------
2001 2000
------ ------
amounts in millions
Cash paid for acquisitions:
Fair value of assets acquired $ 117 1,120
Net liabilities assumed (8) (562)
Deferred tax asset recorded -- 71
Minority interests in equity of acquired subsidiaries -- (285)
------ ------
Cash paid for acquisitions $ 109 344
====== ======
Cash paid for interest $ 156 70
====== ======
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
(4) 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 of the more
significant investments in affiliates:
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Gemstar-TV Guide International, Inc. ("Gemstar") $ 4,958 5,855
Discovery Communications, Inc. ("Discovery") 3,068 3,133
Telewest Communications plc ( "Telewest ") 2,424 2,712
USA Networks, Inc. ( "USAI ") and related investments 2,809 2,824
QVC Inc. ( "QVC ") 2,510 2,508
Other 3,453 3,347
------- -------
$19,222 20,379
======= =======
The following table reflects Liberty's share of earnings (losses) of
affiliates:
Three months ended
March 31,
-----------------------
2001 2000
------- -------
amounts in millions
Gemstar $ (897) --
Discovery (65) (63)
Telewest (131) (87)
USAI and related investments (13) (7)
QVC 2 (1)
UnitedGlobalCom, Inc. ("UGC") (45) (50)
Other (68) (103)
------- -------
$(1,217) (311)
======= =======
At March 31, 2001, the aggregate carrying amount of Liberty's
investments in its affiliates exceeded Liberty's proportionate share of
its affiliates' net assets by $14 billion. Such excess is being
amortized over estimated useful lives ranging from 2 to 20 years.
Amortization aggregating $281 million and $167 million for the three
months ended March 31, 2001 and 2000, respectively, 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.
Gemstar
Gemstar is a global technology and media company focused on consumer
entertainment. The common stock of Gemstar is publicly traded. At March
31, 2001, Liberty held 87.5 million shares of Gemstar common stock.
Gemstar's stock reported a closing price of $28.75 per share on March
31, 2001.
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 of Gemstar common stock. At March 31, 2001, Liberty
owned approximately 21% of Gemstar. Liberty recognized a $4.4 billion
gain (before deferred tax expense of $1.7 billion) 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.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
On May 2, 2001, Liberty entered into a transaction ("Exchange
Transaction") with The News Corporation Limited ("News Corp.") to
exchange 70.7 million shares of Gemstar held by Liberty for 121.5
million News Corp. American Depository Shares ("ADSs") representing
preferred, limited voting, ordinary shares of News Corp. The fair value
of the securities received by Liberty is less than the expected
carrying value of the Gemstar shares on the date of the Exchange
Transaction. As a result of the inherent loss on the Exchange
Transaction, Liberty recognized an other-than-temporary decline in
value adjustment on all of its Gemstar interests in the first quarter
of 2001. Such adjustment ($764 million) is included in share of losses
of Gemstar in the consolidated statements of operations. A summary of
Gemstar's unaudited financial information for the three months ended
March 31, 2001 is included below (amounts in millions):
A summary of Gemstar's unaudited financial information for the three
months ended March 31, 2001 is as follows (amounts in millions):
Operations
Revenue $ 352
Operating expenses (232)
-----
Operating cash flow (as defined by Liberty) 120
Depreciation and amortization (239)
Interest expense (12)
Other, net 8
-----
Net loss $(123)
=====
Telewest
Telewest currently operates and constructs cable television and
telephone systems in the UK. Flextech p.l.c. ("Flextech") develops and
sells a variety of television programming in the UK. In April 2000,
Telewest acquired Flextech. As a result, each share of Flextech was
exchanged for 3.78 new Telewest shares. 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 (before deferred tax expense of $227 million) on
the acquisition during the second quarter of 2000 based on the
difference between the carrying value of Liberty's interest in Flextech
and the fair value of the Telewest shares received. At March 31, 2001,
Liberty indirectly owned 724 million of the issued and outstanding
Telewest ordinary shares. Telewest's ordinary shares reported a closing
price of $1.69 per share on March 31, 2001.
USAI
USAI owns and operates businesses in network and television production,
television broadcasting, electronic retailing, ticketing operations,
and internet services. At March 31, 2001, Liberty directly and
indirectly held 74.4 million shares of USAI's common stock. Liberty
also held shares directly in certain subsidiaries of USAI which are
exchangeable into 79 million shares of USAI common stock. Liberty's
direct ownership of USAI is currently restricted by Federal
Communications Commission ("FCC") regulations. The exchange of the
shares of subsidiaries can be accomplished only if there is a change to
existing regulations or if Liberty obtains permission from the FCC. If
the exchange of subsidiary stock into USAI common stock was completed
at March 31, 2001, Liberty would own 153.4 million shares or
approximately 21% (on a fully-diluted basis) of USAI common stock.
USAI's common stock reported a closing price of $23.94 per share on
March 31, 2001.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
UGC
UGC is a global broadband communications provider of video, voice and
data services with operations in over 20 countries throughout the
world. At March 31, 2001, Liberty owned an approximate 11% economic
ownership interest representing an approximate 37% voting interest in
UGC. Liberty owns 9.9 million shares of UGC Class B common stock and
1.2 million shares of UGC Class A common stock. The UGC Class B common
stock is convertible, on a one-for-one basis, into UGC Class A common
stock. UGC's Class A common stock reported a closing price of $13.13
per share on March 31, 2001.
Summarized unaudited combined financial information for affiliates
other than Gemstar is as follows:
Three months ended
March 31,
-----------------------
2001 2000
------- -------
amounts in millions
Revenue $ 4,045 3,587
Operating expenses (3,575) (3,199)
Depreciation and amortization (836) (622)
------- -------
Operating loss (366) (234)
Interest expense (604) (440)
Other, net 117 (3)
------- -------
Net loss $ (853) (677)
======= =======
(5) Investments in Available-for-sale Securities and Others
Investments in available-for-sale securities and others are summarized
as follows:
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Sprint Corporation ("Sprint PCS") $ 5,007 5,192
AOL Time Warner Inc. ("AOL Time Warner") 7,112 6,325
News Corp. 2,179 2,342
Motorola, Inc. ("Motorola") 1,570 1,982
Other available-for-sale securities 3,797 2,989
Other investments, at cost, and related receivables 460 705
------- -------
20,125 19,535
Less short-term investments 444 500
------- -------
$19,681 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
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
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 for 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.
The Final Judgment requires that the Trustee vote the Sprint Securities
beneficially owned by Liberty in the same proportion as other holders
of Sprint's PCS Group Common Stock 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.
AOL Time Warner
On January 11, 2001, America Online, Inc. completed its merger with
Time Warner Inc. ("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.
Subsequent to the Exchange Transaction, Liberty owns 203 million ADSs
or 18% of the outstanding equity of News Corp.
Motorola
On January 5, 2000, Motorola completed the acquisition of General
Instrument Corporation ("General Instrument") through a merger of
General Instrument with a wholly owned subsidiary of Motorola. In
connection with the merger, Liberty received 54 million shares and
warrants to purchase 37 million shares of Motorola common stock in
exchange for its holdings in General Instrument. Liberty recognized a
$2.2 billion 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. During 2000,
Liberty exercised a warrant to purchase approximately 9 million shares
of Motorola common stock at an exercise price of $8.26 per share.
Viacom, Inc. ("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
pursuant to an Agreement and Plan of Merger among Liberty, BET, Viacom,
Robert L. Johnson and the Johnson Children's Insurance Trust and
certain of their respective affiliates. As a result of the merger,
Liberty received approximately 15.2 million shares of Viacom's Class B
common stock (less than 1% of Viacom's common equity) in exchange for
its 35% 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 $570 million
(before deferred tax expense of $225 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.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
Other-Than-Temporary Decline in Fair Value of Investments
During the three months ended March 31, 2001, Liberty determined that
certain of its other investments experienced other-than-temporary
declines in value. As a result, the carrying amounts of such
investments were adjusted to their respective fair values at March 31,
2001. These adjustments, which included a $127 million adjustment to
Liberty's investment in Antec Corporation, resulted in a total charge
of $304 million, before deducting a deferred tax benefit of $120
million.
Investments in available-for-sale securities are summarized as follows:
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Equity securities:
Cost basis $ 18,279 17,736
Gross unrealized holding gains 1,531 1,868
Gross unrealized holding losses (2,043) (2,517)
-------- --------
Fair value $ 17,767 17,087
======== ========
Debt securities:
Cost basis $ 1,734 1,533
Gross unrealized holding gains 80 86
Gross unrealized holding losses (64) (64)
-------- --------
Fair value $ 1,750 1,555
======== ========
Management estimates the fair market value of all of its investments in
available-for-sale securities and others aggregated $20.2 billion and
$19.7 billion at March 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.
The Company enters into equity collars and put spread collars to manage
market risk associated with its investments in certain marketable
securities. These instruments are recorded at fair value based on
option pricing models using the historical volatility of the underlying
security. Equity collars generally have high correlation between
changes in the fair value of the instrument and changes in the fair
value of the underlying security, and therefore, qualify as fair value
hedges. Conversely, put spread collars generally do not have high
correlation, and therefore, do not qualify as fair value hedges. The
following table illustrates the fair value of the Company's equity
collars and put spread collars which are included as part of the
investment balance:
March 31, December 31,
2001 2000
--------- ------------
Type of Derivative amounts in millions
------------------
Equity collars $1,713 1,293
Put spread collars 148 188
I-12
15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
(6) Acquisitions
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 $385 million. On June 28,
2000, Liberty acquired the remaining 15% 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 5 years.
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, and 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. 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
outstanding immediately following the contribution.
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.
Pro Forma Information
The following unaudited pro forma revenue and net earnings for the
three months ended March 31, 2000 were 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. (amounts in millions)
Revenue $ 467
Net earnings $ 920
I-13
16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
(7) Long-Term Debt
Debt is summarized as follows:
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Parent company debt:
Senior notes $ 742 742
Senior debentures 1,486 1,486
Senior exchangeable debentures 854 1,679
Securities lending agreement 315 338
Bank credit facilities 675 475
Other debt 276 242
------ ------
4,348 4,962
------ ------
Debt of subsidiaries:
Bank credit facilities 1,292 1,129
Senior notes 185 179
Other debt, at varying rates 212 93
------ ------
1,689 1,401
------ ------
Total debt 6,037 6,363
Less current maturities 1,416 1,094
------ ------
Total long-term debt $4,621 5,269
====== ======
Senior Notes and Debentures
On July 7, 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.
On February 2, 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.
The senior notes and debentures are stated net of an aggregate
unamortized discount of $22 million at March 31, 2001 and December 31,
2000, which is being amortized to interest expense in the consolidated
statements of operations.
Senior Exchangeable Debentures
On November 16, 1999, Liberty issued $869 million of 4% Senior
Exchangeable Debentures due 2030. 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 and the date Liberty's
ownership level of Sprint PCS Group Stock 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.
On February 10, 2000, Liberty issued $750 million of 3-3/4% Senior
Exchangeable Debentures due 2030. On March 8, 2000, Liberty issued an
additional $60 million of 3-3/4% Senior Exchangeable Debentures.
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 and the date Liberty's ownership level of
I-14
17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
Sprint PCS Group Stock 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.
On January 11, 2001, Liberty issued $550 million of 3-1/2% Senior
Exchangeable Debentures due 2031. On January 17, 2001, Liberty issued
an additional $50 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.
On March 8, 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 an adjustment to interest
expense in the consolidated statements of operations and comprehensive
earnings. 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 three months ended
March 31, 2001, Liberty recorded unrealized gains of $333 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 three months ended March 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. 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.
Securities Lending Agreement
On January 7, 2000, a trust, which holds Liberty's investment in Sprint
Corporation, entered into agreements to loan 18 million shares of
Sprint PCS Group Stock to a third party, as Agent. The
I-15
18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
obligation to return those shares is secured by cash collateral equal
to 100% of the market value of that stock, which was $315 million at
March 31, 2001. During the period of the loan, which is terminable by
either party at any time, the cash collateral is to be marked-to-market
daily. The trust, for the benefit of Liberty, has the use of 80% of the
cash collateral plus any interest earned thereon during the term of the
loan, and is required to pay a rebate fee equal to the Federal funds
rate less 30 basis points to the borrower of the loaned shares.
Interest earned on the cash collateral aggregated $23 million as of
March 31, 2001, and Liberty had utilized $256 million of the cash
collateral and interest income as of such date. Unutilized cash
collateral of $59 million at March 31, 2001, which represents
restricted cash, is included in other assets in the consolidated
balance sheets.
Bank Credit Facilities
At March 31, 2001, Liberty had approximately $199 million in unused
lines of credit under its bank credit facilities. The bank credit
facilities generally contain restrictive covenants which require the
borrowers and certain of their subsidiaries to maintain certain
financial ratios, and include limitations on indebtedness, liens,
encumbrances, acquisitions, dispositions, guarantees and dividends.
Liberty was in compliance with its debt covenants at March 31, 2001.
Additionally, Liberty pays fees ranging from .15% to .375% per annum on
the average unborrowed portions of the total commitments under the bank
credit facilities.
Based on quoted market prices, the fair value of Liberty's debt at
March 31, 2001 is as follows (amounts in millions):
Senior notes of parent company $ 738
Senior debentures of parent company 1,364
Senior exchangeable debentures of parent company 1,244
Senior notes of subsidiary 192
Liberty believes that the carrying amount of the remainder of its debt
approximated its fair value at March 31, 2001.
(8) 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 March
31, 2001, no shares of preferred stock were issued.
Common Stock
The Class A Stock has one vote per share, and each of the Class B and
Class C Stock has ten votes per share.
As of March 31, 2001, all of the issued and outstanding common stock of
Liberty was held by AT&T.
Stock Issuances of Subsidiaries
During the three months ended March 31, 2001, consolidated subsidiaries
of Liberty issued shares of common stock in connection with certain
acquisitions and the exercise of certain
I-16
19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
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 an $8 million
increase to additional paid-in-capital.
Transactions with Officers and Directors
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 will be tied to the value of Liberty Media Group
tracking stock and will vest as to 25% on the second anniversary of the
Effective Date and as to 25% on each anniversary thereafter until fully
vested. Upon completion of the Split Off Transaction discussed in note
11, the free-standing SARs automatically convert to options to purchase
Liberty 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.
During the first quarter of 2000, an executive officer of Liberty
Digital, Inc. ("LDIG"), a subsidiary of Liberty, exercised certain of
his stock options with tandem stock appreciation rights that had been
granted by LDIG. In order to satisfy LDIG's obligations under the stock
option agreement, LDIG and Liberty offered, and the executive agreed,
to issue 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. The fair value of the shares issued is included
in additional-paid-in capital in the consolidated financial statements.
Transactions with AT&T
Certain subsidiaries of Liberty produce and/or distribute programming
and other services to cable distribution operators (including AT&T) and
others. Charges to AT&T are based upon customary rates charged to
others. Amounts included in revenue for services provided to AT&T were
$86 million and $52 million for the three months ended March 31, 2001
and 2000, respectively.
AT&T allocates certain corporate general and administrative costs to
Liberty pursuant to an intergroup agreement. Management believes such
allocation methods are reasonable. 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 $7 million during each of
the three-month periods ended March 31, 2001 and 2000.
I-17
20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
Due from Related Parties
The components of "Due from related parties" are as follows:
March 31, December 31,
2001 2000
--------- ------------
amounts in millions
Note receivable from related party $(476) (476)
Intercompany account 128 334
----- -----
$(348) (142)
===== =====
During the third quarter of 2000, Liberty transferred its interest in
ICG Communications, Inc. ("ICG") to a related party for $485 million
which was equal to Liberty's carrying value of ICG. No gain or loss was
recognized due to the related party nature of such transaction. In
exchange for its interest in ICG, Liberty received a note receivable
from the related party, which bears interest at 8.5% and is due and
payable in 2010. Interest on the note receivable will be received
semi-annually beginning during the first quarter of 2006. The related
party repaid $9 million on the note during 2000.
The non-interest bearing intercompany account includes income tax
allocations that are to be settled at some future date. All other
amounts included in the intercompany account are generally repaid
within thirty days.
(9) Commitments and Contingencies
Starz Encore Group LLC ("Starz Encore Group"), a wholly owned
subsidiary of Liberty, provides premium programming distributed by
cable, direct-to-home satellite and other distribution media 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 2017 (the "Film Licensing Obligations"). Based on customer
levels at March 31, 2001, these agreements require minimum payments
aggregating approximately $1.2 billion. 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.
Liberty has guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain
affiliates. At March 31, 2001, the Guaranteed Obligations aggregated
approximately $461 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.
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.
I-18
21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
(10) 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 consolidated revenue and those equity
method affiliates whose share of earnings or losses represent 10% or
more of Liberty's 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 match the current period segment presentation.
For the three months ended March 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 the
domestic lodging industry and is majority-owned and consolidated by
Liberty. Telewest 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 Liberty's 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 along with other 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 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 and marketing strategies.
I-19
22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
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:
Starz
Encore Liberty On
Group Livewire Command Other Telewest (1) Eliminations Total
------- -------- ------- ------- ------------ ------------ -------
amounts in millions
Performance Measures:
Three months ended
March 31, 2001
Segment revenue $ 209 155 62 78 440 (440) 504
Segment operating cash
flow (deficit) 77 31 11 (14) 86 (86) 105
Three months ended
March 31, 2000
Segment revenue 176 -- -- 59 377 (377) 235
Segment operating cash
flow (deficit) 63 -- -- (2) 87 (87) 61
Balance Sheet Information:
As of March 31, 2001
Segment assets 2,829 1,245 446 49,875 10,504 (10,504) 54,395
Investments in
affiliates 147 -- -- 19,075 1,105 (1,105) 19,222
-----------------------
(1) Represents an equity method affiliate.
The following table provides a reconciliation of segment operating cash
flow to earnings before income taxes and minority interest:
Three months ended
March 31,
------------------
2001 2000
------- -------
amounts in millions
Segment operating cash flow $ 105 61
Stock compensation (63) 23
Depreciation and amortization (249) (167)
Interest expense (133) (439)
Segment equity in losses of affiliates (1,217) (311)
Gains on dispositions, net 810 2,441
Other, net (195) 83
------- -------
Earnings (loss) before income taxes and minority
interest $ (942) 1,691
======= =======
I-20
23
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Notes to Consolidated Financial Statements, continued
(11) Proposed Split Off Transaction
AT&T currently owns all the outstanding shares of Class A Common Stock,
Class B Common Stock and Class C Common Stock of Liberty. Subsequent to
December 31, 2000, AT&T initiated a process for effecting the split off
of Liberty from AT&T by means of a redemption of AT&T Liberty Media
Group tracking stock (the "Split Off Transaction"). Prior to the Split
Off Transaction, Liberty will increase its authorized capital stock,
and the Liberty Class A and Class B Common Stock will be reclassified
as Series A Liberty Media Corporation common stock ("Series A common
stock") and the Class C Common Stock will be reclassified as Series B
Liberty Media Corporation common stock ("Series B common stock"). In
the Split Off Transaction, each share of AT&T Class A and AT&T Class B
Liberty Media Group common stock will be exchanged for a like share of
Series A common stock and Series B common stock, respectively. Upon
completion of the Split Off Transaction, Liberty will no longer be a
subsidiary of AT&T and no shares of AT&T Liberty Media Group tracking
stock will remain outstanding. The Split Off Transaction will be
accounted for at historical cost. There can be no assurance that the
Split Off Transaction will be effected.
On May 7, 2001, AT&T contributed to Liberty assets that were attributed
to the Liberty Media Group but not previously held by Liberty (the
"Contributed Assets"). These assets include (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 LDIG. The
contributions will be accounted for in a manner similar to a pooling of
interests and, accordingly, the financial statements of Liberty for
periods prior to contributions will be restated to include the
financial position and results of operations of the Contributed Assets
once this transaction is completed.
In connection with the Split Off Transaction, Liberty will also be
deconsolidated from AT&T for federal income tax purposes. As a result,
AT&T will be 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, or is reasonably expected to be, utilized by AT&T. The payment
will be reduced by Liberty's obligation under the 1995 TCI Tax Sharing
Agreement. The expected net payment from AT&T is approximately $692
million. In addition, certain deferred intercompany gains will be
includible in taxable income as a result of the Split Off Transaction
and the resulting tax liability of approximately $122 million will be
an obligation of Liberty.
I-21
24
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The following discussion and analysis provides information concerning
our results of operations and financial condition. This discussion should be
read in conjunction with our accompanying consolidated financial statements and
the notes thereto.
AT&T's Liberty Media Group common stock is a tracking stock designed to
reflect the economic performance of the businesses and assets of AT&T attributed
to the "Liberty Media Group." Liberty is included in the Liberty Media Group,
and the businesses and assets of Liberty and its subsidiaries constitute
substantially all of the businesses and assets of the Liberty Media Group.
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 technology and
Internet businesses, as well as 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.
Liberty's most significant consolidated subsidiaries at March 31, 2001,
were Starz Encore Group LLC, Liberty Livewire Corporation and On Command
Corporation. These businesses are either wholly or majority owned and,
accordingly, the results of operations of these businesses are included in the
consolidated results of Liberty for the periods in which they were wholly or
majority owned.
A significant portion of Liberty's operations are conducted through
entities in which Liberty holds a 20%-50% ownership interest. These businesses
are generally accounted for using the equity method of accounting and,
accordingly, are not included in the consolidated results of Liberty except as
they affect Liberty's interest in earnings or losses of affiliates for the
period in which they were accounted for using the equity method. Included in
Liberty's investments in affiliates at March 31, 2001 were USA Networks, Inc.,
Discovery Communications, Inc., Gemstar-TV Guide International, Inc., QVC Inc.,
UnitedGlobalCom, Inc. and Telewest Communications plc.
Liberty holds interests in companies that are neither consolidated
subsidiaries nor affiliates accounted for using the equity method. The most
significant of these include AOL Time Warner, Sprint Corporation, News Corp. and
Motorola, Inc. which are classified as available-for-sale securities and are
carried at fair value. Realized gains and losses are determined on a
specific-identification basis.
AT&T currently owns all the outstanding shares of Class A Common Stock,
Class B Common Stock and Class C Common Stock of Liberty. Subsequent to December
31, 2000, AT&T initiated a process for effecting our split off from AT&T by
means of a redemption of AT&T Liberty Media Group tracking stock . Prior to the
Split Off Transaction, Liberty will increase its authorized capital stock, and
the Liberty Class A and Class B Common Stock will be reclassified as Series A
Liberty Media Corporation common stock and the Class C Common Stock will be
reclassified as Series B Liberty Media Corporation common stock. In the Split
Off Transaction, each share of Class A and Class B Liberty Media Group tracking
stock will be exchanged for a like share of Series A common stock and Series B
common stock, respectively. Upon completion of the Split Off Transaction,
Liberty will no longer be a subsidiary of AT&T, and no shares of AT&T Liberty
Media Group tracking stock will be outstanding. The Split Off Transaction will
be accounted for at historical cost. There can be no assurance that the split
off will be effected.
On May 7, 2001, AT&T contributed to Liberty assets attributed to the
Liberty Media Group but not previously held by Liberty . These assets include
(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. The
contributions, which will represent only a portion of our assets after the Split
Off Transaction, will be accounted for in a manner similar to a pooling of
interests and, accordingly, the financial statements of Liberty for periods
prior to contributions will be restated to include the financial position and
results of operations of the Contributed Assets upon completion of the Split Off
Transaction.
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SUMMARY OF OPERATIONS
Starz Encore Group provides premium programming distributed by cable,
direct-to-home satellite and other distribution media throughout the United
States. 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. On Command provides in-room on-demand video
entertainment and information services to the domestic lodging industry. Due to
the significance of their operations and to enhance the reader's understanding,
separate financial data has been provided below for Starz Encore Group, Liberty
Livewire and On Command for the periods in which they were consolidated.
Included in the other category are Liberty's other consolidated subsidiaries and
corporate expenses. Some of Liberty's significant other consolidated
subsidiaries include Liberty Digital, Inc., Pramer S.C.A. and Liberty
Cablevision of Puerto Rico. Liberty Digital is principally engaged in
programming, distributing and marketing digital and analog music services to
homes and businesses. Pramer is an owner and distributor of cable programming
services in Argentina. Liberty Cablevision of Puerto Rico is a provider of cable
television services in Puerto Rico. Liberty holds significant equity
investments, the results of which are not a component of operating income, but
are discussed below under "Investments in Affiliates Accounted for Using the
Equity Method." Other items of significance are discussed separately below.
Quarter Quarter
ended ended
March 31, % of March 31, % of
2001 revenue 2000 revenue
--------- ------- --------- -------
dollar amounts in millions
Starz Encore Group
Revenue $ 209 100% $ 176 100%
Operating, selling, general and
administrative 132 63 113 64
Stock compensation 2 1 -- --
Depreciation and amortization 39 19 41 23
----- ----- ----- -----
Operating income $ 36 17% $ 22 13%
===== ===== ===== =====
Liberty Livewire
Revenue $ 155 100% $ -- --
Operating, selling, general and
administrative 124 80 -- --
Stock compensation 5 3 -- --
Depreciation and amortization 35 23 -- --
----- ----- ----- -----
Operating loss $ (9) (6)% $ -- --
===== ===== ===== =====
On Command
Revenue $ 62 100% $ -- --
Operating, selling, general and
administrative 51 82 -- --
Depreciation and amortization 21 34 -- --
----- ----- ----- -----
Operating loss $ (10) (16)% $ -- --
===== ===== ===== =====
Other
Revenue $ 78 (a) $ 59 (a)
Operating, selling, general and
administrative 92 61
Stock compensation 56 (23)
Depreciation and amortization 154 126
----- -----
Operating loss $(224) $(105)
===== =====
------------------
(a) Not meaningful.
Certain of the Company's consolidated subsidiaries and equity
affiliates (the "Programming Affiliates") are dependent on the entertainment
industry for entertainment, educational and informational programming. A
prolonged downturn in the economy could have a negative impact on the revenue
and operating income of the Programming Affiliates. Such an event could reduce
the development of new television and motion picture programming, thereby
adversely impacting the Programming Affiliates'
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supply of service offerings. In addition, a soft economy could reduce consumer
disposable income and consumer demand for the products and services of the
Programming Affiliates.
CONSOLIDATED SUBSIDIARIES
Starz Encore Group. The majority of Starz Encore Group's revenue is
derived from the delivery of movies to subscribers under affiliation agreements
between Starz Encore Group and cable operators and satellite direct-to-home
distributors. Starz Encore Group entered into a 25-year affiliation agreement in
1997 with Tele-Communications, Inc. ("TCI"). TCI cable systems were subsequently
acquired by AT&T in the AT&T merger and operate under the name AT&T Broadband.
Under this affiliation agreement with 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, in certain instances, if AT&T acquires or disposes of cable systems or
if Starz Encore Group's programming costs increase above certain specified
levels. As a result of AT&T's acquisition of MediaOne Group, Inc. on June 15,
2000, the contracted payment amount increased by approximately 20%. After
adjusting for the elimination of the former MediaOne contract, the net payment
amount from the combined AT&T companies increased by approximately 10%. Starz
Encore Group's other affiliation agreements generally provide for payments based
on the number of subscribers that receive Starz Encore Group's services.
Revenue increased to $209 million for the three months ended March 31,
2001 from $176 million for the corresponding quarter of 2000, primarily due to
increases in subscription units from all forms of distribution. These increases
are due to subscription unit increases of 68% for Encore and its Thematic
Multiplex, and 17% for STARZ!, as compared to the same period in 2000.
Operating expenses increased 17% for the three months ended March 31,
2001, as compared to the corresponding period in 2000. Such increase is
primarily due to an increase in programming expense partially offset by reduced
affiliate marketing support and national branding expense.
Liberty expects Starz Encore Group to generate an operating loss during
2001 due to continued stock compensation and depreciation and amortization
expenses. It is expected that this operating loss will decrease compared to 2000
due to improved earnings before interest, taxes, depreciation and amortization.
Liberty Livewire. On April 10, 2000, Liberty acquired all of the
outstanding common stock of Four Media Company in exchange for AT&T Class A
Liberty Media Group common stock and cash. On June 9, 2000, Liberty acquired a
controlling interest in The Todd-AO Corporation in exchange for AT&T Class A
Liberty Media Group common stock. Immediately following the closing of such
transaction, Liberty contributed 100% of the capital stock of Four Media Company
to Todd-AO in exchange for additional Todd-AO common stock. Following these
transactions, 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 and contributed such
assets to Liberty Livewire for additional Liberty Livewire stock. Immediately
following the contributions, Liberty owned approximately 88% of the equity and
controls approximately 99% of the voting power of Liberty Livewire, and as a
result, began to consolidate the operations of Liberty Livewire during the
quarter ended June 30, 2000. Liberty Livewire is dependent on the television and
movie production industries for a substantial portion of its revenue. A strike
by certain entertainment guilds could have a significant negative impact on
Liberty Livewire's revenue during the periods affected by such strike.
On Command. On March 28, 2000, Liberty completed its cash tender offer
for the outstanding common stock of Ascent. Approximately 85% of the outstanding
shares of common stock of Ascent were tendered in the offer. On June 28, 2000,
Liberty acquired the remaining 15% of Ascent. On Command is a majority owned
subsidiary of Ascent. On Command's principal business is providing pay-per-view
entertainment and information services to the domestic lodging industry. Upon
completion of the tender offer, Liberty consolidated the operations of On
Command. Liberty expects On Command to generate an operating loss in 2001.
Other. Included in this information are the results of Liberty's other
consolidated subsidiaries and corporate expenses.
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Revenue increased 32% to $78 million for the three months ended March
31, 2001, as compared to $59 million for the corresponding period in 2000. Such
increase is due to revenue growth at LDIG, as well as revenue from Ascent
Network Services, Inc., which was acquired in March 2000, as part of the Ascent
transaction.
Operating, selling, general and administrative expenses increased 51%
to $92 million for the three months ended March 31, 2001 compared to $61 million
for the same period in 2000. Included in the $92 million for 2001 is $11 million
of expenses related to the Split Off Transaction. In addition, the increase in
expenses for the three months ended March 31, 2001 is due to (i) start up
expenses of True Position, Inc. which was acquired on January 14, 2000, (ii)
increases in expenses of LDIG and (iii) expenses related to Ascent Network
Services.
Depreciation and amortization for the three months ended March 31, 2001
increased 22%, as compared to the corresponding period in 2000. Such increase is
due to amortization of intangibles recorded in connection with the acquisition
of Ascent.
The amount of expense associated with stock compensation is generally
based on the vesting of the related stock options and stock appreciation rights
and the market price of the underlying common stock. The expense reflected in
the table is based on the market price of the underlying common stock as of the
date of the financial statements and is subject to future adjustment based on
market price fluctuations and, ultimately, on the final determination of market
value when the rights are exercised.
Other Income and Expense. Interest expense for the three months ended
March 31, 2001 and March 31, 2000 was $133 million and $439 million,
respectively. 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 Sprint PCS Group Stock. Increases or decreases in the value of the
underlying Sprint PCS Group Stock above the principal amount of the senior
exchangeable debentures were recorded as an adjustment to interest expense in
the consolidated statements of operations and comprehensive earnings. Interest
expense for the three months ended March 31, 2000 included $364 million
associated with increases in the value of Sprint PCS Group Stock. Excluding such
effect, interest expense increased from $75 million to $133 million due to
increased borrowings during 2000 and the first quarter of 2001.
Dividend and interest income for the three months ended March 31, 2001
and 2000 was $57 million and $79 million, respectively. The decrease in dividend
and interest income during the three months ended March 31, 2001 is primarily
attributed to the use of Liberty's cash balance in investing activities,
combined with the elimination of $5 million in dividend income due to the merger
of AOL and Time Warner.
During the three months ended March 31, 2001, Liberty determined that
certain of its other investments experienced other-than-temporary declines in
value. As a result, the carrying amounts of such investments were adjusted to
their respective fair values at March 31, 2001. These adjustments, which
included a $127 million adjustment to Liberty's investment in Antec Corporation,
resulted in a total charge of $304 million, before deducting a deferred tax
benefit of $120 million.
Aggregate gains from dispositions during the three month periods ended
March 31, 2001 and 2000 were $810 million and $2,441 million, respectively.
Included in gains from dispositions in 2001 are $570 million related to the
merger of Viacom and BET, and $253 million related to the merger of AOL and Time
Warner. Included in the 2000 gains from dispositions is $2.2 billion related to
the acquisition of General Instruments by Motorola. See note 5 to the
accompanying consolidated financial statements for a discussion of the foregoing
transactions.
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INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Liberty's share of losses of affiliates for the three months ended
March 31, 2001 and 2000 was $1,217 million and $311 million, respectively. A
summary of Liberty's share of earnings (losses) of affiliates is presented
below:
Three months ended
March 31,
Percentage -----------------------
Ownership 2001 2000
---------- ------- -------
amounts in millions
Gemstar 21% $ (897) --
Discovery 49% (65) (63)
Telewest 25% (131) (87)
USAI and related investments 21% (13) (7)
QVC 42% 2 (1)
UGC 11% (45) (50)
Other Various (68) (103)
------- -------
$(1,217) (311)
======= =======
At March 31, 2001, the aggregate carrying amount of Liberty's
investments in its affiliates exceeded Liberty's proportionate share of its
affiliates' net assets by $14 billion. Such excess is being amortized over
estimated useful lives ranging from 2 to 20 years. Amortization aggregating $281
million and $167 million for the three months ended March 31, 2001 and 2000,
respectively, is included in share of losses of affiliates. Liberty expects to
continue to record share of losses in its affiliates for the foreseeable future
principally due to the significant levels of excess basis amortization that is
included in each affiliate's share of losses.
Gemstar. Liberty's share of Gemstar's net loss was $897 million for the
three months ended March 31, 2001 including excess basis amortization of $109
million. On July 12, 2000, TV Guide and Gemstar completed a merger whereby
Gemstar acquired TV Guide. As a result of this transaction, 133 million shares
of TV Guide held by Liberty were exchanged for 87.5 million shares of Gemstar
common stock. At March 31,2001, Liberty owned approximately 21% of Gemstar.
On May 2, 2001, Liberty entered into a transaction with News Corp. to
exchange 70.7 million shares of Gemstar held by Liberty for 121.5 million News
Corp. American Depository Shares representing preferred, limited voting,
ordinary shares of News Corp. The fair value of the securities received by
Liberty is less than the expected carrying value of the Gemstar shares on the
date of the Exchange Transaction. As a result of the inherent loss on the
Exchange Transaction, Liberty recognized an other-than-temporary decline in
value adjustment on all of its Gemstar interests in the first quarter of 2001.
Such adjustment ($764 million) is included in share of losses of Gemstar.
Telewest. Liberty's share of Telewest's net loss increased to $131
million for the three months ended March 31, 2001 from $87 million for the three
months ended March 31, 2000, including excess basis amortization of $50 million
and $22 million for 2001 and 2000, respectively. Liberty's share of Telewest's
net loss increased due to the increase in excess basis amortization combined
with an $46 million increase in Telewest's net loss. Telewest's net loss
increased due to increased interest expense and increased depreciation and
amortization expense resulting from acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
Liberty's sources of funds include its available cash balances, net
cash from operating activities, dividend and interest receipts, proceeds from
asset sales and proceeds from financing activities. Liberty is generally not
entitled to the cash resources or cash generated by operations of its
subsidiaries and business affiliates. Liberty is primarily dependent upon its
financing activities to generate sufficient cash resources to meet its future
cash requirements and planned commitments.
Upon consummation of the AT&T merger, through a new tax sharing
agreement between Liberty and AT&T, Liberty became entitled to the benefit of
all of the net operating loss carryforwards available to
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the entities included in TCI's consolidated income tax return as of the date of
the AT&T merger. In addition, under the tax sharing agreement, Liberty will
receive a cash payment from AT&T in periods when Liberty generates taxable
losses and those taxable losses are utilized by AT&T to reduce the consolidated
income tax liability.
In connection with the Split Off Transaction, Liberty will also be
deconsolidated from AT&T for federal income tax purposes. As a result, AT&T will
be 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 tax
sharing agreement and that has been, or is reasonably expected to be, utilized
by AT&T. The payment will be reduced by Liberty's obligation under the 1995 TCI
Tax Sharing Agreement. The expected net payment from AT&T is approximately $692
million. In addition, certain deferred intercompany gains will be includible in
taxable income as a result of the Split Off Transaction and the resulting tax
liability of approximately $122 million will be an obligation of Liberty.
At March 31, 2001, Liberty owns 81.7 million ADSs of News Corp. and
62.6 million shares of Motorola common stock. Liberty receives dividends on its
ownership interests in these entities periodically. There can be no assurance
that such dividends will continue to be paid.
Liberty owns shares of Fox Kids Worldwide preferred stock which pays
quarterly dividends at the annual rate of 9% of the liquidation value of $1,000
per share. Cash dividends received by Liberty aggregate $8 million per quarter.
If Fox Kids Worldwide does not declare or pay a quarterly dividend, that
dividend will be added to the liquidation value and the dividend rate will
increase to 11.5% per annum until all accrued and unpaid dividends are paid.
News Corp. has undertaken to fund all amounts needed by Fox Kids Worldwide to
pay any amounts it is required to pay under the certificate of designations for
the Fox Kids Worldwide preferred stock, including payment of the liquidation
value of that stock upon any optional or mandatory redemption of that stock.
At March 31, 2001, Liberty and its consolidated subsidiaries had bank
credit facilities which provided for borrowings of up to $2,166 million.
Borrowings under these facilities of $1,967 million were outstanding at March
31, 2001. Certain assets of Liberty's consolidated subsidiaries serve as
collateral for borrowings under these bank credit facilities. Also, these bank
credit facilities contain provisions which limit additional indebtedness, sale
of assets, liens, guarantees, and distributions by the borrowers.
On January 7, 2000, a trust, which holds Liberty's investment in
Sprint, entered into agreements to loan 18 million shares of Sprint PCS Group
stock to a third party, as Agent. The obligation to return those shares is
secured by cash collateral equal to 100% of the market value of that stock,
which was $315 million at March 31, 2001. During the period of the loan, which
is terminable by either party at any time, the cash collateral is to be
marked-to-market daily. The trust, for the benefit of Liberty, has the use of
80% of the cash collateral plus any interest earned thereon during the term of
the loan, and is required to pay a rebate fee equal to the Federal funds rate
less 30 basis points to the borrower of the loaned shares. Interest earned on
the cash collateral aggregated $23 million as of March 31, 2001, and Liberty had
utilized $256 million of the cash collateral and interest income as of such
date. Unutilized cash collateral of $59 million at March 31, 2001, which
represents restricted cash, is included in other current assets in the
consolidated balance sheets.
In January 2001, Liberty received net cash proceeds of $588 million
(after underwriter fees of $12 million) from the issuance of its 3-1/2% senior
exchangeable debentures due 2031. These debentures are exchangeable, at the
option of the holder, for the value of 36.8189 shares of Motorola stock. Liberty
may pay such value in cash, with a number of shares of Motorola stock or a
combination of cash and stock, as determined in the debentures.
In March 2001, Liberty received net cash proceeds of $801 million
(after underwriter fees of $17 million) from the issuance of its 3-1/4% senior
exchangeable debentures due 2031. These debentures are exchangeable, at the
option of the holder, for the value of 18.5666 shares of Viacom. Liberty may pay
such value in cash, with a number of shares of Viacom stock or a combination of
cash and stock, as determined in the debentures.
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Based on currently available information and expected future
transactions, Liberty expects to receive approximately $223 million in dividend
and interest income during the year ended December 31, 2001. Based on current
debt levels and current interest rates, Liberty expects to make interest
payments of approximately $465 million during the year ended December 31, 2001.
For so long as Liberty is a subsidiary of AT&T, there are restrictions
on incurrence of debt of Liberty under an Inter-Group Agreement with AT&T.
Liberty may not incur any debt that would cause the total indebtedness of
Liberty at any time to be in excess of 25% ($9.5 billion at March 31, 2001) of
the total market capitalization of the AT&T Liberty Media Group tracking stock,
if the excess would adversely affect the credit rating of AT&T.
Various partnerships and other affiliates of Liberty accounted for
under the equity method finance a substantial portion of their acquisitions and
capital expenditures through borrowings under their own credit facilities and
net cash provided by their operating activities.
Pursuant to a proposed final judgment agreed to by TCI, AT&T and the
United States Department of Justice on December 30, 1998, Liberty transferred
all of its beneficially owned securities of Sprint PCS to a trustee prior to the
AT&T merger. The Final Judgment, which was entered by the United States District
Court for 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 held by
the trust 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.
Liberty has guaranteed notes payable and other obligations of certain
affiliates. At March 31, 2001, the U.S. dollar equivalent of the amounts
borrowed pursuant to these guaranteed obligations aggregated approximately $461
million.
Liberty intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of March 31, 2001, Starz Encore
Group's future minimum obligation related to certain film licensing agreements
was $1.2 billion. The amount of the total obligation 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.
Continued development may require additional financing, and it cannot be
predicted whether Starz Encore Group will obtain such financing. If additional
financing cannot be obtained by Starz Encore Group, Starz Encore Group or
Liberty could attempt to sell assets but there can be no assurance that asset
sales, if any, can be consummated at a price and on terms acceptable to Liberty.
On February 23, 2001, Liberty announced that a partnership organized by
Liberty and Klesch & Company Limited, a London-based private equity firm, had
entered into a letter of intent to purchase certain broadband cable assets of
Deutsche Telekom AG in Germany. If consummated as currently contemplated, the
partnership will acquire 55% of the outstanding equity interests in six regional
operating companies of Deutsche Telekom, together with an option for an
additional 20% of such equity interests. The partnership also intends to acquire
certain other assets. Although no assurance can be given that the contemplated
transactions will be consummated, Liberty anticipates that any closing would
occur in the second or third quarter of 2001 and such closing could have a
significant impact on Liberty's capital resources.
Effective June 26, 2000, Liberty entered into an agreement with
UnitedGlobalCom, Inc. and a majority-owned subsidiary of UGC, United Pan-Europe
Communications, N.V. ("UPC"), pursuant to which UGC would acquire from Liberty
interests in various international broadband distribution and programming
assets. On February 23, 2001, Liberty and UGC announced a revision to the
original transaction. Pursuant to the transaction as revised, Liberty would
acquire up to 100,000 shares of a newly issued series of convertible preferred
stock of UGC in exchange for $1.4 billion in cash. Liberty would purchase $400
million of the $1.4 billion of the convertible preferred stock concurrently with
UGC's acquisition of certain of Liberty's Latin American assets, principally
consisting of Liberty's interests in Cablevision S.A., Pramer S.C.A. and Torneos
y Competencias. If UGC acquired all of the Latin American and certain other
assets proposed to be transferred, Liberty would receive approximately 20.1
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million additional shares of UGC's common stock or a number of shares of a
series of UGC's preferred stock convertible therefor. Although no assurance can
be given that the contemplated transactions will be consummated, Liberty
anticipates that any closing would occur during 2001 and such closing could have
a significant impact on Liberty's capital resources.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash used in operating activities for the three months ended March 31,
2001 and 2000 was $360 million and $163 million, respectively, including
payments related to stock appreciation rights of $202 million and $183 million,
respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities was $643 million and $975 million for
the three months ended March 31, 2001 and 2000, respectively. Liberty uses cash
to make contributions and investments in entities in which Liberty holds a 50%
or less ownership interest. Cash flows from investing activities included cash
used for investments in and loans to affiliates amounting to $310 million and
$808 million during the three months ended March 31, 2001 and 2000,
respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
Liberty is primarily dependent on financing activities to generate
sufficient cash resources to meet its cash requirements. Financing cash flows
consist primarily of borrowings and repayments of debt. Liberty had borrowings
of $2,457 million and $2,410 million and repayments of $662 million and $772
million during the three months ended March 31, 2001 and 2000, respectively.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Liberty is exposed to market risk in the normal course of business due
to its investments in different foreign countries and ongoing investing and
financial activities. Market risk refers to the risk of loss arising from
adverse changes in foreign currency exchange rates, interest rates and stock
prices. The risk of loss can be assessed from the perspective of adverse changes
in fair values, cash flows and future earnings. Liberty has established
policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.
Contributions to Liberty's foreign affiliates are denominated in
foreign currency. Liberty therefore is exposed to changes in foreign currency
exchange rates. Liberty does not hedge the majority of its foreign currency
exchange risk because of the long-term nature of its interests in foreign
affiliates. However, during the three months ended March 31, 2001, Liberty
entered into forward purchase contracts with respect to 900 million Euros in
connection with certain foreign currency denominated transactions which are
expected to be completed in the third quarter of 2001. Liberty recorded $12
million in unrealized losses related to these contracts in the first quarter of
2001. If the price of the Euro been 10% lower at March 31, 2001, Liberty would
have recorded an additional unrealized loss on financial instruments, net of
taxes, of $48 million. Liberty continually evaluates its foreign currency
exposure based on current market conditions and the business environment in each
country in which it operates.
Liberty is exposed to changes in interest rates primarily as a result
of its borrowing and investment activities, which include fixed and floating
rate investments and borrowings used to maintain liquidity and to fund its
business operations. The nature and amount of Liberty's long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. Liberty manages its exposure to interest rates primarily
through the issuance of fixed rate debt that Liberty believes has a low stated
interest rate and significant term to maturity. Liberty believes this best
protects the Company from interest rate risk. As of March 31, 2001, 61% of
Liberty's debt was composed of fixed rate debt with a weighted average interest
rate of 5.9%. The Company's variable rate debt had a weighted average interest
rate of 6.4% at March 31, 2001. Had market interest rates been 100 basis points
higher (representing an approximate 16% increase over Liberty's effective cost
of borrowing) throughout the three months ended March 31, 2001 and 2000, Liberty
would have recorded approximately $6 million and $2 million of additional
interest expense, respectively. At March 31, 2001, the aggregate fair value of
Liberty's notes and debentures was $3.5 billion, compared to a book value of
$3.3 billion. Had the price of the securities underlying the call option
obligations associated with the senior exchangeable debentures been 10% higher
during the three months ended March 31, 2001, Liberty would have recorded an
additional unrealized loss on financial instruments, net of taxes, of $98
million.
Liberty is exposed to changes in stock prices primarily as a result of
its significant holdings in publicly traded securities. Liberty continually
monitors changes in stock markets, in general, and changes in the stock prices
of its significant holdings, specifically. Changes in stock prices can be
expected to vary as a result of general market conditions, technological
changes, specific industry changes and other factors. Equity collars and put
spread collars have been used to hedge certain investment positions subject to
fluctuations in stock prices.
In order to illustrate the effect of changes in stock prices on
Liberty's balance sheet and statement of operations, we provide the following
sensitivity analysis. Had the stock price of Liberty's investments accounted for
as available-for-sale securities been 10% lower at March 31, 2001, and December
31, 2000, the value of such securities would have been lower, including
consideration of our equity collars, by $2 billion and $1.7 billion,
respectively. Our unrealized gains, net of taxes would have also been lower by
$1.2 billion and $1.0 billion, respectively. Had the stock price of our publicly
traded investments accounted for using the equity method been 10% lower at March
31, 2001 and December 31, 2000, there would have been no impact on the carrying
value of such investments. Liberty's cash collateral account and debt balance
under the securities lending agreement would be reduced by $32 million if the
underlying shares of the Sprint PCS Group decreased in value by 10%.
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Liberty measures the market risk of its derivative financial
instruments through comparison of the blended rates achieved by those derivative
financial instruments to the historical trends in the underlying market risk
hedged. With regard to interest rate swaps, Liberty monitors the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. Liberty believes
that any losses incurred with regard to interest rate swaps would be offset by
the effects of interest rate movements on the underlying hedged facilities. With
regard to equity collars, Liberty monitors historical market trends relative to
values currently present in the market. Liberty believes that any unrealized
losses incurred with regard to equity collars and swaps would be offset by the
effects of fair value changes on the underlying assets. These measures allow
Liberty's management to measure the success of its use of derivative instruments
and to determine when to enter into or exit from derivative instruments.
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