AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 6, 2003
REGISTRATION NO. 333-108828
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
LIBERTY MEDIA CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 4841 84-1288730
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(720) 875-5400
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
ELIZABETH M. MARKOWSKI, ESQ.
LIBERTY MEDIA CORPORATION
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(720) 875-5400
(Name, address, including zip code and telephone number,
including area code, of agent for service)
------------------------------
Copies to:
STEVEN D. MILLER, ESQ. THOMAS H. MCCORMICK, ESQ.
SHERMAN & HOWARD L.L.C. SHAW PITTMAN LLP
633 SEVENTEENTH STREET, SUITE 3000 2300 N STREET, NW
DENVER, COLORADO 80202 WASHINGTON, DC 20037
(303) 297-2900 (202) 663-8000
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this registration statement and upon the
effective time of the merger described in the proxy statement/prospectus forming
a part of this registration statement.
------------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the
"Securities Act"), check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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[GRAPHIC]
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
Dear Liberty Satellite & Technology, Inc. Stockholder:
The Liberty Satellite board of directors and a special committee of the
board have unanimously approved a merger agreement pursuant to which Liberty
Media Corporation would acquire all of the publicly held shares of Liberty
Satellite common stock that it does not already beneficially own. Liberty Media
is currently the beneficial owner of approximately 87% of Liberty Satellite's
outstanding common stock.
You are cordially invited to attend a special meeting of stockholders of
Liberty Satellite on November 12, 2003, commencing at 9:00 a.m. local time at
The Inverness Hotel and Golf Club, 200 Inverness Drive West, Englewood,
Colorado 80112, at which time we will ask you to adopt the merger agreement and
approve the merger pursuant to which Liberty Media would acquire the remaining
publicly held common stock of Liberty Satellite. If the merger is completed, you
will have the right to receive 0.2750 of a share of Liberty Media Series A
common stock in exchange for each share of Liberty Satellite Series A or
Series B common stock that you own unless you validly exercise your appraisal
rights. The merger exchange ratio has been fixed and will not be adjusted for
changes in the price of Liberty Media's or Liberty Satellite's common stock. A
copy of the merger agreement is included as ANNEX I to this proxy statement/
prospectus and should be read in its entirety.
Liberty Media's Series A common stock is listed on the New York Stock
Exchange under the trading symbol "L." Liberty Satellite's Series A and
Series B common stock are eligible for quotation on the OTC Bulletin Board under
the symbols "LSTTA" and "LSTTB," respectively. On October 3, 2003, the last
reported sale price for Liberty Media Series A common stock was $10.51, the last
reported bid price for Liberty Satellite Series A common stock was $2.73, and
the last reported bid price for Liberty Satellite Series B common stock was
$8.00.
The affirmative vote of the holders of a majority in voting power of the
outstanding equity securities of Liberty Satellite (which includes Series A and
Series B common stock and Series B preferred stock, voting together as a single
class) is required to adopt the merger agreement and approve the merger. In
connection with the merger agreement, Liberty Media has agreed with Liberty
Satellite to vote its shares for the adoption of the merger agreement and
approval of the merger, in which case the merger agreement and the merger will
be approved at the special meeting.
This proxy statement/prospectus is also Liberty Media's prospectus for the
shares of Liberty Media Series A common stock that would be issued to Liberty
Satellite stockholders in the merger. PLEASE CAREFULLY CONSIDER ALL OF THE
INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS REGARDING LIBERTY
SATELLITE, LIBERTY MEDIA AND THE MERGER, INCLUDING IN PARTICULAR THE DISCUSSION
IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 18.
Whether or not you are personally able to attend the meeting, please
complete, sign and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action will not limit your right to
vote in person if you wish to attend the meeting and vote personally. You may
revoke your proxy in the manner described in this proxy statement/prospectus at
any time before it is voted at the special meeting.
Sincerely yours,
/s/ Kenneth G. Carroll
Kenneth G. Carroll,
PRESIDENT
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT/PROSPECTUS OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated October 7, 2003, and is first being
mailed to Liberty Satellite stockholders on or about October 9, 2003.
[GRAPHIC]
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON NOVEMBER 12, 2003
------------------------
To the Stockholders of Liberty Satellite & Technology, Inc.:
Notice is hereby given that a special meeting of stockholders of Liberty
Satellite & Technology, Inc., a Delaware corporation, will be held at The
Inverness Hotel and Golf Club, 200 Inverness Drive West, Englewood,
Colorado 80112, on November 12, 2003, at 9:00 a.m. local time, for the following
purposes:
1. To consider and vote upon a proposal to adopt a merger agreement
dated as of August 26, 2003, among Liberty Satellite, Liberty Media
Corporation, a Delaware corporation, and Liberty Satellite Acquisition Co.,
a Delaware corporation, in the form of ANNEX I to the proxy
statement/prospectus, and to approve the merger contemplated thereby
pursuant to which Liberty Media would acquire all of the publicly held
common stock of Liberty Satellite that it does not already beneficially own.
2. To transact such other business as may properly come before the
meeting.
The foregoing items of business are more completely described in the proxy
statement/prospectus accompanying this notice.
The Liberty Satellite board of directors has fixed the close of business on
October 1, 2003 as the record date for the determination of stockholders
entitled to notice of, and to vote at, the special meeting. Only holders of
record of Liberty Satellite Series A or Series B common stock and Series B
preferred stock as of the close of business on such date are entitled to notice
of, and to vote at, the special meeting. A list of Liberty Satellite
stockholders entitled to vote at the special meeting will be available for
examination by any Liberty Satellite stockholder at the special meeting and, for
a period of ten business days prior to the date of the special meeting, during
ordinary business hours, at Liberty Satellite's corporate offices at 12300
Liberty Boulevard, Englewood, Colorado 80112.
Whether or not you are personally able to attend the meeting, please
complete, sign and date the enclosed proxy card and return it in the enclosed
prepaid envelope as soon as possible. This action will not limit your right to
vote in person if you wish to attend the special meeting and vote personally.
You may revoke your proxy in the manner described in the proxy
statement/prospectus at any time before it is voted at the special meeting.
By Order of the Board of Directors,
/s/ Pamela J. Strauss
Pamela J. Strauss
SECRETARY
Englewood, Colorado
October 9, 2003
DO NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD. THE PROCEDURE
FOR THE EXCHANGE OF YOUR SHARES AFTER THE MERGER IS CONSUMMATED IS SET FORTH IN
THE PROXY STATEMENT/PROSPECTUS.
REFERENCE TO ADDITIONAL INFORMATION
This proxy statement/prospectus "incorporates by reference" important
business and financial information about Liberty Media and Liberty Satellite
from documents that are not included in or delivered with this proxy
statement/prospectus. You may obtain documents incorporated by reference in this
proxy statement/prospectus without charge by requesting them in writing or by
telephone from Liberty Media or from Liberty Satellite at the following address:
Investor Relations Investor Relations
Liberty Media Corporation Liberty Satellite & Technology, Inc.
12300 Liberty Boulevard 12300 Liberty Boulevard
Englewood, Colorado 80112 Englewood, Colorado 80237
Telephone: (877) 772-1518 Telephone: (720) 875-6861
TO OBTAIN TIMELY DELIVERY OF REQUESTED DOCUMENTS PRIOR TO THE SPECIAL
STOCKHOLDERS' MEETING, YOU MUST REQUEST THE INCORPORATED INFORMATION NO LATER
THAN NOVEMBER 4, 2003, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE MEETING. For a
more detailed description of the information incorporated by reference into this
proxy statement/prospectus and how you may obtain it, see the section entitled
"Where You Can Find More Information" on page 15.
A copy of Liberty Satellite's Annual Report on Form 10-K for the year ended
December 31, 2002 and a copy of Liberty Satellite's Form 10-Q/A for the six
months ended June 30, 2003, each as filed with the Securities and Exchange
Commission, accompany this proxy statement/prospectus as ANNEX II.
TABLE OF CONTENTS
PAGE
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QUESTIONS AND ANSWERS ABOUT THE MERGER...................... 1
SUMMARY OF THIS PROXY STATEMENT/PROSPECTUS.................. 4
The Companies............................................. 4
The Special Meeting....................................... 4
The Merger................................................ 5
Interests of Directors and Officers....................... 8
Material U.S. Federal Income Tax Consequences............. 8
Appraisal Rights of Dissenting Stockholders............... 8
Accounting Treatment...................................... 8
Certain Restrictions on Resale of Liberty Media Series A
Common Stock............................................ 8
Differences Between Your Rights as a Liberty Satellite
Stockholder and as a Liberty Media Stockholder.......... 9
Exchange of Stock Certificates............................ 9
Listing of Liberty Media Series A Common Stock............ 9
SELECTED SUMMARY FINANCIAL INFORMATION...................... 10
Liberty Media............................................. 10
Liberty Satellite......................................... 11
Unaudited Comparative Per Share Data...................... 12
Comparative Per Share Market Price and Dividend
Information............................................. 13
WHERE YOU CAN FIND MORE INFORMATION......................... 15
Liberty Media............................................. 15
Liberty Satellite......................................... 16
RISK FACTORS................................................ 18
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS... 24
THE COMPANIES INVOLVED IN THE MERGER........................ 25
Liberty Media............................................. 25
Liberty Satellite......................................... 25
THE SPECIAL MEETING......................................... 29
General................................................... 29
Proxies................................................... 29
Record Date; Stockholders Entitled to Vote................ 30
Quorum; Voting Rights and Vote Required................... 30
Expenses; Solicitation of Proxies......................... 31
Voting of Shares held by Brokerage Firm or Other
Nominee................................................. 31
THE MERGER.................................................. 32
General................................................... 32
Background of the Merger.................................. 32
Purpose for the Merger; Recommendation of the Special
Committee and the Liberty Satellite Board of Directors;
Fairness of the Offer and the Merger.................... 39
Opinion of the Financial Advisor to the Special
Committee............................................... 43
Interests of Directors and Officers....................... 51
Accounting Treatment...................................... 52
Material U.S. Federal Income Tax Consequences............. 52
Deregistration of Liberty Satellite Common Stock after the
Merger.................................................. 53
On Command Merger......................................... 53
Certain Litigation........................................ 54
THE MERGER AGREEMENT........................................ 55
i
PAGE
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General Structure; Effective Time......................... 55
Consideration to be Received in the Merger................ 55
Regulatory Approvals; Conditions to the Merger............ 57
Covenants................................................. 59
Indemnification........................................... 60
Listing of Liberty Media Series A Common Stock............ 60
Termination, Amendment and Waiver......................... 61
Certain Restrictions on Resale of Liberty Media Series A
Common Stock by Affiliates of Liberty Satellite and
Liberty Media........................................... 62
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS................. 63
COMPARISON OF STOCKHOLDER RIGHTS............................ 66
Common Stock.............................................. 66
Preferred Stock........................................... 66
Conversion................................................ 66
Voting Rights............................................. 66
Liquidation and Dissolution............................... 67
Classified Board of Directors............................. 67
Number of Directors....................................... 67
Stockholder Action by Written Consent; Special Meetings... 67
Removal of Directors...................................... 68
Actions Requiring Supermajority Vote...................... 68
CERTAIN RELATED PARTY TRANSACTIONS.......................... 69
EXPERTS..................................................... 69
LEGAL MATTERS............................................... 69
ANNEXES:
Annex I -- Merger Agreement
Annex II -- Liberty Satellite Annual and Quarterly Reports
Annex III -- Delaware Appraisal Rights Statute
Annex IV -- Opinion of Morgan Stanley & Co. Incorporated
ii
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE TRANSACTION? (PAGE 32)
A: The transaction is a merger of Liberty Satellite Acquisition Co., a newly
formed controlled subsidiary of Liberty Media, with and into Liberty
Satellite, with Liberty Satellite as the surviving corporation in the
merger. As a result of the merger, Liberty Media will acquire all of the
publicly held common stock of Liberty Satellite that it does not already
beneficially own. Currently, Liberty Media is the beneficial owner of
approximately 87% of Liberty Satellite's outstanding common stock and
approximately 98% of the voting power associated with Liberty Satellite's
equity securities.
Unless the context clearly indicates otherwise, all references in this proxy
statement/prospectus to the "merger" refer to the merger of Liberty
Satellite Acquisition Co. with and into Liberty Satellite, and all
references to the "merger agreement" refer to the merger agreement among
Liberty Satellite, Liberty Satellite Acquisition Co. and Liberty Media which
accompanies this proxy statement/prospectus as ANNEX I.
Q: WHAT WILL I RECEIVE IN THE MERGER? (PAGE 55)
A: Following the consummation of the merger, unless you validly exercise your
appraisal rights, you will receive 0.2750 of a share of Liberty Media
Series A common stock in exchange for each share of Liberty Satellite
Series A or Series B common stock that you hold on the effective date of the
merger. Liberty Media will not issue fractional shares of Liberty Media
Series A common stock in the merger. You will receive cash based on the
market price of the Liberty Media Series A common stock instead of any
fractional shares.
Q: WILL THE EXCHANGE RATIO AND THE VALUE OF THE SHARES I RECEIVE CHANGE BETWEEN
NOW AND THE TIME THE MERGER IS CONSUMMATED? (PAGE 18)
A: The exchange ratio (which affects the number of shares you will receive)
will not change. The market value of the shares you receive may fluctuate
between the date of this proxy statement/ prospectus and the completion of
the merger, based upon changes in the market price for Liberty Media
Series A common stock.
Q: WILL I HAVE APPRAISAL RIGHTS IN CONNECTION WITH THE MERGER? (PAGE 63)
A: Yes. Under Delaware law, which governs the merger, you have the right to
seek appraisal of your shares of Liberty Satellite common stock. Your right
to seek appraisal requires strict compliance with the procedures contained
in Section 262 of the Delaware corporate statute. Failure to follow any of
these procedures may result in the termination or waiver of your appraisal
right.
Q: DOES THE LIBERTY SATELLITE BOARD OF DIRECTORS RECOMMEND APPROVAL OF THE
MERGER? (PAGE 39)
A: Yes. The Liberty Satellite board of directors, based in part on the
recommendation of a special committee of the board, unanimously recommends
that you vote in favor of adoption of the merger agreement and approval of
the merger.
Q: WHAT IS THE DATE, TIME AND PLACE OF THE SPECIAL MEETING OF STOCKHOLDERS TO
CONSIDER THE MERGER? (PAGE 29)
A: The special meeting of stockholders of Liberty Satellite will be held on
November 12, 2003 at 9:00 a.m., local time, at The Inverness Hotel and Golf
Club, 200 Inverness Drive West, Englewood, Colorado 80112, to consider and
vote upon the proposal to adopt the merger agreement and approve the merger.
1
Q: WHAT VOTE IS REQUIRED TO ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER?
(PAGE 30)
A: In order to adopt the merger agreement and complete the merger, holders of a
majority in voting power of the outstanding equity securities of Liberty
Satellite (which includes Series A and Series B common stock and Series B
preferred stock, voting together as a single class), must approve the merger
agreement and the merger. Liberty Media beneficially owns approximately 87%
of the outstanding Liberty Satellite common stock, and controls
approximately 98% of the total voting power associated with Liberty
Satellite's equity securities. In connection with the merger agreement,
Liberty Media has agreed with Liberty Satellite that it will vote its shares
for the adoption of the merger agreement and approval of the merger, in
which case the merger agreement and the merger will be approved at the
special meeting.
Q: WILL I REALIZE A TAXABLE GAIN OR LOSS FOR U.S. FEDERAL INCOME TAX PURPOSES?
(PAGE 52)
A: Yes. The merger will be a taxable transaction to you. You will be treated as
having sold or exchanged your shares of Liberty Satellite common stock for
Liberty Media Series A common stock and you will recognize gain or loss
equal to the difference between (i) the tax basis for your shares of Liberty
Satellite common stock and (ii) the fair market value of the Liberty Media
Series A common stock and any cash in lieu of fractional shares that you
receive.
Q: WHAT DO I NEED TO DO NOW? (PAGE 29)
A: After carefully reading and considering the information contained in this
proxy statement/ prospectus and its appendices, indicate your vote on your
proxy card, and sign and mail the proxy card in the enclosed return envelope
as soon as possible, so that your shares may be represented at the special
meeting. If you sign and send in your proxy card and do not indicate your
vote, we will count your proxy card as a vote in favor of the proposal to be
voted upon at the special meeting. If you desire to exercise your appraisal
rights, you should follow the procedures described in the section entitled
"Appraisal Rights of Dissenting Stockholders."
Q: MAY I VOTE IN PERSON? (PAGE 29)
A: Yes. If you hold your shares of record as of the close of business on
October 1, 2003, you may attend the special meeting of Liberty Satellite
stockholders and vote your shares in person rather than signing and
returning your proxy card.
Q: WHAT DO I DO IF I WANT TO CHANGE MY VOTE? (PAGE 29)
A: You should send in a new, later dated, signed proxy card, or a written
revocation of your previous proxy card, to Liberty Satellite's corporate
secretary so that it is received before the special meeting or attend the
special meeting in person and vote (however, attendance at the special
meeting without voting at the meeting will not in and of itself constitute a
revocation of a proxy).
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME? (PAGE 31)
A: Yes, but only if you provide instructions to your broker on how to vote.
Accordingly, please contact the person responsible for your account and give
instructions for a proxy card to be signed representing your shares of
Liberty Satellite common stock.
Q: SHOULD I SEND MY STOCK CERTIFICATES NOW? (PAGES 30, 56)
A: No. As soon as practicable after the merger is completed, Liberty Satellite
stockholders will be sent written instructions for exchanging their share
certificates, together with a letter of transmittal for the certificates.
YOU SHOULD NOT SEND ANY STOCK CERTIFICATES WITH YOUR PROXY CARDS.
2
Q: WILL I HAVE TO PAY ANY FEES OR COMMISSIONS? (PAGE 31)
A: If you are the record owner of your shares, you will not have to pay
brokerage fees or incur similar expenses. If you own your shares through a
broker or other nominee, your broker may charge you a fee. You should
consult your broker or nominee to determine whether any charges will apply.
Q: WHOM SHOULD I CALL WITH QUESTIONS? (PAGE 15)
A: You should call Liberty Satellite's Investor Relations Department at
(720) 875-6861. You may also obtain additional information about Liberty
Media and Liberty Satellite from documents filed with the Securities and
Exchange Commission by following the instructions in the section entitled
"Where You Can Find More Information" on page 15.
3
SUMMARY OF THIS PROXY STATEMENT/PROSPECTUS
This summary highlights selected information from this proxy
statement/prospectus and may not contain all the information that is important
to you. To better understand the merger, you should read this entire document
carefully, including the documents to which we refer you. In addition, this
proxy statement/prospectus incorporates by reference important business and
financial information about Liberty Media and Liberty Satellite. You may obtain
the information incorporated by reference into this proxy statement/prospectus
without charge by following the instructions in the section entitled "Where You
Can Find More Information" on page 15.
THE COMPANIES (SEE PAGE 25)
Liberty Satellite & Technology, Inc.
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone: (720) 875-5400
Liberty Satellite is a majority-owned subsidiary of Liberty Media. Liberty
Satellite's primary operating subsidiary is On Command Corporation, in which
Liberty Satellite owns approximately 74% of the outstanding common stock and 80%
of the outstanding voting power. On Command provides in-room, on-demand
entertainment and information services to hotels, motels and resorts. In
addition, Liberty Satellite pursues strategic opportunities worldwide in the
distribution of Internet data and other content via satellite and related
businesses. Currently, Liberty Satellite conducts its business through strategic
investments in, and contractual arrangements with, various entities that
operate, or are developing, satellite and terrestrial wireless networks for
broadband distribution of Internet access, video programming, streaming media
and other data.
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone: (720) 875-5400
Liberty Media owns interests in a broad range of video programming, media,
broadband distribution, interactive technology services and communications
businesses. Liberty Media and its affiliated companies operate in the United
States, Europe, South America and Asia. Its principal assets include interests
in Starz Encore Group LLC, Ascent Media Group, Inc., On Command Corporation,
Discovery Communications, Inc., UnitedGlobalCom, Inc., Jupiter
Telecommunications Co., Ltd., QVC, Inc., Court Television Network, Game Show
Network, AOL Time Warner Inc., IAC/ InterActiveCorp, Sprint PCS Group and The
News Corporation Limited.
THE SPECIAL MEETING (PAGE 29)
GENERAL. The special meeting of stockholders of Liberty Satellite will be
held at 9:00 a.m., local time, on November 12, 2003, at The Inverness Hotel and
Golf Club, 200 Inverness Drive West, Englewood, Colorado 80112.
RECORD DATE. Stockholders are entitled to vote at the special meeting if
they owned shares of Liberty Satellite Series A or Series B common stock or
Series B preferred stock as of the close of business on October 1, 2003, the
record date. As of the record date, there were 14,305,837 shares of Liberty
Satellite Series A common stock outstanding, 34,765,055 shares of Liberty
Satellite Series B common stock outstanding and 150,000 shares of Liberty
Satellite Series B preferred stock outstanding.
VOTING RIGHTS AND PROCEDURES. Liberty Satellite common stockholders will be
entitled to one vote for each share of Liberty Satellite Series A common stock
owned on the record date and ten votes for each share of Liberty Satellite
Series B common stock owned on the record date. In addition, Liberty
4
Satellite Series B preferred stockholders are entitled to vote together with
Liberty Satellite common stockholders on all matters submitted to the Liberty
Satellite common stockholders, with holders of the Series B preferred stock
having 558 votes per share. You may vote either by attending the special meeting
and voting your shares or by completing the enclosed proxy card and mailing it
to us in the enclosed envelope.
STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER. The affirmative vote of
the holders of a majority of the voting power of outstanding shares of Liberty
Satellite Series A and Series B common stock and Series B preferred stock
(voting together as a single class) entitled to vote at the meeting is required
to approve the merger agreement and the merger. As of the record date, Liberty
Media beneficially owned approximately 87% of the outstanding Liberty Satellite
common stock and 100% of the outstanding Liberty Satellite Series B preferred
stock, which collectively represents 98% of the total voting power of equity
securities entitled to vote at the special meeting. This means that Liberty
Media owns enough shares of Liberty Satellite common stock to adopt the merger
agreement and approve the merger under the Delaware corporate statute without
the vote of any other holders of Liberty Satellite common stock. Liberty Media
has agreed to vote its shares of Liberty Satellite stock in favor of the merger.
STOCK OWNERSHIP OF OFFICERS AND DIRECTORS. As of the record date, the
directors and executive officers of Liberty Satellite owned 15,494 shares of
Series A common stock and 141 shares of Series B common stock, and held
exercisable options or other rights to acquire 111,305 shares of Liberty
Satellite Series A common stock and no shares of Liberty Satellite Series B
common stock, collectively representing less than 1% of the total number of
shares of Liberty Satellite common stock outstanding or beneficially owned at
that date.
THE MERGER (PAGE 32)
GENERAL. The merger agreement is attached as ANNEX I to this proxy
statement/prospectus and is incorporated herein by reference. We encourage you
to read the merger agreement, as it is the legal document that governs the
merger. The merger agreement provides that, upon consummation of the merger,
Liberty Satellite Acquisition Co. will merge with and into Liberty Satellite,
with Liberty Satellite continuing as the surviving corporation. The merger will
become effective upon the filing of a certificate of merger with the Secretary
of State of the State of Delaware. This filing is anticipated to be made as soon
as possible after receipt of Liberty Satellite stockholder approval and the
satisfaction or waiver of the other conditions to the merger.
WHAT LIBERTY SATELLITE STOCKHOLDERS WILL RECEIVE. Upon consummation of the
merger, holders of Liberty Satellite Series A and Series B common stock (except
for holders of Liberty Satellite common shares who exercise their appraisal
rights and except for Liberty Satellite Acquisition Co., Liberty Media and its
wholly-owned subsidiaries) will receive 0.2750 of a share of Series A common
stock of Liberty Media in exchange for each share of Liberty Satellite Series A
or Series B common stock that they own. The merger exchange ratio has been fixed
and will not be adjusted for changes in the price of Liberty Media's or Liberty
Satellite's common stock. In connection with the merger, a total of
approximately 1,893,726 shares of Liberty Media Series A common stock will be
issued or issuable in exchange for outstanding shares of Liberty Satellite
Series A and Series B common stock and upon exercise of options or other rights
to acquire shares of Liberty Satellite Series A and Series B common stock
outstanding at the time of the merger.
LIBERTY SATELLITE REASONS FOR THE MERGER; RECOMMENDATION OF LIBERTY
SATELLITE BOARD OF DIRECTORS. The Liberty Satellite board of directors has
unanimously approved the merger agreement and has determined that it is
advisable and fair and in the best interests of Liberty Satellite and its
stockholders (other than Liberty Media and its affiliates), and unanimously
recommends that holders of Liberty
5
Satellite common stock vote in favor of the proposal to adopt the merger
agreement and approve the merger. In making this recommendation, the board
considered the following factors:
- the recommendation of a special committee of the board comprised entirely
of independent directors;
- the financial condition, competitive position and prospects of Liberty
Satellite as a stand-alone entity;
- the opinion of Morgan Stanley & Co. Incorporated, dated August 22, 2003
and subject to and based upon the assumptions and considerations in its
opinion, as to the fairness, from a financial point of view, of the
exchange ratio pursuant to the merger agreement to the holders in the
aggregate of Liberty Satellite common stock (other than Liberty Media and
its affiliates);
- the difficulties that Liberty Satellite, as a holding company, will face
in meeting its dividend obligations with respect to its preferred stock;
- the relative liquidity of the Liberty Media Series A common stock as
compared to the Liberty Satellite Series A and Series B common stock;
- the opportunity for Liberty Satellite stockholders to participate in the
future performance of the other businesses and assets of Liberty Media
through their ownership of Liberty Media Series A common stock, which they
would receive in the merger;
- the fact that based on the closing price of Liberty Media's common stock
on August 20, 2003 of $11.54, the price per share of Liberty Satellite
common stock implied by the exchange ratio represented a premium of
approximately 48% over the market price of Liberty Satellite's Series A
common stock before the public announcement of the initial offer by
Liberty Media; and
- Liberty Satellite's potential for growth is limited by the lack of
strategic investment opportunities in the satellite industry.
LIBERTY MEDIA REASONS FOR THE MERGER. The purpose of the merger for Liberty
Media is to acquire the publicly held minority interest in Liberty Satellite. In
deciding to undertake the merger, which will result in Liberty Satellite ceasing
to be a public company, Liberty Media considered the following factors, among
others:
- Liberty Satellite's need for additional capital resources to develop its
business;
- the trading price volatility of Liberty Satellite common stock caused, in
part, by its limited public float;
- recent capital market trends, which have adversely affected the ability of
companies situated similarly to Liberty Satellite to access capital;
- the elimination of costs associated with operating Liberty Satellite as a
separate public company, including costs and expenses associated with
Securities and Exchange Commission reporting, communicating with
stockholders and related legal and accounting fees; and
- the ability to eliminate certain conflicts of interest between Liberty
Satellite and Liberty Media relating to business dealings between them.
REGULATORY APPROVAL AND OTHER CONDITIONS TO THE MERGER. Except for filing a
certificate of merger in Delaware and compliance with federal and state
securities laws, we are not aware of any material United States federal or state
or foreign governmental regulatory requirement necessary to be complied with, or
approval that must be obtained, in connection with the merger. However, the
respective obligations of Liberty Satellite and Liberty Media to consummate the
transactions contemplated by the
6
merger agreement are subject to the satisfaction or, where permissible, waiver
of a number of conditions, including the adoption of the merger agreement and
approval of the merger by the requisite vote of stockholders of Liberty
Satellite, and certain other conditions that are usual and customary conditions
for merger transactions.
COVENANTS. Under the merger agreement, Liberty Satellite has agreed, prior
to the effective time of the merger, to conduct its business in the ordinary and
usual course consistent with past practice, to use its reasonable efforts to
preserve intact its business organization and assets and to refrain from issuing
additional capital stock, amending its certificate of incorporation, entering
into or modifying certain material agreements or taking certain other actions.
EFFECT OF THE MERGER ON LIBERTY SATELLITE STOCK OPTIONS, STOCK APPRECIATION
RIGHTS AND RESTRICTED STOCK. Liberty Media will assume outstanding stock options
and stock appreciation rights issued under the Liberty Satellite & Technology
1996 Stock Incentive Plan, as amended, and other stock options and stock
appreciation rights not issued under that plan, in each case with respect to
Liberty Satellite Series A or Series B common stock on the effective date of the
merger. Assumed stock options and stock appreciation rights will be exercisable
with respect to the number of shares of Liberty Media Series A common stock
determined by multiplying the number of underlying shares of Liberty Satellite
Series A or Series B common stock on the effective date of the merger by the
0.2750 exchange ratio, rounded up to the nearest whole share. The exercise price
per share of Liberty Media Series A common stock issuable under each assumed
option and the base price of each assumed stock appreciation right will be
calculated by dividing the exercise price of the option or base price of the
stock appreciation right before the merger by the exchange ratio, rounded down
to the nearest whole cent.
In addition, each restricted share of Liberty Satellite common stock issued
under or outside of the Liberty Satellite Stock Incentive Plan will be converted
into restricted shares of Liberty Media Series A common stock at the exchange
ratio, rounded up to the nearest whole share. Each restricted share of Liberty
Media Series A common stock issued to holders of Liberty Satellite restricted
stock will remain subject to the same restrictions applicable to such share
prior to the merger.
TERMINATION. The merger agreement may be terminated and the merger
abandoned at any time prior to the effective time of the merger, by the mutual
consent of Liberty Satellite and Liberty Media. In addition, either Liberty
Satellite or Liberty Media can terminate the merger agreement:
- if the Liberty Satellite board of directors has withdrawn or modified in
any manner adverse to Liberty Media its recommendation to Liberty
Satellite stockholders regarding the adoption of the merger agreement;
- if the merger has not been consummated before March 31, 2004;
- for a material breach by the other party under the merger agreement that
is incapable of being cured;
- if a court of competent jurisdiction has issued an order permanently
enjoining or otherwise prohibiting the merger; or
- if the required adoption of the merger agreement and approval of the
merger by the Liberty Satellite stockholders are not duly obtained at the
special meeting.
7
INTERESTS OF DIRECTORS AND OFFICERS (PAGE 51)
You should be aware that some officers and directors of Liberty Satellite
have interests in the merger that are different from, or in addition to, yours.
These interests include:
- ownership of Liberty Media common stock and options exercisable for shares
of Liberty Media common stock; and
- indemnification arrangements between Liberty Satellite and the directors
and officers of Liberty Satellite.
In addition, some of the officers and directors of Liberty Media and/or
Liberty Satellite Acquisition Co. are also directors of Liberty Satellite and
have interests that are in addition to, or different from, your interests.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES (PAGE 52)
The merger will be treated for tax purposes as a taxable sale or exchange of
Liberty Satellite common stock for Liberty Media Series A common stock. In
general, Liberty Satellite stockholders will have taxable gain or loss equal to
the difference between their aggregate basis for their Liberty Satellite common
shares surrendered in the merger and the sum of the fair market value of the
Liberty Media Series A common stock and any cash in lieu of fractional shares
that they receive in the merger. The gain or loss will be capital if they held
their shares of Liberty Satellite common stock as capital assets and would be
long term gain or loss if they held their shares of Liberty Satellite common
stock for more than a year as of the date of the merger. You should consult your
own tax advisor for a full understanding of the merger's tax consequences to
you.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS (PAGE 63)
Delaware law permits holders of Liberty Satellite common stock to dissent
from the merger and to receive the appraised fair value of their shares of
Liberty Satellite common stock in cash in lieu of merger consideration. To do
this, a holder of Liberty Satellite common stock must follow certain procedures,
including filing certain notices with Liberty Satellite and refraining from
voting his or her shares in favor of the merger. If you validly exercise your
appraisal rights, your shares of Liberty Satellite common stock will not be
exchanged for shares of Liberty Media Series A common stock in the merger, and
your only right will be to receive the appraised fair value of your shares of
Liberty Satellite common stock in cash, which amount could be greater than, less
than or the same as the value of the merger consideration you would have
received at the closing of the merger. A copy of the Delaware statutes
describing these appraisal rights and the procedures for exercising them is
attached as ANNEX III to this proxy statement/prospectus.
ACCOUNTING TREATMENT (PAGE 52)
For accounting and financial reporting purposes, the merger will be
accounted for as a "purchase" of a minority interest, as this term is used under
accounting principles generally accepted in the United States of America.
CERTAIN RESTRICTIONS ON RESALE OF LIBERTY MEDIA SERIES A COMMON STOCK (PAGE 62)
All shares of Liberty Media Series A common stock received by you in
connection with the merger will be freely transferable unless you are considered
an "affiliate" of Liberty Satellite under the Securities Act of 1933 at the time
of the merger or you are an affiliate of Liberty Media. If you are an affiliate
of Liberty Satellite, then you may transfer your shares only pursuant to an
effective registration statement or an exemption under the Securities Act. This
restriction will generally lapse at the end of one year unless you are an
affiliate of Liberty Media.
8
DIFFERENCES BETWEEN YOUR RIGHTS AS A LIBERTY SATELLITE STOCKHOLDER AND AS A
LIBERTY MEDIA STOCKHOLDER (PAGE 66)
There are differences between the rights you have as a holder of Liberty
Satellite Series A or Series B common stock and the rights you will have as a
holder of Liberty Media Series A common stock.
EXCHANGE OF STOCK CERTIFICATES (PAGE 55)
Promptly after the merger is completed, you will receive a letter and
instructions on how to surrender your Liberty Satellite stock certificates in
exchange for Liberty Media stock certificates. You will need to carefully review
and complete these materials and return them as instructed along with your stock
certificates for Liberty Satellite common stock. Please do not send Liberty
Satellite, Liberty Media or their transfer agents any stock certificates until
you receive these instructions. IF YOU HOLD LIBERTY SATELLITE COMMON STOCK AND
YOU ELECT TO EXERCISE YOUR APPRAISAL RIGHTS, YOU SHOULD FOLLOW THE PROCEDURES
OUTLINED IN THE "APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS" SECTION ON
PAGE 64.
LISTING OF LIBERTY MEDIA SERIES A COMMON STOCK
Liberty Media has agreed to list the shares of Liberty Media Series A common
stock to be issued in connection with the merger on the New York Stock Exchange.
9
SELECTED SUMMARY FINANCIAL INFORMATION
LIBERTY MEDIA
The following table provides you with selected historical consolidated
financial data of Liberty Media. From August 1994 to March 1999 Liberty Media
was a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"). On March 9,
1999, AT&T Corp. ("AT&T") acquired TCI in a merger transaction. For financial
reporting purposes, the merger of AT&T and TCI is deemed to have occurred on
March 1, 1999. In connection with that merger, the assets and liabilities of
Liberty Media were adjusted to their respective fair values pursuant to the
purchase method of accounting. For periods prior to March 1, 1999, the assets
and liabilities of Liberty Media and the related consolidated results of
operations are referred to below as "Old Liberty," and for periods subsequent to
February 28, 1999, the assets and liabilities of Liberty Media and the related
consolidated results of operations are referred to as "New Liberty." Also, in
connection with that merger, TCI effected an internal restructuring as a result
of which certain assets and approximately $5.5 billion in cash were contributed
to Liberty Media. On August 10, 2001, AT&T effected a split-off of Liberty Media
and as a result of that transaction, Liberty Media is no longer a subsidiary of
AT&T. Liberty Media derived historical consolidated financial data from its
consolidated financial statements. It is important that when you read this
information, you read along with it the consolidated financial statements and
accompanying notes of Liberty Media incorporated by reference into this proxy
statement/prospectus. For a list of documents incorporated by reference into
this proxy statement/prospectus, see "Where You Can Find More Information" on
page 15.
NEW LIBERTY OLD LIBERTY
------------------------------------------------------- -------------
DECEMBER 31,
JUNE 30, ----------------------------------------- DECEMBER 31,
2003 2002 2001 2000 1999 1998
----------- -------- -------- -------- -------- -------------
(UNAUDITED) AMOUNTS IN MILLIONS
SUMMARY BALANCE SHEET DATA:
Investment in affiliates................................ $ 7,952 7,390 10,076 20,464 15,922 3,079
Investments in available-for-sale securities and other
cost investments...................................... $19,817 14,369 21,152 16,774 27,906 10,539
Total assets............................................ $46,325 39,685 48,539 54,268 58,658 15,783
Long-term debt.......................................... $ 6,390 4,316 4,764 5,269 2,723 1,912
Stockholders' equity.................................... $26,850 24,682 30,123 34,109 38,408 8,820
NEW LIBERTY
--------------------------------------------------------------------------
TEN
SIX MONTHS ENDED YEARS ENDED MONTHS
JUNE 30, DECEMBER 31, ENDED
------------------------- ------------------------------ DECEMBER 31,
2003 2002 2002 2001 2000 1999
----------- ----------- -------- -------- -------- -------------
(UNAUDITED) (UNAUDITED) AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
SUMMARY STATEMENT OF OPERATIONS
DATA:
Revenue........................ $1,005 1,023 2,084 2,059 1,526 729
Operating income (loss)(1)..... $ (36) 65 (184) (1,127) 436 (2,214)
Share of losses of affiliates,
net(2)....................... $ 91 (244) (453) (4,906) (3,485) (904)
Nontemporary declines in fair
value of investments......... $ (27) (5,134) (6,053) (4,101) (1,463) --
Realized and unrealized gains
(losses) on derivative
instruments, net............. $ (485) 1,574 2,122 (174) 223 (153)
Gains (losses) on dispositions,
net.......................... $ 97 (397) (415) (310) 7,340 4
Net earnings (loss)(1)(2)...... $ (332) (4,660) (5,330) (6,203) 1,485 (2,021)
Basic and diluted net earnings
(loss) per common share(3)... $(0.12) (1.80) (2.06) (2.40) .57 (.78)
OLD LIBERTY
-----------------------------
TWO
MONTHS YEAR
ENDED ENDED
FEBRUARY 28, DECEMBER 31,
1999 1998
------------- -------------
AMOUNTS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
SUMMARY STATEMENT OF OPERATIONS
DATA:
Revenue........................ 235 1,359
Operating income (loss)(1)..... (158) (431)
Share of losses of affiliates,
net(2)....................... (66) (1,002)
Nontemporary declines in fair
value of investments......... -- --
Realized and unrealized gains
(losses) on derivative
instruments, net............. -- --
Gains (losses) on dispositions,
net.......................... 14 2,449
Net earnings (loss)(1)(2)...... (70) 622
Basic and diluted net earnings
(loss) per common share(3)... (.03) .24
------------------------------
(1) Effective January 1, 2002, Liberty Media adopted Statement of Financial
Accounting Standards No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS
("Statement 142"), which among other matters, provides that goodwill and
other indefinite-lived assets no longer be amortized. Amortization expense
for such assets aggregated $627 million, $598 million and $438 million for
the
10
years ended December 31, 2001 and 2000 and the ten months ended
December 31, 1999, respectively, and was not significant in prior periods.
(2) Included in share of losses of affiliates are other-than-temporary declines
in value aggregating $148 million, $2,396 million and $1,324 million for the
years ended December 31, 2002, 2001, and 2000, respectively. In addition,
share of losses of affiliates includes excess basis amortization of
$798 million, $1,058 million and $463 million for the years ended
December 31, 2001 and 2000 and the ten months ended December 31, 1999,
respectively. Pursuant to Statement 142, excess costs that are considered
equity method goodwill are no longer amortized, but are evaluated for
impairment under APB Opinion No. 18.
(3) The basic and diluted net earnings (loss) per common share for periods prior
to Liberty Media's split off from AT&T is based upon 2,588 million shares of
Liberty Media Series A and Series B common stock issued upon consummation of
the split-off.
LIBERTY SATELLITE
The following table provides you with selected historical consolidated
financial data of Liberty Satellite. The financial data in the following table
is derived from the consolidated financial statements of Liberty Satellite. It
is important that you read this information along with the consolidated
financial statements and accompanying notes of Liberty Satellite, which are
included in its annual report on Form 10-K for the year ended December 31, 2002
and on its quarterly report on Form 10-Q/A for the six months ended June 30,
2003, which are attached hereto as ANNEX II.
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- ----------------------------------------------------
2003 2002 2002 2001 2000(2) 1999 1998(1)
----------- ----------- -------- -------- -------- -------- --------
(UNAUDITED) (UNAUDITED) AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS
SUMMARY STATEMENT OF OPERATIONS DATA:
Revenue........................................ $116,482 118,592 238,817 254,387 218,273 -- 168,500
Operating, selling, general and administrative
expenses and stock compensation.............. $(88,013) (88,009) (176,056) (222,321) (162,216) (12,160) (158,810)
Operating loss................................. $(24,801) (44,335) (79,489) (140,969) (80,889) (12,183) (55,415)
Interest expense............................... $ (7,423) (9,786) (18,530) (47,477) (34,843) (140) (14,177)
Share of losses of affiliates(3)............... $ (208) (3,358) (13,705) (424,247) (7,251) -- (375,053)
Nontemporary declines in fair values of
investments(4)............................... $ (4,412) (58,948) (163,881) (96,438) (9,860) -- --
Earnings (loss) before cumulative effect of
accounting change............................ $(35,789) (109,786) (238,037) (602,263) (116,959) 67,262 (445,266)
Net earnings (loss)............................ $(35,789) (215,623) (343,874) (602,263) (116,959) 67,262 (445,266)
Basic and diluted earnings (loss) per common
share before cumulative effect of accounting
change....................................... $ (1.11) (3.08) (6.33) (15.41) (4.44) 9.67 (65.75)
Basic and diluted earnings (loss) per common
share........................................ $ (1.11) (5.63) (8.77) (15.41) (4.44) 9.67 (65.75)
DECEMBER 31,
JUNE 30, ------------------------------------------------------
2003 2002 2001 2000(2) 1999 1998(1)
----------- -------- --------- --------- -------- --------
(UNAUDITED) AMOUNTS IN THOUSANDS
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 81,741 11,571 33,913 466,617 2,473 --
Investments in available-for-sale securities and other cost
investments, including securities pledged to creditors... $129,476 143,858 373,900 361,507 140,101 --
Current and long-term derivative assets.................... $ 37,724 326,056 203,582 192,080 -- --
Total assets............................................... $689,298 875,219 1,224,897 2,002,771 143,197 463,133
Debt including amounts due to parent and current portion... $266,323 423,693 430,136 518,418 3,044 --
Redeemable preferred stock................................. $212,707 202,147 196,027 189,907 -- --
Stockholders' equity (deficit)............................. $ 98,933 134,853 459,295 1,061,329 64,727 (6,365)
------------------------------
(1) Pursuant to a roll-up transaction that was consummated on April 1, 1996,
Liberty Satellite contributed and transferred to PRIMESTAR, Inc. (now known
as Phoenixstar, Inc.) all of its assets and liabilities except for assets
and liabilities related to the high power direct broadcast satellite system
then being constructed by Tempo Satellite, Inc., a wholly-owned subsidiary
of Liberty Satellite.
11
(2) On April 1, 2002, Liberty Satellite consummated a transaction (the "LSAT LLC
and Ascent Entertainment Transaction"), whereby Liberty Satellite acquired
from Liberty Media (i) certain subsidiaries of Liberty Media that
collectively held the 89.41% of Liberty Satellite, LLC ("LSAT LLC") not
already owned by Liberty Satellite and (ii) 100% of the capital stock of
Ascent Entertainment Group, Inc. ("Ascent Entertainment"). Due to the fact
that Liberty Satellite, LSAT LLC and Ascent Entertainment are all under the
common control of Liberty Media, the LSAT LLC and Ascent Entertainment
Transaction has been accounted for in a manner similar to a
pooling-of-interests. As such, Liberty Satellite's consolidated financial
statements have been restated to include LSAT LLC and Ascent Entertainment
as wholly-owned subsidiaries of Liberty Satellite, effective with the
respective March 2000 dates that LSAT LLC was formed and Liberty Media
acquired control of Ascent Entertainment.
(3) The 2001 amount includes charges and losses aggregating $417,202,000
relating to Liberty Satellite's investment in ASTROLINK International LLC.
(4) The 2002 amount includes charges aggregating $105,250,000 to reflect
nontemporary declines in the fair value of Liberty Satellite's investment in
various 10% investees that operate satellite television systems in Latin
America. The 2001 amount includes charges aggregating $56,483,000 to reflect
nontemporary declines in the fair value of Liberty Satellite's investment in
WildBlue Communications, Inc.
UNAUDITED COMPARATIVE PER SHARE DATA
The table below provides you with Liberty Media's and Liberty Satellite's
historical per share information as of and for the six months ended June 30,
2003 and as of and for the year ended December 31, 2002. It is important that
when you read this information, you read along with it the consolidated
financial statements and accompanying notes of Liberty Media incorporated by
reference into this proxy statement/prospectus. It is also important that when
you read this information, you read along with it the consolidated financial
statements and accompanying notes of Liberty Satellite, which are included in
its annual report on Form 10-K for the year ended December 31, 2002, and in its
quarterly report for the six months ended June 30, 2003 on Form 10-Q/A, which
are attached hereto as ANNEX II.
LIBERTY LIBERTY SATELLITE
LIBERTY SATELLITE LIBERTY MEDIA PRO FORMA
MEDIA HISTORICAL PRO FORMA EQUIVALENT(5)
-------- ---------- ------------- -----------------
Book value per common share as of:
June 30, 2003................................. $10.00 2.02 10.00 (1) 2.75
December 31, 2002............................. $ 9.18 2.94 9.18 (2) 2.52
Basic and diluted loss attributable to common
shareholders per common share:
Six months ended June 30, 2003................ $ (.12) (1.11) (.12)(3) (.03)
Year ended December 31, 2002.................. $(2.06) (8.77) (2.06)(4) (.57)
------------------------
(1) The pro forma book value per share is based upon 2,475 million shares of
Liberty Media Series A common stock and 212 million shares of Liberty Media
Series B common stock. These amounts represent the number of shares that
would have been outstanding if the merger of Liberty Satellite and Liberty
Satellite Acquisition Co. had been completed on June 30, 2003.
(2) The pro forma book value per share is based upon 2,479 million shares of
Liberty Media Series A common stock and 212 million shares of Liberty Media
Series B common stock. These amounts represent the number of shares that
would have been outstanding if the merger of Liberty Satellite and Liberty
Satellite Acquisition Co. had been completed on December 31, 2002.
(3) The pro forma basic and diluted loss per share is based upon 2,689 million
weighted average shares of Liberty Media Series A and Series B common stock
outstanding for the six months ended June 30, 2003. This amount represents
the number of weighted average shares that would have been outstanding if
the merger of Liberty Satellite and Liberty Satellite Acquisition Co. had
been completed on January 1, 2002.
12
(4) The pro forma basic and diluted loss per share is based upon 2,592 million
weighted average shares of Liberty Media Series A and Series B common stock
outstanding for the year ended December 31, 2002. This amount represents the
number of weighted average shares that would have been outstanding if the
merger of Liberty Satellite and Liberty Satellite Acquisition Co. had been
completed on January 1, 2002.
(5) The Liberty Satellite pro forma equivalents have been determined by
multiplying the Liberty Media pro forma amounts by the exchange ratio of
0.2750 of a share of Liberty Media Series A common stock for each share of
Liberty Satellite common stock outstanding.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Shares of Liberty Media Series A common stock are traded on the New York
Stock Exchange. Public trading of Liberty Media Series A common stock commenced
on August 10, 2001, the date of Liberty Media's split off from AT&T under the
symbol "LMCA." On January 2, 2002, the trading symbol for the Liberty Media
Series A common stock on the New York Stock Exchange was changed to "L." Through
April 1, 2002, shares of the Liberty Satellite Series A and Series B common
stock were quoted on the OTC Bulletin Board under the symbols "LSATA" and
"LSATB", respectively. Following the April 1, 2002 1-for-10 reverse stock splits
of Liberty Satellite's Series A and Series B common Stock (the "Reverse Split"),
shares of Liberty Satellite Series A and Series B common stock were quoted under
the symbols "LSTTA" and "LSTTB", respectively. The OTC Bulletin Board is a
regulated quotation service and is not a national securities exchange.
Historically, shares of Series B common stock have had low trading volume due to
a relatively low number of shares held in the public float.
The following table sets forth, for the fiscal quarters indicated, the
following:
- the range of high and low bid prices in U.S. dollars of shares of Liberty
Satellite Series A and Series B common stock (the prices are interdealer
prices, do not include retail markups, markdowns, or commissions and may
not represent actual transactions); and
- the range of high and low sales prices in U.S. dollars of shares of
Liberty Media Series A common stock, as reported on the New York Stock
Exchange Composite Transaction Tape.
LIBERTY SATELLITE SERIES A LIBERTY SATELLITE SERIES B LIBERTY MEDIA SERIES A
COMMON STOCK COMMON STOCK COMMON STOCK
--------------------------- --------------------------- -----------------------
HIGH LOW HIGH LOW HIGH LOW
------------ ------------ ------------ ------------ ---------- ----------
Year Ended December 31,
2002
First quarter (as
adjusted for the
Reverse Split)........ $10.70 5.60 9.10 6.00 15.03 11.90
Second quarter.......... $ 6.43 2.20 4.00 2.25 12.80 7.70
Third quarter........... $ 3.05 1.00 3.00 1.50 9.60 6.16
Fourth quarter.......... $ 3.10 1.45 5.00 2.25 10.75 6.29
Year Ended December 31,
2003
First quarter........... $ 2.90 2.05 10.01 4.00 10.38 8.45
Second quarter.......... $ 2.95 2.10 14.00 7.00 12.25 9.52
Third quarter........... $ 3.24 2.00 12.00 8.00 12.27 9.86
Liberty Media's and Liberty Satellite's fiscal year ends on December 31 of
each year. Cash dividends have never been paid with respect to Liberty Media or
Liberty Satellite common stock. It is the current intention of Liberty Media to
retain future earnings to finance operations and expand its
13
business. Liberty Media does not anticipate paying any dividends on its common
stock in the foreseeable future.
The following table sets forth the closing bid price per share of Liberty
Satellite Series A and Series B common stock as reported on the OTC Bulletin
Board, and the last sale price per share of Liberty Media Series A common stock
as reported on the New York Stock Exchange Composite Transaction Tape, on:
- August 27, 2003, the last full trading day prior to the public
announcement of the merger; and
- October 3, 2003, the last full trading day for which closing prices were
available prior to the date of this proxy statement/prospectus.
The table also presents, under the heading "Equivalent Per Share Price," an
amount equal to the closing price of a share of Liberty Media Series A common
stock on the applicable date multiplied by the merger exchange ratio of 0.2750.
These equivalent per share prices reflect the market value of the Liberty Media
Series A common stock you would have received for each of your shares of Liberty
Satellite common stock if the merger had been completed on the specified dates.
Because the market price of Liberty Media Series A common stock may increase or
decrease before the merger is completed, we urge you to obtain current market
quotations.
LIBERTY SATELLITE LIBERTY SATELLITE LIBERTY MEDIA
SERIES A SERIES B SERIES A EQUIVALENT PER
DATES COMMON STOCK COMMON STOCK COMMON STOCK SHARE PRICE
----- ----------------- ----------------- ------------- --------------
August 27, 2003........................ $2.05 $8.00 $12.01 $3.30
October 3, 2003........................ $2.73 $8.00 $10.51 $2.89
14
WHERE YOU CAN FIND MORE INFORMATION
Liberty Media and Liberty Satellite each file annual, quarterly and special
reports, proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any reports, statements or other information
Liberty Media and Liberty Satellite file at the Securities and Exchange
Commission's public reference room at the following location:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Securities and Exchange
Commission also maintains an internet site that contains reports, proxy
statements and other information regarding Liberty Media and Liberty Satellite.
The address of the Securities and Exchange Commission website is www.sec.gov.
Information contained on any web site referenced in this proxy
statement/prospectus is not incorporated by reference in this proxy
statement/prospectus. Liberty Media's and Liberty Satellite's Securities and
Exchange Commission filings are also available to the public from commercial
document retrieval services. Liberty Media filed a registration statement on
Form S-4 to register with the Securities and Exchange Commission its Series A
common stock to be issued to Liberty Satellite stockholders in the merger. This
proxy statement/prospectus is a part of that registration statement. As allowed
by Securities and Exchange Commission rules, this proxy statement/prospectus
does not contain all the information you can find in the registration statement
or the exhibits to the registration statement.
Securities and Exchange Commission rules allow Liberty Media and Liberty
Satellite to "incorporate by reference" information into this proxy
statement/prospectus, which means that we can disclose important information to
you by referring you to other documents filed separately with the Securities and
Exchange Commission. The information incorporated by reference is an important
part of this proxy statement/prospectus and is deemed to be a part of this proxy
statement/prospectus, except for any information superseded or modified by
information contained directly in this proxy statement/prospectus or in any
subsequently filed document which also is, or is deemed to be, incorporated by
reference herein. This proxy statement/prospectus incorporates by reference the
documents set forth below that have previously been filed with the Securities
and Exchange Commission. These documents contain important information about
each company and its financial condition.
LIBERTY MEDIA
The following documents filed by Liberty Media (File No. 000-20421) are
hereby incorporated by reference into this proxy statement/prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2002, filed on
March 25, 2003, as amended by Amendment No. 1 to the Annual Report on
Form 10-K/A filed on April 9, 2003;
- Quarterly Report on Form 10-Q for the three months ended March 31, 2003,
filed on May 14, 2003;
- Quarterly Report on Form 10-Q for the six months ended June 30, 2003,
filed on August 13, 2003;
- Current Reports on Form 8-K, filed on March 3, 2003, April 11, 2003,
May 7, 2003, July 8, 2003, September 10, 2003, September 18, 2003 (as
amended by the Form 8-K/A filed on September 24, 2003) and September 23,
2003; and
15
- The description of Liberty Media's capital stock contained in Annex A to
its Form 8-A filed under the Securities Exchange Act of 1934 on July 24,
2001, and any amendment or report filed for the purpose of updating this
description.
LIBERTY SATELLITE
The following documents filed by Liberty Satellite (File No. 000-21317) are
hereby incorporated by reference into this proxy statement/prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2002, filed on
March 28, 2003;
- Quarterly Report on Form 10-Q for the three months ended March 31, 2003,
filed on May 14, 2003;
- Quarterly Report on Form 10-Q for the six months ended June 30, 2003,
filed on August 14, 2003 as amended by Amendment No. 1 to the Quarterly
Report on Form 10-Q/A filed on August 15, 2003; and
- Current Reports on Form 8-K, filed on September 2, 2003 and September 18,
2003.
A copy of Liberty Satellite's Annual Report on Form 10-K for the year ended
December 31, 2002 and a copy of Liberty Satellite's Form 10-Q/A for the six
months ended June 30, 2003, each as filed with the Securities and Exchange
Commission, accompany this proxy statement/prospectus as ANNEX II.
All documents filed by Liberty Media pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Securities Exchange Act of 1934, subsequent to the date of this
proxy statement/prospectus and prior to the termination of the offering and any
reoffering of the securities offered hereby are incorporated by reference into
and are deemed to be a part of this proxy statement/prospectus from the date of
filing of those documents.
You may request a copy of any and all of the documents incorporated by
reference in this proxy statement/prospectus at no cost, by writing or
telephoning the office of either:
Investor Relations Investor Relations
Liberty Media Corporation Liberty Satellite & Technology, Inc.
12300 Liberty Boulevard or 12300 Liberty Boulevard
Englewood, Colorado 80112 Englewood, Colorado 80112
Telephone: (877) 772-1518 (720) 875-6861
TO OBTAIN TIMELY DELIVERY OF REQUESTED DOCUMENTS PRIOR TO THE SPECIAL
STOCKHOLDERS' MEETING, YOU MUST REQUEST THE INCORPORATED INFORMATION NO LATER
THAN NOVEMBER 4, 2003, WHICH IS FIVE BUSINESS DAYS PRIOR TO THE MEETING.
This proxy statement/prospectus incorporates by reference documents of
Liberty Media which include information concerning On Command, Liberty
Satellite, OpenTV Corp., and UnitedGlobalCom, Inc., among other public
companies. All of these companies file reports and other information with the
Securities and Exchange Commission in accordance with the requirements of the
Securities Act of 1933 and the Securities Exchange Act of 1934. Information
incorporated by reference into this proxy statement/prospectus concerning those
companies has been derived from the reports and other information filed by them
with the Securities and Exchange Commission. Those reports and other information
are not incorporated by reference into this proxy statement/prospectus. You may
read and copy any reports and other information filed by those companies with
the Securities and Exchange Commission as set forth above.
You should rely only on the information contained in or incorporated by
reference in this section into the proxy statement/prospectus. We have not
authorized anyone to provide you with information
16
that is different from what is contained in this proxy statement/prospectus.
This proxy statement/ prospectus is dated October 7, 2003. You should not assume
that the information contained in this proxy statement/prospectus is accurate as
of any date other than that date, and neither the mailing of this proxy
statement/prospectus to stockholders nor the issuance of Liberty Media Series A
common stock in the merger shall create any implication to the contrary.
Liberty Satellite has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to Liberty Satellite.
Liberty Media has supplied all information contained or incorporated by
reference in this proxy statement/prospectus relating to Liberty Media.
This proxy statement/prospectus may also be used as a prospectus for the
resale by affiliates of Liberty Satellite of shares of Liberty Media Series A
common stock acquired in the merger. Any such resale would be reflected in a
supplement to this proxy statement/prospectus or a post-effective amendment of
the registration statement, as appropriate.
17
RISK FACTORS
IF YOU HOLD YOUR SHARES OF LIBERTY SATELLITE SERIES A COMMON STOCK OR
SERIES B COMMON STOCK ON THE DATE OF THE MERGER AND DO NOT PROPERLY EXERCISE
YOUR APPRAISAL RIGHTS, YOU WILL RECEIVE SHARES OF LIBERTY MEDIA SERIES A COMMON
STOCK AND WILL BECOME A STOCKHOLDER OF LIBERTY MEDIA. AN INVESTMENT IN OUR
SECURITIES INVOLVES RISK. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS,
AS WELL AS THE OTHER INFORMATION INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS AND
IN THE DOCUMENTS WE HAVE INCORPORATED BY REFERENCE, BEFORE DECIDING WHETHER TO
VOTE IN FAVOR OF THE MERGER. ANY OF THE FOLLOWING RISKS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE VALUE OF OUR SECURITIES.
ALL REFERENCES IN THESE RISK FACTORS TO "WE", "US", "OUR," "OUR COMPANY" OR
SIMILAR REFERENCES ARE TO LIBERTY MEDIA.
RISK FACTORS RELATING TO THE MERGER
THE VALUE OF OUR SERIES A COMMON STOCK THAT YOU WILL RECEIVE IN THE MERGER
MAY FLUCTUATE.
The number of shares of our Series A common stock that you will receive in
the merger will not be adjusted based on changes in the market price of our
Series A common stock. Accordingly, because the market price of our Series A
common stock may fluctuate, the value of the consideration that you receive when
we complete the merger will depend on the market price of our Series A common
stock at that time. We cannot assure you as to the market value of the merger
consideration you will receive when the merger is completed.
THE PRICE OF OUR SERIES A COMMON STOCK MAY BE AFFECTED BY FACTORS DIFFERENT
FROM THOSE AFFECTING THE PRICE OF LIBERTY SATELLITE COMMON STOCK.
If the merger is completed, you will become a holder of our Series A common
stock. Our businesses are much broader than the businesses of Liberty Satellite,
and the results of our operations, as well as the market price of our Series A
common stock, may be affected by factors different from those affecting Liberty
Satellite's results of operations and the market price of Liberty Satellite
common stock. As a result, factors that had little or no effect on the price of
Liberty Satellite common stock may adversely affect the price of our Series A
common stock.
RISK FACTORS RELATING TO OUR COMPANY
WE DEPEND ON A LIMITED NUMBER OF POTENTIAL CUSTOMERS FOR CARRIAGE OF OUR
PROGRAMMING SERVICES.
The cable television and direct-to-home satellite industries are currently
undergoing a period of consolidation. As a result, the number of potential
buyers of our programming services and those of our business affiliates is
decreasing. In this more concentrated market, there can be no assurance that our
owned and affiliated program suppliers will be able to obtain carriage of their
programming services by distributors on commercially reasonable terms or at all.
THE LIQUIDITY AND VALUE OF OUR INTERESTS IN OUR BUSINESS AFFILIATES MAY BE
ADVERSELY AFFECTED BY STOCKHOLDER AGREEMENTS AND SIMILAR AGREEMENTS TO WHICH WE
ARE A PARTY.
We own equity interests in a broad range of domestic and international video
programming and communications businesses. A significant portion of the equity
interests we own is held pursuant to stockholder agreements, partnership
agreements and other instruments and agreements that contain provisions that
affect the liquidity, and therefore the realizable value, of those interests.
Most of these agreements subject the transfer of the stock, partnership or other
interests constituting equity interests to consent rights or rights of first
refusal of the other stockholders or partners. In certain cases, a change in
control of our company or of the subsidiary holding our equity interest will
give rise to rights or remedies exercisable by other stockholders or partners,
such as a right to initiate or require the initiation of buy/sell procedures.
Some of our subsidiaries and business affiliates are parties to loan
18
agreements that restrict changes in ownership of the borrower without the
consent of the lenders. All of these provisions will restrict our ability to
sell those equity interests and may adversely affect the price at which those
interests may be sold. For example, in the event buy/sell procedures are
initiated at a time when we are not in a financial position to buy the
initiating party's interest, we could be forced to sell our interest at a price
based upon the value established by the initiating party, and that price might
be significantly less than what we might otherwise obtain.
WE DO NOT HAVE THE RIGHT TO MANAGE OUR BUSINESS AFFILIATES, WHICH MEANS WE
CANNOT CAUSE THOSE AFFILIATES TO OPERATE IN A MANNER THAT IS FAVORABLE TO US.
We do not have the right to manage the businesses or affairs of any of our
business affiliates in which we have less than a majority voting interest.
Rather, our rights may take the form of representation on the board of directors
or a partners' or similar committee that supervises management or possession of
veto rights over significant or extraordinary actions. The scope of our veto
rights varies from agreement to agreement. Although our board representation and
veto rights may enable us to exercise influence over the management or policies
of an affiliate and enable us to prevent the sale of material assets by a
business affiliate in which we own less than a majority voting interest or
prevent it from paying dividends or making distributions to its stockholders or
partners, they do not enable us to cause these actions to be taken.
OUR BUSINESS IS SUBJECT TO RISKS OF ADVERSE GOVERNMENT REGULATION.
Programming services, cable television systems and satellite carriers are
subject to varying degrees of regulation in the United States by the Federal
Communications Commission and other entities. Such regulation and legislation
are subject to the political process and have been in constant flux over the
past decade. In addition, substantially every foreign country in which we have,
or may in the future make, an investment regulates, in varying degrees, the
distribution and content of programming services and foreign investment in
programming companies and wireline and wireless cable communications, satellite
and telephony services. Further material changes in the law and regulatory
requirements must be anticipated, and there can be no assurance that our
business and the business of our affiliates will not be adversely affected by
future legislation, new regulation or deregulation.
WE MAY MAKE SIGNIFICANT CAPITAL CONTRIBUTIONS AND LOANS TO OUR SUBSIDIARIES
AND BUSINESS AFFILIATES TO COVER THEIR OPERATING LOSSES AND FUND THEIR
DEVELOPMENT AND GROWTH, WHICH COULD LIMIT THE AMOUNT OF CASH AVAILABLE TO PAY
OUR OWN FINANCIAL OBLIGATIONS OR TO MAKE ACQUISITIONS OR INVESTMENTS.
The development of video programming, communications and technology
businesses involves substantial costs and capital expenditures. As a result,
many of our business affiliates have incurred operating and net losses to date
and are expected to continue to incur significant losses for the foreseeable
future. Our results of operations include our, and our consolidated
subsidiaries', share of the net losses of affiliates. Our results of operations
included net earnings (losses) attributable to affiliates of $91 million,
$(244) million, $(453) million, $(4,906) million and $(3,485) million for the
six months ended June 30, 2003 and 2002, and for the years ended December 31,
2002, 2001 and 2000, respectively.
We have assisted, and may in the future assist, our subsidiaries and
business affiliates in their financing activities by guaranteeing bank and other
financial obligations. At June 30, 2003, we and our consolidated subsidiaries in
the aggregate had guaranteed various loans, notes payable, letters of credit and
other obligations of certain of our subsidiaries and business affiliates
totaling approximately $966 million.
To the extent we make loans and capital contributions to our subsidiaries
and business affiliates or we are required to expend cash due to a default by a
subsidiary or business affiliate of any obligation we guarantee, there will be
that much less cash available to us with which to pay our own financial
obligations or make acquisitions or investments.
19
IF WE FAIL TO MEET REQUIRED CAPITAL CALLS TO A SUBSIDIARY OR BUSINESS
AFFILIATE, WE COULD BE FORCED TO SELL OUR INTEREST IN THAT COMPANY, OUR INTEREST
IN THAT COMPANY COULD BE DILUTED OR WE COULD FORFEIT IMPORTANT RIGHTS.
We are parties to stockholder and partnership agreements that provide for
possible capital calls on stockholders and partners. Our failure to meet a
capital call, or other commitment to provide capital or loans to a particular
subsidiary or business affiliate, may have adverse consequences to us. These
consequences may include, among others, the dilution of our equity interest in
that company, the forfeiture of our right to vote or exercise other rights, the
right of the other stockholders or partners to force us to sell our interest at
less than fair value, the forced dissolution of the company to which we have
made the commitment or, in some instances, a breach of contract action for
damages against us. Our ability to meet capital calls or other capital or loan
commitments is subject to our ability to access cash. See "We could be unable in
the future to obtain cash in amounts sufficient to service our financial
obligations" below.
THOSE OF OUR BUSINESS AFFILIATES THAT OPERATE OUTSIDE OF THE UNITED STATES
ARE SUBJECT TO NUMEROUS OPERATIONAL RISKS.
A number of our business affiliates operate primarily in countries other
than the United States. Their businesses are thus subject to the following
inherent risks:
- fluctuations in currency exchange rates;
- longer payment cycles for sales in foreign countries that may increase the
uncertainty associated with recoverable accounts;
- difficulties in staffing and managing international operations; and
- political unrest that may result in disruptions of services that are
critical to their businesses.
THE ECONOMIES IN MANY OF THE OPERATING REGIONS OF OUR INTERNATIONAL BUSINESS
AFFILIATES HAVE RECENTLY EXPERIENCED RECESSIONARY CONDITIONS, WHICH HAVE
ADVERSELY AFFECTED THE FINANCIAL CONDITION OF THEIR BUSINESSES.
The economies in many of the operating regions of our international business
affiliates have recently experienced moderate to severe recessionary conditions,
including Argentina, Chile, the United Kingdom, Germany and Japan, among others,
which has strained consumer and corporate spending and financial systems and
financial institutions in these areas. As a result, our affiliates have
experienced a reduction in consumer spending and demand for services coupled
with an increase in borrowing costs, which has, in some cases, caused our
affiliates to default on their own indebtedness. We cannot assure you that these
economies will recover in the future or that continued economic weakness will
not lead to further reductions in consumer spending or demand for services. We
also cannot assure you that our affiliates in these regions will be able to
obtain sufficient capital or credit to fund their operations.
WE HAVE TAKEN SIGNIFICANT IMPAIRMENT CHARGES DUE TO OTHER THAN TEMPORARY
DECLINES IN THE MARKET VALUE OF CERTAIN OF OUR AVAILABLE FOR SALE SECURITIES.
We own equity interests in a significant number of publicly traded companies
which we account for as available for sale securities. We are required by
accounting principles generally accepted in the United States to determine, from
time to time, whether a decline in the market value of any of those investments
below our cost for that investment is other than temporary. If we determine that
the decline is other than temporary, we are required to write down our cost to a
new cost basis, with the amount of the write-down accounted for as a realized
loss in the determination of net income for the period in which the write-down
occurs. We realized losses of $27 million, $5,134 million, $6,053 million,
$4,101 million and $1,463 million for the six months ended June 30, 2003 and
2002 and the years ended December 31, 2002, 2001 and 2000, respectively, due to
other than temporary declines in the fair value of certain of our available for
sale securities, and we may be required to realize further losses of this
20
nature in future periods. We consider a number of factors in determining the
fair value of an investment and whether any decline in an investment is other
than temporary. As our assessment of fair value and any resulting impairment
losses requires a high degree of judgment and includes significant estimates and
assumptions, the actual amount we may eventually realize for an investment could
differ materially from our assessment of the value of that investment made in an
earlier period.
WE COULD BE UNABLE IN THE FUTURE TO OBTAIN CASH IN AMOUNTS SUFFICIENT TO
SERVICE OUR FINANCIAL OBLIGATIONS.
Our ability to meet our financial obligations depends upon our ability to
access cash. We are a holding company, and our sources of cash include our
available cash balances, net cash from operating activities, dividends and
interest from our investments, availability under credit facilities,
monetization of our public investment portfolio and proceeds from asset sales.
We cannot assure you that we will maintain significant amounts of cash, cash
equivalents or marketable securities in the future.
We obtained from Liberty Satellite net cash in the form of dividends in the
amount of $8 million, $23 million and $5 million in calendar years 2002, 2001
and 2000, respectively. We did not obtain any cash from our subsidiaries during
the six months ended June 30, 2003. The ability of our operating subsidiaries to
pay dividends or to make other payments or advances to us depends on their
individual operating results and any statutory, regulatory or contractual
restrictions to which they may be or may become subject. Some of our
subsidiaries are subject to loan agreements that restrict sales of assets and
prohibit or limit the payment of dividends or the making of distributions, loans
or advances to stockholders and partners.
We generally do not receive cash, in the form of dividends, loans, advances
or otherwise, from our business affiliates. In this regard, we do not have
sufficient voting control over most of our business affiliates to cause those
companies to pay dividends or make other payments or advances to their partners
or stockholders, including us.
WE ARE SUBJECT TO BANK CREDIT AGREEMENTS THAT CONTAIN RESTRICTIONS ON HOW WE
FINANCE OUR OPERATIONS AND OPERATE OUR BUSINESS, WHICH COULD IMPEDE OUR ABILITY
TO ENGAGE IN TRANSACTIONS THAT WOULD BE BENEFICIAL TO US.
Our subsidiaries are subject to significant financial and operating
restrictions contained in outstanding credit facilities. These restrictions will
affect, and in some cases significantly limit or prohibit, among other things,
the ability of our subsidiaries to:
- borrow more funds;
- pay dividends or make other distributions;
- make investments;
- engage in transactions with affiliates; or
- create liens.
The restrictions contained in these credit agreements could have the
following adverse effects on us, among others:
- we could be unable to obtain additional capital in the future to:
- fund capital expenditures or acquisitions that could improve the value
of our company;
- permit us to meet our loan and capital commitments to our business
affiliates;
- allow us to help fund the operating losses or future development of our
business affiliates; or
- allow us to conduct necessary corporate activities;
21
- we could be unable to access the net cash of our subsidiaries to help meet
our own financial obligations;
- we could be unable to invest in companies in which we would otherwise
invest; and
- we could be unable to obtain lower borrowing costs that are available from
secured lenders or engage in advantageous transactions that monetize our
assets.
In addition, some of the credit agreements to which our subsidiaries are
parties require them to maintain financial ratios, including ratios of total
debt to operating cash flow and operating cash flow to interest expense. If our
subsidiaries fail to comply with the covenant restrictions contained in the
credit agreements, that failure could result in a default that accelerates the
maturity of the indebtedness under those agreements. Such a default could also
result in indebtedness under other credit agreements and certain debt securities
becoming due and payable due to the existence of cross-default or
cross-acceleration provisions of these credit agreements and in the indentures
governing these debt securities.
As of June 30, 2003, the subsidiary of our company that operates the DMX
Music service was not in compliance with three covenants contained in its bank
loan agreement, under which it has $89 million outstanding. Although the
subsidiary and the participating banks have entered into a forbearance agreement
whereby the banks have agreed to forbear from exercising certain default-
related remedies against the subsidiary through March 31, 2004, we cannot assure
you that the subsidiary will be able to regain covenant compliance or refinance
the bank loan or that the banks will not eventually seek to exercise their
remedies.
RISKS RELATING TO OUR SERIES A COMMON STOCK
OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY BECAUSE OF STOCK MARKET
FLUCTUATIONS THAT AFFECT THE PRICES OF THE PUBLIC COMPANIES IN WHICH WE HAVE
OWNERSHIP INTERESTS.
The stock market has recently experienced significant price and volume
fluctuations that have affected the market prices of securities of media and
other technology companies. We own equity interests in many media and technology
companies. If market fluctuations cause the stock price of these companies to
decline, our stock price may decline.
OUR STOCK PRICE HAS FLUCTUATED SIGNIFICANTLY OVER THE LAST YEAR.
During the past year, the stock market has experienced significant price and
volume fluctuations that have affected the market prices of our stock. In the
future, our stock price may be materially affected by, among other things:
- actual or anticipated fluctuations in our operating results or those of
the companies in which we invest;
- potential acquisition activity by our company or the companies in which we
invest;
- issuances of debt or equity securities by us to raise capital;
- changes in financial estimates by securities analysts regarding our
company or companies in which we invest; or
- general market conditions.
22
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO MAY BE
BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our certificate of incorporation and bylaws may
discourage, delay or prevent a change in control of our company that a
stockholder may consider favorable. These provisions include the following:
- authorizing a dual class structure, which entitles the holders of our
Series B common stock to ten votes per share and the holders of our
Series A common stock to one vote per share;
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- classifying our board of directors with staggered three-year terms, which
may lengthen the time required to gain control of our board of directors;
- limiting who may call special meetings of stockholders;
- prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of the stockholders; and
- establishing advance notice requirements for nominations of candidates for
election to the board of directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
Our chairman, John C. Malone, holds the power to direct the vote of
approximately 44% of our outstanding voting power, including the power to direct
the vote of approximately 94% of the outstanding shares of our Series B common
stock. Dr. Malone holds a portion of his voting power over our Series B common
stock pursuant to a stockholders agreement with the Estate of Bob Magness, the
late Kim Magness, Gary Magness and certain limited liability companies
controlled by the Magnesses.
Section 203 of the Delaware corporate statute and our stock incentive plan
may also discourage, delay or prevent a change in control of our company even if
such change of control would be in the best interests of our stockholders.
23
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS, INCLUDING DOCUMENTS
INCORPORATED BY REFERENCE HEREIN, CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. TO THE
EXTENT THAT SUCH STATEMENTS ARE NOT RECITATIONS OF HISTORICAL FACT, SUCH
STATEMENTS CONSTITUTE FORWARD-LOOKING STATEMENTS WHICH, BY DEFINITION, INVOLVE
RISKS, UNCERTAINTIES AND ASSUMPTIONS. WHEN USED IN THIS PROXY
STATEMENT/PROSPECTUS AND IN OUR INCORPORATED DOCUMENTS, THE WORDS "BELIEVE,"
"ANTICIPATE," "INTEND," "ESTIMATE," "EXPECT" AND SIMILAR EXPRESSIONS ARE
INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS, ALTHOUGH NOT ALL
FORWARD-LOOKING STATEMENTS CONTAIN SUCH WORDS. WHERE, IN ANY FORWARD-LOOKING
STATEMENT, WE EXPRESS AN EXPECTATION OR BELIEF AS TO FUTURE RESULTS OR EVENTS,
SUCH EXPECTATION OR BELIEF IS EXPRESSED IN GOOD FAITH AND BELIEVED TO HAVE A
REASONABLE BASIS, BUT THERE CAN BE NO ASSURANCE THAT THE STATEMENT OF
EXPECTATION OR BELIEF WILL RESULT OR BE ACHIEVED OR ACCOMPLISHED.
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHER THINGS, THE FACTORS DESCRIBED
ABOVE UNDER THE "RISK FACTORS" SECTION OF THIS PROXY STATEMENT/PROSPECTUS AND
THE FOLLOWING FACTORS THAT COULD CAUSE ACTUAL RESULTS OR EVENTS TO DIFFER
MATERIALLY FROM THOSE ANTICIPATED:
- general economic and business conditions and industry trends;
- spending on domestic and foreign television advertising;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband distribution industry;
- uncertainties inherent in new business strategies, new product launches
and development plans;
- rapid technological changes;
- the acquisition, development and/or financing of telecommunications
networks and services;
- the development and provision of programming for new television and
telecommunications technologies;
- future financial performance, including availability, terms and deployment
of capital;
- the ability of vendors to deliver required equipment, software and
services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or our failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
- competitor responses to our products and services, and the products and
services of the entities in which we have interests, and the overall
market acceptance of these products and services; and
- actual or threatened terrorist attacks and ongoing military action,
including armed conflict in the Middle East and other parts of the world.
THESE FORWARD-LOOKING STATEMENTS AND SUCH RISKS, UNCERTAINTIES AND OTHER
FACTORS SPEAK ONLY AS OF THE DATE OF THIS PROXY STATEMENT/PROSPECTUS. WE
EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO DISSEMINATE ANY UPDATES OR
REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN, TO REFLECT ANY
CHANGE IN OUR EXPECTATIONS WITH REGARD THERETO, OR ANY OTHER CHANGE IN EVENTS,
CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
24
THE COMPANIES INVOLVED IN THE MERGER
LIBERTY MEDIA
Liberty Media owns interests in a broad range of video programming, media,
broadband distribution, interactive technology services and communications
businesses. Liberty Media and its affiliated companies operate in the United
States, Europe, South America and Asia. Its principal assets include interests
in Starz Encore Group LLC, Ascent Media Group, Inc., On Command Corporation,
Discovery Communications, Inc., UnitedGlobalCom, Inc., Jupiter
Telecommunications Co., Ltd., QVC, Inc., Court Television Network, Game Show
Network, AOL Time Warner Inc., IAC/ InterActiveCorp, Sprint PCS Group and The
News Corporation Limited. For more detailed information on the business of
Liberty Media, please see the section entitled "Where You Can Find More
Information," on page 15 of this proxy statement/prospectus.
LIBERTY SATELLITE
Liberty Satellite is a majority-owned subsidiary of Liberty Media. Liberty
Satellite's primary operating subsidiary is On Command Corporation, in which
Liberty Satellite owns approximately 74% of the outstanding common stock and 80%
of the outstanding voting power. On Command provides in-room, on-demand
entertainment and information services to hotels, motels and resorts. In
addition, Liberty Satellite pursues strategic opportunities worldwide in the
distribution of Internet data and other content via satellite and related
businesses. Currently, Liberty Satellite conducts its business through strategic
investments in, and contractual arrangements with, various entities that
operate, or are developing, satellite and terrestrial wireless networks for
broadband distribution of Internet access, video programming, streaming media
and other data.
The following table sets forth information concerning Liberty Satellite's
significant subsidiaries and business affiliates. Ownership percentages in the
table are approximate, calculated as of June 30, 2003, and, where applicable and
except where otherwise noted, assume conversion of Liberty Satellite's ownership
interest to common equity. In addition to the following discussion, for more
detailed information on the business of Liberty Satellite, please see Liberty
Satellite's annual report on Form 10-K for the fiscal year ended December 31,
2002 and its quarterly report on Form 10-Q/A for the six months ended June 30,
2003, each of which accompany this proxy statement/prospectus as ANNEX II, and
the section entitled "Where You Can Find More Information," on page 15 of this
proxy statement/prospectus.
PERCENTAGE
OWNERSHIP AT
JUNE 30,
ENTITY 2003 DESCRIPTION OF BUSINESS
------ ------------ --------------------------------------------
On Command................................ 74% Provides in-room, on demand video
entertainment and information services to
hotels, motels and resorts.
Astrolink International LLC............... 50.3% Building a Ka-band satellite network to
provide broadband data communications
services to businesses.
WildBlue Communications, Inc.............. 32% Building a Ka-band satellite network to
provide broadband data communications
services to homes and small offices in North
America and Latin America.
Sky Latin America......................... 10% Operates a satellite-delivered television
platform serving Mexico, Brazil, Colombia
and Chile.
25
PERCENTAGE
OWNERSHIP AT
JUNE 30,
ENTITY 2003 DESCRIPTION OF BUSINESS
------ ------------ --------------------------------------------
Hughes Electronics Corporation (NYSE:
GMH).................................... less than 1% Provides digital television, entertainment,
satellite services and satellite-based
private business networks.
XM Satellite Radio Holdings, Inc.
(NASDAQ: XMSR).......................... less than 1% Provides 100 national audio channels from
two satellites directly to vehicle, home and
portable radios.
ON COMMAND CORPORATION
On Command provides in-room, video entertainment and information services to
hotels, motels and resorts. At June 30, 2003, On Command provided in-room
entertainment services to approximately 885,000 hotel rooms. Approximately 89%
of On Command's total equipped rooms at June 30, 2003 were located in the United
States, with the balance located primarily in Canada and Mexico.
On September 30, 2003, On Command received a $40 million subordinated loan
from Liberty Media and also closed on an Amended and Restated Credit Agreement
with its bank lenders.
On Command and its bank lenders executed an Amended and Restated Credit
Agreement on April 17, 2003 that would replace On Command's existing revolving
credit facility that provided for aggregate borrowings of $275 million, of which
$265.6 million had been drawn as of June 30, 2003. The Amended and Restated
Credit Agreement provides for, among other things, a $235 million senior secured
credit facility, consisting of a $50 million revolving credit facility and a
$185 million term loan facility. The Amended and Restated Credit Agreement
provides for scheduled amortizations commencing September 30, 2003, with both
facilities maturing on December 31, 2007. Closing of the Amended and Restated
Credit Agreement was conditioned on the contribution of $40 million by Liberty
Media to On Command to be used to repay principal due, and permanently reduce
lender commitments, pursuant to the Amended and Restated Credit Agreement.
The loan from Liberty Media to On Command is unsecured, subordinated to the
senior secured credit facility and provides for an interest rate of 10% per
annum. The maturity date of the subordinated loan is December 31, 2008.
ASTROLINK INTERNATIONAL LLC
In March 2000, Liberty Satellite acquired an approximate 31.5% ownership
interest in ASTROLINK International LLC ("Astrolink"). Astrolink, a
developmental stage entity, was originally established to build a global telecom
network using Ka-band geostationary satellites to provide broadband data
communications services. Astrolink's original business plan required substantial
financing. During the fourth quarter of 2001, certain of the members of
Astrolink informed Astrolink that they did not intend to provide any of
Astrolink's remaining required financing. In light of this decision, Astrolink
and the Astrolink members considered several alternatives with respect to
Astrolink's proposed business plan.
During the second quarter of 2002, Liberty Satellite signed a non-binding
letter of intent with the other members of Astrolink in connection with a
proposed restructuring of Astrolink. In January 2003, Liberty Satellite
announced that it had reached agreement with the other members of Astrolink in
connection with such proposed restructuring. As a part of the Astrolink
restructuring, Astrolink redeemed the interest of one member in January 2003 and
another member in April 2003. As a result
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of such redemptions, Liberty Satellite's ownership interest in Astrolink has
increased to 50.3%, and the ownership interest of the other remaining member has
increased to 49.7%. Notwithstanding Liberty Satellite's ownership interest in
Astrolink, Liberty Satellite does not have a controlling financial interest in
Astrolink due to the significant participatory rights of the other remaining
Astrolink member. Accordingly, Liberty Satellite will continue to use the equity
method to account for its investment in Astrolink.
Under the Astrolink restructuring agreement, Liberty Satellite would acquire
substantially all of the assets of Astrolink, subject to the closing conditions
and other terms and conditions provided for therein. Astrolink simultaneously
signed agreements with Lockheed Martin Corporation and Northrop Grumman Space &
Mission Systems Corp. for completion of two satellites. The parties also reached
agreement on the settlement of all claims related to the previous termination of
Astrolink's major procurement contracts and all other major third party creditor
claims. The closing of Liberty Satellite's acquisition of the Astrolink business
is subject to Liberty Satellite's obtaining satisfactory funding for the
business from additional investors, third party sources of financing, or firm
capacity commitments from prospective customers. The closing is also subject to
regulatory approvals and other closing conditions. Subject to the satisfaction
of these closing conditions, the closing is expected to occur on or before
October 31, 2003. The United States Federal Communications Commission granted
its approval with respect to the Astrolink restructuring on May 22, 2003.
If the closing occurs, Liberty Satellite would pay approximately
$43 million in cash and would issue approximately $3 million in value of
Series A common stock as total consideration for the Astrolink assets, including
certain existing satellite and launch contracts, and the settlement of all
claims against Astrolink. In addition, pursuant to the Astrolink restructuring
agreement, Liberty Satellite agreed to provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
would make a capital contribution to Liberty Satellite in an amount equal to 10%
of the estimated fair value of Liberty Media's equity holdings in Liberty
Satellite at the time of closing, up to a maximum commitment of $55 million, in
exchange for shares of Liberty Satellite's Series B common stock.
Liberty Satellite currently plans to pursue a revised operating plan for the
new Astrolink system, taking into account financial and market factors. The
revised operating plan currently contemplates launching one or two Ka-band
satellites to provide enterprise customers in up to two of North America, Europe
or Asia with virtual private networks and related advanced services, and to
provide various government agencies with a solution to their expanding needs for
bandwidth.
If the Astrolink restructuring is not consummated due to lack of financing
or the failure to satisfy other closing conditions, Liberty Satellite would
receive $7.8 million in exchange for its ownership interest in Astrolink and for
all notes evidencing interim loans made by Liberty Satellite to Astrolink as
prescribed in the Astrolink restructuring agreement.
WILDBLUE COMMUNICATIONS, INC.
WildBlue Communications, Inc. was established to build a Ka-band satellite
network to provide broadband data communications services to homes and small
offices in North America and Latin America. Other strategic investors in
WildBlue include Intelsat USA Sales Corp., National Rural Telecommunications
Cooperative and KPCB Holdings, Inc. (an affiliate of Kleiner Perkins Caufield &
Byers).
In December 2002, Liberty Satellite announced that it agreed to increase its
investment in WildBlue. Prior to the announcement, Liberty Satellite had an
approximate 16% ownership interest in WildBlue. On April 21, 2003, Liberty
Satellite invested $58 million in return for senior preferred stock and warrants
of WildBlue, which increased its ownership interest to approximately 32%. Other
existing
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and new investors concurrently invested $98 million in WildBlue for a total new
investment of $156 million. Liberty Satellite is currently the largest
shareholder in WildBlue.
WildBlue has leased the Ka-band capacity of a satellite, which WildBlue
currently expects to be launched in the second quarter of 2004, and WildBlue
currently expects to begin providing broadband data services in late 2004 or
early 2005.
In connection with the April 2003 investment in WildBlue, Liberty Satellite
entered into a put agreement with KPCB Holdings. Pursuant to this put agreement,
KPCB Holdings will have the right to put its entire interest in WildBlue to
Liberty Satellite and another investor in WildBlue for $10,000,000, the amount
of KPCB Holdings' investment in WildBlue in the April 2003 financing round.
Liberty Satellite and such other investor are each responsible for $5,000,000 of
the aggregate $10,000,000 put obligation. The put may be exercised at any time
on or before April 21, 2007.
SKY LATIN AMERICA
Liberty Satellite has a 10% interest in each of three Latin American
satellite television operators, together known as Sky Latin America, serving
Mexico, Brazil, Colombia and Chile. Sky Latin America offers entertainment and
services via satellite to households through its various owned and affiliated
distribution platforms worldwide. The Sky Latin America entities distribute
their programming primarily via direct-to-home or DTH platforms, allowing their
subscribers to access a variety of channels covering general entertainment,
music, movies, sports, kids, news, documentaries and education genres with their
television remote controls. Other major investors in Sky Latin America include
The News Corporation Limited, Grupo Televisa and Globo Comunicacoes e
Particpacoes. Liberty Satellite has severally guaranteed certain obligations of
the Sky Latin America entities. During the fourth quarter of 2002, Globo
Comunicacoes ceased funding certain of the Sky Latin America entities.
HUGHES ELECTRONICS CORPORATION
Hughes (NYSE: GMH), a subsidiary of General Motors Corporation, provides
digital television entertainment, satellite services and satellite-based private
business networks. At June 30, 2003, Liberty Satellite owned 1.8 million shares
of GM Hughes Stock.
XM SATELLITE RADIO HOLDINGS, INC.
XM Satellite Radio Holdings (Nasdaq: XMSR) offers approximately 100 national
audio channels from two satellites directly to vehicle, home and portable
radios. At June 30, 2003, Liberty Satellite owned 1.0 million shares of XM
Satellite Radio Holdings.
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THE SPECIAL MEETING
GENERAL
This proxy statement/prospectus is first being mailed, on or about
October 9, 2003, to all persons who were Liberty Satellite stockholders of
record on October 1, 2003.
Liberty Satellite stockholders are being provided with a notice of special
meeting and a form of proxy card that is solicited by Liberty Satellite's board
of directors for use at the special meeting of Liberty Satellite stockholders
and at any adjournments or postponements of that meeting.
At the special meeting, Liberty Satellite stockholders will consider and
vote upon a proposal to approve the merger agreement, dated as of August 26,
2003, among Liberty Satellite, Liberty Media and Liberty Satellite Acquisition
Co., a controlled (through direct and indirect ownership interests) subsidiary
of Liberty Media, and the merger contemplated thereby pursuant to which Liberty
Satellite Acquisition Co. will merge with and into Liberty Satellite. As a
result, Liberty Media would acquire all of the publicly held common stock of
Liberty Satellite that it does not already beneficially own.
The special meeting of Liberty Satellite stockholders will be held at the
following time and place:
November 12, 2003
9:00 a.m., local time
The Inverness Hotel and Golf Club
200 Inverness Drive West
Englewood, Colorado 80112
PROXIES
Liberty Satellite stockholders may vote their shares by completing, signing,
dating and returning the enclosed proxy card solicited by Liberty Satellite's
board of directors if they are unable to attend the special meeting in person or
wish to have their shares of Liberty Satellite common stock voted by proxy even
if they do attend the meeting.
A Liberty Satellite stockholder may revoke any proxy given in connection
with this solicitation by:
- Delivering a written notice revoking the proxy prior to the taking of the
vote at the special meeting;
- Delivering a duly executed proxy relating to the same shares bearing a
later date; or
- Attending the meeting and voting in person (however, attendance at the
special meeting without voting at the meeting will not in and of itself
constitute a revocation of a proxy).
Liberty Satellite stockholders should address all written notices of
revocation and other communications with respect to the revocation of proxies to
the following:
Liberty Satellite & Technology, Inc.
Attention: Corporate Secretary
12300 Liberty Boulevard
Englewood, Colorado 80112
For a notice of revocation or later proxy to be valid, however, Liberty
Satellite must actually receive it prior to the vote of Liberty Satellite
stockholders at the special meeting. All shares of Liberty Satellite common
stock represented by valid proxies received through this solicitation and not
revoked prior to their exercise will be voted (or not voted) in accordance with
the voting instructions specified on the proxy card. If no specification is made
on the proxy card, shares of Liberty Satellite common stock represented by valid
proxies received and not revoked prior to their exercise will be voted for the
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adoption of the merger agreement and the approval of the merger and in the best
judgment of the proxy holder as to any other matters that properly may come
before the special meeting.
Liberty Satellite is currently unaware of any other matters that may be
presented for action at the special meeting. If other matters do properly come
before the special meeting, including, among other things, consideration of a
motion to adjourn the special meeting to another time and/or place, then shares
of Liberty Satellite common stock represented by proxies will be voted (or not
voted) by the persons named in the proxies in their best judgment.
STOCKHOLDERS SHOULD NOT SEND IN ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
Liberty Satellite's board of directors has fixed the close of business on
October 1, 2003 as the record date for the determination of Liberty Satellite
stockholders entitled to receive notice of and to vote at Liberty Satellite's
special meeting of stockholders. Accordingly, only Liberty Satellite
stockholders of record at the close of business on October 1, 2003 will be
entitled to notice of and to vote at the special meeting.
At the close of business on Liberty Satellite's record date, there were
14,305,837 shares of Liberty Satellite Series A common stock entitled to vote at
the special meeting held by approximately 4,014 holders of record, and there
were 34,765,055 shares of Liberty Satellite Series B common stock entitled to
vote at the special meeting held by approximately 171 holders of record. In
addition, on the record date, there were 150,000 shares of Liberty Satellite
Series B preferred stock entitled to vote at the special meeting, all of which
are held by wholly-owned subsidiaries of Liberty Media. The Series B preferred
stock, which is convertible into Series B common stock, is entitled to vote
together with Liberty Satellite common stockholders on all matters submitted to
the Liberty Satellite common stockholders, with holders of the Series B
preferred stock to have 558 votes per share.
QUORUM; VOTING RIGHTS AND VOTE REQUIRED
The presence, in person or by proxy, of a majority of the total voting power
of the outstanding shares of stock, including at least one-third of the total
voting power of the Liberty Satellite Series A Common Stock and the Liberty
Satellite Series B Common Stock, entitled to vote at the Liberty Satellite
special meeting is necessary to constitute a quorum.
Each share of Liberty Satellite Series A common stock outstanding on Liberty
Satellite's record date entitles its holder to one vote, and each share of
Liberty Satellite Series B common stock outstanding on the record date entitles
its holder to ten votes, as to the approval of the merger agreement and the
merger or any other proposal that may properly come before the special meeting.
For purposes of determining the presence or absence of a quorum for the
transaction of business, Liberty Satellite will count shares of Liberty
Satellite common stock present in person at the special meeting but not voting,
and shares of Liberty Satellite common stock for which it has received proxies
but with respect to which holders of such shares have abstained, as present at
the special meeting. Abstentions are counted as present at the Liberty Satellite
special meeting for purposes of determining whether a quorum exists, but will
have the effect of a vote against the proposal to adopt the merger agreement and
approve the merger.
If your shares are registered in the name of a broker or other "street name"
nominee, your votes will only be counted as to those matters actually voted. If
you do not provide voting instructions (commonly referred to as "broker
non-votes"), your shares will be counted for purposes of determining the
presence or absence of a quorum for the transaction of business, but will not be
voted in favor of the proposal to adopt the merger agreement and approve the
merger. As with abstentions, broker
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non-votes will also have the effect of a vote against the proposal to adopt the
merger agreement and approve the merger.
Under Delaware law, adoption of the merger agreement and approval of the
merger requires the affirmative vote of the holders of a majority of all votes
entitled to be cast at the special meeting. Liberty Media is the beneficial
owner of 8,145,659 shares of Liberty Satellite Series A common stock and
36,028,982 shares of Liberty Satellite Series B common stock (which includes
1,696,717 shares issuable upon conversion of Liberty Satellite Series B
preferred stock), which shares represent approximately 98% of the total voting
power of Liberty Satellite stockholders entitled to vote at the special meeting.
In connection with the merger agreement, Liberty Media has agreed with Liberty
Satellite to vote its shares in favor of the merger agreement and the merger,
which would assure that a quorum would be present and the merger would be
approved at the special meeting without any action on the part of any other
holder of Liberty Satellite common stock. Accordingly, it is expected that the
merger agreement will be adopted and the merger will be approved at the special
meeting.
As of the record date, the directors and executive officers of Liberty
Satellite owned 15,494 shares of Series A common stock, 141 shares of Series B
common stock and no shares of preferred stock, and held exercisable options to
acquire 111,305 shares of Liberty Satellite Series A common stock and no shares
of Liberty Satellite Series B common stock.
EXPENSES; SOLICITATION OF PROXIES
Pursuant to the merger agreement, costs and expenses incurred in connection
with the printing and mailing of this proxy statement/prospectus will be paid
50% by Liberty Media and 50% by Liberty Satellite. In addition to solicitation
by mail, proxies may be solicited by directors, officers and employees of
Liberty Satellite in person or by telephone, telegram or other means of
communication. Liberty Satellite directors, officers and employees will receive
no additional compensation for these services, but may be reimbursed for
reasonable out-of-pocket expenses in connection with any solicitations.
Brokerage firms, banks, nominees, fiduciaries and other custodians will be
requested to forward proxy solicitation materials to the beneficial owners of
shares held of record by them, and will be reimbursed for the reasonable
expenses incurred by them in connection therewith.
VOTING OF SHARES HELD BY BROKERAGE FIRM OR OTHER NOMINEE
If your shares of Liberty Satellite common stock are held in the name of a
brokerage firm, bank nominee or other institution, only it can sign a proxy card
with respect to your shares of Liberty Satellite common stock. Accordingly,
please contact the person responsible for your account and give instructions for
a proxy card to be signed representing your shares of Liberty Satellite common
stock.
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THE MERGER
GENERAL
The merger agreement provides for the acquisition of Liberty Satellite by
Liberty Media, through the merger of Liberty Satellite Acquisition Co., a
controlled (through direct and indirect ownership interests) subsidiary of
Liberty Media, with and into Liberty Satellite which will be the surviving
corporation. As a result of the merger, Liberty Media will acquire all of the
publicly held common stock of Liberty Satellite that it does not already
beneficially own.
In the merger, each outstanding share of Liberty Satellite Series A and
Series B common stock will be converted into 0.2750 of a share of Liberty Media
Series A common stock (except for any shares for which appraisal rights are
exercised and except for those shares owned by Liberty Satellite Acquisition
Co., Liberty Media and its wholly-owned subsidiaries). If the number of shares
of Liberty Media Series A common stock that you would receive in the merger
includes a fraction of a share of Liberty Media Series A common stock, Liberty
Media will instead pay you an equivalent cash amount, as described below, rather
than give you a fractional share of Liberty Media Series A common stock.
This proxy statement/prospectus also constitutes a prospectus of Liberty
Media, which forms a part of the registration statement on Form S-4 filed by
Liberty Media with the Securities and Exchange Commission under the Securities
Act of 1933 in order to register the shares of Liberty Media Series A common
stock to be issued to Liberty Satellite's stockholders in the merger. The total
number of shares of Liberty Media Series A common stock to be issued in the
merger, based on the number of shares of Liberty Satellite Series A and
Series B common stock outstanding on July 31, 2003, is approximately
1,805,468 million. Up to 88,258 additional shares of Liberty Media Series A
common stock included in this registration statement will be reserved for
issuance upon the exercise of options and other rights for Liberty Satellite
Series A and Series B common stock outstanding on the effective date of the
merger or upon the conversion in the merger of any shares of Liberty Satellite
Series A common stock issued upon any exercise of these outstanding options or
rights prior to the effective date of the merger.
BACKGROUND OF THE MERGER
CERTAIN PRIOR TRANSACTIONS AND NEGOTIATIONS
Liberty Satellite is currently a majority-owned subsidiary of Liberty Media.
Liberty Media holds approximately 87% of Liberty Satellite's common stock and
100% of Liberty Satellite's preferred stock, which collectively represents
approximately 98% of the overall voting power of Liberty Satellite's common and
preferred stock.
In March 2000, Liberty Satellite completed two concurrent transactions with
Liberty Media, which resulted in Liberty Satellite becoming a consolidated
subsidiary of Liberty Media. In the first transaction, Liberty Satellite
acquired from Liberty Media its beneficial interest in approximately 5 million
shares of Sprint Corporation PCS Group common stock in exchange for
$150 million worth of shares of Liberty Satellite's Series A preferred stock and
$150 million worth of shares of Liberty Satellite's Series B preferred stock.
The Series B preferred stock is convertible into shares of Liberty Satellite's
Series B common stock and has super voting rights, which gave Liberty Media
voting control over Liberty Satellite. In the second transaction, Liberty
Satellite and Liberty Media formed a joint venture, Liberty Satellite, LLC
("LSAT LLC"), owned 10.59% by Liberty Satellite, as managing member, and 89.41%
by Liberty Media, to hold and manage interests in entities that distribute
Internet data and other content via satellite and related businesses.
In a related transaction at that same time, Liberty Satellite paid Liberty
Media $60 million in the form of an unsecured promissory note in exchange for a
13.99% interest in Liberty Satellite Astro LLC. Liberty Satellite Astro LLC is a
limited liability company whose assets included an approximate 31.5%
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interest in Astrolink and $250 million in cash. The remaining interest held by
Liberty Media in Liberty Satellite Astro LLC was contributed by Liberty Media to
LSAT LLC.
On August 16, 2001, Liberty Satellite entered into two interrelated purchase
agreements with Liberty Media and its affiliates. One agreement provided for
Liberty Satellite's acquisition of certain subsidiaries of Liberty Media that
collectively held the 89.41% ownership interest in LSAT LLC not already owned by
Liberty Satellite in exchange for 25,298,279 shares of Liberty Satellite's
Series B common stock. The second agreement provided for the acquisition by
Liberty Satellite of 100% of the stock of Ascent Entertainment Group, Inc.
("Ascent Entertainment") from a subsidiary of Liberty Media in exchange for
8,701,621 shares of Liberty Satellite's Series B common stock. Ascent
Entertainment's primary operating subsidiary is On Command. The closing under
each of the August 2001 purchase agreements was conditioned upon the closing of
the other.
On October 12, 2001, prior to the closing of the transaction contemplated by
the August 2001 purchase agreements, Liberty Media submitted to Liberty
Satellite's board of directors a proposal to acquire all the issued and
outstanding shares of common stock of Liberty Satellite that Liberty Media did
not already own in a stock-for-stock merger. Pursuant to the October 2001 merger
proposal, Liberty Satellite stockholders would have received 0.9 of a share of
Liberty Media Series A common stock for each share of Liberty Satellite common
stock held (as adjusted to reflect the Reverse Split). The stock-for-stock
merger would have superseded and replaced the stock-for-assets purchase
transaction provided for by the August 2001 purchase agreements. Accordingly,
Liberty Satellite and Liberty Media announced that the transaction under the
August 2001 purchase agreements would be suspended to give Liberty Satellite's
board of directors an opportunity to consider and respond to Liberty Media's
October 2001 merger proposal.
On October 18, 2001, Liberty Satellite's board of directors formed a special
committee of the board consisting of Messrs. Alan M. Angelich, John W. Goddard
and J. Curt Hockemeier to consider the October 2001 merger proposal. The special
committee convened telephonically six times during October and November 2001 to
discuss the terms of the October 2001 merger proposal and related matters,
including the appropriate criteria for evaluating the merger proposal, and
potential strategic alternatives, including the stock-for-assets transaction
provided for by the August 2001 purchase agreements. The special committee
engaged separate legal counsel to advise the committee in this regard and
interviewed various investment banking firms as potential financial advisors.
Following the announcement of the October 2001 merger proposal, two
purported class action complaints were filed in District Court in Arapahoe
County, Colorado, and eight purported class action complaints were filed in the
Court of Chancery in New Castle County, Delaware. Each complaint named Liberty
Media, Liberty Satellite and members of the board of directors of Liberty
Satellite (and in one case certain officers of Liberty Satellite) as defendants,
and alleged various breaches of duty and other claims in connection with the
proposed merger. The plaintiffs generally sought preliminary and permanent
injunctive relief, and if the transaction were consummated, an order rescinding
the transaction or damages.
On November 30, 2001, the board of directors of Liberty Satellite met to
consider extending the deadline for the stock-for-assets transaction provided
for in the August 2001 purchase agreements. The original deadline under the
August 2001 purchase agreements had been January 5, 2002, and the terms of those
agreements provided that, after such date, either party could terminate the
agreements and abandon the proposed transaction, by notice to the other party.
Members of Liberty Satellite's management and legal counsel were present at the
meeting to answer questions regarding the stock-for-assets transaction.
The Liberty Satellite board of directors noted, and Liberty Media's
representatives acknowledged, that investor reaction to Liberty Media's
October 2001 merger proposal had not been positive, and consensus was reached
that it would not be in the best interests of Liberty Satellite and its public
33
stockholders to permit the August 2001 purchase agreements to expire. The
Liberty Satellite board then determined to proceed with the stock-for-assets
transaction provided for in the August 2001 purchase agreements and approved
amendments to such definitive agreements, which extended the deadline for that
transaction.
On December 3, 2001, Liberty Media announced that it was withdrawing the
October 2001 merger proposal, and both Liberty Satellite and Liberty Media
stated that they would proceed with the stock-for-assets transaction provided
for in the August 2001 purchase agreements. The stock-for-assets transaction
provided for in the August 2001 purchase agreements was approved by the
stockholders of Liberty Satellite at Liberty Satellite's annual meeting of
stockholders on March 26, 2002, and was consummated on April 1, 2002.
Each of the Series A preferred stock and Series B preferred stock of Liberty
Satellite which were issued to Liberty Media and its affiliates in the
March 2000 transactions have dividend rights. The Series A preferred stock
accrues dividends, payable quarterly, at 12% per annum through and including
March 31, 2005, 11% per annum from April 1, 2005 through and including
March 31, 2010 and 10% per annum thereafter, and the Series B preferred stock
accrues dividends, payable quarterly, at 8% per annum. Until March 31, 2003, the
dividends were permitted to be paid in cash or in shares of Liberty Satellite's
Series A common stock. On June 20, 2000, August 3, 2000 and September 20, 2000,
Liberty Satellite issued 8,996, 86,439 and 70,556 shares of Series A common
stock (as such amounts are adjusted to reflect the Reverse Split), respectively,
to Liberty Media and its affiliates in satisfaction of its respective dividend
obligations for the initial three quarters of 2000 (including the partial period
from the date of issuance through March 31, 2000). Such issuances were made in
lieu of a cash payment of dividends on Liberty Satellite's Series A and
Series B preferred stock and were valued at $1.233 million, $7.5 million and
$7.5 million, respectively. In 2001, Liberty Satellite made a cash payment in
the amount of $7.5 million in satisfaction of its dividend obligations for the
fourth quarter of 2000.
Liberty Satellite also satisfied its dividend obligation for the first and
third quarters of 2001 with a cash payment of $7.5 million for each quarter.
Liberty Satellite's dividend payment for the second quarter of 2001 was made by
issuing 204,571 shares of Series A common stock (as adjusted for the Reverse
Split), valued at $7.5 million, to Liberty Media and its affiliates. On July 1,
2002, Liberty Satellite issued 1,970,580 shares of Series A common stock, worth
$15 million, to Liberty Media and its affiliates in satisfaction of its dividend
obligations for the last quarter of 2001 and the first quarter of 2002. On
August 1, 2002, Liberty Satellite issued 2,349,697 shares of its Series A common
stock, worth $7.5 million, to Liberty Media and its affiliates in satisfaction
of its dividend obligations for the second quarter of 2002. On January 20, 2003,
Liberty Satellite issued an additional 3,221,787 shares of its Series A common
stock as dividend payments required to be paid for the last two quarters of 2002
on the Series A preferred stock and Series B preferred stock held by Liberty
Media and its affiliates.
Subsequent to March 31, 2003, dividends on the Series A and Series B
preferred stock are required to be paid in cash. As of March 29, 2003, the
holders of the Series A and Series B preferred stock reached an agreement with
Liberty Satellite that from March 27, 2003, the date of Liberty Media's letter
to the board of directors of Liberty Satellite expressing an interest in a
potential business combination, until the earliest of (i) the date that Liberty
Media terminates negotiations with respect to such business combination without
execution of a definitive agreement, (ii) if a definitive agreement with respect
to such business combination is entered into, the date that such agreement is
terminated or (iii) the date of consummation of such business combination, the
holders of the Series A and Series B preferred stock agree to postpone any
requirement to declare or pay dividends on the preferred stock beginning with
the dividends accruing for and during the quarter ended March 31, 2003.
34
Because Liberty Satellite is a holding company that does not generate
positive cash flow at the Liberty Satellite level, Liberty Satellite will
continue to have difficulty meeting its dividend obligations with respect to its
preferred stock. The only subsidiary of Liberty Satellite that generates
significant revenue is On Command. Due to covenant restrictions in On Command's
revolving credit facility, Liberty Satellite is generally not entitled to the
cash generated by the operations of On Command. Further, many of the businesses
with which Liberty Satellite has a strategic relationship are in developmental
stages and operate at substantial losses.
CONTACTS AND NEGOTIATIONS
On March 27, 2003, Liberty Media sent a letter to the board of directors of
Liberty Satellite expressing interest in a potential business combination with
Liberty Satellite, pursuant to which the holders of common stock of Liberty
Satellite (other than Liberty Media and its subsidiaries) would receive 0.2131
of a share of Liberty Media Series A common stock for each share of Liberty
Satellite common stock. The proposed exchange was based on a valuation of $2.15
per share of Liberty Satellite's common stock, which was equal to the closing
price of Liberty Satellite's Series A common stock on the day preceding the date
of the letter of interest.
On March 31, 2003, Liberty Media sent a letter to On Command (a
majority-owned subsidiary of Liberty Satellite) expressing interest in a
potential business combination in which each stockholder of On Command (other
than Liberty Media and its subsidiaries) would receive 0.0787 of a share of
Liberty Media's Series A common stock for each share of On Command stock. The
proposed exchange was based on a valuation of $0.77 per share of On Command,
represented a 10% premium over the closing price of the stock on the trading day
preceding the offer and a 6% premium over the average trading price over the 20
trading days preceding the offer. On Command formed a separate special committee
of its board of directors to evaluate the proposal.
On April 1, 2003, the Liberty Satellite board of directors met to discuss
the proposal received from Liberty Media. Because Liberty Media is the
beneficial owner of approximately 87% of the outstanding common stock of Liberty
Satellite and certain of the Liberty Media directors serve on the Liberty
Satellite board of directors and may have an interest in the consummation of the
proposal that conflicts with the interests of Liberty Satellite and its other
stockholders, the Liberty Satellite board of directors formed a Special
Committee composed of three independent directors, Messrs. Angelich, Goddard and
Hockemeier. The Liberty Satellite board of directors appointed Mr. Angelich as
chairman of the Special Committee. None of the members of the Special Committee
is an officer or employee of Liberty Satellite, Liberty Media or any of their
affiliates. The Liberty Satellite board of directors delegated to the Special
Committee, among other things, the responsibility and authority to review,
evaluate and, if appropriate, negotiate the terms of the proposal. In
consideration of the anticipated time requirements and commitments required of
the members of the Special Committee, the Liberty Satellite board of directors
determined that each member would receive a fee of $40,000 for such service.
Each member would also be reimbursed for his out-of-pocket expenses. Liberty
Satellite then publicly announced the letter of interest and the formation of
the Special Committee.
The Liberty Satellite board of directors authorized the Special Committee to
retain independent financial and legal advisors to assist it in its evaluation
of the Liberty Media proposal. The Special Committee retained Shaw Pittman LLP,
as its legal advisor.
Shortly after Liberty Satellite's announcement on April 2, 2003 of Liberty
Media's initial merger proposal, five putative class action lawsuits were filed
on behalf of Liberty Satellite stockholders in the Court of Chancery of the
State of Delaware against Liberty Media, Liberty Satellite and members of the
board of directors of Liberty Satellite.
On April 9, 2003, the Special Committee held its first meeting
telephonically. All of the members of the Special Committee were present at the
meeting. At the meeting, the directors discussed with
35
Shaw Pittman the standard of independence that each director on the Special
Committee must meet and determined, after a discussion of the directors' equity
holdings and business relationships, that none of the directors had any
relationships that would compromise their ability to objectively evaluate the
proposal and vigorously negotiate the transactions contemplated by the proposal.
Shaw Pittman advised the Special Committee as to its fiduciary duties and
responsibilities in considering and acting upon the acquisition proposal. The
Special Committee also discussed with its legal advisors the process by which
independent financial advisors to the Special Committee should be selected and
retained.
The Special Committee then interviewed on April 14 and 15, 2003, three
investment banking firms, which they had selected from a larger pool of
candidates, based on the firms' knowledge of the satellite industry, their
expertise in similar advisory assignments and their lack of a significant
relationship with Liberty Media at that time. All of the members of the Special
Committee were present at the interviews.
On April 17, 2003, the Special Committee met with Shaw Pittman to discuss
the interviews. All of the members of the Special Committee were present at the
meeting. After discussing the interviews, the Special Committee selected Morgan
Stanley & Co. Incorporated as its financial advisor, principally based on that
firm's independence and relative experience in the satellite industry. The
Special Committee then authorized Mr. Angelich, with the assistance of Shaw
Pittman, to negotiate an engagement letter with Morgan Stanley on behalf of the
Special Committee. The engagement letter with Morgan Stanley was executed on
April 21, 2003.
On April 23, 2003, Shaw Pittman suggested that, in light of the number of
members of Liberty Satellite's board of directors who are also Liberty Media
management, the General Counsel of Liberty Satellite send to Liberty Satellite
management a letter instructing management not to provide forward-looking
information regarding Liberty Satellite to persons affiliated with Liberty
Satellite that are also officers or employees of Liberty Media. The letter was
thereafter distributed to Liberty Satellite management.
On May 6, 2003, Morgan Stanley had conversations with each of Shaw Pittman
and Mr. Angelich regarding the scope of the financial due diligence that Morgan
Stanley intended to conduct on Liberty Satellite. Thereafter, Mr. Angelich, on
behalf of the Special Committee, sent a letter to the Executive Vice President
and Chief Operating Officer of Liberty Media, informing Liberty Media that the
Special Committee had retained Morgan Stanley and Shaw Pittman as its advisors,
notifying him that the due diligence process had begun and informing him that
the Special Committee would reply to Liberty Media's proposal once the due
diligence process had been completed.
During May and June 2003, Morgan Stanley, on behalf of the Special
Committee, engaged in its financial due diligence review of Liberty Satellite,
including the entities in which Liberty Satellite has an interest, and of
Liberty Media.
On June 10, 2003, the Special Committee held a meeting at Morgan Stanley's
offices in New York, at which Shaw Pittman, Morgan Stanley and all of the
members of the Special Committee were present, in person or by telephone. During
the meeting, Morgan Stanley discussed with the Special Committee various
valuation issues in connection with Liberty Media's offer based on Morgan
Stanley's initial due diligence review. After extensive discussion, the Special
Committee asked Morgan Stanley and Shaw Pittman to engage Liberty Media in
negotiations with respect to the proposal and the price offered thereunder.
On June 25, 2003, Morgan Stanley and Shaw Pittman, on the one hand, and
Liberty Media, on the other hand, met in New York to discuss their respective
clients' approaches to valuation. Morgan Stanley suggested to Liberty Media that
based on its discussions with the Special Committee, Liberty Media reconsider
its analysis of Liberty Satellite with a view to making a higher offer. Liberty
Media
36
disagreed with the positions put forth on behalf of the Special Committee,
indicating that Liberty Media did not believe a higher offer was warranted.
On June 27, 2003, the Special Committee met telephonically with Morgan
Stanley and Shaw Pittman to discuss the initial negotiations with Liberty Media
that took place on June 25, 2003. All of the members of the Special Committee
were present at the meeting. Morgan Stanley reported on the stated positions and
arguments of Liberty Media, and the Special Committee discussed with its
advisors the nature of an acceptable counter-offer that Morgan Stanley would be
authorized to make to Liberty Media. The Special Committee also discussed the
appropriateness of considering information regarding On Command and the status
of negotiations between On Command and Liberty Media in its analysis of the
proposal. The Special Committee then requested that Morgan Stanley engage
Liberty Media in further negotiations regarding an acceptable counter-offer.
On July 1, 2003, Morgan Stanley spoke with Liberty Media via conference call
to discuss in further detail various approaches to the valuation of Liberty
Satellite, including Liberty Media's perspective as to Liberty Satellite's
value.
On July 2, 2003, the Special Committee held a telephonic meeting with its
advisors, which all of the members of the Special Committee attended. At the
meeting, Morgan Stanley reported to the Special Committee on its communications
with Liberty Media. The Special Committee discussed the relative merits of
Liberty Media's views on Liberty Satellite's value. The Special Committee
discussed with its advisors various negotiating strategies, and ultimately
decided that the Special Committee should, together with its financial and legal
advisors, have a face-to-face meeting with Liberty Media. The Special Committee
authorized Morgan Stanley to set up the meeting.
During this period, Morgan Stanley continued to have periodic communications
with the members of the Special Committee. Morgan Stanley also continued its due
diligence on Liberty Satellite and the entities in which Liberty Satellite has
investments.
On July 17, 2003, the Special Committee met telephonically with its legal
and financial advisors to discuss the anticipated face-to-face meeting with
Liberty Media scheduled by Morgan Stanley for July 21, 2003. All of the members
of the Special Committee were present at the meeting. Morgan Stanley summarized
for the Special Committee the purpose of, and agenda for, the meeting with
Liberty Media, and reviewed valuation issues regarding Liberty Satellite and,
potentially, On Command.
On July 18, 2003, the Special Committee met via telephone conference call
with Shaw Pittman and Morgan Stanley to discuss the status of the negotiations
with Liberty Media.
On July 21, 2003, the Special Committee, together with Morgan Stanley and
Shaw Pittman, met with Liberty Media in Englewood, Colorado to discuss Liberty
Media's proposal and to negotiate the consideration to be received by Liberty
Satellite stockholders in a transaction with Liberty Media. At that meeting, the
respective parties continued to have significant differences of opinion with
respect to the valuation of Liberty Satellite and failed to reach an agreement.
The Special Committee again asked Liberty Media to reconsider its proposal and
increase its initial offer.
On July 24, 2003, the Special Committee met via telephone conference call
with Shaw Pittman and Morgan Stanley to discuss the status of the negotiations
with Liberty Media.
On July 25, 2003, Liberty Media contacted Mr. Angelich to increase the
consideration offered in its initial proposal. Liberty Media proposed an
exchange ratio of 0.2627 for the conversion of Liberty Satellite's common stock
into shares of Liberty Media's Series A common stock.
On July 28, 2003, the Special Committee met with its legal and financial
advisors to discuss the 0.2627 exchange ratio proposed by Liberty Media on
July 25, 2003. After the meeting, Mr. Angelich contacted Liberty Media and
suggested that the Special Committee might entertain an offer that was
37
higher than Liberty Media's suggested ratio of 0.2627. Subsequently, Liberty
Media increased the proposed exchange ratio to 0.2750.
On July 29, 2003, the Special Committee met telephonically with Shaw Pittman
and Morgan Stanley. At the meeting, Mr. Angelich reported that a tentative
agreement had been reached with Liberty Media on an exchange ratio of 0.2750 for
the conversion of Liberty Satellite's common stock into shares of Liberty
Media's Series A common stock, assuming that the parties could agree on
acceptable merger terms in their negotiation of a merger agreement.
On July 30, 2003, outside counsel to Liberty Media sent a draft of a
proposed merger agreement to Shaw Pittman.
During late July and early August, counsel to Liberty Media and counsel for
plaintiffs in the stockholder litigation pending before the Delaware Court of
Chancery negotiated over the potential settlement of the litigation. On
August 5, 2003, the parties to the litigation agreed in principle to a proposed
settlement which would provide, subject to certain conditions, that Liberty
Media would proceed with a merger in which the public holders of Liberty
Satellite common stock would receive 0.2750 of a share of Liberty Media
Series A common stock per share of Liberty Satellite common stock. For
additional information on the litigation, please see the section entitled
"Certain Litigation" on page 54.
During the month of August, Shaw Pittman and counsel to Liberty Media
engaged in negotiations with respect to the merger agreement. The parties
discussed, among other things, (i) the breadth of the representations and
warranties to be provided by Liberty Satellite under the merger agreement,
(ii) the need for the Special Committee to be able to consider any acquisition
proposals submitted by third parties in order to discharge its fiduciary duties,
(iii) the appropriateness of Liberty Media's ability to terminate the merger
agreement and abandon the merger if, after signing the merger agreement but
prior to closing, a material adverse change should occur in Liberty Satellite's
condition and (iv) the amount and nature of closing conditions to the Merger,
including whether approval of the disinterested stockholders of Liberty
Satellite should be obtained with respect to the proposed merger.
On August 20, 2003, the Special Committee met via telephone conference call
with its legal and financial advisors to discuss the status of the negotiations
of the merger agreement with Liberty Media's counsel. Messrs. Angelich and
Goddard were present at the meeting. Shaw Pittman outlined for the Special
Committee the remaining outstanding issues with respect to the merger agreement,
which the Special Committee then discussed with its advisors.
On August 22, 2003, the full Liberty Satellite board of directors met with
Morgan Stanley and Shaw Pittman to review Morgan Stanley's presentation in
connection with the delivery of its financial opinion and the current draft of
the merger agreement. All of the members of the Liberty Satellite board of
directors, except for Robert R. Bennett were present, either in person or
telephonically. Following a discussion of the merger agreement and Morgan
Stanley's analysis as contained in its presentation, Morgan Stanley delivered to
the Special Committee its opinion, dated August 22, 2003, that, subject to and
based on the assumptions and considerations set forth in its opinion, the
exchange ratio pursuant to the merger agreement was fair from a financial point
of view to holders in the aggregate of Liberty Satellite's common stock (other
than Liberty Media and its affiliates).
Immediately after the Liberty Satellite board of directors meeting that day,
the Special Committee met with Morgan Stanley and Shaw Pittman to discuss the
remaining outstanding issues with respect to the current draft of the merger
agreement.
On August 26, 2003, after being presented with the final version of the
merger agreement, the Special Committee unanimously determined by written
consent that the proposed merger on the terms presented to the Special Committee
for review, including, without limitation, the exchange ratio, were fair to
Liberty Satellite and the stockholders of Liberty Satellite unaffiliated with
Liberty Media, and
38
recommended to the Liberty Satellite board of directors that the proposed merger
and the final version of the merger agreement be approved, and submitted to the
stockholders of Liberty Satellite for their approval. Based upon the
recommendation of the Special Committee, the Liberty Satellite board of
directors approved the merger and the final version of the merger agreement by
unanimous written consent on that same day.
PURPOSE FOR THE MERGER; RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE LIBERTY
SATELLITE BOARD OF DIRECTORS; FAIRNESS OF THE OFFER AND THE MERGER
LIBERTY SATELLITE PURPOSE AND REASONS FOR THE MERGER
The Liberty Satellite board of directors believes that because of the
limited liquidity of Liberty Satellite's common stock and, in particular its
Series B common stock, and the depressed share price of its common stock in the
public market, Liberty Satellite stockholders have not been able to realize the
value of their investment in Liberty Satellite. The Series A common stock of
Liberty Media to be received by Liberty Satellite stockholders in the merger
will provide such stockholders with enhanced liquidity and an investment in a
relatively attractive portfolio of operating businesses. Based on the closing
price of Liberty Media's Series A common stock on August 20, 2003 of $11.54, the
price per share of Liberty Satellite common stock implied by the exchange ratio
represented a premium of approximately 48% over the market price of Liberty
Satellite's Series A common stock before the public announcement of the initial
offer by Liberty Media.
In addition, Liberty Satellite faces significant challenges as a stand alone
holding company. Its potential for growth is limited by the lack of strategic
investment opportunities in the satellite industry. Also, as discussed in
"Merger--Background of the Merger--Certain Prior Transactions and Negotiations,
"Liberty Satellite's holding company structure and the financial condition of On
Command make it increasingly difficult for Liberty Satellite to meet its cash
dividend obligations.
LIBERTY MEDIA PURPOSE AND REASONS FOR THE MERGER
Management of Liberty Media routinely reviews Liberty Media's investments in
its less than wholly-owned entities to determine whether it would be advisable
for Liberty Media to continue to hold, increase or dispose of any such
investment. Whether a decision to increase or dispose of an investment is made,
and the timing of any such decision, depends on numerous factors, including the
size and nature of the investment, the perceived advantages, if any, of full or
partial ownership and management control, conditions in the relevant industry
and general market and economic conditions.
Since the time Liberty Media obtained its interest in Liberty Satellite,
management of Liberty Media has from time to time evaluated the performance of
Liberty Satellite and analyzed the extent to which it had achieved its business
objectives as a separate publicly-held company. In reaching its decision to make
the merger proposal and to enter into the merger agreement, Liberty Media
considered its management's assessment of Liberty Satellite's existing financial
position, the market performance of the Liberty Satellite Series A and Series B
common stock, industry and market conditions, and the following factors:
- Liberty Satellite's need for additional capital resources to develop its
business;
- the trading price volatility of Liberty Satellite common stock caused, in
part, by its limited public float;
- recent capital market trends, which have adversely affected the ability of
companies situated similarly to Liberty Satellite to access capital;
- the elimination of costs associated with operating Liberty Satellite as a
separate public company, including costs and expenses associated with
Securities and Exchange Commission reporting, communicating with
stockholders and related legal and accounting fees; and
- the ability to eliminate certain conflicts of interest between Liberty
Satellite and Liberty Media relating to business dealings between them.
39
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE LIBERTY SATELLITE BOARD OF
DIRECTORS
In its written consent, dated as of August 26, 2003, the Special Committee:
- determined that the merger agreement and the transactions contemplated
thereby, including the merger and the exchange ratio, are fair to and in
the best interests of Liberty Satellite and its stockholders (other than
Liberty Media and its affiliates);
- recommended that the Liberty Satellite board of directors authorize, adopt
and approve the merger and the merger agreement;
- recommended that the Liberty Satellite board of directors authorize the
execution and delivery of the merger agreement, any other documents
related to the merger agreement and the consummation of the merger; and
- recommended that the Liberty Satellite board of directors submit the
merger agreement to Liberty Satellite's stockholders for a vote, along
with a Liberty Satellite board of directors recommendation that the
stockholders approve such merger agreement.
In its written consent, dated as of August 26, 2003, the Liberty Satellite
board of directors, based upon the recommendation of the Special Committee:
- determined that the merger agreement and the transactions contemplated
thereby, including the merger and the exchange ratio, are fair to and in
the best interests of Liberty Satellite and its stockholders (other than
Liberty Media and its affiliates);
- authorized, adopted, approved and declared advisable the merger agreement
and the transactions contemplated thereby, including the merger and the
exchange ratio;
- resolved to submit the merger agreement to Liberty Satellite's
stockholders for their approval at a meeting of the stockholders;
- advised and recommended that Liberty Satellite's stockholders approve the
merger agreement and the transactions contemplated thereby; and
- authorized certain Liberty Satellite officers to execute, deliver and
perform the merger agreement and any related agreements and to make
certain filings with the Securities and Exchange Commission related to the
merger.
THE SPECIAL COMMITTEE
In reaching the recommendations described above, the Special Committee
considered a number of factors, including the following:
- LIBERTY SATELLITE OPERATING AND FINANCIAL CONDITION AND PROSPECTS. The
Special Committee took into account the current and historical financial
condition and results of operations of Liberty Satellite and the companies
in which it holds an interest. It also considered the prospects of Liberty
Satellite as an independent, publicly held entity, taking into account its
current financial situation, and the current and expected conditions in
the general economy and the satellite industry.
- TRANSACTION FINANCIAL TERMS/PREMIUM TO MARKET PRICE. The Special Committee
considered the relationship of the per share consideration implied by the
exchange ratio to the historical market price of shares of Liberty
Satellite's common stock. At the time the Special Committee made its
decision, the implied value of the merger consideration per share of
Liberty Satellite common stock of $3.17 (based on the closing price of
Liberty Media's Series A common stock on August 20, 2003) represented a
premium of 48% over the closing price per share of Liberty Satellite's
Series A common stock on March 26, 2003, the day before the public
announcement
40
of Liberty Media's preliminary proposal to acquire all of Liberty
Satellite's outstanding common stock, a premium of 20% over the closing
price per share of Liberty Satellite's Series A common stock one month
prior to Liberty Media's announcement, and a premium of 25% over the
average price per share of Liberty Satellite's Series A common stock over
the three month period prior to Liberty Media's announcement. The Special
Committee believes that, after extensive negotiations on its behalf with
Liberty Media, Liberty Satellite has obtained the highest price per share
of Liberty Satellite common stock that Liberty Media is willing to pay.
The Special Committee took into account the fact that the terms of the
merger were determined through extensive negotiations between Liberty
Media and Liberty Satellite and its financial and legal advisors, all of
whom are unaffiliated with Liberty Media. The Special Committee also
considered the risk that further price negotiations with Liberty Media
could cause Liberty Media to abandon the transaction. The Special
Committee was aware that the consideration to be received by Liberty
Satellite's stockholders in the merger would be taxable to such
stockholders for federal income tax purposes.
- LACK OF ACTIVE TRADING MARKET. The Special Committee considered the fact
that Liberty Satellite's common stock is not listed on a national
securities exchange and that the trading of shares in the over-the-counter
market does not constitute an active public trading market providing an
efficient means for determining the value of the shares. The OTC Bulletin
Board is not a securities exchange, it is merely a regulated quotation
service. Therefore, the Special Committee took into account that it could
not base the valuation of Liberty Satellite's common stock upon historic
trading prices.
- FORM OF CONSIDERATION. The Special Committee considered the fact that, in
the merger, the exchange ratio is fixed and, therefore, the value of the
consideration to be received by Liberty Satellite's stockholders is
subject to the risks associated with fluctuations in the market price of
Liberty Media's capital stock.
- PRESENT ECONOMIC ENVIRONMENT/DECREASE IN LIBERTY SATELLITE SHARE
PRICE. The Special Committee considered the fact that the implied value of
$3.17 per share was lower than the average market price of its shares in
early 2002 and the price at which Liberty Media made a similar proposal in
October 2001, which was later withdrawn. The Special Committee nonetheless
determined that the implied per share value would provide fair value to
its stockholders given the depressed price of Liberty Satellite's common
stock, the widespread downturn of equity values in general and, in
particular, in the telecommunications industry, and the lack of confidence
in such equity markets, indicating that the trend may not abate in the
near future. The Special Committee believes this economic environment
makes the merger more beneficial to Liberty Satellite stockholders, as the
current market for Liberty Satellite's common stock may not offer them
sufficient liquidity to make an open market sale of their common stock in
a favorable exit strategy.
- STRATEGIC ALTERNATIVES. The Special Committee considered the fact that
Liberty Media currently owns approximately 98% of the overall voting power
of Liberty Satellite. The Special Committee concluded that Liberty Media's
control over Liberty Satellite could deter any potential acquisition of
Liberty Satellite by a third party, and, accordingly, that a third party
acquisition was not a likely alternative.
- MORGAN STANLEY'S FAIRNESS OPINION. The Special Committee took into account
the presentation from Morgan Stanley and its opinion, dated August 22,
2003, that, based upon and subject to the considerations and assumptions
in its opinion, the exchange ratio pursuant to the merger agreement was
fair from a financial point of view to the holders in the aggregate of
shares of Liberty Satellite's common stock (other than Liberty Media and
its affiliates). A copy of the fairness opinion is attached hereto as
ANNEX IV. For information regarding the analysis
41
conducted by Morgan Stanley, see "The Merger--Opinion of the Financial
Advisor to the Special Committee." Liberty Satellite stockholders are
urged to read the fairness opinion and the section entitled "The
Merger--Opinion of the Financial Advisor to the Special Committee" in
their entirety. The Special Committee was aware that Morgan Stanley
becomes entitled to certain fees described under "The Merger--Opinion of
the Financial Advisor to the Special Committee" upon the consummation of
the merger.
- APPRAISAL RIGHTS. The Special Committee considered the fact that holders
of Liberty Satellite common stock who perfect their appraisal rights will
have the right to dissent from the merger and to demand appraisal of the
fair value of their shares under the Delaware corporate statute, as
described under "Appraisal Rights of Dissenting Stockholders"
THE LIBERTY SATELLITE BOARD OF DIRECTORS
In reaching its determinations referred to above, the Liberty Satellite
board of directors considered the following factors, each of which in the view
of the Liberty Satellite board of directors supported such determinations:
- the conclusions and recommendations of the Special Committee;
- the factors referred to above as having been taken into account by the
Special Committee, including the receipt by the Special Committee of the
opinion of Morgan Stanley that, as of August 22, 2003 and based upon and
subject to the assumptions stated therein, the exchange ratio pursuant to
the merger agreement was fair from a financial point of view to Liberty
Satellite's stockholders (other than Liberty Media and its affiliates),
and the financial analysis presented by Morgan Stanley to the Liberty
Satellite board of directors; and
- the fact that the exchange ratio and the terms and conditions of the
merger agreement were the result of extensive negotiations between the
Special Committee and Liberty Media.
The members of the Liberty Satellite board of directors, including the
members of the Special Committee, evaluated the merger in light of their
knowledge of the business, financial condition and prospects of Liberty
Satellite and based upon the advice of financial and legal advisors.
The Liberty Satellite board of directors, including the members of the
Special Committee, believes that the merger is procedurally fair to the Liberty
Satellite stockholders (other than Liberty Media and its affiliates) based upon
a number of factors, including:
- the fact that the Special Committee consisted of independent directors
appointed to represent the interests of Liberty Satellite's stockholders
(other than Liberty Media and its affiliates), and that the Special
Committee was empowered with the exclusive authority to review, evaluate
and negotiate the proposed merger;
- the fact that the Special Committee retained and was advised by its own
independent legal counsel;
- the fact that the Special Committee retained and was advised by Morgan
Stanley, as its independent financial advisor, to assist it in evaluating
a potential transaction with Liberty Media;
- the extent and nature of the deliberations pursuant to which the Special
Committee evaluated the merger;
- the fact that the merger agreement allows the Liberty Satellite board of
directors to withdraw its recommendation to the stockholders under certain
circumstances and, under certain circumstances, allows Liberty Satellite
to consider an alternative transaction; and
42
- the fact that the exchange ratio resulted from extensive bargaining
between representatives of the Special Committee on the one hand, and
representatives of Liberty Media, on the other.
In making its decision regarding procedural fairness, the Special Committee
also considered the fact that the merger is not conditioned upon approval by a
majority of the stockholders who are unaffiliated with Liberty Media. Although
the Special Committee, through counsel, requested such a condition, Liberty
Media did not agree. The Special Committee nonetheless determined the
transaction was fair even though it was not conditioned upon approval by a
majority of the stockholders who are unaffiliated with Liberty Media because:
- the Special Committee was advised by its legal counsel that the Delaware
statutes do not impose such a "majority of the minority" condition in such
transactions;
- the absence of offers from any interested buyers during the five months
from the date of Liberty Media's initial proposal through the date of this
proxy statement, despite the public announcement of the proposal and the
merger; and
- the terms of the merger agreement permit Liberty Satellite, under certain
circumstances, to consider competing offers and permit the Liberty
Satellite board of directors to withdraw its recommendation to Liberty
Satellite's stockholders and terminate the merger agreement under certain
circumstances.
In view of the wide variety of factors considered in connection with their
evaluation of the merger, neither the Special Committee nor the Liberty
Satellite board of directors found it practicable to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors they
considered in reaching their determinations. The Special Committee and the
Liberty Satellite board of directors considered all the factors as a whole in
reaching their respective determinations.
The foregoing discussion of the information and factors considered by the
Special Committee and the Liberty Satellite board of directors is not intended
to be exhaustive but is believed to include all material factors considered by
the Special Committee and the Liberty Satellite board of directors. Liberty
Satellite's executive officers have not been asked to make a recommendation as
to the merger.
OPINION OF THE FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
Under an engagement letter, dated April 21, 2003, the Special Committee
retained Morgan Stanley to provide it with financial advisory services
(including structuring, planning and negotiating services) and a financial
opinion letter in connection with the merger. At the meeting of the Liberty
Satellite board of directors, including the members of the Special Committee, on
August 22, 2003, Morgan Stanley rendered its oral opinion to the Special
Committee, subsequently confirmed in writing, to the effect that, as of
August 22, 2003 and subject to and based upon the assumptions and considerations
set forth in its written opinion, the exchange ratio of 0.2750 pursuant to the
merger agreement was fair to the holders of shares in the aggregate of Liberty
Satellite's common stock (other than Liberty Media and its affiliates) from a
financial point of view.
THE FULL TEXT OF THE WRITTEN OPINION OF MORGAN STANLEY, DATED AUGUST 22,
2003, IS ATTACHED AS ANNEX IV. THE OPINION SETS FORTH, AMONG OTHER THINGS, THE
ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
SCOPE OF THE REVIEW UNDERTAKEN BY MORGAN STANLEY IN RENDERING ITS OPINION. WE
RECOMMEND THAT YOU READ THE ENTIRE OPINION CAREFULLY. MORGAN STANLEY'S OPINION
IS DIRECTED TO THE SPECIAL COMMITTEE AND ADDRESSES ONLY THE FAIRNESS IN THE
AGGREGATE, FROM A FINANCIAL POINT OF VIEW, OF THE EXCHANGE RATIO PURSUANT TO THE
MERGER AGREEMENT TO THE HOLDERS IN THE AGGREGATE OF LIBERTY SATELLITE'S COMMON
STOCK, OTHER THAN LIBERTY MEDIA AND ITS AFFILIATES, AS OF THE DATE OF THE
OPINION. IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF LIBERTY SATELLITE'S COMMON STOCK AS
TO HOW SUCH STOCKHOLDER SHOULD VOTE WITH RESPECT TO THE MERGER OR ANY OTHER
MATTER RELATING TO THE MERGER. THE SUMMARY OF THE
43
OPINION OF MORGAN STANLEY SET FORTH IN THIS DOCUMENT IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE OPINION.
In connection with rendering its opinion, Morgan Stanley, among other
things:
(i) reviewed certain publicly available financial statements and other
information of Liberty Satellite and Liberty Media, respectively;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning Liberty Satellite and its interests in other
companies including, among others, On Command Corporation and WildBlue
Communications, Inc. (collectively, the "Liberty Satellite
Investments") prepared by the management of Liberty Satellite and
certain of the Liberty Satellite Investments;
(iii) reviewed certain financial forecasts related to Liberty Satellite and
certain of the Liberty Satellite Investments, as prepared by the
managements of Liberty Satellite and certain of the Liberty Satellite
Investments, respectively;
(iv) discussed the past and current operations and financial condition and
the prospects of Liberty Satellite and the Liberty Satellite
Investments with senior executives of Liberty Satellite and certain of
the Liberty Satellite Investments, respectively;
(v) considered information relating to certain strategic, financial and
operational benefits anticipated from the merger, prepared by the
managements of Liberty Satellite and certain of the Liberty Satellite
Investments;
(vi) reviewed the reported prices and trading activity of the Liberty
Satellite common stock, the Liberty Media Series A common stock and
certain of the Liberty Satellite Investments;
(vii) compared the financial performance of Liberty Satellite, Liberty Media
and, if applicable, the Liberty Satellite Investments, and the prices
and trading activity of the Liberty Satellite common stock, the Liberty
Media Series A common stock, and, if applicable, the common stock of
certain of the Liberty Satellite Investments with that of certain
comparable publicly-traded companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
selected minority buy-back transactions;
(ix) participated in discussions and negotiations among representatives of
Liberty Satellite and Liberty Media and their legal advisors;
(x) reviewed the draft merger agreement dated August 20, 2003 and certain
related documents; and
(xi) performed such other analyses and considered such other factors as
Morgan Stanley deemed appropriate.
Morgan Stanley assumed and relied upon, without independent verification,
the accuracy and completeness of the information reviewed by it for the purposes
of its opinion. With respect to the internal financial statements, other
financial and operating data, and financial forecasts, including certain
strategic, financial and operational benefits anticipated from the merger,
Morgan Stanley assumed that they were reasonably prepared on bases reflecting
the management's best currently available estimates and judgments of the future
financial performance of Liberty Satellite and certain of the Liberty Satellite
Investments, respectively. Morgan Stanley has not made any independent valuation
or appraisal of the assets or liabilities or technology of Liberty Satellite,
the Liberty Satellite Investments or Liberty Media, nor has it been furnished
with any such appraisals. In arriving at its opinion, Morgan Stanley relied
primarily on publicly available information on Liberty Media provided
44
by Liberty Media or equity research analysts who cover Liberty Media. In
addition, Morgan Stanley assumed that the merger will be consummated in
accordance with the terms set forth in the merger agreement without material
modification or waiver. Morgan Stanley's opinion was necessarily based on
financial, economic, market and other conditions as in effect on, and the
information made available to Morgan Stanley as of August 22, 2003.
In arriving at its opinion, Morgan Stanley was not authorized to solicit,
and it did not solicit interest from any party with respect to the acquisition,
business combination or other extraordinary transaction involving Liberty
Satellite or the Liberty Satellite Investments or its or their assets. In
addition, Morgan Stanley's opinion does not in any manner address the prices at
which Liberty Media's Series A common stock or Liberty Satellite's common stock
will actually trade at any time or the relative fairness of the merger to the
holders of the Series A common stock or the Series B common stock of Liberty
Satellite.
The following is a summary of the material financial analyses performed by
Morgan Stanley in connection with its oral opinion and the preparation of its
written opinion. Some of these summaries of financial analyses include
information presented in tabular format. In order to fully understand the
financial analyses used by Morgan Stanley, the tables must be read together with
the text of each summary. The tables alone do not constitute a complete
description of the financial analyses.
LIBERTY SATELLITE VALUATION ANALYSIS. Morgan Stanley noted that the implied
value per share of Liberty Satellite Series A common stock was $3.17, based on
the closing price per share of Liberty Media Series A common stock on
August 20, 2003 and the transaction exchange ratio. Morgan Stanley also noted
that the primary differences, among others, between the Liberty Satellite
Series A common stock and Liberty Satellite Series B common stock were the
average daily trading volume and the voting rights associated with each series.
HISTORICAL TRADING ACTIVITY. Morgan Stanley reviewed the closing prices and
trading volume of Liberty Satellite Series A common stock for different time
periods, ending August 20, 2003. Morgan Stanley observed the following:
VALUE PER SHARE OF
LIBERTY SATELLITE
SERIES A COMMON
PERIOD STOCK
------ ------------------
Current (8/20/03)........................................... $2.25
Last Twelve Month High (12/2/02)............................ $3.10
Last Twelve Month Low (8/20/02)............................. $1.10
Morgan Stanley observed that the implied value per share of Liberty
Satellite common stock of $3.17 represented a 41%, 2% and 188% premium over the
current, last twelve month high and last twelve month low of Liberty Satellite
Series A common stock share prices, respectively. Morgan Stanley also noted that
Liberty Satellite Series A common stock is not actively traded, with an average
of 10,475 shares of Liberty Satellite Series A common stock traded daily during
the twelve month period ending August 20, 2003, and that Liberty Satellite is
not covered by equity research analysts.
45
HISTORICAL PERFORMANCE VS. VARIOUS INDICES. Morgan Stanley reviewed the
performance of Liberty Satellite Series A common stock versus various indices
during the two year period ending August 20, 2003. Morgan Stanley observed the
following:
INDEXED PRICE PERFORMANCE
INDEX ENDING AUGUST 20, 2003(5)
----- --------------------------
S&P 500............................................... (15)%
Direct to Home Index(1)............................... (26)%
Fixed Satellite Services Index(2)..................... (39)%
Cable Index(3)........................................ (50)%
Digital Audio Radio Systems Index(4).................. (64)%
Liberty Satellite Series A common stock............... (91)%
------------------------
(1) Includes General Motors Corp. Class H, Echostar Communications Corp., XM
Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc.
(2) Includes SES Global SA, PanAmSat Corp., JSAT Corp., New Skies Satellites
N.V., and Asia Satellite Telecommunications Holdings Limited
(3) Includes Comcast Corp., Cox Communications Inc., Charter
Communications Inc., Cablevision Systems Corp., and AOL Time Warner Inc.
(4) Includes XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc.
(5) Figures in parenthesis represent percentage price declines.
EXCHANGE RATIO AND PRICE PREMIUM ANALYSIS.
EXCHANGE RATIO ANALYSIS. Morgan Stanley reviewed the ratios of the closing
prices of Liberty Satellite's Series A common stock divided by the corresponding
closing prices of Liberty Media's Series A common stock over various periods
ending on August 20, 2003. The resulting ratios are referred to as average
exchange ratios. Morgan Stanley then examined the premiums represented by the
exchange ratio of 0.2750 set forth in the merger agreement to these average
exchange ratios, and found them to be as follows:
TRANSACTION EXCHANGE RATIO
AVERAGE (0.2750) PREMIUM TO AVERAGE
PERIOD ENDING AUGUST 20, 2003 EXCHANGE RATIO EXCHANGE RATIO
----------------------------- -------------- ---------------------------
August 20, 2003........................ 0.1950 41%
Last 5 days............................ 0.2173 27%
Last 10 days........................... 0.2230 23%
Last 20 days........................... 0.2409 14%
Last 30 days........................... 0.2517 9%
Last 60 days........................... 0.2661 3%
Last 90 days........................... 0.2732 1%
March 26, 2003 (one day prior to
initial offer)....................... 0.2131 29%
46
PRICE PREMIUM ANALYSIS. Morgan Stanley then examined the premiums
represented by the value per share of Liberty Satellite Series A common stock
implied by the exchange ratio over these average prices for Liberty Satellite
Series A common stock, and found them to be as follows:
TRANSACTION IMPLIED PRICE
($3.17) PREMIUM TO AVERAGE
PERIOD ENDING AUGUST 20, 2003 AVERAGE PRICE PRICE
----------------------------- ------------- --------------------------
August 20, 2003........................... $2.25 41%
Last 5 days............................... $2.17 46%
Last 10 days.............................. $2.17 46%
Last 20 days.............................. $2.26 41%
Last 30 days.............................. $2.32 37%
Last 60 days.............................. $2.52 26%
Last 90 days.............................. $2.60 22%
March 26, 2003 (one day prior to initial
offer).................................. $2.15 48%
ANALYSIS OF PRECEDENT MERGERS & ACQUISITIONS AND MINORITY BUY-BACK
TRANSACTIONS. Morgan Stanley compared publicly available statistics for mergers
and acquisitions transactions involving a U.S. public target during the 14 year
period ending on July 1, 2003 to the relevant statistics for Liberty Satellite.
The average premium paid in all such transactions was 40% and for transactions
in which stock was the form of consideration was 37%.
Morgan Stanley also compared publicly available statistics for selected
"minority buy-back" transactions to the relevant statistics for Liberty
Satellite. The transactions reviewed included public mergers and acquisitions
announced since 1992, in which a stockholder that owned between 50% and 90% of
the stock of a company sought to purchase the remaining shares that it did not
own, and in which the total equity value of the target company was less than
$100 million. For such transactions, Morgan Stanley analyzed, as of the
announcement date, the premium offered by the acquiror to the target's
unaffected closing price. Morgan Stanley found the mean premium paid in all of
such transactions to be approximately 45%.
Morgan Stanley noted that the implied transaction value per share (based on
the exchange ratio of 0.2750 set forth in the merger agreement) of $3.17
represented an unaffected price premium (based on the day prior to the
announcement of Liberty Media's initial proposal) of 48%.
No company or transaction utilized in the analysis of precedent mergers and
acquisitions and minority buy-back transactions is identical to Liberty
Satellite, Liberty Media or the merger. In evaluating the precedent minority
buy-back transactions, Morgan Stanley made judgments and assumptions with regard
to general business, market and financial conditions and other matters, which
are beyond the control of Liberty Media and Liberty Satellite, such as the
impact of competition on the business of Liberty Media, Liberty Satellite or the
industry generally, industry growth and the absence of any adverse material
change in the financial condition of Liberty Media, Liberty Satellite or the
industry or in the financial markets in general, which could affect the public
trading value of the companies and the premiums paid in the transactions to
which they are being compared. Mathematical analysis, such as determining the
average or median, is not in itself a meaningful method of using comparable
company or transaction data.
SUM-OF-THE-PARTS ANALYSIS. Morgan Stanley also performed a sum-of-the-parts
valuation analysis based on a range of values for each of the Liberty Satellite
Investments. This analysis utilized various
47
valuation methodologies for each of the Liberty Satellite Investments. The
valuation methodologies and valuation ranges for each of the Liberty Satellite
Investments are summarized below:
ELEMENTS OF THE SUM-OF-THE-PARTS ANALYSIS
PUBLIC SECURITIES AND DERIVATIVES
LIBERTY
ON ON SATELLITE'S LIBERTY
COMMAND COMMAND OTHER COMMON SATELLITE'S
COMMON PREFERRED STOCK DERIVATIVE
VALUATION METHODOLOGY STOCK STOCK INVESTMENTS INSTRUMENTS
--------------------- ------------ --------- ------------ -----------
Trading Value.................................. Yes N/A (1) Yes Yes
Public Market Comparables...................... Yes No No No
Implied Liberty Media Offer.................... Yes N/A (1) N/A (1) N/A (1)
Discounted Cash Flow Analysis.................. Yes No No No
Liquidation Preference......................... No Yes No No
Black-Scholes Option Pricing Model............. No No No Yes
Valuation Range ($Million)..................... $15 - $60 $102 $71 - $75
------------------------
(1) Not applicable.
PRIVATE INVESTMENTS/CASH
OTHER
SKY LATIN PRIVATE
VALUATION METHODOLOGY WILDBLUE AMERICA ASTROLINK ASSETS CASH
--------------------- ------------ ------------ ---------- -------- --------
Implied Funding Value............................ Yes No No No N/A (1)
Public Market Comparables........................ Yes Yes No No N/A (1)
Discounted Cash Flow Analysis.................... Yes No No No N/A (1)
Liquidation Value................................ No No Yes Yes Yes
Valuation Range ($Million)....................... $63 - $90 $48 - $87 $0 - $6 $0 $76
------------------------
(1) Not applicable.
The result of the sum-of-the-parts valuation analysis is summarized below:
SUMMARY
VALUATION RANGE
------------------------------
LOW MEDIUM HIGH
-------- -------- --------
($MILLION, EXCEPT PER SHARE)
On Command Common and Preferred Stock....................... $ 117 $ 141 $ 162
Other Public Securities and Derivatives..................... $ 71 $ 74 $ 75
Private Investments and Cash................................ $ 187 $ 243 $ 258
------ ----- -----
Total Assets................................................ $ 374 $ 457 $ 495
Less Total Debt and Liabilities(1)........................ $ (365) $(362) $(360)
------ ----- -----
Equity Value................................................ $ 9 $ 95 $ 135
Per Share Value............................................. $ 0.18 $1.81 $2.59
Premium by Implied Value of 0.275 Exchange Ratio............ 1,658% 75% 23%
------------------------
(1) Includes preferred stock at liquidation value of $300 million, Ascent
Entertainment tax liability of $20 million, iBEAM put liability of
$32.4 million and capitalized corporate overhead values of $12.5 million,
$10 million and $7.5 million for the low, medium and high cases,
respectively.
48
In arriving at the low, medium and high cases in the immediately preceding
table, Morgan Stanley considered, among other things, discussions with Liberty
Satellite management, the ability of Liberty Satellite to sell or transfer
certain investments and the potential trading market for such investments or
lack thereof. Morgan Stanley noted that the sum-of-the-parts valuation analysis
did not assign any value to the contingent liabilities of Sky Latin America,
which currently have a present value of approximately $69 million.
LIBERTY MEDIA VALUATION ANALYSIS.
HISTORICAL TRADING ACTIVITY. Morgan Stanley reviewed the closing prices and
trading activity of Liberty Media Series A common stock for different time
periods, ending August 20, 2003. Morgan Stanley observed the following:
VALUE PER SHARE OF
LIBERTY MEDIA
SERIES A COMMON
PERIOD STOCK
------ ------------------
Current (8/20/03)........................................... $11.54
Last Twelve Month High (7/7/03)............................. $12.27
Last Twelve Month Low (10/7/02)............................. $ 6.29
Morgan Stanley noted that Liberty Media's average daily trading volume over
the past twelve months ending on August 20, 2003 (approximately 7.2 million
shares) was four times the total number of shares of Liberty Media Series A
common stock that would be issued to Liberty Satellite stockholders under the
terms of the merger agreement as of August 20, 2003. Morgan Stanley also noted
that Liberty Media Series A common stock is widely covered by equity research
analysts.
HISTORICAL PERFORMANCE VS. VARIOUS INDICES. Morgan Stanley reviewed the
performance of Liberty Media Series A common stock versus various indices for
the prior two years, ending on August 20, 2003. Morgan Stanley observed the
following:
INDEXED PRICE PERFORMANCE
INDEX ENDING AUGUST 20, 2003(2)
----- --------------------------
S&P 500............................................... (15)%
Liberty Media......................................... (22)%
Entertainment Composite(1)............................ (35)%
------------------------
(1) Consists of The News Corporation Limited, Fox Entertainment Group Inc., Walt
Disney Co., AOL Time Warner Inc. and Viacom Inc.
(2) Figures in parenthesis represent percentage price declines.
EQUITY RESEARCH ANALYSTS' PRICE TARGETS. Morgan Stanley observed that the
range of publicly available price targets set by equity research analysts for
Liberty Media Series A common stock ranged from $12.00 to $17.60 with a mean
price target of $14.89.
NET ASSET VALUE SUM-OF-THE-PARTS ANALYSIS. Morgan Stanley performed an
analysis of the Net Asset Value per share of Liberty Media Series A common stock
based on (i) share prices and derivatives values of Liberty Media's publicly
disclosed interests in public entities as of August 20, 2003 and (ii) Morgan
Stanley equity research estimates of Liberty Media's publicly disclosed private
assets as of June 30, 2003. Morgan Stanley varied the share prices of the public
assets on the low end of the range by the greater of the last twelve month low
or a 25% discount to the current share price as of August 20, 2003. Morgan
Stanley varied the share prices of the public assets on the high end of the
valuation range by the greater of the last twelve month high or the Morgan
Stanley equity research
49
price target, subject to a maximum of a 25% premium to the share prices as of
August 20, 2003. Morgan Stanley varied the Liberty Media private asset values by
a 10% discount on the low end of the valuation range and by a 10% premium on the
high end of the valuation range. This analysis suggested a Liberty Media Net
Asset Value per share range of $12.15 to $16.16. Morgan Stanley observed that
Liberty Media Series A common stock has traded at a discount to the Morgan
Stanley equity research Net Asset Value as high as 40%, but that this discount
was approximately 20% as of July 1, 2003. Applying this 20% discount to the Net
Asset Value range implies a valuation of $10.12 to $13.47. Morgan Stanley noted
that the low end of this range implied a Liberty Satellite per share value of
$2.78, representing a 29% premium over the unaffected Liberty Satellite
Series A common stock price of $2.15.
In connection with the review of the merger by the Special Committee and the
Liberty Satellite board of directors, Morgan Stanley performed a variety of
financial and comparative analyses for purposes of rendering its opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to a partial analysis or summary description. In arriving at its
opinion, Morgan Stanley considered the results of all of its analyses as a whole
and did not attribute any particular weight to any analysis or factor it
considered. Morgan Stanley believes that selecting any portion of its analyses,
without considering all analyses as a whole, would create an incomplete view of
the process underlying its analyses and opinion. In addition, Morgan Stanley may
have given various analyses and factors more or less weight than other analyses
and factors, and may have deemed various assumptions more or less probable than
other assumptions. As a result, the ranges of valuations resulting from any
particular analysis described above should not be taken to be Morgan Stanley's
view of the actual value of Liberty Satellite or Liberty Media. In performing
its analyses, Morgan Stanley made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters. Many of
these assumptions are beyond the control of Liberty Satellite or Liberty Media.
Any estimates contained in Morgan Stanley's analyses are not necessarily
indicative of future results or actual values, which may be significantly more
or less favorable than those suggested by such estimates.
Morgan Stanley conducted the analyses described above solely as part of its
analysis of the fairness of the exchange ratio pursuant to the merger agreement
from a financial point of view to holders in the aggregate of shares of Liberty
Satellite's common stock (other than Liberty Media and its affiliates) and in
connection with the delivery of its opinion to the Special Committee. These
analyses do not purport to be appraisals or to reflect the prices at which
shares of Liberty Satellite common stock or Liberty Media might actually trade.
Liberty Satellite did not impose any limitations on the scope of the information
received or reviewed by Morgan Stanley in connection with its delivery of the
opinion regarding the exchange ratio pursuant to the merger agreement.
The exchange ratio pursuant to the merger agreement was determined through
arm's length negotiations between Liberty Satellite and Liberty Media and was
approved by the Special Committee and the Liberty Satellite board of directors.
Morgan Stanley provided advice to the Special Committee of Liberty Satellite
during these negotiations. Morgan Stanley did not, however, recommend any
specific exchange ratio to the Special Committee or that any specific exchange
ratio constituted the only appropriate exchange ratio for the merger.
In addition, Morgan Stanley's opinion and its presentation to the Special
Committee and the Liberty Satellite board of directors was one of many factors
taken into consideration by the Special Committee and the Liberty Satellite
board of directors in deciding to approve the exchange ratio of 0.2750 and the
merger. Consequently, the analyses as described above should not be viewed as
determinative of the opinion of the Special Committee or the Liberty Satellite
board of directors with respect to the exchange ratio of 0.2750 or of whether
the Special Committee or the Liberty Satellite board of directors would have
been willing to agree to a different exchange ratio.
50
As discussed in the section entitled, "Merger--Background of the
Merger--Contracts and Negotiations," after considering and interviewing a number
of investment banking firms, the Special Committee retained Morgan Stanley based
upon Morgan Stanley's qualifications, experience and expertise. Morgan Stanley
is an internationally recognized investment banking and advisory firm. Morgan
Stanley, as part of its investment banking and financial advisory business, is
continuously engaged in the valuation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for corporate, estate and other purposes. In the ordinary course
of business, Morgan Stanley or its affiliates may from time to time trade in the
securities or indebtedness of Liberty Satellite or Liberty Media for its own
account, the accounts of investment funds and other clients under the management
of Morgan Stanley and for the account of customers and, accordingly, may hold
long or short positions in these securities or indebtedness.
Under the engagement letter, the Special Committee agreed that Liberty
Satellite would pay Morgan Stanley a fee for providing its financial advisory
services, payable in installments. A portion of the fee was a fixed amount paid
upon the engagement of Morgan Stanley in recognition of its general advisory
services. Another portion of the fee, which was a fixed amount attributable to
Morgan Stanley's services with respect to the opinion, was paid upon delivery of
the fairness opinion. The final portion of the fee is an amount based on the
implied value per share received by the holders of Liberty Satellite's common
stock in the merger, calculated and payable upon consummation of the merger.
Under the engagement letter, Liberty Satellite will also reimburse Morgan
Stanley for its expenses incurred in performing its services. In addition,
Liberty Satellite will indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain liabilities
and expenses, including certain liabilities under the federal securities laws,
related to or arising out of Morgan Stanley's engagement. In the past, Morgan
Stanley & Co. Incorporated and its affiliates have provided financing services
for Liberty Media and have received fees for the rendering of those services.
INTERESTS OF DIRECTORS AND OFFICERS
Certain directors and officers of Liberty Satellite have one or more of the
following interests that may be deemed to be different from, or in addition to,
the interests of Liberty Satellite stockholders generally. In the case of
directors of Liberty Satellite, the following interests presented actual or
potential conflicts of interest in determining the exchange ratio and the other
terms of the merger:
- ownership of shares of Liberty Media common stock;
- ownership of options convertible into shares of Liberty Media common
stock; and
- indemnification arrangements between Liberty Satellite and the Liberty
Satellite directors and officers.
Officers and directors of Liberty Media, Liberty Satellite Acquisition Co.
and/or Liberty Satellite who own shares of Liberty Satellite common stock
(including restricted stock) at the effective time of the merger will receive
shares of Liberty Media Series A common stock on the same terms as the Liberty
Satellite public stockholders (except that any shares of restricted stock will
remain subject to the same restrictions in place prior to the merger). Officers
and directors of Liberty Media, Liberty Satellite Acquisition Co. and/or Liberty
Satellite who own options or stock appreciation rights with respect to shares of
Liberty Satellite Series A or Series B common stock at the effective time of the
merger will have these interests assumed by Liberty Media on the same basis as
any other outstanding stock options and stock appreciation rights for Liberty
Satellite Series A or Series B common stock. Assumed stock options and stock
appreciation rights will be exercisable with respect to the number of shares of
Liberty Media Series A common stock determined by multiplying the number of
underlying
51
shares of Liberty Satellite Series A common stock by the exchange ratio of
0.2750, with an inverse and proportionate adjustment to the exercise price per
share.
The following table identifies those directors and executive officers of
Liberty Satellite who are directors or officers of Liberty Media or its
affiliates (other than Liberty Satellite and its controlled affiliates) and the
positions held by such individuals with Liberty Media and Liberty Satellite.
Messrs. Bennett, Fitzgerald and Howard do not receive any compensation for their
services as members of Liberty Satellite's board of directors.
NAME AFFILIATED ENTITY POSITION(S) HELD
---- ----------------- -------------------------------------------------
Robert R. Bennett........ Liberty Media Director, President and Chief Executive Officer
Liberty Director
Satellite........
William R. Fitzgerald.... Liberty Media Senior Vice President
Liberty Satellite Director
Gary S. Howard........... Liberty Media Executive Vice President, Chief Operating
Liberty Satellite Officer, Director
Director and Chairman of the Board
INDEMNIFICATION. Please see the section entitled "The Merger
Agreement--Indemnification" for a description of certain indemnification rights
that the merger agreement provides to present and former directors and officers
of Liberty Satellite and any of its subsidiaries (when acting in such capacity),
and any person who is or was serving at the request of Liberty Satellite as a
director or officer of another entity (when acting in such capacity).
ACCOUNTING TREATMENT
The merger will be accounted as a "purchase" of a minority interest, as this
term is used under accounting principles generally accepted in the United States
of America, for accounting and financial reporting purposes. Accordingly, the
consideration paid for the acquired Liberty Satellite shares will be allocated
to the assets and liabilities of Liberty Satellite based on their respective
fair values.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
GENERAL. The following discussion summarizes the material U.S. federal
income tax consequences of the merger that are applicable to holders of Liberty
Satellite common stock. It is not a complete analysis of all potential tax
effects relevant to the merger. This discussion assumes that you hold your
shares of Liberty Satellite common stock as capital assets within the meaning of
Section 1221 of the Internal Revenue Code.
This discussion does not address the tax consequences that may be relevant
to a particular Liberty Satellite stockholder subject to special treatment under
U.S. federal income tax laws, such as dealers in securities, banks, insurance
companies, financial institutions, partnerships or other pass-through entities,
tax-exempt organizations, non-U.S. persons, stockholders who acquired their
shares of Liberty Satellite common stock pursuant to the exercise of options or
otherwise as compensation, or stockholders who hold their stock as part of a
hedge, constructive sale, wash sale, straddle or conversion transaction, nor
does the discussion address any consequences arising under the laws of any
state, local or foreign jurisdiction or the application of the U.S. federal
estate and gift tax or the alternative minimum tax. Moreover, the tax
consequences to holders of Liberty Satellite options are not discussed. The
discussion is based on and subject to the Internal Revenue Code of 1986, as
amended, Treasury regulations thereunder, and administrative rulings and court
decisions as of the date hereof. All of the foregoing are subject to change,
which may be retroactive, and any such change could affect the
52
continuing validity of this discussion. We urge you to consult your own tax
advisors concerning the U.S. federal, state and local and foreign tax
consequences of the merger to you.
TAX CONSEQUENCES TO LIBERTY SATELLITE COMMON STOCKHOLDERS.
The merger will be treated for tax purposes as a taxable sale or exchange of
Liberty Satellite shares for shares of Liberty Media Series A common stock and
for cash in lieu of fractional shares, if applicable. Liberty Satellite
stockholders will have taxable gain or loss equal to the difference between
their aggregate basis for their Liberty Satellite shares surrendered in the
merger and the sum of the amount of cash and the fair market value of the
Liberty Media Series A common stock they receive in the merger. The gain or loss
will be capital if they held their shares of Liberty Satellite stock as capital
assets and would be long term gain or loss if they held their shares of Liberty
Satellite common stock for more than a year as of the date of the merger. Long
term capital gains of individuals are generally taxed at more favorable tax
rates than other types of income or gain. Capital losses are generally
deductible only against capital gains, plus, in the case of individuals, $3,000
each year.
Your aggregate adjusted basis in the Liberty Media Series A common stock
received in the merger generally will be equal to the fair market value of such
stock as of the date of the merger. Your holding period in the Liberty Media
Series A common stock received in the merger will begin on the day after the
date of the merger.
CONSEQUENCES TO THE CORPORATIONS
The corporations that are parties to the merger will recognize no gain or
loss in the merger. The merger will be treated as a taxable purchase of the
stock of Liberty Satellite. Such a transaction results in gain or loss
recognition for the Liberty Satellite stockholders, but no gain or loss
recognition for the corporations.
THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS
AND CIRCUMSTANCES OF YOUR STATUS AND ATTRIBUTES. AS A RESULT, THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT
APPLY TO YOU. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, YOU
ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THE APPLICATION AND EFFECT OF
UNITED STATES FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN UNITED STATES FEDERAL AND OTHER TAX LAWS.
DEREGISTRATION OF LIBERTY SATELLITE COMMON STOCK AFTER THE MERGER
If the merger is completed, Liberty Satellite Series A and Series B common
stock will be deregistered under the Securities Exchange Act and will no longer
be eligible for quotation on the OTC Bulletin Board.
ON COMMAND MERGER
Liberty Media has also entered into a merger agreement with On Command,
pursuant to which Liberty Media would acquire all of the publicly held common
stock of On Command not already beneficially owned by Liberty Satellite. In this
separate merger transaction, unaffiliated holders of On Command common stock
will receive 0.166 of a share of Series A common stock of Liberty Media in
exchange for each share of On Command common stock that they own (subject to
certain adjustments described below based on the trading price of Liberty Media
Series A common stock). The closing of the Liberty Satellite merger and the On
Command merger are not conditioned upon each other. If the implied value of the
exchange ratio in the On Command merger is less than $1.90 or more than $2.10
per share of On Command common stock, based on the average market price of the
Liberty Media
53
Series A common stock during the five trading days ending on the third trading
day prior to the closing of the merger, then the exchange ratio will be adjusted
upward or downward, as applicable, to yield an implied value of $1.90 or $2.10
per share, respectively, based on such average market price. Any adjustment of
the exchange ratio to more than 0.190 of a share of Liberty Media Series A
common stock for each share of On Command common stock will be at Liberty
Media's sole discretion. If Liberty Media determines not to increase the
exchange ratio further, then the exchange ratio would be fixed at 0.190 and On
Command would be entitled to terminate the merger agreement. Any decision of the
On Command board of directors to terminate the merger agreement would be made by
vote of the independent directors.
CERTAIN LITIGATION
Shortly after Liberty Satellite's announcement on April 2, 2003 of Liberty
Media's initial merger proposal, five putative class action lawsuits were filed
on behalf of Liberty Satellite stockholders in the Court of Chancery of the
State of Delaware (the "Delaware Court") against Liberty Media, Liberty
Satellite and members of the board of directors of Liberty Satellite (the "Class
Action Lawsuits"). The complaints allege, among other things, that the
defendants breached fiduciary and other duties in connection with Liberty
Media's proposal to acquire ownership of all issued and outstanding shares of
Liberty Satellite common stock. The complaints seek a court order enjoining the
proposed transaction, an award of unspecified damages and attorneys' fees, the
unwinding of any transaction consummated and various other equitable relief. The
five lawsuits were consolidated by the Delaware Court on April 30, 2003.
Following settlement discussions between plaintiffs' counsel and counsel for
Liberty Media during late July and early August, the parties to the pending
stockholder litigation agreed on and executed a memorandum of understanding on
August 5, 2003 to reflect a proposed settlement of the litigation. The parties
also agreed, subject to the conditions described below, to enter into a
settlement agreement, cooperate in public disclosures related to the settlement
and use best efforts to gain approval of the settlement by the Delaware courts.
Without any admission of fault by the defendants, the memorandum of
understanding contemplates a dismissal of all claims with prejudice and a
release in favor of all defendants of any and all claims related to the proposed
transaction that have been or could have been asserted by the plaintiffs or any
members of the purported class consisting of all record and beneficial holders
of Liberty Satellite common stock from April 1, 2003 through the completion of
the merger. These dismissed claims are referred to in this proxy statement as
the settled claims.
The proposed settlement is subject to numerous conditions, including the
completion of confirmatory discovery, execution of a settlement agreement, a
determination by Liberty Media that the dismissal of the litigation in
accordance with the settlement agreement will result in the final release with
prejudice of the settled claims, final approval of the settlement by the
Delaware courts and completion of the merger. Because the proposed settlement is
subject to consummation of the merger and other conditions described above, any
settlement will not be final at the time you will be asked to vote on the
merger.
If the parties to the litigation do not proceed with the proposed
settlement, or in the event that the proposed settlement ultimately is not
approved by the Delaware courts, the litigation could proceed and plaintiffs
could seek the relief sought in their complaints, including rescission of the
merger or an award of damages in favor of Liberty Satellite stockholders in any
plaintiff class that might be certified.
54
THE MERGER AGREEMENT
The following description of the merger agreement is qualified in its
entirety by reference to the complete text of the merger agreement, which is
incorporated by reference herein and a copy of which is annexed to this proxy
statement/prospectus as ANNEX I.
GENERAL STRUCTURE; EFFECTIVE TIME.
The merger agreement provides that, upon the terms and subject to the
conditions of the merger agreement, Liberty Satellite Acquisition Co. will merge
with and into Liberty Satellite, with Liberty Satellite being the surviving
corporation. In the merger, which will become effective on the date and at the
time that a certificate of merger is accepted for filing by the Delaware
Secretary of State in accordance with the applicable provisions of the Delaware
corporate statute (or such later date and time as may be agreed to by Liberty
Media and Liberty Satellite and specified in the certificate of merger),
stockholders of Liberty Satellite will receive the consideration described below
under "Consideration to be Received in the Merger." The effective time of the
merger will occur as soon as practicable after the last of the conditions
described under "Conditions to the Merger" below, has been satisfied or waived
by Liberty Media or Liberty Satellite, as applicable. We expect the merger to
become effective as soon as possible following the special meeting of
stockholders. However, because the merger is subject to certain conditions, the
merger may occur on any date thereafter, or not at all.
As a result of the merger, Liberty Media will acquire all of the publicly
held common stock of Liberty Satellite that it does not already beneficially
own. The merger agreement provides that:
- the Liberty Satellite certificate of incorporation will remain as the
certificate of incorporation of Liberty Satellite after the merger until
thereafter amended in accordance with the terms thereof and the Delaware
corporate statute;
- Liberty Satellite's bylaws will remain as the bylaws of Liberty Satellite
after the merger until thereafter amended in accordance with the terms
thereof, the certificate of incorporation of Liberty Satellite and the
Delaware corporate statute; and
- the parties will take appropriate action to ensure that the directors of
Liberty Satellite Acquisition Co. and the officers of Liberty Satellite at
the effective time of the merger will, from and after the effective time
of the merger, be the directors and officers of Liberty Satellite after
the merger until their respective successors are duly elected or appointed
and qualified in accordance with the certificate of incorporation and
bylaws of Liberty Satellite, or as otherwise provided by applicable law.
CONSIDERATION TO BE RECEIVED IN THE MERGER
LIBERTY MEDIA SERIES A COMMON STOCK. At the effective time of the merger,
each holder of shares of Liberty Satellite Series A and Series B common stock
(other than Liberty Media, Liberty Satellite Acquisition Co. and wholly-owned
subsidiaries of Liberty Media) who has not properly exercised appraisal rights,
will be entitled to receive 0.2750 of a share of Liberty Media Series A common
stock for each share of Liberty Satellite Series A or Series B common stock held
immediately prior to the merger. Liberty Media will not issue fractional shares
of Liberty Media Series A common stock in the merger. Instead, if any holder of
Liberty Satellite common stock would be entitled to receive a number of shares
of Liberty Media Series A common stock that includes a fraction, then in lieu of
a fractional share, the stockholder will be entitled to receive cash in an
amount determined by multiplying the fraction by the current market value of a
whole share of Liberty Media Series A common stock and rounding the product to
the nearest whole cent. The "current market value" of a share of Liberty Media
Series A common stock means, for this purpose, the average of the last reported
sale prices of a
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share of Liberty Media Series A common stock on the New York Stock Exchange for
the period of five consecutive trading days prior to the last full trading day
preceding the closing date of the merger.
TREATMENT OF LIBERTY SATELLITE STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
AND RESTRICTED STOCK.
Liberty Media will assume outstanding stock options and stock appreciation
rights issued under the Liberty Satellite & Technology 1996 Stock Incentive
Plan, as amended, and other stock options and stock appreciation rights not
issued under that plan, in each case with respect to Liberty Satellite Series A
or Series B common stock on the effective date of the merger. Assumed stock
options and stock appreciation rights will be exercisable with respect to the
number of shares of Liberty Media Series A common stock determined by
multiplying the number of underlying shares of Liberty Satellite Series A or
Series B common stock on the effective date of the merger by the 0.2750 exchange
ratio, rounded up to the nearest whole share. The exercise price per share of
Liberty Media Series A common stock issuable under each assumed option (and the
base price of each stock appreciation right issued in tandem with, and at the
same exercise price as the stock options) will be calculated by dividing the
exercise price of the option (or base price of the stock appreciation right)
before the merger by the exchange ratio, rounded down to the nearest whole cent.
In addition, each restricted share of Liberty Satellite common stock issued
under or outside of the Liberty Satellite Stock Incentive Plan will be converted
into restricted shares of Liberty Media Series A common stock at the exchange
ratio, rounded up to the nearest whole share. Each restricted share of Liberty
Media stock issued to holders of Liberty Satellite restricted stock will remain
subject to the same restrictions applicable to such share prior to the merger.
EFFECT OF THE MERGER ON LIBERTY SATELLITE PREFERRED STOCK. All shares of
Liberty Satellite Series A and B preferred stock that are issued and outstanding
immediately prior to the merger will remain outstanding after the merger. All
outstanding shares of Series A and B preferred stock are currently held by
wholly-owned subsidiaries of Liberty Media. For additional information on the
Liberty Satellite preferred stock, please see the section entitled "Comparison
of Stockholder Rights" on page 66.
LIBERTY SATELLITE ACQUISITION CO. CAPITAL STOCK. At the effective time of
the merger, each share of capital stock of Liberty Satellite Acquisition Co.
outstanding immediately prior to the effective time of the merger will be
converted into one share of the common stock of Liberty Satellite, as the
surviving corporation in the merger, and will constitute the only outstanding
shares of capital stock of the surviving corporation (other than dissenting
shares and Liberty Satellite preferred stock). As a result, Liberty Media will
acquire all of the publicly held common stock of Liberty Satellite that it does
not beneficially own, as Liberty Media directly and indirectly through several
controlled subsidiaries, controls all of the issued and outstanding capital
stock of Liberty Satellite Acquisition Co.
CERTAIN ADJUSTMENTS. If, prior to the effective time of the merger, the
Liberty Media Series A common stock is recapitalized or reclassified or Liberty
Media effects any stock dividend, stock split, or reverse stock split of Liberty
Media Series A common stock or otherwise effects any transaction that changes
the Liberty Media Series A common stock into any other securities (including
securities of another corporation), or any dividend or distribution is made on
the Liberty Media Series A common stock (or such other securities), then the
shares of Liberty Media Series A common stock to be delivered in the merger to
the holders of Liberty Satellite common stock will be appropriately and
equitably adjusted to the kind and amount of shares of stock and other
securities and property which the holders of such shares of Liberty Media
Series A common stock would have been entitled to receive had such shares been
issued and outstanding as of the record date for determining stockholders
entitled to participate in such corporate event.
EXCHANGE OF SHARES. Promptly after the effective time of the merger,
transmittal letters will be mailed to each holder of record of shares of Liberty
Satellite common stock to be used in forwarding
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his or her certificates evidencing such shares for surrender and exchange for
certificates evidencing the shares of Liberty Media Series A common stock to
which he or she has become entitled and, if applicable, cash in lieu of a
fractional share of Liberty Media Series A common stock. After receipt of this
transmittal letter, each holder of certificates formerly representing Liberty
Satellite common stock should surrender such certificates to the exchange agent
designated in the transmittal letter, and each such holder will receive in
exchange therefor certificates evidencing the number of whole shares of Liberty
Media Series A common stock to which he or she is entitled and a check for any
cash that may be payable in lieu of a fractional share of Liberty Media
Series A common stock. These transmittal letters will be accompanied by
instructions specifying other details of the exchange.
STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL LETTER.
After the effective time of the merger, except for holders of Liberty
Satellite common stock who exercise their statutory dissenters' rights of
appraisal, each certificate evidencing Liberty Satellite common stock (other
than certificates evidencing shares held directly by Liberty Satellite in its
treasury or shares owned of record by Liberty Satellite Acquisition Co., Liberty
Media or any wholly-owned subsidiary of Liberty Media, all of which will be
canceled), until so surrendered and exchanged, will be deemed, for all purposes,
to evidence only the right to receive the number of shares of Liberty Media
Series A common stock that the holder of the certificate is entitled to receive
and the right to receive any cash payment in lieu of a fractional share of
Liberty Media Series A common stock. The holder of the unexchanged certificate
will not be entitled to receive any dividends or other distributions payable by
Liberty Media until the certificate is surrendered. Subject to applicable laws,
these dividends and distributions, if any, will be accumulated and, at the time
of the surrender, all such unpaid dividends and distributions, together with any
cash payment in lieu of a fractional share of Liberty Media Series A common
stock, will be paid, without interest.
REGULATORY APPROVALS; CONDITIONS TO THE MERGER.
REGULATORY APPROVALS. We are not aware of any material regulatory
requirements applicable to the merger under any U.S. state or federal law or
regulation, other than any requirements under applicable federal and state
securities laws and regulations and Delaware corporate law.
CONDITIONS OF ALL PARTIES. The respective obligations of Liberty Satellite,
Liberty Media and Liberty Satellite Acquisition Co. to consummate the
transactions contemplated by the merger agreement are subject to the
satisfaction or, where permissible, waiver of the following conditions:
- adoption of the merger agreement and approval of the merger by the
requisite vote of the stockholders of Liberty Satellite at the special
meeting;
- effective registration under the Securities Act of 1933 of the shares of
Liberty Media Series A common stock to be issued in connection with the
merger and receipt of all state securities law permits and authorizations
necessary to carry out the transactions contemplated by the merger
agreement; and
- the absence of any effective permanent or preliminary injunction or
similar order issued by a court or other governmental entity of competent
jurisdiction preventing consummation of the transactions contemplated by
the merger agreement as provided therein or permitting such consummation
only subject to any condition or restriction that has or would have a
material adverse effect on Liberty Satellite.
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CONDITIONS OF LIBERTY MEDIA AND LIBERTY SATELLITE ACQUISITION CO. The
obligations of Liberty Media and Liberty Satellite Acquisition Co. to consummate
the transactions contemplated by the merger agreement are also subject to the
satisfaction or waiver of the following conditions:
- the accuracy of the representations and warranties regarding the business
operations of Liberty Satellite (except for inaccuracies that could not
have a material adverse effect on Liberty Satellite or prevent or
materially delay consummation of the merger), the accuracy in all material
respects of the remaining representations and warranties of Liberty
Satellite, and the performance, in all material respects, of the
obligations, agreements and covenants made by Liberty Satellite in the
merger agreement;
- receipt of certain closing certificates from Liberty Satellite;
- no action having been taken, nor any statute, rule, regulation, order,
judgment or decree proposed, enacted, issued, enforced or deemed
applicable by any foreign or United States federal, state or local
governmental entity, and the absence of any pending or threatened action,
suit or proceeding, which (i) makes or may make the merger agreement, the
merger or any of the other transactions contemplated by the merger
agreement illegal or imposes or may impose material damages or penalties
in connection therewith, (ii) requires or may require the divestiture of a
material portion of the business of Liberty Media or any of its
subsidiaries, (iii) imposes or may impose material limitations on the
ability of Liberty Media effectively to exercise full rights of ownership
of shares of capital stock of Liberty Satellite, (iv) requires or may
require Liberty Media, Liberty Satellite or any of their respective
material subsidiaries or affiliates to refrain from engaging in any
material business if the merger is consummated, or (v) materially
increases Liberty Media's obligations in connection therewith; and
- receipt of all material governmental and applicable third party consents,
approvals and authorizations.
CONDITIONS OF LIBERTY SATELLITE. The obligation of Liberty Satellite to
consummate the transactions contemplated by the merger agreement is also subject
to the satisfaction or waiver of the following conditions:
- the accuracy of the representations and warranties regarding the business
operations of Liberty Media (except for inaccuracies that could not have a
material adverse effect on Liberty Media or prevent or materially delay
consummation of the merger), the accuracy in all material respects of the
remaining representations and warranties of Liberty Media and Liberty
Satellite Acquisition Co., and the performance, in all material respects,
of the obligations, agreements and covenants made by Liberty Media and
Liberty Satellite Acquisition Co. in the merger agreement;
- receipt of certain closing certificates from Liberty Media;
- no action having been taken, nor any statute, rule, regulation, order,
judgment or decree proposed, enacted, issued, enforced or deemed
applicable by any foreign or United States federal, state or local
governmental entity, and the absence of any pending or threatened action,
suit or proceeding, which (i) makes or may make the merger agreement, the
merger or any of the other transactions contemplated by the merger
agreement illegal or may impose material damages or penalties in
connection therewith, or (ii) has or, in the reasonable judgment of
Liberty Satellite, assuming consummation of the merger, is reasonably
likely to have a material adverse effect on the business, properties,
operations or financial condition of Liberty Media and its subsidiaries
(including Liberty Satellite and its subsidiaries), taken as a whole;
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- the shares of Liberty Media Series A common stock that will be issued in
the merger must be authorized for listing on the New York Stock Exchange,
subject only to official notice of issuance; and
- receipt of all material governmental consents, approvals and
authorizations.
COVENANTS
CERTAIN COVENANTS BY LIBERTY SATELLITE. Liberty Satellite has agreed,
except as permitted, required or specifically contemplated by the merger
agreement, required by a change in applicable law or consented to in writing by
Liberty Media, to conduct, and to cause each of its subsidiaries to conduct, its
business, in the ordinary and usual course consistent with past practice, and to
use its reasonable efforts to preserve intact its business organization, to
preserve its licenses and other permits in full force and effect, to keep
available the services of its present officers and key employees and to preserve
the good will of those with which it has business relationships. Liberty
Satellite has also agreed that except as permitted, required or specifically
contemplated by the merger agreement, required by a change in applicable law or
consented to in writing by Liberty Media, it will not and will not permit any of
its subsidiaries to, prior to the effective time of the merger:
- amend its certificate of incorporation or bylaws or other governing
instrument or document;
- authorize for issuance, issue, grant, sell, deliver, dispose of, pledge or
otherwise encumber any shares of its capital stock or any securities or
rights convertible into, exchangeable for, or evidencing the right to
subscribe for any shares of its capital stock or other equity or voting
interests, or any rights, options, warrants, calls, commitments or other
agreements of any character to purchase or acquire any shares of its
capital stock or other equity or voting interests, or any securities or
rights convertible into, exchangeable for, or evidencing the right to
subscribe for, any shares of its capital stock or other equity or voting
interests, subject to certain specified exceptions;
- split, combine, subdivide or reclassify the outstanding shares of its
capital stock or other equity or voting interests, or declare, set aside
for payment or pay any dividend, or make any other actual, constructive or
deemed distribution in respect of any shares of its capital stock or other
equity or voting interests, or otherwise make any payments to stockholders
or owners of equity or voting interests in their capacity as such (other
than dividends or distributions paid by any wholly-owned subsidiary of
Liberty Satellite to Liberty Satellite or another wholly-owned
subsidiary);
- redeem, purchase or otherwise acquire, directly or indirectly, any
outstanding shares of capital stock or other securities or equity or
voting interests of Liberty Satellite or any subsidiary of Liberty
Satellite, subject to certain specified exceptions;
- make any other changes in its capital or ownership structure;
- sell or grant a lien with respect to any stock, equity or partnership
interest owned by it in any subsidiary of Liberty Satellite; or
- enter into or assume any contract, agreement, obligation, commitment or
arrangement with respect to any of the foregoing.
Except as permitted, required or specifically contemplated by the merger
agreement, required by a change in applicable law or consented to in writing by
Liberty Media, Liberty Satellite has also agreed that it will not, and will
cause its subsidiaries not to take certain actions outside the ordinary course
of business.
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In addition, Liberty Satellite has agreed that it will not, and it will not
permit its officers, directors, representatives and agents to, directly or
indirectly, (i) take any action to solicit, initiate or knowingly encourage the
submission of any offer or proposal concerning a tender offer, exchange offer,
merger, share exchange, recapitalization, consolidation or other similar
business combination, or a direct or indirect acquisition in any manner of a
significant equity interest in, or a substantial portion of the assets of,
Liberty Satellite (each, an "Acquisition Proposal") or (ii) engage in
discussions or negotiations with any person to facilitate an Acquisition
Proposal. However, Liberty Satellite may engage in discussions or negotiations
with, and furnish nonpublic information or access to, any person in response to
an unsolicited Acquisition Proposal, if (y) it has complied with the foregoing
non-solicitation covenant and (z) the Liberty Satellite board of directors
determines in good faith after consultation with counsel that it is necessary to
do so in order to discharge its fiduciary duties under applicable law. Liberty
Satellite must notify Liberty Media of, and keep it informed of any developments
with respect to, an Acquisition Proposal. The Liberty Satellite board of
directors is permitted to withdraw or modify in a manner adverse to Liberty
Media its recommendation to the stockholders of Liberty Satellite to approve the
merger agreement if it has complied with this non-solicitation covenant.
CERTAIN COVENANTS BY LIBERTY MEDIA. Pursuant to the merger agreement,
Liberty Media has agreed, in its capacity as a beneficial owner of Liberty
Satellite common and preferred stock, to cause the Liberty Satellite stock
beneficially owned by Liberty Media, Liberty Satellite Acquisition Co. and
Liberty Media's wholly-owned subsidiaries to be voted at the special meeting in
favor of the proposal to adopt the merger agreement.
INDEMNIFICATION
The merger agreement provides that, from and after the effective time of the
merger, Liberty Satellite (as the surviving corporation in the merger) will
indemnify, defend and hold harmless the present and former directors and
officers of Liberty Satellite and any of its subsidiaries (when acting in such
capacity), and any person who is or was serving at the request of Liberty
Satellite as a director or officer of another entity (when acting in such
capacity) (collectively, the "Indemnified Parties") against all losses, claims,
damages, costs, expenses (including fees and expenses of counsel properly
retained by an Indemnified Party under the merger agreement), liabilities or
judgments or amounts that are paid in settlement with the approval of Liberty
Satellite (which approval shall not be unreasonably withheld) of or in
connection with any claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of the fact that such
person was at any time prior to the effective time of the merger a director or
officer of Liberty Satellite, pertaining to any matter existing or occurring at
or prior to the effective time of the merger and whether asserted or claimed
prior to, at or after the effective time of the merger ("Indemnified
Liabilities") to the full extent that (x) a corporation is permitted under
Delaware law to indemnify or advance expenses to its own directors or officers,
as the case may be, (y) such Indemnified Party would have been entitled to be
indemnified by Liberty Satellite, if such Indemnified Party was a director or
officer of Liberty Satellite, with respect to the Indemnified Liabilities in
question under the Liberty Satellite certificate of incorporation and Liberty
Satellite's bylaws as in effect on August 26, 2003 and under any indemnification
agreement with Liberty Satellite in a form disclosed to Liberty Media prior to
the date of the merger agreement and (z) such indemnification otherwise is
permitted by applicable law.
LISTING OF LIBERTY MEDIA SERIES A COMMON STOCK
Liberty Media will use reasonable efforts to cause the shares of Liberty
Media Series A common stock that will be issued in the merger (including shares
issued in connection with Liberty Satellite's options assumed in the merger) to
be authorized for listing on the New York Stock Exchange, subject to official
notice of issuance, before completing the merger. The merger will not be
completed before the authorization is obtained.
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TERMINATION, AMENDMENT AND WAIVER
TERMINATION. The merger agreement may be terminated and the merger
abandoned at any time prior to the effective time of the merger, whether before
or after adoption of the merger agreement by the stockholders of Liberty
Satellite, by
- mutual consent of Liberty Satellite and Liberty Media;
- either Liberty Satellite, on the one hand, or Liberty Media and Liberty
Satellite Acquisition Co., on the other hand, if (i) the merger has not
been consummated before March 31, 2004, unless this delay in consummation
is due to the failure of the party seeking to terminate the merger
agreement to perform any of its obligations thereunder, (ii) there has
been a material breach of any representation, warranty, covenant or
agreement on the part of the other party (or by Liberty Satellite
Acquisition Co., if the party seeking to terminate the merger agreement is
Liberty Satellite) contained in the merger agreement and this breach is
incapable of being cured, (iii) any court of competent jurisdiction or
other competent governmental authority has issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the merger and this action has become final and
nonappealable, or (iv) the required adoption of the merger agreement by
the stockholders of Liberty Satellite has not been duly obtained at the
special meeting, provided the terminating party has complied with its
obligations contained in the merger agreement regarding the special
meeting and applicable Securities and Exchange Commission filings; or
- Liberty Media or Liberty Satellite, if the Liberty Satellite board of
directors has withdrawn or modified in any manner adverse to Liberty Media
its recommendation to Liberty Satellite stockholders regarding the
adoption of the merger agreement and approval of the merger.
In the event of termination of the merger agreement by either Liberty
Satellite or Liberty Media as provided above, the merger agreement will become
void and there will be no liability or obligation on the part of Liberty Media,
Liberty Satellite Acquisition Co., Liberty Satellite or their respective
affiliates, stockholders, officers, directors, agents or representatives (other
than under certain specified provisions of the merger agreement which will
survive the termination thereof and other than to the extent this termination
results from the willful breach by Liberty Media, Liberty Satellite Acquisition
Co. or Liberty Satellite of any of its respective representations, warranties,
covenants or agreements contained in the merger agreement).
AMENDMENT AND WAIVER. Liberty Satellite and Liberty Media may amend the
merger agreement, by action taken or authorized by their respective boards of
directors, at any time prior to the effective time of the merger, either before
or after adoption by the stockholders of Liberty Satellite of the merger
agreement, except that after the adoption by the stockholders of Liberty
Satellite, no amendment may be made which by law requires further approval by
such stockholders without further approval. At any time prior to the effective
time of the merger, either Liberty Satellite or Liberty Media, by action taken
or authorized by such party's board of directors, may, to the extent legally
allowed, extend the time specified in the merger agreement for the performance
of any of the obligations of the other party, waive any inaccuracies in the
representations and warranties of the other party contained in the merger
agreement or in any document delivered pursuant thereto, waive compliance by the
other party with any of the agreements or covenants of the other party contained
in the merger agreement or waive any condition to the waiving party's obligation
to consummate the transactions contemplated by, or other obligations under, the
merger agreement.
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CERTAIN RESTRICTIONS ON RESALE OF LIBERTY MEDIA SERIES A COMMON STOCK BY
AFFILIATES OF LIBERTY SATELLITE AND LIBERTY MEDIA
All shares of Liberty Media Series A common stock received by Liberty
Satellite stockholders in the merger will be registered under the Securities Act
of 1933 and freely transferable under the federal securities laws, except that
any such shares received by persons who are deemed "affiliates" (as such term is
defined under the Securities Act of 1933) of Liberty Satellite prior to the
merger may be resold by them only in transactions permitted by the resale
provisions of Rule 145 under the Securities Act of 1933 (or Rule 144 in the case
of such persons who become affiliates of Liberty Media) or as otherwise
permitted under the Securities Act of 1933. This proxy statement/prospectus may
also be used as a prospectus for the resale by affiliates of Liberty Satellite
of shares of Liberty Media Series A common stock acquired in the merger. Any
such resale would be reflected in a supplement to this proxy
statement/prospectus or a post-effective amendment to the registration
statement, as appropriate.
Persons who may be deemed to be affiliates of Liberty Satellite or Liberty
Media generally include individuals or entities that control, are controlled by,
or are under common control with such party and may include certain officers and
directors of such party as well as principal stockholders of such party.
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APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
If the merger is consummated, holders of Liberty Satellite common stock on
the date of making a demand for appraisal, as described below, will be entitled
to have the fair value of those shares appraised by the Delaware Court of
Chancery under Section 262 of the Delaware General Corporation Law and to
receive payment for the "fair value" of those shares instead of the merger
consideration. In order to be eligible for such appraisal rights, however, a
stockholder must (1) continue to hold such stockholder's shares through the
effective date of the merger; (2) strictly comply with the procedures described
in Section 262 and (3) not have voted in favor of the merger (a stockholder's
vote against the merger, including as a result of a failure to vote, will not in
and of itself constitute a waiver or exercise of his or her appraisal rights).
THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT
COMPLIANCE WITH THE PROCEDURES SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY
OF THESE PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS
UNDER SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF
SECTION 262.
The following summary is not a complete statement of Section 262 of the
Delaware General Corporation Law, and is qualified in its entirety by reference
to Section 262, which is incorporated in this proxy statement/prospectus by
reference, together with any amendments to the laws that may be adopted after
the date of this proxy statement/prospectus. A copy of Section 262 is attached
as ANNEX III to this proxy statement/prospectus.
NOTICE REQUIREMENTS. Under Section 262, not less than 20 days prior to the
date of the special meeting, Liberty Satellite, as the surviving corporation, is
required to mail to each Liberty Satellite stockholder entitled to appraisal
rights, a notice that appraisal rights are available to the stockholder. This
notice must also include a copy of Section 262. THIS PROXY STATEMENT/PROSPECTUS
CONSTITUTES YOUR NOTICE OF APPRAISAL RIGHTS AS REQUIRED UNDER SECTION 262,
INCLUDING YOUR NOTICE AS TO THE TIME PERIODS IN WHICH YOU HAVE TO EXERCISE THOSE
RIGHTS. NO FURTHER NOTICE AS TO TIME RESTRICTIONS ON YOUR APPRAISAL RIGHTS WILL
BE GIVEN. IT WAS MAILED TO THE STOCKHOLDERS OF LIBERTY SATELLITE ON OR ABOUT
OCTOBER 9, 2003.
DEMAND FOR APPRAISAL. In order to exercise appraisal rights, a stockholder
must, before the taking of the vote on the merger agreement and the merger at
the special meeting, demand in writing from the surviving corporation, Liberty
Satellite, an appraisal of the stockholder's shares of Liberty Satellite common
stock. This demand will be sufficient if it reasonably informs Liberty Satellite
of the identity of the stockholder and that the stockholder intends to demand an
appraisal of the fair value of the stockholder's shares of Liberty Satellite
common stock. Failure to make this demand on or before the taking of the vote on
the merger agreement and the merger at the meeting will foreclose a
stockholder's rights to appraisal. A stockholder's vote against the merger
agreement and the merger, including as a result of a failure to vote, will not
in and of itself constitute a waiver or exercise of his or her appraisal rights.
ALL DEMANDS SHOULD BE DELIVERED TO LIBERTY SATELLITE AND ADDRESSED AS FOLLOWS:
LIBERTY SATELLITE & TECHNOLOGY, INC., 12300 LIBERTY BOULEVARD, ENGLEWOOD,
COLORADO 80112, ATTENTION: CORPORATE SECRETARY.
Only a record holder of shares of Liberty Satellite common stock on the date
of making a written demand for appraisal who continuously holds those shares
through the time of the merger is entitled to seek appraisal. Demand for
appraisal must be executed by or for the holder of record, fully and correctly,
as that holder's name appears on the holder's stock certificates representing
shares of Liberty Satellite common stock. If Liberty Satellite common stock is
owned of record in a fiduciary capacity by a trustee, guardian or custodian, the
demand should be made in that capacity. If Liberty Satellite common stock is
owned of record by more than one person, as in a joint tenancy or tenancy in
common, the demand should be made by or for all owners of record.
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An authorized agent, including an agent for one or more joint owners, may
execute the demand for appraisal for a holder of record; that agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of the shares.
If a stockholder holds shares of Liberty Satellite common stock through a broker
who in turn holds the shares through a central securities depository nominee
such as Cede & Co., a demand for appraisal of such shares must be made by or on
behalf of the depository nominee and must identify the depository nominee as
record holder.
A record holder such as a broker, fiduciary, depository or other nominee who
holds shares of Liberty Satellite common stock as a nominee for more than one
beneficial owner, some of whom desire to demand appraisal, may exercise
appraisal rights on behalf of those beneficial owners with respect to the shares
of Liberty Satellite common stock held for those beneficial owners. In that
case, the written demand for appraisal should state the number of shares of
Liberty Satellite common stock covered by it. Unless a demand for appraisal
specifies a number of shares, the demand will be presumed to cover all shares of
Liberty Satellite common stock held in the name of the record owner.
THIS PROXY STATEMENT/PROSPECTUS CONSTITUTES STATUTORY NOTICE THAT BENEFICIAL
OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE APPRAISAL RIGHTS
SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY REQUIREMENTS WITH
RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS BEFORE THE TAKING OF THE VOTE ON THE
MERGER AGREEMENT AND THE MERGER AT THE SPECIAL MEETING.
Within 10 days of the effective date of the merger, Liberty Satellite must
notify each stockholder whose demand for appraisal complies with Section 262 and
who has not voted in favor of the merger of the date that the merger has become
effective.
FILING OF PETITION. Within 120 days after the effective date of the merger,
any stockholder who has complied with the applicable provisions of Section 262
will be entitled, upon written request, to receive from Liberty Satellite a
statement setting forth the aggregate number of shares of common stock not voted
in favor of the merger and with respect to which demands for appraisal were
received by Liberty Satellite and the number of holders of these shares.
Liberty Satellite must mail this statement within ten days after it receives
the written request or within ten days after the expiration of the period for
the delivery of demands as described above, whichever is later.
Within 120 days after the effective date of the merger, the surviving
corporation or any stockholder who has complied with the requirements of
Section 262 may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of Liberty Satellite common stock
held by all stockholders seeking appraisal. A dissenting stockholder must serve
a copy of the petition on Liberty Satellite. If no petition is filed within the
120-day period, the rights of all dissenting stockholders to appraisal will
cease.
Stockholders seeking to exercise appraisal rights should not assume that the
surviving corporation will file a petition with respect to the appraisal of the
fair value of their shares or that the surviving corporation will initiate any
negotiations with respect to the fair value of those shares. The surviving
corporation is under no obligation to, and has no present intention to, take any
action in this regard. Accordingly, stockholders who wish to seek appraisal of
their shares should initiate all necessary action with respect to the perfection
of their appraisal rights within the time periods and in the manner prescribed
in Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE
STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
HEARING IN CHANCERY COURT. If a petition for an appraisal is filed in a
timely manner, at the hearing on the petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and will
appraise the shares of Liberty Satellite common stock owned by those
stockholders. The Delaware Court of Chancery may require the stockholders who
have demanded an
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appraisal for their shares and who hold stock represented by certificates to
submit their stock certificates to the Register in Chancery for notation on such
certificates of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Delaware Court of Chancery
may dismiss the proceedings as to such stockholder. The court will determine the
fair value of those shares, taking into account all relevant circumstances,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest, to be paid, if any, upon
the fair value. The Delaware Court of Chancery may determine the cost of the
appraisal proceeding and assess it against the parties as the court deems
equitable.
Neither Liberty Media nor Liberty Satellite makes any representation as to
the outcome of the appraisal of fair value as determined by the court and
stockholders should recognize that such an appraisal could result in a
determination of a value that is higher or lower than, or the same as, the
merger consideration. Liberty Media does not anticipate offering more than the
merger consideration to any stockholder exercising appraisal rights and reserves
the right to assert, in any appraisal proceeding, that, for purposes of
Section 262, the "fair value" of a share of Liberty Satellite common stock is
less than the merger consideration.
EXPENSES. Each dissenting stockholder is responsible for his or her
attorneys' and expert witness expenses, although upon application of a
dissenting stockholder, the court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding (including, without limitation, reasonable attorney's fees and the
fees and expenses of experts) be charged pro rata against the value of all
shares of Liberty Satellite common stock entitled to appraisal. In the absence
of a court determination or assessment, each party bears its own expenses.
NO RIGHT TO VOTE OR RECEIVE DIVIDENDS. Any stockholder who has demanded
appraisal in compliance with Section 262 will not, after the effective time of
the merger, be entitled to vote such stock for any purpose or receive payment of
dividends or other distributions, if any, on Liberty Satellite common stock,
except for dividends or distributions, if any, payable to stockholders of record
at a date prior to the merger.
WITHDRAWAL. A stockholder may withdraw a demand for appraisal and accept
Liberty Media Series A common stock at any time within 60 days after the
effective date of the merger, or thereafter may withdraw a demand for appraisal
with the written approval of Liberty Satellite. Notwithstanding the foregoing,
if an appraisal proceeding is properly instituted, it may not be dismissed as to
any stockholder without the approval of the Delaware Court of Chancery, and any
such approval may be conditioned on the Court of Chancery's deeming the terms to
be just. If, after the merger, a holder of Liberty Satellite common stock who
had demanded appraisal for his or her shares fails to perfect or loses his or
her right to appraisal, those shares will be treated as if they were converted
into Liberty Media Series A common stock at the time of the merger.
BECAUSE A STOCKHOLDER THAT FAILS TO COMPLY ENTIRELY WITH THE STRICT
REQUIREMENTS OF THE DELAWARE CORPORATE STATUTE MAY LOSE SUCH STOCKHOLDER'S RIGHT
TO AN APPRAISAL, ANY LIBERTY SATELLITE STOCKHOLDER WHO IS CONSIDERING EXERCISING
APPRAISAL RIGHTS SHOULD PROMPTLY CONSULT A LEGAL ADVISOR.
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COMPARISON OF STOCKHOLDER RIGHTS
As a stockholder of Liberty Satellite, your rights are governed by Liberty
Satellite's certificate of incorporation and bylaws. After completion of the
merger, you will become a stockholder of Liberty Media. As a Liberty Media
stockholder, your rights will be governed by Liberty Media's certificate of
incorporation and bylaws. Liberty Satellite and Liberty Media are each
incorporated under the laws of the State of Delaware and accordingly, your
rights as a stockholder will continue to be governed by the Delaware General
Corporation Law after completion of the merger.
This section of the proxy statement/prospectus describes certain differences
between the rights of holders of Liberty Satellite common stock and Liberty
Media common stock. This description is only a summary and may not contain all
of the information that is important to you. You should carefully read this
entire document and the other documents we refer to for a more complete
understanding of the differences between being a stockholder of Liberty
Satellite and being a stockholder of Liberty Media.
COMMON STOCK
Liberty Satellite has Series A common stock and Series B common stock issued
and outstanding and Liberty Media has Series A common stock and Series B common
stock issued and outstanding. Liberty Satellite has authorized 170 million
shares of common stock, and Liberty Media has authorized 4,400 million shares of
common stock. As of August 21, 2003, there were approximately 49,043,261 shares
of Liberty Satellite common stock outstanding (14,278,206 shares of Series A
common stock and 34,765,055 shares of Series B common stock) and an aggregate of
approximately 320,938 shares of Liberty Satellite common stock reserved for
issuance upon exercise of outstanding options and warrants. As of July 31, 2003,
there were approximately 2,685,665,231 shares of Liberty Media common stock
outstanding (2,473,846,455 shares of Series A common stock and 211,818,776
shares of Series B common stock), and an aggregate of approximately 81,223,239
shares of Liberty Media Series A common stock and 28,165,255 shares of Liberty
Media Series B common stock reserved for issuance upon exercise of outstanding
options and warrants.
PREFERRED STOCK
Liberty Satellite has authorized five million shares of preferred stock. Of
Liberty Satellite's preferred stock, 150,000 shares are designated as Cumulative
Preferred Stock, Series A, and 150,000 shares are designated as Cumulative
Convertible Voting Preferred Stock, Series B. As of August 21, there were
150,000 shares of Series A preferred stock outstanding and 150,000 shares of
Series B preferred stock outstanding. Liberty Media has authorized 50 million
shares of preferred stock, none of which were outstanding as of July 31, 2003.
CONVERSION
Each share of Series B common stock of Liberty Satellite and each share of
Series B common stock of Liberty Media, respectively, is convertible, at the
option of the holder, into one share of Series A common stock of Liberty
Satellite or one share of Series A common stock of Liberty Media, respectively.
Neither the Series A common stock of Liberty Satellite nor the Series A common
stock of Liberty Media is convertible.
As of August 21, 2003, each share of Series B preferred stock of Liberty
Satellite is convertible at the option of the holder into 11.31145 shares of
Series B common stock of Liberty Satellite.
VOTING RIGHTS
With respect to each of Liberty Satellite and Liberty Media, the holders of
Series A common stock are entitled to one vote for each share held, and the
holders of Series B common stock are entitled to
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ten votes for each share held, on all matters voted on by stockholders,
including elections of directors. Additionally, the holders of Series B
preferred stock of Liberty Satellite are entitled to 558 votes for each share
held on all matters voted on by stockholders, including elections of directors.
Neither Liberty Satellite nor Liberty Media provides for cumulative voting in
the election of directors in its respective certificate of incorporation.
LIQUIDATION AND DISSOLUTION
In the event of liquidation, dissolution or winding up of Liberty Satellite,
the holders of Series A common stock and Series B common stock of Liberty
Satellite, and in the event of liquidation, dissolution or winding up of Liberty
Media, the holders of Series A common stock and Series B common stock of Liberty
Media, respectively, will share equally, on a share for share basis, in the
assets remaining for distribution to the common stockholders of the applicable
corporation, after payment or provisions for payment of such corporation's debts
and liabilities and subject to prior payment in full of any preferential amounts
to which the holders of such corporation's preferred stock may be entitled.
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be divided
into various classes with staggered terms of office. Liberty Satellite's
certificate of incorporation and bylaws do not provide for a classified board of
directors. The board of directors of Liberty Media is divided into three
classes, as nearly equal in size as possible, with one class elected annually.
The holders of a series of preferred stock of Liberty Media may be entitled to
elect additional directors if the certificate of designations with respect to
such series so provides. Directors of Liberty Media are elected for a term of
three years, subject to the election and qualification of the director's
successor and to the director's earlier death, resignation or removal.
NUMBER OF DIRECTORS
Liberty Satellite's board of directors currently consists of seven
directors. The number of directors on Liberty Satellite's board is determined by
resolution of the board of directors, but cannot be fewer than three. Liberty
Media's board of directors currently consists of nine directors. The number of
directors on Liberty Media's board is determined by resolution of the board of
directors, but cannot be fewer than three.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The certificate of incorporation of each of Liberty Media and Liberty
Satellite does not permit the applicable corporation's stockholders to take
action by written consent in lieu of a meeting of stockholders, except as
otherwise provided in the terms of any series of preferred stock of the
applicable corporation.
Special meetings of stockholders of each of Liberty Media and Liberty
Satellite for any purpose or purposes may be called only by the secretary of the
applicable corporation (1) upon written request of holders of not less than
66 2/3% of the total voting power of outstanding voting capital stock or (2) at
the request of at least 75% of the members of the board then in office, except
as otherwise required by law and subject to the rights of the holders of any
series of preferred stock. No business other than that stated in the notice of
special meeting shall be transacted at any special meeting of either
corporation.
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REMOVAL OF DIRECTORS
Liberty Satellite's certificate of incorporation and bylaws do not provide
specific procedures for removal of a director from the board of directors; such
removal would be done in accordance with Delaware law. Delaware law provides
that any director or the entire board of directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors.
The certificate of incorporation of Liberty Media provides that, subject to
the rights of any series of preferred stock, directors may be removed from
office only for cause upon the affirmative vote of the holders of a least a
majority of the total voting power of the then outstanding shares of Series A
common stock, Series B common stock and any series of preferred stock entitled
to vote at an election of directors, voting together as a single class.
ACTIONS REQUIRING SUPERMAJORITY VOTE
The certificate of incorporation of each of Liberty Satellite and Liberty
Media provides that, subject to the rights of the holders of any series of
preferred stock, the affirmative vote of the holders of at least 66 2/3% of the
voting power of outstanding voting capital stock, voting together as a single
class, is required for the following corporate actions:
- to amend, alter or repeal any provision of the certificate of
incorporation or the addition or insertion of other provisions in the
certificate;
- to adopt, amend or repeal any provision of the bylaws, except that no vote
of stockholders will be required to authorize the adoption, amendment or
repeal of any provision of the bylaws by the board of directors in
accordance with the power conferred upon it pursuant to the certificate of
incorporation;
- the merger or consolidation of the corporation with any other corporation,
unless (1) the laws of the state of Delaware, as then in effect, do not
require stockholder consent or (2) at least 75% of the members of its
board then in office has approved such transaction;
- the sale, lease or exchange of all, or substantially all, of the assets of
the corporation; or
- the dissolution of the corporation.
In the case of Liberty Media, the supermajority voting requirement will not
apply to the amendment of its certificate of incorporation, the sale, lease or
exchange of all or substantially all of its assets, or its dissolution if such
action is approved by at least 75% of the members of its board of directors then
in office.
Liberty Media's chairman, John C. Malone, holds the power to direct the vote
of approximately 44% of Liberty Media's outstanding voting power. Liberty Media
holds the power to direct the vote of approximately 98% of Liberty Satellite's
voting power.
CERTAIN RELATED PARTY TRANSACTIONS
For a description of certain relationships and material transactions between
Liberty Media and Liberty Satellite, or their respective affiliates, please see
the section entitled "The Merger--Background of the Merger--Certain Prior
Transactions and Negotiations" on page 32, and Item 13 of Liberty Satellite's
Form 10-K for the year ending December 31, 2002, a copy of which is attached
hereto as Annex II. In addition, please see the section entitled "The Companies
Involved in the Merger--Libery Satellite--On Command" on page 26 for a
description of the $40 million subordinated loan made by Liberty Media to
On Command.
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EXPERTS
The consolidated balance sheets of Liberty Media and subsidiaries as of
December 31, 2002 and 2001, and the related consolidated statements of
operations and comprehensive earnings, stockholder's equity, and cash flows for
each of the years in the three-year period ended December 31, 2002 have been
incorporated by reference herein in reliance upon the report, dated March 17,
2003, of KPMG LLP, independent accountants, incorporated by reference herein,
and upon the authority of said firm as experts in accounting and auditing. As
discussed in notes 3 and 7 to the consolidated financial statements, Liberty
Media changed its method of accounting for intangible assets in 2002 and for
derivative financial instruments in 2001.
The consolidated balance sheets of Telewest Communications plc and
subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity and comprehensive income, and
cash flows for each of the years in the three-year period ended December 31,
2002, have been incorporated by reference herein in reliance upon the report,
dated March 26, 2003, of KPMG Audit plc, independent chartered accountants,
incorporated by reference herein, and upon the authority of said firm as experts
in accounting and auditing.
The report of KPMG Audit plc dated March 26, 2003 contains an explanatory
paragraph that states that Telewest Communications plc is undergoing financial
restructuring which raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. As discussed in note 3 to the
consolidated financial statements, Telewest Communications plc changed its
method of accounting for intangible assets in 2002 and derivative instruments in
2001.
The consolidated financial statements of Liberty Satellite and subsidiaries
as of December 31, 2002 and 2001, and for each of the years in the three-year
period ended December 31, 2002, have been incorporated by reference herein and
in the registration statement in reliance upon the report of KPMG LLP,
independent accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing. The audit report
covering the December 31, 2002 consolidated financial statements refers to a
change in Liberty Satellite's method of accounting for goodwill and other
intangible assets in 2002.
The consolidated financial statements of Astrolink as of December 31, 2001
and 2002, and for each of the years in the three-year period ended December 31,
2002 and for the period from April 22, 1999 (date of inception) through
December 31, 2002, have been incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
The audit report covering the December 31, 2002, Astrolink consolidated
financial statements contains an explanatory paragraph that states that
Astrolink has not generated any revenue and is dependent upon additional equity
and/or debt financing or firm commitments from prospective customers to complete
construction and launch of its intended satellite system, which raises
substantial doubt about Astrolink's ability to continue as a going concern. The
consolidated financial statements of Astrolink do not include any adjustments
that might result from the outcome of that uncertainty.
LEGAL MATTERS
An opinion regarding the legality of the Liberty Media Series A common stock
to be issued in the merger is being provided by Sherman & Howard L.L.C., counsel
to Liberty Media. Certain Sherman & Howard L.L.C. attorneys own shares of
Liberty Media common stock and stock of certain of Liberty Media's subsidiaries.
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ANNEX I
MERGER AGREEMENT
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement") is made as of this 26th
day of August, 2003, by and among Liberty Media Corporation, a Delaware
corporation ("Parent"), Liberty Satellite Acquisition Co., a Delaware
corporation ("Merger Sub"), and Liberty Satellite & Technology, Inc., a Delaware
corporation (the "Company").
RECITALS
WHEREAS, Parent beneficially owns approximately 87% of the Company's issued
and outstanding common stock;
WHEREAS, Merger Sub is an indirect controlled subsidiary of Parent;
WHEREAS, Parent, acting through Merger Sub, desires to acquire all of the
common stock of the Company that it does not beneficially own;
WHEREAS, the Boards of Directors of Parent, Merger Sub and the Company each
have determined that it is advisable and in the best interests of their
respective stockholders for Parent to so acquire such common stock and, to that
end, for Merger Sub to merge with and into the Company (the "Merger") upon the
terms and subject to the conditions of this Agreement; and
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants, representations, warranties and agreements contained herein, the
parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND CONSTRUCTION
1.1 CERTAIN DEFINITIONS.
As used in this Agreement, the following terms will have the following
meanings unless the context otherwise requires:
"ACQUISITION PROPOSAL" means any offer or proposal by any Person or group of
Persons concerning (i) any tender or exchange offer, (ii) any merger, share
exchange, recapitalization, consolidation or other business combination
involving the Company or (iii) an acquisition in any manner, directly or
indirectly, of a significant equity interest in, or a substantial portion of the
assets of, the Company, other than pursuant to the transactions contemplated by
this Agreement.
"AFFILIATE" of any Person has the meaning ascribed to such term in
Rule 12b-2 under the Exchange Act. For purposes of this Agreement, unless
otherwise specified, (A) neither the Company nor any of its Subsidiaries will be
deemed to be Affiliates of Parent or any of Parent's Subsidiaries; (B) neither
Parent nor any of its Subsidiaries will be deemed to be Affiliates of the
Company or any of the Company's Subsidiaries; (C) none of the Affiliates of the
Company or any of its Subsidiaries (the "Company Affiliates") will be deemed to
be an Affiliate of Parent or any of Parent's Subsidiaries, unless such Company
Affiliate would be such an Affiliate if neither Parent nor any of its
Subsidiaries (1) owned any capital stock of the Company, (2) designated or
nominated, or possessed any contractual right to designate or nominate, any
directors of the Company or any of its Subsidiaries or (3) otherwise possessed,
directly or indirectly, the power to direct or cause the direction of the
management or policies of the Company or any of its Subsidiaries; and (D) none
of the Affiliates of Parent or any of Parent's Subsidiaries ("Parent
Affiliates") will be deemed to be an Affiliate of the Company or any of the
Company's Subsidiaries, unless such Parent Affiliate would be such an Affiliate
if neither Parent nor any of its Subsidiaries (1) owned any capital stock of the
Company, (2) designated or nominated, or possessed any contractual right to
designate or nominate, any directors of the Company or any of its
1
Subsidiaries or (3) otherwise possessed, directly or indirectly, the power to
direct or cause the direction of the management or policies of the Company or
any of its Subsidiaries.
"AFFILIATE CONTRACT" has the meaning specified in Section 4.12(a).
"AGREEMENT" has the meaning specified in the preamble.
"ASSUMED OPTION" has the meaning specified in Section 2.6(a).
"ASSUMED SAR" has the meaning specified in Section 2.6(b).
"CERTIFICATES" has the meaning specified in Section 2.4(b).
"CERTIFICATE OF MERGER" means the certificate of merger with respect to the
Merger, containing the provisions required by, and executed in accordance with,
Section 251 of the DGCL.
"CHANGE OF CONTROL" shall mean any (i) change in the direct or indirect
record or beneficial ownership of any of the equity securities of the Company or
any of its Subsidiaries, (ii) merger, consolidation, statutory share exchange or
other transaction involving the Company or any of its Subsidiaries or
(iii) change in the composition of the board of directors or other governing
body of the Company or any of its Subsidiaries.
"CHANGE OF CONTROL COVENANT" shall mean any covenant, agreement or other
provision pursuant to which the occurrence or existence of a Change of Control
would result in a violation or breach of, constitute (with or without due notice
or lapse of time or both) or permit any Person to declare a default or event of
default under, give rise to any right of termination, cancellation, amendment,
acceleration, repurchase, prepayment or repayment or to increased payments
under, give rise to or accelerate any material obligation (including any
obligation to, or to offer to, repurchase, prepay, repay or make increased
payments) or result in the loss or modification of any material right or benefit
under, or result in any Restriction or give any Person the right to obtain any
Restriction on any capital stock or other securities or ownership interests
pursuant to, or result in any Lien or give any Person the right to obtain any
Lien on any material asset pursuant to, any Contract to which the Company or any
of its Subsidiaries is or becomes a party or to which the Company or any of its
Subsidiaries or any of their respective assets are or become subject or bound.
"CLOSING" means the consummation of the transactions contemplated by this
Agreement.
"CLOSING DATE" means the date on which the Closing occurs pursuant to
Section 2.2.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMPANY" has the meaning specified in the preamble.
"COMPANY BOARD" means the Board of Directors of the Company.
"COMPANY CHARTER," means the Amended and Restated Certificate of
Incorporation of the Company, including any certificate of designations filed
with respect to the Company Preferred Stock, as amended to the date hereof.
"COMPANY COMMON STOCK" means the Company Series A Common Stock and the
Company Series B Common Stock.
"COMPANY EQUITY AFFILIATES" has the meaning specified in Section 4.1.
"COMPANY OPTION" has the meaning specified in Section 2.6(a).
"COMPANY PLAN" means each bonus, deferred compensation, incentive
compensation, stock purchase, stock option, severance or termination pay,
hospitalization, medical, life or other insurance, supplemental unemployment
benefits, profit-sharing, pension or retirement plan, program, agreement or
arrangement, and each other employee benefit plan, program, agreement or
arrangement,
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sponsored, maintained or contributed to or required to be contributed to at any
time since December 31, 1999 by the Company or by any trade or business, whether
or not incorporated ("ERISA Affiliate"), that together with the Company would be
deemed a "controlled group" within the meaning of Section 4001(a)(14) of ERISA,
for the benefit of any employee, director or former employee or director of the
Company or any ERISA Affiliate including any such type of plan established,
maintained or contributed to under the laws of any foreign country; provided,
however, that Company Plan will not include any such plan or arrangement
maintained by Liberty Media Corporation.
"COMPANY PREFERRED STOCK" means the preferred stock, par value $.01 per
share, of the Company, including the Company Series A Preferred Stock and the
Company Series B Preferred Stock.
"COMPANY RESTRICTED STOCK" has the meaning specified in Section 2.6(c).
"COMPANY SAR" has the meaning specified in Section 2.6(b).
"COMPANY SEC FILINGS" has the meaning specified in Section 4.4.
"COMPANY SERIES A COMMON STOCK" means the Series A Common Stock, par value
$1.00 per share, of the Company.
"COMPANY SERIES B COMMON STOCK" means the Series B Common Stock, par value
$1.00 per share, of the Company.
"COMPANY SERIES A PREFERRED STOCK" means the Series A Cumulative Preferred
Stock, par value $.01 per share, of the Company.
"COMPANY SERIES B PREFERRED STOCK" means the Series B Cumulative Convertible
Voting Preferred Stock, par value $.01 per share, of the Company.
"COMPANY STOCK" means the Company Common Stock and the Company Preferred
Stock.
"CONSOLIDATED PERIOD" means any period from and including March 16, 2000
through the date of this Agreement (1) during which the Company was a member of
the affiliated group (within the meaning of Section 1504 of the Code) the common
parent of which is Parent or (2) with respect to which the Company or any of its
Subsidiaries otherwise was or will be required to file a consolidated or unitary
Tax Return pursuant to which the Company or any of its Subsidiaries were or will
be combined with Parent on the same Tax Return.
"CONSOLIDATED PERIOD TAXES" means any Taxes of the Company or any of its
Subsidiaries related to any Consolidated Period, which were or will be required
to be included on any Consolidated Tax Return.
"CONSOLIDATED TAX RETURN" means any consolidated or unitary income Tax
Return related to any Consolidated Period on which the Company or any of its
Subsidiaries were or will be combined with Parent on the same Tax Return.
"CONTRACT CONSENT" has the meaning specified in Section 4.5(iii).
"CONTRACT NOTICE" has the meaning specified in Section 4.5(iii).
"CONTRACT" has the meaning specified in Section 4.5(iv).
"CONTRIBUTED CONTRACT" has the meaning specified in Section 4.12(a).
"CONTROL" means, with respect to any Person, the possession, direct or
indirect, of the power to direct or cause the direction of the management and
policies of such Person, whether through the ownership of voting securities, by
contract or otherwise.
"CONVERTIBLE SECURITIES" has the meaning specified in Section 4.3(e).
3
"DGCL" means the General Corporation Law of the State of Delaware.
"DISSENTING SHARES" has the meaning specified in Section 2.7.
"EFFECTIVE TIME" means the time when the Merger of Merger Sub with and into
the Company becomes effective under applicable law as provided in
Section 2.1(a).
"ENVIRONMENTAL LAWS" has the meaning specified in Section 4.9(b).
"EQUITY AFFILIATE" of a Person shall mean any other Person in which the
first Person directly or indirectly through a Subsidiary owns an investment
accounted for by the equity method within the meaning of GAAP.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and all regulations promulgated thereunder, as in effect from time to
time.
"ERISA AFFILIATE" has the meaning specified in the definition of the term
"Company Plan".
"EXCHANGE AGENT" has the meaning specified in Section 2.4(a).
"EXCHANGE AGENT AGREEMENT" has the meaning specified in Section 2.4(a).
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"EXCHANGE RATIO" has the meaning specified in Section 2.3(a)(i).
"FAIRNESS OPINION" has the meaning specified in Section 4.14.
"GAAP" means generally accepted accounting principles as accepted by the
accounting profession in the United States as in effect from time to time.
"GOVERNMENT CONSENT" has the meaning specified in Section 4.5(ii).
"GOVERNMENTAL ENTITY" means any court, arbitrator, administrative or other
governmental department, agency, commission, authority or instrumentality,
domestic or foreign.
"GOVERNMENTAL FILING" has the meaning specified in Section 4.5(ii).
"INDEBTEDNESS" shall mean, with respect to any Person, without duplication
(whether or not the recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof), (i) every liability of such Person
(excluding intercompany accounts between the Company and any wholly-owned
Subsidiary of the Company or between wholly-owned Subsidiaries of the Company)
(A) for borrowed money, (B) evidenced by notes, bonds, debentures or other
similar instruments (whether or not negotiable), (C) for reimbursement of
amounts drawn under letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person, (D) issued or assumed as the
deferred purchase price of property or services (excluding accounts payable) or
(E) relating to a capitalized lease obligation and all debt attributable to
sale/leaseback transactions of such Person; and (ii) every liability of others
of the kind described in the preceding clause (i) that such Person has
guaranteed or which is otherwise its legal liability.
"INDEMNIFIED LIABILITIES" has the meaning specified in Section 6.6(a).
"INDEMNIFIED PARTIES" has the meaning specified in Section 6.6(a).
"INDEMNIFIED PARTY" has the meaning specified in Section 6.6(a).
"INJUNCTION" has the meaning specified in Section 3.4.
"LEGAL PROCEEDING" shall mean any private or governmental action, suit,
complaint, arbitration, mediation, legal or administrative proceeding or
investigation.
4
"LICENSE" means any license, franchise, ordinance, authorization, permit,
certificate, variance, exemption, concession, lease, right of way, easement,
instrument, order and approval, domestic or foreign.
"LIEN" means any security interest, mortgage, pledge, hypothecation, charge,
claim, option, right to acquire, adverse interest, assignment, deposit
arrangement, encumbrance, restriction, lien (statutory or other), or preference,
priority or other security agreement or preferential arrangement of any kind or
nature whatsoever (including any conditional sale or other title retention
agreement, any financing lease involving substantially the same economic effect
as any of the foregoing, and the filing of any financing statement under the
Uniform Commercial Code or comparable law of any jurisdiction).
"LOCAL APPROVALS" has the meaning specified in Section 4.5(ii).
"MATERIAL ADVERSE EFFECT" means (A) with respect to Parent, a material
adverse effect on the business, properties, operations or financial condition of
Parent and its Subsidiaries (including the Company and its Subsidiaries) taken
as a whole, other than any such effect arising out of or resulting from general
business or economic conditions or from general changes in or affecting the
industries in which Parent operates in areas where Parent does business directly
or through its Subsidiaries (including the Company and its Subsidiaries), and
(B) with respect to the Company, a material adverse effect on the business,
properties, operations or financial condition of the Company and its
Subsidiaries taken as a whole, other than any such effect arising out of or
resulting from general business or economic conditions or from general changes
in or affecting the industries in which the Company operates in areas where the
Company does business directly or through its Subsidiaries.
"MATERIAL CONTRACT" has the meaning specified in Section 4.12(a).
"MERGER" has the meaning specified in the recitals.
"MERGER SUB" has the meaning specified in the preamble hereto.
"NYSE" means The New York Stock Exchange.
"PARENT" has the meaning set forth in the preamble.
"PARENT CHARTER" means the Restated Certificate of Incorporation of Parent,
as amended.
"PARENT MARKET PRICE," on any date of determination, means the average of
the closing sales prices of a share of Parent Series A Stock on the NYSE on each
of the five consecutive trading days immediately preceding the trading day prior
to the date of such determination.
"PARENT PREFERRED STOCK" means the preferred stock, $.01 par value per
share, of Parent.
"PARENT SEC FILINGS" has the meaning specified in Section 5.4.
"PARENT SERIES A STOCK" means the Series A common stock, $.01 par value per
share, of Parent, or such other securities as may be issuable to holders fo
Company Common Stock in the Merger in accordance with Section 2.5.
"PARENT SERIES B STOCK" means the Series B common stock, $.01 par value per
share, of Parent.
"PERMITS" has the meaning specified in Section 4.9(a).
"PERSON" means an individual, partnership, corporation, limited liability
company, trust, unincorporated organization, association, joint venture or other
entity or a government, agency, political subdivision, or instrumentality
thereof.
"PROXY STATEMENT" has the meaning specified in Section 3.2(a).
"REGISTRATION STATEMENT" has the meaning specified in Section 3.2(a).
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"REPRESENTATIVES" has the meaning specified in Section 6.2.
"RESTRICTION", with respect to any capital stock or other security, shall
mean any voting or other trust or agreement, option, warrant, escrow
arrangement, proxy, buy-sell agreement, power of attorney or other Contract, or
any law, rule, regulation, order, judgment or decree which, conditionally or
unconditionally: (i) grants to any Person the right to purchase or otherwise
acquire, or obligates any Person to purchase or sell or otherwise acquire,
dispose of or issue, or otherwise results in or, whether upon the occurrence of
any event or with notice or lapse of time or both or otherwise, may result in,
any Person acquiring, (A) any of such capital stock or other security; (B) any
of the proceeds of, or any distributions paid or which are or may become payable
with respect to, any of such capital stock or other security; or (C) any
interest in such capital stock or other security or any such proceeds or
distributions; (ii) restricts or, whether upon the occurrence of any event or
with notice or lapse of time or both or otherwise, may restrict the transfer or
voting of, or the exercise of any rights or the enjoyment of any benefits
arising by reason of ownership of, any such capital stock or other security or
any such proceeds or distributions; or (iii) creates or, whether upon the
occurrence of any event or with notice or lapse of time or both or otherwise,
may create a Lien or purported Lien affecting such capital stock or other
security, proceeds or distributions.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
"SIGNIFICANT STOCKHOLDER" shall mean any Person known to the Company to be
the beneficial owner of 5% of more of the outstanding shares of Company Common
Stock other than Parent or any of its Affiliates.
"SPECIAL MEETING" has the meaning specified in Section 3.1.
"SUBSIDIARY" when used with respect to any Person, means any other Person:
(1) of which (x) in the case of a corporation, at least (A) a majority of the
equity and (B) a majority of the voting interests are owned or Controlled,
directly or indirectly, by such first Person, by any one or more of its
Subsidiaries, or by such first Person and one or more of its Subsidiaries or
(y) in the case of any Person other than a corporation, such first Person, one
or more of its Subsidiaries, or such first Person and one or more of its
Subsidiaries (A) owns a majority of the equity interests thereof and (B) has the
power to elect or direct the election of a majority of the members of the
governing body thereof or otherwise has Control over such organization or
entity; or (2) that is required to be consolidated with such first Person for
financial reporting purposes under GAAP.
"SURVIVING CORPORATION" means the Company as the Surviving Corporation after
the Merger as provided in Section 2.1(a).
"TAX" or "TAXES" shall mean (i) any and all federal, state, local and
foreign taxes and other assessments, governmental charges, duties, fees, levies,
impositions and liabilities in the nature of a tax, including taxes based upon
or measured by gross receipts, income, profits, sales, use and occupation, and
value added, ad valorem, transfer, franchise, withholding, payroll, recapture,
employment, excise and property taxes and (ii) all interest, penalties and
additions imposed with respect to such amounts in clause (i).
"TAX RETURN" shall mean a report, return or other information required to be
supplied to or filed with a Governmental Entity with respect to any Tax
including an information return, claim for refund, amended Tax return or
declaration of estimated Tax.
"TREASURY REGULATIONS" shall mean the regulations promulgated under the Code
in effect on the date hereof and the corresponding sections of any regulations
subsequently issued that amend or supersede such regulations.
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"VIOLATION" has the meaning specified in Section 4.5(iv).
"VOTING DEBT" has the meaning specified in Section 4.3(d).
"WHOLLY-OWNED SUBSIDIARY" means, as to any Person, a Subsidiary of such
Person, 100% of the equity and voting interest in which is owned, directly
and/or indirectly, by such Person.
1.2 TERMS GENERALLY.
The definitions in Section 1.1 will apply equally to both the singular and
plural forms of the terms defined. Whenever the context may require, any pronoun
will include the corresponding masculine, feminine and neuter forms. The words
"include", "includes" and "including" will be deemed to be followed by the
phrase "without limitation". The words "herein", "hereof" and "hereunder" and
words of similar import refer to this Agreement (including the Exhibits and
Schedules) in its entirety and not to any part hereof unless the context
otherwise requires. As used herein, the term "to the knowledge of the Company"
or any similar term relating to the Company's knowledge means the actual
knowledge, without investigation, of either of Pamela Strauss or Kenneth G.
Carroll, and the term "to the knowledge of Parent" or any similar term relating
to Parent's knowledge means the actual knowledge, without investigation, of any
of the officers or directors of Parent. All references herein to Articles,
Sections, Exhibits and Schedules will be deemed references to Articles and
Sections of, and Exhibits and Schedules to, this Agreement unless the context
otherwise requires. Unless the context otherwise requires, any references to any
agreement or other instrument or statute or regulation are to it as amended and
supplemented from time to time (and, in the case of a statute or regulation, to
any successor provisions). Any reference in this Agreement to a "day" or number
of "days" (without the explicit qualification of "business") will be interpreted
as a reference to a calendar day or number of calendar days. If any action or
notice is to be taken or given on or by a particular calendar day, and such
calendar day is not a business day, then such action or notice will be deferred
until, or may be taken or given on, the next business day. As used herein, the
phrase "made available" means that the information referred to has been made
available if requested by the party to whom such information is to be made
available.
ARTICLE II
THE MERGER AND RELATED MATTERS
2.1 THE MERGER.
(A) MERGER; EFFECTIVE TIME.
At the Effective Time and subject to and upon the terms and conditions of
this Agreement, Merger Sub will merge with and into the Company in accordance
with the provisions of the DGCL, the separate corporate existence of Merger Sub
will cease and the Company will continue as the Surviving Corporation. The
Effective Time will occur on the date and at the time that the Certificate of
Merger has been accepted for filing by the Delaware Secretary of State (or such
later date and time as may be agreed to by Parent and the Company and specified
in the Certificate of Merger). Provided that this Agreement has not been
terminated pursuant to Article VIII, the parties will cause the Certificate of
Merger to be filed with the Delaware Secretary of State as soon as practicable
after the Closing.
(B) EFFECTS OF THE MERGER.
From and after the Effective Time, the Merger will have the effects set
forth in the DGCL (including, without limitation, Sections 259, 260 and 261
thereof). Without limiting the generality of the foregoing, and subject thereto,
at the Effective Time, all the properties, rights, privileges, powers and
franchises of the Company and Merger Sub will vest in the Surviving Corporation,
and all debts,
7
liabilities and duties of the Company and Merger Sub will become the debts,
liabilities and duties of the Surviving Corporation.
(C) CERTIFICATE OF INCORPORATION OF THE SURVIVING CORPORATION.
At the Effective Time, the Company Charter will remain as the Certificate of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with the terms thereof and the DGCL and all certificates of
designation filed by the Company with respect to the Company Preferred Stock
will remain as certificates of designation of the Surviving Corporation until
thereafter amended in accordance with the terms thereof and the DGCL.
(D) BYLAWS OF THE SURVIVING CORPORATION.
The Bylaws of the Company will remain as the Bylaws of the Surviving
Corporation until thereafter amended in accordance with the terms thereof, the
Certificate of Incorporation of the Surviving Corporation and the DGCL.
(E) DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION.
Parent, the Company and the Surviving Corporation will take such action as
is necessary to ensure that the directors of Merger Sub at the Effective Time
will, from and after the Effective Time, be the directors of the Surviving
Corporation until their respective successors are duly elected or appointed and
qualified in accordance with the Certificate of Incorporation and Bylaws of the
Surviving Corporation, or as otherwise provided by applicable law. Parent, the
Company and the Surviving Corporation will take such action as is necessary to
ensure that the officers of the Company at the Effective Time will, from and
after the Effective Time, be the officers of the Surviving Corporation until
their respective successors are duly appointed and qualified in accordance with
the Certificate of Incorporation and Bylaws of the Surviving Corporation, or as
otherwise provided by applicable law.
2.2 CLOSING.
Unless this Agreement has been terminated pursuant to Section 8.1 and
subject to the satisfaction or, when permissible, waiver of the conditions set
forth in Article VII, the Closing will take place (i) at 10:00 a.m. (Denver
time) at the executive offices of Parent in Englewood, Colorado, on the date on
which the last of the conditions set forth in Article VII (other than the filing
of the Certificate of Merger and other than any such conditions which by their
terms are not capable of being satisfied until the Closing Date or thereafter)
is satisfied or, when permissible, waived, or (ii) on such other date and/or at
such other time and/or place as the parties may mutually agree.
2.3 CONVERSION OF SECURITIES.
(A) CONVERSION OF COMPANY SECURITIES.
At the Effective Time, by virtue of the Merger and without any action on the
part of Parent, Merger Sub, the Company or the holders of shares of Company
Common Stock:
(i) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than any shares of Company Common
Stock to be canceled pursuant to Section 2.3(a)(ii) and other than
Dissenting Shares, if any) will be converted into and represent the
right to receive, and will be exchangeable for, .2750 (the "Exchange
Ratio") of a validly issued, fully paid and nonassessable share of
Parent Series A Stock. At the Effective Time, all such shares of Company
Common Stock will no longer be outstanding and will automatically be
canceled and retired and will cease to exist, and each holder of a
certificate representing any such shares will cease to have any rights
with respect thereto, except the
8
right to receive the shares of Parent Series A Stock to be issued
pursuant to this Section 2.3(a)(i) (and any dividends or other
distributions and any cash in lieu of a fractional share payable
pursuant to Sections 2.4(f) and 2.4(g)) with respect thereto upon the
surrender of such certificate in accordance with Section 2.4, without
interest.
(ii) Each share of Company Common Stock (not including any common stock of
the Surviving Corporation that is issued under Section 2.3(b)) that
immediately prior to the Effective Time is (x) owned of record by
Parent, Merger Sub or any Wholly-Owned Subsidiary of Parent or
(y) held in the treasury of the Company or held by any Wholly-Owned
Subsidiary of the Company will automatically be canceled, retired and
cease to exist without payment of any consideration thereof and without
any conversion thereof into Parent Series A Stock.
(iii) Each share of Company Preferred Stock issued and outstanding
immediately prior to the Effective Time, will, by virtue of the Merger,
and without any further act on the part of any holder thereof, remain
as an issued and outstanding share of preferred stock of the Surviving
Corporation that will have the powers, designations, preferences and
relative, participating, optional or other rights, if any, and the
qualifications limitations and restrictions thereof, as are set forth
in the certificate of designations for such Company Preferred Stock
immediately prior to the Effective Time.
(B) CONVERSION OF MERGER SUB STOCK.
At the Effective Time, by virtue of the Merger and without any action on the
part of Parent, Merger Sub or the Company, each share of capital stock of Merger
Sub outstanding immediately prior to the Effective Time will be converted into
and become one share of common stock of the Surviving Corporation and will
constitute the only outstanding shares of capital stock of the Surviving
Corporation (other than Dissenting Shares, if any, and the preferred stock of
the Surviving Corporation described in Section 2.3(a)(iii)).
2.4 EXCHANGE OF SHARES.
(A) APPOINTMENT OF EXCHANGE AGENT.
On or before the Closing Date, Parent will enter into an agreement (the
"Exchange Agent Agreement") with an exchange agent selected by Parent and
reasonably acceptable to the Company (the "Exchange Agent"), authorizing such
Exchange Agent to act as Exchange Agent hereunder.
(B) LETTER OF TRANSMITTAL.
As soon as reasonably practicable after the Effective Time, Parent will
instruct the Exchange Agent to mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time evidenced issued and
outstanding shares of Company Common Stock (other than shares to be canceled
pursuant to Section 2.3(a)(ii)) (the "Certificates"): (i) a notice of the
effectiveness of the Merger and (ii) a letter of transmittal (which will state
that delivery will be effected, and risk of loss and title to the Certificates
will pass, only upon proper delivery of the Certificates to the Exchange Agent)
with instructions for use in effecting the surrender and exchange of the
Certificates. Such notice, letter of transmittal and instructions will contain
such provisions and be in such form as Parent and the Company may jointly
specify.
(C) EXCHANGE PROCEDURE.
Promptly following the surrender, in accordance with such instructions, of a
Certificate to the Exchange Agent (or such other agent or agents as may be
appointed by the Exchange Agent or Parent pursuant to the Exchange Agent
Agreement), together with such letter of transmittal (duly executed)
9
and any other documents required by such instructions or letter of transmittal,
Parent will, subject to Section 2.4(d), cause to be distributed to the Person in
whose name such Certificate has been issued (i) a certificate registered in the
name of such Person representing the number of whole shares of Parent Series A
Stock into which the shares previously represented by the surrendered
Certificate are to have been converted at the Effective Time pursuant to this
Article II and (ii) payment (which will be made by check) of any cash payable in
lieu of a fractional share of Parent Series A Stock pursuant to Section 2.4(f).
Each Certificate so surrendered will immediately be canceled.
(D) UNREGISTERED TRANSFERS OF COMPANY COMMON STOCK.
In the event of a transfer of ownership of shares of Company Common Stock
which is not registered in the transfer records of the Company, a certificate
representing the proper number of whole shares of Parent Series A Stock may be
issued (and cash in lieu of a fractional share of Parent Series A Stock may be
paid) to the transferee of such shares if the Certificate evidencing such shares
of Company Common Stock surrendered to the Exchange Agent in accordance with
Section 2.4(c) is properly endorsed for transfer or is accompanied by
appropriate and properly endorsed stock powers and is otherwise in proper form
to effect such transfer, if the Person requesting such transfer pays to the
Exchange Agent any transfer or other taxes payable by reason of such transfer or
establishes to the satisfaction of the Exchange Agent that such taxes have been
paid or are not required to be paid and if such Person establishes to the
satisfaction of Parent that such transfer would not violate applicable federal
or state securities laws.
(E) LOST, STOLEN OR DESTROYED CERTIFICATES.
In the event any Certificate has been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the Person claiming such Certificate to
be lost, stolen or destroyed satisfactory to Parent and complying with any other
reasonable requirements imposed by Parent, Parent will cause to be delivered to
such Person in respect of such lost, stolen or destroyed Certificate the shares
of Parent Series A Stock or other property deliverable in respect thereof as
determined in accordance with this Article II. Parent may, in its discretion,
require the owner of such lost, stolen or destroyed Certificate to give Parent a
bond in such sum as it may direct as indemnity against any claim that may be
made against Parent or the Surviving Corporation with respect to the Certificate
alleged to have been lost, stolen or destroyed.
(F) NO FRACTIONAL SHARES.
No certificates or scrip representing fractional shares of Parent Series A
Stock will be issued upon the surrender for exchange of Certificates for Company
Common Stock; and no such fractional share interest will entitle the owner
thereof to vote as, or to any other rights of, a stockholder of Parent. In lieu
of such fractional shares, any holder of Company Common Stock who would
otherwise be entitled to a fractional share of Parent Series A Stock will, upon
surrender of his Certificate to the Exchange Agent in accordance with
Section 2.4(c), be entitled to receive cash in an amount determined by
multiplying such fraction by the Parent Market Price as of the Closing Date and
rounding the product to the nearest whole cent. No interest will accrue or be
paid with respect to fractional share interests or with respect to cash payable
in lieu of fractional share interests.
(G) NO DIVIDENDS BEFORE SURRENDER OF CERTIFICATES.
No dividends or other distributions declared or made after the Effective
Time with respect to Parent Series A Stock with a record date after the
Effective Time will be paid to the holder of any unsurrendered Certificate with
respect to the shares of Parent Series A Stock for which such Certificate is
then entitled to be exchanged, until the holder of record of such Certificate
will surrender such Certificate as provided herein. Subject to the effect of
applicable laws, following surrender of any such
10
Certificate, there will be paid to the record holder of the certificates
representing whole shares of Parent Series A Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the amount of dividends or
other distributions, if any, with a record date after the Effective Time that
were previously paid by Parent with respect to such whole shares of Parent
Series A Stock, and (ii) at the appropriate payment date, the amount of
dividends or other distributions, if any, with a record date after the Effective
Time but prior to surrender and with a payment date subsequent to surrender
payable with respect to such whole shares of Parent Series A Stock.
(H) NO FURTHER OWNERSHIP RIGHTS IN COMPANY COMMON STOCK.
All shares of Parent Series A Stock issued and all cash in lieu of
fractional shares paid upon the surrender for exchange of shares of Company
Common Stock in accordance with the terms hereof will be deemed to have been
issued and paid in full satisfaction of all rights pertaining to such shares of
Company Common Stock, and there will be no further registration of transfers on
the stock transfer books of the Surviving Corporation of the shares of Company
Common Stock which were outstanding immediately prior to the Effective Time.
Subject to Section 2.4(i), if, after the Effective Time, Certificates are
presented to the Surviving Corporation for any reason, they will be canceled and
exchanged as provided in this Article II.
(I) ABANDONED PROPERTY LAWS.
Payment or delivery of the shares of Parent Series A Stock, any cash in lieu
of fractional shares thereof and any dividends or distributions with respect
thereto in accordance with the terms hereof will be subject to applicable
abandoned property, escheat and similar laws and none of Parent, Merger Sub, the
Surviving Corporation or the Company will be liable to any holder of shares of
Company Common Stock or Parent Series A Stock for any such shares, for any
dividends or distributions with respect thereto or for any cash in lieu of
fractional shares which may be delivered to any public official pursuant to any
abandoned property, escheat or similar law.
(J) WITHHOLDING RIGHTS.
Each of the Surviving Corporation and Parent will be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of shares of Company Common Stock such amounts as it is required to
deduct and withhold with respect to the making of such payment under the Code,
or any provision of state, local or foreign tax law. To the extent that amounts
are so withheld by the Surviving Corporation or Parent, as the case may be, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the shares of Company Common Stock in respect of
which such deduction and withholding were made by the Surviving Corporation or
Parent, as the case may be.
2.5 CHANGES IN PARENT SERIES A STOCK.
If, after the date hereof and prior to the Effective Time, the Parent
Series A Stock is recapitalized or reclassified or Parent will effect any stock
dividend, stock split, or reverse stock split of Parent Series A Stock or
otherwise effect any transaction that changes the Parent Series A Stock into any
other securities (including securities of another corporation) or any other
dividend or distribution is made on the Parent Series A Stock (or such other
securities), then the shares of Parent Series A Stock to be delivered under this
Agreement to the holders of Company Common Stock will be appropriately and
equitably adjusted to the kind and amount of shares of stock and other
securities and property which the holders of such shares of Parent Series A
Stock would have been entitled to receive had such shares been issued and
outstanding as of the record date for determining stockholders entitled to
participate in such corporate event.
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2.6 STOCK OPTIONS, SARS AND RESTRICTED STOCK.
(A) STOCK OPTIONS.
Each of the then outstanding stock options, if any, to purchase shares of
Company Common Stock (each, a "Company Option") issued by the Company pursuant
to any Company Plan, and any non-plan options to acquire shares of Company
Common Stock set forth in Schedule 2.6 issued by the Company pursuant to an
option agreement or otherwise issued by the Company, will, by virtue of the
Merger, and without any further action on the part of any holder thereof, be
assumed by Parent and converted into an option (an "Assumed Option") to purchase
that number of shares of Parent Series A Stock determined by multiplying the
number of shares of Company Common Stock subject to such Company Option at the
Effective Time by the Exchange Ratio, at an exercise price per share of Parent
Series A Stock equal to the exercise price per share of such Company Option
immediately prior to the Effective Time divided by the Exchange Ratio, rounded
down to the nearest whole cent. If the foregoing calculation results in an
Assumed Option being exercisable for a fraction of a share of Parent Series A
Stock, then the number of shares of Parent Series A Stock subject to such option
will be rounded up to the nearest whole number of shares, with no cash being
payable for such fractional share. The terms and conditions of each Assumed
Option will otherwise remain as set forth in the Company Option converted into
such Assumed Option. The adjustment provided for in this Section 2.6(a) with
respect to any options that are "incentive stock options" (as defined in
Section 422 of the Code) will be and is intended to be effected in a manner
which is consistent with Section 424(a) of the Code.
(B) STOCK APPRECIATION RIGHTS.
Each of the then outstanding stock appreciation rights, if any, with respect
to shares of Company Common Stock (each, a "Company SAR") issued by the Company
pursuant to any Company Plan, and any non-plan stock appreciation rights with
respect to shares of Company Common Stock set forth in Schedule 2.6 or otherwise
issued by the Company, will, by virtue of the Merger, and without any further
action on the part of any holder thereof, be assumed by Parent and converted
into a stock appreciation right (an "Assumed SAR") with respect to that number
of shares of Parent Series A Stock equal to the number of shares of Company
Common Stock that were subject to such Company SAR at the Effective Time
multiplied by the Exchange Ratio, at an exercise or base price per stock
appreciation right equal to (i) in the case of a Company SAR issued in tandem
with, and at the same base or exercise price as, Company Options, the exercise
price per share of the related Company Option assumed by Parent as determined
above and (ii) in the case of a free standing Company SAR or a Company SAR
issued in tandem with, and at a different base or exercise price as, Company
Options, the amount determined by dividing the base price per share of such
Company SAR immediately prior to the Effective Time by the Exchange Ratio,
rounded down to the nearest whole cent. If the foregoing calculation results in
an Assumed SAR being exercisable with respect to a fraction of a share of Parent
Series A Stock, then the number of shares of Parent Series A Stock in respect of
such stock appreciation right will be rounded up to the nearest whole number of
shares, with no cash being payable for such fractional share. The terms and
conditions of each Assumed SAR will otherwise remain as set forth in the Company
SAR converted into such Assumed SAR.
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(C) RESTRICTED STOCK.
Each restricted share of Company Common Stock ("Company Restricted Stock")
granted pursuant to any Company Plan and each restricted share of Company Common
Stock issued pursuant to individual awards not granted pursuant to any Company
Plan will, by virtue of the Merger, and without any further action on the part
of any holder thereof, be converted into a number of restricted shares of Parent
Series A Stock at the Exchange Ratio, and will remain subject to the same
restrictions applicable to such restricted share of Company Common Stock
immediately prior to the Effective Time. If the foregoing calculation results in
a restricted share of Company Common Stock being convertible for a fraction of a
share of Parent Series A Stock, then the number of shares of Parent Series A
Stock to be issued will be rounded up to the nearest whole number of shares,
with no cash being payable for such fractional share.
2.7 APPRAISAL RIGHTS.
Holders of Company Common Stock are entitled to appraisal rights in the
Merger under Section 262 of the DGCL. Notwithstanding anything to the contrary
in this Agreement, each outstanding share of Company Common Stock, the holder of
which has demanded and perfected his demand for appraisal of the fair value of
such shares in accordance with Section 262 and has not effectively withdrawn or
lost his right to such appraisal (the "Dissenting Shares"), shall not be
converted into or represent a right to receive the Merger consideration
specified in Section 2.3, but the holder thereof shall be entitled only to such
rights as are granted by Section 262. The Company shall give Parent prompt
notice upon receipt of any such written demands for appraisal of the fair value
of shares of Company Common Stock and of withdrawals of such demands and any
other instruments provided to the Company pursuant to Section 262. Any payment
to a holder of Company Common Stock ordered by the Delaware Court of Chancery
pursuant to Section 262 of the DGCL shall be made by the Surviving Corporation
out of its own funds. Parent and Merger Sub acknowledge that they have received
a copy of Section 262 of the DGCL and that, as a result of their consent to the
Merger as set forth in Section 6.9, they will have no right to exercise
appraisal rights under Section 262 of the DGCL with respect to any Company Stock
that immediately prior to the Effective Time is owned of record by Parent or any
Wholly-Owned Subsidiary of Parent.
ARTICLE III
CERTAIN ACTIONS
3.1 STOCKHOLDER MEETING.
Except as otherwise required by the fiduciary duties of the Company Board,
as determined in good faith by the Company Board following the receipt of advice
of the Company's outside legal counsel thereon, (A) the Company, acting through
the Company Board, will, in accordance with applicable law, the Company Charter
and the Company's Bylaws, duly call, give notice of, convene and hold, as soon
as reasonably practicable after the date hereof, a meeting of the Company's
stockholders (the "Special Meeting") for the purpose of considering and voting
upon this Agreement and (B) the Company will, through the Company Board,
recommend to its stockholders the adoption of this Agreement.
3.2 REGISTRATION STATEMENT AND OTHER SEC FILINGS.
(A) REGISTRATION STATEMENT AND PROXY STATEMENT.
As soon as reasonably practicable after the execution of this Agreement, the
Company will prepare and file with the SEC a preliminary proxy statement in form
and substance reasonably satisfactory to Parent, and Parent will prepare and
file with the SEC a Registration Statement on Form S-4 (the
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"Registration Statement") in connection with the registration under the
Securities Act of the Parent Series A Stock issuable in the Merger and upon
exercise of the Assumed Options. The proxy statement furnished to the Company's
stockholders in connection with the Special Meeting (the "Proxy Statement") will
be included as part of the prospectus forming part of the Registration
Statement. Each party hereto agrees to use commercially reasonable efforts to
cooperate with each other party in connection with the preparation and filing of
the preliminary proxy statement, the Proxy Statement and the Registration
Statement, including providing information to the other party with respect to
itself as may be reasonably required in connection therewith. Each of Parent and
the Company will use commercially reasonable efforts to respond to any comments
of the SEC, to cause the Registration Statement to be declared effective under
the Securities Act as soon as reasonably practicable after such filing and to
continue to be effective as of the Effective Time and to cause the Proxy
Statement approved by the SEC to be mailed to the Company's stockholders at the
earliest practicable time. Parent also will use commercially reasonable efforts
to take any reasonable action (other than qualifying to do business in any
jurisdiction in which it is not now so qualified, subjecting itself to taxation
in any jurisdiction in which it is not now so subject, giving any consent to
general service of process in any jurisdiction in which it is not now subject to
such service or changing in any respect its authorized or outstanding capital
stock or the composition of its assets) required to be taken under any
applicable state securities or blue sky laws in connection with the issuance of
the Parent Series A Stock to be covered by the Registration Statement.
(B) SEC COMMENTS; AMENDMENTS AND SUPPLEMENTS.
Each of Parent and the Company will notify the other party promptly of the
receipt of any comments of the SEC or its staff and of any request by the SEC or
its staff or any other governmental officials for amendments or supplements to
the preliminary proxy statement, the Proxy Statement, the Registration Statement
or any other related filing or for additional information related thereto, and
will supply the other with copies of all correspondence between it and any of
its representatives, on the one hand, and the SEC or its staff or any other
governmental officials, on the other hand, with respect to the preliminary proxy
statement, the Proxy Statement, the Registration Statement, the Merger or any
other filing relating thereto. The Proxy Statement, the Registration Statement
and such other filings will comply in all material respects with all applicable
requirements of law. If at any time prior to the Effective Time, any event
occurs relating to Parent or the Company, as the case may be, or its
Subsidiaries or any of their respective officers, directors, partners or
Affiliates which should be described in an amendment or supplement to the Proxy
Statement, the Registration Statement or any other related filing, Parent or the
Company, as the case may be, will inform the other party promptly after becoming
aware of such event and cooperate in filing with the SEC or its staff or any
other government officials, and/or mailing to stockholders of the Company, such
amendment or supplement.
3.3 [RESERVED]
3.4 REASONABLE EFFORTS.
Subject to the terms and conditions of this Agreement and applicable law
and, in the case of the Company, except as otherwise required by the fiduciary
duties of the Company Board (as determined in good faith by the Company Board
following the receipt of advice of the Company's outside legal counsel thereon),
each of the parties hereto will use commercially reasonable efforts to take, or
cause to be taken, all actions, and to do, or cause to be done, all things
reasonably necessary, proper or advisable under applicable laws and regulations
or otherwise to consummate and make effective the Merger and the other
transactions contemplated by this Agreement as soon as reasonably practicable,
including such actions or things as any other party hereto may reasonably
request in order to cause any of the conditions to such other party's obligation
to consummate such transactions specified in Article VII to be fully satisfied.
Without limiting the generality of the foregoing, the parties will, and
14
will cause their respective directors, officers and Subsidiaries, and use
commercially reasonable efforts to cause their respective Affiliates, employees,
agents, attorneys, accountants and representatives, to consult and fully
cooperate with and provide reasonable assistance to each other in (i) obtaining
all necessary consents, approvals, waivers, licenses, permits, authorizations,
registrations, qualifications, or other permission or action by, and giving all
necessary notices to and making all necessary filings with and applications and
submissions to, any Governmental Entity or other Person; (ii) lifting any
permanent or preliminary injunction or restraining order or other similar order
issued or entered by any court or Governmental Entity (an "Injunction") of any
type referred to in Section 7.1(c); (iii) subject to the last sentence of
Section 3.2(a), taking such actions as may reasonably be required under
applicable state securities or blue sky laws in connection with the issuance of
the Parent Series A Stock to be covered by the Registration Statement; and
(iv) in general, consummating and making effective the transactions contemplated
hereby. Prior to making any application to or filing with any Governmental
Entity or other Person in connection with this Agreement, each party will
provide the other party with drafts thereof and afford the other party a
reasonable opportunity to comment on such drafts.
3.5 NO SOLICITATIONS; OTHER OFFERS.
(a) The Company shall not, nor shall it knowingly permit any of its
officers, directors, representatives or agents to, directly or indirectly,
(i) take any action to solicit, initiate or knowingly encourage the submission
of any Acquisition Proposal or (ii) engage in discussions or negotiations with
any other Person to facilitate an Acquisition Proposal. From and after the date
hereof, the Company and all of its officers, directors, employees, agents and
advisors shall cease doing any of the foregoing. Nothing contained in this
Agreement shall prevent the Company Board from complying with Rule 14d-9 or
Rule 14e-2 under the Exchange Act with respect to any Acquisition Proposal.
(b) Notwithstanding the foregoing, the Company may, subject to a
confidentiality agreement containing customary terms, engage in discussions or
negotiations with, and furnish nonpublic information or access to, any Person in
response to an unsolicited Acquisition Proposal or a request for information or
access made incident to an unsolicited Acquisition Proposal if (i) the Company
has complied with the terms of Section 3.5(a) hereof and (ii) the Company Board
determines in good faith, after consultation with outside legal counsel, that
the taking of such action is necessary to discharge its fiduciary duties under
applicable law.
(c) The Company will promptly (but in no event later than 48 hours) notify
Parent if any Acquisition Proposal is made, indicating the identity of the
offeror and the terms and conditions of such Acquisition Proposal. The Company
shall keep Parent fully informed of all material developments that could result
in the Company Board withdrawing, modifying or amending its recommendation to
its stockholders referred to in Section 3.1(B) hereof.
(d) The Company Board shall be permitted to withdraw, or modify in a manner
adverse to Parent, its recommendation to its stockholders referred to in
Section 3.1(B) and Section 4.15 hereof if the Company has complied with the
terms of this Section 3.5.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Merger Sub as
follows:
4.1 ORGANIZATION AND QUALIFICATION.
Each of the Company and its Subsidiaries (i) is a corporation, partnership,
limited liability company or other business association duly organized, validly
existing and in good standing under the
15
laws of the jurisdiction of its incorporation or organization, (ii) has all
requisite corporate, partnership, limited liability company or other business
association power and authority to own, lease and operate its properties and to
carry on its business as it is now being conducted and (iii) is duly qualified
or licensed and in good standing to do business in each jurisdiction in which
the property owned, leased or operated by it or the nature of the business
conducted by it makes such qualification or license necessary, except in such
jurisdictions where the failure to be so duly qualified or licensed or in good
standing has not had and could not have, individually or in the aggregate, a
Material Adverse Effect on the Company. To the Company's knowledge, each entity
in which the Company, directly or through one or more of its Subsidiaries, owns
an investment accounted for by the equity method within the meaning of GAAP (the
"Company Equity Affiliates") is a corporation, partnership, limited liability
company or other business association (A) duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation or
organization, (B) has all requisite corporate, partnership, limited liability
company or other business association power and authority to own, lease and
operate its properties and to carry on its business as it is now being conducted
and (C) is duly qualified to do business and is in good standing in each
jurisdiction in which the property owned, leased or operated by it, or the
nature of its activities, makes such qualification necessary, except in each
case where such failure to be so existing and in good standing or to have such
power and authority or to be so qualified to do business and be in good standing
has not had and could not have, in the aggregate, a Material Adverse Effect on
the Company. The Company has heretofore furnished or made available to Parent a
true and complete copy of the Company Charter and the Company's Bylaws, each as
amended through and in effect on the date hereof.
4.2 AUTHORIZATION AND VALIDITY OF AGREEMENT.
The Company has all requisite corporate power and authority to enter into
this Agreement and, subject to obtaining the approval of its stockholders
specified in Section 4.11, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution, delivery and
performance by the Company of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by the Company Board
and by all other necessary corporate action on the part of the Company, subject,
in the case of the consummation by it of the Merger, to such approval of the
Company's stockholders. This Agreement has been duly executed and delivered by
the Company and (assuming the due execution and delivery of this Agreement by
the other parties hereto) constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms (except
insofar as enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by principles governing the availability of equitable remedies).
4.3 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of (i) 170,000,000
shares of Company Common Stock, of which 100,000,000 shares are designated
Company Series A Common Stock and 70,000,000 shares are designated Company
Series B Common Stock and (ii) 5,000,000 shares of Company Preferred Stock,
issuable in series, of which 150,000 are designated as Company Series A
Preferred Stock and 150,000 are designated as Company Series B Preferred Stock.
(b) As of the close of business on August 21, 2003, (i) 14,304,794 shares of
Company Series A Common Stock and 34,764,921 shares of Company Series B Common
Stock were issued and outstanding, (ii) 150,000 shares of Company Series A
Preferred Stock and 150,000 shares of Company Series B Preferred Stock were
issued and outstanding, (iii) 213,353 shares of Company Series A Common Stock
were reserved for issuance upon conversion of outstanding Company Series B
Common Stock, (iv) 5,150 shares of Company Series B Common Stock were reserved
for issuance upon conversion of outstanding Company Series B Preferred Stock;
(v) 320,938 shares of Company Series A
16
Common Stock and no shares of Company Series B Common Stock were reserved for
issuance upon conversion, exchange or exercise of outstanding Company Options,
Company SARs and Company Restricted Stock issued pursuant to Company Plans,
(vi) 479,911 shares of Company Series A Common Stock and no shares of Company
Series B Common Stock were reserved for issuance upon conversion, exchange or
exercise of Company Options, Company SARs and Company Restricted Stocks
available for grant pursuant to Company Plans (vii) no shares of Company
Preferred Stock other than the Company Series A Preferred Stock and the Company
Series B Preferred Stock were issued and outstanding and no action had been
taken by the Company Board with respect to the designation of the rights and
preferences of any series of Company Preferred Stock other than the Company
Series A Preferred Stock and the Company Series B Preferred Stock, and
(viii) 2,954 shares of Company Series A Common Stock, no shares of Company
Series B Common Stock and no Company Preferred Stock were held in the treasury
of the Company or held by Subsidiaries of the Company. Except as set forth in
the preceding sentence, at the close of business on August 21, 2003, no shares
of capital stock or other securities or other equity interests of the Company
and no phantom shares, phantom equity interests, or stock or equity appreciation
rights relating to the Company or any of its divisions or Subsidiaries were
issued, reserved for issuance or outstanding. Since the close of business on
August 21, 2003, no shares of capital stock or other securities or other equity
interests of the Company and no phantom shares, phantom equity interests, or
stock or equity appreciation rights relating to the Company or any of its
divisions or Subsidiaries have been issued other than shares of Company Common
Stock issued upon exercise of Company Options, Company SARs and Company
Restricted Stock outstanding at the close of business on August 21, 2003
referred to in clause (v) of the second preceding sentence in accordance with
their terms.
(c) All outstanding shares of Company Common Stock and Company Preferred
Stock are, and all shares of Company Common Stock which may be issued upon the
exercise of Company Options, Company SARs or Company Restricted Stock will be,
duly authorized, validly issued, fully paid and nonassessable, and no class of
capital stock of the Company is entitled to preemptive rights. All outstanding
shares of Company Common Stock and Company Options, Company SARs or Company
Restricted Stock issued pursuant to the Company Plans were issued, and all
shares of Company Common Stock which may be issued upon the exercise of Company
Options or Company SARs issued pursuant to the Company Plans will be, when
issued, in compliance with all applicable state and federal laws concerning the
offer, sale and issuance of such securities.
(d) There are no issued or outstanding bonds, debentures, notes or other
Indebtedness of the Company or any of its Subsidiaries which have the right to
vote (or which are convertible into other securities having the right to vote)
on any matters on which stockholders of the Company may vote (the "Voting
Debt").
(e) Except as described on Schedule 4.3(e), there are no, and immediately
after the Effective Time there will be no, outstanding or authorized
subscriptions, options, warrants, securities, calls, rights, commitments or any
other contracts of any character to or by which the Company or any of its
Subsidiaries is a party or is bound that, directly or indirectly, obligate the
Company or any of its Subsidiaries (contingently or otherwise) to issue, deliver
or sell or cause to be issued, delivered or sold any shares of Company Common
Stock or any Company Preferred Stock or other capital stock, securities, equity
interests or Voting Debt of the Company or any Subsidiary of the Company, any
securities convertible into, or exercisable or exchangeable for, or evidencing
the right (contingent or otherwise) to subscribe for any such shares,
securities, interests or Voting Debt, or any phantom shares, phantom equity
interests or stock or equity appreciation rights, or obligating the Company or
any of its Subsidiaries to grant, extend or enter into any such subscription,
option, warrant, security, call, right or Contract (collectively, "Convertible
Securities"). Schedule 4.3(e) sets forth with respect to each outstanding
Company Option, Company SAR and each Company Restricted Stock share (i) the name
of the Person that holds such Company Option, Company SAR or Company Restricted
Stock and
17
(ii) the total number of shares of Company Common Stock issuable upon exercise
of such Company Option or Company SAR or subject to such Company Restricted
Stock (assuming that all conditions to the exercise thereof, including the
passage of time, had been met). Neither the Company nor any Subsidiary thereof
is subject to any obligation (contingent or otherwise) to repurchase or
otherwise acquire or retire any shares of its capital stock. The Company has
delivered to Parent true and complete copies of the Company Restricted Stock
documents and the Company Option and Company SAR documents which copies
(together, with the provisions of the applicable Company Plans) represent the
complete terms, conditions, provisions, obligations and undertakings of the
Company with respect to all the Company Restricted Stock, the Company Options
and the Company SARs.
(f) Except as described on Schedule 4.3(f), neither the Company nor any of
its Subsidiaries has adopted, authorized or assumed any plans, arrangements or
practices for the benefit of its officers, employees or directors that require
or permit the issuance, sale, purchase or grant of any capital stock, securities
or other equity interests or Voting Debt of the Company or any Subsidiary of the
Company, any phantom shares, phantom equity interests or stock or equity
appreciation rights or any Convertible Securities.
4.4 REPORTS AND FINANCIAL STATEMENTS.
(a) The Company has filed on a timely basis all forms, reports and documents
with the SEC required to filed by it under the Securities Act or the Exchange
Act since January 1, 1999 (collectively, the "Company SEC Filings"). The Company
has heretofore furnished or made available to Parent true and complete copies of
all the Company SEC Filings filed prior to the date hereof. As of their
respective dates, each of the Company SEC Filings complied in all material
respects with the applicable requirements of the Exchange Act and the rules and
regulations thereunder, and none of the Company SEC Filings contained as of such
date any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading (except
that no representation or warranty is made with respect to any information
regarding Parent or its Affiliates included in the Company SEC Filings which was
furnished by Parent or its Affiliates expressly for use therein). When filed
with the SEC, the financial statements (including the related notes) included in
the Company SEC Filings complied as to form in all material respects with the
applicable requirements of the Exchange Act and the applicable rules and
regulations thereunder and were prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated therein or in the schedules
thereto), and such financial statements fairly present, in all material
respects, the consolidated financial position of the Company and its
consolidated Subsidiaries as of the respective dates thereof and the
consolidated results of their operations and their consolidated cash flows for
the respective periods then ended, subject, in the case of the unaudited interim
financial statements, to normal, recurring year-end audit adjustments.
(b) Except as and to the extent reflected or reserved against in the
financial statements included in the Company's quarterly report on Form 10-Q for
the quarter ended June 30, 2003 or as disclosed therein or in Schedule 4.4, none
of the Company or any of its Subsidiaries, or to its knowledge, any of its
Equity Affiliates, had as of such date any actual or potential liability or
obligation of any kind, whether accrued, absolute, contingent, unliquidated or
other, or whether due or to become due (including any liability for breach of
contract, breach of warranty, torts, infringements, claims or lawsuits), that in
the aggregate, insofar as the Company can reasonably foresee, could have, a
Material Adverse Effect on the Company or that individually is required by the
applicable rules and regulations of the SEC and GAAP to be disclosed, reflected
or reserved against in the Company's consolidated financial statements
(including the notes thereto). Except as set forth on Schedule 4.4, neither the
Company nor any of its Subsidiaries has guaranteed or otherwise agreed to become
responsible for any Indebtedness of any other Person.
18
4.5 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH INSTRUMENTS.
Except as set forth on Schedule 4.5, the execution and delivery by the
Company of this Agreement do not, and the performance by the Company of its
obligations hereunder and the consummation of the transactions contemplated
hereby will not:
(i) assuming adoption of this Agreement at the Special Meeting by the
requisite vote of the Company's stockholders, conflict with or violate
the Company Charter or Bylaws or the charter or bylaws of any corporate
Subsidiary of the Company, or any other instrument or document governing
any Subsidiary of the Company that is not a corporation or partnership;
(ii) require any consent, approval, order or authorization of or other
action by any Governmental Entity (a "Government Consent") or any
registration, qualification, declaration or filing with or notice to any
Governmental Entity (a "Governmental Filing"), in each case on the part
of or with respect to the Company, any Subsidiary of the Company or, to
the knowledge of the Company, any Company Equity Affiliate, except for
(A) the filing with the SEC of the Registration Statement and the Proxy
Statement and such reports under Sections 13(a) and 16(a) of the Exchange
Act as may be required in connection with this Agreement and the
transactions contemplated hereby, (B) the filing of the Certificate of
Merger with the Delaware Secretary of State and appropriate documents
with the relevant authorities of other states in which the Company is
qualified to do business, (C) such Government Consents and Governmental
Filings with federal, foreign, state and local governmental authorities
(the "Local Approvals") as may be required with respect to the Licenses
held by the Company, any of its Subsidiaries or, to the knowledge of the
Company, any of the Company Equity Affiliates or as may otherwise be
required under laws applicable to the conduct of the businesses of the
Company and its Subsidiaries in the ordinary course, all of which are
listed on Schedule 4.5, (D) the Governmental Filings to be made on the
part of or with respect to Parent and Merger Sub referred to in
clause (ii) of Section 5.5, (E) such Government Consents and Governmental
Filings as may be required in connection with the issuance of the Parent
Series A Stock to be covered by the Registration Statement pursuant to
state securities and blue sky laws, and (F) such Government Consents and
Government Filings the absence or omission of which could not, in the
aggregate, have a Material Adverse Effect on the Company or prevent or
materially delay the consummation of the Merger;
(iii) assuming adoption of this Agreement at the Special Meeting by the
requisite vote of the Company's stockholders, require, on the part of the
Company, any Subsidiary of the Company or, to the knowledge of the
Company, any Company Equity Affiliate, any consent by or approval or
authorization of (a "Contract Consent") or notice to (a "Contract
Notice") any other Person (other than a Governmental Entity), whether
under any License or other Contract or otherwise, except (A) as set forth
on Schedule 4.5 and (B) such Contract Consents and Contract Notices the
absence or omission of which could not, in the aggregate, have a Material
Adverse Effect on the Company or prevent or materially delay the
consummation of the Merger;
(iv) assuming that the Contract Consents and Contract Notices described on
Schedule 4.5 are obtained and given and that any Government Consents and
Governmental Filings required under any Licenses are obtained or made,
conflict with or result in any violation or breach of or default (with or
without notice or lapse of time, or both) under, or give rise to a right
of termination, cancellation, suspension, modification or acceleration of
any obligation or any increase in any payment required by or the
impairment, loss or forfeiture of any material benefit, rights or
privileges under or the creation of a Lien, Restriction or other
encumbrance on any assets pursuant to (any such conflict, violation,
breach, default, right of termination, cancellation or acceleration, loss
or creation, a "Violation") any contract (including any note,
19
bond, indenture, mortgage, deed of trust, lease, franchise, permit,
authorization, license, contract, instrument, employee benefit plan or
practice, or other agreement, obligation, commitment or concession of any
nature (each, a "Contract")) to which the Company, any Subsidiary of the
Company or, to the knowledge of the Company, any Company Equity Affiliate
is a party, by which the Company, any Subsidiary of the Company or, to
the knowledge of the Company, any Company Equity Affiliate or any of
their respective assets or properties is bound or affected or pursuant to
which the Company, any Subsidiary of the Company or, to the knowledge of
the Company, any Company Equity Affiliate is entitled to any rights or
benefits (including the Licenses), except such Violations which could
not, in the aggregate, have a Material Adverse Effect on the Company or
prevent or materially delay the consummation of the Merger; or
(v) assuming adoption of this Agreement at the Special Meeting by the
requisite vote of the Company's stockholders and assuming that the
Government Consents and Governmental Filings specified in clause (ii) of
this Section 4.5 are obtained, made and given, result in a Violation of,
under or pursuant to any law, rule, regulation, order, judgment or decree
applicable to the Company, any Subsidiary of the Company or, to the
knowledge of the Company, any Company Equity Affiliate, or by which any
of their respective properties or assets are bound or affected, except
for such Violations which could not, in the aggregate, have a Material
Adverse Effect on the Company or prevent or materially delay the
consummation of the Merger.
4.6 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as otherwise disclosed in the Company SEC Filings filed with the SEC
and publicly available prior to the date hereof or as set forth on
Schedule 4.6, from December 31, 2002 through the date of this Agreement,
(a) there has not been any material adverse change in the business, properties,
operations or financial condition of the Company and its Subsidiaries taken as a
whole, and no event has occurred and no condition exists which, individually or
together with other events or conditions, has had or, insofar as the Company can
reasonably foresee, could have, a Material Adverse Effect on the Company and
(b) no action has been taken by the Company or any Subsidiary of the Company
that, if Section 6.4 of this Agreement had then been in effect, would have been
prohibited by such Section without the consent or approval of Parent, and no
Contract to take any such action was entered into during such period, except for
such actions which could not, in the aggregate, have a Material Adverse Effect
on the Company or prevent or materially delay the consummation of the Merger.
4.7 REGISTRATION STATEMENT; PROXY STATEMENT.
None of the information supplied or to be supplied by the Company in writing
specifically for inclusion or incorporation by reference in, and which is
included or incorporated by reference in, (i) the Registration Statement
(including the Proxy Statement forming part of the prospectus included therein)
or any amendment or supplement thereto or (ii) any other documents filed or to
be filed with the SEC or any other Governmental Entity in connection with the
transactions contemplated hereby, will, at the respective times such documents
are filed, and, in the case of the Registration Statement (including the Proxy
Statement forming part of the prospectus included therein) or any amendment or
supplement thereto, when the same becomes effective, at the time of the Special
Meeting and at the Effective Time, be false or misleading with respect to any
material fact, or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading or necessary to correct any statement in any earlier
communication.
20
4.8 LEGAL PROCEEDINGS.
Except as otherwise disclosed in the Company SEC Filings filed with the SEC
and publicly available prior to the date hereof or as set forth on
Schedule 4.8, there is no (a) Legal Proceeding pending or, to the knowledge of
the Company, threatened, against, involving or affecting the Company, any
Subsidiary of the Company or, to the knowledge of the Company, any Equity
Affiliate of the Company or any of its or their respective assets or rights,
(b) judgment, decree, Injunction, rule, or order of any Governmental Entity
applicable to the Company or any Subsidiary of the Company, or to the knowledge
of the Company, any Equity Affiliate of the Company that has had or could have,
either individually or in the aggregate, a Material Adverse Effect on the
Company, (c) Legal Proceeding pending or, to the knowledge of the Company,
threatened, against the Company, any Subsidiary of the Company or, to the
knowledge of the Company, any Equity Affiliate of the Company that seeks to
restrain, enjoin or delay the consummation of the Merger or any of the other
transactions contemplated by this Agreement or that seeks damages in connection
therewith, or (d) Injunction of any type referred to in Section 7.1(c).
4.9 LICENSES; COMPLIANCE WITH REGULATORY REQUIREMENTS.
(a) The Company and its Subsidiaries, and to the knowledge of the Company,
its Equity Affiliates hold all Licenses required for or which are material to
the ownership of the assets and the operation of the businesses of the Company
or any of its Subsidiaries, except for those Licenses which the failure to hold
has not had and could not have, in the aggregate, a Material Adverse Effect. The
Company and each of its Subsidiaries, and to the knowledge of the Company, each
of its Equity Affiliates, are in compliance with, and have conducted their
respective businesses so as to comply with, the terms of their respective
Licenses and with all applicable laws, rules, regulations, ordinances and codes
(domestic or foreign), except where the failure so to comply has not had and
could not have, in the aggregate, a Material Adverse Effect. Without limiting
the generality of the foregoing, the Company and its Subsidiaries, and to the
knowledge of the Company, its Equity Affiliates (i) have all Licenses of
foreign, state and local Governmental Entities required for the operation of the
facilities being operated on the date hereof by the Company or any of its
Subsidiaries or Equity Affiliates (the "Permits"), (ii) have duly and currently
filed all reports and other information required to be filed with any
Governmental Entity in connection with such Permits and (iii) are not in
violation of any of such Permits, other than the lack of Permits, delays in
filing reports or possible violations that have not had and, could not have, a
Material Adverse Effect.
(b) Except as set forth in Schedule 4.9(b), (i) the Company and its
Subsidiaries and to the knowledge of the Company, its Equity Affiliates, and the
operation of their respective businesses, equipment and other assets and the
facilities owned or leased by them are in compliance in all material respects
with all applicable Environmental Laws, (ii) the Company and its Subsidiaries
and to the knowledge of the Company, its Equity Affiliates, hold all material
Licenses required under Environmental Laws necessary to enable them to own,
lease or otherwise hold their assets and to carry on their businesses as
presently conducted, (iii) there are no investigations, administrative
proceedings, judicial actions, orders, claims or notices that are pending or, to
the knowledge of the Company, threatened against the Company or any of its
Subsidiaries or to the knowledge of the Company, its Equity Affiliates, relating
to or arising under any Environmental Laws, (iv) there is no ongoing remediation
of or other response activity to address contamination or any other adverse
environmental or indoor air quality condition and no condition that would be
reasonably expected to give rise to a requirement under applicable Environmental
Laws to conduct such remediation or response activities, and no Governmental
Entity has proposed or threatened any such remediation or response, at any real
property currently or formerly leased or owned by the Company or any of its
Subsidiaries or to the knowledge of the Company, any of its Equity Affiliates,
or resulting from any activity of the Company or any of its Subsidiaries or to
the knowledge of the Company, any of its Equity Affiliates, (v) neither
21
the Company nor any of its Subsidiaries nor to the knowledge of the Company, any
of its Equity Affiliates, has received any notice alleging a violation of or
liability of the Company or any of its Subsidiaries or any of its Equity
Affiliates, under any Environmental Laws, and (vi) neither the Company nor any
of its Subsidiaries nor to the knowledge of the Company, any of its Equity
Affiliates, have contractually agreed to assume or provide an indemnity for
environmental liabilities of any third party. For purposes of this Agreement,
the term "Environmental Laws" means any federal, state, local or foreign law,
statute, rule or regulation or the common law relating to the environment, the
management of hazardous or toxic substances, the protection of natural resources
or wildlife, or occupational or public health and safety, including the federal
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended and the federal Occupational Safety and Health Act of 1970, as
amended, and any state or foreign law counterpart.
4.10 TAX MATTERS. Except as set forth on Schedule 4.10:
(a) The Company and each of its Subsidiaries (except with respect to any
Consolidated Tax Return) have timely filed all Tax Returns that they were
required to file. All such Tax Returns were correct and complete in all
respects. All Taxes owed by the Company and each of its Subsidiaries (except any
Consolidated Period Taxes) (whether or not shown on any Tax Return) have been
timely paid. A reserve, which the Company reasonably believes to be adequate,
has been set up for the payment of all such Taxes anticipated to be payable by
the Company and each of its Subsidiaries in respect of periods through the date
hereof. Neither the Company nor any of its Subsidiaries (except with respect to
any Consolidated Tax Return) is currently the beneficiary of any extension of
time within which to file any Tax Return.
(b) No claim has ever been made by an authority in a jurisdiction where the
Company or any of its Subsidiaries does not file Tax Returns that the Company or
any of its Subsidiaries is or may be subject to taxation by that jurisdiction.
(c) There are no Liens or Restrictions on any of the assets or properties of
the Company or any of its Subsidiaries that arose in connection with any failure
(or alleged failure) to pay any Tax, except any Liens or Restrictions on any of
the assets or properties of the Company or any of its Subsidiaries that arose in
connection with any failure (or alleged failure) by Parent to pay any
Consolidated Period Taxes.
(d) The Company and its Subsidiaries have withheld and paid over to the
relevant taxing authority all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, shareholder, or other third party.
(e) None of the Tax Returns filed by the Company or any of its Subsidiaries
(except with respect to any Consolidated Tax Return) has been or is currently
being examined by the Internal Revenue Service or relevant state, local or
foreign taxing authorities. Except with respect to any Consolidated Period
Taxes, (i) there are no examinations or other administrative or court
proceedings relating to Taxes of the Company or any of its Subsidiaries in
progress or pending, (ii) neither the Company nor any of its Subsidiaries has
received any notice or report asserting a Tax deficiency with respect to the
Company or any of its Subsidiaries and (iii) there are no current or threatened
actions, suits, proceedings, investigations, audits or claims relating to or
asserted for Taxes of the Company or any of its Subsidiaries.
(f) Except with respect to any Consolidated Period Taxes, all deficiencies
or assessments asserted against the Company or any of its Subsidiaries by any
taxing authority have been paid or fully and finally settled and, to the
knowledge of the Company, no issue previously raised in writing by any such
taxing authority reasonably could be expected to result in a material assessment
for any taxable period (or portion of a period) beginning on or after the
Closing Date.
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(g) Except with respect to any Consolidated Period Taxes, the Company and
its Subsidiaries have not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(h) Neither the Company nor any of its Subsidiaries (A) has filed a consent
under Section 341(f) of the Code concerning collapsible corporations, or (B) is
required to include in income any adjustment pursuant to Section 481(a) of the
Code by reason of a change in accounting method.
(i) There is no contract, agreement, plan or arrangement to which the
Company or any of its Subsidiaries is a party covering any employee, former
employee, officer, director, shareholder or contract worker of the Company or
any of its Subsidiaries, which, individually or collectively, could give rise to
the payment of any amount that would not be deductible pursuant to Sections 280G
or 162(m) of the Code.
(j) Neither the Company nor any of its Subsidiaries (A) is or has been a
member of an affiliated group (within the meaning of Section 1504 of the Code)
filing a consolidated federal income Tax Return other than an affiliated group
the common parent of which is the Company or Parent, (B) is or has been a member
of any affiliated, combined, consolidated, unitary, or similar group for state,
local or foreign Tax purposes other than a group the common parent of which is
the Company or Parent, (C) is or has been a party to any Tax allocation or Tax
sharing agreement except with Parent, or (D) has any liability for the Taxes of
any Person (other than any of the Company and its Subsidiaries or pursuant to
any agreement between the Company and Parent) under Treasury Regulations
Section 1.1502-6 (or any similar provision of state, local, or foreign law), as
a transferee or successor, by Contract, or otherwise.
(k) Neither the Company nor any of its Subsidiaries (except with respect to
any Consolidated Period Taxes) has requested a ruling from, or entered into a
closing agreement with, the Internal Revenue Service or any other taxing
authority which will have an effect on the Surviving Corporation or any of its
Subsidiaries in any taxable period ending after the Closing Date.
(l) None of the assets of the Company or any of its Subsidiaries is
"tax-exempt use property" within the meaning of Section 168(h)(1) of the Code,
"tax-exempt bond financed property" within the meaning of Section 168(g)(5) of
the Code, or may be treated as owned by any other Person pursuant to the
provisions of Section 168(f)(8) of the Internal Revenue Code of 1954, as amended
and in effect immediately prior to the enactment of the Tax Reform Act of 1986.
(m) Neither the Company nor any of its Subsidiaries has participated in a
corporate tax shelter within the meaning of Treasury Regulations
Section 1.6011-4T or participated in a transaction that it has disclosed
pursuant to Internal Revenue Services Announcement 2002-2, 2002-2 I.R.B. 304.
The Company and its Subsidiaries (except with respect to any Consolidated Tax
Return) have disclosed on their U.S. federal Tax Returns all positions taken
therein that are likely to give rise to a substantial understatement of federal
income Tax within the meaning of Section 6662 of the Code.
4.11 EMPLOYEE MATTERS.
(a) Schedule 4.11(a) contains a true and complete list of all of the Company
Plans, except for any such plans that relate exclusively to On Command
Corporation and/or its Subsidiaries. The Company has heretofore delivered to
Parent true and complete copies of (i) each Company Plan and, if the Company
Plan is funded through a trust or any third party funding vehicle, a copy of the
trust or other funding document, (ii) the most recent determination letter
issued by the Internal Revenue Service with respect to each Company Plan for
which such a letter has been obtained, (iii) annual reports on Form 5500
required to be filed with any Governmental Entity for each Company Plan for the
three most recent plan years and all required actuarial reports for the last
three plan years of each Company Plan.
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(b) No Company Plan is subject to Title IV of ERISA or section 412 of the
Code and neither the Company nor any ERISA Affiliate made, or was required to
make, contributions to any employee benefit plan subject to Title IV of ERISA or
section 412 of the Code during the six year period ending on the Effective Time.
(c) Each Company Plan that utilizes a funding vehicle described in
Section 501(c)(9) of the Code or is subject to the provisions of Section 505 of
the Code has been the subject of a notification by the Internal Revenue Service
that such funding vehicle (i) qualifies for tax-exempt status under
Section 501(c)(9) of the Code and (ii) complies with Section 505 of the Code,
except for those Company Plans listed on Schedule 4.11(c) which the Internal
Revenue Service does not as a matter of policy issue such notification with
respect to that particular type of plan. Each such Company Plan satisfies, where
appropriate, the requirements of Sections 501(c)(9) and 505 of the Code.
(d) There has been no event or circumstance which has resulted in any
liability being asserted by any Company Plan, the Pension Benefit Guaranty
Corporation or any other Person under Title IV of ERISA or section 412 of the
Code against the Company or any ERISA Affiliate and there has not been any event
or circumstance which could reasonably be expected to result in such liability.
(e) Neither the Company nor any Subsidiary of the Company is a party to or
bound by the terms of any collective bargaining agreement. The Company and each
of its Subsidiaries is in compliance in all material respects with all
applicable laws respecting the employment and employment practices, terms and
conditions of employment and wage and hours of its employees and is not engaged
in any unfair labor practice. There is no labor strike or labor disturbance
pending or, to the knowledge of the Company, threatened against the Company or
any Subsidiary of the Company, and during the past five years neither the
Company nor any Subsidiary of the Company has experienced a work stoppage.
(f) Each Company Plan has been operated and administered in accordance with
its terms and applicable law, including Section 406 of ERISA and Section 4975 of
the Code.
(g) Each Company Plan which is intended to be "qualified" within the meaning
of Section 401(a) of the Code is so qualified and the trusts maintained
thereunder are exempt from taxation under Section 501(a) of the Code.
(h) No Company Plan provides welfare benefits, including death or medical
benefits, with respect to current or former employees or consultants of the
Company or any Subsidiary of the Company beyond their retirement or other
termination of service (other than coverage mandated by applicable law).
(i) There are no pending, or the Company's knowledge threatened claims by or
on behalf of any Company Plan, by any employee or beneficiary covered under any
such Company Plan with respect to such Company Plan, or otherwise involving any
such Company Plan (other than routine claims for benefits).
(j) Schedule 4.11(j) sets forth a true and complete list as of the date
hereof of each of the following material agreements, arrangements and
commitments to which the Company or any of its Subsidiaries is a party or by
which any of them may be bound (true and complete copies of which have been
delivered to Parent), except for any of such agreements, arrangements or
commitments that have been filed by the Company with the SEC as an exhibit to
its Annual Report on Form 10-K: (i) each employment, consulting, agency or
commission agreement not terminable without liability to the Company or any of
its Subsidiaries upon 60 days' or less prior notice to the employee, consultant
or agent; (ii) each agreement with any employee of the Company or any Subsidiary
of the Company the benefits of which are contingent, or the terms of which are
materially altered, upon the consummation of the transactions contemplated by
this Agreement (whether alone or in conjunction with other actions); (iii) each
agreement with respect to any employee of the Company or any Subsidiary of the
Company providing any term of employment or compensation guarantee extending for
a period longer
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than one year; and (iv) each other agreement or Company Plan any of the benefits
of which will be increased, or the vesting of the benefits of which will be
accelerated, by the occurrence of any of the transactions contemplated by this
Agreement (whether alone or in conjunction with other actions) or the value of
any of the benefits of which will be calculated on the basis of any of the
transactions contemplated by this Agreement.
(k) Except as set forth in Schedule 4.11(k), (i) no employee of the Company
or any of its Subsidiaries will be entitled to any additional benefits or any
acceleration of the time of payment or vesting of any benefits under any Company
Plan as a result of the consummation of the transactions contemplated by this
Agreement (whether alone or in conjunction with other actions), (ii) no amount
payable, or economic benefit provided, by the Company or any of its Subsidiaries
(including any acceleration of the time of payment or vesting of any benefit) as
a result of the consummation of the transactions contemplated by this Agreement
(whether alone or in conjunction with other actions) could be considered an
"excess parachute payment" under Section 280G of the Code, (iii) no Person is
entitled to receive any additional payment from the Company, any of its
Subsidiaries or any other Person (a "Parachute Gross-Up Payment") in the event
that the excise tax of Section 4999 of the Code is imposed on such Person, and
(iv) neither the Company nor any of its Subsidiaries has granted to any Person
any right to receive any Parachute Gross-Up Payment.
4.12 CERTAIN AGREEMENTS, AFFILIATE TRANSACTIONS AND INSURANCE.
(a) Schedule 4.12(a) lists or describes each Contract to which the Company
or any of its Subsidiaries is a party, or by which any of their respective
assets are subject or bound, of the following nature, except for (x) any of such
Contracts that have previously been filed by the Company with the SEC as an
exhibit to its Annual Report on Form 10-K, (y) any of such Contracts that Parent
or any of its Affiliates are a party to (each, an "Affiliate Contract") and
(z) any of such Contracts that were directly or indirectly contributed to or
assumed by the Company or any of its Subsidiaries by virtue of the transactions
consummated pursuant to either (1) the Purchase Agreement dated as of
August 16, 2001 by and among the Company, Liberty AEG, Inc. and for certain
limited purposes, Parent, or (2) the Purchase Agreement dated as of August 16,
2001 by and among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc., Liberty
Mexico DTH Inc., Liberty Multicountry DTH, Inc., Liberty International
DTH, Inc., Liberty Latin Partners, Inc., the Company, and for certain limited
purposes, Parent (each Contract referenced in subclause (1) or (2), a
"Contributed Contract") (each Contract listed or required to be listed on
Schedule 4.12(a), along with each Contract listed or described, or required to
be listed or described, on Schedules 4.3(e), 4.3(f), 4.12(b) or 4.12(c), each
contract which has previously been filed with the SEC as an exhibit to its
Annual Report on Form 10-K and each Affiliate Contract and Contributed Contract,
a "Material Contract"):
(i) Contracts that have not previously been filed and are required to be
filed with the SEC pursuant to the Exchange Act as an exhibit to the
Company's Annual Report on Form 10-K;
(ii) Contracts that were entered into outside the ordinary course of
business and pursuant to which any obligations or liabilities (whether
absolute, contingent or otherwise) remain outstanding;
(iii) employment, bonus or consulting agreements involving potential
payments in excess of $100,000 over any period of 12 months or more;
(iv) Contracts evidencing or securing Indebtedness of the Company or any of
its Subsidiaries (other than trade accounts arising in the ordinary
course of business that do not exceed $10,000 individually or $250,000 in
the aggregate);
(v) Contracts in which the Company or any of its Subsidiaries has guaranteed
the obligations of any Person;
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(vi) Contracts that may require the Company or any of its Subsidiaries to
indemnify any other Person;
(vii) any Contract involving the potential payment (A) by the Company or any
of its Subsidiaries of $100,000 or more or (B) to the Company or any of
its Subsidiaries of an amount that is reasonably likely to be $100,000 or
more;
(viii)Contracts that contain any "most favored nations" provisions, as such
term is commonly understood in the cable television and satellite
television industries;
(ix) Contracts that guarantee any Person a particular amount of payment from
the Company or any of the Company's Subsidiaries irrespective of such
Person's performance of any of its obligations under such Contract;
(x) Contracts between the Company or any of its Subsidiaries, on the one
hand, and any director, officer or Significant Stockholder of the Company
or any of its Subsidiaries or Equity Affiliates, on the other hand;
(xi) Contracts that contain a Change of Control Covenant; and
(xii) Contracts giving any Person the right (contingent or otherwise) to
require the Company or any of its Subsidiaries to register under the
Securities Act any securities or to participate in any registration of
such securities.
Except as set forth in Schedule 4.12(a), each Material Contract is in full
force and effect and is valid and enforceable in accordance with its terms
(except insofar as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally, or by principles governing the availability of equitable
remedies and except that employees' covenants not to compete may not be
enforceable in accordance with their terms in Colorado and certain other
jurisdictions), and the Company or the applicable Subsidiary of the Company, as
the case may be, has taken all actions necessary to comply in all material
respects with such Material Contract and is not in material breach or violation
of or default under (with or without notice or lapse of time or both) any such
Material Contract. To the knowledge of the Company, except as set forth in
Schedule 4.12(a), all parties to the Material Contracts other than the Company
and its Subsidiaries have complied in all material respects with the provisions
thereof and no party is in breach or violation of, or in default (with or
without notice or lapse of time, or both) under, such Material Contracts. The
Company has not received notice of any actual or threatened termination,
cancellation or limitation to, and there has not been any other adverse
development in respect of, any of the Material Contracts. The Company has
delivered to Parent a true and correct copy of each Material Contract (other
than the Contributed Contracts and the Contracts that have previously been filed
with the SEC as an exhibit to the Company's Annual Report on Form 10-K) that is
in writing, and a description of all material terms of each Material Contract or
arrangement that is not in writing, listed or described or required to be listed
or described on Schedule 4.12(a).
(b) Except as set forth in Schedule 4.12(b), (i) there is no Contract or any
judgment, injunction, order or decree binding upon the Company or any of its
Subsidiaries that has or would reasonably be likely to have the effect of
prohibiting or materially restricting or limiting the ability of the Company to
conduct its business as the same is currently conducted or contemplated to be
conducted and (ii) none of the Company or any of the Company's Subsidiaries is a
party to, and none of their respective assets is bound by, any Contract or any
judgment, injunction, order or decree that, after the consummation of the
transactions contemplated by this Agreement, would be or would purport to be
binding upon Parent or any of its Affiliates (other than the Surviving
Corporation) or any Contract or any judgement, injunction, order or decree in
respect of which any act or omission of Parent or any of its Affiliates (other
than the Surviving Corporation) would result in a breach or violation thereof
or, in the case of any Contract, constitute (with or without notice or lapse of
time or both) a default or event of
26
default thereunder, or give rise to any right of termination, cancellation,
amendment, acceleration, repurchase, prepayment or repayment or to increased
payments thereunder, or give rise to or accelerate any material obligation or
result in the loss or modification of any material rights or benefits thereunder
or result in any Lien or Restriction on any of the material assets of the
Surviving Corporation or any of its Subsidiaries. The Company has delivered to
Parent a true and correct copy of each Contract that is in writing, a
description of all material terms of each Contract or arrangement that is not in
writing, and a true and correct copy of each judgment, injunction, order or
decree, listed or described, or required to be listed or described, on
Schedule 4.12(b).
(c) Schedule 4.12(c) lists or describes all transactions and Contracts
between the Company or any of its Subsidiaries, on the one hand, and any
director, executive officer or Significant Stockholder of the Company or any of
its Subsidiaries or Equity Affiliates, on the other hand, other than any of such
transactions that have previously been described in the Company SEC Filings
filed with the SEC and publicly available prior to the date hereof. The Company
has delivered to Parent a true and correct copy of each Contract and arrangement
that is in writing, and a description of all material terms of each transaction
and each Contract that is not in writing, listed or described, or required to be
listed or described, on Schedule 4.12(c).
(d) The directors' and officers', errors and omissions, fire and casualty,
general liability, business interruption, product liability, and sprinkler and
water damage insurance policies maintained by the Company or any of its
Subsidiaries provide adequate coverage for all normal risks incident to the
business of the Company and its Subsidiaries and their respective properties and
assets, and are in character and amount at least equivalent to that carried by
Persons engaged in similar businesses and subject to the same or similar perils
or hazards, except for any such failures to maintain insurance policies that, in
the aggregate, could not have a Material Adverse Effect on the Company.
4.13 BROKERS OR FINDERS.
No investment banker, broker, finder, consultant or intermediary (other than
Morgan Stanley) is entitled to any brokerage, finder's or other fee or
commission in connection with this Agreement, the Merger and the other
transactions contemplated hereby based upon arrangements made by or on behalf of
the Company.
4.14 FAIRNESS OPINION.
The Company Board has received the opinion, dated August 22, 2003, of Morgan
Stanley to the effect that the Exchange Ratio contemplated by Section 2.3(a) for
the conversion of Company Common Stock into Parent Series A Stock pursuant to
the Merger is fair, from a financial point of view, to the holders of Company
Common Stock (other than Parent or its Affiliates) (the "Fairness Opinion"). A
true and complete copy of the Fairness Opinion (which includes a consent to the
inclusion in its entirety of a copy of the Fairness Opinion in any documents
required to be filed by the Company with the SEC with respect to the Merger,
which consent has not been withdrawn) has been delivered to Parent.
4.15 RECOMMENDATION OF THE COMPANY BOARD.
The Company Board, at a meeting duly called and held, unanimously
(a) determined that this Agreement and the Merger are fair to and in the best
interests of the Company's stockholders (other than Parent and its
Subsidiaries), (b) approved this Agreement, the Merger and the other
transactions contemplated hereby and (c) resolved to recommend adoption of this
Agreement by the stockholders of the Company.
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4.16 VOTE REQUIRED.
The only vote of stockholders of the Company required under the DGCL, the
Company Charter and the Company's Bylaws in order to adopt this Agreement is the
affirmative vote of a majority of the aggregate voting power of the issued and
outstanding shares of Company Series A Common Stock, the Company Series B Common
Stock and the Company Series B Preferred Stock voting together as a single
class, and no other vote or approval of or other action by the holders of any
capital stock or other securities of the Company is required.
4.17 FULL DISCLOSURE.
No statement in this Agreement or in any certificate delivered pursuant to
the requirements of this Agreement by or on behalf of the Company to Parent
contains or will contain an untrue statement of a material fact or omits or will
omit to state a material fact necessary in order to make the statements herein
or therein, in light of the circumstances under which they were made, not
misleading.
4.18 DOCUMENTS DELIVERED.
All documents which have been or shall be delivered to Parent by or on
behalf of the Company pursuant to this Agreement or in connection with the
transactions contemplated hereby (including all documents and agreements
referenced in any schedules or provided to Parent in connection with its due
diligence investigation of the Company) are or when so delivered shall be
correct, current and complete copies of the originals thereof.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent hereby represents and warrants to the Company as follows:
5.1 ORGANIZATION.
Each of Merger Sub and Parent (i) is a corporation duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation or organization, (ii) has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as it is now being conducted and (iii) is duly qualified or licensed and in good
standing to do business in each jurisdiction in which the property owned, leased
or operated by it or the nature of the business conducted by it makes such
qualification or license necessary, except in such jurisdictions where the
failure to be so duly qualified or licensed or in good standing has not had and
could not have, in the aggregate, a Material Adverse Effect on Parent.
5.2 AUTHORIZATION AND VALIDITY OF AGREEMENT.
Each of Parent and Merger Sub has all requisite corporate power and
authority to enter into this Agreement, to perform its obligations hereunder and
to consummate the transactions contemplated hereby. The execution, delivery and
performance by each of Parent and Merger Sub of this Agreement and the
consummation by each of Parent and Merger Sub of the transactions contemplated
hereby have been approved by the respective Boards of Directors of Parent and
Merger Sub and by Parent as the sole stockholder of Merger Sub, and have been
duly authorized by all other necessary corporate action on the part of Parent or
Merger Sub. This Agreement has been duly executed and delivered by Parent and
Merger Sub and (assuming the due execution and delivery of this Agreement by the
Company) constitutes a valid and binding agreement of Parent and Merger Sub,
enforceable against Parent and Merger Sub in accordance with its terms (except
insofar as enforceability may be limited by
28
applicable bankruptcy, insolvency, reorganization, moratorium or similar laws
affecting creditors' rights generally, or by principles governing the
availability of equitable remedies).
5.3 CAPITALIZATION OF PARENT AND MERGER SUB.
(a) As of the date hereof, the authorized capital stock of Parent consists
of (i) 4,400,000,000 shares of common stock, $.01 par value, of which
4,000,000,000 are designated Parent Series A Stock and 400,000,000 shares are
designated Parent Series B Stock and (ii) 50,000,000 shares of Parent Preferred
Stock.
(b) As of the close of business on July 30, 2003, (A) 2,473,846,455 shares
of Parent Series A Stock and 211,818,776 shares of Parent Series B Stock (in
each case net of shares held in treasury and shares held by Subsidiaries of
Parent all of the common stock of which is beneficially owned by Parent) were
issued and were outstanding, and (B) no shares of preferred stock were issued
and were outstanding.
(c) All outstanding shares of Parent Series A Stock and Parent Series B
Stock are duly authorized, validly issued, fully paid and nonassessable, and no
class of capital stock of Parent is entitled to preemptive rights.
(d) As of the close of business on July 30, 2003, there were no options,
warrants or other rights to acquire Parent Series A Stock (or securities
convertible into or exercisable or exchangeable for Parent Series A Stock) from
Parent, other than (i) the right of the holders of Parent Series B Stock to
convert shares of Parent Series B Stock into Parent Series A Stock, pursuant to
the Parent Charter, and (ii) options or other rights representing in the
aggregate the right to purchase or otherwise acquire up to 77,418,789 shares of
Parent Series A Stock (which includes 28,165,255 options that can be exercised
for either Parent Series A Stock or Parent Series B Stock) and 28,165,255 shares
of Parent Series B Stock (all of which are options that can be exercised for
either Parent Series A Stock or Parent Series B Stock), pursuant to a parent
employee benefit plan or otherwise. All other material information about the
capitalization of Parent has been disclosed in the Parent SEC Filings.
(e) The authorized capital stock of Merger Sub consists of 1,000 shares of
common stock, all of which is owned beneficially and of record by Parent or any
Wholly Owned Subsidiary of Parent.
5.4 PARENT REPORTS AND FINANCIAL STATEMENTS.
(a) Parent has filed on a timely basis all forms, reports and documents with
the SEC required to filed by it under the Securities Act or the Exchange Act
since August 11, 2001 (collectively, the "Parent SEC Filings"). Parent has
heretofore furnished or made available to the Company true and complete copies
of all the Parent SEC Filings filed prior to the date hereof. The Parent SEC
Filings constitute all of the documents (other than preliminary material) that
Parent was required to file with the SEC under the Exchange Act since such date.
As of their respective dates, each of the Parent SEC Filings complied in all
material respects with the applicable requirements of the Exchange Act and the
rules and regulations thereunder, and none of the Parent SEC Filings contained
as of such date any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (except that no representation or warranty is made with respect to
any information regarding the Company included in the Parent SEC Filings which
was furnished by the Company expressly for use therein). When filed with the
SEC, the financial statements (including the related notes) included in the
Parent SEC Filings complied as to form in all material respects with the
applicable requirements of the Exchange Act and the applicable rules and
regulations thereunder and were prepared in accordance with GAAP applied on a
consistent basis (except as may be indicated therein or in the schedules
thereto), and such financial statements fairly present, in all material
respects, the consolidated financial position of Parent and its consolidated
Subsidiaries as of the respective dates thereof and the consolidated results of
their operations and their consolidated cash flows for the respective periods
then ended, subject, in the case of the unaudited interim financial statements,
to normal, recurring year-end audit adjustments.
29
(b) Except as and to the extent reflected or reserved against in the
financial statements included in Parent's quarterly report on Form 10-Q for the
quarter ended June 30, 2003 or as disclosed therein or in Schedule 5.4, none of
Parent or any of its Subsidiaries, or to its knowledge, any of its Equity
Affiliates, had as of such date any actual or potential liability or obligation
of any kind, whether accrued, absolute, contingent, unliquidated or other, or
whether due or to become due (including any liability for breach of contract,
breach of warranty, torts, infringements, claims or lawsuits), that in the
aggregate has had or would have a Material Adverse Effect on Parent or that
individually is required by the applicable rules and regulations of the SEC and
GAAP to be disclosed, reflected or reserved against in Parent's consolidated
financial statements (including the notes thereto).
5.5 NO APPROVALS OR NOTICES REQUIRED; NO CONFLICT WITH INSTRUMENTS.
The execution and delivery by Parent and Merger Sub of this Agreement do
not, and the performance by Parent and Merger Sub of their obligations hereunder
and the consummation of the transactions contemplated hereby will not:
(i) conflict with or violate the Parent Charter or Parent's Bylaws or the
Certificate of Incorporation or Bylaws of Merger Sub;
(ii) require any Government Consent or Governmental Filing on the part of or
with respect to Parent, Merger Sub or any other Subsidiary (except for
the Company and its Subsidiaries) of Parent, except for (A) the filing
with the SEC of the Registration Statement and such reports under
Sections 12(g), 13(a), 13(d) and 16(a) of the Exchange Act as may be
required in connection with this Agreement and the transactions
contemplated hereby, (B) the filing of the Certificate of Merger with the
Delaware Secretary of State and appropriate documents with the relevant
authorities of other states in which the Company or Merger Sub is
qualified to do business, (C) the Local Approvals, (D) such Government
Consents and Governmental Filings as may be required in connection with
the issuance of the Parent Series A Stock to be covered by the
Registration Statement pursuant to state securities and blue sky laws,
(E) the Governmental Filings to be made on the part of or with respect to
the Company and its Subsidiaries referred to in clause (ii) of
Section 4.5 or in Schedule 4.5, and (F) such Government Consents and
Governmental Filings the absence or omission of which could not in the
aggregate, have a Material Adverse Effect on Parent or prevent or
materially delay the consummation of the Merger;
(iii) require on the part of Parent, Merger Sub or any other Subsidiary of
Parent (other than the Company or its Subsidiaries), any Contract Consent
or Contract Notice, except such Contract Consents and Contract Notices
the absence or omission of which could not, in the aggregate, have a
Material Adverse Effect on Parent or prevent or materially delay the
consummation of the Merger;
(iv) assuming that any Government Consents and Governmental Filings required
under any Licenses are obtained or made, result in a Violation by Parent,
Merger Sub or any other Subsidiary of Parent (other than the Company or
any of its Subsidiaries) of any Contract to which Parent, Merger Sub, or
any other Subsidiary of Parent (other than the Company or any of its
Subsidiaries) is a party, by which Parent, Merger Sub or any other
Subsidiary of Parent (other than the Company or any of its Subsidiaries)
or any of their respective assets or properties is bound or affected or
pursuant to which Parent, Merger Sub or any other Subsidiary of Parent
(other than the Company or any of its Subsidiaries) is entitled to any
rights or benefits, except for such Violations which could not, in the
aggregate, have a Material Adverse Effect on Parent or prevent or
materially delay the consummation of the Merger; or
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(v) assuming that this Agreement is adopted by the Company's stockholders as
required by the DGCL and the Company Charter and Bylaws, and that the
Government Consents and Governmental Filings specified in clause (ii) of
this Section 5.5 are obtained, made and given, result in a Violation of,
under or pursuant to any law, rule, regulation, order, judgment or decree
applicable to Parent, Merger Sub or any other Subsidiary of Parent (other
than the Company or any of its Subsidiaries) or by which any of their
respective properties or assets are bound or affected, except for such
Violations which could not, in the aggregate, have a Material Adverse
Effect on Parent or prevent or materially delay the consummation of the
Merger.
5.6 ABSENCE OF CERTAIN CHANGES OR EVENTS.
Except as otherwise disclosed in the Parent SEC Filings filed with the SEC
prior to the date hereof, from December 31, 2002 through the date of this
Agreement, there has not been any material adverse change in the business,
properties, operations or financial condition of Parent and its Subsidiaries
taken as a whole, and no event has occurred and no condition exists which,
individually or together with other events or conditions, has had or could have
a Material Adverse Effect on Parent.
5.7 REGISTRATION STATEMENT.
None of the information supplied or to be supplied by Parent or Merger Sub
in writing specifically for inclusion or incorporation by reference in, and
which is included or incorporated by reference in, (i) the Registration
Statement (including the Proxy Statement forming part of the prospectus included
therein) or any amendment or supplement thereto, or (ii) any other documents
filed or to be filed with the SEC or any other Governmental Entity in connection
with the transactions contemplated hereby, will, at the respective times such
documents are filed, and, in the case of the Registration Statement (including
the Proxy Statement forming part of the prospectus included therein) or any
amendment or supplement thereto, when the same becomes effective, at the time of
the Special Meeting and at the Effective Time, be false or misleading with
respect to any material fact, or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading or necessary to correct any statement in any
earlier communication.
5.8 BROKERS OR FINDERS.
No investment banker, broker, finder, consultant or intermediary is entitled
to any brokerage, finder's or other fee or commission in connection with this
Agreement, the Merger and the other transactions contemplated hereby based upon
arrangements made by or on behalf of Parent or Merger Sub.
5.9 VOTE REQUIRED.
No vote of stockholders of Parent is required under the DGCL, the Parent
Charter, Parent's Bylaws or the rules and regulations of the NYSE in order for
Parent to validly perform its obligations under this Agreement (including,
without limitation, its obligation to issue the Parent Series A Stock pursuant
to Article II hereof).
5.10 FULL DISCLOSURE.
No statement in this Agreement or in any certificate delivered pursuant to
the requirements of this Agreement by or on behalf of Parent or Merger Sub to
the Company contains or will contain an untrue statement of a material fact or
omits or will omit to state a material fact necessary in order to make the
statements herein or therein, in light of the circumstances under which they
were made, not misleading.
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5.11 INTERIM OPERATIONS OF MERGER SUB.
Merger Sub has been formed solely for the purpose of engaging in the
transactions contemplated hereby, and immediately prior to the Effective Time
will have engaged in no other business activities, will have no Subsidiaries
(other than the Company), and will have conducted its operations only as
contemplated hereby.
5.12 PARENT SERIES A STOCK.
The Parent Series A Stock is duly listed on the NYSE and no inquiry or
proceeding has been initiated or, to Parent's knowledge, threatened for the
purpose of causing such listing to be terminated or restricted. The shares of
Parent Series A Stock to be issued and delivered pursuant to Section 2.4 will
be, when the Merger has become effective and such shares are issued and
delivered as provided in Section 2.4 and as described in the Registration
Statement, duly authorized, validly issued, fully paid and nonassessable and no
stockholder of Parent will have any preemptive right of subscription or purchase
in respect thereof granted by Parent or under applicable law. The shares of
Parent Series A Stock to be issued in the Merger, will, when issued, be
registered under the Securities Act and the Exchange Act and registered or
exempt from registration under any applicable state securities laws.
ARTICLE VI
TRANSACTIONS PRIOR TO CLOSING
6.1 ACCESS TO INFORMATION.
From the date hereof to the Effective Time, upon reasonable notice, the
Company will (and will cause its Subsidiaries, and use commercially reasonable
efforts to cause its other Affiliates, to) afford to the officers, employees,
counsel, accountants and other authorized representatives of Parent reasonable
access during normal business hours to all its properties, personnel, books and
records and furnish promptly to such Persons such information concerning its
business, properties, personnel and affairs as such Persons will from time to
time reasonably request.
6.2 CONFIDENTIALITY.
Unless otherwise agreed to in writing by the party disclosing (or whose
Representatives disclosed) the same (a "disclosing party"), each receiving party
(a "receiving party") will, and will cause its Affiliates, directors, officers,
employees, agents and Controlling Persons (such Affiliates and other Persons
with respect to any party being collectively referred to as such party's
"Representatives") to, (i) keep all Proprietary Information (as defined below)
of the disclosing party confidential and not disclose or reveal any such
Proprietary Information to any Person other than those Representatives of the
receiving party who are participating in effecting the transactions contemplated
hereby or who otherwise need to know such Proprietary Information, (ii) use such
Proprietary Information only in connection with consummating the transactions
contemplated hereby and enforcing the receiving party's rights hereunder, and
(iii) not use Proprietary Information in any manner detrimental to the
disclosing party. In the event that a receiving party is requested pursuant to,
or required by, applicable law or regulation or by legal process to disclose any
Proprietary Information of the disclosing party, the receiving party will
provide the disclosing party with prompt notice of such request(s) to enable the
disclosing party to seek an appropriate protective order. A party's obligations
hereunder with respect to Proprietary Information that (A) is disclosed to a
third party with the disclosing party's written approval, (B) is required to be
produced under order of a court of competent jurisdiction or other similar
requirements of a governmental agency, or (C) is required to be disclosed by
applicable law or regulation, will, subject in the case of clauses (B) and
(C) above to the receiving party's compliance with the preceding sentence, cease
to the extent of the disclosure so consented to or required, except to the
extent otherwise provided by the terms of such consent or covered by a
protective order. If a
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receiving party uses a degree of care to prevent disclosure of the Proprietary
Information that is at least as great as the care it normally takes to preserve
its own information of a similar nature, it will not be liable for any
disclosure that occurs despite the exercise of that degree of care, and in no
event will a receiving party be liable for any indirect, punitive, special or
consequential damages unless such disclosure resulted from its willful
misconduct or gross negligence in which event it will be liable in damages for
the disclosing party's lost profits resulting directly and solely from such
disclosure. In the event this Agreement is terminated, each party will, if so
requested by the other party, promptly return or destroy all of the Proprietary
Information of such other party, including all copies, reproductions, summaries,
analyses or extracts thereof or based thereon in the possession of the receiving
party or its Representatives; provided, however, that the receiving party will
not be required to return or cause to be returned summaries, analyses or
extracts prepared by it or its Representatives, but will destroy (or cause to be
destroyed) the same upon request of the disclosing party.
For purposes of this Section 6.2, "Proprietary Information" of a party means
all proprietary or confidential information about such party that is furnished
by it or its Representatives to the other party or the other party's
Representatives, regardless of the manner in which it is furnished. "Proprietary
Information" does not include, however, information which (a) has been or in the
future is published or is now or in the future is otherwise in the public domain
through no fault of the receiving party or its Representatives, (b) was
available to the receiving party or its Representatives on a non-confidential
basis prior to its disclosure by the disclosing party, (c) becomes available to
the receiving party or its Representatives on a non-confidential basis from a
Person other than the disclosing party or its Representatives who is not
otherwise bound by a confidentiality agreement with the disclosing party or its
Representatives, or is not otherwise prohibited from transmitting the
information to the receiving party or its Representatives, or (d) is
independently developed by the receiving party or its Representatives through
Persons who have not had, either directly or indirectly, access to or knowledge
of such information.
6.3 PUBLIC ANNOUNCEMENTS.
No party will or will permit any of its Subsidiaries to (and each party will
use commercially reasonable efforts to cause its Affiliates, directors,
officers, employees, agents and representatives not to) issue any press release,
make any public announcement or furnish any written statement to its employees
or stockholders generally concerning the transactions contemplated by this
Agreement without the consent of the other party (which consent will not be
unreasonably withheld), except to the extent required by applicable law or the
applicable requirements of the NYSE (and in either such case such party will, to
the extent consistent with timely compliance with such requirement, consult with
the other party prior to making the required release, announcement or
statement).
6.4 CONDUCT OF THE COMPANY'S BUSINESS PENDING THE EFFECTIVE TIME.
The Company will, and will cause each of its Subsidiaries to, except as
permitted, required or specifically contemplated by this Agreement or by
Schedule 6.4, required by any change in applicable law or consented to or
approved in writing by Parent (which consent or approval will not be
unreasonably withheld) during the period commencing on the date hereof and
ending at the Effective Time:
(a) conduct its business only in, and not take any action except in, the
ordinary and usual course of its business and consistent with past practices;
(b) use commercially reasonable efforts, in the ordinary and usual course of
business and consistent with past practices, to preserve intact its current
business organizations, to preserve its Licenses in full force and effect, to
keep available the services of its present officers and key employees, and to
preserve the good will of those having business relationships with it;
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(c) not (i) make any change or amendments in its charter, bylaws or
partnership agreement or other governing instrument or document (as the case may
be); (ii) authorize for issuance, issue, grant, sell, deliver, dispose of,
pledge or otherwise encumber any shares of its capital stock or any securities
or rights convertible into, exchangeable for, or evidencing the right to
subscribe for any shares of its capital stock or other equity or voting
interests, or any rights, options, warrants, calls, commitments or other
agreements of any character to purchase or acquire any shares of its capital
stock or other equity or voting interests, or any securities or rights
convertible into, exchangeable for, or evidencing the right to subscribe for,
any shares of its capital stock or other equity or voting interests, other than
(A) shares of Company Common Stock issued upon exercise of Company Options or
other rights outstanding as of the date hereof under Company Plans or otherwise
disclosed pursuant to this Agreement, in accordance with the terms thereof,
(B) shares of Company Series B Common Stock issued upon conversion of shares of
Company Series B Preferred Stock outstanding on the date hereof and shares of
Company Series A Common Stock issued upon conversion of shares of Company
Series B Common Stock outstanding on the date hereof, each in accordance with
the terms of the Company Charter as in effect on the date hereof, (C) shares of
Company Common Stock issued in connection with the conversion of convertible or
exchangeable securities of the Company or its Subsidiaries, outstanding as of
the date hereof, in accordance with the terms of such securities, and
(D) shares of Company Series B Common Stock issued as payment of dividends on
Company Series B Preferred Stock; (iii) split, combine, subdivide or reclassify
the outstanding shares of its capital stock or other equity or voting interests,
or declare, set aside for payment or pay any dividend (except as provided in
Section 6.4(c)(ii)(D)), or make any other actual, constructive or deemed
distribution in respect of any shares of its capital stock or other equity or
voting interests, or otherwise make any payments to stockholders or owners of
equity or voting interests in their capacity as such (other than dividends or
distributions paid by any Wholly-Owned Subsidiary of the Company to the Company
or another Wholly-Owned Subsidiary); (iv) except for conversions of shares of
Company Series B Common Stock issued upon conversion of shares of Company
Series B Preferred Stock outstanding on the date hereof and conversion of shares
of Company Series B Common Stock outstanding on the date hereof into shares of
Company Series A Common Stock, each in accordance with the terms of the Company
Charter as in effect on the date hereof, redeem, purchase or otherwise acquire,
directly or indirectly, any outstanding shares of capital stock or other
securities or equity or voting interests of the Company or any Subsidiary of the
Company; (v) make any other changes in its capital or ownership structure;
(vi) sell or grant a Lien or Restriction with respect to any stock, equity or
partnership interest owned by it in any Subsidiary of the Company; or
(vii) enter into or assume any contract, agreement, obligation, commitment or
arrangement with respect to any of the foregoing;
(d) not (i) modify or change in any material respect any material License or
other material Contract, other than in the ordinary course of business;
(ii) enter into any new employment, consulting, agency or commission agreement,
make any amendment or modification to any existing such agreement or grant any
increases in compensation, (A) in each case other than in the ordinary course of
business and consistent with past practice and with or granted to Persons who
are not officers or directors of the Company or any Subsidiary of the Company
and which do not, in the aggregate, materially increase the compensation or
benefit expense of the Company or any Subsidiary of the Company or any Company
Equity Affiliate and (B) other than the regular annual salary increase granted
in the ordinary course of business and consistent with past practice to officers
of the Company or its Subsidiaries who are not directors or executive officers
of the Company; (iii) establish, amend or modify any Company Plan or any other
employee benefit plan, except in the ordinary course of business, consistent
with past practice and to the extent not material and except to the extent
required by any applicable law or the existing terms of such Company Plan or by
the provisions of this Agreement; (iv) pay, discharge or satisfy claims,
liabilities or obligations (absolute, accrued, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of business
and consistent with past practice of liabilities reflected or reserved against
in, or contemplated by, the consolidated financial statements (or
34
the notes thereto) of the Company included in the Company SEC Filings, or
incurred in the ordinary course of business and consistent with past practice;
(v) cancel any debts or waive any claims or rights, except in the ordinary
course of business and consistent with past practice; (vi) make any capital
expenditures which individually or in the aggregate are in excess of the amount
provided for capital expenditures in the most recent capital budget for the
Company and its Subsidiaries approved by the Company Board prior to
December 31, 2002 (the "2003 capital budget"); (vii) accelerate the payment of,
or otherwise prepay, any existing outstanding indebtedness for borrowed money;
(viii) other than the normal cash management practices of the Company and its
Subsidiaries conducted in the ordinary and usual course of their business and
consistent with past practice, make any advance or loan to or engage in any
transaction with any director, officer, partner or Affiliate not required by the
terms of an existing Contract; or (ix) enter into or assume any contract,
agreement, obligation, commitment or arrangement with respect to any of the
foregoing;
(e) not (i) incur (which will not be deemed to include entering into credit
agreements, lines of credit or similar arrangements until borrowings are made
under such arrangements) any material amount of indebtedness for borrowed money
or guarantee any such indebtedness; (ii) issue or sell any debt securities or
warrants or rights to acquire any debt securities of the Company or any of its
Subsidiaries or guarantee any debt securities of others other than in the
ordinary course of business consistent with past practice; (iii) provide any
security for outstanding Indebtedness that was previously unsecured;
(iv) increase any security for outstanding secured Indebtedness; or (v) grant
any Liens or Restrictions on any of the assets of Company or its Subsidiaries;
provided, however, that the foregoing will not prohibit (A) any guarantees in
effect on the date of this Agreement that are referred to in the Company SEC
Filings or in Schedule 6.4 or that are required to be given under existing
agreements referred to in the Company SEC Filings, (B) the incurrence or
guarantee of the indebtedness set forth on Schedule 6.4, and (C) any renewal,
extension, amendment or refinancing of existing indebtedness (provided there is
no increase in the interest rate or the principal amount of such indebtedness);
(f) not acquire or agree to acquire by merging or consolidating with, or by
purchasing a substantial equity interest in or a substantial portion of the
assets of, or by any other manner, any business or any corporation, partnership,
association or other business organization or division thereof or otherwise
acquire or agree to otherwise acquire any assets that are material, individually
or in the aggregate, to the Company and its Subsidiaries taken as a whole;
(g) not sell, lease or encumber or otherwise voluntarily dispose of, or
agree to sell, lease, encumber or otherwise dispose of, any of its assets that
are material, individually or in the aggregate, to the Company and its
Subsidiaries taken as a whole;
(h) not (i) make, revoke or amend any Tax election, (ii) make any material
change in any accounting, financial reporting or Tax practice or policy,
(iii) execute any waiver of restrictions on assessment or collection of any Tax,
(iv) enter into or amend any agreement or settlement with any Tax authority,
(v) change the Company's auditors or (vi) permit any insurance policy naming it
as a beneficiary or loss-payable payee to be cancelled or terminated, except, in
the case of clause (v), in the ordinary course of business consistent with past
practice; and
(i) not take any action that would cause its representations and warranties
contained in Section 4.1 to be untrue in any respect.
6.5 EXPENSES.
Whether or not the Merger is consummated, all costs and expenses incurred or
to be incurred in connection with this Agreement and the transactions
contemplated hereby will be paid by the party incurring such cost or expense,
except that the costs and expenses incurred in connection with printing and
mailing the Proxy Statement, the Registration Statement (and any amendment or
supplement thereto) and the prospectus included in the Registration Statement
(and any amendment or supplement thereto) will be borne 50% by Parent and 50% by
the Company.
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6.6 INDEMNIFICATION.
(A) INDEMNIFICATION OF COMPANY DIRECTORS AND OFFICERS.
From and after the Effective Time, the Surviving Corporation will indemnify,
defend and hold harmless the present and former directors and officers of the
Company (when acting in such capacity) and any of its Subsidiaries, and any
Person who is or was serving at the request of the Company as a director or
officer of another Person (when acting in such capacity) (individually an
"Indemnified Party" and, collectively, the "Indemnified Parties") against all
losses, claims, damages, costs, expenses (including fees and expenses of counsel
properly retained by an Indemnified Party under this Section 6.6), liabilities
or judgments or amounts that are paid in settlement with the approval of the
Surviving Corporation (which approval will not be unreasonably withheld) of or
in connection with any claim, action, suit, proceeding or investigation based in
whole or in part on or arising in whole or in part out of the fact that such
Person was at any time prior to the Effective Time a director or officer, of the
Company, pertaining to any matter existing or occurring at or prior to the
Effective Time and whether asserted or claimed prior to, at or after the
Effective Time ("Indemnified Liabilities"), to the fullest extent that (x) a
corporation is permitted under Delaware law to indemnify or advance expenses to
its own directors or officers, as the case may be, (y) such Indemnified Party
would have been entitled to be indemnified by the Company, if such Indemnified
Party was a director or officer of the Company, with respect to the Indemnified
Liabilities in question under the Company Charter and the Company's Bylaws as in
effect on the date hereof and under any indemnification agreement with the
Company in a form disclosed to Parent prior to the date hereof and (z) such
indemnification otherwise is permitted by applicable law. In the event any such
claim, action, suit, proceeding or investigation is asserted or commenced
against any Indemnified Party (whether before or after the Effective Time), the
Surviving Corporation will be entitled to participate and, to the extent that it
may wish, to assume the defense thereof, except that if the Surviving
Corporation also is a subject of such claim, action, suit, proceeding or
investigation and there is, under applicable standards of professional conduct,
a conflict on any significant issue between the position of the Surviving
Corporation and the position of such Indemnified Party, or if the Surviving
Corporation will fail to assume responsibility for such defense, such
Indemnified Party may, subject to Section 6.6(b), retain counsel who will
represent such Indemnified Party, and the Surviving Corporation will pay all
fees and expenses of such counsel promptly as statements therefor are received;
provided that such Indemnified Party will vigorously defend (or, if the defense
is assumed by the Surviving Corporation, use commercially reasonable efforts to
assist in the vigorous defense of) any such matter; provided, further, that the
Surviving Corporation will not be liable for any settlement effected without its
written consent, which consent, however, will not be unreasonably withheld; and
provided, further, that the Surviving Corporation will not have any obligation
hereunder to any Indemnified Party when and if a court of competent jurisdiction
will ultimately determine, after exhaustion of all avenues of appeal, that such
Indemnified Party is not entitled to indemnification hereunder.
(B) INDEMNIFICATION PROCEDURES.
Any Indemnified Party wishing to claim indemnification or advancement of
expenses under Section 6.6(a), upon learning of any such claim, action, suit,
proceeding or investigation, will promptly notify the Surviving Corporation
thereof (provided that the failure so to notify the Surviving Corporation will
not relieve the Surviving Corporation from any liability which it may have under
this Section 6.6, except to the extent such failure materially prejudices the
Surviving Corporation) and will deliver to the Surviving Corporation an
undertaking to repay any amounts advanced pursuant thereto when and if a court
of competent jurisdiction ultimately determines, after exhaustion of all avenues
of appeal, that such Indemnified Party is not entitled to indemnification
hereunder. In no event may the Indemnified Parties retain more than one lead law
firm and one local counsel to represent them with respect to any such matter
unless the independent directors of the Company determine that under
36
applicable standards of professional conduct, there is a conflict on any
significant issue between the position of the independent directors and any
other Indemnified Parties in which case the independent directors may (unless
the defense of such matter has been assumed by the Surviving Corporation as
provided herein) retain, at the expense of the Surviving Corporation, one lead
law firm and one local counsel to represent the independent directors
(C) SURVIVAL OF EXISTING INDEMNIFICATION RIGHTS.
The Surviving Corporation and Merger Sub agree that all rights to
indemnification, including provisions relating to advances of expenses incurred
in defense of any action, suit or proceeding, whether civil, criminal,
administrative or investigative (each, a "Claim"), existing in favor of the
Indemnified Parties as provided in the Company Charter or the Company's Bylaws
or pursuant to other agreements, or certificates of incorporation or bylaws or
similar documents of any of the Company's Subsidiaries, as in effect as of the
date hereof, will survive the Merger and will continue in full force and effect
for a period of not less than six years from the Effective Time; provided,
however, that all rights to indemnification in respect of any Claim asserted,
made or commenced within such period will continue until the final disposition
of such Claim.
(D) SURVIVAL.
This Section 6.6 will survive the consummation of the Merger. The provisions
of this Section 6.6 are intended to be for the benefit of and will be
enforceable by each of the Indemnified Parties and his heirs and legal
representatives, and will be binding on Parent, Merger Sub and the Surviving
Corporation and their respective successors and assigns.
6.7 NOTIFICATION OF CERTAIN MATTERS.
Between the date hereof and the Effective Time, each party will give prompt
notice in writing to the other party of: (i) any information that indicates that
any of its representations or warranties contained herein was not true and
correct as of the date hereof or will not be true and correct at and as of the
Effective Time with the same force and effect as if made at and as of the
Effective Time (except for changes permitted or contemplated by this Agreement),
(ii) the occurrence or non-occurrence of any event which will result, or has a
reasonable prospect of resulting, in the failure of any condition, covenant or
agreement contained in this Agreement to be complied with or satisfied,
(iii) any failure of the Company or Parent (or Merger Sub), as the case may be,
to comply with or satisfy any condition, covenant or agreement to be complied
with or satisfied by it hereunder, (iv) any notice or other communication from
any third party alleging that the consent of such third party is or may be
required in connection with the transactions contemplated by this Agreement or
that such transactions otherwise may violate the rights of or confer remedies
upon such third party and (v) any notice of, or other communication relating to,
any litigation referred to in Section 6.8 or any order or judgment entered or
rendered therein; provided, however, that the delivery of any notice pursuant to
this Section 6.7 will not limit or otherwise affect the remedies available
hereunder to the party receiving such notice.
6.8 DEFENSE OF LITIGATION.
Each of the parties agrees, except, in the case of the Company, as otherwise
required by the fiduciary duties of the Company Board (as determined in good
faith by the Company Board following the receipt of advice of the Company's
outside legal counsel thereon), to vigorously defend against all actions, suits
or proceedings in which such party is named as a defendant which seek to enjoin,
restrain or prohibit the transactions contemplated hereby or seek damages with
respect to such transactions. No party will settle any such action, suit or
proceeding or fail to perfect on a timely basis any right to appeal any judgment
rendered or order entered against such party therein without the consent of the
37
other party (which consent will not be withheld unreasonably). Each of the
parties further agrees to use commercially reasonable efforts to cause each of
its Affiliates, directors and officers to vigorously defend any action, suit or
proceeding in which such Affiliate, director or officer is named as a defendant
and which seeks any such relief to comply with this Section to the same extent
as if such Person were a party hereto.
6.9 ACTIONS BY PARENT AND MERGER SUB.
In its capacity as a beneficial owner of Company Stock, Parent hereby
consents to the adoption of this Agreement and agrees to cause the Company Stock
beneficially owned by Parent, Merger Sub and Wholly Owned Subsidiaries of Parent
to be voted in favor of the adoption of this Agreement at the Special Meeting.
In its capacity as the sole stockholder of Merger Sub, (i) Parent hereby
consents to the adoption of this Agreement by Merger Sub and agrees that such
consent will be treated for all purposes as a vote in favor of this Agreement
duly adopted at a meeting of the stockholders of Merger Sub held for such
purpose, and (ii) Parent will cause Merger Sub to take all commercially
reasonable corporate action necessary on its part to consummate the Merger and
the transactions contemplated hereby. Merger Sub will not conduct any other
business.
6.10 LISTING.
Parent shall use commercially reasonable efforts to cause the shares of
Parent Series A Stock to be issued pursuant to this Agreement and upon exercise
of the Assumed Options to be approved for listing on the NYSE, subject to
official notice of issuance, prior to the Closing Date.
6.11 TRANSFER TAXES.
All stock transfer, real estate transfer, documentary, stamp, recording and
other similar taxes incurred in connection with the Merger shall be paid either
by Merger Sub or the Surviving Corporation, and the Company shall cooperate with
Merger Sub and Parent in preparing, executing and filing any tax returns with
respect to such taxes.
ARTICLE VII
CONDITIONS PRECEDENT
7.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF PARENT, MERGER SUB AND THE
COMPANY.
The respective obligations of Parent, Merger Sub and the Company to
consummate the transactions contemplated by this Agreement are subject to the
satisfaction at or prior to the Effective Time of each of the following
conditions, any or all of which, to the extent permitted by applicable law, may
be waived by Parent, for itself and Merger Sub (but not for the Company), or by
the Company for itself (but not for Parent or Merger Sub):
(A) STOCKHOLDER APPROVAL.
This Agreement will have been duly adopted by the requisite vote of the
stockholders of the Company at the Special Meeting, in accordance with the DGCL,
the Company Charter and the Company's Bylaws.
(B) REGISTRATION.
The Registration Statement (as amended or supplemented) will have been
declared effective and will be effective under the Securities Act at the
Effective Time, and no stop order suspending effectiveness will have been
issued, and no action, suit, proceeding or investigation seeking a stop order or
to suspend the effectiveness of the Registration Statement will have been
initiated and be continuing
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or will have been threatened and be unresolved. Parent will have received all
state securities law or blue sky permits and authorizations necessary to carry
out the transactions contemplated hereby, such permits and authorizations will
be in full force and effect and no action, suit, proceeding or investigation
seeking to revoke or suspend the effectiveness of any such permit or
authorization will have been initiated and be continuing or will have been
threatened and be unresolved.
(C) ABSENCE OF INJUNCTIONS.
No permanent or preliminary Injunction or restraining order or other order
by any court or other Governmental Entity of competent jurisdiction, or other
legal restraint or prohibition, preventing consummation of the transactions
contemplated hereby as provided herein will be in effect, or permitting such
consummation only subject to any condition or restriction that has or would have
a Material Adverse Effect on the Company.(c)
7.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF MERGER SUB AND PARENT.
The obligations of Merger Sub and Parent to consummate the transactions
contemplated by this Agreement are also subject to the satisfaction at or prior
to the Closing Date of each of the following conditions, unless waived by
Parent:
(A) ACCURACY OF REPRESENTATIONS AND WARRANTIES.
Each of the representations and warranties of the Company contained in
Sections 4.1, 4.2, 4.3, 4.4(a), 4.5, 4.6, 4.7, 4.13, 4.14, 4.15, 4.16, 4.17 and
4.18 of this Agreement will, if specifically qualified by materiality, be true
and correct and, if not so qualified, be true and correct in all material
respects in each case as of the date of this Agreement and (except to the extent
such representations and warranties, including without limitation Section 4.6,
speak as of a specified earlier date) on and as of the Closing Date as though
made on and as of the Closing Date, except for changes permitted or contemplated
by this Agreement. In addition, each of the representations and warranties of
the Company contained in Sections 4.4(b), 4.8, 4.9, 4.10, 4.11 and 4.12 of this
Agreement will be true and correct as of the date of this Agreement and (except
to the extent such representations and warranties speak as of a specified
earlier date) on and as of the Closing Date as though made on and as of the
Closing Date, except for changes permitted or contemplated by this Agreement and
except for any inaccuracies which could not, in the aggregate, have a Material
Adverse Effect on the Company or prevent or materially delay the consummation of
the Merger.
(B) PERFORMANCE OF AGREEMENTS.
The Company will have performed in all material respects all obligations and
agreements, and complied in all material respects with all covenants and
conditions, contained in this Agreement to be performed or complied with by it
prior to or on the Closing Date.
(C) OFFICERS' CERTIFICATES.
Parent and Merger Sub will have received such certificates of the Company,
dated the Closing Date, in each case signed by an executive officer of the
Company (but without personal liability thereto), to evidence satisfaction of
the conditions set forth in Sections 7.1(a), 7.1(c), 7.2(a) and 7.2(b)(insofar
as each relates to the Company), as may be reasonably requested by Parent.
(D) NO ADVERSE ENACTMENTS.
There will not have been any action taken, or any statute, rule, regulation,
order, judgment or decree proposed, enacted, promulgated, entered, issued,
enforced or deemed applicable by any foreign or United States federal, state or
local Governmental Entity, and there will be no action, suit or
39
proceeding pending or threatened, which (i) makes or may make this Agreement,
the Merger, or any of the other transactions contemplated by this Agreement
illegal or imposes or may impose material damages or penalties in connection
therewith; (ii) requires or may require the divestiture of a material portion of
the business of Parent or any of its Subsidiaries, if the Merger is consummated,
(iii) imposes or may result in imposition of material limitations on the ability
of Parent effectively to exercise full rights of ownership of shares of capital
stock of the Surviving Corporation (including the right to vote such shares on
all matters properly presented to the stockholders of the Surviving Corporation)
or makes the holding by Parent of any such shares illegal or subject to any
materially burdensome requirement or condition, (iv) requires or may require
Parent or the Company or any of their respective material Subsidiaries or
Affiliates to cease or refrain from engaging in any material business, including
any material business conducted by the Company or any of its Subsidiaries, if
the Merger is consummated, or (v) increases or may increase in any material
respect the liabilities or obligations of Parent arising out of this Agreement,
the Merger, or any of the other transactions contemplated by this Agreement.
(E) RECEIPT OF LICENSES, PERMITS AND CONSENTS.
Other than the filing of the Certificate of Merger with the Delaware
Secretary of State and filings due after the Effective Time, all Local Approvals
and all other Government Consents as are required in connection with the
consummation of the transactions contemplated hereby will have been obtained and
will be in full force and effect and all Governmental Filings as are required in
connection with the consummation of such transactions will have been made, and
all waiting periods, if any, applicable to the consummation of such transactions
imposed by any Governmental Entity will have expired, other than those which, if
not obtained, in force or effect, made or expired (as the case may be) could
not, in the aggregate, (i) have a material adverse effect on the transactions
contemplated hereby or (ii) assuming consummation of the Merger, have a Material
Adverse Effect, as of or after the Effective Time, on the Company or Parent.
(F) CONTRACT CONSENTS.
The Company shall have obtained or made, and shall have provided Parent and
Merger Sub with copies of, all Contract Consents and Contract Notices set forth
on Schedule 4.5, other than those which, if not obtained or made (as the case
may be) would not, either individually or in the aggregate, (i) have a material
adverse effect on the transactions contemplated hereby or (ii) assuming
consummation of the Merger, have a Material Adverse Effect, as of or after the
Effective Time, on the Company or Parent.
7.3 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE COMPANY.
The obligation of the Company to consummate the transactions contemplated by
this Agreement is also subject to the satisfaction at or prior to the Closing
Date of each of the following conditions, unless waived by the Company:
(A) ACCURACY OF REPRESENTATIONS AND WARRANTIES.
Each of the representations and warranties of Parent contained in Sections
5.1, 5.2, 5.3, 5.4(a), 5.5, 5.6, 5.7, 5.8, 5.9, 5.10, 5.11 and 5.12 of this
Agreement will, if specifically qualified by materiality, be true and correct
and, if not so qualified, be true and correct in all material respects in each
case as of the date of this Agreement and (except to the extent such
representations and warranties, including without limitation Section 5.6, speak
as of a specified earlier date) on and as of the Closing Date as though made on
and as of the Closing Date, except for changes permitted or contemplated by this
Agreement. In addition, each of the representations and warranties of Parent
contained in Section 5.4(b) of this Agreement will be true and correct as of the
date of this Agreement and (except
40
to the extent such representations and warranties speak as of a specified
earlier date) on and as of the Closing Date as though made on and as of the
Closing Date, except for changes permitted or contemplated by this Agreement and
except for any inaccuracies which could not, in the aggregate, have a Material
Adverse Effect on Parent or prevent or materially delay the consummation of the
Merger.
(B) PERFORMANCE OF AGREEMENTS.
Each of Merger Sub and Parent will have performed in all material respects
all obligations and agreements, and complied in all material respects with all
covenants and conditions, contained in this Agreement to be performed or
complied with by it prior to or on the Closing Date.
(C) OFFICERS' CERTIFICATES.
The Company will have received such certificates of Parent, dated the
Closing Date, in each case signed by an executive officer of Parent (but without
personal liability thereto) to evidence satisfaction of the conditions set forth
in Sections 7.1(b), 7.1(c), 7.3(a), 7.3(b) and 7.3(d) (insofar as each relates
to Parent or Merger Sub), as may be reasonably requested by the Company.
(D) NO ADVERSE ENACTMENTS.
There will not have been any action taken, or any statute, rule, regulation,
order, judgment or decree proposed, enacted, promulgated, entered, issued,
enforced or deemed applicable by any foreign or United States federal, state or
local Governmental Entity, and there will be no action, suit or proceeding
pending or threatened, which (i) makes or may make this Agreement, the Merger,
or any of the other transactions contemplated by this Agreement illegal or
imposes or may impose material damages or penalties in connection therewith or
(ii) has or, in the reasonable judgment of the Company, assuming consummation of
the Merger, could have a Material Adverse Effect, as of or after the Effective
Time, on Parent (including any potential change or event disclosed on any
Schedule which, subsequent to the date hereof, actually occurs).
(E) RECEIPT OF LICENSES, PERMITS AND CONSENTS.
Other than the filing of the Certificate of Merger with the Delaware
Secretary of State and filings due after the Effective Time, all Local Approvals
and all other Government Consents as are required in connection with the
consummation of the transactions contemplated hereby will have been obtained and
will be in full force and effect, all Governmental Filings as are required in
connection with the consummation of such transactions will have been made, and
all waiting periods, if any, applicable to the consummation of such transactions
imposed by any Governmental Entity will have expired, other than those which, if
not obtained, in force or effect, made or expired (as the case may be), could
not, in the aggregate, assuming consummation of the Merger, have a Material
Adverse Effect, as of or after the Effective Time, on Parent.
(F) NYSE LISTING.
The shares of Parent Series A Stock to be issued pursuant to this Agreement
and upon exercise of the Assumed Options will have been approved for listing on
the NYSE, subject only to official notice of issuance.
41
ARTICLE VIII
TERMINATION
8.1 TERMINATION AND ABANDONMENT.
This Agreement may be terminated and the transactions contemplated hereby
may be abandoned at any time prior to the Effective Time, whether before or
after adoption of this Agreement by the stockholders of the Company:
(i) by mutual consent of Parent and the Company;
(ii) by either the Company, on the one hand, or Parent and Merger Sub, on
the other hand: (A) if the Merger has not been consummated before
March 31, 2004, provided that the right to terminate this Agreement
pursuant to this clause (ii)(A) will not be available to any party whose
failure to perform any of its obligations under this Agreement required
to be performed by it at or prior to the Effective Time has been the
cause of or resulted in the failure of the Merger to be consummated
before such date, (B) if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the other
party (or by Merger Sub, if the party seeking to terminate this Agreement
is the Company) contained in this Agreement and such breach is incapable
of being cured, (C) if any court of competent jurisdiction or other
competent governmental authority will have issued an order, decree or
ruling or taken any other action permanently restraining, enjoining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action will have become final and nonappealable, or (D) if the required
adoption of this Agreement by the stockholders of the Company has not
been duly obtained in accordance with the provisions of Section 7.1(a)
hereof, provided that the terminating party has complied with its
obligations under Section 3.1 or 3.2 (as the case may be); or
(iii) by either Parent or the Company if the Company Board has
(i) withdrawn or modified in any manner adverse to Parent its
recommendation to the Company stockholders referred to in Section 3.1(B)
and Section 4.16, (ii) recommended an Acquisition Proposal or
(iii) resolved to do any of the foregoing.
8.2 EFFECT OF TERMINATION.
In the event of any termination of this Agreement by the Company or Parent
pursuant to Section 8.1, this Agreement (other than as set forth in Sections
6.2, 6.5, 8.2 and Article 9, each of which will survive the termination of this
Agreement) immediately will become void and there will be no liability or
obligation on the part of Parent, Merger Sub, the Company or their respective
Affiliates, stockholders, directors, officers, agents or representatives;
PROVIDED, that no such termination will relieve any party of any liability or
damages resulting from any willful or intentional breach of any of its
representations, warranties, covenants or agreements contained in this
Agreement.
ARTICLE IX
MISCELLANEOUS
9.1 EFFECTIVENESS OF REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
Except as set forth in the next sentence, the respective representations,
warranties and agreements of the parties contained herein or in any certificate
or other instrument delivered pursuant hereto prior to or at the Closing will
remain operative and in full force and effect, regardless of any investigation
made by or on behalf of the other parties hereto, after the execution of this
Agreement. The
42
representations, warranties, covenants or agreements contained in this Agreement
or in any certificate or other instrument delivered pursuant to this Agreement
will terminate at the Effective Time, except for the agreements contained in
Article II, Sections 6.5 and 6.6, and in this Article IX.
9.2 NOTICES.
All notices, requests, demands, waivers and other communications required or
permitted to be given under this Agreement will be in writing and will be deemed
to have been duly given if delivered personally or mailed, certified or
registered mail with postage prepaid, or sent by telegram, overnight courier or
confirmed telex or telecopier, as follows:
(a) if to Parent or Merger Sub, to:
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Attn: Elizabeth M. Markowski, Esq.
Telecopier: (720) 875-5858
and with a copy to:
Sherman & Howard L.L.C.
633 Seventeenth Street, Suite 3000
Denver, Colorado 80202
Attn: Steven D. Miller, Esq.
Telecopier: (303) 298-0940
(b) if to the Company, to:
Liberty Satellite & Technology, Inc.
12300 Liberty Boulevard
Englewood, Colorado 80112
Attn: Pamela Strauss, Esq.
Telecopier: (720) 875-6895
with a copy to:
Shaw Pittman LLP
2300 N Street, NW
Washington, DC 20037
Attn: Thomas H. McCormick, Esq.
Telecopier: (202) 663-8007
or to such other Person or address as any party will specify by notice in
writing to the other party. All such notices, requests, demands, waivers and
communications will be deemed to have been received on the date of delivery or
on the third business day after the mailing thereof, except that any notice of a
change of address will be effective only upon actual receipt thereof.
9.3 ENTIRE AGREEMENT.
This Agreement (including the Schedules, Exhibits and other documents
delivered in connection herewith) constitutes the entire agreement of the
parties and supersedes all prior agreements and understandings, oral and
written, between the parties with respect to the subject matter hereof.
43
9.4 ASSIGNMENT; BINDING EFFECT; BENEFIT.
Neither this Agreement nor any of the rights, benefits or obligations
hereunder may be assigned by any party (whether by operation of law or
otherwise) without the prior written consent of the other party. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns.
Nothing in this Agreement, expressed or implied, is intended to confer on, or to
make enforceable by, any Person other than the parties or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement, other than rights conferred upon Indemnified
Parties under Section 6.6 and upon stockholders, directors, officers,
Affiliates, agents and representatives of the parties under Section 9.11.
Notwithstanding anything to the contrary contained in this Agreement, the
provisions of Section 6.6 of this Agreement may not be amended or altered in any
manner with respect to any Indemnified Party without the written consent of such
Indemnified Party. No assignment of this Agreement will relieve the Surviving
Corporation from its obligations to any Indemnified Party contained in
Section 6.6 of this Agreement.
9.5 AMENDMENT.
Before or after adoption of this Agreement by the stockholders of the
Company, this Agreement may be amended by the parties hereto, by action taken or
authorized by their respective Boards of Directors, at any time prior to the
Effective Time; provided, however, that after adoption of this Agreement by the
stockholders of the Company, no amendment may be made without the further
requisite approval of such stockholders if such amendment by law requires the
further approval of such stockholders. This Agreement may not be amended except
by an instrument in writing signed by the parties hereto.
9.6 EXTENSION; WAIVER.
At any time prior to the Effective Time, either of the parties, by action
taken or authorized by such party's Board of Directors, may, to the extent
legally allowed, (i) extend the time specified herein for the performance of any
of the obligations of the other party, (ii) waive any inaccuracies in the
representations and warranties of the other party contained herein or in any
document delivered pursuant hereto, (iii) waive compliance by the other party
with any of the agreements or covenants of such other party contained herein or
(iv) waive any condition to such waiving party's obligation to consummate the
transactions contemplated hereby or to any of such waiving party's other
obligations hereunder. Any such extension or waiver will be valid only if set
forth in a written instrument signed by the party or parties to be bound
thereby. Any such extension or waiver by any party will be binding on such party
but not on the other party entitled to the benefits of the provision of this
Agreement affected unless such other party also has agreed to such extension or
waiver. No such waiver will constitute a waiver of, or estoppel with respect to,
any subsequent or other breach or failure to strictly comply with the provisions
of this Agreement. The failure of any party to exercise any of its rights,
powers or remedies hereunder or with respect hereto or to insist on strict
compliance with this Agreement will not constitute a waiver by such party of its
right to exercise any such or other rights, powers or remedies or to demand such
compliance. Whenever this Agreement requires or permits consent or approval by
any party, such consent or approval will be effective if given in writing in a
manner consistent with the requirements for a waiver of compliance as set forth
in this Section 9.6.
9.7 HEADINGS.
The headings contained in this Agreement are for reference purposes only and
will not affect in any way the meaning or interpretation of this Agreement.
44
9.8 COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
will be deemed to be an original, and all of which together will be deemed to be
one and the same instrument.
9.9 APPLICABLE LAW.
This Agreement and the legal relations between the parties will be governed
by and construed in accordance with the laws of the State of Delaware, without
regard to the conflict of laws rules thereof.
9.10 WAIVER OF JURY TRIAL.
EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (I) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (II) EACH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (III) EACH PARTY
MAKES THIS WAIVER VOLUNTARILY, AND (IV) EACH PARTY HAS BEEN INDUCED TO ENTER
INTO THIS AGREEMENT BY AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS
IN THIS SECTION 9.10.
9.11 JOINT PARTICIPATION IN DRAFTING THIS AGREEMENT.
The parties acknowledge and confirm that each of their respective attorneys
has participated jointly in the drafting, review and revision of this Agreement
and that it has not been written solely by counsel for one party and that each
party has had the benefit of its independent legal counsel's advice with respect
to the terms and provisions hereof and its rights and obligations hereunder.
Each party hereto, therefore, stipulates and agrees that the rule of
construction to the effect that any ambiguities are to be or may be resolved
against the drafting party shall not be employed in the interpretation of this
Agreement to favor any party against another and that no party shall have the
benefit of any legal presumption or the detriment of any burden of proof by
reason of any ambiguity or uncertain meaning contained in this Agreement.
9.12 ENFORCEMENT OF THIS AGREEMENT.
The parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the parties will be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which they are entitled at
law or in equity.
9.13 LIMITED LIABILITY.
Notwithstanding any other provision of this Agreement, no stockholder,
director, officer, Affiliate, agent or representative of any party (other than
Parent as the sole stockholder of Merger Sub) will have any liability in respect
of or relating to the covenants, obligations, representations or warranties of
such party hereunder or in respect of any certificate delivered with respect
thereto and, to the fullest extent legally permissible, each party, for itself
and its stockholders, directors, officers and Affiliates,
45
waives and agrees not to seek to assert or enforce any such liability which any
such Person otherwise might have pursuant to applicable law.
9.14 SEVERABILITY.
If any term or other provision of this Agreement is invalid, illegal or
incapable of being enforced by any rule of law or public policy, all other
conditions and provisions of this Agreement will nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any manner materially adverse to any
party. Upon such determination that any term or other provision is invalid,
illegal or incapable of being enforced, the parties hereto will negotiate in
good faith to modify this Agreement so as to effect the original intent of the
parties as closely as possible to the fullest extent permitted by applicable law
in an acceptable manner to the end that the transactions contemplated hereby are
fulfilled to the extent possible.
[SIGNATURE PAGE FOLLOWS]
46
IN WITNESS WHEREOF, the parties hereto have executed this Agreement and Plan
of Merger as of the date first above written.
LIBERTY MEDIA CORPORATION
By: /s/ ELIZABETH M. MARKOWSKI
--------------------------------------
Name: Elizabeth M. Markowski
Title: SENIOR VICE PRESIDENT
ATTEST:
/s/ MAUREEN STURGEON
-------------------------------------------
ASSISTANT SECRETARY
LIBERTY SATELLITE & TECHNOLOGY,
INC.
By: /s/ KENNETH G. CARROLL
--------------------------------------
Name: Kenneth G. Carroll
Title: PRESIDENT
ATTEST:
/s/ PAMELA STRAUSS
-------------------------------------------
SECRETARY
LIBERTY SATELLITE ACQUISITION CO.
By: /s/ ELIZABETH M. MARKOWSKI
--------------------------------------
Name: Elizabeth M. Markowski
Title: SENIOR VICE PRESIDENT
ATTEST:
/s/ MAUREEN STURGEON
-------------------------------------------
ASSISTANT SECRETARY
47
ANNEX II
LIBERTY SATELLITE ANNUAL AND QUARTERLY REPORTS
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-21317
------------------------
LIBERTY SATELLITE & TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 84-1299995
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
12300 LIBERTY BOULEVARD 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (720) 875-5400
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Series A Common Stock, par value $1.00 per share
Series B Common Stock, par value $1.00 per share
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 / /
Indicate by check mark whether the Registrant is an accelerated filer as
described in Rule 12(b)-2 of the Securities Exchange Act. Yes / / No /X/
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendments to this Form 10-K. /X/
The aggregate market value of the voting stock held by nonaffiliates of
Liberty Satellite & Technology, Inc. computed by reference to the last sales
price of such stock, as of the close of trading on June 28, 2002, was
approximately $14,822,000.
The number of shares outstanding of Liberty Satellite & Technology, Inc.'s
common stock as of February 28, 2003 was:
Series A Common Stock--14,304,794 shares; and
Series B Common Stock--34,765,055 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LIBERTY SATELLITE & TECHNOLOGY, INC.
2002 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
--------
PART I
Item 1. Business.................................................... I-1
Item 2. Properties.................................................. I-22
Item 3. Legal Proceedings........................................... I-22
Item 4. Submission of Matters to a Vote of Security Holders......... I-23
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... II-1
Item 6. Selected Financial Data..................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. II-3
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... II-20
Item 8. Financial Statements and Supplementary Data................. II-20
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. II-20
PART III
Item 10. Directors and Executive Officers of the Registrant.......... III-1
Item 11. Executive Compensation...................................... III-3
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ III-5
Item 13. Certain Relationships and Related Transactions.............. III-10
Item 14. Controls and Procedures..................................... III-13
PART IV
Item 15. Exhibits, Financial Statements and Financial Statement
Schedules and Reports on Form 8-K......................... IV-1
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
GENERAL. Liberty Satellite & Technology, Inc. ("LSAT", and together with
its consolidated subsidiaries, the "Company") is a majority-owned subsidiary of
Liberty Media Corporation ("Liberty Media"). At December 31, 2002, Liberty Media
owned 85.6% of LSAT's common stock, and 100% of LSAT's preferred stock, which
ownership interests collectively represented 97.6% of the overall voting power
of LSAT's common and preferred securities. LSAT's primary operating subsidiary
is On Command Corporation, which provides in-room, on-demand entertainment and
information services to hotels, motels and resorts. In addition, LSAT pursues
strategic opportunities worldwide in the distribution of Internet data and other
content via satellite and related businesses. Currently, the Company conducts
its business through strategic investments in, and contractual arrangements
with, various entities that operate, or are developing, satellite and
terrestrial wireless networks for broadband distribution of Internet access,
video programming, streaming media and other data. Most of the businesses with
which the Company has strategic relationships are in developmental stages and
operate at substantial losses. There can be no assurances that such businesses
will continue to be able to fund such losses or that their development plans
will be achieved.
Since its formation in 1996, the Company has undergone a number of
significant changes in its business. In order to help the reader to understand
the financial information presented herein, following is a brief description of
the business of LSAT and its predecessors since 1996, as well as certain
material transactions affecting the Company during such period.
THE SPIN-OFF. LSAT was incorporated in Delaware in November 1996 under the
name TCI Satellite Entertainment, Inc. Prior to the Spin-off (as defined below),
the Company was wholly owned by Tele-Communications, Inc. ("TCI") (which was
acquired by AT&T Corp. in 1999 and subsequently by Comcast Corporation (formerly
AT&T Comcast Corporation) in 2002). Among its other businesses, TCI, through
various subsidiaries, was engaged in distributing
PRIMESTAR-Registered Trademark- satellite television services, a medium power
digital satellite service. The Company was formed to own and operate certain
businesses constituting TCI's collective interest in the digital satellite
business. On December 4, 1996, TCI distributed, as a dividend, all of the issued
and outstanding LSAT common stock to the holders of TCI's then outstanding TCI
Group tracking stock (the "Spin-off").
PRIMESTAR BY TCI. From December 1996 through March 1998, LSAT marketed and
distributed the PRIMESTAR-Registered Trademark- programming service under the
brand names "PRIMESTAR By TCI" and "PRIMESTAR By TSAT" and owned an aggregate
21% partnership interest in PRIMESTAR Partners L.P. (now known as Phoenixstar
Partners L.P.) ("Primestar Partners"). Primestar Partners owned and operated the
PRIMESTAR-Registered Trademark- service, which was the second largest digital
satellite business and the eighth largest multichannel video programming
distribution business in the U.S., measured by the number of subscribers at
December 31, 1998. In addition, the Company, through its wholly-owned
subsidiary, Tempo Satellite, Inc. ("Tempo"), held a construction permit (the
"FCC License") issued by the Federal Communications Commission ("FCC"),
authorizing construction of a high power direct broadcast satellite ("DBS")
system. Tempo was a party to a satellite construction agreement (the "Satellite
Construction Agreement") with Space Systems/Loral, Inc. ("Loral") pursuant to
which Tempo arranged for the construction of two high power direct broadcast
satellites (the "Tempo Satellites"). In March 1997, one of the Tempo Satellites
("Tempo DBS-1") was launched into geosynchronous orbit. The other Tempo
Satellite ("Tempo DBS-2") served as a ground spare for Tempo DBS-1.
THE PRIMESTAR ROLL-UP. Effective April 1, 1998, a business combination (the
"Primestar Roll-up") was consummated whereby LSAT contributed and transferred to
PRIMESTAR, Inc. (now known as Phoenixstar, Inc.) ("Phoenixstar") substantially
all of LSAT's assets and liabilities in exchange
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for shares of Phoenixstar common stock representing approximately 37% of the
outstanding shares of common equity of Phoenixstar and approximately 38% of the
combined voting power of such common equity. In addition, the business of
Primestar Partners and the business of distributing the
PRIMESTAR-Registered Trademark- programming service of each of the other
partners in Primestar Partners was consolidated into Phoenixstar.
As a result of the Primestar Roll-up, LSAT became a holding company, with no
substantial assets or liabilities other than (i) 100% of the outstanding capital
stock of Tempo, (ii) its ownership interest in Phoenixstar, and (iii) its rights
and obligations under certain agreements with Phoenixstar and others.
THE HUGHES TRANSACTIONS. In 1999, LSAT, Tempo, Phoenixstar and Primestar
Partners sold to Hughes Electronics Corporation ("Hughes"), a subsidiary of
General Motors Corporation, (i) Tempo DBS-1 and Tempo DBS-2 (ii) Tempo's FCC
License and (iii) Phoenixstar's rights to use Tempo's DBS system for aggregate
consideration of $500 million including assumed liabilities (the "Hughes High
Power Transaction").
In a separate transaction (the "Hughes Medium Power Transaction") completed
on April 28, 1999 (the "Hughes Closing Date"), Phoenixstar sold to Hughes,
Phoenixstar's medium-power DBS business and assets for $1.1 billion in cash plus
14.613 million shares of General Motors Class H common stock ("GM Hughes
Stock"). Phoenixstar used the cash proceeds from Hughes to repay its bank and
public debt.
In connection with their approval of the Hughes Medium Power Transaction and
other transactions, the stockholders of Phoenixstar approved the payment to LSAT
of 4,221,921 shares of GM Hughes Stock (the "Phoenixstar Payment"). In
consideration of the Phoenixstar Payment, the Company agreed to approve the
Hughes Medium Power Transaction and Hughes High Power Transaction (the "Hughes
Transactions") as a stockholder of Phoenixstar, to modify certain agreements to
facilitate the Hughes High Power Transaction, and to issue Phoenixstar a share
appreciation right (the "LSAT GMH SAR") with respect to the shares of GM Hughes
Stock received as the Phoenixstar Payment. The LSAT GMH SAR granted Phoenixstar
the right to any market price appreciation in such GM Hughes Stock during the
one-year period following the date of issuance, over an agreed strike price of
$15.67. The Company agreed to forgo any liquidating distribution or other
payment that may be made in respect of the outstanding shares of Phoenixstar
upon any dissolution and winding-up of Phoenixstar, or otherwise in respect of
Phoenixstar's existing equity and to transfer its shares in Phoenixstar to the
other Phoenixstar stockholders. Effective May 10, 2000, the Company sold
2,400,000 shares of GM Hughes Stock and used a portion of the cash proceeds to
satisfy the LSAT GMH SAR liability.
LIBERTY 2000 TRANSACTIONS. On March 16, 2000, the Company completed two
transactions with Liberty Media (the "Liberty 2000 Transactions"). Pursuant to
the terms of the first transaction, the Company acquired from Liberty Media its
beneficial interest in 5,084,745 shares of Sprint Corporation PCS Group common
stock ("Sprint PCS Stock"), in exchange for (i) Series A 12% Cumulative
Preferred Stock of the Company with a liquidation value of $150,000,000 and
(ii) Series B 8% Cumulative Convertible Voting Preferred Stock ("Series B
Preferred Stock") of the Company with a liquidation value of $150,000,000. The
Series B Preferred Stock is convertible into Series B Common Stock of the
Company at a conversion price of $88.40 per share, subject to adjustment. The
shares of Series B Preferred Stock have super voting rights, which gave Liberty
Media voting control over the Company. Accordingly, since March 16, 2000, LSAT
has been a consolidated subsidiary of Liberty Media.
Pursuant to the terms of the second transaction, the Company and Liberty
Media formed a joint venture, Liberty Satellite, LLC, a Delaware limited
liability company ("LSAT LLC"), to hold and manage interests in entities engaged
globally in the distribution of Internet data and other content via satellite
and related businesses. Liberty Media contributed cash and its interests in XM
Satellite Radio Holdings, Inc., Wildblue Communications, Inc., LSAT Astro LLC
and the Sky Latin America satellite
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businesses in exchange for an 89.41% ownership interest in LSAT LLC. The Company
contributed its interest in GM Hughes Stock, subject to the LSAT GMH SAR, and
certain other assets, in exchange for a 10.59% managing ownership interest in
LSAT LLC.
In a related transaction, which was also consummated on March 16, 2000, the
Company paid Liberty Media $60,000,000 in the form of an unsecured promissory
note in exchange for a 13.99% ownership interest in LSAT Astro LLC ("LSAT
Astro"), a limited liability company whose assets included an approximate 31.5%
interest in ASTROLINK International LLC and $250,000,000 in cash. The remaining
86.01% of LSAT Astro was contributed by Liberty Media to LSAT LLC, as indicated
above.
LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates. Both agreements were amended in
November 2001 and January 2002. One agreement provided for the Company's
acquisition of certain subsidiaries of Liberty Media that collectively held the
89.41% ownership interest in LSAT LLC not already owned by LSAT in exchange for
25,298,379 shares of the Company's Series B Common Stock. The second purchase
agreement provided for the Company's acquisition of 100% of the capital stock of
Ascent Entertainment Group, Inc. ("Ascent Entertainment") from a subsidiary of
Liberty Media in exchange for 8,701,621 shares of the Company's Series B Common
Stock. Ascent Entertainment's primary operating subsidiary is On Command
Corporation (together with its subsidiaries, "On Command"), which provides
in-room, on-demand video entertainment and information services to hotels,
motels and resorts, primarily in the United States. The foregoing transaction
(the "LSAT LLC and Ascent Entertainment Transaction") closed on April 1, 2002.
FORWARD LOOKING STATEMENTS. Certain statements in this Annual Report on
Form 10-K constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. To the extent that such
statements are not recitations of historical fact, such statements constitute
forward-looking statements which, by definition, involve risks and
uncertainties. Where, in any forward-looking statement, the Company expresses an
expectation or belief as to future results or events, such expectation or belief
is expressed in good faith and believed to have a reasonable basis, but there
can be no assurance that the statement of expectation or belief will result or
be achieved or accomplished. The following include some but not all of the
factors that could cause actual results or events to differ materially from
those anticipated:
- General economic and business conditions, particularly trends in the
telecommunications, travel and entertainment industries;
- The regulatory and competitive environment of the industries in which the
Company, and the entities in which it has interests, operate;
- Uncertainties inherent in new business strategies, product launches,
development plans and investments, including the Company's proposed
investments in ASTROLINK International LLC and Wildblue
Communications, Inc., and On Command's strategy to expand its target
market to include smaller hotels;
- Uncertainties associated with the Company's contingent obligations with
respect to its investments in satellite television operators in Latin
America;
- The acquisition, development and/or financing of telecommunications
networks and services;
- Trends in hotel occupancy rates and business and leisure travel patterns,
including the potential impacts that wars, terrorist activities, or other
geopolitical events might have on such occupancy rates and travel
patterns;
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- Uncertainties inherent in On Command's efforts to renew or enter into
agreements on acceptable terms with its significant hotel chain customers
and their owned, managed and franchised hotels;
- On Command's ability to access quality movies, programming networks and
other content on acceptable terms;
- The potential impact that any negative publicity, lawsuits, or boycotts by
opponents of mature-themed programming content distributed by On Command
could have on the willingness of hotel industry participants to deliver
such content to guests;
- The potential for increased government regulation and enforcement actions,
and the potential for changes in laws that would restrict or otherwise
inhibit On Command's ability to make mature-themed programming content
available over its video systems;
- Competitive threats posed by rapid technological changes;
- The development, provision and marketing of On Command's new platforms,
such as the Roommate-TM- and MiniMate-TM- platforms, and customer
acceptance, usage rates, and profitability of such platforms;
- The development and provision of new services, such as On Command's
television-based Internet service, short subject, video game and digital
music products, and customer acceptance and usage rates of such services;
- Uncertainties inherent in On Command's future operating results and
capital expenditure requirements;
- Uncertainties inherent in On Command's ability to execute planned upgrades
of its video systems, including uncertainties associated with operational,
economic and other factors;
- The ability of vendors to deliver required equipment, software and
services;
- Availability of qualified personnel;
- The ability of On Command to restructure or refinance its revolving credit
facility;
- The ability of LSAT and On Command to secure long-term financing on
acceptable terms; and
- Other factors discussed in this Report.
Many of the foregoing risks and uncertainties are discussed in greater
detail under the captions "BUSINESS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." These forward-looking
statements (and such risks, uncertainties and other factors) speak only as of
the date of this Annual Report. The Company expressly disclaims any obligation
or undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company has two operating segments: "On Command" and "Other". Financial
information related to the Company's operating segments is included in the notes
to the accompanying consolidated financial statements.
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(c) NARRATIVE DESCRIPTION OF BUSINESS
PRINCIPLE SUBSIDIARIES AND STRATEGIC RELATIONSHIPS
The following table sets forth information concerning the Company's
significant subsidiaries and business affiliates. Ownership percentages in the
table are approximate, calculated as of February 1, 2003, and, where applicable
and except where otherwise noted, assume conversion of the Company's ownership
interest to common equity.
PERCENTAGE
OWNERSHIP
ENTITY AT 3/1/03 DESCRIPTION OF BUSINESS
------ --------------- ----------------------------------------
On Command.............................. 80% Provides in-room, on demand video
entertainment and information services
to hotels, motels and resorts.
Sky Latin America....................... 10% Operates a satellite-delivered
television platform serving Mexico,
Brazil, Colombia and Chile.
Wildblue Communications, Inc............ 16% Building a Ka-band satellite network to
provide broadband data communications
services to homes and small offices in
North America and Latin America.
ASTROLINK International LLC............. 31.5% Building a Ka-band satellite network to
provide broadband data communications
services to businesses.
Hughes Electronics Corporation (NYSE:
GMH).................................. less than 1% Provides digital television
entertainment, satellite services and
satellite-based private business
networks.
XM Satellite Radio Holdings, Inc.
(NASDAQ: XMSR)........................ less than 1% Provides 100 national audio channels
from two satellites directly to vehicle,
home and portable radios.
ON COMMAND CORPORATION
GENERAL
On Command is a leading provider (in terms of revenue and number of rooms
served) of in-room, video entertainment and information services to hotels,
motels and resorts. At December 31, 2002, On Command provided in-room
entertainment services to approximately 891,000 hotel rooms. Approximately 89%
of On Command's total equipped rooms at December 31, 2002 were located in the
United States, with the balance located primarily in Canada and Mexico. A hotel,
motel or resort is collectively referred to herein as a "hotel." At March 1,
2003, LSAT, through Ascent Entertainment, controlled approximately 74% of the
outstanding On Command Common Stock and approximately 80% of the total voting
power associated with On Command's equity securities.
INDUSTRY BACKGROUND
The provision of in-room entertainment and information services to the hotel
industry includes offering pay-per-view motion pictures, archived television and
other short subject content, games, digital
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music, Internet connectivity, guest programming of select pay cable channels and
an increasing array of interactive programs and information services. Depending
on the type of system installed and the size of the hotel, guests could choose
from among 12 to 85 pay-per-view programming titles as of December 31, 2002.
Based on the current storage capacities of On Command's most technologically
advanced systems, and improvements in the storage capacities of those systems
that are expected to occur in 2003 and future periods, On Command expects that
the average number of programming titles available to guests will increase over
time. Changes in technology have also led to the ability to provide a number of
on-demand interactive services such as Internet services, games, digital music,
guest folio review, automatic checkout, survey completion and guest messaging.
The market for in-room entertainment and information is characterized as a
highly competitive environment among several industry-dedicated companies and a
number of new entrants including cable companies, satellite distribution
companies, telecommunications companies, laptop connectivity companies and
others.
OPERATING AND GROWTH STRATEGY
On Command's operating and growth strategy for the next several years is to
increase revenue while containing, and wherever possible, reducing expenses and
capital expenditures. Specifically On Command plans to increase revenue by
(i) developing and, to the extent economically feasible, implementing new
technologies that will enhance On Command's ability to manage its existing
systems or products and/or allow On Command to introduce new or more
technologically advanced products; (ii) retaining existing hotel customers and
selectively increasing the number of rooms in On Command's traditional target
market (generally hotels with 150 or more rooms); (iii) expanding On Command's
target market by marketing the MiniMate-TM- platform to smaller hotels
(generally hotels with less than 150 rooms) and lower cost hotels; and
(iv) selectively increasing prices. On Command initiated cost reduction and
containment efforts in 2001, and On Command expects to continue to focus on all
available opportunities to reduce or contain costs for the foreseeable future.
In this regard, On Command believes vendor and customer relationships,
outsourcing, and new technologies, such as On Command's new satellite
distribution system, are among the areas that will provide opportunities for
cost reduction and containment during 2003 and future periods. On Command
intends to contain and reduce capital expenditures by continuing its efforts to
more effectively manage and deploy capital with a view towards improving On
Command's return on its capital expenditures. On Command's ability to accomplish
its operating objectives is dependent to a degree on hotel occupancy rates and
other factors outside of its control. No assurance can be given that On Command
will be able to significantly increase its revenue base or reduce its expenses
or capital expenditures. To the extent that changes in hotel occupancy rates
impact On Command's revenue base, On Command will not experience proportionate
changes in its expenses since many of On Command's expenses do not vary with
hotel occupancy rates.
VIDEO SYSTEMS
OCX-Registered Trademark- Video System
The OCX-Registered Trademark- video system is a multimedia platform that, in
most cases, incorporates digital content storage and playback. The
OCX-Registered Trademark- video system currently is capable of providing
interactive multimedia menus, high-speed television-based Internet service,
Playstation-Registered Trademark- games and digital music, as well as the
ability to offer more choices of higher-quality on-demand movie services,
including full-length feature films and non-theatrical short videos.
On Command has developed an updated version of the OCX-Registered Trademark-
video system, marketed under the name Roommate-TM-. This new version expands
upon the basic architecture of the OCX-Registered Trademark- video system,
allowing On Command to take advantage of general cost reductions in hardware
technology while preserving its investment in its Site Manager software. The
Roommate-TM- system, which was designed to be installed in hotels with 150 or
more rooms, was launched during the fourth quarter of 2001. Due to the cost
benefits and greater storage capacity associated with Roommate-TM-, On Command
generally installs the Roommate-TM- system whenever a new video system is
required to be installed in new and existing hotels with 150 or more rooms.
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During the fourth quarter of 2002, On Command conducted field tests of
MiniMate-TM-, a reduced scale extension of the Roommate-TM- video system that
was designed to be economically and technologically viable for hotels with 150
rooms or less. Based on the results of the field testing, On Command has
concluded that the MiniMate-TM- system was ready to be deployed, and On Command
has commenced marketing the MiniMate-TM- system to smaller hotels. The standard
MiniMate-TM- system is designed to provide on-demand pay-per-view services and
digital music, with television-based Internet access service also available for
an additional cost at the option of the hotel. When compared to the standard
configuration of the Roommate-TM- system, the standard MiniMate-TM- system has
the same capacity for the storage of programming titles, but has a smaller
capacity for the simultaneous output of entertainment services. The scalable
design of MiniMate-TM- enables On Command to add additional products and
services as such products and services become economically viable.
One version of On Command's OCX-Registered Trademark- system utilizes an
analog tape based video storage sub-system, as opposed to the digital content
storage sub-system that is utilized by the majority of the
OCX-Registered Trademark- systems. This video system, which On Command refers to
as an OCX.i video system, represents an older system that has been upgraded on
the "front end" to allow for the provision of the full range of entertainment
and guest services available through the OCX-Registered Trademark- platform. The
analog tape based storage sub-system of the OCX.i video system was not upgraded
to the digital content storage sub-system utilized in a typical
OCX-Registered Trademark- system due to economic considerations at the time of
the upgrade. The analog tape based storage sub-system utilized by the OCX.i
system is not compatible with the satellite distribution system that On Command
began deploying in 2003. On Command is currently studying different alternatives
that might allow On Command to economically convert to a compatible digital
content storage sub-system in its OCX.i systems. No specific time frame for this
conversion has been set.
At December 31, 2002, the OCX-Registered Trademark- video system was
installed in 291,000 rooms, including 85,000 with Roommate-TM- systems, and
47,000 with OCX.i systems.
While the OCX-Registered Trademark- platform itself may be extended or
upgraded to support future new product offerings, current implementations
include on-demand pay-per-view services, television-based Internet access,
Playstation-Registered Trademark- video games, digital music and a rich
interactive multimedia user interface. With the OCX-Registered Trademark- video
system technology, each component of the platform has multiple uses. For
example, the same component used for navigating graphics-intensive menus is used
subsequently for accessing the Internet and sending e-mail. With the digital
content storage that is included in most OCX-Registered Trademark- systems, a
two-hour feature film could be replaced by four 30-minute short subject videos,
unlike one-for-one replacement with videocassettes. In addition, digital content
storage will allow On Command to economically implement the electronic delivery
of digital content through On Command's satellite distribution system.
On Command is continually upgrading its video systems with the overall
objective of maximizing revenue, while minimizing expenses and capital
expenditures. During 2002, On Command upgraded 26,000 OCX-Registered Trademark-
rooms to allow for the digital provision, where applicable, of music and a
24-hour mature-themed motion picture product, and to provide a full-motion video
and audio promotional screen. On Command plans to install similar upgrades in an
estimated 116,000 OCX-Registered Trademark- rooms during 2003. During 2003, On
Command also plans to upgrade all of its OCX-Registered Trademark- systems that
utilize digital content storage sub-systems (approximately 243,000 rooms at
December 31, 2002) to facilitate the electronic delivery of digital content
through On Command's satellite distribution system. Wherever possible, On
Command will install both of the above-described OCX-Registered Trademark-
upgrades contemporaneously.
During 2003, On Command also plans to deploy a new graphical interface that
will provide for an enhanced menu in all of its OCX-Registered Trademark-
systems that use a digital content storage sub-system. This new menu is expected
to increase revenue by expanding the entertainment options available to the
guest, improving product presentation, and facilitating guest navigation of the
on-screen menu.
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OCV-Registered Trademark- Video System
The On Command video system (the "OCV-Registered Trademark- or Blue
Box-Registered Trademark- video system") is On Command's original platform, and
the predecessor to the OCX-Registered Trademark- video system. At December 31,
2002, the OCV-Registered Trademark- video system was installed in approximately
562,000 rooms. The OCV-Registered Trademark- video system was patented by On
Command in 1992, and consists of a microprocessor controlling the television in
each room, a hand-held remote control, and a central "head-end" video rack and
system computer located elsewhere in the hotel. Programming signals originate
from video cassette players located within the head-end rack and are transmitted
to individual rooms by way of the OCV-Registered Trademark- video system's
proprietary video switching technology. Movie starts are automatically
controlled by the system computer. The system computer also records the purchase
by a guest of any title and reports billing data for manual or automated entry
into the hotel's property management system, which system posts the charge to
the guest's bill.
Manual functions of the OCV-Registered Trademark- video system equipment are
limited to changing videocassettes once per month and are all handled by On
Command's service personnel, who also update the system's movie titles screens.
The OCV-Registered Trademark- video system's information system is capable of
generating regular reports of guests' entertainment selections, permitting the
OCV-Registered Trademark- video system to adjust its programming to respond to
viewing patterns. The number of guests that can view a particular movie at the
same time varies from hotel to hotel depending upon the popularity of the movie.
The OCV-Registered Trademark- video system provides more copies of the most
popular programming to hotels. The OCV-Registered Trademark- video system
includes a computerized in-room on-screen menu that offers guests a list of only
those movie selections available to the guest at that time rather than all of
the titles currently playing at the hotel. This minimizes the possibility of a
guest being disappointed when the guest's selection is not available. The
high-speed, two-way digital communications capability of the
OCV-Registered Trademark- video system enables On Command to provide advanced
interactive and information features, such as video games, in addition to basic
guest services such as video checkout, room service ordering and guest
satisfaction surveys. The OCV-Registered Trademark- video system also enables
hotel owners to broadcast informational and promotional messages and to monitor
room availability.
The analog tape based storage sub-system utilized by the
OCV-Registered Trademark- system is not compatible with the satellite
distribution system that On Command began deploying in 2003. As a result, On
Command is currently studying different alternatives that might allow On Command
to economically convert to a compatible digital content storage sub-system in
its OCV-Registered Trademark- systems. No specific timeframe for this conversion
has been set.
During 2002, On Command upgraded approximately 61,000
OCV-Registered Trademark- rooms to allow for the digital provision of music, a
24-hour mature-themed motion picture product, and a full-motion video and audio
promotional screen. On Command plans to install similar upgrades in an estimated
78,000 OCV-Registered Trademark- rooms during 2003. On Command's experience has
been that the installation of this upgrade typically results in increases in
room revenue.
Other Video Systems
The SpectraVision-Registered Trademark- video system, which provides in-room
entertainment on a rolling schedule basis, and in some upgraded variations, on
an on-demand basis, remained in approximately 30,000 rooms at December 31, 2002.
The SpectraVision-Registered Trademark- video system generally offers fewer
movie choices than the OCX-Registered Trademark- or OCV-Registered Trademark-
video systems. The Video Now video system, which provides in-room entertainment
on an on-demand basis, remained in approximately 8,000 rooms at December 31,
2002. Both the SpectraVision-Registered Trademark- and Video Now video systems
utilize older technologies, and On Command expects that the number of hotels
served by the SpectraVision-Registered Trademark- and Video Now video systems
will decrease significantly during 2003, and will be phased-out completely over
the next several years. In general, On Command expects that service will be
discontinued to unprofitable or marginally profitable hotels, while other more
profitable hotels will be converted to a more technologically advanced video
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system, if the return on invested capital is projected to be adequate. During
the year ended December 31, 2002, the SpectraVision-Registered Trademark- and
Video Now video systems generated less than 3% of On Command's total net
revenue.
CONTENT DISTRIBUTION
On Command uses several methods to distribute content to On Command's
proprietary video and entertainment systems located in hotels. Free-to-guest
cable programming is distributed via satellite to the antennae systems of
hotels. VHS tapes and removable hard disk drives containing films, digital music
and short subjects, and video game cassettes have historically been distributed
to hotels by air and ground transportation. However, during the fourth quarter
of 2002, On Command successfully completed test trials of a satellite
distribution system for films, short subjects and digital music. The economic
feasibility of implementing satellite delivery is dependent upon the nature of
On Command's proprietary equipment installed at hotels. On Command expects to
convert all of its OCX-Registered Trademark- systems that utilize a digital
content storage sub-system (243,000 rooms at December 31, 2002) to satellite
delivery by the end of the third quarter of 2003. On Command is currently
studying different alternatives that might provide for the economic
implementation of satellite delivery for films and videos to hotels that use
OCV-Registered Trademark- and OCX.i video systems, and no specific time frame
for this application of satellite delivery has been set. On Command's satellite
delivery technology does not currently encompass the delivery of video games.
The use of a satellite delivery system is considered desirable due to the cost
savings and efficiencies that are expected to arise from a more efficient
distribution system, and the potential increases in revenue that are expected to
result from On Command's ability to more actively manage the content that is
available in hotel rooms.
SERVICES
Pay-Per-View Movie Services
On Command provides on-demand and, in less than 2% of rooms served,
scheduled in-room television viewing of major motion pictures and non-rated
motion pictures intended for mature audiences, for which a hotel guest pays on a
per-view basis. Depending on the type of system installed and the size of the
hotel, guests could choose from among 12 to 85 pay-per-view programming titles
at December 31, 2002. Based on the current storage capacities of On Command's
most technologically advanced systems, and improvements in the storage
capacities of those systems that are expected to occur in 2003 and future
periods, On Command expects that the average number of programming titles
available to guests will increase over time. On Command obtains the
non-exclusive rights to show recently released motion pictures from major motion
picture studios generally pursuant to agreements with each studio. The license
period and fee for each motion picture are negotiated individually with each
studio, which typically receives a percentage of that picture's net revenue
generated by the pay-per-view system. Typically, On Command obtains rights to
exhibit major motion pictures during the "Hotel/Motel Pay-Per-View Window,"
which is the time period after initial theatrical release and before release for
home video distribution or cable television exhibition. On Command attempts to
license pictures as close as possible to motion pictures' theatrical release
dates to benefit from the studios' advertising and promotional efforts.
Through 2002, On Command also obtained non-rated motion pictures intended
for mature audiences for a one-time flat fee that was nominal in relation to the
licensing fees paid for major motion pictures. During the first quarter of 2003,
On Command began to acquire most of its mature-themed content from a supplier
who receives a contractually determined percentage of the net revenue generated
from the content provided to On Command. Although On Command expects that the
cost of mature-themed content will increase as a result of this new arrangement,
On Command believes that the higher cost is justified by the potential for
increased revenue as a result of the improved quantity and quality of content
that is expected to be provided by the supplier. In addition, the new supplier
will
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perform editing and production services that On Command was generally required
to perform under its prior arrangements with providers of mature-themed product.
The revenue generated from On Command's pay-per-view service is dependent on
the occupancy rate at the hotel, the "buy rate" or percentage of occupied rooms
that buy movies or other services at the hotel, and the price of the movie or
service. Occupancy rates vary based on general economic conditions, the hotel's
location and its competitive position within the marketplace. Buy rates
generally reflect the hotel's guest demographic profile, the popularity of the
motion pictures or services available at the hotel and the guests' other
entertainment alternatives. Buy rates also vary over time with general economic
conditions. The business of On Command is closely related to the performance of
hotels in the top 25 markets, as defined by Smith Travel Research. Movie price
levels are set based on overall economic conditions, recent release dates and
guest acceptability. Currently, On Command's prices for individual motion
pictures typically range from $8.99 to $12.99, and its prices for the 24-hour
viewing of certain non-rated motion pictures intended for mature audiences
typically range from $14.99 to $21.99.
Short Subjects
In addition to movies, On Command provides short video programming options
to the hotel guest. This content includes HBO-Registered Trademark-'s Sex and
the City and The Sopranos, the comedy series Seinfeld, Showtime's Red Shoe
Diaries, programming from the Discovery Networks and other entertainment
packages. On Command currently charges $5.99 to $9.99 for this type of
programming and pays the supplier of the programming a negotiated percentage of
net revenue from the programming. On Command's short video suppliers receive
license fees that are equal to a negotiated percentage of the net revenue stream
generated by the applicable short subject videos. At December 31, 2002, short
subject videos were available to 758,000 or 85% of the total rooms served by On
Command. Future growth of rooms in which On Command's short subject service is
available is expected to come from those hotels where On Command can expect to
earn an adequate return on its invested capital.
Internet Services
OCX-Registered Trademark- video systems are capable of supporting a
television-based Internet service that enables guests to access and navigate the
Internet through the television, using the remote control and wireless keyboard
in their room. This service allows up to 24 hours of access for a typical price
of $10.99 for basic Internet and e-mail service. In addition, On Command is
currently field-testing a premium Internet service in 14 hotels that allows the
guest to access the basic Internet service plus certain mature-themed content
for a price of $14.99. On Command expects to increase the availability of the
premium Internet service during 2003. On Command has continually upgraded its
television-based Internet service through improvements to its Internet browser
software that offer better reformatting for the television, improved speed and
enhanced functionality. Most recently, On Command, in conjunction with an
Internet browser provider, developed and, in July 2002, deployed a special
purpose Internet browser that reformats web pages for optimal viewing and
navigation on a television. On Command has subsequently deployed additional
updates of this software to further improve the functionality and features of
the television-based Internet browser. In addition, during 2002, On Command
entered into agreements with entities such as New Frontier Media, Inc. and
TeamOn Systems, Inc. for the provision of pre-formatted interactive content and
applications that have been developed specifically for presentation to hotel
guests via the OCX-Registered Trademark- platform. During the first quarter of
2003, On Command renewed a similar arrangement with Gannett Co., Inc. to
continue to offer USA TODAY-Registered Trademark- NewsCenter iTV content to
guests. On Command plans to continue to seek out additional arrangements that
will allow On Command to expand the amount of pre-formatted interactive content
that is available through On Command's television-based Internet service. In
addition to the software and content improvements, On Command has also improved
the functionality of the latest versions of its television remote controls and
wireless keyboards. On Command pays the provider of its Internet browser a flat
software fee and either On Command or the applicable hotel pay the connectivity
fees
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related to the service. At December 31, 2002, On Command's television-based
Internet product was available to 235,000 or 26% of the total rooms served by On
Command. Future growth of rooms in which On Command's Internet service is
available is expected to come from those hotels where connectivity is available
at a reasonable price, and where On Command can expect to earn an adequate
return on its investment in the required in-room equipment and other capital
requirements.
Digital Music
In March 2001, On Command acquired control of Hotel Digital Network, Inc.
("Hotel Digital Network"), a company that provides in-room music content to
hotels through On Command and other in-room entertainment providers. Until
February 2002, Hotel Digital Network operated under the name Digital Music
Network. In February 2002, Hotel Digital Network began doing business under the
name Instant Media Network ("IMN"). With the IMN system, an On Command hotel
guest pays $9.99 per two-hour period to choose from over 600 CDs and over 100
music videos. The IMN system, marketed by On Command as Music On
Command-Registered Trademark-, is available on certain OCX-Registered Trademark-
and upgraded OCV-Registered Trademark- video systems. At December 31, 2002, On
Command's digital music product was available to 178,000 or 20% of the total
rooms served by On Command. On Command plans to continue to install and market
Music On Command-Registered Trademark- in 2003. On Command, through IMN,
generally advances minimum royalties to its suppliers, and is subject to
additional fees that are calculated as a percentage of net revenue generated
from the service once certain thresholds are met. The minimum royalties advanced
to suppliers generally are not recoverable by the Company in the event that
actual revenue is less than the revenue that is projected for the license period
at the time that royalties are advanced to the suppliers. Future growth of rooms
in which Music On Command-Registered Trademark- is available is expected to
occur in those hotels where On Command can expect to earn an adequate return on
its invested capital.
Game Services
At December 31, 2002, On Command's video game service was available to
390,000 or 44% of the total rooms served by On Command. On Command's
Roommate-TM-, OCX-Registered Trademark- and OCV-Registered Trademark- video
systems support PlayStation-Registered Trademark- games. On Command's video
systems, however, do not support Playstation-Registered Trademark-2 games. There
are on average 8 to 12 game titles available in most rooms in which video games
are offered. Guests typically pay $6.99 per hour to play the games. On Command
does not expect significant growth during 2003 in the number of hotel rooms
equipped with On Command's video game service as new installations will be
limited to only those hotels (primarily resort hotels) where historical
experience would suggest that On Command will earn an adequate return on its
invested capital. On Command pays its video game suppliers a flat software fee.
In addition, suppliers receive a percentage of net revenue generated from the
service.
Free-To-Guest Programming Services
On Command also markets free-to-guest programming services pursuant to which
a hotel may elect to receive one or more programming channels, such as
ESPN-Registered Trademark-, HBO-Registered Trademark-, Turner Services, USA,
STARZ!-Registered Trademark-, and other popular cable networks, which the hotel
provides to guests at no additional cost. On Command provides hotels with guest
programming services through a variety of arrangements, ranging from the payment
by hotels of a monthly fee per room for each programming channel selected to the
inclusion of the cost or part of the cost of such programming within On
Command's overall contractual arrangements with hotels. On Command obtains its
free-to-guest programming either directly from the supplier or from
DIRECTV, Inc. ("DIRECTV") pursuant to an agency agreement. Since all of On
Command's free-to-guest programming channels are available pursuant to the
DIRECTV agency agreement, the determination of whether to purchase directly from
the programming supplier, or from DIRECTV, is based on cost considerations at
the time that contracts with programming suppliers are under review for renewal.
DIRECTV also provides transport services for most of On Command's free-to-guest
programming. During the fourth quarter of 2002, On Command executed a new agency
agreement with DIRECTV, and amended its existing transport agreement with
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DIRECTV. On Command's agreements with DIRECTV and other suppliers expire on
various dates ranging from 2003 to 2008. Agreements with respect to certain of
the programming carried by On Command's video systems have expired, and On
Command is operating under letter agreements or other arrangements until new
arrangements are finalized.
On Command has agreements with over 25 programming suppliers that provide
over 80 channels of programming. However, the standard free-to-guest channel
line-up offered by On Command typically provides approximately 20 different
channels of programming. Payment to programming suppliers primarily is based on
subscriber room counts. However, variables such as the combination of channels
received, occupancy, volume and penetration also factor into many of On
Command's rates. Certain of On Command's arrangements with programming suppliers
provide for increases in programming rates in future periods that are
significantly in excess of (i) recent rates of inflation and (ii) On Command's
projected growth rates for free-to-guest programming revenue. Although On
Command is working with programming suppliers and taking other actions to
mitigate future cost increases, there is no assurance that On Command will be
able to limit the growth in its free-to-guest programming costs to rates that
are less than or equal to On Command's projected growth rates for free-to-guest
programming revenue. If programming costs increase at rates in excess of
free-to-guest revenue growth rates in future periods, On Command will experience
pressure on its operating margins. On Command's ability to pass increases in
programming costs on to hotels is limited by certain of On Command's contracts
with hotels.
Other Hotel and Guest Services
In addition to entertainment services, On Command provides other guest
services to the hotel industry. These additional services use the two-way
interactive communications capability of On Command's equipment. Among the guest
services provided are video check-out, room service ordering and guest
satisfaction surveys. Guest services are available in various foreign languages.
SALES AND MARKETING
Historically, substantially all of On Command's growth in rooms served was
derived from obtaining contracts with hotels in the United States not under
contract with existing vendors or whose contracts with other vendors were
expiring or have expired. On Command believes that the opportunity for
additional growth in rooms served in the deluxe, luxury and upscale hotel
markets in the United States is more limited than in the past since most of the
hotels in these categories are under contract with On Command or its
competitors. Therefore, On Command has broadened its strategy for obtaining new
hotel customers to target both smaller hotels and lower cost hotels. Management
anticipates that the lower costs and flexibility associated with the
MiniMate-TM- version of On Command's OCX-Registered Trademark- system will make
marketing to smaller hotels and lower cost hotels more economically attractive
than in the past. On Command began marketing the MiniMate-TM- platform during
the fourth quarter of 2002. Under On Command's current marketing plan, hotels
will enter into agreements that will provide for (i) the purchase by the hotels
of the MiniMate-TM- system; (ii) the licensing of the hotels to use On Command's
proprietary software, and (iii) the performance of video system maintenance
services by On Command. Hotels that purchase the MiniMate-TM- platform will
receive a contractual percentage of the net margin generated by the MiniMate-TM-
video system. No assurance can be given that that MiniMate-TM- system will be
successfully marketed to smaller hotels, or that On Command will be successful
in the execution of its strategy to use the MiniMate-TM- system to broaden its
target market.
In addition to broadening its strategy to obtain new customers, On Command
is focusing on increasing the revenue derived from each equipped room by
developing and, to the extent economically feasible, implementing new
technologies that will enhance On Command's ability to manage its existing
products and/or allow On Command to introduce new or more technologically
advanced systems or products, and by selectively increasing prices.
On Command markets its services to hotel guests primarily by means of
on-screen advertising that highlights the services and motion picture selections
for the month. During 2002, On Command upgraded certain of its
OCX-Registered Trademark- and OCV-Registered Trademark- video systems to provide
a full-motion video and audio promotional screen, and On Command's plans to
implement this upgrade for additional OCX-Registered Trademark- and
OCV-Registered Trademark- systems during 2003. During 2003, On Command also
plans to deploy a new graphical interface that will provide for an enhanced menu
in all of its OCX-Registered Trademark- systems that use a digital content
storage sub-system.
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HOTEL CONTRACTS
For some of On Command's large customers, On Command negotiates and enters
into a single master contract covering all hotels owned, and in some cases,
managed or franchised by the hotel chain customer. A master contract typically
provides for the financial and operational terms that govern the provision of
in-room services. In some cases, the economic and other terms of a contract with
an individual hotel may be different from those contained in the applicable
master contract. In this regard, the contractual relationship with an individual
hotel that is covered by a master contract generally has a duration that
commences on the date that On Command's video system becomes operational in that
hotel. Accordingly, the expiration date of the contractual relationship with any
such hotel is largely independent from the expiration date of the applicable
master contract. Furthermore, upon expiration, On Command's contracts typically
convert into month-to-month arrangements that generally remain in effect until
such time as the Company is able to enter into new or renewed contracts, or a
competitor is able to install its proprietary equipment in the applicable
hotels. Notwithstanding the foregoing, a limited number of On Command's master
contracts provide for the simultaneous expiration of On Command's contractual
relationships with all of the individual hotels that are subject to such a
master contract. In the case of hotels that are not covered by master contracts,
On Command generally executes contracts separately with each hotel. On Command's
existing contracts, whether master contracts or contracts with individual
hotels, generally have terms ranging from five to seven years.
Under its existing contracts, On Command generally installs its system into
the hotel at On Command's cost, and On Command generally retains ownership of
all equipment used in providing the service. However, in the case of the
recently introduced MiniMate-TM- system, On Command's marketing plan is to sell
the MiniMate-TM- system to hotels. In certain cases, On Command has entered into
master contracts whereby On Command has agreed to purchase televisions and/or
provide other forms of capital assistance and, to a lesser extent, provide
television maintenance services to hotels during the respective terms of the
applicable contracts. However, On Command generally seeks to avoid entering into
new contracts or renewals that require On Command to provide capital assistance
or television maintenance services unless other terms of the contract make it
economical for On Command to do so.
On Command's contracts with hotels generally provide that On Command will be
the exclusive provider of in-room, pay-per-view entertainment services to the
hotel and generally permit On Command to set its prices. Under certain
circumstances, certain hotel customers have the right to prior approval of any
price changes, which approval may not be unreasonably withheld. On Command's
contracts with hotels typically set forth the terms governing On Command's
provision of free-to-guest programming as well. Depending on the contract, On
Command may or may not be the exclusive provider of free-to-guest programming,
and in cases where On Command is not the exclusive provider, certain of On
Command's contracts require On Command to make payments to hotels to subsidize
the cost to the hotels of using another free-to-guest programming provider. Most
of On Command's contracts with hotels contain provisions that limit the amount
of programming cost increases that may be passed on to the hotels for the
free-to-guest service. As a result of these limitations, increases in
free-to-guest programming revenue have not kept pace with increases in the
corresponding programming costs, and the amount of revenue derived from On
Command's free-to-guest service has been less than the aggregate cost to On
Command of the corresponding programming during each of the past three years. On
Command is currently working with its programming vendors and hotels to mitigate
the shortfall. In this regard, as On Command enters into new contracts, or
renews existing contracts, with hotels, On Command seeks to maximize the amount
of free-to-guest programming cost increases that are permitted to be passed on
to hotels while limiting the overall cost of the free-to-guest channel line-up
that is required to be provided.
The hotels collect fees from their guests and, in most cases, the hotels
retain a commission equal to a negotiated percentage of the net revenue
generated from On Command's video systems. The amount of the commission varies
depending on the overall economics of the applicable contract and
I-13
other factors. Some contracts also require On Command to upgrade systems to the
extent that new technologies and features are introduced during the term of the
contract. At the scheduled expiration of a contract, On Command generally seeks
to extend the agreement on terms that are based upon the competitive situation
in the market. As of December 31, 2002, contracts covering approximately 40% of
On Command's equipped rooms have expired, or are scheduled to expire, if not
renewed, during the two-year period ending December 31, 2004.
MARKETS AND CUSTOMERS
On Command currently provides entertainment and information services to
hotels that are associated with major hotel chains, management companies and
independent hotels including Marriott-Registered Trademark-,
Hilton-Registered Trademark-, Six Continents-TM-, Starwood,
Hyatt-Registered Trademark-, Wyndham Hotels and Resorts-Registered Trademark-,
Radisson-Registered Trademark-, Four Seasons, Fairmont and other select hotels.
The majority of On Command's hotel customers are located in the United States,
with the balance located primarily in Canada and Mexico.
The following table sets forth certain information regarding the number of
hotels and rooms served by On Command:
DECEMBER 31,
---------------------------
2002 2001
------------ ------------
Hotels served:
U.S........................................... 2,989 3,038
International................................. 383 402
------------ ------------
3,372 3,440
============ ============
Rooms served:
U.S........................................... 792,000 819,000
International................................. 99,000 107,000
------------ ------------
891,000 926,000
============ ============
Average net room revenue per equipped room...... $20.76/month $20.21/month
SIGNIFICANT CUSTOMERS
During 2002, hotels owned, managed or franchised by Marriott
International, Inc. ("Marriott"), Hilton Hotels Corporation ("Hilton"), Six
Continents Hotels, Inc. ("Six Continents"), Hyatt Hotel Corporation ("Hyatt"),
and Starwood Hotels and Resorts Worldwide, Inc. ("Starwood") accounted for 30%,
16% 12%, 7% and 7%, respectively, of On Command's net room revenue. Accordingly,
hotels owned, managed or franchised by On Command's five largest hotel chain
customers accounted for 72% of On Command's total net room revenue during 2002.
The loss of any of these hotel chain customers, or the loss of a significant
number of other hotel chain customers, could have a material adverse effect on
On Command's results of operations and financial condition.
On March 21, 2001, On Command and Marriott entered into a definitive master
agreement pursuant to which On Command distributes its services in hotel rooms
owned or managed by Marriott. In addition, On Command has the opportunity to
enter into agreements to provide its services to additional hotel rooms
franchised by Marriott. The master agreement with Marriott expires in 2008. At
September 30, 2002, the total number of rooms that were owned or managed by
Marriott was approximately 175,000, and the number of rooms that were franchised
by Marriott was approximately 167,000. At December 31, 2002, On Command provided
entertainment services to approximately 160,000 rooms that were owned or managed
by Marriott, and approximately 79,000 rooms that were franchised by Marriott.
Subject to the availability of capital and other economic considerations, On
Command is seeking to increase the number of Marriott rooms it serves.
I-14
As further discussed below, the Hilton master contract has expired, and
Hilton has signed a new master contract with a competitor of On Command. In
addition, On Command does not have master contracts with either Starwood or Six
Continents, and the Hyatt master contract provides for the simultaneous
expiration of On Command's contractual relationships with all of the individual
hotels that are subject to the Hyatt master contract as of December 31, 2004. At
December 31, 2002, On Command provided entertainment services to approximately
178,000 rooms in hotels that are owned, managed or franchised by Starwood or Six
Continents. Agreements with respect to approximately 54% of such Starwood and
Six Continents rooms have already expired, or will expire by December 31, 2004.
At December 31, 2002, approximately 39,000 or 61% of On Command's Starwood rooms
were located in Sheraton or Four Points hotels that, depending on whether such
hotels are owned, managed or franchised by Starwood, may be covered by a master
contract with a competitor of On Command upon the expiration of such hotels'
contracts with On Command. On Command is actively pursuing master agreements
with Hyatt and Six Continents, and with Starwood with respect to the Starwood
brands that are not already covered by a competitor's contract. In certain
cases, On Command is also pursuing direct contractual relationships with
individual hotels that are owned, managed or franchised by these hotel chains.
No assurance can be given that On Command will be successful in executing master
or individual hotel contracts. Due to the significant cost involved in changing
the proprietary video equipment installed in hotels, On Command expects that,
regardless of the expiration dates of master contracts or individual contracts
with hotels, On Command will continue to be the provider of in-room
entertainment services for individual hotels that are not under contract until
such time as a competitor's equipment can be installed. For this and other
reasons, On Command does not anticipate that it will cease earning revenue from
all of its Hyatt rooms on December 31, 2004 in the event that a new master
contract has not been executed by that date.
In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. As a result, hotels owned, managed or franchised by
Hilton are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command anticipates that hotels owned
by Hilton will not renew their contracts as they expire. On the other hand,
hotels that are managed or franchised by Hilton are not precluded from renewing
their contracts with On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew. At
December 31, 2002, On Command provided service to approximately 126,200 rooms in
534 hotels that are owned, managed or franchised by Hilton. The majority of
these rooms are located in managed or franchised hotels that are not owned by
Hilton. Through December 31, 2002, On Command's contracts with 71 of the
aforementioned 534 hotels (20,400 rooms) had expired and service to these hotels
is currently provided under monthly or other short-term renewals. On Command's
individual contracts with the remaining 463 Hilton hotels (105,800 rooms) expire
at various dates through 2010, with 56% of those rooms expiring by 2005. During
2002, On Command entered into new contracts, or renewed existing contracts, with
respect to 7,000 rooms that were franchised by Hilton, and 2,600 rooms that were
managed by Hilton. Over time, On Command anticipates that the revenue it derives
from hotels that are owned, managed or franchised by Hilton will decrease.
However, due to the uncertainties involved, On Command is currently unable to
predict the amount and timing of the revenue decreases.
TECHNOLOGY--RESEARCH AND DEVELOPMENT
On Command develops technologies to be used in its video systems to support
and enhance their operations, and develops new applications. On Command incurred
costs of approximately $4,064,000, $5,600,000 and $8,734,000 in 2002, 2001 and
2000, respectively, related to research and development.
On Command's product development philosophy is to design and integrate
components for high quality entertainment and information systems that
incorporate features allowing On Command to add system enhancements as they
become commercially available and economically viable. The high speed, two-way
digital communications capability of OCX-Registered Trademark- video systems
enables On Command to provide
I-15
advanced interactive features such as video games and television-based Internet
access in addition to basic guest services such as video checkout and guest
survey.
On Command's systems incorporate proprietary communications system designs
with commercially manufactured components and hardware such as video cassette
players, digital video disk players, other digital storage media, televisions,
amplifiers and computers. Because On Command's systems generally use industry
standard interfaces, On Command can often economically integrate new
technologies as they become viable.
On Command is in the process of developing applications of Internet Protocol
("IP") technology for use in On Command's video systems. No assurance can be
made that On Command will be successful in developing economically viable
applications of IP technology.
PATENTS, TRADEMARKS AND COPYRIGHTS
On Command holds a number of patents and patent licenses covering various
aspects of its pay-per-view and interactive systems primarily related to the
OCV-Registered Trademark- video system. The patents expire between 2007 and
2015. With the rate of technological development currently being experienced, a
patent's utility and value may diminish before the end of its respective term.
Currently, On Command is pursuing patent protection of elements of the
OCX-Registered Trademark- and Roommate-TM- video systems. In connection with a
negotiated settlement agreement with LodgeNet in 1998, On Command and LodgeNet
have cross-licensed certain of each other's patented technology and have also
agreed not to engage in patent litigation against one another through 2003.
On Command holds United States trademarks for all significant names that it
uses, including "Blue Box-Registered Trademark-" "On
Command-Registered Trademark-", "OCV-Registered Trademark-",
"SpectraVision-Registered Trademark-" and "OCX-Registered Trademark-." The
federal registration of these trademarks expires between 2004 and 2011 if not
renewed.
On Command has trademark applications pending in the United States Patent
and Trademark Office for the "Roommate-TM-", "MiniMate-TM-" and "TeleMate-TM-"
trademarks.
LICENSEES AND OTHER SYSTEM SALES
On Command sells systems to certain other providers of in-room entertainment
including Allin Interactive, which is licensed to install On Command's equipment
on cruise ships; Techlive Limited, formerly known as On Command Europe Limited,
which is licensed to use On Command's system to provide service in Europe and
the Middle East; and e-ROOM CORPORATION ("e-ROOM"), formerly known as MagiNet
Corporation, which is licensed to use On Command's system to provide service in
the Asia marketplace. In addition, IMN sells in-room digital music systems and
licenses software to Hospitality, and licenses content to Hospitality and
LodgeNet.
SEASONALITY
The amount of revenue realized by On Command each month is affected by a
variety of factors, including among others, hotel occupancy rates, business and
leisure travel patterns, general economic conditions, changes in the number of
rooms served, the number of business days in a month, and holidays. With the
exception of December, which is generally On Command's lowest month for revenue,
On Command typically does not experience significant variations in its monthly
revenue that can be attributed solely to seasonal factors.
SPRINT CORPORATION PCS GROUP
At December 31, 2002, LSAT LLC held beneficial interests with respect to
5,084,745 shares of Sprint Corporation PCS Group common stock ("Sprint PCS
Stock") (NYSE: PCS) and certain derivative financial instruments related to
those shares. In March 2003, the Company received aggregate proceeds of
approximately $149 million in connection with the sale of a portion of its
shares
I-16
of Sprint PCS Stock and the settlement of a portion of its interests in the
Sprint PCS Stock equity collar. In April 2003, the Company expects to receive
additional proceeds of approximately $154 million in connection with the sale of
its remaining Sprint PCS Stock and the settlement of its remaining interests in
the Sprint PCS Stock equity collar.
SKY LATIN AMERICA
LSAT LLC has a 10% interest in each of three Latin American satellite
television operators, together known as Sky Latin America, serving Mexico,
Brazil, Colombia and Chile. Sky Latin America offers entertainment and services
via satellite to households through its various owned and affiliated
distribution platforms worldwide. The Sky Latin America entities distribute
their programming primarily via direct-to-home or DTH platforms, allowing their
subscribers to access a variety of channels covering general entertainment,
music, movies, sports, kids, news, documentaries and education genres with their
television remote controls. Other major investors in Sky Latin America include
News Corporation, Grupo Televisa and Globo Comunicacoes e Particpacoes
("GloboPar"). The Company has severally guaranteed certain obligations of the
Sky Latin America entities. During the fourth quarter of 2002, GloboPar ceased
funding certain of the Sky Latin America entities.
WILDBLUE COMMUNICATIONS, INC.
Wildblue Communications, Inc. ("Wildblue") was established to build a
Ka-band satellite network to provide broadband data communications services to
homes and small offices in North America and Latin America. Other strategic
investors in Wildblue include Gemstar-TV Guide International, Inc., Kleiner
Perkins Caufield & Byers, TRW, Inc., EchoStar Communications Corp., and Telesat
Canada.
In December 2002, the Company announced that it has agreed to increase its
investment in Wildblue. Currently, the Company has an approximate 16% ownership
interest in Wildblue. Under the new agreement, the Company will invest
$58 million in return for senior preferred stock and warrants of Wildblue. As
also agreed, other existing and new investors will invest $98 million in
Wildblue for a total new investment of $156 million. Upon closing of the
transaction, of which no assurance can be given, the Company will be the largest
shareholder with an ownership interest of approximately 32% and a voting
interest of approximately 37%. The closing of the transaction is subject to
certain conditions, and is expected to occur in the second quarter of 2003.
Assuming the Wildblue transaction is consummated as described above, of which no
assurance can be given, Wildblue currently expects to launch its satellite in
the fourth quarter of 2003 and begin providing broadband data services in the
second or third quarter of 2004.
In connection with the aforementioned additional investment in Wildblue, the
Company entered into a put agreement with KPCB Holdings, Inc. ("KPCB"), another
investor in Wildblue. Pursuant to this put agreement and in the event the
parties make additional investments in Wildblue, KPCB will have the right to put
its interest in Wildblue to the Company and another investor in Wildblue for
$10,000,000, the amount KPCB has agreed to invest in Wildblue at the closing of
the Wildblue transaction. The Company and such other investor are each
responsible for $5,000,000 of the aggregate $10,000,000 put obligation. The put
may be exercised at any time within four years from the closing of the Wildblue
transaction.
ASTROLINK INTERNATIONAL LLC
The Company owns an approximate 31.5% ownership interest in Astrolink.
Astrolink, a developmental stage entity, was originally established to build a
global telecom network using Ka-band geostationary satellites to provide
broadband data communications services. Astrolink's original business plan
required substantial financing. During the fourth quarter of 2001, certain of
the members of Astrolink informed Astrolink that they did not intend to provide
any of Astrolink's remaining required
I-17
financing. In light of this decision, Astrolink and the Astrolink members
considered several alternatives with respect to Astrolink's proposed business
plan.
During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other Astrolink members in connection with the proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring ("the Astrolink Restructuring"). Under the agreement (the
"Astrolink Restructuring Agreement"), the Company will acquire substantially all
of the assets of Astrolink. Astrolink simultaneously signed agreements with
Lockheed Martin Corporation and Northrop Grumman Space & Mission Systems Corp.
for completion of two satellites. The parties also reached agreement on the
settlement of all claims related to the previous termination of Astrolink's
major procurement contracts and all other major third party creditor claims. The
closing of the Company's acquisition of the Astrolink business is subject to the
Company obtaining satisfactory funding for the business from additional
investors, third party sources of financing, or firm capacity commitments from
prospective customers. The closing is also subject to regulatory approvals and
other closing conditions. Subject to satisfaction of these closing conditions,
the closing is expected to occur on or before October 31, 2003.
If the closing occurs, the Company will pay approximately $43 million in
cash and will issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, the Company will provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
will make a capital contribution to the Company in an amount equal to 10% of the
estimated fair value of Liberty Media's equity holdings in the Company at the
time of closing, up to a maximum commitment of $55 million, in exchange for
shares of the Company's Series B Common Stock.
The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching one or two Ka-band satellites to
provide enterprise customers in up to two of North America, Europe or Asia, with
virtual private networks and related advanced services, and to provide various
government agencies with a solution to their expanding needs for bandwidth.
In the event the Astrolink Restructuring is not consummated due to lack of
financing or other closing conditions, the Company anticipates that Astrolink
will be liquidated and the Company will receive $7.8 million as prescribed in
the Astrolink Restructuring Agreement.
HUGHES ELECTRONICS CORPORATION
Hughes (NYSE: GMH), a subsidiary of General Motors Corporation, provides
digital television entertainment, satellite services and satellite-based private
business networks. At December 31, 2002, LSAT LLC owned 1,821,921 shares of GM
Hughes Stock.
XM SATELLITE RADIO HOLDINGS, INC.
XM Satellite Radio Holdings (Nasdaq: XMSR) offers approximately 100 national
audio channels from two satellites directly to vehicle, home and portable
radios. At December 31, 2002, LSAT LLC owned 1.0 million shares of XM Satellite
Radio Holdings.
COMPETITION
LSAT COMPETITION
LSAT pursues strategic opportunities worldwide in the distribution of
Internet data and other content via satellite and related businesses. Currently,
LSAT conducts its business through strategic investments in, and contractual
arrangements with, various entities that operate, or are developing,
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satellite and terrestrial wireless networks for broadband distribution of
Internet access, video programming, streaming media and other data. Most of the
businesses with which LSAT has strategic relationships are in the development
stage and operate at substantial losses. There can be no assurances that such
businesses will continue to be able to fund such losses or that their
development plans will be achieved.
The broadband communications industry experiences intense competition in
worldwide markets among numerous global competitors, including some of the
world's largest and best known companies. LSAT and those entities in which LSAT
has made strategic investments will face competition from other satellite
providers, cable television providers, "wireless cable" providers, DSL (digital
subscriber line) providers, traditional narrowband Internet access providers,
proprietary on-line services and other telecommunications companies and service
providers. Many of such competitors and potential competitors have substantially
greater capital and financial resources, brand recognition, marketing resources,
and/or technological capabilities than LSAT, and many have substantial existing
customer bases and established relationships with content providers,
distributors and/or retail outlets. Such advantages may increase the ability of
such actual and potential competitors to compete successfully against LSAT and
its strategic investments.
LSAT expects that significant competitive factors will include price,
service quality and reliability, signal latency, susceptibility to "rain fade"
and other forms of interference, geographic service areas or "footprints," ease
of use, breadth of features and service offerings, the ability to bundle
complementary services, the availability of vendor financing for antennas,
receivers and other customer premises equipment, brand recognition and
time-to-market.
LSAT believes that competition in its industry will increase as the FCC
grants additional licenses in existing frequency ranges and as new technologies
are developed and deployed.
ON COMMAND COMPETITION
There are numerous providers of in-room entertainment services to the hotel
industry. Market participants include, but are not limited to, (i) other full
service in-room providers, such as LodgeNet Entertainment Corporation
("LodgeNet"), Hospitality Network ("Hospitality"), NXTV, Inc., SeaChange
International, Inc., KoolConnect Technologies, Inc. and other providers in
international markets, (ii) cable television companies, such as Comcast
Corporation, AOL Time Warner Inc., Cox Communications, Inc., (iii) direct
broadcast satellite services, such as DirecTV and the DISH Network,
(iv) television networks and programmers, such as ABC, NBC, CBS, FOX,
HBO-Registered Trademark-, STARZ!-Registered Trademark-, and Showtime,
(v) Internet service providers, such as AOL Time Warner Inc., (vi) broadband
connectivity companies, such as STSN, Inc. and (vii) other telecommunications
companies. In addition, On Command's services compete for a guest's time and
entertainment resources with other forms of entertainment and leisure
activities. On Command anticipates that it will continue to face substantial
competition from traditional as well as new competitors, and that certain of
these competitors have greater financial resources and better access to the
capital markets than On Command. Many of the Company's potential competitors are
developing ways to use their existing infrastructure to provide in-room
entertainment and/or informational services. Certain of these competitors are
already providing guest programming services and are beginning to provide
video-on-demand, Internet and high-speed connectivity services to hotels. At
December 31, 2002, On Command served approximately 891,000 rooms world wide, of
which approximately 874,000 are served by on-demand systems. Based on publicly
available information, On Command estimates that, at December 31, 2002, LodgeNet
and Hospitality provided service to approximately 953,000 and 110,000 rooms,
respectively.
Competition with respect to the provision of in-room entertainment and
information systems centers on a variety of factors, depending upon the
circumstances important to a particular hotel. Among the more important factors
are (i) the financial terms and conditions of the proposed contract; (ii) the
features and benefits of the entertainment and information systems; and
(iii) the quality of the vendor's technical support and maintenance services.
With respect to hotel properties already receiving in-room entertainment
services, the current provider may have certain informational and installation
cost advantages compared to outside competitors.
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On Command anticipates that it will face substantial competition in
obtaining new contracts with major hotel chains. On Command believes that hotels
view the provision of in-room on-demand entertainment and information services
both as a revenue source and as a source of competitive advantage because
sophisticated hotel guests are increasingly demanding a greater range of quality
entertainment and information alternatives. At the same time, On Command
believes that certain major hotel chains have awarded contracts based primarily
on the level and nature of financial and other incentives offered by the service
provider. While On Command believes it will continue to enter into contractual
arrangements that are attractive to both On Command and its hotel customers, its
competitors may attempt to maintain or gain market share at the expense of
profitability. On Command may not always be willing or able to match incentives
provided by its competitors.
The communications industry is subject to rapid technological change. New
technological developments could adversely affect On Command's operations unless
On Command is able to provide equivalent services at competitive prices.
REGULATORY MATTERS
LSAT REGULATORY MATTERS
FCC REGULATION. The FCC is the government agency with primary authority in
the United States to regulate the use of radio spectrum, including both
satellite and terrestrial applications. LSAT does not directly hold any FCC
licenses or other authorizations, and cannot directly acquire, own, construct or
operate a satellite system without an appropriate license, construction permit
or other authorization issued by the FCC for such purpose. In addition, most
microwave and other terrestrial radio operations also require FCC authorization.
The FCC has promulgated numerous regulations governing the construction,
ownership and operation of satellite and terrestrial radio systems. Wireless
communications companies must comply with all such regulations applicable to
their operations, and if they violate such regulations, the FCC can impose
sanctions such as fines, loss or modification of authorizations, and/or the
denial of applications for new authorizations or for renewal of existing
authorizations.
Certain terrestrial wireless systems utilize un-licensed radio frequencies
for communicating between the antenna serving an individual community and
subscribers in that community. However, such systems are nevertheless subject to
FCC regulation and may utilize other frequencies that require authorizations for
other purposes (such as satellite earth stations or microwave communications
between a head end and community antennas). Service providers that use
unlicensed spectrum are also subject to interference from other permitted users
of such spectrum in their service areas, and may be subject to restrictions on
amplification and other limitations.
Construction of a Ka-band satellite system requires an appropriate
construction permit from the FCC. Such permits are subject to time limits and
requirements that the permittee exercise due diligence toward the construction
and deployment of the permitted system within such time limits. Licenses for
Ka-band satellites are issued for an initial ten-year term commencing once the
satellite is successfully placed into orbit and its operations fully conform to
the terms and conditions of the license. Upon the expiration of the license for
each Ka-band satellite, the licensee must apply for renewal of the license.
Astrolink and Wildblue have been granted five and two FCC permits, respectively.
However, Astrolink has applied to return two of its permits and Wildblue has
applied to return one of its permits. Such permits require Astrolink and
Wildblue to meet terms and conditions and comply with FCC regulations. If they
do not meet the FCC terms and conditions, their FCC permits could expire, be
revoked, modified, or may or may not be renewed.
INVESTMENT COMPANY ACT. The Investment Company Act requires companies that
are engaged primarily in the business of investing, reinvesting, owning, holding
or trading in securities, or that fail certain numerical tests regarding the
composition of their assets and their sources of income and that
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are not primarily engaged in a business other than investing, reinvesting,
owning, holding or trading in securities, to register as "investment companies."
Various substantive restrictions are imposed on investment companies by the
Investment Company Act.
LSAT is primarily engaged in a business other than investing, reinvesting,
owning, holding or trading securities, and does not intend to be an investment
company within the meaning of the Investment Company Act. However, as LSAT is a
holding company with ownership interests in other entities, some of which
represent less than 50% of the voting equity of such entities, there is a risk
that LSAT could be deemed to have become an inadvertent investment company
within the meaning of the Investment Company Act. If LSAT is required to
register as an investment company under the Investment Company Act, LSAT would
become subject to substantial regulation of its capital structure, management,
operations, transactions with "affiliated persons," as defined in the Investment
Company Act, and other matters. If LSAT were deemed to be an investment company
subject to regulation under the Investment Company Act and did not register
under that Act, it would be in violation of the Investment Company Act and would
be prohibited from engaging in business or selling its securities and could be
subject to civil and criminal actions for doing so. In addition, LSAT's
contracts would be voidable and a court could appoint a receiver to take control
of LSAT and liquidate it. Therefore, LSAT's classification as an investment
company subject to regulation under the Investment Company Act could materially
adversely affect its business, results of operations and financial condition.
ON COMMAND REGULATORY MATTERS
The Communications Act of 1934, as amended by the Cable Communications
Policy Act of 1984, the Cable Television Consumer Protection and Competition Act
of 1992 and the Telecommunications Act of 1996, governs the distribution of
video programming by cable, satellite or over-the-air technology, through
regulation by the FCC. However, because On Command's video distribution systems
do not use any public rights of way, they are not classified as cable systems
and are subject to minimal regulation. Thus, the FCC does not directly regulate
the pay-per-view or guest programming provided by On Command to hotel guests.
The Internet-based services offered by On Command potentially may be
affected by various laws and governmental regulations. There are currently few
laws or regulations directly applicable to access to or commerce on commercial
online services or the Internet. However, because of the increasing popularity
and use of commercial online services and the Internet, a number of laws and
regulations may be adopted with respect to commercial online services and the
Internet. For example, the Internet Tax Freedom Act, which was extended through
November 1, 2003, placed a moratorium on new state and local taxes on Internet
access and commerce. Other Internet-related laws and regulations may cover
issues such as user privacy, defamatory speech, copyright infringement, pricing
and characteristics and quality of products and services. The adoption of such
laws or regulations in the future may slow the growth of commercial online
services and the Internet, which could in turn cause a decline in the demand for
On Command's Internet-based services and products or otherwise have an adverse
effect on On Command. Moreover, the applicability to commercial online services
and the Internet of existing laws governing issues such as property ownership,
libel, personal privacy and taxation is uncertain and could expose On Command to
liability.
Although the FCC generally does not directly regulate the services provided
by On Command, the regulation of video distribution and communications services
is subject to the political process and has been in constant flux over the past
decade. Further material changes in the law and regulatory requirements must be
anticipated and there can be no assurance that On Command's business will not be
adversely affected by future legislation or new regulations.
On Command is required to have performance licenses to the extent that its
services utilize copyrighted music. On Command has one agreement in place and is
negotiating a second agreement
I-21
with organizations that represent rights holders. In addition, certain
programming distributed by On Command is acquired pursuant to agreements that
require performance licenses to be obtained by On Command's suppliers. IMN has
separate performance licenses in place with two groups that represent rights
holders, one of which is on an interim basis, and is attempting to negotiate a
third license. Music performance licensing rights have been the subject of
industry-wide arbitration and/or litigation for a number of years. Depending
upon the outcome of on-going proceedings and On Command's negotiations, the
performance license fees for such distribution may increase over the course of
time.
OTHER
Compliance with federal, state and local provisions that have been enacted
or adopted regulating the discharge of material into the environment or
otherwise relating to the protection of the environment has had no material
effect upon the capital expenditures, results of operations or competitive
position of the Company.
As of December 31, 2002, LSAT had 4 employees, and On Command had 620
employees.
ITEM 2. PROPERTIES.
LSAT owns no real estate. LSAT subleases office space from Liberty Media in
Englewood, Colorado. LSAT believes that such office space is adequate for its
business operations for the foreseeable future.
On Command has two leases, which expire in June 2005 and May 2006, for
approximately 25,700 square feet and 7,500 square feet, respectively, for its
corporate headquarters in Denver, Colorado. On Command also has a lease that
expires in February 2008 for 76,972 square feet of light manufacturing and
storage space in Denver, Colorado. On Command has another lease, which expires
in June 2004, for approximately 131,000 square feet of leased office, light
manufacturing and storage space in San Jose, California, a portion of which has
been subleased and the majority of the remainder of which On Command is
attempting to sublease. On Command has a number of other small leases for small
parcels of property throughout the United States, Canada and Mexico. On
Command's properties are suitable and adequate for On Command's business
operations.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings to which the Company is a
party or to which any of its property is subject, except as follows:
In a civil action entitled DANIEL BOONE, OZARK HEARTLAND ELECTRONICS, INC.
V. RADIO SHACK, ET AL, the plaintiff alleged that the Company and other
defendants (i) entered into a vertical resale price maintenance agreement
with Radio Shack, in violation of Section 1 of the Sherman Act, and
(ii) tortiously interfered with plaintiff's contractual relationship with
Radio Shack when they requested that Radio Shack terminate plaintiff's right
to market PRIMESTAR-Registered Trademark- products. On February 1, 2001, the
Eighth Circuit Court of Appeals affirmed an earlier ruling by the District
Court granting summary judgment in favor of each of the Defendants and
dismissing the suit. The plaintiff filed a Petition for Rehearing, which was
denied by the Eighth Circuit Court of Appeals on March 4, 2002. The
plaintiff had until June 3, 2002 to file a petition for certiorari with the
United States Supreme Court, but did not do so. As a result, this matter has
concluded, and it will not be reported in future filings.
On Command has received a series of letters from Acacia Media Technologies
Corporation regarding a portfolio of patents owned by Acacia. Acacia has
alleged that its patents cover certain activities performed by On Command
and has proposed that On Command take a license under
I-22
those patents. On Command is reviewing Acacia's patents and believes there
are substantial arguments that Acacia's claims lack merit.
The Company is a defendant, and may be a potential defendant, in other
lawsuits and claims arising in the ordinary course of its business. While the
outcomes of such claims, lawsuits, or other proceedings cannot be predicted with
certainty, management expects that such liability, to the extent not provided
for by insurance or otherwise, will not have a material adverse effect on the
financial condition of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Company's annual meeting of stockholders held on November 6, 2002,
the following matters were voted upon and approved by the stockholders of the
Company:
Election of the following to the Company's Board of Directors:
VOTES VOTES
FOR WITHHELD
----------- --------
Alan M. Angelich...................................... 437,484,593 93,970
Robert R. Bennett..................................... 437,478,091 100,472
William H. Berkman.................................... 437,520,069 58,494
William R. Fitzgerald................................. 437,517,112 61,451
John W. Goddard....................................... 437,484,335 94,228
J. Curt Hockemeier.................................... 437,484,952 93,611
Gary S. Howard........................................ 437,515,515 63,048
Ratification of the appointment of KPMG LLP as the Company's independent
auditors for the year ended December 31, 2002 (437,487,406 votes "For", 48,312
votes "Against", and 42,845 Abstentions).
I-23
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Through April 1, 2002, shares of the Series A common stock ("Series A Common
Stock") and Series B common stock ("Series B Common Stock") of Liberty Satellite
and Technology, Inc. ("LSAT", and together with its consolidated subsidiaries,
the "Company") traded over-the-counter on the OTC Bulletin Board under the
symbols "LSATA" and "LSATB", respectively. Following an April 1, 2002 reverse
stock split, shares of Series A Common Stock and Series B Common Stock began
trading under the symbols "LSTTA" and "LSTTB", respectively. Historically,
shares of Series B Common Stock have had low trading volume due to a relatively
low number of shares held in the public float. The following table sets forth
the range of high and low bid prices in U.S. dollars of shares of Series A
Common Stock and Series B Common Stock for the periods indicated. The prices are
interdealer prices, do not include retail markups, markdowns, or commissions and
may not represent actual transactions.
SERIES A SERIES B
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
2002
First quarter................................ $10.70 5.60 9.10 6.00
Second quarter............................... $ 6.43 2.20 4.00 2.25
Third quarter................................ $ 3.05 1.00 3.00 1.50
Fourth quarter............................... $ 3.10 1.45 5.00 2.25
2001
First quarter................................ $50.00 14.38 46.25 16.25
Second quarter............................... $45.50 14.38 45.00 16.25
Third quarter................................ $31.50 10.40 29.50 11.00
Fourth quarter............................... $14.80 7.50 16.50 8.10
As of December 31, 2002, there were approximately 2,918 and 137 record
holders of the Series A Common Stock and Series B Common Stock, respectively
(which amounts do not include the number of shareholders whose shares are held
of record by banks, brokerage houses or other institutions, but include each
such institution as one shareholder).
The Company has not paid cash dividends on its Series A Common Stock and
Series B Common Stock and has no present intention of so doing. Payment of cash
dividends, if any, in the future will be determined by the LSAT's Board of
Directors in light of its earnings, financial condition and other relevant
considerations.
On April 1, 2002, LSAT issued 34,000,000 shares of Series B Common Stock
valued at $204,000,000 to Liberty Media Corporation ("Liberty Media") in
exchange for (i) the capital stock of certain subsidiaries of Liberty Media that
collectively held the 89.41% of Liberty Satellite, LLC not already owned by LSAT
and (ii) 100% of the capital stock of Ascent Entertainment Group, Inc. ("Ascent
Entertainment"). The issuance was made in reliance on the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933 (the "Act")
for transactions by an issuer not involving a public offering.
On July 1, 2002, LSAT issued 1,970,580 shares of Series A Common Stock to
Liberty Media. Such issuance was made in lieu of a cash payment of dividends on
LSAT's Series A 12% Cumulative Preferred Stock ("Series A Preferred Stock") and
LSAT's Series B 8% Cumulative Convertible Voting Preferred Stock ("Series B
Preferred Stock") for the quarters ended December 31, 2001 and March 31, 2002
and was valued at $15,000,000. The foregoing issuance was made pursuant to the
private placement exemption from the Act afforded by Section 4(2) of the Act.
On August 1, 2002, LSAT issued 2,349,697 shares of Series A Common Stock to
Liberty Media. Such issuance was made in lieu of a cash payment of dividends on
LSAT's Series A and Series B Preferred Stock for the quarter ended June 30, 2002
and was valued at $7,500,000. The foregoing
II-1
issuance was made pursuant to the private placement exemption from the Act
afforded by Section 4(2) of the Act.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data related to the Company's financial condition and
results of operations for the five years ended December 31, 2002 are summarized
as follows. Such information should be read in conjunction with the accompanying
consolidated financial statements of the Company and "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" included
elsewhere herein.
YEARS ENDED DECEMBER 31,
-----------------------------------------------------
2002 2001 2000(2) 1999 1998(1)
--------- -------- -------- -------- --------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
SUMMARY STATEMENT OF OPERATIONS DATA:
Revenue.................................. $ 238,817 254,387 218,273 -- 168,500
Operating, selling, general and
administrative expenses and stock
compensation........................... $(176,056) (222,321) (162,216) (12,160) (158,810)
Operating loss........................... $ (79,489) (140,969) (80,889) (12,183) (55,415)
Interest expense......................... $ (18,530) (47,477) (34,843) (140) (14,177)
Share of losses of affiliates(3)......... $ (13,705) (424,247) (7,251) -- (375,053)
Nontemporary declines in fair values of
investments(4)......................... $(163,881) (96,438) (9,860) -- --
Earnings (loss) before cumulative effect
of accounting change................... $(238,037) (602,263) (116,959) 67,262 (445,266)
Net earnings (loss)...................... $(343,874) (602,263) (116,959) 67,262 (445,266)
Basic and diluted earnings (loss) per
common share before cumulative effect
of accounting change................... $ (6.33) (15.41) (4.44) 9.67 (65.75)
Basic and diluted earnings (loss) per
common share........................... $ (8.77) (15.41) (4.44) 9.67 (65.75)
DECEMBER 31,
------------------------------------------------------
2002 2001 2000(2) 1999 1998(1)
-------- --------- --------- -------- --------
AMOUNTS IN THOUSANDS
SUMMARY BALANCE SHEET DATA:
Cash and cash equivalents................ $ 11,571 33,913 466,617 2,473 --
Investments in available-for-sale
securities and other cost investments,
including securities pledged to
creditors.............................. $143,858 373,900 361,507 140,101 --
Current and long-term derivative
assets................................. $326,056 203,582 192,080 -- --
Total assets............................. $875,219 1,224,897 2,002,771 143,197 463,133
Debt, including amounts due to parent and
current portion........................ $423,693 430,136 518,418 3,044 --
Redeemable preferred stock............... $202,147 196,027 189,907 -- --
Stockholders' equity (deficit)........... $134,853 459,295 1,061,329 64,727 (6,365)
------------------------
(1) Pursuant to a roll-up transaction that was consummated on April 1, 1998,
LSAT contributed and transferred to PRIMESTAR, Inc. (now known as
Phoenixstar, Inc.) all of its assets and liabilities except for assets and
liabilities related to the high power direct broadcast satellite system then
being constructed by Tempo Satellite, Inc., a wholly-owned subsidiary of the
Company.
(2) On April 1, 2002, the Company consummated a transaction (the "LSAT LLC and
Ascent Entertainment Transaction"), whereby the Company acquired from
Liberty Media (i) certain
II-2
subsidiaries of Liberty Media that collectively held the 89.41% of Liberty
Satellite, LLC ("LSAT LLC") not already owned by LSAT and (ii) 100% of the
capital stock of Ascent Entertainment Group, Inc. ("Ascent Entertainment").
Due to the fact that the Company, LSAT LLC and Ascent Entertainment are all
under the common control of Liberty Media, the LSAT LLC and Ascent
Entertainment Transaction has been accounted for in a manner similar to a
pooling-of-interests. As such, the Company's consolidated financial
statements have been restated to include LSAT LLC and Ascent Entertainment
as wholly-owned subsidiaries of LSAT, effective with the respective
March 2000 dates that Liberty Media acquired control of such entities.
(3) The 2001 amount includes charges and losses aggregating $417,202,000
relating to the Company's indirect investment in ASTROLINK International
LLC.
(4) The 2002 amount includes charges aggregating $105,250,000 to reflect
nontemporary declines in the fair value of the Company's indirect investment
in various 10% investees that operate satellite television systems in Latin
America ("Sky Latin America"). The 2001 amount includes charges aggregating
$56,483,000 to reflect nontemporary declines in the fair value of the
Company's indirect investment in Wildblue Communications, Inc.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RECENT TRANSACTIONS
LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates with respect to the LSAT LLC and
Ascent Entertainment Transaction. Both agreements were amended in November 2001
and January 2002. One agreement provided for the Company's acquisition of
certain subsidiaries of Liberty Media that collectively held the 89.41%
ownership interest in LSAT LLC not already owned by the Company in exchange for
25,298,379 shares of Series B Common Stock of the Company. The second purchase
agreement provided for the Company's acquisition of 100% of the capital stock of
Ascent Entertainment from a subsidiary of Liberty Media in exchange for
8,701,621 shares of Series B Common Stock of the Company. Ascent Entertainment's
primary operating subsidiary is On Command Corporation ("On Command"). The LSAT
LLC and Ascent Entertainment Transaction closed on April 1, 2002. At
December 31, 2002, Liberty Media owned 85.6% of the Company's outstanding common
stock, and 100% of the Company's preferred stock, which ownership interests
collectively represented 97.6% of the overall voting power of the Company's
common and preferred securities.
As a result of the consummation of the LSAT LLC and Ascent Entertainment
Transaction, the Company became the owner of 100% of the equity interests of
Ascent Entertainment and LSAT LLC. Due to the fact that the Company, LSAT LLC
and Ascent Entertainment are all under the common control of Liberty Media, the
LSAT LLC and Ascent Entertainment Transaction has been accounted for by the
Company in a manner similar to a pooling-of-interests. As such, the consolidated
financial statements of the Company for periods prior to the consummation of the
LSAT LLC and Ascent Entertainment Transaction have been restated to include LSAT
LLC and Ascent Entertainment as wholly-owned subsidiaries of LSAT, effective
with the respective March 2000 dates that Liberty Media acquired control of such
entities.
As a result of the LSAT LLC and Ascent Entertainment Transaction, LSAT's
primary operating subsidiary is On Command. At December 31, 2002, LSAT, through
its ownership interest in Ascent Entertainment, owned approximately 70% of the
outstanding On Command common stock ("On Command Common Stock") and 100% of
certain series of On Command's preferred stock, which ownership interests
collectively represented approximately 76% of the voting power associated with
On Command's common and preferred securities. Subsequent to December 31, 2002,
the Company's ownership interest in the outstanding On Command Common Stock
increased to approximately 74%, and the Company's overall voting power in On
Command increased to approximately 80%. On Command develops, assembles,
installs, and operates proprietary video systems. On Command's
II-3
primary distribution system allows hotel guests to select, on an on-demand
basis, motion pictures on computer-controlled television sets located in their
hotel rooms. On Command also provides, under long-term contracts, in-room
viewing of select cable channels and other interactive services to hotels and
businesses. The interactive services include video games, Internet offerings,
digital music and various hotel and guest services. At December 31, 2002,
approximately 89% of On Command's equipped rooms were located in the United
States, with the balance located primarily in Canada and Mexico.
In addition to On Command's operations, the Company pursues strategic
opportunities worldwide in the distribution of Internet data and other content
via satellite and related business. The Company is actively seeking to develop
and/or acquire operating businesses related to, or complementary with, such
strategy.
SALE OF ASCENT NETWORK SERVICES. Effective September 4, 2001, Ascent
Entertainment completed the sale of Ascent Network Services to Ascent Media
Group, Inc. (formerly Liberty Livewire Corporation) ("Ascent Media"), a
consolidated subsidiary of Liberty Media, for cash consideration of $32,038,000.
Ascent Network Services provides video distributions services to the NBC
television network and other private networks. As Ascent Entertainment and
Ascent Media are both consolidated subsidiaries of Liberty Media, no gain or
loss was recognized in connection with this transaction.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires the Company 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. Listed
below are the accounting policies that the Company believes are critical to its
financial statements due to the degree of uncertainty regarding the estimates or
assumptions involved and the magnitude of the asset, liability, revenue or
expense being reported. All of these accounting policies, estimates and
assumptions, as well as the resulting impact to the Company's financial
statements, have been discussed with the Company's audit committee. The
following descriptions of the Company's critical accounting policies with
respect to long-lived assets and goodwill relate primarily to the Company's "On
Command" operating segment, and the descriptions with respect to investments and
derivatives relate primarily to the Company's "Other" operating segment.
CARRYING VALUE OF LONG-LIVED ASSETS. In accordance with Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS, the Company periodically reviews the carrying
amounts of property and equipment and amortizable intangible assets to determine
whether current events and circumstances indicate that such carrying amounts may
not be recoverable. If the carrying amount of the asset is greater than the
expected undiscounted cash flows to be generated by such asset, an impairment
adjustment is to be recognized. Such adjustment is measured by the amount that
the carrying value of such asset exceeds its estimated fair value. The Company
generally measures estimated fair value by considering quoted market prices,
sales prices for similar assets, or by discounting estimated future cash flows.
Considerable management judgment is necessary to estimate the undiscounted cash
flows and fair values of assets. Accordingly, actual results could vary
significantly from such estimates. At December 31, 2002, the Company concluded
that its long-lived assets were not impaired based on an analysis of estimated
undiscounted cash flows. A significant decline in the estimated undiscounted
cash flows of the Company's long-lived assets could cause the Company to
recognize an impairment charge.
CARRYING VALUE OF GOODWILL. In accordance with Statement of Financial
Accounting Standards No. 142, ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE
ASSETS ("Statement 142"), the Company evaluates, on at least an annual basis,
the carrying amount of goodwill to determine whether current events and
circumstances indicate that such carrying amount may not be recoverable. To
accomplish
II-4
this, the Company compares the fair value of its assets to their carrying
amounts. If the carrying value of a reporting unit were to exceed its fair
value, the Company would perform the second step of the impairment test. In the
second step, the Company would compare the implied fair value of the reporting
unit's goodwill to its carrying amount and any excess would be charged to
operations. Considerable management judgment is necessary to estimate the fair
values of assets. Accordingly, actual results could vary significantly from such
estimates. At December 31, 2002, the Company concluded that its goodwill was not
impaired based on an assessment of estimated fair values. The fair values used
in such assessment were based on the market price of On Command's Common Stock.
CARRYING VALUE OF INVESTMENTS. The Company's cost and equity method
investments comprise a significant portion of its total assets at December 31,
2002 and 2001. The Company accounts for these investments pursuant to Statement
of Financial Accounting Standards No. 115, Statement 142 and Accounting
Principles Board Opinion No. 18. These accounting principles require the Company
to periodically evaluate its investments to determine if decreases in fair value
below its cost bases are other than temporary or "nontemporary." If a decline in
fair value is determined to be nontemporary, the Company is required to reflect
such decline in its consolidated statement of operations. Nontemporary declines
in fair value of cost investments are recognized on a separate line in the
consolidated statement of operations, and nontemporary declines in fair value of
equity method investments are included in share of losses of affiliates in the
consolidated statement of operations.
The Company considers a number of factors in its determination of whether a
decline in fair value below the cost basis is nontemporary including (i) the
financial condition, operating performance and near term prospects of the
investee; (ii) the reason for the decline in fair value, be it general market,
industry specific or investee specific conditions; (iii) the length of time that
the fair value of the investment is below the Company's carrying value; (iv)
changes in valuation subsequent to the balance sheet date and (v) the Company's
intent and ability to hold the investment for a period of time sufficient to
allow for a recovery in fair value. If the decline in fair value is deemed to be
nontemporary, a new cost basis of the security is established at the then
estimated fair value. In situations where the fair value of an asset is not
evident due to a lack of public market price or other factors, management uses
its bests estimates and assumptions to arrive at the estimated fair value of
such an asset. The Company's assessment of the foregoing factors pursuant to
this accounting policy involves a high degree of judgment and includes
significant estimates and assumptions.
The Company's evaluation of the fair value of its investments and any
resulting impairment charges are determined as of the most recent balance sheet
date. Changes in fair value subsequent to the balance sheet date due to the
factors described in the preceding paragraph are possible. Subsequent decreases
in fair value will be recognized in the Company's statement of operations in the
period in which they occur to the extent such decreases are deemed to be
nontemporary. Subsequent increases in fair value will be recognized in the
Company's consolidated statement of operations upon disposition of the
investment.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS. The Company uses various derivative
instruments, including equity collars and put spread collars, to manage fair
value risk associated with certain of its investments. The Company accounts for
these derivative instruments pursuant to Statement of Financial Accounting
Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
("Statement 133"). Statement 133 requires that all derivative instruments be
recorded on the balance sheet at fair value. Changes in derivatives designated
as cash flow hedges are recorded in other comprehensive income. Changes in
derivatives designated as fair value hedges and changes in derivatives not
designated as hedges are included in realized and unrealized gains (losses) on
derivative instruments in the statement of operations.
The Company uses the Black-Scholes model to estimate the fair value of its
derivative instruments. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected volatility of the
underlying security and an appropriate discount rate. The Company obtains a
II-5
volatility rate from an independent source at the inception of the derivative
instrument based on the expected volatility of the underlying security over the
term of the derivative instrument. The volatility assumption is generally
evaluated annually to determine if it should be adjusted. The Company selects a
discount rate at the inception of the derivative instrument and updates such
rate each reporting period based on an estimate of the discount rate at which
the derivative instrument could be settled. Considerable management judgment is
required in estimating the Black-Scholes variables. Actual results upon
settlement or unwinding of the Company's derivative instruments may differ
materially from these estimates.
For long-term derivatives, changes in the Company's assumptions regarding
(1) the volatility rates of the underlying securities and (2) the risk free
interest rate would have the most significant impact on the valuation of its
derivatives. Due to the short-term nature of the Company's derivatives (all
expire within 15 months of December 31, 2002), changes in these assumptions
would not have had a significant impact upon the December 31, 2002 valuations.
RESULTS OF OPERATIONS
As noted above, the Company's consolidated results of operations include
Ascent Entertainment and its majority-owned subsidiary On Command since
March 2000. Accordingly, and unless otherwise noted below, increases in the
Company's revenue and expenses from 2000 to 2001 are due in part to the
inclusion of Ascent Entertainment and On Command for a full year in 2001, as
compared to nine months in 2000.
REVENUE
IN-ROOM ENTERTAINMENT REVENUE
Revenue from On Command's in-room entertainment services consists primarily
of fees collected from hotels for in-room services provided to hotel guests by
On Command ("room revenue"). Services provided by On Command to hotel guests
include pay-per-view movies and short subjects, free-to-guest programming, video
games, Internet service and digital music. On Command also earns revenue from
the sale of video and music systems to third parties and the sale of video
equipment to hotels, from other sources ("system and equipment sales and other
entertainment revenue"). Total in-room entertainment revenue (comprised of room
revenue, and system and equipment sale and other entertainment revenue)
decreased $1,012,000 or less than one percent during 2002 and increased
$38,993,000 or 19.5% during 2001.
Net room revenue decreased $1,616,000 or less than 1% during 2002, as
compared to 2001. The decrease in net room revenue during 2002 is primarily
attributable to the net effect of (i) a decrease attributable to a lower volume
of pay-per-view buys; (ii) an increase attributable to higher average rates for
certain pay-per-view products; and (iii) a $4,428,000 increase in the aggregate
revenue derived from short subject, digital music and television-based Internet
products. On Command believes that most of the decrease in pay-per-view buys is
attributable to a decline in occupancy rates, as further discussed below. A 3.3%
reduction in the average number of rooms served by On Command during 2002 also
contributed to the decrease in pay-per-view buys. The decline in the average
number of rooms served by On Command is attributable to (i) the disposition of
certain hotel rooms; (ii) the loss of rooms to competitors; and (iii) the
discontinuance of service to certain non-profitable hotels.
Overall hotel occupancy rates declined 1.0% during 2002, as compared to
2001. In addition, occupancy rates for hotels in the top 25 markets, as defined
by Smith Travel Research, declined 1.8% over the same period. Since On Command
derives a significant portion of its revenue from hotels located in the top 25
markets, On Command believes that the occupancy rate for this segment is the
best indicator of the impact changes in hotel occupancy are having on On
Command's business. Hotel occupancy rates are outside of On Command's control,
and changes in hotel occupancy rates can have a significant impact on On
Command's results of operations.
II-6
During 2002, hotels owned, managed or franchised by Marriott
International, Inc. ("Marriott"), Hilton Hotels Corporation ("Hilton"), Six
Continents Hotels, Inc. ("Six Continents"), Hyatt Hotel Corporation ("Hyatt"),
and Starwood Hotels and Resorts Worldwide, Inc. ("Starwood") accounted for 30%,
16% 12%, 7% and 7%, respectively, of On Command's net room revenue. Accordingly,
hotels owned, managed or franchised by On Command's five largest hotel chain
customers accounted for 72% of On Command's total net room revenue during 2002.
The loss of any of these hotel chain customers, or the loss of a significant
number of other hotel chain customers, could have a material adverse effect on
On Command's results of operations and financial condition.
As further discussed below, the Hilton master contract has expired, and
Hilton has signed a new master contract with a competitor of On Command. In
addition, On Command does not have master contracts with either Starwood or Six
Continents, and the Hyatt master contract provides for the simultaneous
expiration of On Command's contractual relationships with all of the individual
hotels that are subject to the Hyatt master contract as of December 31, 2004. At
December 31, 2002, On Command provided entertainment services to approximately
178,000 rooms in hotels that are owned, managed or franchised by Starwood or Six
Continents. Agreements with respect to approximately 54% of such Starwood and
Six Continents rooms have already expired, or will expire by December 31, 2004.
At December 31, 2002, approximately 39,000 or 61% of On Command's Starwood rooms
were located in Sheraton or Four Points hotels that, depending on whether such
hotels are owned, managed or franchised by Starwood, may be covered by a master
contract with a competitor of On Command upon the expiration of such hotels'
contracts with On Command. On Command is actively pursuing master agreements
with Hyatt and Six Continents, and with Starwood with respect to the Starwood
brands that are not already covered by a competitor's contract. In certain
cases, On Command is also pursuing direct contractual relationships with
individual hotels that are owned, managed or franchised by these hotel chains.
No assurance can be given that On Command will be successful in executing master
or individual hotel contracts. Due to the significant cost involved in changing
the proprietary video equipment installed in hotels, On Command expects that,
regardless of the expiration dates of master contracts or individual contracts
with hotels, On Command will continue to be the provider of in-room
entertainment services for individual hotels that are not under contract until
such time as a competitor's equipment can be installed. For this and other
reasons, On Command does not anticipate that it will cease earning revenue from
all of its Hyatt rooms on December 31, 2004 in the event that a new master
contract has not been executed by that date.
In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. As a result, hotels owned, managed or franchised by
Hilton are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command anticipates that hotels owned
by Hilton will not renew their contracts as they expire. On the other hand,
hotels that are managed or franchised by Hilton are not precluded from renewing
their contracts with On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew. At
December 31, 2002, On Command provided service to approximately 126,200 rooms in
534 hotels that are owned, managed or franchised by Hilton. The majority of
these rooms are located in managed or franchised hotels that are not owned by
Hilton. Through December 31, 2002, On Command's contracts with 71 of the
aforementioned 534 hotels (20,400 rooms) had expired and service to these hotels
is currently provided under monthly or other short-term renewals. On Command's
individual contracts with the remaining 463 Hilton hotels (105,800 rooms) expire
at various dates through 2010, with 56% of those rooms expiring by 2005. During
2002, On Command entered into new contracts, or renewed existing contracts, with
respect to 7,000 rooms that were franchised by Hilton, and 2,600 rooms that were
managed by Hilton. Over time, On Command anticipates that the revenue it derives
from hotels that are owned, managed or franchised by Hilton will decrease.
However, due to the uncertainties involved, On Command is currently unable to
predict the amount and timing of the revenue decreases.
II-7
The Company's consolidated financial statements reflect an increase in
in-room entertainment revenue from 2000 to 2001 due to the inclusion of On
Command's operating results for only nine months during the 2000 period.
However, On Command's in-room entertainment revenue actually decreased by 9.8%
from 2000 to 2001 on a full-year basis. Such full-year decrease represents the
net effect of (i) a lower volume of pay-per-view buys; (ii) an increase
attributable to higher average rates for certain pay-per-view products; (iii) a
decrease associated with the inclusion of non-recurring license fee revenue in
the full year 2000 amount; and (iv) an increase in the aggregate revenue derived
from short subject, television-based Internet and other new products. On Command
believes that most of the decrease in pay-per-view buys is due to a decline in
occupancy rates. Hotel occupancy rates declined 5.7% during 2001, as compared to
2000. In addition, occupancy rates for hotels in the top 25 markets, as defined
by Smith Travel Research, declined 7.8% over the same period.
OTHER REVENUE
Other revenue is primarily comprised of revenue generated by Ascent Network
Services during the 2001 and 2000 periods. Ascent Entertainment sold Ascent
Network Services to Ascent Media on September 4, 2001.
OPERATING COSTS
IN-ROOM ENTERTAINMENT OPERATING COSTS
In-room entertainment operating costs consist primarily of fees paid to
movie and other content providers, hotel commissions, direct costs associated
with On Command's television-based Internet product, costs associated with video
and music systems sold to third parties, costs associated with the repair,
maintenance and support of video systems and other room service equipment, and
costs associated with research and development activities.
In-room entertainment operating costs decreased $9,100,000 or 5.8% during
2002, as compared to 2001. Such decrease represents the net effect of (i) a
decrease associated with certain changes to On Command's operational structure
and other cost savings measures, including the outsourcing of certain call
center and warehouse management functions; (ii) a $4,083,000 increase in
free-to-guest programming costs; (iii) a $2,074,000 reduction in Internet direct
costs; (iv) a $1,783,000 increase in hotel commissions; (v) a $1,329,000
decrease attributable to the third quarter 2002 reversal of accruals deemed no
longer needed for their originally intended purpose, and (vi) various other
individually insignificant items. The increase in free-to-guest programming
costs is primarily the result of higher rates from programming suppliers.
Certain of On Command's content fees and other in-room service costs do not vary
with room revenue and occupancy rates.
The Company's consolidated financial statements reflect an increase in
in-room entertainment operating costs from 2000 to 2001 due to the inclusion of
On Command's operating results for only nine months during the 2000 period.
However, On Command's in-room entertainment operating costs actually decreased
by 4.8% from 2000 to 2001 on a full-year basis. Such full-year decrease
represents the net effect of (i) reductions in hotel commissions, license fee
royalties and video duplication and distribution costs; (ii) increases in
free-to-guest programming costs; and (iii) increases in the direct costs
associated with On Command's television-based Internet and short subject
products. Such increases and decreases include an overall net decrease resulting
from the disposition of On Command's Asian operations during the first quarter
of 2001. The decreases in hotel commissions and license fee royalties on a
full-year basis are largely the result of decreases in corresponding revenue
amounts.
On Command is a party to various agreements with programming suppliers that
permit On Command to distribute movies and programming networks. On Command
expects that the cost of such movies and programming networks will increase in
future periods as contracts expire and renewals are
II-8
negotiated. Certain of On Command's contracts with hotel customers limit the
amount of any cost increases that can be passed on to any such hotels. Any cost
increases that On Command is not able to pass on to its customers would result
in increased pressure on On Command's operating margins.
OTHER OPERATING COSTS
Other operating costs are primarily comprised of costs incurred by Ascent
Network Services during the 2001 and 2000 periods. Ascent Entertainment sold
Ascent Network Services to Ascent Media on September 4, 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense decreased $30,811,000 or 51.9%
during 2002, as compared to 2001. Costs associated with On Command's 2001
relocation and restructuring activities, together with the cost savings that
resulted from such activities, accounted for approximately $15,000,000 of such
decrease. The remaining decrease is attributable to other reductions in the
selling, general and administrative expenses incurred by Ascent Entertainment.
Such other reductions in Ascent Entertainment expenses are primarily
attributable to (i) the elimination of expenses as a result of the September 4,
2001 sale of Ascent Network Services to Ascent Media and (ii) the inclusion of
$7,746,000 in the 2001 amount related to Ascent Entertainment's 2001 repurchase
of 2,245,155 shares of On Command Common Stock from the then chief executive
officer of On Command.
Selling, general and administrative expenses increased $33,426,000 or 128.7%
from 2000 to 2001. Such increase is due to increases in Ascent Entertainment's
expenses as a result of (i) the inclusion of Ascent Entertainment in the
Company's consolidated financial statements for a full 12 month in 2001, as
compared to nine months in 2000; (ii) an $8,236,000 increase in On Command's
relocation and restructuring costs from 2000 to 2001; and (ii) a $7,746,000
increase in the 2001 amount related to Ascent Entertainment's 2001 repurchase of
2,245,155 shares of On Command Common Stock from the then chief executive
officer of On Command.
STOCK COMPENSATION
LSAT records estimated stock compensation pursuant to the intrinsic value
method of Accounting Principles Board Opinion No. 25. Such estimate is subject
to future adjustment based upon the market value of the underlying common stock.
Since none of LSAT's outstanding stock appreciation rights ("SARs") were
in-the-money at December 31, 2002 or 2001, LSAT recorded no compensation expense
with respect to SARs during 2002 and 2001. The adjustment to stock compensation
expense in 2000 is the result of a decrease in the Company's liability for SARs.
The stock compensation expense recorded during 2002 and 2001 is attributable to
restricted stock awards granted in February 2001.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $38,926,000 or 22.6% during 2002, as
compared to 2001. Such decrease in depreciation and amortization is primarily
the result of the Company's adoption of Statement 142, which, among other
things, required the Company to cease recording goodwill amortization effective
January 1, 2002. Depreciation remained relatively constant during the 2002 and
2001 periods as reductions to On Command's depreciable asset base attributable
to (i) assets becoming fully depreciated, and (ii) asset dispositions were
largely offset by increases attributable to capital expenditures.
Depreciation and amortization increased $37,014,000 or 27.4% during 2001, as
compared to 2000. The majority of such increase is attributable to the inclusion
of Ascent Entertainment in the Company's consolidated financial statements for a
full 12 months in 2001, as compared to nine months in 2000. The application of
purchase accounting in connection with the March 2000 acquisition of Ascent
II-9
Entertainment also contributed to the increase. On a full-year basis, the
depreciation incurred by On Command during 2001 and 2000 remained relatively
constant.
ASSET IMPAIRMENTS AND OTHER CHARGES
On Command recorded impairment charges of $8,850,000 during 2002, including
a loss of $5,103,000 relating to the sale of its European operations, and a loss
of $1,411,000 relating to a transaction in which certain equipment was
transferred to STSN, Inc. On Command also recorded other charges aggregating
$2,336,000, $709,000 and $1,634,000 during 2002, 2001 and 2000 respectively,
related to obsolete materials and equipment, and losses on various dispositions
of property and equipment and other assets.
INTEREST INCOME
The Company recognized interest income of $2,174,000, $12,967,000 and
$21,066,000 during 2002, 2001 and 2000, respectively. The 2002 income was earned
primarily on certain bonds that were purchased by LSAT LLC in August 2001. Such
bonds are included with the Company's investment in Sky Latin America. The 2001
and 2000 income was earned primarily on the cash and cash equivalent balances
maintained by Ascent Entertainment and LSAT Astro LLC ("LSAT Astro"), a
subsidiary of the Company. The majority of Ascent Entertainment's cash and cash
equivalent balances were utilized to redeem the Ascent Entertainment Senior
Secured Discount Notes on December 31, 2001, and all of LSAT Astro's cash and
cash equivalent balances were utilized to fund the capital calls during 2001 and
2000 of ASTROLINK International LLC ("Astrolink"), LSAT Astro's 31.5%-owned
investee.
INTEREST EXPENSE
During 2002, 2001 and 2000, the Company recognized interest expense of
$18,530,000, $47,477,000 and $34,843,000, respectively. The decrease in interest
expense from 2001 to 2002 represents the combined effect of a decrease in the
Company's weighted average debt balance and a decrease in interest rates. The
reduction in the Company's weighted average debt balance is primarily due to the
December 31, 2001 redemption of the Ascent Entertainment Senior Secured Discount
Notes. The increase in interest expense from 2000 to 2001 is primarily due to
the inclusion of Ascent Entertainment in the Company's consolidated financial
statements for a full 12 months in 2001, as compared to nine months in 2000.
SHARE OF LOSSES OF AFFILIATES
During 2002, 2001 and 2000, the Company's share of losses of affiliates
aggregated $13,705,000, $424,247,000 and $7,251,000, respectively. The 2002
amount is primarily related to losses arising from LSAT LLC's investment in
Aerocast.com, Inc. ("Aerocast"). In 2002, LSAT LLC determined that its
investment in Aerocast experienced a nontemporary decline in value that resulted
in a $7,072,000 write-off of the remaining carrying value of its investment in
Aerocast. Such write-off is included in LSAT LLC's share of Aerocast's 2002
losses. The 2001 amount includes $417,202,000 of losses and charges arising from
LSAT Astro's investment in Astrolink. Due to the Company's fourth quarter 2001
determination that LSAT Astro's investment in Astrolink should be reduced to a
fair value that assumes the liquidation of Astrolink, LSAT Astro wrote-off its
remaining $249,868,000 investment in Astrolink during the fourth quarter of
2001. Previously, the Company had taken a $155,000,000 writedown on this
investment during the second quarter of 2001. Since LSAT Astro's investment in
Astrolink was reduced to zero at December 31, 2001, LSAT Astro's share of
Astrolink's losses in 2002 has been limited to the amounts loaned to Astrolink
by the Company during 2002. Subsequent to December 31, 2002, the Company entered
into an agreement that, among other matters, provides for the recapitalization
of Astrolink, subject to certain conditions. The 2000 amount includes the
II-10
Company's share of Astrolink's losses for 10 months, and the Company's share of
Aerocast's losses for 6 months.
NONTEMPORARY DECLINES IN FAIR VALUES OF INVESTMENTS
Nontemporary declines in fair values of investments aggregated $163,881,000,
$96,438,000 and $9,860,000 during 2002, 2001 and 2000, respectively, and are
comprised of the following.
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Sky Latin America........................................... $105,250 -- --
Sprint Corporation PCS Group................................ 21,511 -- --
Loral Space and Communications Ltd.......................... 17,384 -- --
STSN, Inc................................................... 6,060 16,539 --
Wildblue Communications, Inc................................ -- 56,483 --
XMSR Satellite Holdings, Inc................................ 1,626 14,575 --
Other....................................................... 12,050 8,841 9,860
-------- ------ -----
$163,881 96,438 9,860
======== ====== =====
UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS
Unrealized gains (losses) on financial instruments during 2002, 2001 and
2000 aggregated $2,393,000, $38,891,000 and ($14,426,000), respectively. The
details of such gains (losses) are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Change in fair value of GM Hughes put spread collar......... $ 5,259 9,748 4,997
Change in time value of Sprint PCS Stock and XMSR equity
collars................................................... (302) 25,902 --
Change in fair value of iBEAM put option.................... (2,564) 3,241 (19,423)
------- ------ -------
$ 2,393 38,891 (14,426)
======= ====== =======
During 2002 and 2001, the Company had designated its equity collars as fair
value hedges. Pursuant to Statement 133, the equity collars were recorded on the
balance sheet at fair value, and changes in the fair value of the equity collars
and of the hedged security were recognized in earnings. Effective December 31,
2002, the Company elected to no longer designate its equity collars as fair
value hedges. This election had no impact on the Company's financial position or
results of operations on December 31, 2002. However, subsequent to December 31,
2002, changes in the fair value of the hedged securities that previously had
been reported in earnings will now be reported as a component of other
comprehensive income on the Company's balance sheet. Changes in the fair value
of the equity collars will continue to be reported in earnings.
LOSS ON EXTINGUISHMENT OF DEBT
The $14,322,000 loss on extinguishment of debt during 2001 resulted from the
December 31, 2001 redemption of the Ascent Senior Secured Discount Notes.
GM HUGHES STOCK TRANSACTIONS
In May 2000, the Company sold 2,400,000 shares of General Motors Corporation
Class H common Stock ("GM Hughes Stock") for net cash proceeds of $74,243,000
and used $65,721,000 of such net
II-11
cash proceeds to satisfy a GM Hughes Stock share appreciation right. The
$36,643,000 gain recognized by the Company on the sale of GM Hughes Stock was
more than offset by the $65,721,000 loss recognized on the satisfaction of the
GM Hughes Stock share appreciation right.
INCOME TAXES
The Company recognized income tax benefits of $35,621,000, $35,652,000 and
$28,450,000 during 2002, 2001, and 2000, respectively. The 2002 benefit includes
a $5,666,000 tax refund received by LSAT as a result of a change in tax law that
occurred during the first quarter of 2002. Such change resulted in the
elimination of restrictions on the use of net operating loss carryforwards to
offset alternative minimum tax liabilities. The 2002, 2001 and 2000 income tax
benefits also include deferred tax benefits associated with losses recognized by
the Company. The Company has recognized such losses to the extent that the tax
effect of such losses offsets the Company's deferred income tax liability. At
December 31, 2002, the Company's deferred tax liability was $14,558,000. The
Company is only able to recognize income tax benefits for financial reporting
purposes to the extent that such benefits offset recorded income tax liabilities
or the Company generates taxable income. In connection with the consummation of
the LSAT LLC and Ascent Entertainment Transaction, LSAT and Liberty Media
entered into a Tax Liability Allocation and Indemnification Agreement, and LSAT
assumed an intercompany tax liability owed by Ascent Entertainment to Liberty
Media pursuant to a separate Tax Liability Allocation and Indemnification
Agreement. Since April 1, 2002, the Company and its 80%-or-more owned
subsidiaries have been included in Liberty Media's consolidated tax return.
MINORITY INTERESTS IN LOSSES OF CONSOLIDATED SUBSIDIARIES
The minority interests' share of losses of consolidated subsidiaries
aggregated $165,000, $34,346,000 and $15,078,000 during 2002, 2001, and 2000,
respectively. Such amounts primarily represent the minority interests' share of
On Command's net losses. The decrease from 2001 to 2002 is primarily
attributable to a change in how On Command's losses are allocated between Ascent
Entertainment and the minority interest holders. During the first quarter of
2002, the cumulative losses allocated by Ascent to the On Command minority
interests reduced to zero Ascent's carrying amount for the minority interests in
On Command's equity. Since the On Command minority interest holders have no
obligation to make further contributions to On Command, 100% of On Command's
losses for periods subsequent to March 31, 2002 have been, and will be in future
periods, allocated to Ascent unless and to the extent that the On Command
minority interest holders make additional investments in On Command's equity.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Pursuant to the transitional provisions of Statement 142, the Company
recorded a $105,837,000 reduction of goodwill in 2002. Such goodwill was
originally recorded in connection with the March 2000 Ascent Entertainment
acquisition. In accordance with Statement 142, this goodwill reduction has been
recorded as the cumulative effect of an accounting change.
NET LOSS
As a result of the factors described above, the Company incurred net losses
of $343,874,000, $602,263,000 and $116,959,000 during 2002, 2001 and 2000,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
LSAT is a holding company that does not generate positive cash flow at the
LSAT level. The only subsidiary of LSAT that generates significant revenue is On
Command. Due to covenant restrictions contained in the On Command Revolving
Credit Facility, LSAT is generally not entitled to the cash
II-12
resources or cash generated by the operations of On Command. The sources of
liquidity available to LSAT at the LSAT level are described below.
On a consolidated basis, the Company used cash provided by operating
activities of $62,820,000, cash and cash equivalents on hand of $22,342,000 and
cash provided by financing activities of $4,777,000 to fund investing activities
of $89,939,000 during 2002. The Company's investing activities included
$54,397,000 of capital expenditures and $31,304,000 of investments and advances
to affiliates.
LSAT LLC's revolving credit facility, as amended, (the "PCS Loan Facility")
provides for maximum borrowings of $303,000,000. The PCS Loan Facility is
secured by the Company's interest in the Sprint Corporation PCS Group common
stock ("Sprint PCS Stock") and the Sprint PCS Stock equity collar. Interest
accrues at the 30 day LIBOR (1.44% at December 31, 2002) and is payable monthly.
The Company expects that all amounts due under the PCS Loan Facility will be
repaid in April 2003 with proceeds received upon the sale of its Sprint PCS
Stock and the settlement of its interests in the Sprint PCS Stock equity collar.
In March 2000, LSAT received a 13.99% ownership interest in LSAT Astro in
exchange for a $60,000,000 note payable to Liberty Media. Interest on the note
accrued at the 3 month LIBOR plus 2% (3.74% at December 31, 2002). Interest
payments were due semi-annually on the first day of March and September. At
December 31, 2002, the unpaid principal on the note was $48,411,000 and the
accrued interest on the note was $614,000. All amounts due under the note
payable to Liberty Media were repaid in March 2003.
In August 2002, the LSAT Board of Directors authorized the Company's
purchase of up to 3,000,000 of Series A and Series B Common Stock in open market
purchases. The timing of purchases, prices paid and actual number of shares of
common stock purchased will depend on market conditions and the direction of
management. During 2002, LSAT purchased 24,900 shares of Series A Common Stock
for aggregate cash consideration of $53,000 pursuant to this share buy back
program.
In March 2000, LSAT issued 150,000 shares of Series A Preferred Stock, and
150,000 shares of Series B Preferred Stock to Liberty Media in exchange for
shares of Sprint PCS Stock. On the date of issuance, each such series of
preferred stock had an aggregate stated value of $150,000,000. The Series A
Preferred Stock and Series B Preferred Stock, which were each issued at a
discount to their stated values, are redeemable at the option of Liberty Media
on or after April 1, 2020 at a price equal to stated value plus all accrued and
unpaid dividends. The Company may elect to use cash, Series A Common Stock or a
combination thereof to satisfy such dividend requirements through March 2003.
Subsequent to March 31, 2003, dividends are required to be paid in cash. During
2002, the Company issued 4,320,277 shares of Series A Common Stock, and paid
$7,500,000 in cash, in satisfaction of dividends accrued through September 30,
2002. Accrued and unpaid dividends on the Series A Preferred Stock and Series B
Preferred Stock aggregated $7,500,000 as of December 31, 2002. Such accrued
dividends were satisfied through the issuance of 3,221,787 shares of Series A
Common Stock during the first quarter of 2003.
During the year ended December 31, 2001 and the three months ended
March 31, 2002, Liberty Media loaned $18,552,000 and $6,573,000, respectively,
to LSAT LLC. LSAT LLC used the proceeds from these loans to fund capital calls
from Sky Latin America. The loans provided for interest at 8% per annum and were
due and payable on demand after November 27, 2001. Concurrently, with the
closing of the LSAT LLC and Ascent Entertainment Transaction, (i) Liberty Media
contributed to the Company, as part of that transaction and for no additional
consideration, promissory notes issued by subsidiaries of Liberty Media, with an
aggregate principal balance of $18,552,000 and related accrued interest of
$651,000, representing the loans described above that were made through
December 31, 2001, and (ii) LSAT LLC repaid principal of $6,573,000 and accrued
interest of $37,000 related to the first quarter 2002 advances.
II-13
During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other Astrolink members in connection with the proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring (the "Astrolink Restructuring"). Under the agreement (the
"Astrolink Restructuring Agreement"), the Company will acquire substantially all
of the assets of Astrolink. Astrolink simultaneously signed agreements with
Lockheed Martin Corporation and Northrop Grumman Space & Mission Systems Corp.
for completion of two satellites. The parties also reached agreement on the
settlement of all claims related to the previous termination of Astrolink's
major procurement contracts and all other major third party creditor claims. The
closing of the Company's acquisition of the Astrolink business is subject to the
Company obtaining satisfactory funding for the business from additional
investors, third party sources of financing, or firm capacity commitments from
prospective customers. The closing is also subject to regulatory approvals and
other closing conditions. Subject to satisfaction of these closing conditions,
the closing is expected to occur on or before October 31, 2003.
If the closing occurs, the Company will pay approximately $43 million in
cash and will issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, the Company will provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
will make a capital contribution to the Company in an amount equal to 10% of the
estimated fair value of Liberty Media's equity holdings in the Company at the
time of closing, up to a maximum commitment of $55 million, in exchange for
shares of the Company's Series B Common Stock.
The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching Ka-band satellites to provide
enterprise customers in North America with virtual private networks and related
advanced services, and to provide various government agencies with a solution to
their expanding needs for bandwidth.
In the event the Astrolink Restructuring is not consummated due to lack of
financing or other closing conditions, the Company anticipates that Astrolink
will be liquidated and the Company will receive $7.8 million dollars as
prescribed in the Astrolink Restructuring Agreement.
In December 2002, the Company announced that it has agreed to increase its
investment in Wildblue Communications, Inc. ("Wildblue"). Currently, the Company
has an approximate 16% ownership interest in Wildblue. Under the new agreement,
the Company will invest $58 million in return for senior preferred stock and
warrants of Wildblue. As also agreed, other existing and new investors will
invest $98 million in Wildblue for a total new investment of $156 million. Upon
closing of the transaction, of which no assurance can be given, the Company will
be the largest shareholder with an ownership interest of approximately 32% and a
voting interest of approximately 37%. The closing of the transaction is subject
to certain conditions, and is expected to occur in the second quarter of 2003.
Assuming the Wildblue transaction is consummated as described above, of which no
assurance can be given, Wildblue currently expects to launch its satellite in
the fourth quarter of 2003 and begin providing broadband data services in the
second or third quarter of 2004.
In connection with the aforementioned additional investment in Wildblue, the
Company entered into a put agreement with KPCB Holdings, Inc. ("KPCB"), another
investor in Wildblue. Pursuant to this put agreement and in the event the
parties make additional investments in Wildblue, KPCB will have the right to put
its interest in Wildblue to the Company and another investor in Wildblue for
$10,000,000, the amount KPCB has agreed to invest in Wildblue at the closing of
the Wildblue transaction. The Company and such other investor are each
responsible for $5,000,000 of the aggregate $10,000,000 put obligation. The put
may be exercised at any time within four years from the closing of the Wildblue
transaction.
II-14
As a result of the consummation of the LSAT LLC and Ascent Entertainment
Transaction, Liberty Media no longer has a direct ownership interest in LSAT
LLC, and has no obligation to provide funding to LSAT LLC. Accordingly, the
primary sources of liquidity expected to be available at the LSAT level during
2003 are the (i) proceeds of approximately $149 million received in March 2003
upon the sale of a portion of the Company's Sprint PCS Stock and the settlement
of a portion of its interests in the Sprint PCS Stock equity collar;
(ii) proceeds of approximately $154 million to be received upon the expected
April 2003 sale of the Company's remaining Sprint PCS Stock and settlement of
its remaining interests in the Sprint PCS Stock equity collar; and
(iii) $9,741,000 of cash and cash equivalents held by LSAT at December 31, 2002.
As noted above, the Company has used, or intends to use, approximately
$163 million of such Sprint proceeds to repay in full all amounts due under the
PCS Loan Facility and the note payable to Liberty Media in March and
April 2003. The Company believes that the remaining proceeds of approximately
$140 million, together with the cash and cash equivalents held at the LSAT
level, will be sufficient to fund LSAT's expected cash requirements during 2003,
exclusive of the proposed investment in Astrolink, which investment, as further
described above, will be funded primarily by a capital contribution from Liberty
Media. LSAT's liquidity requirements during 2003 are expected to include
(i) its proposed investment in Wildblue, if consummated; (ii) its preferred
stock dividend requirements; (iii) its capital contributions to Sky Latin
America, and its interim funding commitments to Astrolink. LSAT does not expect
Ascent Entertainment or its principal operating subsidiary, On Command, to
provide any of LSAT's financial resources during 2002. The financial resources
and requirements of On Command are described below.
At December 31, 2002, the On Command Revolving Credit Facility, as amended
in 2001, provided for aggregate borrowings of $275,000,000. Borrowings under the
On Command Revolving Credit Facility are due and payable in July 2004. On
Command had $13,367,000 of remaining availability under the On Command Revolving
Credit Facility at December 31, 2002. On Command's ability to draw additional
funds under the On Command Revolving Credit Facility is subject to On Command's
continual compliance with applicable financial covenants.
Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the LIBOR plus a spread that may range from 1.10% to 2.75% depending
on certain operating ratios of On Command (3.94% effective borrowing rate at
December 31, 2002). In addition, a facility fee ranging from 0.15% to 0.50% per
annum is charged on the On Command Revolving Credit Facility, depending on
certain operating ratios of On Command. The On Command Revolving Credit Facility
contains customary covenants and agreements, most notably the inclusion of
restrictions on On Command's ability to pay dividends or make other
distributions, and restrictions on On Command's ability to make capital
expenditures. In addition, On Command is required to maintain leverage and
interest coverage ratios. On Command was in compliance with such covenants at
December 31, 2002. Substantially all of On Command's assets are pledged as
collateral for borrowings under the On Command Revolving Credit Facility.
At December 31, 2002, the maximum leverage ratio permitted under the On
Command Revolving Credit Facility was 4.25, and On Command's actual leverage
ratio was 3.99. The maximum leverage ratio permitted under the On Command
Revolving Credit Facility at March 31, 2003 is 3.50. Although On Command is in
compliance with the leverage ratio covenant at December 31, 2002, On Command
believes that it would not have been in compliance with such covenant at
March 31, 2003. In March 2003, On Command reached agreement with its bank
lenders to postpone until June 29, 2003 the step-down of the leverage ratio
covenant from 4.25 to 3.50. On Command is also seeking to restructure the On
Command Revolving Credit Facility to, among other matters, extend the maturity
date to December 31, 2007. It is anticipated that any closing of the
restructuring of the On Command Revolving Credit Facility will be contingent
upon the contribution of $40,000,000 by Liberty Media or one of its affiliates
to On Command to be used to repay principle due, and permanently reduce lender
commitments, pursuant to the restructured On Command Revolving Credit Facility.
The terms of the
II-15
proposed Liberty Media contribution (including the securities or other
consideration to be received by Liberty Media or its affiliate in exchange for
such contribution) have not yet been agreed upon, and no assurance can be given
that Liberty Media or its affiliate will contribute $40,000,000 to On Command,
as contemplated by the terms of the proposed restructuring. In the event On
Command determines that it is unlikely that the proposed restructuring of the On
Command Revolving Credit Facility will close on or before June 29, 2003, On
Command anticipates that it would seek a further postponement of the step-down
of the leverage ratio covenant, and would continue to seek to refinance or
restructure the On Command Revolving Credit Facility. In the event that a
restructuring or refinancing is not completed by the date that the leverage
ratio is reduced to 3.50, On Command anticipates that a default would occur
under the terms of the On Command Revolving Credit Facility. Upon the occurrence
of a default, if left uncured, the bank lenders would have various remedies,
including terminating their revolving loan commitment, declaring all outstanding
loan amounts including interest immediately due and payable, and exercising
their rights against their collateral which consists of substantially all of On
Command's assets. No assurance can be given that On Command will be able to
successfully restructure or refinance the On Command Revolving Credit Facility
on terms acceptable to On Command, or that On Command will be able to avoid a
default under the On Command Revolving Credit Facility. In light of the
foregoing circumstances, On Command's independent auditors have included an
explanatory paragraph in their audit report that addresses the ability of On
Command to continue as a going concern.
In connection with a first quarter 2001 transaction, On Command agreed that
e-ROOM Corporation ("e-ROOM") would have the option during the 15 day period
beginning on March 1, 2003 to cause On Command to repurchase all, but not less
than all, of the 275,000 shares of On Command Common Stock issued to e-ROOM at a
price of $15 per share. During the fourth quarter of 2002, On Command
repurchased 119,500 of such shares for an aggregate price of $1,344,000 or
$11.25 per share. The $448,000 excess of the repurchase obligation, calculated
at $15 per share, over the aggregate price paid to repurchase such shares has
been reflected as a decrease to intangible assets in the accompanying
consolidated balance sheets. In connection with this transaction, the parties
agreed to postpone until March 1, 2004 the date on which On Command can be
required to repurchase 119,500 of the remaining shares subject to repurchase. On
Command is not precluded from repurchasing such shares at an earlier date. The
repurchase price for such shares will be $15 per share, plus an adjustment
factor calculated from March 1, 2003 to the date of repurchase, at a rate of 8%
per annum. Subsequent to December 31, 2002, the date on which the remaining
36,000 shares will first become subject to repurchase by On Command was
postponed until March 1, 2004. The repurchase price for such shares will remain
at $15 per share.
On February 28, 2001, On Command acquired a controlling interest in the
common stock of Hotel Digital Network, Inc. ("HDN"). In connection with such
acquisition, On Command entered into a stockholders' agreement (the "HDN
Stockholders' Agreement") with the then controlling stockholder of Hotel Digital
Network (the "HDN Stockholder"). The HDN Stockholders' Agreement provides the
HDN Stockholder with the right during each of the 30-day periods beginning on
March 1, 2003 and 2004 to require On Command to exchange shares of On Command
Common Stock for all, but not less than all, of the Hotel Digital Network common
shares held by the HDN Stockholder. On March 20, 2003, the HDN Stockholder
exercised such right. The HDN Stockholders' Agreement also provides On Command
with the right during the 30-day period beginning on March 1, 2006 to require
the HDN Stockholder to exchange all, but not less than all, of his Hotel Digital
Network common shares for shares of On Command Common Stock. The number of
shares of On Command Common Stock to be issued in any such exchanges will be
determined based on the then market value of On Command Common Stock and the
then fair value of Hotel Digital Network common stock, each as determined in
accordance with the HDN Stockholders' Agreement. At December 31, 2002, On
Command held 85.9%, and the HDN Shareholder held 13.3% of the outstanding Hotel
Digital Network common stock. Based on On Command's current assessment of
values, On Command does not expect that the settlement of
II-16
this obligation will have a material impact on its capitalization, financial
condition or results of operations.
Historically, On Command has required external financing to fund the cost of
installing and upgrading video systems in hotels. However, during 2002 On
Command was able to manage its operations and capital expenditures such that On
Command was able to rely on internally generated funds and existing sources of
liquidity to finance its installation and upgrade activities. During 2003 and
future periods, On Command intends to continue to focus its efforts on
increasing revenue while containing, and wherever possible, reducing expenses
and capital expenditures. Assuming On Command meets its operating and capital
expenditure targets for 2003, On Command expects that it will be able to rely on
cash provided by operations, existing availability under the Revolving Credit
Facility, and existing cash and cash equivalent balances to fund its capital
expenditures and other anticipated liquidity requirements during 2003. On
Command's operating plan for 2003 is based in part on the assumption that hotel
occupancy rates will increase modestly from 2002 to 2003. To the extent that On
Command was to experience a revenue shortfall or any other unfavorable variance
from its 2003 operating plan, On Command would seek to reduce expenses and/or
capital expenditures to compensate for any such shortfall or unfavorable
variance. Accordingly, On Command believes, although no assurance can be given,
that it will not require additional sources of liquidity to fund its capital
expenditures and anticipated liquidity requirements during 2003. Notwithstanding
the foregoing, On Command anticipates that it would require additional external
financing to (i) fund any significant new growth initiatives or unanticipated
liquidity requirements; or (ii) refinance the Revolving Credit Facility, if
necessary (as discussed above). No assurance can be given that On Command will
not be required to seek external financing during 2003, and if external
financing is required, no assurance can be given that any such financing would
be available on terms acceptable to On Command or at all.
The Company uses equity collars and a put spread collar to hedge market risk
with respect to certain of its publicly traded securities. Although the
Company's equity collars and put spread collar provide protection against market
risk, such derivative instruments may involve elements of credit risk and market
risk in excess of what is recognized in the Company's consolidated financial
statements. The Company monitors its positions and the credit quality of
counterparties, consisting primarily of major financial institutions and does
not anticipate nonperformance by any counterparty.
Liberty Media International, Inc., ("Liberty International") a subsidiary of
Liberty Media, and other investors in the Sky Latin America businesses have
severally guaranteed obligations due under certain transponder agreements and
equipment lease agreements through 2018. The Company has indemnified Liberty
International with respect to Liberty International's obligations under these
guarantees. At December 31, 2002, the portions of the remaining undiscounted
obligations due under such transponder agreements and equipment lease agreements
that were severally guaranteed by Liberty International aggregated approximately
$107,906,000 and $7,000,000, respectively. During the fourth quarter of 2002,
Globo Comunicacoes e Participacoes ("GloboPar"), an investor in three of the Sky
Latin America entities, announced that it was reevaluating its capital
structure. Since that time, GloboPar has not provided any funding to the three
Sky Latin America entities in which it is an investor. In the case of one such
entity, Sky Multi-Country Partners ("Sky Multi-Country"), the Company and the
other investors in Sky Multi-Country have each entered into a Forbearance
Agreement with respect to Sky Multi-Country's obligations under a Transponder
Services Agreement with PamAmSat Corporation (successor-in-interest to PamAmSat
International, Inc.) ("PamAmSat"). Pursuant to the Forbearance Agreement,
PamAmSat will forbear from enforcing its rights under the Transponder Services
Agreement through April 30, 2003, provided that it receives at least 70% of the
fees due under the Transponder Services Agreement. Through March 15, 2003, the
Company and the other investors in Sky Multi-Country have collectively funded at
least 70% of the fees due under the Transponder Services Agreement. At
December 31, 2002, the aggregate obligations of Sky Multi-Country that were
severally guaranteed by Liberty International were $40,667,000. Sky
Multi-Country
II-17
funds another Sky Latin America entity in which GloboPar is an investor. At
December 31, 2002, the aggregate obligations of this entity that are severally
guaranteed by Liberty International were $7,000,000. In the case of Sky Brasil
Servicos Limitada ("Sky Brasil"), another entity in which GloboPar is an
investor, an investor other than the Company had previously agreed in July 2002
to assume up to $50,000,000 of GloboPar's funding obligations through 2003 in
exchange for increased ownership and governance rights. At December 31, 2002,
the aggregate obligations of Sky Brasil that are severally guaranteed by Liberty
International were $41,360,000. As detailed above, the three entities in which
GloboPar is an investor account for approximately $89,027,000 of the aggregate
obligations guaranteed by Liberty International at December 31, 2002. To the
extent that the Company or other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable transponder agreements and equipment lease agreements. With respect
to the equipment lease agreements, default also includes bankruptcy, debt
default, or material adverse change in the business or financial condition of
any guarantor that materially adversely affects the ability of any such
guarantor to perform its obligations under the guarantee. In the event any such
defaults were to occur, the default provisions of the applicable agreements
would determine the ultimate amount to be paid by the Company. The Company
believes that the maximum amount of the Company's aggregate exposure under the
default provisions of the various agreements is not in excess of the
undiscounted remaining obligations guaranteed by the Company, as set forth
above. The Company cannot currently predict if, and to what extent, it will be
required to perform under any of such guarantees.
In connection with the LSAT LLC and Ascent Entertainment Transaction, the
Company assumed an intercompany income tax liability owed by Ascent
Entertainment to Liberty Media pursuant to a tax liability allocation and
indemnification agreement. At December 31, 2002, the amount owed by Ascent
Entertainment to Liberty Media pursuant to this agreement was $8,409,000. Such
amount, which is non-interest bearing, includes $36,568,000 that is due on
demand to Liberty Media, and $28,159,000 that is payable to the Company by
Liberty Media if, and to the extent, that tax benefits generated by Ascent
Entertainment are utilized to reduce Liberty Media's taxable income.
Effective September 29, 2000, LSAT LLC acquired a 1% managing common
interest in a joint venture ("IB2 LLC") from a subsidiary of Liberty
Digital, Inc. ("Liberty Digital") for $652,000. Liberty Digital, a consolidated
subsidiary of Liberty Media, retained a preferred interest (the "Preferred
Interest") in IB2 LLC, which owns approximately 360,000 shares of iBEAM
Broadcasting Corp. ("iBEAM") common stock ("iBEAM Stock"). The Preferred
Interest had an initial liquidation value of $64,574,000 and is entitled to a
return of 9%, compounded annually. As part of the transaction, LSAT LLC granted
Liberty Digital the right to put the Preferred Interest to LSAT LLC for a
purchase price equal to $26,000,000 (the value of iBEAM Stock on September 29,
2000) plus a 9% return, compounded annually (the "iBEAM Put Option"). LSAT LLC
has the right to call Liberty Digital's Preferred Interest at a price equal to
the initial liquidation value plus a return of 9%, compounded annually. Both the
iBEAM Put Option and call option are exercisable on September 29, 2008. Under
certain limited circumstances, including iBEAM's bankruptcy, LSAT LLC can force
Liberty Digital to exercise the iBEAM Put Option prior to September 29, 2008.
During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter 11
of the Bankruptcy Code. As a result of such bankruptcy filing, the Company began
carrying the iBEAM Put Option liability at an amount ($31,052,000 at
December 31, 2002), which represents the iBEAM Put Option purchase price to LSAT
LLC plus an accrued return to Liberty Digital of 9%, compounded annually. The
Company anticipates that future losses with respect to the iBEAM Put Option will
be limited to Liberty Digital's 9% return on the iBEAM Put Option liability.
II-18
Information concerning the timing of the Company's required payments due
under various contractual obligations at December 31, 2002 is summarized below:
PAYMENTS DUE BY PERIOD
------------------------------------------
LESS THAN 1 TO 3 4 TO 5 AFTER
TOTAL ONE YEAR YEARS YEARS 5 YEARS
-------- --------- -------- -------- --------
AMOUNTS IN THOUSANDS
On Command Revolving Credit Facility............ $261,633 -- 261,633 -- --
Redeemable preferred stock...................... 202,147 -- -- -- 202,147
PCS Loan Agreement(1)........................... 112,503 112,503 -- -- --
Note payable to Liberty Media(2)................ 48,411 48,411 -- -- --
iBEAM Put Option liability...................... 31,052 -- -- -- 31,052
Operating leases................................ 6,637 3,229 3,005 400 3
Obligation to repurchase On Command Common
Stock......................................... 2,333 -- 2,333 -- --
Capital lease obligations....................... 1,146 833 310 3 --
-------- ------- ------- --- -------
Total........................................... $665,862 164,976 267,281 403 233,202
======== ======= ======= === =======
------------------------
(1) The Company expects to repay all amounts due under the PCS Loan Agreement in
April 2003 with proceeds received upon the sale of its Sprint PCS Stock and
the settlement of its Sprint PCS Stock equity collar.
(2) All amounts due under the note payable to Liberty Media were repaid in
March 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("Statement 146"). In October 2002,
the FASB issued Statement of Financial Accounting Standards No. 147,
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF FASB STATEMENT
NOS. 72 AND 144 AND FASB INTERPRETATION NO. 9 ("Statement No. 147"). In
December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN
AMENDMENT OF FASB STATEMENT NO. 123 ("Statement No. 148"). The adoption of
Statement Nos. 146, 147 and 148 is not expected to have, a material impact on
the Company's financial condition, results of operations or cash flows.
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34 ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions in FIN
45 are effective for all guarantees issued or modified after December 31, 2002.
The Company does not believe that the implementation of FIN 45 will have a
material impact on its financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51 ("FIN 46"). FIN
46 addresses consolidation of variable interest entities which have
characteristics described in the pronouncement. In general, if an entity is
considered a variable interest entity ("VIE"), the party that has the most
exposure to economic risks and potential rewards from the VIE is required to
consolidate the VIE. The consolidation requirements of FIN 46 apply to all VIE's
created after January 31, 2003. In addition, by July 1, 2003, the consolidation
II-19
requirements must be applied to all VIE's in existence prior to February 1,
2003. Based on the Company's preliminary analysis, the Company does not believe
that the implementation of FIN 46 will have a material impact on its financial
condition or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 31, 2002, the Company had $422,547,000 of variable-rate
liabilities with a weighted-average interest rate of 3.25%. Accordingly, the
Company is exposed to interest rate risk. To date, the Company has not entered
into any derivative instruments to manage its interest rate exposure. Assuming
no increase or decrease in the amount outstanding, a hypothetical 100 basis
point increase (or decrease) in interest rates at December 31, 2002 would
increase (or decrease) the Company's annual interest expense and cash outflows
by approximately $4,225,000. In March 2003, the Company repaid $48,411,000 of
the outstanding principle amount of its variable-rate liabilities at
December 31, 2002, and the Company expects to repay an additional $112,503,000
in April 2003.
The Company is exposed to changes in stock prices primarily as a result of
its holdings in publicly traded securities. The Company uses equity collars and
a put spread collar to hedge market risk with respect to certain of its publicly
traded securities. At December 31, 2002, the aggregate fair market value of the
Company's publicly traded securities (excluding the fair value of related hedge
instruments) was $48,532,000 ($22,271,000 of which represents the fair value of
the Sprint PCS Stock). At December 31, 2002, the fair value of the Company's
equity collars was $306,052,000 ($280,559,000 of which represents the fair value
of the Sprint PCS Stock equity collar), and the fair value of the Company's put
spread collar was $20,004,000. At December 31, 2002, the fair market value of
the GM Hughes Stock that is the subject of the put spread collar was
$19,495,000. Among other things, the GM Hughes put spread collar (i) provides
the Company with the right to require a counterparty to purchase shares of GM
Hughes Stock for a weighted average price of $26.64 per share in October 2003;
and (ii) provides a counterparty with the right to require the Company to
repurchase shares of GM Hughes Stock for a weighted average price of $14.80 per
share in October 2003. At December 31, 2002, the per share market value of GM
Hughes Stock was $10.70. In addition, the Company owned $4,076,000 of publicly
traded securities at December 31, 2002 that were not hedged.
On Command's foreign operations are located primarily in Canada and Mexico.
In addition, the Sky Latin America entities operate satellite television systems
in Mexico, Brazil, Chile and Colombia. The Company has a 10% beneficial interest
in each of the Sky Latin America businesses. The Company believes the risks of
foreign exchange rate fluctuations on its present operations are not material to
the Company's overall financial condition. However, the Company will consider
using foreign currency contracts, swap arrangements, or other financial
instruments designed to limit exposure to foreign exchange rate fluctuations, if
deemed prudent.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements of the Company are filed under this item beginning
on page II-21.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
II-20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Liberty Satellite & Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Liberty
Satellite & Technology, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operations, comprehensive loss,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2002. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Liberty
Satellite & Technology, Inc. and subsidiaries as of December 31, 2002 and 2001,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, effective January 1, 2002.
KPMG LLP
Denver, Colorado
February 12, 2003, except as to notes 9 and
21 to the consolidated financial statements,
which are as of March 28, 2003
II-21
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002 AND 2001
2002 2001
--------- ---------
AMOUNTS IN THOUSANDS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,571 33,913
Restricted cash (note 6).................................. 2,690 18,360
Trade and other receivables, net.......................... 33,513 34,060
Derivative assets (note 7)................................ 317,580 --
Other current assets...................................... 3,629 3,193
--------- ---------
Total current assets.................................... 368,983 89,526
--------- ---------
Investments in affiliates accounted for using the equity
method (note 5)........................................... -- 12,158
Investments in available-for-sale securities and other cost
investments, including securities pledged to creditors
(note 6).................................................. 143,858 373,900
Long-term derivative assets (note 7)........................ 8,476 203,582
Property and equipment:
Video systems............................................. 392,350 410,121
Support equipment......................................... 12,813 13,716
--------- ---------
405,163 423,837
Accumulated depreciation.................................. (130,086) (115,352)
--------- ---------
275,077 308,485
--------- ---------
Intangible assets subject to amortization:
Hotel contracts........................................... 163,000 163,000
Accumulated amortization.................................. (149,417) (95,083)
--------- ---------
13,583 67,917
--------- ---------
Intangible assets not subject to amortization--Goodwill
(note 2).................................................. 52,272 155,191
Other assets................................................ 12,970 14,138
--------- ---------
Total assets............................................ $ 875,219 1,224,897
========= =========
(continued)
II-22
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2002 AND 2001
2002 2001
----------- ----------
AMOUNTS IN THOUSANDS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 28,709 21,042
Accrued compensation...................................... 6,469 5,550
Sales, use and property tax liabilities................... 4,587 5,158
Other accrued liabilities................................. 8,567 7,987
Due to parent (note 4)
Note payable............................................ 48,411 18,552
Accrued interest........................................ 614 1,171
Other accrued expenses.................................. 6,931 14,678
----------- ----------
55,956 34,401
----------- ----------
Current portion of debt (note 9).......................... 113,336 909
Securities lending agreement (note 6)..................... 2,690 18,360
----------- ----------
Total current liabilities............................... 220,314 93,407
----------- ----------
Note payable to parent (note 4)............................. -- 48,411
Debt (note 9)............................................... 261,946 362,264
Put option liability due to related party (note 4).......... 31,052 28,488
Deferred tax liability (note 15)............................ 14,558 27,169
Other long-term liabilities................................. 495 --
----------- ----------
Total liabilities....................................... 528,365 559,739
----------- ----------
Minority interests in equity of consolidated subsidiaries
(note 10)................................................. 9,854 9,836
Redeemable preferred stock (note 11)........................ 202,147 196,027
Stockholders' Equity (note 12)
Preferred stock; authorized 5,000,000 shares; issued
300,000 shares in 2002 and 2001......................... -- --
Series A common stock, $1 par value; authorized
100,000,000 shares; issued 11,078,834 in 2002 and
6,753,101 in 2001....................................... 11,079 6,753
Series B common stock, $1 par value; authorized 70,000,000
shares; issued and outstanding 34,765,055 in 2002 and
34,771,828 in 2001...................................... 34,765 34,772
Additional paid-in capital................................ 1,981,831 1,980,389
Accumulated other comprehensive earnings (loss)........... 3,085 (10,650)
Accumulated deficit....................................... (1,895,220) (1,551,346)
----------- ----------
135,540 459,918
Series A common stock held in treasury, at cost (27,854
shares in 2002 and 2,954 shares in 2001) (notes 12 and
14)..................................................... (378) (325)
Notes receivable from officers (note 14).................. (309) (298)
----------- ----------
Total stockholders' equity.............................. 134,853 459,295
----------- ----------
Commitments and contingencies (notes 5, 6, 9, 17 and 18)
Total liabilities and stockholders' equity.............. $ 875,219 1,224,897
=========== ==========
See accompanying notes to consolidated financial statements.
II-23
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
2002 2001 2000
--------- -------- --------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
Revenue:
In-room entertainment services............................ $ 238,397 239,409 200,416
Other..................................................... 420 14,978 17,857
--------- -------- --------
238,817 254,387 218,273
Operating costs and expenses:
Operating
In-room entertainment services.......................... 147,186 156,286 130,471
Other................................................... -- 6,378 8,897
Selling, general and administrative ("SG&A")(notes 4 and
14)..................................................... 28,578 59,389 25,963
Stock compensation--SG&A (note 13)........................ 292 268 (3,115)
Depreciation and amortization............................. 133,400 172,326 135,312
Asset impairments and other charges....................... 8,850 709 1,634
--------- -------- --------
318,306 395,356 299,162
--------- -------- --------
Operating loss........................................ (79,489) (140,969) (80,889)
Other income (expense):
Interest income........................................... 2,174 12,967 21,066
Interest expense--parent (note 4)......................... (2,396) (3,686) (3,942)
Interest expense--other................................... (16,134) (43,791) (30,901)
Share of losses of affiliates (note 5).................... (13,705) (424,247) (7,251)
Nontemporary declines in fair values of investments
(note 6)................................................ (163,881) (96,438) (9,860)
Unrealized gains (losses) on financial instruments, net
(note 6)................................................ 2,393 38,891 (14,426)
Loss on extinguishment of debt (note 9)................... -- (14,322) --
Gain on sale of GM Hughes Stock (note 6).................. -- -- 36,643
Loss on GM Hughes Stock share appreciation rights
(note 6)................................................ -- -- (65,721)
Other, net................................................ (2,785) (666) (5,206)
--------- -------- --------
(194,334) (531,292) (79,598)
--------- -------- --------
Loss before income taxes and minority interest........ (273,823) (672,261) (160,487)
Income tax benefit (note 15)................................ 35,621 35,652 28,450
Minority interest in losses of consolidated subsidiaries
(note 10)................................................. 165 34,346 15,078
--------- -------- --------
Loss before cumulative effect of accounting change.... (238,037) (602,263) (116,959)
Cumulative effect of accounting change, net of taxes
(note 2).................................................. (105,837) -- --
--------- -------- --------
Net loss.............................................. (343,874) (602,263) (116,959)
Accretion of redeemable preferred stock (note 11)........... (6,120) (6,120) (4,634)
Dividends on redeemable preferred stock (note 11)........... (30,000) (30,000) (23,733)
--------- -------- --------
Net loss attributable to common stockholders.......... $(379,994) (638,383) (145,326)
--------- -------- --------
Basic and diluted loss per common share before cumulative
effect of accounting change............................... $ (6.33) (15.41) (4.44)
Cumulative effect of accounting change (note 2)............. (2.44) -- --
--------- -------- --------
Basic and diluted loss per common share..................... $ (8.77) (15.41) (4.44)
========= ======== ========
See accompanying notes to consolidated financial statements
II-24
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
--------- -------- --------
AMOUNTS IN THOUSANDS
Net loss.................................................... $(343,874) (602,263) (116,959)
--------- -------- --------
Other comprehensive earnings (loss), net of tax:
Unrealized holding losses on available for sale
securities.............................................. (17,363) (6,127) (34,482)
Reclassification adjustments for losses (gains) included
in net loss............................................. 30,076 9,000 (23,070)
Unrealized gain on share appreciation rights liability.... -- -- 2,000
Reclassification adjustment for losses included in net
loss.................................................... -- -- 40,583
Foreign currency translation adjustment................... 92 2,077 (631)
Reclassification adjustment for losses included in net
loss.................................................... 930 -- --
--------- -------- --------
Other comprehensive earnings (loss)..................... 13,735 4,950 (15,600)
--------- -------- --------
Comprehensive loss.................................... $(330,139) (597,313) (132,559)
========= ======== ========
See accompanying notes to consolidated financial statements
II-25
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
SERIES A SERIES B CAPITAL LOSS DEFICIT STOCK EQUITY
-------- -------- ---------- ------------- ----------- -------- -------------
AMOUNTS IN THOUSANDS
Balance at January 1, 2000.......... $6,290 846 889,715 -- (832,124) -- 64,727
Net loss.......................... -- -- -- -- (116,959) -- (116,959)
Other comprehensive loss.......... -- -- -- (15,600) -- -- (15,600)
Acquisition of Liberty Satellite,
LLC (note 1).................... -- 25,298 496,615 -- -- -- 521,913
Acquisition of Ascent
Entertainment Group, Inc.
(note 1)........................ -- 8,702 445,035 -- -- -- 453,737
Cash contributions from parent.... -- -- 51,412 -- -- -- 51,412
Reversal of deferred tax asset
valuation allowance resulting
from the transactions with
Liberty Media in 2000
(note 1)........................ -- -- 114,628 -- -- -- 114,628
Accretion and dividends on
redeemable preferred stock...... -- -- (28,367) -- -- -- (28,367)
Issuance of Series A common stock
for preferred stock dividends... 166 -- 16,067 -- -- -- 16,233
Recognition of stock compensation
related to stock options and
restricted stock awards, net of
taxes........................... -- -- 22 -- -- -- 22
Issuance of Series A common stock
upon exercise of stock
options......................... 7 -- 490 -- -- -- 497
Issuance of common stock related
to restricted stock awards...... 11 -- (11) -- -- -- --
Series B common stock exchanged
for Series A common stock....... 73 (73) -- -- -- -- --
Purchase of treasury stock........ -- -- -- -- -- (325) (325)
Dividend to related party
(note 4)........................ -- -- (652) -- -- -- (652)
Gain in connection with issuance
of stock by subsidiary, net of
taxes........................... -- -- 63 -- -- -- 63
------ ------ --------- ------- -------- ---- ---------
Balance at December 31, 2000........ $6,547 34,773 1,985,017 (15,600) (949,083) (325) 1,061,329
====== ====== ========= ======= ======== ==== =========
(continued)
II-26
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
------------------- PAID-IN COMPREHENSIVE ACCUMULATED TREASURY
SERIES A SERIES B CAPITAL EARNING (LOSS) DEFICIT STOCK
-------- -------- ---------- -------------- ------------ --------
AMOUNTS IN THOUSANDS
Balance at December 31, 2000... $ 6,547 34,773 1,985,017 (15,600) (949,083) (325)
Net loss..................... -- -- -- -- (602,263) --
Other comprehensive
earnings................... -- -- -- 4,950 -- --
Cash contributions from
parent..................... -- -- 21,970 -- -- --
Gain in connection with
issuance of stock by a
subsidiary, net of taxes... -- -- 2,061 -- -- --
Accretion and dividends on
redeemable preferred
stock...................... -- -- (36,120) -- -- --
Issuance of Series A common
stock for preferred stock
dividends.................. 205 -- 7,295 -- -- --
Recognition of stock
compensation related to
restricted stock awards,
net of taxes............... -- -- 166 -- -- --
Reclassify notes receivable
from officers to equity.... -- -- -- -- -- --
Series B common stock
exchanged for Series A
common stock............... 1 (1) -- -- -- --
------- ------ --------- ------- ---------- ----
Balance at December 31, 2001... 6,753 34,772 1,980,389 (10,650) (1,551,346) (325)
Net loss..................... -- -- -- -- (343,874) --
Other comprehensive
earnings................... -- -- -- 13,735 -- --
Contribution by Liberty Media
of intercompany notes
receivable (note 4)........ -- -- 19,203 -- -- --
Purchase of Series A common
stock...................... -- -- -- -- -- (53)
Retirement of fractional
shares in connection with
reverse stock split........ -- (1) (10) -- -- --
Series B common stock
exchanged for Series A
common stock............... 6 (6) -- -- -- --
Accretion and dividends on
redeemable preferred
stock...................... -- -- (36,120) -- -- --
Issuance of Series A common
stock for preferred stock
dividends.................. 4,320 -- 18,180 -- -- --
Recognition of stock
compensation related to
restricted stock awards,
net of taxes............... -- -- 178 -- -- --
Accrual of interest on notes
receivable from officers... -- -- 11 -- -- --
------- ------ --------- ------- ---------- ----
Balance at December 31, 2002... $11,079 34,765 1,981,831 3,085 (1,895,220) (378)
======= ====== ========= ======= ========== ====
NOTES
RECEIVABLE TOTAL
FROM STOCKHOLDERS'
OFFICERS EQUITY
---------- -------------
AMOUNTS IN THOUSANDS
Balance at December 31, 2000... -- 1,061,329
Net loss..................... -- (602,263)
Other comprehensive
earnings................... -- 4,950
Cash contributions from
parent..................... -- 21,970
Gain in connection with
issuance of stock by a
subsidiary, net of taxes... -- 2,061
Accretion and dividends on
redeemable preferred
stock...................... -- (36,120)
Issuance of Series A common
stock for preferred stock
dividends.................. -- 7,500
Recognition of stock
compensation related to
restricted stock awards,
net of taxes............... -- 166
Reclassify notes receivable
from officers to equity.... (298) (298)
Series B common stock
exchanged for Series A
common stock............... -- --
---- ---------
Balance at December 31, 2001... (298) 459,295
Net loss..................... -- (343,874)
Other comprehensive
earnings................... -- 13,735
Contribution by Liberty Media
of intercompany notes
receivable (note 4)........ -- 19,203
Purchase of Series A common
stock...................... -- (53)
Retirement of fractional
shares in connection with
reverse stock split........ -- (11)
Series B common stock
exchanged for Series A
common stock............... -- --
Accretion and dividends on
redeemable preferred
stock...................... -- (36,120)
Issuance of Series A common
stock for preferred stock
dividends.................. -- 22,500
Recognition of stock
compensation related to
restricted stock awards,
net of taxes............... -- 178
Accrual of interest on notes
receivable from officers... (11) --
---- ---------
Balance at December 31, 2002... (309) 134,853
==== =========
See accompanying notes to consolidated financial statements.
II-27
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
2002 2001 2000
--------- -------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 3)
Cash flows from operating activities:
Net loss.................................................. $(343,874) (602,263) (116,959)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Stock compensation and restricted stock awards.......... 292 268 (3,115)
Payments for stock compensation......................... -- -- (2,404)
Depreciation and amortization........................... 133,400 172,326 135,312
Asset impairments and other charges..................... 8,850 709 1,634
Non-cash interest expense............................... -- 22,275 14,921
Share of losses of affiliates........................... 13,705 424,247 7,251
Nontemporary declines in fair values of investments..... 163,881 96,438 9,860
Unrealized losses (gains) on financial instruments...... (2,393) (38,891) 14,426
Loss on extinguishment of debt.......................... -- 14,322 --
Gain on sale of GM Hughes Stock......................... -- -- (36,643)
Loss on GM Hughes share appreciation rights............. -- -- 65,721
Deferred income tax benefit............................. (20,811) (17,486) (67,384)
Minority interest in losses of consolidated
subsidiaries.......................................... (165) (34,346) (15,078)
Cumulative effect of accounting change, net of taxes.... 105,837 -- --
Other non-cash charges.................................. 1,542 4,038 3,773
Changes in operating assets and liabilities, net of the
non-cash effect of acquisitions and dispositions:
Receivables and prepaid expenses...................... (412) 5,503 2,507
Accruals and payables................................. 2,968 (58,751) 25,646
--------- -------- --------
Net cash provided by (used in) operating
activities........................................ 62,820 (11,611) 39,468
--------- -------- --------
Cash flows from investing activities:
Capital expended for equipment............................ (54,397) (88,080) (86,483)
Investments in and advance to affiliates.................. (31,304) (230,863) (200,546)
Proceeds received upon disposition of assets.............. 1,135 31,995 267,661
Acquisition of minority interest of subsidiary............ (2,921) (17,455) --
Net proceeds from sale of GM Hughes Stock................. -- -- 74,242
Payment of GM Hughes share appreciation rights............ -- -- (65,721)
Proceeds received in Liberty 2000 Transactions............ -- -- 249,620
Cash acquired in Ascent Entertainment acquisition......... -- -- 49,317
Other investing activities................................ (2,452) (2,857) (700)
--------- -------- --------
Net cash provided by (used in) investing
activities........................................ (89,939) (307,260) 287,390
--------- -------- --------
Cash flows from financing activities:
Borrowings of third-party debt............................ 25,020 150,000 324,236
Repayments of third-party debt............................ (12,862) (283,891) (233,494)
Advances and contributions from parent.................... 6,573 49,130 51,412
Repayments of note payable to parent...................... (6,573) (6,572) (5,018)
Cash payment of preferred stock dividends................. (7,500) (22,500) --
Other financing activities................................ 119 -- 150
--------- -------- --------
Net cash provided by (used in) financing
activities........................................ 4,777 (113,833) 137,286
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents....................................... (22,342) (432,704) 464,144
Cash and cash equivalents--beginning of year........ 33,913 466,617 2,473
--------- -------- --------
Cash and cash equivalents--end of year.............. $ 11,571 33,913 466,617
========= ======== ========
See accompanying notes to consolidated financial statements.
II-28
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2002, 2001 AND 2000
(1) BASIS OF PRESENTATION
GENERAL. Liberty Satellite & Technology, Inc. ("LSAT," and together with
its consolidated subsidiaries, the "Company") has been a consolidated subsidiary
of Liberty Media Corporation ("Liberty Media") since March 16, 2000, when LSAT
issued preferred stock to Liberty Media in exchange for certain assets. On
March 28, 2000, Liberty Media acquired voting control of Ascent Entertainment
Group, Inc. ("Ascent Entertainment"), and on June 8, 2000, Liberty Media
completed its acquisition of Ascent Entertainment pursuant to which Ascent
Entertainment became an indirect wholly-owned subsidiary of Liberty Media.
Ascent Entertainment's primary operating subsidiary is On Command Corporation
("On Command"), which provides in-room, on-demand entertainment and
informational services to hotels, motels and resorts. On April 1, 2002, LSAT
issued 34,000,000 shares of its Series B common stock ("Series B Common Stock")
to Liberty Media in exchange for the 89.41% interest in Liberty Satellite, LLC
("LSAT LLC") not already owned by LSAT, and 100% of the capital stock of Ascent
Entertainment (the "LSAT LLC and Ascent Entertainment Transaction"). The
foregoing transactions are described in greater detail below.
At December 31, 2002, Liberty Media owned 85.6% of the Company's outstanding
common stock, and 100% of the Company's preferred stock, which ownership
interests collectively represented 97.6% of the overall voting power of the
Company's common and preferred securities. At December 31, 2002, LSAT, through
its ownership interest in Ascent Entertainment, owned approximately 70% of the
outstanding On Command common stock ("On Command Common Stock") and 100% of
certain series of On Commands' preferred stock, which ownership interests
collectively represented approximately 76% of the voting power associated with
On Command's common and preferred securities. Subsequent to December 31, 2002,
the Company's ownership interest in the outstanding On Command Common Stock
increased to approximately 74%, and the Company's overall voting power in On
Command increased to approximately 80%.
As a result of the consummation of the LSAT LLC and Ascent Entertainment
Transaction, the Company became the owner of 100% of the equity interests of
Ascent Entertainment and LSAT LLC. Due to the fact that LSAT, LSAT LLC and
Ascent Entertainment are all under the common control of Liberty Media, the LSAT
LLC and Ascent Entertainment Transaction has been accounted for in a manner
similar to a pooling-of-interests. As such, the Company's consolidated financial
statements have been restated to include LSAT LLC and Ascent Entertainment as
wholly-owned subsidiaries of LSAT, effective with the respective March 2000
dates that Liberty Media acquired control of such entities.
II-29
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Separate results of operations for LSAT, LSAT LLC and Ascent Entertainment
for the periods prior to the LSAT LLC and Ascent Entertainment Transaction are
as follows:
YEARS ENDED
THREE MONTHS DECEMBER 31,
ENDED -------------------
MARCH 31, 2002 2001 2000
-------------- -------- --------
AMOUNTS IN THOUSANDS
REVENUE
LSAT....................................... $ 105 420 445
LSAT LLC................................... -- -- --
Ascent Entertainment....................... 57,383 253,967 217,828
--------- -------- --------
Combined................................... $ 57,488 254,387 218,273
========= ======== ========
NET EARNINGS (LOSS)
LSAT....................................... $ 7,136 (58,261) (49,200)
LSAT LLC................................... (13,223) (419,320) 599
Ascent Entertainment(1).................... (125,595) (124,682) (68,358)
--------- -------- --------
Combined................................... $(131,682) (602,263) (116,959)
========= ======== ========
------------------------
(1) Includes Liberty Media purchase accounting adjustments that previously had
not been "pushed down" to Ascent Entertainment's historical financial
statements.
In addition to the Company's interests in On Command and various
investments, the Company is currently pursuing strategic opportunities worldwide
in the distribution of Internet and other content via satellite and related
businesses.
CONTRIBUTION OF SPRINT PCS STOCK AND FORMATION OF LSAT LLC. On March 16,
2000, the Company completed two transactions with Liberty Media. Pursuant to the
terms of the first transaction, the Company acquired a beneficial interest in
5,084,745 shares of Sprint Corporation PCS Group common stock ("Sprint PCS
Stock") with an aggregate market value on the closing date of $300,000,000 in
exchange for 150,000 shares of LSAT Series A Preferred Stock with a liquidation
value of $150,000,000 and 150,000 shares of LSAT Series B Preferred Stock
("Series B Preferred Stock") with a liquidation value of $150,000,000. The
shares of Series B Preferred Stock have super voting rights, which gave Liberty
Media voting control over the Company. Accordingly, since March 16, 2000, the
Company has been a consolidated subsidiary of Liberty Media.
Pursuant to the terms of the second transaction with Liberty Media, the
Company (through its wholly-owned subsidiaries) became the managing member of
two newly formed limited liability companies, LSAT LLC and LSAT Astro LLC ("LSAT
Astro," and together with LSAT LLC, the "LSAT Joint Ventures"). The Company
contributed (i) its beneficial interest in 4,221,921 shares of General Motors
Corporation Class H common stock ("GM Hughes Stock"), subject to a stock
appreciation right, and (ii) other assets to LSAT LLC in exchange for a 10.59%
ownership interest in LSAT LLC. Liberty Media contributed cash and its interests
in various satellite related assets, including an 86.01% ownership interest in
LSAT Astro, to LSAT LLC in exchange for the remaining 89.41% ownership interest
in LSAT LLC. As the Company is a consolidated subsidiary of Liberty Media, all
of the assets contributed by the Company and Liberty Media to the LSAT Joint
Ventures were recorded at their net book values at the date of contribution.
II-30
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LIBERTY MEDIA'S ACQUISITION OF ASCENT ENTERTAINMENT. On March 28, 2000,
Liberty Media completed its cash tender offer for the outstanding common stock
of Ascent Entertainment at a price of $15.25 per share. Approximately, 85% of
the outstanding common shares of Ascent Entertainment were tendered in the
offer, and Liberty Media paid approximately $385,000,000. On June 8, 2000,
Liberty Media completed its acquisition of 100% of Ascent Entertainment for an
additional $67,000,000. The total purchase price for the acquisition was
$452,000,000. Liberty Media accounted for such transaction using the purchase
method of accounting. The following pro forma information for the year ended
December 31, 2000 was prepared assuming Liberty Media's acquisition of Ascent
Entertainment had occurred on January 1, 2000. These pro forma amounts are not
necessarily indicative of operating results that would have occurred if the
acquisition of Ascent Entertainment had occurred on January 1, 2000 (amounts in
thousands, except per share amount):
Revenue..................................................... $ 288,309
Net loss.................................................... $(152,597)
Pro forma basic and diluted loss per share.................. $ (4.39)
LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates with respect to the LSAT LLC and
Ascent Entertainment Transaction. Both agreements were amended in November 2001
and January 2002. One agreement provided for the Company's acquisition of
certain subsidiaries of Liberty Media that collectively held the 89.41%
ownership interest in LSAT LLC not already owned by LSAT in exchange for
25,298,379 shares of Series B Common Stock. The second purchase agreement
provided for the Company's acquisition of 100% of the capital stock of Ascent
Entertainment from a subsidiary of Liberty Media in exchange for 8,701,621
shares of Series B Common Stock. The foregoing transaction closed on April 1,
2002. As noted above, the LSAT LLC and Ascent Entertainment Transaction has been
accounted for in a manner similar to a pooling-of-interests.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
LSAT and all subsidiaries where it exercises a controlling financial interest
through the ownership of a majority voting interest. All significant
inter-company transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less at the date of acquisition to be cash equivalents.
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts of
$1,087,000 and $1,640,000 at December 31, 2002 and 2001, respectively. The
allowance is based on historical collection trends and management's judgment of
the collectibility of the Company's accounts receivable. These collection
trends, as well as prevailing and anticipated economic conditions, are routinely
monitored by management, and any adjustments required are reflected in current
operations.
II-31
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
INVESTMENTS
All marketable equity securities held by the Company are classified as
available-for-sale and are carried at estimated fair value. Unrealized holding
gains and losses on securities classified as available-for-sale are carried net
of taxes as a component of accumulated other comprehensive earnings in
stockholders' equity. Realized gains and losses are determined on a
specific-identification basis. Other investments in which the ownership
interests are less than 20% and are not considered marketable securities are
carried at cost, subject to other-than-temporary impairment.
For those investments in affiliates in which the Company has the ability to
exercise significant influence, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, subject to
other-than-temporary impairment, is adjusted to recognize the Company's share of
net earnings or losses of the affiliates as they occur rather than as dividends
or other distributions are received, limited to the extent of the Company's
investment in, and advances and commitments to the investee. The Company's share
of net earnings or losses of affiliates includes the amortization of the
difference between the Company's investment and its share of the net assets of
the investee when such difference is attributable to amortizable assets.
Recognition of gains on sales of properties to affiliates accounted for under
the equity method is deferred in proportion to the Company's ownership interest
in such affiliates.
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional securities by such subsidiary or equity investee, are recognized as
increases to or reductions of additional paid-in capital in the consolidated
statements of stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary or
"nontemporary". The Company considers a number of factors in its determination
including (i) the financial condition, operating performance and near term
prospects of the investee; (ii) the reason for the decline in fair value, be it
general market, industry specific or investee specific conditions; (iii) the
length of time that the fair value of the investment is below the Company's
carrying value; (iv) changes in valuation subsequent to the balance sheet date
and (v) the Company's intent and ability to hold the investment for a period of
time sufficient to allow for a recovery in fair value. If the decline in
estimated fair value is deemed to be nontemporary, a new cost basis of the
security is established at the then estimated fair value. In situations where
the fair value of an asset is not evident due to a lack of public market price
or other factors, management uses its best estimates and assumptions to arrive
at the estimated fair value of such an asset. The Company's assessment of the
foregoing factors involves a high degree of judgment and includes significant
estimates and assumptions. Writedowns of cost investments are included in the
consolidated statements of operations as nontemporary declines in fair values of
investments. Writedowns of equity method investments are included in share of
losses of affiliates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
LSAT accounts for its derivative instruments pursuant to 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
II-32
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 consolidated statement of
operations when the hedged item affects earnings. Ineffective portions of
changes in the fair value of cash flow hedges are recognized in earnings. If the
derivative is not designated as a hedge, changes in the fair value of the
derivative are recognized in earnings.
The Company has entered into equity collars and put spread collars with
respect to certain securities held by the Company. The Company uses these
derivatives to manage fair value risk associated with the related investments.
During 2001 and 2002, the Company's equity collars were designated as fair value
hedges. Effective December 31, 2002, the Company elected to no longer designate
its equity collars as fair value hedges. Such election had no effect on the
Company's financial position or results of operations on December 31, 2002.
Subsequent to December 31, 2002, changes in the fair value of the Company's
available-for-sale securities that previously had been reported in earnings due
to the designation of equity collars as fair value hedges will be reported as a
component of other comprehensive earnings on the Company's consolidated balance
sheet. Changes in the fair value of the equity collars will continue to be
reported in earnings.
The Company uses the Black-Scholes model to estimate the fair value of its
derivative instruments. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected volatility of the
underlying security and an appropriate discount rate. The Company obtains a
volatility rate from an independent source at the inception of the derivative
instrument based on the expected volatility of the underlying security over the
term of the derivative instrument. The volatility assumption is generally
evaluated annually to determine if it should be adjusted. The Company selects a
discount rate at the inception of the derivative instrument and updates such
rate each reporting period based on an estimate of the discount rate at which
the derivative instrument could be settled. Considerable management judgment is
required in estimating the Black-Scholes variables. Actual results upon
settlement or unwinding of derivative instruments may differ significantly from
these estimates.
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 expect nonperformance by any
counter-party.
For derivatives designated 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. The Company currently does not
have any cash flow hedges. Hedge ineffectiveness, determined in accordance with
Statement 133, had no impact on earnings for the years ended December 31, 2002
and 2001.
II-33
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost less accumulated depreciation.
Video systems in service consist of equipment, related costs of assembling and
costs of installation at hotel locations. Depreciation is calculated on a
straight-line basis using the remaining terms of the applicable hotel contracts
for video systems, and the shorter of capital lease terms or estimated useful
lives for all remaining depreciable assets. The original terms of the Company's
hotel contracts generally range from five to seven years. Support equipment,
vehicles and leasehold improvements generally are depreciated using estimated
lives of five years. Repairs and maintenance costs that do not significantly
extend the life of the asset are charged to operations. Gains or losses are
recognized upon the retirement, impairment or disposal of assets.
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
The Company's intangible asset associated with hotel contracts represents
the amount assigned to On Command's contractual relationships with its hotel
customers, and such intangible asset represents the Company's only intangible
asset with a finite useful life. This intangible asset is being amortized over
three years, the estimated weighted average remaining life of such contractual
relationships at the March 28, 2000 date that Liberty Media acquired control of
Ascent Entertainment. Accordingly, the Company's hotel contracts intangible
asset will be fully amortized at March 31, 2003. Amortization of this intangible
asset aggregated $54,334,000, 54,333,000 and 40,750,000 during December 31,
2002, 2001 and 2000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, the Company
periodically reviews the carrying amounts of property and equipment, and
amortizable intangible assets to determine whether current events and
circumstances indicate that such carrying amounts may not be recoverable. If the
carrying amount of the asset is greater than the expected undiscounted cash
flows to be generated by such asset, an impairment adjustment is to be
recognized. Such adjustment is measured by the amount that the carrying value of
such asset exceeds its estimated fair value. The Company generally measures
estimated fair value by considering quoted market prices, sales prices for
similar assets, or by discounting estimated future cash flows. Considerable
management judgment is necessary to estimate the undiscounted cash flows and
fair values of assets. Accordingly, actual results could vary significantly from
such estimates.
GOODWILL
In accordance with Statement of Financial Accounting Standards No. 142,
ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS ("Statement No. 142"), the
Company evaluates, on at least an annual basis, the carrying amount of goodwill
to determine whether current events and circumstances indicate that such
carrying amount may not be recoverable. To accomplish this, the Company compares
the fair value of its reporting units to their carrying amounts. If the carrying
value of a reporting unit were to exceed its fair value, the Company would
perform the second step of the impairment test. In the second step, the Company
would compare the implied fair value of the reporting unit's goodwill to its
carrying amount and any excess would be charged to operations. Considerable
management judgment is
II-34
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
necessary to estimate the fair values of assets and liabilities. Accordingly,
actual results could vary significantly from such estimates.
Under Statement No. 142, which the Company adopted January 1, 2002, the
Company no longer amortizes goodwill. Prior to the adoption of Statement 142,
goodwill was amortized over the expected periods to be benefited, generally
20 years. Adjusted net loss and pro forma loss per common share for 2001 and
2000, exclusive of amortization expense related to goodwill are as follows
(amounts in thousands, except per share amounts):
YEARS ENDED
DECEMBER 31,
--------------------
2001 2000
--------- --------
Net loss, as reported.................................. $(602,263) (116,959)
Adjustment for amortization of goodwill.............. 37,623 31,690
--------- --------
Net loss, as adjusted.................................. $(564,640) (85,269)
========= ========
Basic and diluted loss per common share, as reported... $ (15.41) (4.44)
Adjustment for amortization of goodwill.............. .91 .97
--------- --------
Basic and diluted loss per common share, as adjusted... $ (14.50) (3.47)
========= ========
INTERNALLY DEVELOPED SOFTWARE
On Command capitalizes certain internally developed software costs in
accordance with AICPA Statement of Position 98-1, ACCOUNTING FOR THE COSTS OF
COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Internally developed
software that is integral to the On Command video systems is classified within
video systems in the accompanying consolidated balance sheet. All other
internally developed software is included in other assets. Amortization or
depreciation commences when the software is ready for its intended use. Software
is generally amortized or depreciated over five years. Capitalized costs
primarily include internal salaries and wages of individuals dedicated to the
development of internal use software. On Command capitalized software
development costs of $4,865,000, $4,218,000 and $4,088,000 during 2002, 2001 and
2000, respectively.
FOREIGN CURRENCY TRANSLATION
All balance sheet accounts of foreign subsidiaries whose functional currency
is not the United States ("U.S.") dollar are translated into U.S. dollars at the
current exchange rate as of the end of the accounting period. Results of
operations are translated at average currency exchange rates. The resulting
translation adjustment is recorded as a separate component of accumulated other
comprehensive earnings in stockholders' equity.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses,
which are reflected in the combined statements of operations as unrealized
(based on the applicable period end translation) or realized upon settlement of
the transactions. Such realized and unrealized gains and losses were not
material to the accompanying consolidated financial statements.
II-35
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The impact of exchange rate fluctuations on intercompany accounts between On
Command and its foreign subsidiaries is reported as a component of other
comprehensive income so long as the intercompany accounts are determined to be
of a long-term investment nature.
REVENUE RECOGNITION
The Company recognizes pay-per-view revenue at the time of viewing, net of
estimated denials. Revenue from other guest room services is recognized in the
period that services are delivered. Revenue from the sale of video systems is
recognized when the terms of the sales agreement are fixed, the equipment is
shipped, there are no future obligations, and collectibility is reasonably
assured.
STOCK BASED-COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, ("APB Opinion No. 25") and related interpretations, to
account for its fixed plan stock options. Under this method, compensation
expense for stock options or awards that are fixed is required to be recognized
over the vesting period only if the current market price of the underlying stock
exceeds the exercise price on the date of grant. Statement of Financial
Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
("Statement 123") established accounting and disclosure requirements using a
fair value-based method of accounting for stock-based employee compensation
plans. As allowed by Statement 123, the Company has elected to continue to apply
the intrinsic value-based method of accounting prescribed by APB Opinion
No. 25, and has adopted the disclosure requirement of Statement 123, as amended
by Statement of Financial Accounting Standards No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN AMENDMENT OF FASB
STATEMENT NO. 123 ("Statement 148"). The following table illustrates the effects
on net loss and loss per share if the Company had applied the fair value
recognition provisions of Statement 123 to stock-based employee compensation.
YEARS ENDED DECEMBER 31,
---------------------------------
2002 2001 2000
--------- --------- ---------
Net loss, as reported....................... $(343,874) $(602,263) $(116,959)
Deduct stock compensation expense
determined under fair value method, net
of taxes................................ (6,242) (5,188) (10,573)
--------- --------- ---------
Pro forma net loss...................... $(350,116) $(607,451) $(127,532)
========= ========= =========
Pro forma net loss applicable to common
shareholders.......................... $(386,236) $(643,571) $(155,899)
========= ========= =========
Loss per share:
Basic and diluted--as reported............ $ (8.77) $ (15.41) $ (4.44)
========= ========= =========
Basic and diluted--pro forma.............. $ (8.92) $ (15.53) $ (4.77)
========= ========= =========
The grant-date fair values underlying the foregoing calculations are based
on the Black-Scholes option-pricing model. With respect to options granted by
LSAT, the key assumptions used in the model for purposes of these calculations
include the following: (a) a discount rate equal to the one-year Treasury Bill
rate; (b) an 85% volatility rate; (c) the 10-year option term; (d) the closing
price of the Series A Common Stock on the date of grant; and (e) an expected
dividend rate of zero. With respect
II-36
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to options granted by On Command, the key assumptions used in the model include
the following: (a) a discount rate equal to the one-year Treasury Bill rate at
the date of grant; (b) volatility rates of 86.3% for 2002 grants, 71.8% for 2001
grants, 47.7% for 2000 grants, 45.9% for 1999 grants and 25% for all grants in
all prior periods; (c) expected option lives of 5 or 5.5 years; (d) the closing
price of the On Command Common Stock on the date of grant; and (e) an expected
dividend rate of zero.
INCOME TAXES
The Company accounts for its income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per share is measured as the earnings or loss
attributable to common stockholders divided by the weighted average outstanding
common shares for the period. Net earnings (loss) is reduced (increased) by
preferred stock dividends and accretion to arrive at earnings (loss)
attributable to common stockholders. Diluted earnings per share is similar to
basic earnings per share but presents the dilutive effect on a per share basis
of potential common shares (e.g., convertible securities, options, etc.) as if
they had been converted at the beginning of the periods presented, or at
original issuance date, if later. Potential dilutive common shares that have an
anti-dilutive effect (i.e., those that increase income per share or decrease
loss per share) are excluded from diluted earnings per share.
The loss per common share for 2002, 2001 and 2000 is based on 43,337,100,
41,430,500 and 32,703,300 weighted average shares outstanding during the
respective periods. Potential common shares were not included in the computation
of diluted EPS because their inclusion would be anti-dilutive. At December 31,
2002 and 2001, the number of potential common shares was approximately 2,170,300
and 2,159,200, respectively. Such potential common shares consist of stock
options to acquire shares of the Company's Series A Common Stock and securities
that were convertible into 1,696,717 shares of the Company's Series B Common
Stock at each of December 31, 2002 and 2001. The foregoing potential common
share amounts do not take into account the assumed number of shares that would
be repurchased by the Company upon the exercise of stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES ("Statement 146"). In October 2002,
the FASB issued Statement of Financial Accounting Standards No. 147,
ACQUISITIONS OF CERTAIN FINANCIAL INSTITUTIONS, AN AMENDMENT OF FASB STATEMENT
NOS. 72 AND 144 AND FASB INTERPRETATION NO. 9 ("Statement No. 147"). In
December 2002, the FASB issued Statement of Financial Accounting Standards
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION--TRANSITION AND DISCLOSURE--AN
AMENDMENT OF FASB STATEMENT NO. 123 ("Statement No. 148"). The adoption of
Statement Nos. 146, 147 and 148 is not expected to have, a material impact on
the Company's financial condition, results of operations or cash flows.
II-37
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In November 2002, the FASB issued FASB Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS OF OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57, AND 107 AND RESCISSION OF FASB INTERPRETATION NO. 34 ("FIN 45"). FIN
45 elaborates on the disclosures to be made by a guarantor in its financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions in FIN
45 are effective for all guarantees issued or modified after December 31, 2002.
The Company does not believe that the implementation of FIN 45 will have a
material impact on its financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46, CONSOLIDATION
OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51 ("FIN 46"). FIN
46 addresses consolidation of variable interest entities which have
characteristics described in the pronouncement. In general, if an entity is
considered a variable interest entity ("VIE"), the party that has the most
exposure to economic risks and potential rewards from the VIE is required to
consolidate the VIE. The consolidation requirements of FIN 46 apply to all VIE's
created after January 31, 2003. In addition, by July 1, 2003 the consolidation
requirements must be applied to all VIE's in existence prior to February 1,
2003. Based on the Company's preliminary analysis, the Company does not believe
that the implementation of FIN 46 will have a material impact on its financial
condition or results of operations.
USE OF ESTIMATES
The preparation of consolidated 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 and
disclosure of contingent liabilities, as well as the reported amounts of revenue
and expenses. Significant estimates are involved in the determination of the
fair value of derivative instruments, the allowance for doubtful accounts
receivable, asset impairments and the estimated useful lives of video systems,
property and equipment and intangible assets, and the amounts in certain accrued
liabilities. Actual results may vary significantly from these estimates.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Cash paid for interest was $14,616,000, $25,733,000 and $15,659,000 during
2002, 2001 and 2000, respectively. Cash paid for income taxes was $5,845,000 in
2001 and was not material during 2002 and 2000.
II-38
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Significant non-cash investing and financing activities are as follows:
2000
Acquisition of Ascent Entertainment:
Fair value of assets acquired........................... $(933,894)
Net liabilities assumed................................. 459,543
Minority interest in consolidated subsidiaries.......... 69,931
Issuance of Series B Common Stock....................... 453,737
---------
Cash acquired......................................... $ 49,317
=========
Cash received in transactions with Liberty Media:
Value of investments received........................... $(632,293)
Debt issued............................................. 60,000
Deferred tax liability assumed.......................... 114,628
Redeemable preferred stock issued....................... 185,372
Issuance of Series B Common Stock....................... 521,913
---------
$ 249,620
=========
For descriptions of certain other non-cash investing and financing
activities, see notes 6, 8 and 14.
(4) TRANSACTIONS WITH LIBERTY MEDIA AND OTHER RELATED PARTIES
TRANSACTIONS WITH LIBERTY MEDIA AND AFFILIATES
On March 16, 2000, the Company received a 13.99% ownership interest in LSAT
Astro in exchange for a $60,000,000 note payable to Liberty Media. Interest on
the note accrued at the 3 month LIBOR plus 2% (3.74% at December 31, 2002).
Interest payments were due semi-annually on the first day of March and
September. At December 31, 2002, the unpaid principal on the note was
$48,411,000 and the accrued interest on the note was $614,000.
TAX LIABILITY ALLOCATION AND INDEMNIFICATION AGREEMENT. In connection with
the LSAT LLC and Ascent Entertainment Transaction, the Company and Liberty Media
entered into a tax liability allocation and indemnification agreement whereby
the Company will be obligated to make a cash payment to Liberty Media in each
year that the Company (taken together with any of its subsidiaries) has taxable
income. The amount of the payment will be equal to the amount of the taxable
income of the Company and its subsidiaries (determined as if the Company and its
subsidiaries filed a separate return) multiplied by the highest applicable
corporate tax rate. In the event that (1) the Company and its subsidiaries, when
treated as a separate group, has a net operating loss or deduction or is
entitled to a tax credit for a particular year; and (2) Liberty Media is able to
use such loss, deduction or credit to reduce its tax liability, the Company will
be entitled to a credit against current and future payments to Liberty Media
under the agreement. If the Company disaffiliates itself with Liberty Media and
the members of Liberty Media's affiliated group prior to the time that the
Company is able to use such credit, the Company will be entitled to a payment
from Liberty Media at the earlier of the time that (1) the Company and its
subsidiaries show they could have used the net operating loss or net tax credit
to reduce their own separately computed tax liability or (2) the voting power of
the stock of the Company held by Liberty Media and the members of its affiliated
group drops below 20%.
II-39
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, under the tax liability allocation and indemnification
agreement, the Company will have the opportunity to participate in the defense
of claims of the Internal Revenue Service that might affect its liability under
the agreement, and to participate in tax refunds paid to Liberty Media where
such refunds are due in part to the Company's operations.
In connection with the LSAT LLC and Ascent Entertainment Transaction, the
Company assumed an intercompany income tax liability owed by Ascent
Entertainment to Liberty Media pursuant to a tax liability allocation and
indemnification agreement with terms similar to the agreement described above.
At December 31, 2002, the amount owed by Ascent Entertainment to Liberty Media
pursuant to this agreement was $8,409,000. Such amount, which is non-interest
bearing, includes $36,568,000 that is due on demand to Liberty Media, and
$28,159,000 that is payable to the Company by Liberty Media if, and to the
extent, that tax benefits generated by Ascent Entertainment are utilized to
reduce Liberty Media's taxable income.
EXPENSE ALLOCATIONS AND REIMBURSEMENTS. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative expenses to the
Company. Although there is no written agreement with Liberty Media for these
allocations, the Company believes the allocated amounts to be reasonable. The
aggregate allocations from Liberty Media were $303,000, $329,000 and $200,000
during 2002, 2001 and 2000, respectively. In addition, the Company reimburses
Liberty Media for certain expenses paid by Liberty Media on behalf of the
Company. Amounts owed to Liberty Media pursuant to these arrangements
($1,585,000 at December 31, 2002) are non-interest bearing and are generally
paid on a monthly basis.
SKY LATIN AMERICA LOANS. During the year ended December 31, 2001 and the
three months ended March 31, 2002, Liberty Media loaned $18,552,000 and
$6,573,000, respectively, to LSAT LLC. LSAT LLC used the proceeds from these
loans to fund capital calls from its various 10% investees that operate
satellite television systems in Latin America ("Sky Latin America"). The loans
provided for interest at 8% per annum and were due and payable on demand after
November 27, 2001. Concurrently, with the closing of the LSAT LLC and Ascent
Entertainment Transaction, (i) Liberty Media contributed to the Company, as part
of that transaction and for no additional consideration, promissory notes issued
by LSAT LLC due to subsidiaries of Liberty Media, with an aggregate principal
balance of $18,552,000 and related accrued interest of $651,000, and (ii) LSAT
LLC repaid principal of $6,573,000 and accrued interest of $37,000.
SALE OF ASCENT NETWORK SERVICES. Effective September 4, 2001, Ascent
Entertainment completed the sale of Ascent Network Services to Ascent Media
Group, Inc. (formerly Liberty Livewire Corporation) ("Ascent Media"), a
consolidated subsidiary of Liberty Media, for cash consideration of $32,038,000.
Ascent Network Services provides video distribution services to the NBC
television network and other private networks. As Ascent Entertainment and
Ascent Media are both consolidated subsidiaries of Liberty Media, no gain or
loss was recognized in connection with this transaction. During 2001, Ascent
Network Services paid management fees to Ascent Media aggregating $6,400,000
through September 4, 2001. Such management fees are included in selling, general
and administrative expenses in the accompanying consolidated statement of
operations.
ASCENT MEDIA SATELLITE SERVICES. Effective October 1, 2002, On Command
entered into a short-term agreement with Ascent Media pursuant to which Ascent
Media supplied On Command with uplink and satellite transport services at a cost
of $120,000 through December 31, 2002. On Command had been utilizing the
services to test the satellite delivery of content updates to On Command's
downlink sites at various hotels. On Command has completed its testing of
satellite delivery and the parties have
II-40
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
executed a Content Preparation and Distribution Services Agreement, dated
March 24, 2003, to be effective April 1, 2003, which will provide for uplink and
satellite transport services for a period of five years. The long-term agreement
also provides for Ascent Media to supply On Command with content preparation
services at a negotiated rate for a period of five years at On Command's
request. On Command is also negotiating an agreement with a wholly-owned
subsidiary of Ascent Media for the installation by such subsidiary of satellite
equipment at On Command's downlink sites at hotels for a set fee per
installation completed.
PUT OPTION LIABILITY. Effective September 29, 2000, LSAT LLC acquired a 1%
managing common interest in a joint venture ("IB2 LLC") from a subsidiary of
Liberty Digital, Inc. ("Liberty Digital") for $652,000. Liberty Digital, an
indirect wholly-owned subsidiary of Liberty Media, retained a preferred interest
(the "Preferred Interest") in IB2 LLC, which owns approximately 360,000 shares
of iBEAM Broadcasting Corp. ("iBEAM") common stock ("iBEAM Stock"). The
Preferred Interest had an initial liquidation value of $64,574,000 and is
entitled to a return of 9%, compounded annually. As part of the transaction,
LSAT LLC granted Liberty Digital the right to put the Preferred Interest to LSAT
LLC for a purchase price equal to $26,000,000 (the value of iBEAM Stock on
September 29, 2000) plus a 9% return, compounded annually (the "iBEAM Put
Option"). LSAT LLC has the right to call Liberty Digital's Preferred Interest at
a price equal to the initial liquidation value plus a return of 9%, compounded
annually. Both the iBEAM Put Option and call option are exercisable on
September 29, 2008. Under certain limited circumstances, including iBEAM's
bankruptcy, LSAT LLC can force Liberty Digital to exercise the iBEAM Put Option
prior to September 29, 2008.
Due to the related party nature of the transaction, the fair value of the
iBEAM Put Option on the iBEAM Closing Date has been reflected as a reduction of
redeemable preferred stock in the accompanying consolidated financial
statements. Similarly, the cash paid for LSAT LLC's interest in IB2 LLC has been
reflected as a direct charge to additional paid-in capital.
During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter
11 of the Bankruptcy Code. As a result of such bankruptcy filing, the Company
began carrying the iBEAM Put Option liability at an amount ($31,052,000 at
December 31, 2002) which represents the iBEAM Put Option purchase price to LSAT
LLC plus an accrued return to Liberty Digital of 9%, compounded annually. The
Company anticipates that future losses with respect to the iBEAM Put Option will
be limited to Liberty Digital's 9% return on the iBEAM Put Option liability.
Changes in the fair market value of the iBEAM Put Option subsequent to
September 29, 2000 have been recognized as unrealized gains (losses) on
financial instruments in the Company's consolidated statements of operations.
During 2002, 2001 and 2000, the Company recorded unrealized gains (losses) of
$2,564,000, $3,241,000 and ($19,423,000), respectively, related to the iBEAM Put
Option.
TRANSACTIONS WITH OTHER RELATED PARTIES
PHOENIXSTAR MANAGEMENT AGREEMENT. Effective February 1, 2000, the Company
entered into a management agreement with Phoenixstar, Inc. (formerly known as
PRIMESTAR, Inc.) ("Phoenixstar") pursuant to which the company is managing
Phoenixstar's affairs in exchange for a monthly management fee. Prior to 1999,
the Company beneficially owned 37% of Phoenixstar's outstanding shares. In
connection with certain other transactions that closed in 1999, the Company
agreed to forego any liquidating distribution or other payment that may be made
in respect of the outstanding shares of Phoenixstar upon any dissolution and
winding-up of Phoenixstar, or otherwise in respect of Phoenixstar's equity, and
to transfer its shares in Phoenixstar to the other Phoenixstar stockholders.
II-41
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Management fees from Phoenixstar aggregated $420,000, $420,000 and $445,000 in
2002, 2001 and 2000, respectively. In addition, the Company allocates certain
general and administrative expenses, such as office rent and computer support to
Phoenixstar. Under the current management agreement, expense allocations have
been limited to $5,000 per month since February 2001. Such allocations
aggregated $60,000, $54,000 and $169,000 during 2002, 2001 and 2000,
respectively, and are reflected as a reduction of general and administrative
expenses in the accompanying consolidated statements of operations.
(5) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
The following table reflects the carrying amounts of investments accounted
for using the equity method:
DECEMBER 31,
--------------------
2002 2001
--------- --------
AMOUNTS IN
THOUSANDS
ASTROLINK International LLC ("Astrolink")................... $ -- --
Aerocast.com, Inc. ("Aerocast")............................. -- 12,158
--------- ------
$ -- 12,158
========= ======
The following table reflects the Company's share of losses of affiliates
(including nontemporary declines in fair values of investments):
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Astrolink........................................ $ (1,447) (417,202) (6,498)
Aerocast......................................... (12,258) (7,045) (753)
-------- -------- ------
$(13,705) (424,247) (7,251)
======== ======== ======
ASTROLINK
The Company owns an approximate 31.5% ownership interest in Astrolink.
Astrolink, a developmental stage entity, was originally established to build a
global telecom network using Ka-band geostationary satellites to provide
broadband data communications services. Astrolink's original business plan
required substantial financing. During the fourth quarter of 2001, certain of
the members of Astrolink informed Astrolink that they did not intend to provide
any of Astrolink's remaining required financing. In light of this decision,
Astrolink and the Astrolink members considered several alternatives with respect
to Astrolink's proposed business plan.
During the second quarter of 2002, LSAT signed a non-binding letter of
intent with the other Astrolink members in connection with the proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring ("the Astrolink Restructuring"). Under the agreement (the
"Astrolink Restructuring Agreement"), the Company will acquire substantially all
of the assets of Astrolink. Astrolink simultaneously signed agreements with
Lockheed Martin Corporation and Northrop Grumman Space & Mission Systems Corp.
for completion of two satellites. The parties also reached
II-42
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement on the settlement of all claims related to the previous termination of
Astrolink's major procurement contracts and all other major third party creditor
claims. The closing of the Company's acquisition of the Astrolink business is
subject to the Company obtaining satisfactory funding for the business from
additional investors, third party sources of financing, or firm capacity
commitments from prospective customers. The closing is also subject to
regulatory approvals and other closing conditions. Subject to the satisfaction
of these closing conditions, the closing is expected to occur on or before
October 31, 2003.
If the closing occurs, the Company will pay approximately $43 million in
cash and will issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, the Company will provide additional interim funding for
Astrolink pending closing. If the transactions are consummated, Liberty Media
will make a capital contribution to the Company in an amount equal to 10% of the
estimated fair value of Liberty Media's equity holdings in the Company at the
time of closing, up to a maximum commitment of $55 million, in exchange for
shares of the Company's Series B Common Stock.
The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching one or two Ka-band satellites to
provide enterprise customers in up to two of North America, Europe or Asia with
virtual private networks and related advanced services, and to provide various
government agencies with a solution to their expanding needs for bandwidth.
In the event the Astrolink Restructuring is not consummated due to lack of
financing or other closing conditions, the Company anticipates that Astrolink
will be liquidated and the Company will receive $7.8 million as prescribed in
the Astrolink Restructuring Agreement.
During the second quarter of 2001, the Company determined that its
investment in Astrolink experienced a nontemporary decline in value.
Accordingly, the carrying amount of such investment was adjusted to its then
estimated fair value resulting in a recognized loss of $155,000,000. Such loss
is included in share of losses of affiliates. Based on a fourth quarter 2001
assessment of Astrolink's remaining sources of liquidity and Astrolink's
inability to obtain financing for its business plan, the Company concluded that
the carrying value of LSAT Astro's investment in Astrolink should be reduced to
reflect a fair value that assumes the liquidation of Astrolink. Accordingly,
LSAT Astro wrote-off all of its remaining investment in Astrolink during the
fourth quarter of 2001. The aggregate amount required to reduce LSAT Astro's
investment in Astrolink to zero was $249,868,000. Including such fourth quarter
amount, LSAT Astro recorded losses and charges relating to its investment in
Astrolink aggregating $417,202,000 during the year ended December 31, 2001.
Since LSAT Astro's investment in Astrolink was reduced to zero at
December 31, 2001, LSAT Astro's share of Astrolink's losses since December 31,
2001 has been limited to the amounts loaned to Astrolink by the Company during
the year ended December 31, 2002 ($1,447,000).
II-43
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized unaudited financial information for Astrolink for the periods in
which Astrolink was owned by LSAT LLC is as follows:
YEARS ENDED DECEMBER 31,
-------------------------
2002 2001
----------- -----------
AMOUNTS IN THOUSANDS
FINANCIAL POSITION
Current assets..................................... $ 11,587 21,686
Property and equipment, net........................ 515,167 525,146
Other assets....................................... 25,447 25,370
-------- -------
Total assets..................................... $552,201 572,202
======== =======
Current liabilities................................ $228,215 234,354
Other liabilities.................................. -- 164
Members' equity.................................... 323,986 337,684
-------- -------
Total liabilities and equity..................... $552,201 572,202
======== =======
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
RESULTS OF OPERATIONS
General and administrative expense............ $ (4,558) (65,930) (31,431)
Write-down of system under construction....... -- (728,495) --
Contract termination charges.................. -- (174,016) --
Depreciation and amortization................. (8,844) (3,894) (636)
Other income (expense)........................ (297) 8,179 7,818
-------- -------- -------
Net loss.................................... $(13,699) (964,156) (24,249)
======== ======== =======
AEROCAST
LSAT LLC owns an approximate 45.5% ownership interest in Aerocast. During
the fourth quarter of 2002, the Company recorded a $7,072,000 charge to reduce
the carrying value of LSAT LLC's investment in Aerocast to zero. Such charge is
included in the Company's share of Aerocast's losses for the year ended
December 31, 2002.
II-44
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Summarized unaudited financial information for Aerocast for the periods in
which Aerocast was owned by LSAT LLC is as follows:
DECEMBER 31,
---------------------
2002 2001
--------- ---------
AMOUNTS IN THOUSANDS
FINANCIAL POSITION
Current assets....................................... $ 201 5,268
Property and equipment, net.......................... 1,159 1,798
Other assets......................................... 2,921 2,902
------ -----
Total assets....................................... $4,281 9,968
====== =====
Current liabilities.................................. $1,634 690
Owners' equity....................................... 2,647 9,278
------ -----
Total liabilities and equity....................... $4,281 9,968
====== =====
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
RESULTS OF OPERATIONS
Revenue.......................................... $ 85 23 --
Operating expenses............................... (6,242) (10,736) (2,081)
Depreciation and amortization.................... (384) (351) --
Other income (expense), net...................... (103) 129 52
------- ------- ------
Net loss....................................... $(6,644) (10,935) (2,029)
======= ======= ======
(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments are
summarized as follows:
DECEMBER 31,
---------------------
2002 2001
--------- ---------
AMOUNTS IN THOUSANDS
Sky Latin America........................................ $ 86,772 175,048
Sprint Corporation PCS Group ("Sprint PCS Group")*....... 22,271 124,119
Hughes Electronics Corporation ("GM Hughes")*............ 19,495 28,148
XM Satellite Radio Holdings, Inc. ("XMSR")*.............. 2,690 18,360
Other.................................................... 12,630 28,225
-------- -------
$143,858 373,900
======== =======
------------------------
* Denotes an investment carried as an available-for-sale security.
II-45
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SKY LATIN AMERICA
Represents the aggregate book basis of a number of different satellite
television operators located in Mexico, Brazil, Chile and Colombia. LSAT LLC has
a 10% beneficial interest in each of the Sky Latin America businesses.
During 2002, the Company recorded aggregate losses of $105,250,000 to
reflect nontemporary declines in the value of LSAT LLC's investment in Sky Latin
America.
SPRINT PCS STOCK
The Company acquired beneficial interest in 5,084,745 shares of Sprint PCS
Stock from Liberty Media in March 2000. The Company accounts for such investment
as an available-for-sale security.
GM HUGHES
The Company, through LSAT LLC, holds 1,821,921 shares of GM Hughes Stock and
accounts for such shares as available-for-sale. During 2002, the Company
recorded a $9,049,000 loss to recognize a nontemporary decline in the fair value
of its GM Hughes Stock.
Effective May 10, 2000, the Company sold 2.4 million shares of GM Hughes
Stock for net cash proceeds of $74,243,000 (after fees and commissions of
$717,000), and recognized a gain on sale of $36,643,000. The Company paid
$65,721,000 of such cash proceeds to Phoenixstar to satisfy a stock appreciation
right, and recognized a loss of $65,721,000.
XMSR
At December 31, 2002, LSAT LLC owned 1,000,000 shares of XMSR Class A common
stock, representing an ownership interest of less than 1%. The closing stock
price of XMSR Class A common stock on December 31, 2002 was $2.69 per share.
On June 27, 2001, LSAT LLC entered into an agreement to loan 1,000,000
shares of XMSR to a third party. The obligation to return those shares is
secured by cash collateral equal to 100% of the market value of that stock,
which was $2,690,000 at December 31, 2002. Such cash collateral is reported as
restricted cash in the accompanying consolidated balance sheet with the offset
being reflected as a liability. 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. Interest accrues on the cash collateral for the benefit
of LSAT LLC at the rate of .15% per annum. As of December 31, 2002, 1,000,000
shares of XMSR had been lent under this agreement. The loan has no stated
maturity date.
OTHER
Information concerning certain of the Company's other investments is set
forth below.
In December 2002, the Company announced that it has agreed to increase its
investment in Wildblue Communications, Inc. ("Wildblue"). Currently, the Company
has an approximate 16% ownership interest in Wildblue. Under the new agreement,
the Company will invest $58 million in return for senior preferred stock and
warrants of Wildblue. As also agreed, other existing and new investors will
invest $98 million in Wildblue for a total new investment of $156 million. Upon
closing of the transaction, of which no assurance can be given, the Company will
be the largest shareholder with an ownership interest of approximately 32% and a
voting interest of approximately 37%. The closing of
II-46
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the transaction is subject to certain conditions, and is expected to occur in
the second quarter of 2003. Assuming the Wildblue transaction is consummated as
described above, of which no assurance can be given, Wildblue currently expects
to launch its satellite in the fourth quarter of 2003 and begin providing
broadband data services in the second or third quarter of 2004.
In connection with the aforementioned additional investment in Wildblue, the
Company entered into a put agreement with KPCB Holdings, Inc. ("KPCB") another
investor in Wildblue. Pursuant to this put agreement and in the event the
parties make additional investments in Wildblue, KPCB will have the right to put
its interest in Wildblue to the Company and another investor in Wildblue for
$10,000,000, the amount KPCB has agreed to invest in Wildblue at the closing of
the Wildblue transaction. The Company and such other investor are each
responsible for $5,000,000 of the aggregate $10,000,000 put obligation. The put
may be exercised at any time within four years from the closing of the Wildblue
transaction.
During the first quarter of 2001, On Command completed a transaction that
resulted in On Command's acquisition of a 7.5% interest in e-ROOM and the
settlement of certain litigation. To acquire the 7.5% interest and settle the
litigation, On Command (i) contributed its Asia-Pacific subsidiaries to e-ROOM
and transferred On Command's intercompany receivables from such subsidiaries to
e-ROOM; (ii) issued 275,000 shares of Company Common Stock to e-ROOM; and
(iii) paid $1,000,000 to e-ROOM. Due to the existence of the repurchase
obligation, described below, On Command valued the equity issued to e-ROOM at
$15 per share. The excess of the value assigned to the consideration paid to
e-ROOM over the then estimated $5,298,000 fair value of the 7.5% interest in
e-ROOM received by On Command has been reflected as loss on settlement of
litigation in the accompanying consolidated statements of operations. On
Command's original estimate of the litigation loss resulted in a $4,764,000
charge during the fourth quarter of 2000. An additional charge of $3,700,000 was
recorded during the first quarter of 2001 to reflect a change in the estimate of
the amount of On Command's intercompany receivables to be transferred to e-ROOM.
During the fourth quarter of 2001, On Command recorded a $2,000,000 impairment
charge to reflect an other than temporary decline in the estimated fair value of
its investment in e-ROOM.
On Command also agreed that e-ROOM would have the option during the 15 day
period beginning on March 1, 2003 to cause On Command to repurchase all, but not
less than all, of the 275,000 shares of Company Common Stock issued to e-ROOM at
a price of $15 per share. During the fourth quarter of 2002, On Command
repurchased 119,500 of such shares for an aggregate price of $1,344,000 or
$11.25 per share. In connection with this transaction, the parties agreed to
postpone until March 1, 2004 the date on which On Command can be required to
repurchase 119,500 of the remaining shares subject to repurchase. On Command is
not precluded from repurchasing such shares at an earlier date. The repurchase
price for such shares will be $15 per share, plus an adjustment factor
calculated from March 1, 2003 to the date of repurchase, at a rate of 8% per
annum. Subsequent to December 31, 2002, the date on which the remaining 36,000
shares will first become subject to repurchase by On Command was postponed until
March 1, 2004. The repurchase price for such shares will remain at $15 per
share.
NONTEMPORARY DECLINES IN FAIR VALUES OF INVESTMENTS
During 2002, 2001 and 2000, the Company determined that certain investments
experienced other-than-temporary declines in value. As a result, the cost bases
of such investments were adjusted to
II-47
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
their respective estimated fair values. Such adjustments resulted in losses
aggregating $163,881,000, $96,438,000 and $9,860,000 in 2002, 2001 and 2000,
respectively, and are comprised of the following:
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Investments
Sky Latin America................................ $105,250 -- --
Sprint PCS Stock................................. 21,511 -- --
Loral Space & Communications, Ltd................ 17,384 -- --
STSN, Inc........................................ 6,060 16,539 --
Wildblue......................................... -- 56,483 --
XMSR............................................. 1,626 14,575 --
Other............................................ 12,050 8,841 9,860
-------- ------ -----
$163,881 96,438 9,860
======== ====== =====
Investments in available-for-sale securities are summarized below. The
unrealized holding gains and losses are in addition to the unrealized gains and
losses recognized in the consolidated statements of operations.
DECEMBER 31,
---------------------
2002 2001
--------- ---------
AMOUNTS IN THOUSANDS
Equity securities
Fair value........................................... $48,532 184,581
======= =======
Gross unrealized holding gains....................... $ 1,517 3,942
======= =======
Gross unrealized holding losses...................... $ -- (23,532)
======= =======
(7) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are comprised of the following:
FAIR VALUE AT
DECEMBER 31,
TYPE OF UNDERLYING ---------------------
DERIVATIVE SECURITY 2002 2001
---------- ---------- --------- ---------
AMOUNTS IN THOUSANDS
Equity collar................................ Sprint PCS $280,559 177,721
Equity collar................................ XMSR 25,493 11,115
Put spread collar............................ GMH 20,004 14,746
-------- -------
Total...................................... $326,056 203,582
Less current portion....................... (317,580) --
-------- -------
Long-term derivative assets.................. $ 8,476 203,582
======== =======
II-48
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The trust holding the Sprint PCS Stock for LSAT's benefit has entered into
an equity collar with a financial institution with respect to LSAT's Sprint PCS
Stock. The collar provides the trust with a put option that gives it the right
to require its counterparty to buy 5,084,745 shares of Sprint PCS Stock from the
trust in seven tranches in March 2003 for a weighted average price of $59.71 per
share. LSAT simultaneously sold a call option giving the counterparty the right
to buy the same shares of stock from the trust in seven tranches in March 2003
for a weighted average price of $82.39 per share. The put and call options for
this collar were equally priced, resulting in no cash receipts or payments.
LSAT LLC has entered into a put spread collar with a financial institution
with respect to the Company's shares of GM Hughes Stock. The collar
(i) provides LSAT LLC with a put option that gives it the right to require its
counterparty to buy 1,821,921 shares of GM Hughes Stock from LSAT LLC in three
tranches in October 2003 for a weighted average price of $26.64, and
(ii) provides the counterparty with a put option that gives it the right to
require LSAT LLC to repurchase the shares of GM Hughes Stock for a weighted
average price of $14.80. LSAT LLC simultaneously sold a call option giving the
counterparty the right to buy the same shares of stock from LSAT LLC in three
tranches in October 2003 for a weighted average price of $54.32 per share. The
put and call options for this collar were equally priced, resulting in no cash
receipts or payments.
LSAT LLC has entered into an equity collar with a financial institution with
respect to its shares of XMSR common stock. The collar provides LSAT LLC with a
put option that gives it the right to require its counterparty to buy 1,000,000
shares of XMSR common stock from LSAT LLC in three tranches in November 2003,
December 2003 and February 2004 for a weighted average price of $28.55. LSAT LLC
simultaneously sold a call option giving the counterparty the right to buy the
same shares of stock from LSAT LLC in three tranches in November 2003,
December 2003 and February 2004 for a weighted average price of $51.49 per
share. The put and call options for this collar were equally priced, resulting
in no cash receipts or payments.
Unrealized gains (losses) on financial instruments during 2002, 2001 and
2000 aggregated $2,393,000, $38,891,000 and ($14,426,000), respectively. The
details of such gains (losses) are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Change in fair value of GM Hughes put spread
collar.......................................... $ 5,259 9,748 4,997
Change in time value of Sprint PCS Stock and XMSR
equity collars.................................. (302) 25,902 --
Change in fair value of iBEAM Put Option.......... (2,564) 3,241 (19,423)
------- ------ -------
$ 2,393 38,891 (14,426)
======= ====== =======
II-49
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) ACQUISITIONS AND DISPOSITIONS
In July 2002, On Command consummated the sale (the "OCE Sale") of its 70%
majority shareholdings in On Command Europe Limited ("OCE") to Techlive Limited
("Techlive"), the owner of the remaining 30% interest in OCE. Proceeds from the
sale, net of cash transferred, aggregated $1,135,000. As a result of the
consummation of the OCE Sale, On Command recorded a $5,103,000 impairment loss
during the second quarter of 2002 to reduce the carrying value of OCE's
long-lived assets to the fair value indicated by the OCE Sale. During the third
quarter of 2002, OCE's remaining net assets, including a $930,000 cumulative
foreign currency translation loss, were written-off against the net proceeds
received, resulting in no material impact to the Company's net loss for the
period.
Effective July 6, 2000, Ascent Entertainment sold its sports-related
businesses, which were comprised of the Denver Nuggets basketball team, the
Colorado Avalanche hockey team and Ascent Arena Company, the owner and operator
of the Pepsi Center, to an unrelated third party for cash consideration of
$267,661,000 and the assumption of $136,200,000 in non-recourse debt. In
connection with Liberty Media's acquisition of Ascent Entertainment on
March 28, 2000, net assets of the sport-related businesses were treated as
assets held for sale. Accordingly, the net assets of the sports-related
businesses were recorded at their estimated net realizable value, and no gain or
loss was recognized by Liberty Media in connection with the disposition of these
businesses. The operating results of the sports-related businesses from
March 28, 2000 through July 6, 2000, which were excluded from Liberty Media's
operating results and treated as an adjustment of the net realizable value of
the sports-related businesses, were not material.
(9) DEBT
Debt is summarized as follows:
DECEMBER 31,
--------------------
2002 2001
--------- --------
AMOUNTS IN THOUSANDS
On Command Revolving Credit Facility(a)................ $ 261,633 263,633
PCS Loan Facility(b)................................... 112,503 97,503
Capital lease obligations.............................. 1,146 2,037
--------- --------
375,282 363,173
Less current portion................................... (113,336) (909)
--------- --------
$ 261,946 362,264
========= ========
------------------------
(a) At December 31, 2002, On Command's revolving credit facility, as amended in
2001, (the "On Command Revolving Credit Facility") provided for aggregate
borrowings of $275,000,000. Borrowings under the On Command Revolving Credit
Facility are due and payable in July 2004. On Command had $13,367,000 of
remaining availability under the On Command Revolving Credit Facility at
December 31, 2002. On Command's ability to draw additional funds under the
On Command Revolving Credit Facility is subject to On Command's continued
compliance with applicable financial covenants.
Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the London Interbank Offering Rate ("LIBOR") plus a spread that
may range from 1.10% to 2.75%
II-50
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
depending on certain operating ratios of On Command (3.94% effective
borrowing rate at December 31, 2002). In addition, a facility fee ranging
from 0.15% to 0.50% per annum is charged on the On Command Revolving Credit
Facility, depending on certain operating ratios of On Command. The On
Command Revolving Credit Facility contains customary covenants and
agreements, most notably the inclusion of restrictions on On Command's
ability to pay dividends or make other distributions, and restrictions on On
Command's ability to make capital expenditures. In addition, On Command is
required to maintain minimum leverage and interest coverage ratios. On
Command was in compliance with such covenants at December 31, 2002.
Substantially all of On Command's assets are pledged as collateral for
borrowings under the On Command Revolving Credit Facility.
At December 31, 2002, the maximum leverage ratio permitted under the On
Command Revolving Credit Facility was 4.25, and On Command's actual leverage
ratio was 3.99. The maximum leverage ratio permitted under the On Command
Revolving Credit Facility at March 31, 2003 is 3.50. Although On Command is
in compliance with the leverage ratio covenant at December 31, 2002, On
Command believes that it would not have been in compliance with such
covenant at March 31, 2003. In March 2003, On Command reached agreement with
its bank lenders to postpone until June 29, 2003 the step-down of the
leverage ratio covenant from 4.25 to 3.50. On Command is also seeking to
restructure the On Command Revolving Credit Facility to, among other
matters, extend the maturity date to December 31, 2007. It is anticipated
that any closing of the restructuring of the On Command Revolving Credit
Facility will be contingent upon the contribution of $40,000,000 by Liberty
Media or one of its affiliates to On Command to be used to repay principle
due, and permanently reduce lender commitments, pursuant to the restructured
On Command Revolving Credit Facility. The terms of the proposed Liberty
Media contribution (including the securities or other consideration to be
received by Liberty Media or its affiliate in exchange for such
contribution) have not yet been agreed upon, and no assurance can be given
that Liberty Media or its affiliate will contribute $40,000,000 to On
Command, as contemplated by the terms of the proposed restructuring. In the
event On Command determines that it is unlikely that the proposed
restructuring of the On Command Revolving Credit Facility will close on or
before June 29, 2003, On Command anticipates that it would seek a further
postponement of the step-down of the leverage ratio covenant, and would
continue to seek to refinance or restructure the On Command Revolving Credit
Facility. In the event that a restructuring or refinancing is not completed
by the date that the leverage ratio is reduced to 3.50, On Command
anticipates that a default would occur under the terms of the On Command
Revolving Credit Facility. Upon the occurrence of a default, if left
uncured, the bank lenders would have various remedies, including terminating
their revolving loan commitment, declaring all outstanding loan amounts
including interest immediately due and payable, and exercising their rights
against their collateral which consists of substantially all of On Command's
assets. No assurance can be given that On Command will be able to
successfully restructure or refinance the On Command Revolving Credit
Facility on terms acceptable to On Command, or that On Command will be able
to avoid a default under the On Command Revolving Credit Facility. In light
of the foregoing circumstances, On Command's independent auditors have
included an explanatory paragraph in their audit report that addresses the
ability of On Command to continue as a going concern.
(b) LSAT LLC's revolving credit facility, as amended, provides for maximum
borrowings of $303,000,000 (the "PCS Loan Facility"). The PCS Loan Facility
is secured by LSAT LLC's interest in shares of Sprint PCS Stock and by the
Sprint PCS Stock equity collar. Interest accrues at the 30 day LIBOR (1.44%
at December 31, 2002) and is payable monthly.
II-51
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Ascent Entertainment's Senior Secured Discount Notes (the "Ascent
Entertainment Senior Notes"), which were scheduled to mature on December 15,
2004, were originally sold at a discount. The terms of the Ascent Entertainment
Senior Notes required no cash interest payments prior to December 15, 2002. On
November 30, 2001, Ascent gave notice that it had elected to redeem the Ascent
Entertainment Senior Notes effective December 31, 2001 at a price of 105.9375%
of the accreted value of the Ascent Entertainment Senior Notes. This price
represented $948.63 per $1,000 principal amount, or an aggregate of
approximately $213,000,000, including accrued interest. Ascent Entertainment
recognized a loss of $14,322,000 in connection with such redemption.
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for the same remaining maturities. Due to its variable rate nature,
the fair value of the Company's debt approximated its carrying value at
December 31, 2002.
Annual maturities of the Company's debt for each of the next five years are
as follows (amounts in thousands):
2003........................................................ $113,336
2004........................................................ 261,905
2005........................................................ 38
2006........................................................ 3
2007........................................................ --
--------
$375,282
========
(10) MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES
ON COMMAND
GENERAL
During the first quarter of 2002, the cumulative losses allocated by Ascent
Entertainment to the On Command minority interests reduced to zero Ascent
Entertainment's carrying amount for the minority interests in On Command's
equity. Since the On Command minority interest holders have no obligation to
make further contributions to On Command, 100% of On Command's losses for
periods subsequent to March 31, 2002 have been, and will be in future periods,
allocated to Ascent Entertainment unless and to the extent that the On Command
minority interest holders make additional investments in On Command's equity.
ON COMMAND WARRANTS
At December 31, 2002, warrants ("On Command Warrants") issued by On Command
to purchase 7,494,854 shares of On Command Common Stock at a purchase price of
$15.27 per share were outstanding. The outstanding On Command Warrants, which
include 1,424,875 Series A Warrants, 2,619,979 Series B Warrants and 3,450,000
Series C Warrants, expire on October 7, 2003. The Series A Warrants provide only
for a cashless exercise that allows the holder to use the excess of the fair
market value of On Command Common Stock over the $15.27 exercise price as a
currency to acquire shares of On Command Common Stock. The exercise price for
the Series B and Series C Warrants is to be paid with cash. At December 31,
2002, Ascent Entertainment held 1,123,792 Series A Warrants and 40
II-52
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Series B Warrants. The On Command Warrants are included in minority interests in
equity of consolidated subsidiaries in the accompanying consolidated balance
sheets.
ON COMMAND SERIES A PREFERRED STOCK
On August 8, 2000, On Command issued 13,500 shares of Series A, $.01 par
value Convertible Participating Preferred Stock ("On Command Series A Preferred
Stock"), to the former Chairman and Chief Executive Officer of On Command in
exchange for a $21,080,000 promissory note and a $13,500 cash payment. The On
Command Series A Preferred Stock is initially convertible into an aggregate of
1,350,000 shares of On Command Common Stock. The price of the On Command
Series A Preferred Stock was $1,562.50 per share. The On Command Series A
Preferred Stock participates in any dividends paid to the holders of On Command
Common Stock but otherwise is not entitled to receive any dividends. The On
Command Series A Preferred Stock has a liquidation preference of $.01 per share,
and will also participate with the On Command Common Stock in any liquidating
distributions on an as-converted basis. The holder of the Series A Preferred
Stock votes with the holders of the On Command Common Stock as a single class
and is entitled to one vote per share. The promissory note is secured by the On
Command Series A Preferred Stock or proceeds thereon and the former Chairman and
Chief Executive Officer's personal obligations under such promissory note are
limited to 25% of the principal amount of the note, plus accrued interest
thereon. The note may not be prepaid and interest on the note accrues at a rate
of 7% per annum, compounded quarterly. The right to transfer the Series A
Preferred Stock is restricted. The On Command Series A Preferred Stock is
included in minority interests in equity of consolidated subsidiaries in the
accompanying consolidated balance sheets.
(11) REDEEMABLE PREFERRED STOCK
On March 16, 2000, the Company issued 150,000 shares of Series A Cumulative
Preferred Stock ("Series A Preferred Stock") and 150,000 shares of Series B
Preferred Stock to Liberty Media in exchange for shares of Sprint PCS Stock.
SERIES A CUMULATIVE PREFERRED STOCK
The Series A Preferred Stock accrues dividends at 12% per annum at all times
prior to April 1, 2005, 11% on and after April 1, 2005 and prior to April 1,
2010, and 10% on and after April 1, 2010. Such dividends are payable the last
day of each March, June, September and December. Prior to April 1, 2003,
dividends may be paid, at the option of the Company, in cash, shares of
Series A Common Stock of the Company, or a combination of both. Subsequent to
March 31, 2003, dividends are payable in cash. Dividends not paid are added to
the liquidation preference on such date and remain a part of the liquidation
preference until such dividends are paid. In the event of a default, the
dividend rate will be equal to the dividend rate then in effect plus 2%. Subject
to certain specified exceptions, the Company is prohibited from paying dividends
on any shares, parity securities or junior securities during any period in which
the Company is in arrears with respect to payment of dividends on Series A
Preferred Stock.
The holder of Series A Preferred Stock is not entitled to vote on any
matters submitted to a vote of the shareholders of the Company, except as
required by law and other limited exceptions.
The liquidation preference of each share of the Series A Preferred Stock is
equal to the stated value per share of $1,000 plus all accrued and unpaid
dividends.
II-53
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Series A Preferred Stock is redeemable at the option of the Company, in
whole or from time to time in part, on any business day after April 1, 2020 at a
redemption price per share equal to the liquidation preference of such share on
the applicable redemption date. If less than all outstanding shares are to be
redeemed, shares will be redeemed ratably from the holders. On or after
April 1, 2020, the Series A Preferred Stock is redeemable at the option of the
holder for cash.
SERIES B CUMULATIVE CONVERTIBLE VOTING PREFERRED STOCK
The Series B Preferred Stock accrues dividends at the rate of 8% per annum.
Such dividends are payable the last day of each March, June, September and
December. Prior to April 1, 2003, dividends may be paid, at the option of the
Company, in cash, shares of Series A Common Stock of the Company, or a
combination of both. Subsequent to March 31, 2003, dividends are payable in
cash. Dividends not paid are added to the liquidation preference on such date
and remain a part of the liquidation preference until such dividends are paid.
In the event of a default, the dividend rate will be 10% per annum. Subject to
certain specified exceptions, the Company is prohibited from paying dividends on
any shares, parity securities or junior securities during any period in which
the Company is in arrears with respect to payment of dividends on Series B
Preferred Stock.
In addition to voting rights required by law, each share of Series B
Preferred Stock will be entitled to vote together with holders of the Series A
and Series B Common Stock as a single class upon all matters upon which holders
of Series A and Series B Common Stock are entitled to vote. In any such vote,
the holders of Series B Preferred Stock will be entitled to 558 votes per share
held. The Series B Preferred Stock is redeemable at the option of the Company
after April 1, 2005. At any date on or after April 1, 2020, the Series B
Preferred Stock is redeemable at the option of the holder for cash.
The liquidation preference of each share of the Series B Preferred Stock as
of any date of determination is equal to the stated value per share of $1,000
plus all accrued and unpaid dividends.
Each share of the Series B Preferred Stock is initially convertible into
11.31145 shares of Series B Common Stock. Such conversion rate was calculated as
the liquidation value of such shares divided by $88.406 and is adjustable based
on the adjusted liquidation value at the date of conversion.
Accrued dividends on the Series A Preferred Stock and Series B Preferred
Stock aggregated $7,500,000 at December 31, 2002.
Both the Series A and Series B Preferred Stock were issued at a discount
from the stated values of such shares. Therefore, the Company is accreting both
the Series A Preferred Stock and the Series B Preferred Stock up to the
respective redemption values over the period from the issuance date to the
redemption date using the effective interest method. Accretion on the Series A
and Series B Preferred Stock aggregated $6,120,000, $6,120,000 and $4,634,000
during 2002, 2001 and 2000 respectively. Such accretion has been accounted for
as a direct charge to additional paid-in capital and has been included in the
calculation of loss attributable to common shareholders.
II-54
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock. The
preferred stock may be issued from time to time as determined by the Company's
Board of Directors (the "LSAT Board"), without stockholder approval. Such
preferred stock may be issued in such series and with such designations,
preferences, conversion or other rights voting powers, qualifications,
limitations, or restrictions as shall be stated or expressed in a resolution or
resolutions providing for the issue of such series adopted by the LSAT Board.
COMMON STOCK
The Series A Common Stock has one vote per share and the Series B Common
Stock has ten votes per share. Each share of Series B Common Stock is
convertible, at the option of the holder, into one share of Series A Common
Stock.
On December 4, 1996, (the "Spin-off Date"), Tele-Communications, Inc.
("TCI") (now a part of Comcast Corporation) distributed (the "Spin-off"), as a
dividend, all of the issued and outstanding LSAT common stock to the holders of
TCI's then outstanding TCI Group tracking stock. In connection with the
Spin-off, TCI and the Company entered into a "Share Purchase Agreement" to sell
to each other from time to time, at the then current market price, shares of
Series A TCI Group common stock and Series A Common Stock, respectively, as
necessary to satisfy their respective obligations after the Spin-off Date under
certain stock options and SARs held by their respective employees and
non-employee directors. At December 31, 2002, shares of Series A Common Stock
were reserved for issuance pursuant to options to purchase approximately 92,725
shares of Series A Common Stock that were held by current and former employees
of TCI pursuant to the Share Purchase Agreement. Such options, which have
expiration dates ranging from 2003 to 2005, include 10,579 options with an
exercise price of $8.40 per share, and 82,146 options with exercise prices
ranging from $174.70 to $237.60 per share.
In August 2002, the LSAT Board of Directors authorized the Company's
purchase of up to 3,000,000 of Series A and Series B Common Stock in open market
purchases. The timing of purchases, prices paid and actual number of shares of
common stock purchased will depend on market conditions and the direction of
management. During 2002, LSAT purchased 24,900 shares of Series A Common Stock
for aggregate cash consideration of $53,000 pursuant to this share buy back
program.
At December 31, 2002, a total of 380,820 shares of Series A Common Stock
were reserved for issuance pursuant to outstanding stock options and restricted
stock awards. In addition, 1,696,717 shares of Series B Common Stock are
reserved for issuance upon conversion of the Series B Preferred Stock, and one
share of Series A Common Stock is reserved for each outstanding share of
Series B Common Stock.
(13) STOCK COMPENSATION
LSAT STOCK OPTIONS
The Liberty Satellite & Technology 1996 Stock Incentive Plan (the "LSAT 1996
Plan"), as amended, provides for awards to be made in respect of a maximum of
520,000 shares of Series A Common Stock (subject to certain anti-dilution
adjustments). Awards may be made as grants of stock
II-55
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options, stock appreciation rights ("SARs"), restricted shares, stock units,
performance awards or any combination thereof (collectively, "Awards"). Awards
may be made to employees and to consultants and advisors to the Company who are
not employees. Shares of Series A Common Stock that are subject to Awards that
expire, terminate or are annulled for any reason without having been exercised
(or deemed exercised, by virtue of the exercise of a related SAR), or are
forfeited prior to becoming vested, will return to the pool of such shares
available for grant under the LSAT 1996 Plan.
Options granted to certain key employees and officers of LSAT pursuant to
the LSAT 1996 Plan generally vest over a 5-year period beginning on the date of
the grant, first becomes exercisable as to 25% on the second anniversary of the
date of grant and become exercisable as to an additional 25% on each of the
third, fourth and fifth anniversaries of the date of grant. Such options expire
10 years from the date of grant.
In June 1996, the Board of Directors of TCI (the "TCI Board") authorized TCI
to permit certain of its executive officers to acquire equity interests in
certain of TCI's subsidiaries. In connection therewith, the TCI Board approved
the acquisition by each of two then executive officers of TCI who were not
employees of the Company (the "TCI Officers"), of 1.0% of the net equity of the
Company. The TCI Board also approved the acquisition by an individual who was
then the chief executive officer and a director of the Company (the "Company
Officer"), of 1.0% of the net equity of the Company and the acquisition by a
then executive officer of certain TCI subsidiaries who was also then a director,
but not an employee, of the Company (the "TCI Subsidiary Officer"), of 0.5% of
the net equity of the Company. The TCI Board determined to structure such
transactions as grants by the Company to such persons of options to purchase
shares of Series A Common Stock representing 1.0% (in the case of each of the
TCI Officers and the Company Officer) and 0.5% (in the case of the TCI
Subsidiary Officer) of the shares of Series A Common Stock and Series B Common
Stock issued and outstanding on the Spin-off Date, determined immediately after
giving effect to the Spin-off, but before giving effect to any exercise of such
options (the "Spin-off Date Options").
Spin-off Date Options to purchase 232,427 shares of Series A Common Stock at
a per share price of $88.60 were granted on the Spin-off Date. In
February 1999, 66,408 of the Spin-off Date Options were cancelled. The remaining
Spin-off Date Options are fully vested at December 31, 2002 and expire
February 1, 2006.
Pursuant to the terms of the Spin-off, and (in the case of the TCI Officers
and the TCI Subsidiary Officer) in partial consideration for the capital
contribution made by TCI to the Company in connection with the Spin-off, the
Company agreed, effective as of the Spin-off Date, to bear all obligations under
such options and to enter into stock option agreements with respect to such
options with each of the TCI Officers, the Company Officer and the TCI
Subsidiary Officer.
The TCI Satellite Entertainment, Inc. 1997 Nonemployee Director Stock Option
Plan (the "LSAT DSOP") provides for the grant to each person that is a member of
the LSAT Board and is not an employee of the Company, its subsidiaries or its
affiliates, of options to purchase 5,000 shares of Series A Common Stock.
Options issued pursuant to the LSAT DSOP vest and become exercisable over a
three-year period from the date of grant and expire 10 years from the date of
grant.
II-56
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table presents the number, weighted-average exercise price and
weighted-average grant-date fair value of the Spin-off Date Options and options
to buy Series A Common Stock granted pursuant to the LSAT 1996 Plan and the LSAT
DSOP.
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE GRANT-DATE
OPTIONS PRICE FAIR VALUE
--------- --------- ----------
Outstanding at January 1, 2000.............................. 382,070 $ 83.32
Exercised................................................. (54,000) $ 78.60
Forfeited and cancelled................................... (9,000) $ 71.30
Granted................................................... 25,000 $111.90 $87.70
-------
Outstanding at December 31, 2000............................ 344,070 $ 86.45
Exercised................................................. --
Forfeited and cancelled................................... --
Granted................................................... 15,000 $ 26.00 $22.40
-------
Outstanding at December 31, 2001............................ 359,070 $ 83.94
Exercised................................................. --
Forfeited and cancelled................................... --
Granted................................................... --
-------
Outstanding at December 31, 2002............................ 359,070 $ 83.94
=======
Exercisable at December 31, 2000............................ 175,815 $ 86.50
=======
Exercisable at December 31, 2001............................ 203,327 $ 85.60
=======
Exercisable at December 31, 2002............................ 276,545 $ 86.78
=======
The outstanding options at December 31, 2002, which had a weighted-average
remaining contractual life of approximately five years, included 15,000 options
with an exercise price of $26.00 per share and 344,070 options with exercise
prices ranging from $71.25 to $119.38 per share.
The respective estimated grant-date fair values of the options noted above
are based on the Black-Scholes model and are stated in current annualized
dollars on a present value basis. The key assumptions used in the model for
purposes of these calculations include the following: (a) a discount rate equal
to the one-year Treasury Bill rate; (b) an 85% volatility rate; (c) the 10-year
option term; (d) the closing price of the Series A Common Stock on the date of
grant; and (e) an expected dividend rate of zero.
ON COMMAND STOCK OPTIONS
On Command adopted the 1996 Key Employee Stock Option Plan (the "On Command
1996 Plan") under which employees may be granted incentive or non-statutory
stock options for the purchase of On Command Common Stock. In addition,
restricted stock purchases, performance awards, stock payment or appreciation
rights or deferred stock may be granted under the On Command 1996 Plan. A total
of 3,000,000 shares were initially reserved for the On Command 1996 Plan. The On
Command 1996 Plan expires in 2006. In June 2000, the Board of Directors approved
an amendment to the On Command 1996 Plan to increase the number of shares
reserved under the On Command 1996 Plan to 5,250,000.
II-57
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The exercise price of options granted is set by On Command's Board of
Directors. Incentive stock options are granted at no less than fair market value
on the date of grant. Options generally expire in ten years, vest over a
five-year period and are exercisable in installments of 20% one year from the
date of grant and 20% annually thereafter. Unvested options generally are
cancelled upon termination of employment.
1997 NON-EMPLOYEE DIRECTORS STOCK PLAN
The On Command 1997 Non-Employee Directors Stock Plan, as amended, (the "On
Command Directors Plan") authorized the granting of an annual award of 400
shares of On Command Common Stock and, pursuant to an amendment adopted in 1999,
a one-time non-qualified option to purchase 50,000 shares of On Command Common
Stock (an "On Command Independent Director Option") to each On Command
independent director. The aggregate number of shares of On Command Common Stock
which may be issued upon exercise of On Command Independent Directors Options
granted under the On Command Directors Plan plus the number of shares which may
be awarded pursuant to the On Command Directors Plan will not exceed 696,800,
subject to adjustment to reflect events such as stock dividends, stock splits,
recapitalizations, mergers or reorganizations of or by On Command. Effective
December 2002, On Command's Board of Directors adopted a new compensation plan
for independent directors that eliminates the equity component set forth in the
On Command Directors Plan. Subject to the terms and conditions of the plan, the
stock options were granted at no less than fair market value on the date of
grant. The options generally expire in ten years, vest over a three-year period
and are exercisable in installments of 25% after the first and second years, and
the remaining 50% after the third year. During 2002, no options were granted
pursuant to the Directors Plan. In 2001 and 2000, options granted pursuant to
the On Command Directors Plan aggregated 50,000 and 200,000, respectively.
II-58
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following is a summary of activity under the On Command 1996 Plan and
the On Command Directors Plan:
OPTIONS OUTSTANDING
---------------------
WEIGHTED
OPTIONS AVERAGE
AVAILABLE NUMBER OF EXERCISE
FOR GRANT SHARES PRICE
---------- ---------- --------
Balances, January 1, 2000 (690,847 exercisable at a
weighted-average price of $12.77)......................... 436,224 2,489,079 $14.11
Granted (weighted-average fair value of $7.06).............. (2,460,500) 2,460,500 $14.12
Increase in options authorized.............................. 2,650,000 --
Exercised................................................... -- (191,762) $10.40
Cancelled................................................... 862,342 (862,342) $15.25
---------- ----------
Balances, December 31, 2000 (1,124,938 exercisable at a
weighted-average price of $14.07)......................... 1,488,066 3,895,475 $13.79
Granted (weighted-average fair value of $3.68).............. (1,317,000) 1,317,000 $ 6.62
Exercised................................................... -- (2,520) $ 7.19
Cancelled................................................... 1,938,009 (1,938,009) $13.24
---------- ----------
Balances, December 31, 2001 (1,404,793 exercisable at a
weighted-average price of $13.94)......................... 2,109,075 3,271,946 $11.38
Granted (weighted average fair value of $3.32).............. (1,282,000) 1,282,000 $ 4.74
Cancelled................................................... 1,213,850 (1,213,850) $10.75
---------- ----------
Balances, December 31, 2002 (1,187,907 exercisable at a
weighted-average price of $12.87)......................... 2,040,925 3,340,096 $ 9.06
========== ==========
The following table summarizes information about On Command's fixed stock
options outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------- ----------------------------
WEIGHTED
AVERAGE
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
RANGE OF OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/02 LIFE (YEARS) EXERCISE PRICE AT 12/31/02 EXERCISE PRICE
--------------------- ----------- ------------ -------------- ----------- --------------
$ 1.10 - 4.53 400,000 9.2 $ 2.20 38,000 $ 3.41
$ 5.45 - 5.80 1,289,000 9.0 $ 5.54 89,000 $ 5.80
$ 7.34 - 9.34 314,500 7.8 $ 7.65 153,500 $ 7.90
$ 11.13 - 14.87 374,096 5.7 $12.74 262,957 $12.72
$ 15.19 - 15.91 666,500 7.0 $15.27 351,400 $15.33
$ 16.00 - 18.09 296,000 6.6 $16.03 293,050 $16.02
--------- ---------
3,340,096 7.5 $ 9.06 1,187,907 $12.87
========= =========
The Company applies Accounting Principles Board Opinion No. 25 in accounting
for its stock options, and accordingly, compensation expense has been recognized
for its stock options in the accompanying financial statements using the
intrinsic value method. The adjustment to stock compensation of $3,115,000 in
2000 resulted from a decrease in LSAT's liability for SARs.
II-59
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER
Effective February 1, 2001, certain key employees of the Company were
granted, pursuant to the LSAT 1996 Plan, an aggregate of 21,750 restricted
shares of Series A Common Stock. Such shares vest 25% on February 1, 2003, and
vest an additional 25% on each of February 1, 2004, 2005 and 2006. Compensation
expense with respect to the restricted shares aggregated $292,000 and $268,000
during 2002 and 2001, respectively.
(14) TRANSACTIONS WITH DIRECTORS AND EXECUTIVE OFFICERS
LSAT
In September 2000, an executive officer, who was the Company's Chief
Executive Officer and President until his resignation on October 8, 2001,
purchased a 1.83% common stock interest in a subsidiary of Liberty Media for
$400,000. Such subsidiary owned an indirect interest in LSAT LLC. Liberty Media
and the executive officer entered into a shareholders agreement in which the
executive officer could require Liberty Media to purchase, after five years, all
or part of his common stock interest in the subsidiary, in exchange for Liberty
Media common stock, at its then fair value. In addition, Liberty Media had the
right to purchase, in exchange for Liberty Media common stock, the executive
officer's common stock interest for fair market value at any time. On
October 10, 2001, Liberty Media purchased the executive officer's 1.83% common
stock interest in the subsidiary for $425,000.
During 2000, a then director of the Company exercised stock options to buy
5,000 shares of Series A Common Stock of the Company. Such options had an
exercise price of $65.00 per share, and the market price of Series A Common
Stock at the time of such exercise was $110.00. Simultaneously with such
exercise, the Company purchased from the director 2,954 shares of Series A
Common Stock for an aggregate purchase price of $325,000, which represented the
director's aggregate exercise price. Such shares are reflected as treasury
shares in the Company's consolidated statement of stockholders' equity.
During 2000, two executive officers of the Company, received loans in the
principal amounts of $136,000 and $135,000, respectively, to be used solely for
the purpose of satisfying tax liabilities related to the lapse of restrictions
on shares of common stock awarded under the LSAT 1996 Plan. Through
December 31, 2001, the loans accrued interest at an annual rate of 6.41%. In
addition, each of the loans originally provided for principal and interest to be
payable upon the occurrence of certain events and in no event later than
December 1, 2001. During the first quarter of 2002, the Company agreed to extend
the maturity dates of the loans to December 31, 2003, and lower the annual
interest rates of the loans to 4% per annum. Consistent with the terms of the
original loans, interest payments may be deferred by the borrowers until
maturity. Each loan is secured in each case by 2,500 shares of the Company's
Series A Common Stock and are otherwise nonrecourse to the borrowers. As of
December 31, 2002, the balances outstanding on the loans including accrued
interest, were $155,000 and $154,000 respectively, and such balances were
reflected as reductions of stockholders' equity in the accompanying consolidated
balance sheets. Effective April 27, 2001, one of the executive officers became
the President of On Command. Since that date, On Command has been responsible
for 100% of such executive's compensation.
II-60
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASCENT ENTERTAINMENT
During the second quarter of 2001, Ascent Entertainment purchased 2,245,155
shares of common stock of On Command from On Command's former Chairman of the
Board and Chief Executive Officer for aggregate cash consideration of
$25,191,000. Such purchase price represents a per share price of $11.22. The
closing market price for On Command common stock on the day the transaction was
signed was $7.77. The Company has included the $7,746,000 difference between the
aggregate market value of the shares purchased and the cash consideration paid
in selling, general and administrative expenses in the accompanying consolidated
statement of operations.
ON COMMAND
On August 8, 2000, On Command issued 13,500 shares of On Command Series A
Preferred Stock, to the then Chairman and Chief Executive Officer of On Command
in exchange for a $21,080,000 promissory note and a $13,500 cash payment. The
promissory note is secured by the Series A Preferred Stock or proceeds thereon
and the former Chairman and Chief Executive Officer's personal obligations under
such promissory note are limited to 25% of the principal amount of the note plus
accrued interest thereon. The note, which may not be prepaid, is due and payable
on August 1, 2005, and interest on the note accrues at a rate of 7% per annum,
compounded quarterly.
On Command had made arrangements for the use of an airplane owned by a
limited liability company of which On Command's former Chairman of the Board and
Chief Executive Officer is the sole member. When that airplane was used for
purposes related to the conduct of On Command's business, On Command reimbursed
the limited liability company for such use at market rates. The aggregate amount
paid for this service in 2001 was approximately $190,000. This arrangement was
terminated in June 2001.
On August 3, 1998, On Command loaned a Senior Vice President of On Command
$175,000 in connection with such Senior Vice President's relocation. Interest on
the loan accrued at an annual interest rate of 6.34%. Interest accrued annually
but was not payable by the Senior Vice President until the last payment was made
on the loan in accordance with the terms of the loan agreement. All principal
amounts due under the loan were to be paid in three equal payments on
December 31, 2002, 2003 and 2004. As of December 31, 2002, the outstanding
balance on the loan to the Senior Vice President including accrued interest, was
approximately $206,000. On February 5, 2003, all amounts outstanding under this
loan were repaid in full.
II-61
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) INCOME TAXES
LSAT and its 80%-or-more owned subsidiaries have been included in Liberty
Media's consolidated tax return since April 1, 2002. As of December 31, 2002, On
Command was a separate taxpayer and was not included in Liberty Media's
consolidated tax return. In connection with the LSAT LLC and Ascent
Entertainment Transaction, the Company and Liberty Media entered into a Tax
Liability Allocation and Indemnification Agreement, and the Company assumed an
intercompany income tax liability owed by Ascent Entertainment to Liberty Media.
See note 4.
Income tax benefit (expense) for 2002, 2001 and 2000 consists of:
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Current
Federal................................................... $15,228 18,596 (35,578)
State, local and foreign.................................. (418) (430) (3,356)
------- ------ -------
14,810 18,166 (38,934)
------- ------ -------
Deferred
Federal................................................... 17,527 20,075 59,248
State, local and foreign.................................. 3,284 (2,589) 8,136
------- ------ -------
20,811 17,486 67,384
------- ------ -------
Income tax benefit.......................................... $35,621 35,652 28,450
======= ====== =======
Income tax benefit (expense) differs from the amounts computed by applying
the federal income tax rate of 35% as a result of the following:
YEARS ENDED DECEMBER 31,
------------------------------
2002 2001 2000
-------- -------- --------
AMOUNTS IN THOUSANDS
Computed "expected" tax (benefit............................ $ 95,780 223,270 50,893
State and local income taxes, net of federal income tax
benefit................................................... 10,748 2,910 4,686
Minority interest share of losses........................... 205 12,108 5,131
Change in valuation allowance............................... (67,388) (189,714) (59,221)
Foreign taxes............................................... (3,705) (130) (185)
Amortization of goodwill.................................... -- (13,326) (5,994)
Tax benefit from disposal of investment..................... -- -- 27,210
Other....................................................... (19) 534 5,930
-------- -------- -------
$ 35,621 35,652 28,450
======== ======== =======
II-62
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2002 and 2001 are presented below:
DECEMBER 31,
--------------------
2002 2001
--------- --------
AMOUNTS IN THOUSANDS
Deferred tax assets:
Capital and net operating loss carryforwards and tax
credits............................................ $ 192,097 177,696
Investments.......................................... 241,620 181,261
Future deductible amounts principally due to accruals
deductible in later periods........................ 3,582 4,921
--------- --------
Total deferred tax assets.......................... 437,299 363,878
Valuation allowance.................................. (414,179) (346,791)
--------- --------
Net deferred tax assets............................ 23,120 17,087
Deferred tax liabilities:
Property and equipment............................... (20,724) (18,106)
Intangible assets.................................... (4,931) (24,610)
Future taxable amounts principally due to accruals
recognized for tax purposes........................ (12,023) (1,540)
--------- --------
Net deferred tax liabilities..................... $ (14,558) (27,169)
========= ========
The valuation allowance for deferred tax assets as of December 31, 2002 and
2001 was $414,179,000 and $346,791,000, respectively. Such balances increased
$67,388,000 and $189,714,000 from December 31, 2001 and 2000, respectively.
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable to
deductible temporary differences will be realized to the extent of future
reversals of existing taxable temporary differences.
At December 31, 2002, the Company had capital and net operating loss carry
forwards for income tax purposes aggregating approximately $544,201,000 which,
if not utilized to reduce taxable income in future periods, expire as follows
(amounts in thousands):
2009........................................................ $ 42,971
2011........................................................ $ 5,783
2012........................................................ $ 62,712
2018........................................................ $136,988
2019........................................................ $ 44,039
2020........................................................ $117,400
2021........................................................ $ 76,333
2022........................................................ $ 57,975
Current federal and state tax laws include substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" of a corporation. Accordingly, the Company's ability to
utilize net operating loss and tax credit carryforwards may be limited as a
result of such restrictions. Such a limitation could result in the expiration of
carryforwards before they are utilized.
II-63
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company and TCI entered into a tax sharing agreement (the "TCI Tax
Sharing Agreement") dated June 1997, to confirm that (i) neither the Company nor
any of its subsidiaries has any obligation to indemnify TCI or the TCI
shareholders for any tax resulting from the Spin-off failing to qualify as a
tax-free distribution pursuant to Section 355 of the Internal Revenue Code of
1986 (the "Code"); (ii) TCI is obligated to indemnify the Company and its
subsidiaries for any taxes resulting from the Spin-off failing to qualify as a
tax-free distribution pursuant to Section 355 of the Code; (iii) to the best
knowledge of TCI, the Company's total payment obligation under the TCI Tax
Sharing Agreement could not reasonably be expected to exceed $5,000,000.
(16) EMPLOYEE BENEFIT PLANS
On Command is the sponsor of the On Command 401(k) Saving Plan, which
provides employees an opportunity to create a retirement fund by contributing up
to 15% of their eligible earnings in several different mutual funds. On Command,
by annual resolution of On Command's Board of Directors, generally contributes
up to 50% of the amount contributed by employees up to a maximum matching
contribution of 4% of the participating employee's wages. Matching contributions
made by On Command were approximately $798,000, $971,000 and $1,068,000 for
2002, 2001 and 2000, respectively.
In August 1997, On Command adopted the Employee Stock Purchase Plan (the "On
Command ESP Plan") which is intended to qualify under Section 423 of the
Internal Revenue Code. Under the terms of the On Command ESP Plan, On Command
employees can purchase On Command Common Stock at a 10% discount from the market
value on the purchase date. As of December 31, 2002, all shares authorized for
issuance pursuant to the On Command ESP Plan had been purchased by On Command
employees.
(17) CONCENTRATION OF RISK
The Company invests its cash in high-credit quality institutions. These
instruments are short-term in nature and, therefore, bear minimal credit risk.
On Command generates the majority of its revenue from the guest usage of
proprietary video systems in various hotels located primarily throughout the
United States, Canada and Mexico. On Command performs periodic credit
evaluations of its installed hotel locations and generally requires no
collateral while maintaining allowances for potential credit losses.
During 2002, hotels owned, managed or franchised by Marriott
International, Inc. ("Marriott"), Hilton Hotels Corporation ("Hilton"), Six
Continents Hotels, Inc. ("Six Continents"), Hyatt Hotel Corporation ("Hyatt"),
and Starwood Hotels and Resorts Worldwide, Inc. ("Starwood") accounted for 30%,
16% 12%, 7% and 7%, respectively, of On Command's total net room revenue.
Accordingly, hotels owned, managed or franchised by On Command's five largest
hotel chain customers accounted for 72% of On Command's total net room revenue
during 2002. The loss of any of these hotel chain customers, or the loss of a
significant number of other hotel chain customers, could have a material adverse
effect on the Company's results of operations and financial condition.
As further discussed below, the Hilton master contract has expired, and
Hilton has signed a new master contract with a competitor of On Command. In
addition, On Command does not have master contracts with either Starwood or Six
Continents, and the Hyatt master contract provides for the simultaneous
expiration of On Command's contractual relationships with all of the individual
hotels
II-64
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
that are subject to the Hyatt master contract as of December 31, 2004. At
December 31, 2002, On Command provided entertainment services to approximately
178,000 rooms in hotels that are owned, managed or franchised by Starwood or Six
Continents. Agreements with respect to approximately 54% of such Starwood and
Six Continents rooms have already expired, or will expire by December 31, 2004.
At December 31, 2002, approximately 39,000 or 61% of On Command's Starwood rooms
were located in Sheraton or Four Points hotels that, depending on whether such
hotels are owned, managed or franchised by Starwood, may be covered by a master
contract with a competitor of On Command upon the expiration of such hotels'
contracts with On Command. On Command is actively pursuing master agreements
with Hyatt and Six Continents, and with Starwood with respect to the Starwood
brands that are not already covered by a competitor's contract. In certain
cases, On Command is also pursuing direct contractual relationships with
individual hotels that are owned, managed or franchised by these hotel chains.
No assurance can be given that On Command will be successful in executing master
or individual hotel contracts. Due to the significant cost involved in changing
the proprietary video equipment installed in hotels, On Command expects that,
regardless of the expiration dates of master contracts or individual contracts
with hotels, On Command will continue to be the provider of in-room
entertainment services for individual hotels that are not under contract until
such time as a competitor's equipment can be installed. For this and other
reasons, On Command does not anticipate that it will cease earning revenue from
all of its Hyatt rooms on December 31, 2004 in the event that a new master
contract has not been executed by that date.
In October 2000, Hilton announced that it would not be renewing its master
contract with On Command. As a result, hotels owned, managed or franchised by
Hilton are currently subject to a master contract between Hilton and a
competitor of On Command. Accordingly, On Command anticipates that hotels owned
by Hilton will not renew their contracts as they expire. On the other hand,
hotels that are managed or franchised by Hilton are not precluded from renewing
their contracts with On Command, and, although no assurance can be given, On
Command anticipates that certain of those hotels will choose to renew. At
December 31, 2002, On Command provided service to approximately 126,200 rooms in
534 hotels that are owned, managed or franchised by Hilton. The majority of
these rooms are located in managed or franchised hotels that are not owned by
Hilton. Through December 31, 2002, On Command's contracts with 71 of the
aforementioned 534 hotels (20,400 rooms) had expired and service to these hotels
is currently provided under monthly or other short-term renewals. On Command's
individual contracts with the remaining 463 Hilton hotels (105,800 rooms) expire
at various dates through 2010, with 56% of those rooms expiring by 2005. During
2002, On Command entered into new contracts, or renewed existing contracts, with
respect to 7,000 rooms that were franchised by Hilton, and 2,600 rooms that were
managed by Hilton. Over time, On Command anticipates that the revenue it derives
from hotels that are owned, managed or franchised by Hilton will decrease.
However, due to the uncertainties involved, On Command is currently unable to
predict the amount and timing of the revenue decreases.
During 2001, Marriott, Hilton and Six Continents accounted for 27%, 19% and
12%, respectively of On Command's net room revenue. During 2000, Marriott,
Hilton and Six Continents accounted for 24%, 20% and 11%, respectively of On
Command's net room revenue.
II-65
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(18) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company leases office space and certain equipment pursuant to
noncancelable operating leases. Rental expense under such agreements amounted to
$3,737,000, $4,914,000 and $3,967,000 for 2002, 2001 and 2000, respectively.
Future minimum annual payments under non-cancelable operating leases at
December 31, 2002 are as follows (amounts in thousands):
YEARS ENDING DECEMBER 31:
-------------------------
2003...................................................... $3,229
2004...................................................... 2,124
2005...................................................... 881
2006...................................................... 308
2007 and thereafter....................................... 95
------
Total..................................................... $6,637
======
The foregoing future minimum payment amounts include $1,590,000 of future
payments provided for in certain On Command restructuring accruals. Such
reserves are included in other accrued liabilities and other long term
liabilities in the accompanying consolidated balance sheets.
On Command is a party to affiliation agreements with programming suppliers.
Pursuant to certain of such agreements, On Command is committed to carry such
suppliers' programming on its video systems. Additionally, certain of such
agreements provide for penalties and charges in the event the programming is not
carried or not delivered to a contractually specified number of rooms.
In certain cases, On Command has entered into master contracts whereby On
Command has agreed to purchase televisions and/or provide other forms of capital
assistance and, to a lesser extent, provide television maintenance services to
hotels during the respective terms of the applicable contracts.
In connection with the first quarter 2001 acquisition of Hotel Digital
Network, Inc. ("HDN"), On Command entered into a stockholders' agreement (the
"HDN Stockholders' Agreement") with the then controlling stockholder of Hotel
Digital Network (the "HDN Stockholder"). The HDN Stockholders' Agreement
provides the HDN Stockholder with the right during each of the 30-day periods
beginning on March 1, 2003 and 2004 to require On Command to exchange shares of
On Command Common Stock for all, but not less than all, of the HDN common shares
held by the HDN Stockholder. On March 20, 2003, the HDN Stockholder exercised
such right. The HDN Stockholders' Agreement also provides On Command with the
right during the 30-day period beginning on March 1, 2006 to require the HDN
Stockholder to exchange all, but not less than all, of his HDN common shares for
shares of On Command Common Stock. The number of shares of On Command Common
Stock to be issued in any such exchanges will be determined based on the then
market value of On Command Common Stock and the then fair value of HDN common
stock, each as determined in accordance with the HDN Stockholders' Agreement. At
December 31, 2002, On Command held 85.9%, and the HDN Stockholder held 13.3% of
the outstanding HDN common stock. Based on On Command's current assessment of
values, On Command does not expect that the settlement of this obligation will
have a material impact on its capitalization, financial condition or results of
operations.
II-66
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
CONTINGENCIES
Liberty Media International, Inc. ("Liberty International"), a subsidiary of
Liberty Media, and other investors in the Sky Latin America businesses have
severally guaranteed obligations due under certain transponder agreements and
equipment lease agreements through 2018. The Company has indemnified Liberty
International with respect to Liberty International's obligations under these
guarantees. At December 31, 2002, the portions of the remaining undiscounted
obligations due under such transponder agreements and equipment lease agreements
that were severally guaranteed by Liberty International aggregated approximately
$107,906,000 and $7,000,000, respectively. During the fourth quarter of 2002,
Globo Comunicacoes e Participacoes ("GloboPar"), an investor in three of the Sky
Latin America entities, announced that it was reevaluating its capital
structure. Since that time, GloboPar has not provided any funding to the three
Sky Latin America entities in which it is an investor. In the case of one such
entity, Sky Multi-Country Partners ("Sky Multi-Country"), the Company and the
other investors in Sky Multi-Country have each entered into a Forbearance
Agreement with respect to Sky Multi-Country's obligations under a Transponder
Services Agreement with PamAmSat Corporation (successor-in-interest to PamAmSat
International, Inc.) ("PamAmSat"). Pursuant to the Forbearance Agreement,
PamAmSat will forbear from enforcing its rights under the Transponder Services
Agreement through April 30, 2003, provided that it receives at least 70% of the
fees due under the Transponder Services Agreement. Through March 15, 2003, the
Company and the other investors in Sky Multi-Country have collectively funded at
lease 70% of the fees due under the Transponder Service Agreement. At
December 31, 2002, the aggregate obligations of Sky Multi-Country that were
severally guaranteed by Liberty International were $40,667,000. Sky
Multi-Country funds another Sky Latin America entity in which GloboPar is an
investor. At December 31, 2002, the aggregate obligations of this entity that
are severally guaranteed by Liberty International were $7,000,000. In the case
of Sky Brasil Servicos Limitada ("Sky Brasil"), another entity in which GloboPar
is an investor, an investor other than the Company had previously agreed in
July 2002 to assume up to $50,000,000 of GloboPar's funding obligations through
2003 in exchange for increased ownership and governance rights. At December 31,
2002, the aggregate obligations of Sky Brasil that are severally guaranteed by
Liberty International were $41,360,000. As detailed above, the three entities in
which GloboPar is an investor account for approximately $89,027,000 of the
aggregate obligations guaranteed by Liberty International at December 31, 2002.
To the extent that the Company or other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable transponder agreements and equipment lease agreements. With respect
to the equipment lease agreements, default also includes bankruptcy, debt
default, or material adverse change in the business or financial condition of
any guarantor that materially adversely affects the ability of any such
guarantor to perform its obligations under the guarantee. In the event any such
defaults were to occur, the default provisions of the applicable agreements
would determine the ultimate amount to be paid by the Company. The Company
believes that the maximum amount of the Company's aggregate exposure under the
default provisions of the various agreements is not in excess of the
undiscounted remaining obligations guaranteed by the Company, as set forth
above. The Company cannot currently predict if, and to what extent, it will be
required to perform under any of such guarantees.
On Command has received a series of letters from Acacia Media Technologies
Corporation regarding a portfolio of patents owned by Acacia. Acacia has alleged
that its patents cover certain activities performed by On Command and has
proposed that On Command take a license under those patents. On Command is
reviewing Acacia's patents and believes there are substantial arguments that
Acacia's claims lack merit.
II-67
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has contingent liabilities related to other legal proceedings
and other matters arising in the ordinary course of business. Although it is
reasonably possible the Company 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.
(19) INFORMATION ABOUT OPERATING SEGMENTS
LSAT identifies its reportable segments as those consolidated subsidiaries
that represent 10% or more of its combined revenue, net earnings or loss, or
total assets and those equity method affiliates whose share of earnings or
losses represent 10% or more of its pre-tax earnings or loss. Subsidiaries and
affiliates not meeting this threshold are aggregated together for segment
reporting purposes. The segment presentation for prior periods has been
conformed to the current period segment presentation.
For the year ended December 31, 2002, LSAT had two operating segments: "On
Command" and "Other." On Command provides in-room, on-demand video entertainment
and information services to hotels, motels and resorts primarily in the United
States and is majority owned and consolidated by LSAT. "Other" includes LSAT's
non-consolidated investments, corporate and other consolidated businesses not
representing separately reportable segments.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. LSAT evaluates performance based
on the measures of revenue and operating cash flow. LSAT defines operating cash
flow as operating income before deducting stock compensation, depreciation and
amortization, and asset impairments and other charges. LSAT's definition of
operating cash flow may differ from cash flow measurements provided by other
public companies. LSAT believes operating cash flow is a widely used financial
indicator of companies similar to LSAT and its affiliates, which should be
considered in addition to, but not as a substitute for, operating income, net
income, cash flow provided by operating activities and other measures of
financial performance prepared in accordance with generally accepted accounting
principles. LSAT generally accounts for intersegment sales and transfers as if
the sales or transfers were to third parties, that is, at current prices.
II-68
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LSAT utilizes the following financial information for purposes of making
decisions about allocating resources to a segment and assessing a segment's
performance:
ON COMMAND OTHER TOTAL
---------- -------- ---------
AMOUNTS IN THOUSANDS
PERFORMANCE MEASURES:
Year ended December 31, 2002
Revenue................................................... $238,397 420 238,817
Operating cash flow....................................... $ 65,431 (2,378) 63,053
Year ended December 31, 2001
Revenue................................................... $239,409 14,978 254,387
Operating cash flow....................................... $ 44,131 (11,797) 32,334
Year ended December 31, 2000
Revenue................................................... $200,416 17,857 218,273
Operating cash flow....................................... $ 50,440 2,502 52,942
BALANCE SHEET INFORMATION:
As of December 31, 2002
Total assets.............................................. $397,973 477,246 875,219
Investments in affiliates................................. -- -- --
As of December 31, 2001
Total assets.............................................. $584,726 640,171 1,224,897
Investments in affiliates................................. $ -- 12,158 12,158
The following table provides a reconciliation of segment operating cash flow
to loss before income taxes and minority interest:
YEARS ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
--------- -------- --------
AMOUNTS IN THOUSANDS
Segment operating cash flow................................. $ 63,053 32,334 52,942
Stock compensation.......................................... (292) (268) 3,115
Depreciation and amortization............................... (133,400) (172,326) (135,312)
Asset impairments and other charges......................... (8,850) (709) (1,634)
Interest expense............................................ (18,530) (47,477) (34,843)
Share of losses of affiliates............................... (13,705) (424,247) (7,251)
Nontemporary declines in fair value of investments.......... (163,881) (96,438) (9,860)
Unrealized gain (losses) on financial instruments........... 2,393 38,891 (14,426)
Other, net.................................................. (611) (2,021) (13,218)
--------- -------- --------
Loss before income taxes and minority interest.............. $(273,823) (672,261) (160,487)
========= ======== ========
II-69
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
--------- -------- -------- --------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
2002:
Revenue, as reported................................ $ 105 61,104 60,895
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... 57,383 -- --
--------- ------- -------
Revenue, as adjusted................................ $ 57,488 61,104 60,895 59,330
========= ======= ======= ========
Operating loss, as reported......................... $ (941) (21,920) (17,600)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (20,338) -- --
--------- ------- -------
Operating loss, as adjusted......................... $ (21,279) (21,920) (17,600) (18,690)
========= ======= ======= ========
Loss before cumulative effect of accounting change,
as reported....................................... $ 6,314 (83,941) (29,666)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (32,159) -- --
--------- ------- -------
Loss before cumulative effect of accounting change,
as adjusted....................................... $ (25,845) (83,941) (29,666) (98,585)
========= ======= ======= ========
Net loss attributable to common shareholders, as
reported.......................................... $ (2,629) (92,971) (38,696)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (138,083) -- --
--------- ------- -------
Net loss attributable to common shareholders, as
adjusted.......................................... $(140,712) (92,971) (38,696) (107,615)
========= ======= ======= ========
Basic and diluted loss per common share before
cumulative effect of accounting change, as
reported.......................................... $ 0.84 (2.02) (0.67)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (1.46) -- --
--------- ------- -------
Basic and diluted loss per common share before
cumulative effect of accounting change, as
adjusted.......................................... $ (0.62) (2.02) (0.67) (2.15)
========= ======= ======= ========
Basic and diluted loss per common share, as
reported.......................................... $ (0.35) (2.24) (0.88)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (3.04) -- --
--------- ------- -------
Basic and diluted loss per common share, as
adjusted.......................................... $ (3.39) (2.24) (0.88) (2.35)
========= ======= ======= ========
II-70
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIARIES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS
2001:
Revenue, as reported................................ $ 105 105 105 105
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... 67,645 69,145 61,642 55,535
-------- -------- ------- --------
Revenue, as adjusted................................ $ 67,750 69,250 61,747 55,640
======== ======== ======= ========
Operating loss, as reported......................... $ (759) (785) (1,664) (1,531)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (32,361) (44,456) (28,358) (31,055)
-------- -------- ------- --------
Operating loss, as adjusted......................... $(33,120) (45,241) (30,022) (32,586)
======== ======== ======= ========
Net loss attributable to common shareholders, as
reported.......................................... $(12,088) (49,203) (9,154) (67,975)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... (55,323) (161,784) (26,494) (256,362)
-------- -------- ------- --------
Net loss attributable to common shareholders, as
adjusted.......................................... $(67,411) (210,987) (35,648) (324,337)
======== ======== ======= ========
Basic and diluted loss per common share, as
reported.......................................... $ (1.65) (6.72) (1.22) (9.03)
Adjustment for related party acquisition accounted
for similar to a pooling of interests........... .02 1.61 .36 1.22
-------- -------- ------- --------
Basic and diluted loss per common share, as
adjusted.......................................... $ (1.63) (5.11) (0.86) (7.81)
======== ======== ======= ========
(21) SUBSEQUENT EVENTS
In March 2003, the Company received proceeds of approximately $149 million
upon the sale of a portion of its Sprint PCS Stock and the settlement of a
portion of its interests in the Sprint PCS Stock equity collar. The Company used
approximately $48 million of such proceeds to repay all amounts due under its
note payable to Liberty Media. In April 2003, the Company expects to receive
additional proceeds of approximately $154 million in connection with the sale of
its remaining Sprint PCS Stock and the settlement of its remaining interests in
the Sprint PCS Stock equity collar. The Company expects to use approximately
$115 million of such proceeds to repay all amounts due under the PCS Loan
Facility.
II-71
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following lists the directors and executive officers of Liberty
Satellite and Technology, Inc. ("LSAT," and together with its consolidated
subsidiaries, the "Company"), their birth dates, a description of their business
experience and positions held with the Company, as of February 1, 2003, unless
otherwise noted.
NAME POSITION
---- ------------------------------------------------------------
Alan M. Angelich ..... Has served as a director of the Company since August 2000.
Born October 22, 1943 Mr. Angelich has been the President of Janco Capital
Partners, Inc., an investment banking firm specializing in
the telecommunications industry, since December 1995 when he
co-founded the firm.
Robert R. Bennett .... Has served as a director of the Company since August 2000.
Born April 19, 1958 Mr. Bennett has served as President and Chief Executive
Officer of the Company's parent, Liberty Media Corporation
("Liberty Media"), since April 1997. Mr. Bennett served as
Executive Vice President of Tele-Communications, Inc.
("TCI") (now a part of Comcast Corporation) from April 1997
to March 1999. Mr. Bennett has held various executive
positions since Liberty Media's inception in 1990. Mr.
Bennett is a director of Liberty Media, Ascent Media Group,
Inc. (formerly Liberty Livewire Corporation) ("Ascent
Media"), UnitedGlobalCom, Inc. ("UnitedGlobalCom"), USA
Interactive, and OpenTV Corp.
William H. Berkman . Has served as a director of the Company since August 2000.
Born February 26, 1965 Since January 2000, Mr. Berkman has been the Managing
Partner of the Associated Group, LLC, the general partner of
Liberty Associated Partners, LP, an investment partnership
specializing in the telecommunications and media industry.
From 1994 to January 2000, Mr. Berkman was a principal at
The Associated Group, Inc., a publicly traded company. Mr.
Berkman was also one of the founders of Teligent, Inc. and
served as a member of Teligent, Inc.'s board of directors
from August 1996 to January 2000.
William R. Has served as a director of the Company since April 1, 2002.
Fitzgerald . Mr. Fitzgerald has served as Senior Vice President of
Born May 20, 1957 Liberty Media and as Chairman of the Board of Ascent Media,
since August 2000, and has served as Acting Chief Executive
Officer of Ascent Media since May 2002. Mr. Fitzgerald
served as Chief Operating Officer, Operations
Administration, of AT&T Broadband LLC (formerly TCI, and now
a part of Comcast Corporation), from August 1999 to May
2000, and Executive Vice President and Chief Operating
Officer of TCI from March 1999 to August 1999. Mr.
Fitzgerald served as Executive Vice President and Chief
Operating Officer of TCI Communications, Inc. (TCI
Communications"), the domestic cable subsidiary of TCI, from
November 1998 to March 1999, and served as Executive Vice
President of TCI Communications from December 1997 to March
1999. Mr. Fitzgerald is a director of On Command Corporation
("On Command"), an indirect subsidiary of the Company, and
Ascent Media.
III-1
NAME POSITION
---- ------------------------------------------------------------
John W. Goddard ...... Has served as a director of the Company since December 1996.
Born May 4, 1941 Mr. Goddard served as President and Chief Executive Officer
of the cable division of Viacom International, Inc. from
1980 until the division was sold in July 1996. Mr. Goddard
is also a director of Cable Television Laboratories, Inc.
(Cablelabs), and The Deafness Research Foundation and is a
Trustee of the Walter Kaitz Foundation.
J. Curt Hockemeier ... Has served as a director of the Company since August 2000.
Born May 15, 1948 Mr. Hockemeier has been President of Arbinet-thexchange, a
leading online telecommunications exchange, since April
2000, and Chief Executive Officer since August 2000. From
June 1999 until April 2000, Mr. Hockemeier served as
Executive Vice President and Chief Operating Officer for
telephone operations for AT&T Broadband, LLC (formerly TCI,
and now a part of Comcast Corporation) and from July 1998
until June 1999, he served as AT&T Local Network Services'
Vice President. Beginning in 1992, Mr. Hockemeier served as
Senior Vice President of Affiliate Services for Teleport
Communications Group and held other senior management
positions with Teleport, including Senior Vice President of
National Operations, until AT&T Corporation acquired
Teleport Communications Group in July 1998.
Gary S. Howard ....... Has served as Chairman of the Board since August 2000 and
Born February 22, 1951 has served as a director of the Company since November 1996.
Mr. Howard served as Chief Executive Officer of the Company
from December 1996 until April 2000. From February 1995
through August 1997, Mr. Howard also served as President of
the Company. Mr. Howard has served as the Executive Vice
President, Chief Operating Officer and director of Liberty
Media since July 1998. Mr. Howard served as Executive Vice
President of TCI from December 1997 to March 1999; as Chief
Executive Officer, Chairman of the Board and director of TV
Guide, Inc. from June 1997 to March 1999; and as President
and Chief Executive Officer of TCI Ventures Group, LLC from
December 1997 to March 1999. Mr. Howard is a director of
Liberty Media, Ascent Media, UnitedGlobalCom, On Command and
SpectraSite, Inc.
Kenneth G. Carroll ... Has served as Senior Vice President and Chief Financial
Born April 21, 1955 Officer of the Company since February 1995 and as Treasurer
since August 1999. Mr. Carroll is currently the Company's
acting President. He has also served as Senior Vice
President and Chief Financial Officer of Phoenixstar, Inc.
(formerly known as PRIMESTAR, Inc.) since April 1998. Mr.
Carroll is a director of On Command.
The directors of the Company will hold office until the next annual meeting
of stockholders of the Company and until their successors are duly elected and
qualified. The executive officers named above will serve in such capacities
until the next annual meeting of the Company's Board of Directors (the "LSAT
Board"), or until their respective successors have been duly elected and have
been qualified, or until their earlier death, resignation, disqualification or
removal from office.
The Company's charter provides for a Board of Directors of not less than
three members. The exact number of directors is fixed by resolution of the LSAT
Board.
There are no family relations by blood, marriage or adoption, of first
cousin or closer, among the above named individuals.
III-2
During the past five years, none of the persons named above has had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
("SEC"). Officers, directors and greater-than-ten-percent shareholders are
required by SEC regulation to furnish the Company with copies of all
Section 16(a) forms they file.
Based solely on review of the copies of Forms 3, 4 and 5 and amendments
thereto furnished to the Company with respect to its most recent fiscal year, or
written representations that no Forms 5 were required, the Company believes
that, during the year ended December 31, 2002, its officers, directors and
greater-than-ten-percent beneficial owners complied with all Section 16(a)
filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
(a) SUMMARY COMPENSATION TABLE
The following table is a summary of all forms of compensation paid by the
Company to the officer named therein for services rendered in all capacities to
the Company for the fiscal years ended December 31, 2002, 2001 and 2000.
ANNUAL
COMPENSATION LONG-TERM COMPENSATION
------------ --------------------------
SECURITIES ALL
RESTRICTED UNDERLYING OTHER
NAME AND PRINCIPAL POSITION STOCK OPTIONS/ COMPENSATION
WITH THE COMPANY YEAR SALARY AWARD SARS (4)
--------------------------------------- -------- ------------ ---------- ---------- ------------
Kenneth G. Carroll .................... 2002 $284,457 $ -- -- $17,856
(Senior Vice President, 2001 $278,000 $314,063(2) 15,000(3) $17,500
CFO, Treasurer and Acting President) 2000 $238,343(1) $ -- -- $15,000
------------------------
(1) Mr. Carroll began receiving compensation from the Company on February 1,
2000. Accordingly, the 2000 compensation information included in the table
represents eleven months of employment.
(2) Effective February 1, 2001, Mr. Carroll was granted 7,500 restricted shares
of the Company's Series A common stock ("Series A Common Stock"). Such
shares vested 25% on February 1, 2003, and will vest an additional 25% on
February 1, 2004, 2005 and 2006.
(3) Pursuant to the Company's 1996 Stock Incentive Plan (the "LSAT 1996 Plan")
and effective August 10, 2001, Mr. Carroll was granted an aggregate of
15,000 options to acquire shares of Series A Common Stock at a purchase
price of $26.00.
(4) Includes LSAT contributions to the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Savings Plan") beginning in April 2000. Mr. Carroll is fully
vested in such plan.
Since April 2000, LSAT employees have been eligible to participate in the
Liberty 401(k) Savings Plan. The Liberty 401(k) Savings Plan provides employees
with an opportunity to save for retirement. The Liberty 401(k) Savings Plan
participants may contribute up to 10% of their pre-tax compensation and/or up to
10% of their post-tax compensation. Liberty 401(k) Savings contributes a
matching contribution of 100% of the participants' contributions. Participant
contributions to the Liberty 401(k) Savings Plan are fully vested upon
contribution.
III-3
Generally, participants acquire a vested right in Liberty 401(k) Savings
Plan contributions as follows:
YEARS OF SERVICE VESTING PERCENTAGE
---------------- ------------------
Less than 1......................................... 0%
1-2................................................. 33%
2-3................................................. 66%
3 or more........................................... 100%
Directors who are not employees of Liberty Media are ineligible to
participate in the Liberty 401(k) Savings Plan. Under the terms of the Liberty
401(k) Savings Plan, employees are eligible to participate after three months of
service.
(b) OPTION GRANTS IN LAST FISCAL YEAR
No stock options were granted during the year ended December 31, 2002 to the
named executive officer of the Company.
(c) AGGREGATED LSAT OPTION/STOCK APPRECIATION RIGHT ("SAR") EXERCISES AND
FISCAL YEAR-END LSAT
OPTION/SAR VALUES
The following table provides, for the executive named in the Summary
Compensation Table, information on (i) the exercise during the year ended
December 31, 2002, of options/SARs with respect to shares of Series A Common
Stock, (ii) the number of shares of Series A Common Stock represented by
unexercised options/SARs owned by him at December 31, 2002, and (iii) the value
of those options/ SARs as of the same date.
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/ OPTIONS/
SARS AT SARS AT
DECEMBER 31, DECEMBER 31,
SHARES 2002 2002
ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
---- ----------- -------- ------------- -------------
Kenneth G. Carroll
Exercisable Series A............................ -- -- 31,465 --
Unexercisable Series A.......................... -- -- 36,250 --
(d) COMPENSATION OF DIRECTORS
Members of the LSAT Board who are also full-time employees of the Company or
Liberty Media, or any of their respective subsidiaries, do not receive any
additional compensation for their services as directors. Directors who are not
full-time employees of the Company or Liberty Media, or any of their respective
subsidiaries, receive a retainer of $30,000 per year. Directors are generally
not separately compensated for service on committees. All members of the LSAT
Board are reimbursed for expenses incurred to attend any meeting of the LSAT
Board or any committee thereof. In addition, the TCI Satellite
Entertainment, Inc. 1997 Nonemployee Director Stock Option Plan (the "LSAT
DSOP") provides for the grant to each person that is a member of the LSAT Board
and is not an employee of the Company, its subsidiaries or its affiliates, of
options to purchase 5,000 shares of Series A Common Stock. Such grant of options
is made at the time a person first becomes an LSAT director. The LSAT DSOP
provides that the per share exercise price of each option granted under the LSAT
DSOP will be equal to the fair market value of the Series A Common Stock on the
date such option is granted. In
III-4
general, fair market value is determined by reference to the last sale price for
shares of Series A Common Stock on the date of grant.
During the first quarter of 2002, Messrs. Allan M. Angelich, John W. Goddard
and J. Curt Hockemeier, each received $7,500 for their service during the fourth
quarter of 2001 on a special committee formed by the LSAT Board to review and
evaluate Liberty Media's October 12, 2001 proposal to acquire all of the Company
common stock not already owned by Liberty Media.
(e) ADDITIONAL INFORMATION WITH RESPECT TO COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The members of the Company's compensation committee are Messrs. Alan M.
Angelich, William H. Berkman and John. W. Goddard, each a director of the
Company. None of the members of the compensation committee are or were officers
of the Company or any of its subsidiaries or any other person that would
constitute a compensation committee interlock with the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table lists stockholders (excluding any directors or officers
of the Company) believed by the Company to be the beneficial owners of more than
five percent of the outstanding voting securities as of December 31, 2002 based
upon filings pursuant to Section 13(d) or (g) under the Securities Exchange Act
of 1934, as amended. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of common stock issuable
upon exercise or conversion of options, warrants and convertible securities that
were exercisable or convertible on or within 60 days after December 31, 2002,
are deemed to be outstanding and to be beneficially owned by the person holding
the options, warrants or convertible securities for the purpose of computing the
percentage ownership of the person, but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person. Voting power
in the table is computed with respect to a general election of directors. So far
as is known to the Company, the persons indicated below have sole voting and
investment power with respect to the shares indicated as believed to be owned by
them except as otherwise stated in the notes to the table.
NUMBER OF
SHARES COMBINED
BENEFICIALLY VOTING
NAME AND ADDRESS OF OWNED PERCENT OF POWER OF ALL
BENEFICIAL OWNER TITLE OF CLASS (IN THOUSANDS) CLASS(1) HOLDINGS(1)
------------------- ------------------------ -------------- ---------- ------------
Liberty Media Corporation ......... Series B Preferred Stock 150 100.0% 97.6%(2)
12300 Liberty Boulevard Series A Common Stock 4,924 44.4%
Englewood, Colorado Series B Common Stock 34,332(2) 98.8%(2)
Arnhold and S. Bleichroeder ....... Series B Preferred Stock -- -- *
Advisers, Inc. (3) Series A Common Stock 200 1.8%
1345 Avenue of the Americas Series B Common Stock -- --
New York, NY 10105
Michael M. Kellen (4) ............. Series B Preferred Stock -- -- *
1345 Avenue of the Americas Series A Common Stock 598 5.4%
New York, NY 10105 Series B Common Stock -- --
------------------------
* Less than one percent.
III-5
(1) Based on 150,000 shares of the Series B Preferred Stock ("Series B Preferred
Stock"), 11,078,834 shares of Series A Common Stock and 34,765,055 shares of
Series B Common Stock outstanding as of December 31, 2002.
(2) Does not include 1,696,717 shares of Series B common stock ("Series B Common
Stock") issuable upon conversion of the Series B Preferred Stock.
(3) Based upon a Schedule 13D jointly filed on November 5, 2002 by Michael M.
Kellen, an individual, DEF Associates N.V., a corporation incorporated in
Saint Maarten under the laws of the Netherlands Antilles, Arnhold and S.
Bleichroeder Holdings, Inc., a New York corporation ("A&SB Holdings"), and
Arnhold and S. Bleichroeder Advisers, Inc., a New York corporation ("A&SB
Advisers") and a wholly-owned subsidiary of A&SB Holdings. The foregoing
persons are hereinafter referred to collectively as the A&SB Reporting
Persons. DEF Associates owns 200,000 shares. Each of A&SB Advisers, by
reason of its investment advisory relationship with DEF Associates, and A&SB
Holdings, by reason of its controlling ownership of A&SB Advisers, may be
deemed to own the 200,000 shares owned by DEF Associates. DEF Associates,
A&SB Advisers and A&SB Holdings share the power to direct the vote and the
disposition of 200,000 shares. While the beneficial ownership of the A&SB
Reporting Persons amounts to less than five percent of the outstanding
shares of Series A common stock, their beneficial ownership is related to,
and reported on, the same Schedule 13D for Michael Kellen's beneficial
ownership of shares of Series A common stock. For a further discussion of
Mr. Kellen's relationship to the A&SB Reporting Persons, please see
note (4) to this table below.
(4) Based upon the Schedule 13D jointly filed on November 5, 2002 by the A&SB
Reporting Persons. A Senior Vice President and Director of A&SB Holdings,
Mr. Kellen, in his individual capacity, has discretionary investment
management authority with respect to certain assets of the funds advised by
A&SB Advisers, including the 200,000 shares held by DEF Associates.
Mr. Kellen, therefore, may also be deemed to beneficially own such 200,000
shares. Mr. Kellen also beneficially owns 397,740 shares of Series A common
stock through certain discretionary accounts under his management.
Mr. Kellen has the shared power to direct the vote and the disposition of
597,740 shares.
(b) SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the ownership by
each director and each of the named executive officers of LSAT and by all
directors and executive officers of LSAT as a group of shares of Series A Common
Stock and Series B Common Stock. In addition, the table sets forth information
with respect to the ownership of such individuals of shares of On Command common
stock ("On Command Common Stock"), and of Liberty Media Series A common stock
("Liberty Media Series A Common Stock") and Liberty Media Series B common stock
("Liberty Media Series B Common Stock"). Liberty Media owns a controlling
interest in LSAT, and LSAT owns a controlling interest in On Command.
III-6
The following information is given as of December 31, 2002 and, in the case
of percentage ownership information, is based on 11,078,834 shares of Series A
Common Stock, 34,765,055 shares of Series B Common Stock, 30,854,489 shares of
On Command common stock, 2,476,953,566 shares of Liberty Media Series A Common
Stock, and 212,044,128 shares of Liberty Media Series B Common Stock,
outstanding on that date. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission and generally includes
voting or investment power with respect to securities. Shares of common stock
issuable upon exercise or conversion of options, warrants and convertible
securities that were exercisable or convertible on or within 60 days after
December 31, 2002, are deemed to be outstanding and to be beneficially owned by
the person holding the options, warrants or convertible securities for the
purpose of computing the percentage ownership of the person, but are not treated
as outstanding for the purpose of computing the percentage ownership of any
other person. Voting power in the table is computed with respect to a general
election of directors. So far as is known to the Company, the persons indicated
below have sole voting and investment power with respect to the shares indicated
as believed to be owned by them, except as indicated in the notes to the table.
NUMBER
OF SHARES
BENEFICIALLY PERCENT
OWNED OF VOTING
NAME TITLE OF CLASS (IN THOUSANDS) CLASS POWER
---- ---------------------- -------------- -------- --------
Directors:
Alan M. Angelich........... Series A 3 (1) * *
Series B -- --
On Command -- --
Liberty Media Series A 40 * *
Liberty Media Series B -- --
Robert R. Bennett.......... Series A 1 (2) * *
Series B -- --
On Command -- --
Liberty Media Series A 3,800 (3)(4)(5)(6) * 1.8%
Liberty Media Series B 7,923 (4) 3.6%
William H. Berkman......... Series A 3 (1)(7) * *
Series B -- --
On Command -- --
Liberty Media Series A 1,382 (8) * *
Liberty Media Series B -- --
William R. Fitzgerald...... Series A -- --
Series B -- --
On Command -- --
Liberty Media Series A 654 (9)(10) * *
Liberty Media Series B -- --
III-7
NUMBER
OF SHARES
BENEFICIALLY PERCENT
OWNED OF VOTING
NAME TITLE OF CLASS (IN THOUSANDS) CLASS POWER
---- ---------------------- -------------- -------- --------
John W. Goddard............ Series A 5 (11)(12) * *
Series B -- (11) --
On Command -- --
Liberty Media Series A 83 (11) * *
Liberty Media Series B 73 (11) *
J. Curt Hockemeier......... Series A 3 (1) * *
Series B -- --
On Command -- --
Liberty Media Series A 2 (13) * *
Liberty Media Series B -- --
Gary S. Howard............. Series A 58 (14) * *
Series B -- --
On Command 1 * *
Liberty Media Series A 5,651 (15)(16)(17) * *
(18)(19)
Liberty Media Series B -- --
Named executive officer:
Kenneth G. Carroll......... Series A 44 (20) * *
Series B -- --
On Command -- --
Liberty Media Series A 17 (21) * *
Liberty Media Series B -- --
All directors and executive 117 1.1% *
officers as a group........ Series A
Series B -- --
On Command 1 * *
Liberty Media Series A 11,629 * 2.0%
Liberty Media Series B 7,996 3.6%
------------------------
* Less than one percent.
(1) Assumes the exercise in full of options to purchase 3,333 shares granted
pursuant to the Company's Nonemployee Director Stock Option Plan, all of
which are exercisable on or within 60 days after December 31, 2002.
(2) Assumes the exercise in full of stock options granted in tandem with SARs
to purchase 500 shares, all of which are exercisable on or within 60 days
after December 31, 2002.
(3) Includes 349,307 restricted shares, none of which was vested at
December 31, 2002.
(4) Assumes the exercise in full of options to purchase 25,640 shares of
Liberty Media Series A Common Stock and 7,922,930 shares of Liberty Media
Series B Common Stock, all of which are exercisable on or within 60 days
after December 31, 2002. Mr. Bennett also has the right to convert options
to purchase Liberty Media Series B Common Stock into options to purchase
Liberty Media Series A Common Stock.
(5) Includes 22,287 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Bennett.
III-8
(6) Includes 1,246,580 shares owned by Hilltop Investments, Inc. which is
jointly owned by Mr. Bennett and his wife, Mrs. Deborah Bennett.
(7) Includes 12 shares of Series A Common Stock held by trusts for the benefit
of Mr. Berkman's brother's children. Mr. Berkman is the trustee of two of
the trusts.
(8) Assumes the exercise in full of options to purchase 1,306,121 shares, all
of which are exercisable on or within 60 days after December 31, 2002.
(9) Assumes the exercise in full of options to purchase 611,274 shares, all of
which are exercisable on or within 60 days after December 31, 2002.
(10) Includes 6,168 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Fitzgerald.
(11) Includes 140 shares of Series A Common Stock, 142 shares of Series B Common
Stock, 83,136 shares of Liberty Media Series A Common Stock and 72,772
shares of Liberty Media Series B Common Stock held in trusts in which
Mr. Goddard is a beneficial owner.
(12) Assumes the exercise in full of options to purchase 5,000 shares granted
pursuant to the Company's Nonemployee Director Stock Option Plan, all of
which are exercisable on or within 60 days after December 31, 2002.
(13) Includes 1,603 shares held by a long-term 401(k) savings plan for the
benefit of Mr. Hockemeier.
(14) Assumes the exercise in full of Company stock options to purchase 49,965
shares, all of which are exercisable on or within 60 days after
December 31, 2002. Also includes 2,549 shares held by trusts of which
Mr. Howard is beneficial owner as trustee for his children.
(15) Includes 291,089 restricted shares held by a Grantor Retained Annuity
Trust, none of which were vested at December 31, 2002.
(16) Assumes the exercise in full of options to purchase 4,173,183 shares, all
of which are exercisable on or within 60 days after December 31, 2002.
(17) Includes 40,623 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Howard.
(18) Includes 314,376 shares held by a Grantor Retained Annuity Trust.
(19) Includes 12,284 shares owned directly by Mr. Howard's wife, Mrs. Leslie D.
Howard, and 185,120 shares owned by Mrs. Leslie D. Howard that are held by
a Grantor Retained Annuity Trust, as to which shares Mr. Howard has
disclaimed beneficial ownership.
(20) Assumes the exercise in full of Company stock options to purchase 31,465
shares, all of which are exercisable on or within 60 days after
December 31, 2002. Also includes 7,500 restricted shares issued in
February 2001, 25% of which vest within 60 days of December 31, 2002.
(21) Includes 4,721 shares held by the Liberty 401(k) Savings Plan for the
benefit of Mr. Carroll
III-9
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS.
The following table sets forth information as of December 31, 2002 with
respect to securities authorized for issuance under the Company's equity
compensation plans.
NUMBER OF
SECURITIES
NUMBER OF AVAILABLE FOR
SECURITIES TO WEIGHTED FUTURE ISSUANCE
BE ISSUED AVERAGE UNDER EQUITY
UPON EXERCISE EXERCISE PRICE COMPENSATION
OF OF PLANS
OUTSTANDING OUTSTANDING (EXCLUDING
OPTIONS, OPTIONS, SECURITIES
WARRANTS AND WARRANTS AND REFLECTED IN
PLAN CATEGORY RIGHTS(A) RIGHTS COLUMN(A))
------------- ------------- -------------- ---------------
Equity compensation plans approved by security
holders:
Liberty Satellite & Technology 1996 Incentive
Plan:............................................ 324,070 $82.55 141,680
TCI Satellite Entertainment, Inc. 1997 Nonemployee
Director Stock Option Plan....................... 35,000 $96.88 10,000
Equity compensation plans not approved by security
holders--None...................................... -- -- --
------- -------
Total................................................ 359,070 $83.94 151,680
======= ====== =======
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
GENERAL. Liberty owns a controlling interest in the Company. For so long as
Liberty continues to indirectly control more than 50% of the outstanding voting
stock of the Company, it will be able, among other things, to approve any
corporate action requiring stockholder approval, by a majority or plurality,
including the election of directors and, amendments to the Company's Amended and
Restated Certificate of Incorporation and Bylaws, without the consent of the
other stockholders of the Company. In addition, through its representation on
the Board of Directors, Liberty is able to influence certain decisions,
including decisions with respect to the Company's dividend policy, the Company's
access to capital (including the decision to incur additional indebtedness or
issue additional shares of common or preferred stock), mergers or other business
combinations involving the Company, the acquisition or disposition of assets by
the Company and any change in control of the Company.
DIVIDENDS ON PREFERRED STOCK HELD BY LIBERTY MEDIA. In accordance with the
terms of the Series A Preferred Stock and Series B Preferred Stock, through
March 31, 2003, the Company has the right to issue shares of Series A Common
Stock in satisfaction of its dividend liability. During the year ended
December 31, 2002, the Company issued 4,320,277 shares of Series A Common Stock,
representing a $13,500,000 dividend obligation under the terms of the Series A
Preferred Stock and a $9,000,000 dividend obligation under the terms of
Series B Preferred Stock. During the same period, cash dividends on the
Series A Preferred Stock and Series B Preferred Stock have aggregated $4,500,000
and $3,000,000, respectively.
PROMISSORY NOTE WITH LIBERTY MEDIA. On March 16, 2000, the Company paid
Liberty Media $60,000,000 in the form of an unsecured promissory note in
exchange for a 13.99% ownership interest in LSAT Astro LLC. Interest on the note
accrued interest at the 3 month LIBOR plus 2% (3.74% at December 31, 2002).
Interest payments were due semi-annually on the first day of March and
September. As of December 31, 2002, the unpaid principal balance on the note was
$48,411,000 and accrued interest under this note was $614,000. Interest expense
on the note for the year ended December 31, 2002 was $1,992,000. All amounts due
under this note were repaid in March 2003.
III-10
LSAT LLC AND ASCENT ENTERTAINMENT TRANSACTION. On August 16, 2001, the
Company entered into two interrelated purchase agreements with Liberty Media and
certain of its subsidiaries and affiliates. Both agreements were amended in
November 2001 and January 2002. One agreement provided for the Company's
acquisition of certain subsidiaries of Liberty Media that collectively held the
aggregate 89.41% ownership interest in Liberty Satellite, LLC ("LSAT LLC") not
already owned by LSAT in exchange for 25,298,379 shares of Series B Common Stock
of the Company. The second purchase agreement provided for the Company's
acquisition of 100% of the capital stock of Ascent Entertainment from a
subsidiary of Liberty Media in exchange for 8,701,621 shares of Series B Common
Stock of the Company. Ascent Entertainment's primary operating subsidiary is On
Command, which provides in-room, on-demand video entertainment and information
services to hotels, motels and resorts, primarily in the United States. The
foregoing transaction (the "LSAT LLC and Ascent Entertainment Transaction")
closed on April 1, 2002.
Concurrently with the closing of the LSAT LLC and Ascent Entertainment
Transaction, Liberty Media contributed to the Company, as part of those
transactions and for no additional consideration, promissory notes issued by
LSAT LLC due to subsidiaries of Liberty Media, with an aggregate principal
balance of $18,552,000. Interest expense on these notes was $404,000 during the
first quarter of 2002.
REGISTRATION RIGHTS AGREEMENT BETWEEN THE COMPANY AND LIBERTY MEDIA. The
Company and Liberty Media are parties to a registration rights agreement, dated
as of March 16, 2000, whereby Liberty Media and its affiliates have at any time,
the right to request that the Company register under the Securities Act of 1933,
as amended, (the "Securities Act") any and all of the shares of Series A Common
Stock and Series B Common Stock (collectively, "LSAT Common Stock") or shares of
the Company's capital stock that are convertible into shares of LSAT Common
Stock, owned by them, subject to the terms and conditions thereunder. Liberty
Media and its affiliates also have certain "piggy-back" registration rights,
whereby anytime the Company proposes to register shares of the Company's capital
stock under the Securities Act, Liberty Media and its affiliates have the right
to include their shares of the Company's capital stock in such registration. In
general, the Company will bear the expenses incurred in connection with the
registration and distribution of shares of the LSAT Common Stock owned by
Liberty Media and its affiliates. The Company and Liberty Media entered into an
amendment to this registration rights agreement to include thereunder the shares
of Series B Common Stock that Liberty Media and its affiliates acquired as a
result of the consummation of the LSAT LLC and Ascent Entertainment
Transactions.
TRANSACTION BETWEEN LSAT LLC AND LIBERTY DIGITAL. Effective September 29,
2000, LSAT LLC acquired a 1% managing common interest in a joint venture known
as IB2 LLC, from a subsidiary of Liberty Digital for $652,000. Liberty Digital,
an indirect wholly-owned subsidiary of Liberty Media, retained a preferred
interest (the "Preferred Interest") in IB2 LLC, which owns approximately 360,000
shares of the common stock of iBEAM Broadcasting Corp. ("iBEAM"). The Preferred
Interest had an initial liquidation value of $64,574,000 and is entitled to a
return of 9%, compounded annually. As part of the transaction, LSAT LLC granted
Liberty Digital the right to put the Preferred Interest to LSAT LLC for a
purchase price equal to $26,000,000 (the value of iBEAM stock on September 29,
2000) plus a return of 9%, compounded annually (the "Put Option"). LSAT LLC has
the right to call the Preferred Interest at a price equal to the initial
liquidation value plus a return of 9%, compounded annually. Both the Put Option
and call option are exercisable on September 29, 2008. Under certain limited
circumstances, including iBEAM's bankruptcy, LSAT LLC can force Liberty Digital
to exercise the Put Option prior to September 29, 2008.
Changes in the fair market value of the Put Option subsequent to
September 29, 2000 were recognized as unrealized gains and losses on financial
instruments in the Company's consolidated statements of operations. During the
year ended December 31, 2002, the Company recorded an unrealized loss of
$2,564,000 related to the Put Option.
III-11
During the fourth quarter of 2001, iBEAM filed for bankruptcy under Chapter
11 of the Bankruptcy Code. As a result of such bankruptcy filing, the Company
began carrying amount the Put Option liability at an amount ($31,052,000 at
December 31, 2002), which represents the Put Option purchase price to LSAT LLC
plus an accrued return to Liberty Digital of 9%, compounded annually.
EXECUTIVE OFFICER LOANS. Messrs. Carroll and Sophinos, executive officers
of the Company, received loans in the principal amounts of $136,000 and
$135,000, respectively, to be used solely for the purpose of satisfying tax
liabilities related to the lapse of restrictions on shares of common stock
awarded under the Company's 1996 Stock Incentive Plan. Through December 31,
2001, the loans accrued interest at an annual rate of 6.41%. In addition, each
of the loans originally provided for principal and interest to be payable upon
the occurrence of certain events and in no event later than December 1, 2001.
During the first quarter of 2002, the Company agreed to extend the maturity
dates of the loans to December 31, 2003, and lower the annual interest rates of
the loans to 4% per annum. Consistent with the terms of the original loans,
interest payments may be deferred by the borrowers until maturity. Each loan is
secured in each case by 2,500 shares of Series A Common Stock and are otherwise
nonrecourse to the borrowers. As of December 31, 2002, the balances outstanding
on the loans to Messrs. Carroll and Sophinos, including accrued interest, were
$155,000 and $154,000 respectively. Effective April 27, 2001, Mr. Sophinos
became the President of On Command. Since that date, On Command has been
responsible for 100% of Mr. Sophinos' compensation.
EXPENSE ALLOCATIONS FROM LIBERTY MEDIA. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative expenses to the
Company. Although there is no written agreement with Liberty Media for these
services, the Company believes the allocated amounts to be reasonable. The
aggregate amount allocated pursuant to this arrangement was $303,000 during
2002. In addition, the Company reimburses Liberty Media for certain expenses
paid by Liberty Media on behalf of the Company. Amounts owed to Liberty Media
pursuant to these arrangements ($1,585,000 at December 31, 2002) are
non-interest bearing and are generally paid on a monthly basis.
ASCENT MEDIA SATELLITE SERVICES. Effective October 1, 2002, On Command
entered into a short-term agreement with Ascent Media pursuant to which Ascent
Media supplied On Command with uplink and satellite transport services at a cost
of $120,000 through December 31, 2002. On Command had been utilizing the
services to test the satellite delivery of content updates to On Command's
downlink sites at various hotels. On Command has completed its testing of
satellite delivery and the parties have executed a Content Preparation and
Distribution Services Agreement, dated March 24, 2003, to be effective April 1,
2003, which will provide for uplink and satellite transport services for a
monthly fee of approximately $36,000, subject to adjustment, for a period of
five years. The long-term agreement also provides for Ascent Media to supply On
Command with content preparation services at a negotiated rate for a period of
five years at On Command's request. On Command is also negotiating an agreement
with a wholly-owned subsidiary of Ascent Media for the installation by such
subsidiary of satellite equipment at On Command's downlink sites at hotels for a
set fee per installation completed.
TAX LIABILITY ALLOCATION AND INDEMNIFICATION AGREEMENT BETWEEN LIBERTY MEDIA
AND THE COMPANY. In connection with the LSAT LLC and Ascent Entertainment
Transaction, the Company and Liberty Media entered into a Tax Liability
Allocation and Indemnification Agreement whereby the Company will be obligated
to make a cash payment to Liberty Media in each year that the Company (taken
together with any of its subsidiaries) has taxable income. The amount of the
payment will be equal to the amount of the taxable income of the Company and its
subsidiaries (determined as if the Company and its subsidiaries filed a separate
return) multiplied by the highest applicable corporate tax rate. In the event
that (1) the Company and its subsidiaries, when treated as a separate group, has
a net operating loss or deduction or is entitled to a tax credit for a
particular year; and (2) Liberty Media is able to use such loss, deduction or
credit to reduce its tax liability, the Company will be entitled to a credit
against current and future payments to Liberty Media under the agreement. If the
Company
III-12
disaffiliates itself with Liberty Media and the members of Liberty Media's
affiliated group prior to the time that the Company is able to use such credit,
the Company will be entitled to a payment from Liberty Media at the earlier of
the time that (1) the Company and its subsidiaries show they could have used the
net operating loss or net tax credit to reduce their own separately computed tax
liability or (2) the voting power of the stock of the Company held by Liberty
Media and the members of its affiliated group drops below 20%.
In addition, under the proposed Tax Liability Allocation and Indemnification
Agreement, the Company will have the opportunity to participate in the defense
of claims of the Internal Revenue Service that might affect its liability under
the agreement, and to participate in tax refunds paid to Liberty Media where
such refunds are due in part to the Company's operations.
In connection with the LSAT LLC and Ascent Entertainment Transaction, the
Company assumed an intercompany income tax liability owed by Ascent
Entertainment to Liberty Media pursuant to a tax liability allocation and
indemnification agreement with terms similar to the agreement describe above. At
December 31, 2002, the amount owed by Ascent Entertainment to Liberty Media
pursuant to this agreement was $8,409,000. Such amount, which is non-interest
bearing, includes $36,568,000 that is due on demand to Liberty Media, and
$28,159,000 that is payable to the Company by Liberty Media if, and to the
extent, that tax benefits generated by Ascent are utilized to reduce Liberty
Media's taxable income.
ITEM 14. CONTROLS AND PROCEDURES
The Company's acting president and chief financial officer (the "Executive")
conducted an evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as defined in Exchange Act
Rule 13(a)-14(c), as of a date within 90 days prior to the filing of this annual
report on Form 10-K. Based on this evaluation, the Executive concluded that the
Company's disclosure controls and procedures were effective as of the date of
that evaluation. There have been no significant changes in the Company's
disclosure controls and procedures or in other factors that could significantly
affect these controls subsequent to the date on which the Executive completed
this evaluation.
III-13
PART IV.
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Included in Part II of this Report:
PAGE NO.
--------
Independent Auditors' Report................................ II-21
Consolidated Balance Sheets, December 31, 2002 and 2001..... II-22
Consolidated Statements of Operations, Years ended
December 31, 2002, 2001, and 2000......................... II-24
Consolidated Statements of Comprehensive Loss Years ended
December 31, 2002, 2001 and 2000.......................... II-25
Consolidated Statements of Stockholders' Equity, Years ended
December 31, 2002, 2001 and 2000.......................... II-26
Consolidated Statements of Cash Flows, Years ended
December 31, 2002, 2001 and 2000.......................... II-28
Notes to Consolidated Financial Statements, December 31,
2002, 2001 and 2000....................................... II-29
(a) (2) FINANCIAL STATEMENT SCHEDULES
Included in Part IV of this Report:
(1) Separate Financial Statements for ASTROLINK International LLC:
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report.............................. IV-6
Consolidated Balance Sheets............................... IV-7
Consolidated Statements of Operations..................... IV-8
Consolidated Statements of Members' Equity................ IV-9
Consolidated Statements of Cash Flows..................... IV-10
Notes to Consolidated Financial Statements................ IV-11
IV-1
(a) (3) EXHIBITS
The following exhibits are filed herewith or are incorporated by reference
herein (according to the number assigned to them in Item 601 of Regulation S-K)
as noted:
2--Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1 Reorganization Agreement dated as of December 4, 1996, among
Tele-Communications, Inc. ("TCI"), TCI Communications,
Inc. ("TCIC"), Tempo Enterprises, Inc., TCI Digital
Satellite Entertainment, Inc., TCI K-1, Inc. ("TCI K-1"),
United Artists K-1 Investments, Inc. ("UA K-1"), TCI SE
Partner 1, Inc. ("TCISE 1"), TCI SE Partner 2, Inc.
"(TCISE 2") and TCI Satellite Entertainment, Inc. (the
"Company").(b)
2.2 Merger and Contribution Agreement dated as of February 6,
1998, among the Company, PRIMESTAR, Inc., Time Warner
Entertainment Company L.P. ("TWE"), Advance/ Newhouse
Partnership ("Newhouse"), Comcast Corporation ("Comcast"),
Cox Communications, Inc. ("Cox"), MediaOne of Delaware,
Inc. ("MediaOne") and GE American Communications, Inc.
("GE Americom").(d)
2.3 Asset Transfer Agreement dated as of February 6, 1998,
between the Company and PRIMESTAR, Inc.(d)
2.4 Contribution and Exchange Agreement among TCI Satellite
Entertainment, Inc., Liberty LSAT, Inc. and Liberty LSAT
II, Inc. dated as of March 16, 2000.(a)
2.5 Contribution Agreement by and among Liberty Media
Corporation, Liberty Media International, Inc., LSAT
Holdings, Inc., TCI Satellite Entertainment, Inc., TSAT
Holding 1, Inc., each of the Liberty Members signatory
hereto, Liberty Satellite, LLC, and LSAT Astro, LLC dated
March 16, 2000.(a)
2.6 Operating Agreement of Liberty Satellite, LLC dated March
16, 2000.(a)
2.7 Amended and Restated Operating Agreement of LSAT Astro LLC
dated March 16, 2000.(a)
3--Articles of Incorporation and Bylaws:
3.1 Amended and Restated Certificate of Incorporation of the
Company.(f)
3.2 Certificate of Amendment of Amended and Restated Certificate
of Incorporation filed herewith.
3.3 Amended and Restated Bylaws of the Company.(c)
3.4 Certificate of Designations, Series A Preferred Stock.(a)
3.5 Certificate of Designations, Series B Preferred Stock.(a)
4--Instruments Defining the Rights of Security Holders:
4.1 Specimen certificate representing shares of Series A Common
Stock of the Company.(c)
4.2 Specimen certificate representing shares of Series B Common
Stock of the Company.(c)
10--Material Contracts
10.1 Amended and Restated Liberty Satellite & Technology, Inc.
1996 Stock Incentive Plan*.(c)
10.2 Qualified Employee Stock Purchase Plan of the Company*.(b)
10.3 Indemnification Agreement dated December 4, 1996, by and
between TCI and Gary S. Howard.(d)
IV-2
10.4 Option Agreement, dated as of December 4, 1996, by and
between the Company and Gary S. Howard*.(b)
10.5 Option Agreement, dated as of December 4, 1996, by and
between the Company and Larry E, Romrell*.(b)
10.6 Option Agreement, dated as of December 4, 1996, by and
between the Company and David P. Beddow*.(b)
10.7 Share Purchase Agreement dated as of December 4, 1996,
between TCI and the Company.(b)
10.8 Option Agreement dated as of December 4, 1996, between TCI
and the Company.(b)
10.9 TCI Satellite Entertainment, Inc. 1997 Nonemployee Director
Plan*.(d)
10.10 Asset Purchase Agreement by and among Hughes Electronics
Corporation, PRIMESTAR, Inc., PRIMESTAR Partners L.P.,
Tempo Satellite, Inc. and the Stockholders of PRIMESTAR
listed herein, dated as of January 22, 1999.(e)
10.11 Asset Purchase Agreement among PRIMESTAR, Inc., PRIMESTAR
Partners L.P., PRIMESTAR MDU, Inc., the Stockholders of
PRIMESTAR, Inc. listed herein and Hughes Electronics
Corporation dated as of January 22, 1999.(e)
10.12 PRIMESTAR Payment Agreement dated as of January 22, 1999
among TCI Satellite Entertainment, Inc., PRIMESTAR, Inc.,
the Funding Parties and Paragon Communications.
Incorporated by reference to Phoenixstar, Inc.'s Current
Report on Form 8-K, dated May 13, 1999. (Commission File
No. 0-23883).
10.13 Promissory Note, dated March 16, 2000, between TCI Satellite
Entertainment, Inc. (now known as Liberty Satellite &
Technology, Inc.) and Liberty Media Corporation.
Incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
(Commission File No. 0-21317).
10.14 Amended and Restated Loan Agreement by and between Liberty
PCS Trust and DLJ Cayman Islands, LCD dated November 3,
2000. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
(Commission File No. 0-21317).
10.15 Purchase Agreement by and among LSAT, Liberty AEG, Inc. and
Liberty Media dated August 16, 2001.(f)
10.16 First Amendment to the Purchase Agreement by and among LSAT,
Liberty AEG, Inc. and Liberty Media dated November 30,
2001.(f)
10.17 Second Amendment to the Purchase Agreement by and among
LSAT, Liberty AEG, Inc. and Liberty Media dated February
7, 2002.(f)
10.18 LSAT LLC Purchase Agreement by and among LMC/LSAT Holdings,
Inc., Liberty Brazil DTH Inc., Liberty Mexico DTH Inc.,
Liberty Multicountry DTH, Inc., Liberty International DTH,
Inc., Liberty Latin Partners, Inc., LSAT and Liberty Media
dated August 16, 2001.(f)
10.19 First Amendment to the LSAT LLC Purchase Agreement by and
among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc.,
Liberty Mexico DTH Inc., Liberty Multicountry DTH, Inc.,
Liberty International DTH, Inc., Liberty Latin Partners,
Inc., LSAT and Liberty Media dated November 20, 2001.(f)
IV-3
10.20 Second Amendment to the LSAT LLC Purchase Agreement by and
among LMC/LSAT Holdings, Inc., Liberty Brazil DTH Inc.,
Liberty Mexico DTH Inc., Liberty Multicountry DTH, Inc.,
Liberty International DTH, Inc., Liberty Latin Partners,
Inc., LSAT and Liberty Media dated February 7, 2002.(f)
10.21 Tax Liability Allocation and Indemnification Agreement dated
as of April 1, 2002 between Liberty Media and LSAT filed
herewith.
10.22 Subscription Agreement, dated as of December 9, 2002,
between Wildblue Communications, Inc. and Liberty
Satellite & Technology, Inc. filed herewith.
10.23 Subscription Agreement, dated as of December 9, 2002,
between Wildblue Communications, Inc. and Liberty
Satellite & Technology, Inc. filed herewith.
10.24 Agreement of Stockholders, dated as of December 9, 2002,
among Wildblue Communications, Inc. and the stockholders
listed therein filed herewith.
10.25 Supplemental Stockholders Agreement, dated as of January 31,
2003, between Liberty Satellite & Technology, Inc. and
IntelSat USA Sales Corp. filed herewith.
10.26 Master Agreement Regarding Restructuring of ASTROLINK
International LLC, dated as of January 17, 2003, by and
among Liberty Satellite & Technology, Inc. and the other
parties named therein filed herewith.
10.27 Contribution Agreement, dated as of January 17, 2003, by and
among Liberty Satellite & Technology, Inc., Liberty Media
Corporation and ASTROLINK International LLC filed
herewith.
10.28 Master Services Agreement, dated as of August 3, 1993, by
and between Marriott International, Inc., Marriott Hotel
Services, Inc. and On Command Video Corporation
(confidential treatment granted) (Incorporated by
reference to Exhibit 10.6 to the Registration Statement on
Form S-1 (File No. 33-98502) of Ascent Entertainment
Group, Inc.).
10.29 Service Agreement, dated March 21, 2001, between On Command
Corporation and Marriott International, Inc. (composite
version) (confidential treatment requested) (Incorporated
by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended June 30, 2001 of On
Command Corporation, Commission File No. 00-21315).
10.30 Hilton Hotels Corporation-On Command Video Agreement, dated
April 27, 1993, by and between Hilton Hotels Corporation
and On Command Video Corporation (confidential treatment
granted) (Incorporated by reference to Exhibit 10.4 to the
Registration Statement on Form S-4 (File No. 333-10407) of
On Command Corporation).
10.31 Credit Agreement, dated as of July 18, 2000, by and among On
Command Corporation, the lenders party thereto, Toronto
Dominion (Texas), Inc., Fleet National Bank, Bank of
America, N.A., and the Bank of New York. (Incorporated by
reference to Exhibit 10.16 of the Annual Report on
Form 10-K/A for the year ended December 31, 2000 of On
Command Corporation).
10.32 Amendment No. 1, dated as of March 27, 2001, to the Credit
Agreement, dated as of July 18, 2000, by and among On
Command Corporation, the lenders party thereto, Toronto
Dominion (Texas), Inc., Fleet National Bank, Bank of
America, N.A., and the Bank of New York. (Incorporated by
reference to Exhibit 10.17 of the Annual Report on
Form 10-K/A for the year ended December 31, 2000 of On
Command Corporation).
IV-4
10.33 Amendment No. 2 dated as of November 14, 2001, to the Credit
Agreement, by and among On Command Corporation, Toronto
Dominion (Texas), Inc. Fleet National Bank, Bank of
America, the Bank of New York Company and the Bank of New
York. (Incorporated by reference to Exhibit 10.16 of the
Annual Report of Form 10-K for the year ended
December 31, 2001 of On Command Corporation).
21 Subsidiaries of the Registrant filed herewith.
23.1 Consent of KPMG LLP filed herewith.
23.2 Consent of KPMG LLP filed herewith.
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 filed herewith.
------------------------
* Indicates compensatory plan or arrangement.
(a) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 (Commission File No. 0-21317).
(b) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996 (Commission File No. 0-21317).
(c) Incorporated by reference to the Company's Registration Statement on Form 10
filed with the Securities and Exchange Commission ("SEC") on November 15,
1996 (Registration No. 0-21317).
(d) Incorporated by reference to PRIMESTAR, Inc.'s Registration Statement on
Form S-4 filed with the SEC on February 9, 1998 (Registration No.
333-45835).
(e) Incorporated by reference to the Company's Current Report on Form 8-K, dated
February 1, 1999.
(f) Incorporated by reference to the Company's definitive proxy materials filed
with the SEC on February 11, 2002.
(b) REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 2002:
FINANCIAL
DATE OF ITEM STATEMENTS
REPORT FILED FILED
------- -------- ----------
November 14, 2002........................................ Item 9. None
IV-5
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Members
ASTROLINK International LLC:
We have audited the accompanying consolidated balance sheets of ASTROLINK
International LLC and subsidiaries (a development stage limited liability
company) as of December 31, 2001 and 2002, and the related consolidated
statements of operations, Members' equity, and cash flows for each of the years
in the three-year period ended December 31, 2002, and for the period from
April 22, 1999 (date of inception) through December 31, 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in notes 1 and 4 to the consolidated financial statements,
during October 2001, certain of the Company's Members announced that they would
not provide additional funding beyond those amounts previously committed. On
January 17, 2003, one of the Company's Members reached an agreement with the
other Members to acquire substantially all of the assets of the Company and all
contractual claims were settled. The agreement is expected to close by
October 31, 2003, and is dependent upon achieving additional financing and
regulatory approval.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ASTROLINK
International LLC and subsidiaries (a development stage limited liability
company) as of December 31, 2001 and 2002 and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 2002, and the period from April 22, 1999 (date of inception)
through December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 3 to the consolidated financial statements, to date the Company has not
generated any revenue and is dependent upon additional equity and/or debt
financing or firm commitments from prospective customers to complete
construction and launch of its intended satellite system, which raises
substantial doubt about its ability to continue as a going concern. The
Company's plans with respect to these matters are also described in note 3. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG LLP
McLean, Virginia
March 14, 2003
IV-6
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2002
2001 2002
-------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,774,057 634,634
Restricted cash........................................... 7,243,206 2,165,723
Prepaid and other current assets.......................... 8,668,636 8,786,614
-------------- ---------------
Total current assets.................................... 21,685,899 11,586,971
Value added tax receivable.................................. 7,649,537 7,725,671
System under construction................................... 478,429,567 478,294,286
Property and equipment, net of accumulated depreciation and
amortization of $4,600,605 and $11,851,183 in 2001 and
2002, respectively........................................ 46,716,019 36,872,608
Intangible assets........................................... 17,721,000 17,721,000
-------------- ---------------
$ 572,202,022 552,200,536
============== ===============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,669,137 5,832,509
Accounts payable to Members............................... 41,693,433 41,693,433
Member advances........................................... -- 2,498,557
Accrued contract termination liabilities.................. 46,653,000 46,653,000
Accrued contract termination liabilities to Members....... 127,362,988 127,362,988
Accrued expenses.......................................... 11,975,077 4,174,253
-------------- ---------------
Total current liabilities............................... 234,353,635 228,214,740
Deferred rent............................................... 164,024 --
-------------- ---------------
Total liabilities....................................... 234,517,659 228,214,740
-------------- ---------------
Commitments and contingencies
Members' equity:
Class A units--authorized 135,010,000 units; issued and
outstanding at December 31, 2001 and 2002............... 1,336,037,500 1,336,037,500
Class B units--authorized 7,466,391 units; no units issued
and outstanding......................................... -- --
Deficit accumulated during development stage.............. (998,353,137) (1,012,051,704)
-------------- ---------------
Total members' equity................................... 337,684,363 323,985,796
-------------- ---------------
$ 572,202,022 552,200,536
============== ===============
See accompanying notes to consolidated financial statements.
IV-7
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM
APRIL 22, 1999
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31,
2000 2001 2002 2002
------------ ------------ ----------- --------------
Revenues............................... $ -- -- -- --
Expenses:
General and administrative........... 31,431,521 65,929,746 4,558,228 113,617,266
Write-down of system under
construction....................... -- 728,494,722 -- 728,494,722
Contract termination charges......... -- 174,015,988 -- 174,015,988
Depreciation and amortization........ 635,810 3,894,217 8,843,636 13,585,573
------------ ------------ ----------- --------------
Total expenses..................... 32,067,331 972,334,673 13,401,864 1,029,713,549
------------ ------------ ----------- --------------
Loss from operations............... (32,067,331) (972,334,673) (13,401,864) (1,029,713,549)
Other income (expense)
Interest income...................... 7,818,150 8,178,576 84,566 18,043,114
Interest expense..................... -- -- (110,836) (110,836)
Loss on disposal of property and
equipment.......................... -- -- (804,034) (804,034)
Unrealized foreign currency
transaction gain................... -- -- 533,601 533,601
------------ ------------ ----------- --------------
Total other income (expense)....... 7,818,150 8,178,576 (296,703) 17,661,845
------------ ------------ ----------- --------------
Net loss........................... $(24,249,181) (964,156,097) (13,698,567) (1,012,051,704)
============ ============ =========== ==============
See accompanying notes to consolidated financial statements.
IV-8
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
DEFICIT
ACCUMULATED
CLASS A UNITS CLASS B UNITS DURING TOTAL
---------------------------- -------------------- SUBSCRIPTIONS DEVELOPMENT MEMBERS'
UNITS AMOUNT UNITS AMOUNT RECEIVABLE STAGE EQUITY
----------- -------------- -------- --------- ------------- -------------- ------------
Balance at April 22, 1999
(inception)............. -- $ -- -- $ -- -- -- --
Issuance of Class A Units
(July 20, 1999)......... 92,000,000 920,000,000 -- -- (599,840,000) -- 320,160,000
Issuance of Class A Units
(December 13, 1999)..... 43,010,000 430,100,000 -- -- (361,610,000) -- 68,490,000
Issuance costs of Class A
Units................... -- (14,062,500) -- -- -- -- (14,062,500)
Net loss.................. -- -- -- -- -- (9,947,859) (9,947,859)
----------- -------------- -------- --------- ------------ -------------- ------------
Balance at December 31,
1999.................... 135,010,000 1,336,037,500 -- -- (961,450,000) (9,947,859) 364,639,641
Payments under
subscriptions
receivables............. -- -- -- -- 495,740,000 -- 495,740,000
Net loss.................. -- -- -- -- -- (24,249,181) (24,249,181)
----------- -------------- -------- --------- ------------ -------------- ------------
Balance at December 31,
2000.................... 135,010,000 1,336,037,500 -- -- (465,710,000) (34,197,040) 836,130,460
Payments under
subscriptions
receivables............. -- -- -- -- 465,710,000 -- 465,710,000
Net loss.................. -- -- -- -- -- (964,156,097) (964,156,097)
----------- -------------- -------- --------- ------------ -------------- ------------
Balance at December 31,
2001.................... 135,010,000 1,336,037,500 -- -- -- (998,353,137) 337,684,363
Net loss.................. -- -- -- -- -- (13,698,567) (13,698,567)
----------- -------------- -------- --------- ------------ -------------- ------------
Balance at December 31,
2002.................... 135,010,000 $1,336,037,500 -- $ -- -- (1,012,051,704) 323,985,796
=========== ============== ======== ========= ============ ============== ============
See accompanying notes to consolidated financial statements.
IV-9
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM
APRIL 22, 1999
(INCEPTION)
YEAR ENDED DECEMBER 31, THROUGH
----------------------------------------- DECEMBER 31,
2000 2001 2002 2002
------------ ------------ ----------- --------------
Cash flows from operating activities:
Net loss...................................... $(24,249,181) (964,156,097) (13,698,567) (1,012,051,704)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 635,810 3,894,217 8,843,636 13,585,573
Loss on disposal of property and
equipment................................. -- 150,678 804,034 954,712
Foreign currency gain....................... -- -- (533,601) (533,601)
Non-cash interest........................... -- -- 110,836 110,836
Write-off of contributed assets............. -- -- -- 225,000
Write-down of system under construction..... -- 728,494,722 -- 728,494,722
Changes in assets and liabilities:
Cash reserved for trust fund establishment
and distribution........................ -- (7,243,206) 5,077,483 (2,165,723)
Prepaid and other current assets.......... 445,177 (8,406,815) 17,303 (8,786,614)
Accounts payable and accrued
liabilities............................. 2,504,389 187,030,723 (8,801,476) 225,716,183
------------ ------------ ----------- --------------
Net cash used in operating activities... (20,663,805) (60,235,778) (8,180,352) (54,450,616)
------------ ------------ ----------- --------------
Cash flows from investing activities:
Value added tax receivable.................... (4,678,252) (22,485) 457,467 (7,192,070)
Purchases of property and equipment........... (660,756) (48,603,771) -- (49,554,634)
Proceeds from sale of property and
equipment................................... -- -- 195,741 195,741
Additions to system under construction........ (448,142,278) (396,288,578) -- (1,206,789,008)
------------ ------------ ----------- --------------
Net cash used in investing activities... (453,481,286) (444,914,834) 653,208 (1,263,339,971)
------------ ------------ ----------- --------------
Cash flows from financing activities:
Proceeds from Member advances................. -- -- 2,387,721 2,387,721
Proceeds from the issuance of Class A units... 495,740,000 465,710,000 -- 1,330,100,000
Unit issuance costs........................... (5,312,500) -- -- (14,062,500)
------------ ------------ ----------- --------------
Net cash provided by financing
activities............................ 490,427,500 465,710,000 2,387,721 1,318,425,221
------------ ------------ ----------- --------------
Net increase (decrease) in cash and cash
equivalents........................... 16,282,409 (39,440,612) (5,139,423) 634,634
Cash and cash equivalents, beginning of
period........................................ 28,932,260 45,214,669 5,774,057 --
------------ ------------ ----------- --------------
Cash and cash equivalents, end of period........ $ 45,214,669 5,774,057 634,634 634,634
============ ============ =========== ==============
Supplemental disclosure of noncash investing
activities:
Contribution of assets by Member.............. $ -- -- -- 20,000,000
See accompanying notes to consolidated financial statements.
IV-10
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2002
(1) NATURE OF THE BUSINESS
ASTROLINK International LLC (the Company) was formed on April 22, 1999 in
the State of Delaware as a Limited Liability Company for the purpose of engaging
in one or more telecommunications businesses and all incidental activities. The
Company was formed by Lockheed Martin Global Telecommunications, Inc. (LMGT) (a
wholly owned subsidiary of Lockheed Martin Corporation (LMC)). The Company's
initial Members were LMGT, TRW Inc. (TRW), and Telespazio, S.p.A. through
Telespazio Luxembourg, S.A. (Telespazio). Liberty Media Group, through LSAT
Astro LLC (LMG), became a Member in December 1999. The Company was originally
formed to establish and operate a worldwide, digital, Ka-band telecommunications
system consisting initially of four geosynchronous satellites and a space and
ground control system to provide worldwide multimedia interactive broadband
telecommunications services (the original ASTROLINK System-TM-).
During 2001, certain of the Company's investors indicated that they would
not provide additional funding to the Company beyond those amounts previously
subscribed for. On January 17, 2003, one of the Company's Members reached an
agreement (the Master Agreement) with the other Members in connection with the
proposed restructuring of the Company. Under the Master Agreement and related
agreements, the Member will acquire substantially all of the assets of the
Company and all contractual claims of certain Members, affiliates of the Members
and certain other parties were settled. The closing of the agreement is expected
by October 31, 2003 and is dependent upon achieving additional financing and
regulatory approval, see note 4.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of ASTROLINK
International LLC and its wholly owned subsidiaries. All significant
intercompany transactions and accounts have been eliminated. Members are
generally not liable for debts, obligations or liabilities of the Company.
(B) DEVELOPMENT STAGE ENTERPRISE
The Company's consolidated financial statements are presented as those
of a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards (SFAS) No. 7, ACCOUNTING AND REPORTING BY DEVELOPMENT
STAGE ENTERPRISES.
(C) CASH AND CASH EQUIVALENTS
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. Cash
equivalents at December 31, 2001 and 2002 consist primarily of investments
in U.S. government obligations, and amounted to approximately $1,266,000 and
$0, respectively. These investments are stated at amortized cost, which
approximated the fair value due to the highly liquid nature and short
maturities of the underlying securities.
IV-11
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
(D) RESTRICTED CASH
During 2001, the Company established a trust fund to pay severance to
terminated employees in accordance with the Company's severance pay plans,
as approved by the Company's Board of Directors. Restricted cash in the
trust fund at December 31, 2001 and 2002 amounted to $7,243,206 and
$2,165,723, respectively, and was comprised of money market investments.
(E) FURNITURE AND EQUIPMENT
Property and equipment, including equipment with an original cost of
$2,054,000 contributed by LMC and LMGT in July 1999, are carried at
historical cost less accumulated depreciation and amortization. Depreciation
and amortization is calculated using the straight-line method over the
following estimated useful lives:
Furniture and fixtures.................... 5 years
Machinery, equipment, and computer
hardware and software................... 3 years
Shorter of estimated life or remaining
Leasehold improvements.................... term
(F) SYSTEM UNDER CONSTRUCTION
The Company has been in the process of designing and developing its
broadband telecommunications service via a Ka-band satellite
telecommunications system. System under construction includes all costs
incurred related to the construction of the space and ground components of
the original ASTROLINK System-TM-. Depreciation expense will be recognized
on a satellite-by-satellite basis as the satellites are placed into service
following delivery of each satellite to its mission orbit. Depreciation
expense related to the ground components will commence with the placement
into service of such components. To date, no satellites have been completed
and launched, nor have the ground components been completed.
(G) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, (SFAS No. 144) provides a single accounting model for long-lived
assets to be disposed of. SFAS No. 144 also changes the criteria for
classifying an asset as held for sale; and broadens the scope of businesses
to be disposed of that qualify for reporting as discontinued operations and
changes the timing of recognizing losses on such operations. The Company
adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did
not affect the Company's financial statements.
In accordance with SFAS No. 144, long-lived assets, such as property and
equipment, and purchased intangibles subject to amortization, are reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an
asset to estimated undiscounted future cash flows expected to be generated
by the asset. If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the asset. Assets
to be disposed of would be separately presented in the balance sheet and
reported at
IV-12
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
the lower of the carrying amount or fair value less costs to sell, and are
no longer depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested
annually for impairment, and are tested for impairment more frequently if
events and circumstances indicate that the asset might be impaired. An
impairment loss is recognized to the extent that the carrying amount exceeds
the asset's fair value.
Prior to the adoption of SFAS No. 144, the Company accounted for
long-lived assets in accordance with SFAS No. 121, ACCOUNTING FOR IMPAIRMENT
OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
(H) INTANGIBLE ASSETS
Intangible assets represent the contracts, agreements, and licenses
related to the space component of the original ASTROLINK System-TM- which
were contributed by LMGT in partial consideration for its Class A units.
These intangible assets will be amortized on a straight-line basis over
seven years, commencing with the placement of the satellites into service.
In the first quarter of 2002, the Company adopted the provisions SFAS
No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS No. 142). SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 144.
Upon adoption of SFAS No. 142, the Company was also required to reassess
the useful lives and residual values of all of its intangible assets, and
make any necessary amortization period or impairment adjustments. Impairment
is measured as the excess of carrying value over the fair value of an
intangible asset with an indefinite life. The Company determined that the
carrying amounts of its intangible assets were not impaired and the useful
lives were appropriate upon adoption of SFAS No. 142.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
(SFAS No. 107) requires disclosures of fair value information about
financial instruments, whether or not recognized in the balance sheet, for
which it is practicable to estimate that value. SFAS No. 107 excludes
certain financial instruments and all non-financial instruments from these
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The carrying
amounts reported in the consolidated balance sheets approximates the fair
value for cash and cash equivalents, restricted cash, prepaid and other
current assets, value added tax receivable, accounts payable, and accrued
expenses. The accounts payable to Members, Member advances, and accrued
contract terminations were settled as part of the Master Agreement.
IV-13
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
(J) INCOME TAXES
As a limited liability company, the Company is not subject to U.S.
federal income taxes directly. Rather, each holder of Class A Units of the
Company (each Member) is subject to U.S. federal income taxation based on
its ratable portion of the Company's income or loss. Certain of the
Company's subsidiaries are subject to tax in various jurisdictions; however,
the subsidiaries had no taxable income through December 31, 2002.
(K) UNIT-BASED COMPENSATION
At December 31, 2002, the Company had one unit-based employee
compensation plan, which is described more fully in note 10. The Company
accounts for the plan under the recognition and measurement principles of
APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related
interpretations. No unit-based employee compensation cost is reflected in
net loss, as all options granted under the plan had an exercise price equal
to the estimated market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net loss if the Company
had applied the fair value recognition provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION, to unit-based employee
compensation.
2000 2001 2002
----------- ----------- ----------
Net loss, as reported.................. $24,249,181 964,156,097 13,698,567
Add: Total unit-based employee
compensation expense determined under
fair value based method for all
awards............................... 1,428,907 2,946,673 1,153,371
----------- ----------- ----------
Pro forma net loss............... $25,678,088 967,102,770 14,851,938
=========== =========== ==========
(L) MANAGEMENT ESTIMATES
The preparation of the Company's consolidated financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities, including the recoverability of the
system under construction and the amounts of contract termination
liabilities, at the date of the consolidated financial statements and the
reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.
(M) FOREIGN CURRENCY
All balance sheet accounts of foreign operations are translated into
U.S. dollars at the year-end rate of exchange and statements of operations
items are translated at the weighted average exchange rates for the year.
Gains and losses from foreign currency transactions, such as those resulting
from the settlement of foreign receivables or payables, are included in the
consolidated statements of operations.
IV-14
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2002
(N) OTHER COMPREHENSIVE INCOME
The Company has engaged in no transactions during the years ended
December 31, 2000, 2001, and 2002 that would be classified as other
comprehensive income.
(O) DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
On January 1, 2001, the Company adopted SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITIES and SFAS No. 138,
ACCOUNTING FOR CERTAIN DERIVATIVE INSTRUMENTS AND CERTAIN HEDGING ACTIVITY,
AN AMENDMENT OF SFAS 133. SFAS Nos. 133 and 138 require that all derivative
instruments be recorded on the balance sheet at their respective fair
values. The Company has reviewed its contracts and has no derivative
instruments and does not engage in hedging activities.
(P) RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT
OBLIGATIONS (SFAS No. 143). SFAS No. 143 requires the Company to record the fair
value of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development, and/or
normal use of the assets. The Company also records a corresponding asset that is
depreciated over the life of the asset. Subsequent to the initial measurement of
the asset retirement obligation, the obligation will be adjusted at the end of
each period to reflect the passage of time and changes in the estimated future
cash flows underlying the obligation. The Company is required to adopt SFAS
No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have
a material effect on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB STATEMENTS
NO. 4, 44 AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS
(SFAS No. 145). SFAS No. 145 amends existing guidance on reporting gains and
losses on the extinguishment of debt to prohibit the classification of the gain
or loss as extraordinary, as the use of such extinguishments have become part of
the risk management strategy of many companies. SFAS No. 145 also amends SFAS
No. 13 to require sale-leaseback accounting for certain lease modifications that
have economic effects similar to sale-leaseback transactions. The provisions of
the Statement related to the rescission of Statement No. 4 is applied in fiscal
years beginning after May 15, 2002. Earlier application of these provisions is
encouraged. The provisions of the Statement related to Statement No. 13 were
effective for transactions occurring after May 15, 2002, with early application
encouraged. The adoption of SFAS No. 145 is not expected to have a material
effect on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS ASSOCIATED
WITH EXIT OR DISPOSAL ACTIVITIES (SFAS No. 146). SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force (EITF) Issue 94-3, LIABILITY
RECOGNITION FOR CERTAIN EMPLOYEE TERMINATION BENEFITS AND OTHER COSTS TO EXIT AN
ACTIVITY. The provisions of this Statement are effective for exit or disposal
activities that are initiated after December 31, 2002, with early application
encouraged. The adoption of SFAS No. 146 is not expected to have a material
effect on the Company's consolidated financial statements.
IV-15
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
In November 2002, the FASB issued Interpretation No. 45, GUARANTOR'S
ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES, INCLUDING INDIRECT
GUARANTEES OF INDEBTEDNESS TO OTHERS, AN INTERPRETATION OF FASB STATEMENTS
NO. 5, 57 AND 107 AND A RESCISSION OF FASB INTERPRETATION NO. 34. This
Interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The Interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
Interpretation are applicable to guarantees issued or modified after
December 31, 2002 and are not expected to have a material effect on the
Company's financial statements. The disclosure requirements are effective for
consolidated financial statements of annual periods ending after December 15,
2002.
In December 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION AND DISCLOSURE, AN AMENDMENT OF FASB STATEMENT
NO. 123. This Statement amends FASB Statement No. 123 to provide alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement No. 123 to require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after
December 15, 2002 and are included in the notes to these consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. 46, CONSOLIDATION OF
VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO. 51. This Interpretation
addresses the consolidation by business enterprises of variable interest
entities as defined in the Interpretation. The Interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. For nonpublic enterprises, such as the Company,
with a variable interest in a variable interest entity created before
February 1, 2003, the Interpretation is applied to the enterprise no later than
the end of the first annual reporting period beginning after June 15, 2003. The
application of this Interpretation is not expected to have a material effect on
the Company's financial statements. The Interpretation requires certain
disclosures in financial statements issued after January 31, 2003 if it is
reasonably possible that the Company will consolidate or disclose information
about variable interest entities when the Interpretation becomes effective.
(3) LIQUIDITY
To date, the Company has devoted all of its efforts to developing,
constructing and marketing the original ASTROLINK System-TM-. Through
December 31, 2002, the Company has generated no revenue and has an accumulated
deficit of approximately $1.0 billion. The reduced-scale operating plan
discussed in note 4 will require substantial additional financing to complete
the construction and launch of the two satellites and to market and distribute
the satellite-based services. Management's plans are to fund the remaining
satellite construction and launch and operations with equity investments from
additional investors, third-party sources of financing, or firm capacity
commitments from prospective customers, (see note 4(b)). Currently, economic
uncertainties exist regarding the successful acquisition of additional equity or
debt financing or firm commitments from prospective customers and the attainment
of positive cash flows from the Company's reduced-scale operating plan. These
factors individually, or in the aggregate, could have an adverse effect on the
Company's financial condition and future operating results and create an
uncertainty as to the Company's ability to continue as a going
IV-16
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
concern. The consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going
concern.
(4) BUSINESS DEVELOPMENTS AND PROPOSED RECONSTITUTION OF THE COMPANY
(A) CESSATION OF FURTHER FUNDING FROM MEMBERS, CONTRACT TERMINATIONS AND
RELATED ACTIONS
On October 25, 2001, LMGT advised the Company and publicly stated that it
would not provide additional funding to the Company beyond those amounts
previously subscribed for. Subsequent to that date, TRW made a similar
announcement.
As a result of these announcements, the Company terminated substantially all
of its major procurement contracts for the original ASTROLINK System-TM-,
including those with Members or Member-affiliates (see notes 6 and 11). The
Company terminated these contracts "for convenience", which is permitted by the
terms of the contracts. Also, in accordance with the terms of those contracts,
the parties are to determine payments due, if any, in connection with the
termination, which amounts are subject to review and, in some cases, negotiation
by the parties before final settlement. As of December 31, 2001, based on
termination claims received from the various contractors, Company estimates, and
the terms of each contract, the Company accrued approximately $174,015,988 to
recognize the estimated termination liability for these contracts. Of that
amount, approximately $127,362,988 relates to contracts with Members or
Member-affiliates.
In December 2001, the Company's Board of Directors established a plan to
terminate all of the Company's employees and established a trust fund to pay
severance to terminated employees in accordance with the Company's severance pay
plans. Restricted cash in the trust fund at December 31, 2001 and 2002 amounted
to approximately $7,243,000 and $2,166,000, respectively. Through December 31,
2001 and 2002, the Company made severance payments of approximately $2,446,000
and $5,145,000, respectively, to the terminated employees. Additionally, some
employees forfeited their severance rights in 2002 in the amount of $913,000 and
the plan was amended in 2002 to cancel the terminations of the remaining
employees, which resulted in a reduction of the accrual of approximately
$1,226,000. As of December 31, 2001 and 2002, the severance accrual was
approximately $7,934,000 and $680,000, respectively. Severance costs are
included in general and administrative expenses in the accompanying consolidated
statements of operations for the years ended December 31, 2001 and 2002.
On March 6, 2002, the Company filed a Demand for Arbitration with the
American Arbitration Association to initiate arbitration under the provisions of
one of its procurement contracts with an affiliate of a Member. The Demand for
Arbitration results from a dispute as to the Company's rights resulting from the
termination of the contract by the Company in November 2001. In connection with
the settlement of claims pursuant to the Master Agreement, this arbitration was
terminated.
(B) PROPOSED RECONSTITUTION OF THE COMPANY
On January 22, 2003, Liberty Satellite & Technology, Inc. (Liberty
Satellite), an affiliate of LMG announced that it had entered into the Master
Agreement with Lockheed Martin Corporation, Northrop Grumman Space & Mission
Systems Corp. (formerly TRW, Inc.) (Northrop Grumman), Telespazio S.p.A and
certain of their affiliates in connection with the proposed restructuring of the
Company.
IV-17
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
Under the Master Agreement, Liberty Satellite will acquire substantially all
of the assets of the Company. The Company simultaneously signed agreements with
Lockheed Martin and Northrop Grumman for completion of two satellites. The
parties also reached agreement on the settlement of all claims related to the
previous termination of the Company's major procurement contracts and all other
major third-party creditor claims. The closing of Liberty Satellite's
acquisition of the Company's business is subject to regulatory approvals and
other closing conditions, including Liberty Satellite obtaining satisfactory
funding for the business from additional investors, third party sources of
financing, or firm capacity commitments from prospective customers. Closing is
expected to occur on or before October 31, 2003.
If the closing occurs, Liberty Satellite will pay approximately $43 million
in cash and will issue approximately $3 million in value of Series A common
stock as total consideration for the Company's assets, including certain
existing satellite and launch contracts, and the settlement of all claims
against the Company. In addition, Liberty Satellite will provide additional
interim funding for the Company pending the closing.
Liberty Satellite currently plans to pursue a revised operating plan for the
new Astrolink System-TM-, taking into account current financial and market
factors. The revised operating plan currently envisions launching two Ka-band
satellites to provide enterprise customers with virtual private networks and
related advanced services, as well as their use in fulfilling the expanding
needs for bandwidth by various government agencies.
If the closing under the Master Agreement does not occur, the Company will
pursue an orderly liquidation in accordance with the terms of the Master
Agreement.
Effective January 17, 2003, Northrop Grumman's Class A units were redeemed
and retired by the Company under the terms of the Master Agreement for $500,000
in cash contributed by other Members and $1,000,000 in assets. Whether the
closing of the Master Agreement occurs or if the Company enters a orderly
liquidation, certain Members' Class A units are to be redeemed and retired under
the terms of the Master Agreement.
(C) WRITE-DOWN RELATING TO SYSTEM UNDER CONSTRUCTION ASSET
As a result of the Company's reduced-scale operating plan, it has written
down all capitalized costs except those costs necessary to support the new plan
as discussed above. Charges relating to these costs were approximately
$728,495,000 for the year ended December 31, 2001.
In accordance with SFAS No. 144, the Company also assessed whether the costs
incurred and capitalized associated with the current reduced-scale operating
plan had been further impaired during 2002. Based on the Company's projected
undiscounted cash flows from this plan, and after considering the estimated
costs to complete construction and launch of the reduced-scale system as well as
the risk of availability of adequate additional financing and likelihood of
customer acceptance of the services from the new Astrolink System-TM-,
management does not believe that the costs incurred and capitalized associated
with the reduced-scale system, have been impaired as of December 31, 2002.
IV-18
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
(D) RISKS AND UNCERTAINTIES RELATING TO THE RECONSTITUTION AND REDUCED-SCALE
OPERATING PLAN
The completion of the reconstitution is subject to numerous conditions,
including obtaining adequate financing, or firm capacity commitments from
prospective customers and receipt of governmental approvals, which involve
substantial risks and uncertainties. In addition, the Company's development
effort relating to the reduced-scale operating plan involves substantial risks
and uncertainties. Future operating results will be subject to significant
business, economic, regulatory, technological, and competitive uncertainties and
contingencies, including the ability to obtain and maintain the necessary
licenses and other approvals to operate the network and provide services. These
factors individually or in the aggregate could have an adverse effect on the
Company's financial condition and future operating results. In addition, the
Company will require substantial additional financing before construction is
completed, see note 3. Failure to obtain the required long-term financing will
prevent the Company from realizing its objective of operating its Ka-band
telecommunications system. There can be no assurance that the Company will be
successful in its efforts to reconstitute the development, construction and
implementation of the reduced-scale operating plan, or that it will be able to
obtain the necessary financing to complete and operate the system even if the
reconstitution plan, as described above, is implemented.
(5) MEMBERS' EQUITY
On July 20, 1999, LMGT purchased 42,000,000 Class A units for an aggregate
purchase price of $420,000,000. During 1999, 2000 and 2001, LMGT paid all
amounts in accordance with this commitment.
Also on July 20, 1999, Northrop Grumman and Telespazio each purchased
25,000,000 Class A units for a purchase price of $250,000,000. Northrop Grumman
subscribed to purchase an additional 510,000 Class A units on December 13, 1999,
for a purchase price of $5,100,000. During 1999, 2000, and 2001, Northrop
Grumman and Telespazio each paid all amounts of their respective commitments.
On December 31, 1999, LMG purchased 42,500,000 Class A units for an
aggregate purchase price of $425,000,000. In 1999, 2000 and 2001, LMG paid all
amounts in accordance with this commitment.
On January 17, 2003, Northrop Grumman's Class A units were redeemed and
retired by the Company under the terms of the Master Agreement, see note 4(b).
(6) TRANSACTIONS AND COMMITMENTS WITH MEMBERS
(A) SATELLITE PURCHASE AND LAUNCH SERVICES CONTRACTS WITH MEMBERS
During 1999, 2000, and 2001, the Company entered into a series of contracts
with a Member and certain of its affiliates for the procurement of four
satellites, launch services, and a satellite control facility with related
services, training and documentation. The total original aggregate commitment
under the agreements was approximately $1,826,235,000, before considering the
terminations discussed in note 4. The amounts under the contracts were due
partly in monthly payments and partly upon the completion of certain milestones.
During the years ended December 31, 2000 and 2001, the Company paid
approximately $348,521,000 and $300,942,000, respectively, to the Member under
the terms of these contracts. No payment was made in 2002 due to the termination
of such contracts in 2001. At
IV-19
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
December 31, 2001 and 2002, $26,771,000 was payable to the Member under the
original terms of these contracts. In accordance with the terms of the Master
Agreement at closing, the Company will receive a refund of $8,314,000 for its
prepaid launch costs paid to an affiliate of a Member, which is included in
prepaid and other current assets in the consolidated balance sheets.
(B) GROUND SEGMENT AND TELEMETRY, TRACKING AND COMMAND PRODUCTS, AND
SERVICES CONTRACTS
On April 29, 1999, the Company entered into two contracts with a Member for
obtaining certain satellite ground segment and telemetry, tracking and command
products, and services. The total original aggregate commitment under these
contracts, as amended, was approximately $511,500,000, before considering the
terminations discussed in note 4. This amount was due upon the completion of
certain milestones. During the years ended December 31, 2000 and 2001, the
Company paid approximately $81,400,000 and $135,242,000, respectively, to the
Member under the terms of the contracts. No payment was made in 2002 due to the
termination of such contracts in 2001. At December 31, 2001 and 2002,
approximately $13,001,000 was payable to the Member.
(C) OPERATIONS AND MAINTENANCE CONTRACTS
On July 27, 2001, the Company entered into two contracts with a Member for
obtaining certain operations and maintenance services for the ASTROLINK
System-TM- for 15 years. Amounts due under these contracts are billed on a time
and materials basis. During the year ended December 31, 2001, the Company paid
approximately $1,315,000 to the Member under the terms of the contracts. No
payment was made in 2002 due to the termination of such contracts in 2001. At
December 31, 2001 and 2002, approximately $776,000 was payable to the Member.
(D) SATELLITE APPLICATIONS INTERFACE CONTRACTS
During 1999 and 2000, the Company entered into contracts with a Member for
obtaining a satellite applications interface and payload emulators. The total
original commitment under the agreements was approximately $34,525,000 with an
option to purchase up to $1,525,000 in additional support services, before
considering the terminations discussed in note 4. The amounts were due upon the
completion of certain milestones or the delivery of optional support services.
During the years ended December 31, 2000 and 2001, the Company paid
approximately $18,220,000 and $12,666,000, respectively, to the Member under the
terms of the contracts. No payment was made in 2002 due to the termination of
such contracts in 2001. At December 31, 2001 and 2002, approximately $1,146,000
was payable to the Member under the original terms of the contracts.
(E) SETTLEMENTS OF CLAIMS UNDER PROCUREMENT CONTRACTS WITH MEMBERS
As of January 17, 2003, all claims related to the previous termination of
the Company's procurement contracts with its Members and certain of their
affiliates were settled under the Master Agreement. During January 2003, the
Company entered into two contracts with a Member and a Member-affiliate for the
completion of two satellite payloads, two spacecraft, and provision of one
launch. The total aggregate commitment under the agreements is approximately
$272,000,000. The amounts under the contracts are due partly in periodic
payments and partly upon completion of certain milestones.
IV-20
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
(F) MEMBER ADVANCES
During 2002, the Company received $2,387,721 from its Members in the form of
loans bearing interest at 10%, of which $800,000 was secured by all of the
assets of the Company with the exception of any work in process under any system
procurement contract unless it constituted proceeds from the procurement
contract. The Company incurred $110,836 in interest during 2002 under these
advances.
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 2001 and
2002:
2001 2002
----------- -----------
Computer hardware and software..................... $ 679,239 470,768
Furniture and fixtures............................. 1,288,679 22,493
Machinery and equipment............................ 418,894 --
Leasehold improvements............................. 1,261,934 720,000
Satellite equipment................................ 47,667,878 47,510,530
----------- -----------
51,316,624 48,723,791
Less accumulated depreciation and amortization..... (4,600,605) (11,851,183)
----------- -----------
$46,716,019 36,872,608
=========== ===========
During 2002, the Company disposed of the majority of its headquarters'
furniture and fixtures and leasehold improvements as a direct result of Company
downsizing, resulting in a loss on disposal of approximately $804,000.
(8) EMPLOYEE BENEFIT PLAN
On July 20, 1999, the Company adopted a profit sharing and savings plan (the
Plan) under Section 401(k) of the Internal Revenue Code. This Plan allows
eligible employees to defer up to 20% of their annual compensation, subject to
IRS rules and applicable limits to the Plan. During the years ended
December 31, 2000, 2001 and 2002, the Company contributed 4% of each employee's
annual compensation to the Plan, which amounted to approximately $345,000,
$555,000, and $93,000, respectively.
IV-21
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND 2002
(9) LEASES
The Company has a non-cancelable operating lease for property that will
expire in 2016. The future minimum lease payments under the lease as of
December 31, 2002 are:
Year ending December 31:
2003...................................................... $ 96,000
2004...................................................... 96,000
2005...................................................... 96,000
2006...................................................... 96,000
2007 and thereafter....................................... 896,000
----------
$1,280,000
==========
Rent expense for the years ended December 31, 2000, 2001, and 2002 was
approximately $1,545,000, $1,656,000, and $733,000, respectively.
(10) UNIT OPTIONS
The Company has a unit option plan that provides for the granting of options
to employees of the Company to purchase Class B units. The Class B units are
non-voting and are convertible into any class of securities that become
registered during an initial public offering. The options vest over a five-year
period and expire ten years after the date of grant. As of December 31, 2001 and
2002, the Company had reserved 8,512,704 units for issuance under the option
plan.
The Company has elected to follow APB No. 25 and related interpretations in
accounting for its employee unit options rather than the alternative fair value
accounting method allowed by SFAS No. 123. APB No. 25 provides that compensation
expense under variable plan accounting applicable to junior option plans is
based upon the difference, if any, between the exercise price and the fair value
of the Company's units when it becomes probable that the conversion of the
non-voting units to the voting class will occur. SFAS No. 123 requires companies
that continue to follow APB No. 25 to
IV-22
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
provide pro forma disclosure of the impact of applying the fair value method of
SFAS No. 123. The following table summarizes unit option activity:
CLASS B PRICE
UNITS PER UNIT
---------- --------
Balance at January 1, 2000.............................. -- $ 0.00
Granted................................................. 3,932,000 10.00
Exercised............................................... -- --
Forfeited............................................... (419,000) 10.00
----------
Balance at December 31, 2000............................ 3,513,000 $10.00
Granted................................................. 4,350,204 10.00
Exercised............................................... -- --
Forfeited............................................... (641,000) 10.00
----------
Balance at December 31, 2001............................ 7,222,204 $10.00
Granted................................................. -- --
Exercised............................................... -- --
Forfeited............................................... (4,655,999) 10.00
----------
Balance at December 31, 2002............................ 2,566,205 $10.00
==========
There were 754,700 and 610,941 options exercisable at December 31, 2001 and
2002, respectively. There were 5,946,499 units available for future grants as of
December 31, 2002. The weighted average exercise price of unit options granted
during the year ended December 31, 2000 and 2001 was $10.00. The weighted
average remaining contractual life of the Company's unit options was
approximately eight years at December 31, 2002.
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee unit
options under the fair value method. The weighted average fair value of unit
options granted during 2000 and 2001 was $2.56 and $2.00, respectively, per
share using the Black-Scholes option pricing model with the following
assumptions: expected dividend yield 0%, volatility 0%, average risk free
interest rate 4.51%--6.01%, and expected life of five years. For purposes of the
pro forma disclosures, the estimated fair value of the unit options is amortized
to expense over the unit options' vesting period. Had compensation expense for
the unit options granted to employees been determined based on the fair value of
the related unit options at the grant dates in accordance with SFAS No. 123, the
Company's net loss for the years ended December 31, 2000, 2001 and 2002 would
have increased by the pro forma amount indicated below:
2000 2001 2002
----------- ------------ -----------
Net loss, as reported................ $22,249,181 $964,156,097 $13,698,567
Net loss, pro forma.................. 25,678,088 967,102,770 14,851,938
IV-23
ASTROLINK INTERNATIONAL LLC
(A DEVELOPMENT STAGE LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2001 AND 2002
(11) OTHER CONTRACTUAL COMMITMENTS AND RELATED TERMINATIONS
During 2000 and 2001, the Company entered into contracts with third-party
contractors for the development and manufacture of end-user terminals and
service provider gateway terminals. Amounts under the contracts were due upon
the completion of certain milestones. As described in note 4, the Company
terminated all of its construction and related contracts during 2001. During the
years ended December 31, 2000 and 2001, the Company paid approximately
$1,500,000 and $16,000,000, respectively, to the contractors under the terms of
these contracts. At December 31, 2001 and 2002, approximately $4,675,000 was
payable to the contractors under the original terms of these contracts. The
Company has accrued an additional $46,653,000 related to the termination of
these contracts. During January 2003, all claims from third party contractors
for the development and manufacture of terminals were settled in consideration
of payments made by a Member.
As of December 31, 2002, the Company was subject to a legal proceeding and
claim relating to a software license agreement that arose in the ordinary course
of its operations that had not been finally adjudicated. The amount at issue in
this proceeding was $1,200,000, all of which was accrued for as of December 31,
2001. As of January 17, 2003, and in connection with the Master Agreement, the
dispute was settled in consideration of a payment of $350,000 by the Company to
the software vendor and the proceeding was dismissed. In December 2002, the
Company reduced its accrual for the settlement by $850,000, which is included in
the consolidated statements of operations.
(12) VALUE ADDED TAX (VAT) REFUND DISPUTE
In 2001, in accordance with Italian law, the Company's Italian subsidiary
submitted a written request for a refund of value added tax (VAT) that has been
paid to the Italian government in connection with work performed in Italy on the
original Astrolink System-TM-. In 2002, the Italian VAT authority provided a
partial refund of VAT of approximately $450,000 and is currently disputing the
remaining refund petition of approximately $7,726,000. The Italian VAT authority
has also threatened other actions against the Company in connection with the VAT
refund request. The Company believes that the Italian government's position is
without merit and that the collectibility of the remaining VAT receivable is
probable (although the timing is uncertain). Therefore, no reserve has been
established over the VAT receivable at December 31, 2002. However, there can be
no assurance that the resolution of this dispute will not result in the
write-off of some portion, or all, of the VAT receivable.
IV-24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 SATELLITE & TECHNOLOGY, INC.
By: /s/ KENNETH G. CARROLL
------------------------------------------------
Name: Kenneth G. Carroll
Title: ACTING PRESIDENT, CHIEF FINANCIAL OFFICER
AND TREASURER
Dated March 28, 2003
Pursuant to the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the Registrant and in the capacities and
on the date indicated:
SIGNATURE TITLE DATE
--------- ----- ----
/s/ GARY S. HOWARD
------------------------------------ Chairman of the Board and Director March 28, 2003
Gary S. Howard
/s/ ALAN M. ANGELICH
------------------------------------ Director March 28, 2003
Alan M. Angelich
/s/ ROBERT R. BENNETT
------------------------------------ Director March 28, 2003
Robert R. Bennett
/s/ WILLIAM H. BERKMAN
------------------------------------ Director March 28, 2003
William H. Berkman
/s/ WILLIAM R. FITZGERALD
------------------------------------ Director March 28, 2003
William R. Fitzgerald
/s/ JOHN W. GODDARD
------------------------------------ Director March 28, 2003
John W. Goddard
/s/ J. CURT HOCKEMEIER
------------------------------------ Director March 28, 2003
J. Curt Hockemeier
Acting President, Chief Financial
/s/ KENNETH G. CARROLL Officer and Treasurer (Principal
------------------------------------ Executive, Financial and Accounting March 28, 2003
Kenneth G. Carroll Officer)
IV-25
CERTIFICATION
I, Kenneth G. Carroll, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Satellite &
Technology, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the
registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this annual report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 28, 2003
/s/ KENNETH G. CARROLL
--------------------------------------------
Kenneth G. Carroll
ACTING PRESIDENT, CHIEF FINANCIAL OFFICER AND
TREASURER
IV-26
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 JUNE 30, 2003
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: 0-21317
LIBERTY SATELLITE & TECHNOLOGY, INC.
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 84-1299995
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12300 LIBERTY BOULEVARD 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (720) 875-5400
Indicate by check mark whether the Registrant is an accelerated filer as
described in Rule 12(b)-2 of the Securities Exchange Act. Yes / / No /X/
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 / /
The number of shares outstanding of Liberty Satellite & Technology, Inc.'s
common stock as of July 31, 2003 was:
Series A common stock--14,278,206 shares; and
Series B common stock--34,765,055 shares.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
AMOUNTS IN THOUSANDS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 81,741 11,571
Restricted cash (note 6).................................. 10,990 2,690
Trade and other receivables, net.......................... 30,531 33,513
Derivative assets (note 8)................................ 37,724 317,580
Other current assets...................................... 2,106 3,629
--------- ---------
Total current assets.................................... 163,092 368,983
--------- ---------
Investments in available-for-sale securities and other cost
investments, including securities pledged to creditors
(note 6).................................................. 129,476 138,602
Investment in WildBlue Communications, Inc. (note 7)........ 64,098 5,256
Property and equipment:
Video systems............................................. 388,525 392,350
Support equipment......................................... 13,170 12,813
--------- ---------
401,695 405,163
Accumulated depreciation.................................. (138,745) (130,086)
--------- ---------
262,950 275,077
--------- ---------
Intangible asset subject to amortization, net of accumulated
amortization.............................................. -- 13,583
Intangible asset not subject to amortization--Goodwill...... 53,371 52,272
Other assets (note 8)....................................... 16,311 21,446
--------- ---------
Total assets............................................ $ 689,298 875,219
========= =========
(continued)
I-1
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
JUNE 30, DECEMBER 31,
2003 2002
----------- ------------
AMOUNTS IN THOUSANDS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 40,046 48,332
Due to parent (note 2)
Note payable............................................ -- 48,411
Accrued interest........................................ -- 614
Other accrued expenses.................................. 5,763 6,931
Current portion of long-term debt (note 9)................ 266,295 113,336
Securities lending agreement (note 6)..................... 10,990 2,690
----------- -----------
Total current liabilities............................. 323,094 220,314
----------- -----------
Long-term debt (note 9)..................................... 28 261,946
Put option liability due to related party (note 2).......... 32,418 31,052
Deferred tax liability...................................... 10,595 14,558
Other liabilities (note 7).................................. 1,516 495
----------- -----------
Total liabilities..................................... 367,651 528,365
----------- -----------
Minority interests in equity of consolidated subsidiaries... 10,007 9,854
Redeemable preferred stock.................................. 212,707 202,147
Stockholders' Equity:
Preferred stock; authorized 5,000,000 shares; issued and
outstanding 300,000 shares in 2003 and 2002............. -- --
Series A common stock, $1 par value; authorized
100,000,000 shares; issued 14,306,060 shares at June 30,
2003 and 11,078,834 shares at December 31, 2002......... 14,306 11,079
Series B common stock, $1 par value; authorized 70,000,000
shares; issued and outstanding 34,765,055 shares at
June 30, 2003 and December 31, 2002..................... 34,765 34,765
Additional paid-in capital................................ 1,968,104 1,981,831
Accumulated other comprehensive earnings.................. 13,460 3,085
Accumulated deficit....................................... (1,931,009) (1,895,220)
----------- -----------
99,626 135,540
Series A common stock held in treasury, at cost (27,854
shares at June 30, 2003 and December 31, 2002).......... (378) (378)
Notes receivable from officers............................ (315) (309)
----------- -----------
Total stockholders' equity.............................. 98,933 134,853
----------- -----------
Commitments and contingencies (notes 6, 7, 11 and 12)
$ 689,298 875,219
=========== ===========
See accompanying notes to condensed consolidated financial statements.
I-2
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- ---------
AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS
Net revenue:
In-room entertainment.................................. $ 59,552 60,999 116,272 118,382
Other.................................................. 105 105 210 210
-------- -------- -------- ---------
59,657 61,104 116,482 118,592
-------- -------- -------- ---------
Operating costs and expenses:
Operating.............................................. 39,289 38,553 74,682 75,280
Selling, general and administrative (note 2)........... 7,051 6,216 13,331 12,729
Depreciation and amortization.......................... 19,444 33,553 52,014 67,268
Asset impairments and other charges.................... 931 5,821 1,256 7,650
-------- -------- -------- ---------
66,715 84,143 141,283 162,927
-------- -------- -------- ---------
Operating loss..................................... (7,058) (23,039) (24,801) (44,335)
Other income (expense):
Interest expense-parent (note 2)....................... -- (470) (412) (1,462)
Interest expense-other................................. (2,938) (4,253) (7,011) (8,324)
Share of losses of affiliates.......................... (208) (1,856) (208) (3,358)
Realized and unrealized gains (losses) on financial
instruments, net (note 8)............................ (5,559) 6,563 (7,535) (753)
Nontemporary declines in fair values of investments
(note 6)............................................. (4,412) (58,948) (4,412) (58,948)
Other, net............................................. 653 1,918 813 299
-------- -------- -------- ---------
(12,464) (57,046) (18,765) (72,546)
-------- -------- -------- ---------
Loss before income taxes and minority interests.... (19,522) (80,085) (43,566) (116,881)
Income tax benefit (expense)............................. 3,406 (3,542) 8,189 6,712
Minority interests in losses (earnings) of consolidated
subsidiaries........................................... (249) (314) (412) 383
-------- -------- -------- ---------
Loss before cumulative effect of accounting
change........................................... (16,365) (83,941) (35,789) (109,786)
Cumulative effect of accounting change, net of taxes..... -- -- -- (105,837)
-------- -------- -------- ---------
Net loss........................................... (16,365) (83,941) (35,789) (215,623)
Accretion of redeemable preferred stock.................. (1,530) (1,530) (3,060) (3,060)
Dividends on redeemable preferred stock.................. (7,500) (7,500) (15,000) (15,000)
-------- -------- -------- ---------
Net loss attributable to common stockholders....... $(25,395) (92,971) (53,849) (233,683)
======== ======== ======== =========
Basic and diluted loss per common share before cumulative
effect of accounting change (note 4)................... $ (.52) (2.24) (1.11) (3.08)
Cumulative effect of accounting change................... -- -- -- (2.55)
-------- -------- -------- ---------
Basic and diluted loss per common share.................. $ (.52) (2.24) (1.11) (5.63)
======== ======== ======== =========
See accompanying notes to condensed consolidated financial statements.
I-3
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- --------------------
2003 2002 2003 2002
-------- -------- -------- ---------
AMOUNTS IN THOUSANDS
Net loss............................................ $(16,365) (83,941) (35,789) (215,623)
-------- -------- -------- ---------
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses)................. 4,696 (13,596) 6,182 (14,636)
Reclassification of holding losses included in
earnings........................................ 91 -- 503 --
Foreign currency translation adjustments.......... 1,636 1,446 3,690 1,506
-------- -------- -------- ---------
Other comprehensive income (loss)............... 6,423 (12,150) 10,375 (13,130)
-------- -------- -------- ---------
Comprehensive loss............................ $ (9,942) (96,091) (25,414) (228,753)
======== ======== ======== =========
See accompanying notes to condensed consolidated financial statements.
I-4
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 2003
(UNAUDITED)
ACCUMULATED NOTES
COMMON STOCK ADDITIONAL OTHER RECEIVABLE TOTAL
------------------- PAID-IN COMPREHENSIVE ACCUMULATED TREASURY FROM STOCKHOLDERS'
SERIES A SERIES B CAPITAL EARNINGS DEFICIT STOCK OFFICERS EQUITY
-------- -------- ---------- ------------- ----------- -------- ---------- -------------
AMOUNTS IN THOUSANDS
Balance at January 1,
2003.................. $11,079 34,765 1,981,831 3,085 (1,895,220) (378) (309) 134,853
Net loss.............. -- -- -- -- (35,789) -- -- (35,789)
Other comprehensive
income.............. -- -- -- 10,375 -- -- -- 10,375
Accretion and
dividends on
redeemable preferred
stock............... -- -- (18,060) -- -- -- -- (18,060)
Issuance of Series A
common stock for
preferred stock
dividends........... 3,222 -- 4,278 -- -- -- -- 7,500
Recognition of stock
compensation related
to restricted stock
awards, net of
taxes............... -- -- 54 -- -- -- -- 54
Accrual of interest on
notes receivable
from officers....... -- -- 6 -- -- -- (6) --
Issuance of restricted
stock............... 5 -- (5) -- -- -- -- --
------- ------- --------- ------ ---------- ---- ---- -------
Balance at June 30,
2003.................. $14,306 34,765 1,968,104 13,460 (1,931,009) (378) (315) 98,933
======= ======= ========= ====== ========== ==== ==== =======
See accompanying notes to condensed consolidated financial statements.
I-5
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
--------------------
2003 2002
--------- --------
AMOUNTS IN THOUSANDS
(SEE NOTE 5)
Cash flows from operating activities:
Net loss.................................................. $ (35,789) (215,623)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization......................... 52,014 67,268
Asset impairments and other charges................... 1,256 7,650
Share of losses of affiliates......................... 208 3,358
Realized and unrealized losses on financial
instruments, net.................................... 7,535 753
Nontemporary declines in fair values of investments... 4,412 58,948
Minority interests in earnings (losses) of
consolidated subsidiaries........................... 412 (383)
Deferred tax benefit.................................. (8,272) (1,585)
Cumulative effect of accounting change, net of
taxes............................................... -- 105,837
Other non-cash items.................................. 2,186 3,375
Changes in operating assets and liabilities:
Receivables and prepaid expenses.................... 4,862 (3,384)
Accruals and payables............................... (10,207) 5,791
--------- --------
Net cash provided by operating activities......... 18,617 32,005
--------- --------
Cash flows from investing activities:
Proceeds from disposition of available-for-sale security
and related equity collar............................... 303,586 --
Investments in and advances to affiliates and investees... (65,931) (23,350)
Capital expended for equipment............................ (25,606) (26,018)
Other investing activities................................ (2,077) (469)
--------- --------
Net cash provided (used) by investing
activities...................................... 209,972 (49,837)
--------- --------
Cash flows from financing activities:
Borrowings of third-party debt............................ 6,000 22,000
Repayments of third-party debt............................ (114,960) (5,406)
Advances and contributions from parent.................... -- 6,573
Repayments of note payable to parent...................... (48,411) (6,573)
Payment of deferred financing costs....................... (1,027) --
Other financing activities................................ (21) 49
--------- --------
Net cash provided (used) by financing
activities...................................... (158,419) 16,643
--------- --------
Net increase (decrease) in cash and cash
equivalents..................................... 70,170 (1,189)
Cash and cash equivalents:
Beginning of period............................. 11,571 33,913
--------- --------
End of period................................... $ 81,741 32,724
========= ========
See accompanying notes to condensed consolidated financial statements.
I-6
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2003
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Liberty Satellite & Technology, Inc. and those of all majority-owned
or controlled subsidiaries ("LSAT" and together with its consolidated
subsidiaries, the "Company"). All significant inter-company transactions have
been eliminated.
LSAT is a consolidated subsidiary of Liberty Media Corporation ("Liberty
Media"). At June 30, 2003, Liberty Media owned approximately 87% of LSAT's
outstanding common stock, which, when considered with LSAT redeemable preferred
stock owned by Liberty Media, represented approximately 98% of LSAT's
outstanding voting power. The Company's primary operating subsidiary is On
Command Corporation ("On Command"), which provides in-room, on-demand video
entertainment and informational services to hotels, motels and resorts. At
June 30, 2003, LSAT, indirectly controlled approximately 74% of the outstanding
On Command common stock ("On Command Common Stock") and 100% of certain series
of On Command's preferred stock, which ownership interests collectively
represented approximately 80% of On Command's outstanding voting power.
In addition to LSAT's indirect interests in On Command and in various
investments, the Company is currently pursuing strategic opportunities worldwide
relating to the business of distributing Internet and other content via
satellite and related businesses.
These interim condensed consolidated financial statements are unaudited. In
the opinion of management, all adjustments (consisting only of normal recurring
accruals) have been made that are necessary to present fairly the financial
position of the Company as of June 30, 2003 and the results of its operations
for the three and six months ended June 30, 2003 and 2002. The results of
operations for any interim period are not necessarily indicative of the results
for the entire year. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and related notes
thereto included in the Company's December 31, 2002 Annual Report on Form 10-K.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 2003 presentation.
(2) TRANSACTIONS WITH LIBERTY MEDIA AND OTHER RELATED PARTIES
PROPOSALS BY LIBERTY MEDIA TO ACQUIRE LSAT AND ON COMMAND PUBLICLY-HELD
STOCK
On April 1, 2003, the Company announced that it had received an expression
of interest from Liberty Media regarding the possibility of Liberty Media
acquiring all the issued and outstanding shares of LSAT that Liberty Media does
not already own. As proposed by Liberty Media, LSAT stockholders would receive
0.2131 of a share of Liberty Media Series A common stock for each share of LSAT
common stock held. The transaction would be taxable to LSAT stockholders.
I-7
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LSAT's Board of Directors has established a committee of independent
directors to consider the proposal from Liberty Media. The committee has engaged
independent legal counsel and financial advisors, and has authority, among other
things, to review and evaluate the terms and conditions of the proposed
transaction, to determine whether the proposed transaction is in the best
interests of the Company and its public stockholders, to negotiate with Liberty
Media, and to accept, reject or seek to modify the proposed transaction. Any
transaction between LSAT and Liberty Media would be subject to negotiation,
execution and delivery of definitive documentation relating thereto and any
closing conditions provided for in such documentation.
On April 2, 2003, On Command announced that it had received an expression of
interest from Liberty Media regarding the possibility of Liberty Media acquiring
all the issued and outstanding shares of On Command that Liberty Media (through
its subsidiaries) does not already own. As proposed by Liberty Media, On Command
stockholders would receive 0.0787 of a share of Liberty Media Series A common
stock for each share of On Command Common Stock held. The transaction would be
taxable to On Command stockholders.
On Command's Board of Directors has established a committee of independent
directors to consider the proposal from Liberty Media. The committee has engaged
independent legal counsel and financial advisors, and has authority, among other
things, to review and evaluate the terms and conditions of the proposed
transaction, to determine whether the proposed transaction is in the best
interests of On Command and its public stockholders, to negotiate with Liberty
Media, and to accept, reject or seek to modify the proposed transaction. Any
transaction between On Command and Liberty Media would be subject to
negotiation, execution and delivery of definitive documentation relating thereto
and any closing conditions provided for in such documentation.
TRANSACTIONS WITH LIBERTY MEDIA AND AFFILIATES
NOTE PAYABLE. On March 26, 2003, LSAT used a portion of the proceeds from
the delivery of 2,500,000 shares of Sprint Corporation PCS Group common stock
and the termination of a related equity collar to repay a note payable to
Liberty Media with a principal balance of $48,411,000 and an accrued interest
balance of $115,000.
TAX LIABILITY ALLOCATION AND INDEMNIFICATION AGREEMENT. LSAT and Liberty
Media have entered into a tax liability allocation and indemnification agreement
whereby LSAT is obligated to make a cash payment to Liberty Media in each year
that LSAT (taken together with any of its subsidiaries) has taxable income. The
amount of the payment will be equal to the amount of the taxable income of LSAT
and its subsidiaries (determined as if LSAT and its subsidiaries filed a
separate return) multiplied by the highest applicable corporate tax rate. In the
event that (1) LSAT and its subsidiaries, when treated as a separate group, have
a net operating loss or deduction or are entitled to a tax credit for a
particular year; and (2) Liberty Media is able to use such loss, deduction or
credit to reduce its tax liability, LSAT will be entitled to a credit against
current and future payments to Liberty Media under the agreement. If LSAT ceases
to be affiliated with Liberty Media and the members of Liberty Media's
affiliated group prior to the time that LSAT is able to use such credit, LSAT
will be entitled to a payment from Liberty Media at the earlier of the time that
(1) LSAT and its subsidiaries show they could have used the net operating loss
or net tax credit to reduce their own separately computed tax liability or
(2) the voting power of the stock of LSAT held by Liberty Media and the members
of its affiliated group drops below 20%.
I-8
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, under the tax liability allocation and indemnification
agreement, LSAT will have the opportunity to participate in the defense of
claims of the Internal Revenue Service that might affect its liability under the
agreement, and to participate in tax refunds paid to Liberty Media where such
refunds are due in part to LSAT's operations. Through June 30, 2003, the Company
has recorded a $2,814,000 intercompany receivable from Liberty Media pursuant to
this agreement.
At June 30, 2003, Ascent Entertainment, Inc., a wholly-owned subsidiary of
LSAT, ("Ascent Entertainment") owed Liberty Media $8,409,000 pursuant to a
separate tax liability allocation and indemnification agreement. Such amount,
which is non-interest bearing, represents the net effect of $36,568,000 that is
due on demand to Liberty Media and $28,159,000 that is payable to the Company by
Liberty Media if, and to the extent that, tax benefits generated by Ascent
Entertainment are utilized to reduce Liberty Media's taxable income.
EXPENSE ALLOCATIONS AND REIMBURSEMENTS. Liberty Media allocates rent,
salaries, benefits and certain other general and administrative expenses to the
Company. Although there is no written agreement with Liberty Media for these
allocations, the Company believes the allocated amounts to be reasonable. The
aggregate allocations from Liberty Media were $227,000 during each of the six
month periods ended June 30, 2003 and 2002. In addition, the Company reimburses
Liberty Media for certain expenses paid by Liberty Media on behalf of the
Company. Amounts owed to Liberty Media pursuant to these arrangements ($168,000
at June 30, 2003) are non-interest bearing and are generally paid on a monthly
basis.
PUT OPTION LIABILITY. Effective September 29, 2000, Liberty Satellite LLC
("LSAT LLC"), a subsidiary of LSAT, acquired a 1% managing common interest in a
joint venture ("IB2 LLC") from a subsidiary of Liberty Digital, Inc. ("Liberty
Digital") for $652,000. Liberty Digital, an indirect wholly-owned subsidiary of
Liberty Media, retained a preferred interest (the "Preferred Interest") in IB2
LLC, which owns approximately 360,000 shares of iBEAM Broadcasting Corp.
("iBEAM") common stock ("iBEAM Stock"). The Preferred Interest had an initial
liquidation value of $64,574,000 and is entitled to a return of 9%, compounded
annually. As part of the transaction, LSAT LLC granted Liberty Digital the right
to put the Preferred Interest to LSAT LLC for a purchase price equal to
$26,000,000 (the value of iBEAM Stock on September 29, 2000) plus a 9% return,
compounded annually (the "iBEAM Put Option"). LSAT LLC has the right to call
Liberty Digital's Preferred Interest at a price equal to the initial liquidation
value plus a return of 9%, compounded annually. Both the iBEAM Put Option and
call option are exercisable on September 29, 2008. Under certain limited
circumstances, including iBEAM's bankruptcy, LSAT LLC can force Liberty Digital
to exercise the iBEAM Put Option prior to September 29, 2008.
During the fourth quarter of 2001, iBEAM filed for bankruptcy under
Chapter 11 of the Bankruptcy Code. As a result of such bankruptcy filing, the
Company began carrying the iBEAM Put Option liability at an amount ($32,418,000
at June 30, 2003), which represents the iBEAM Put Option purchase price to LSAT
LLC plus an accrued return to Liberty Digital of 9%, compounded annually. The
Company anticipates that future losses with respect to the iBEAM Put Option will
be limited to Liberty Digital's 9% return on the iBEAM Put Option liability.
Changes in the fair market value of the iBEAM Put Option subsequent to
September 29, 2000 have been recognized as unrealized gains (losses) on
financial instruments in the Company's condensed consolidated statements of
operations. During the six months ended June 30, 2003 and 2002, the Company
recorded unrealized losses of $1,367,000 and $1,254,000, respectively, related
to the iBEAM Put Option.
I-9
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
ASCENT MEDIA SATELLITE SERVICES. Since October 1, 2002, Ascent Media
Group, Inc., a consolidated subsidiary of Liberty ("Ascent Media") has provided
uplink and satellite transport services to the Company for a negotiated monthly
fee. Beginning in April 2003, Ascent also began installing satellite equipment
at On Command's downlink sites at hotels. During the six months ended June 30,
2003, Ascent Media charged the Company $217,000 for such services. The terms for
the above-described services are set forth in a Content Preparation and
Distribution Services Agreement that covers the five-year period beginning on
April 1, 2003. Ascent Media also may supply the Company with content preparation
services at a negotiated rate during the term of the agreement. No content
preparation services have been provided through June 30, 2003.
TRANSACTIONS WITH OTHER RELATED PARTIES
PHOENIXSTAR MANAGEMENT AGREEMENT. Effective February 1, 2000, the Company
entered into a management agreement with Phoenixstar, Inc. ("Phoenixstar")
pursuant to which the Company is managing Phoenixstar's affairs in exchange for
a monthly management fee. Prior to 1999, the Company beneficially owned 37% of
Phoenixstar's outstanding shares. In connection with certain transactions that
closed in 1999, the Company agreed to forgo any liquidating distribution or
other payment that may be made in respect of the outstanding shares of
Phoenixstar upon any dissolution and winding-up of Phoenixstar, or otherwise in
respect of Phoenixstar's equity, and to transfer its shares in Phoenixstar to
the other Phoenixstar stockholders. Management fees from Phoenixstar aggregated
$210,000 for each of the six-month periods ended June 30, 2003 and 2002. In
addition, the Company allocates certain general and administrative expenses,
such as office rent and computer support to Phoenixstar. Under the current
management agreement, expense allocations are limited to $5,000 per month. Such
allocations aggregated $30,000 during each of the six-month periods ended
June 30, 2003 and 2002, and are reflected as a reduction of general and
administrative expenses in the accompanying condensed consolidated statements of
operations.
(3) RECENT ACCOUNTING PRONOUCEMENTS
In May 2003, the Financial Accounting Standards Board issued STATEMENT
NO. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
BOTH LIABILITIES AND EQUITY ("Statement No. 150"). Statement No. 150 provides
guidance as to whether certain financial instruments are required to be
classified as liabilities, subject to its recognition and measurement
provisions. Generally, Statement No. 150 is effective for financial instruments
entered into or modified after May 31, 2003 and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
adopted the provisions of Statement No.150 on July 1, 2003. The adoption of
Statement No. 150 is not expected to have a material effect on the Company's
consolidated financial statements.
(4) LOSS PER COMMON SHARE
The loss per common share is based on 49,043,300 and 48,581,500 weighted
average shares outstanding for the three and six months ended June 30, 2003,
respectively; and 41,523,600 and 41,524,200 weighted average shares outstanding
for the three and six months ended June 30, 2002, respectively. Potential common
shares were not included in the computation of diluted loss per share because
their inclusion would have been anti-dilutive. At June 30, 2003, the number of
potential common shares was approximately 2,170,000. Such potential common
shares consist of stock options to acquire shares of LSAT Series A common stock
("Series A Common Stock") and securities that are convertible into 1,696,717
shares of LSAT Series B common stock ("Series B Common Stock') at
I-10
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
June 30, 2003. The foregoing potential common share amounts do not take into
account the assumed number of shares that may be repurchased by the Company upon
the exercise of stock options.
(5) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash paid for interest was $7,538,000 and $8,333,000 for the six months
ended June 30, 2003 and 2002, respectively. Cash paid for income taxes was not
significant during these periods.
(6) INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments are
summarized as follows:
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
AMOUNTS IN THOUSANDS
Various 10% investees that operate satellite television
systems in Latin America ("Sky Latin America")............ $ 88,958 86,772
General Motors Corporation Class H common stock ("GM Hughes
Stock")*.................................................. 23,339 19,495
Sprint Corporation PCS Group ("Sprint PCS Group")*.......... -- 22,271
XM Satellite Radio Holdings, Inc. ("XMSR")*................. 10,990 2,690
Other....................................................... 6,189 7,374
-------- --------
$129,476 138,602
======== ========
------------------------
* Denotes an investment carried as an available-for-sale security.
SPRINT PCS GROUP
The Company accounted for its investment in Sprint Corporation PCS Group
common stock ("Sprint PCS Stock") as an available-for-sale security. On
March 26, 2003, the Company delivered 2,500,000 shares of Sprint PCS Stock in
connection with the settlement of a portion of the Sprint PCS Stock equity
collar. The Company received cash proceeds of $149,263,000 upon such settlement.
On April 9, 2003, the Company delivered all of its remaining 2,584,745 shares of
Sprint PCS Stock in connection with the settlement of the remaining portion of
the Sprint PCS Stock equity collar and received cash proceeds of $154,323,000.
XMSR
LSAT LLC currently owns 1,000,000 shares or approximately 1% of the
outstanding XMSR Class A common stock.
On June 27, 2001, LSAT LLC entered into an agreement to lend 1,000,000
shares of XMSR to a third party. The obligation of such third party to return
those shares to LSAT LLC is secured by cash collateral equal to 100% of the
market value of that stock, which was $10,990,000 at June 30, 2003. Such cash
collateral is reported as restricted cash in the accompanying condensed
consolidated balance sheet. 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. Interest accrues on the cash collateral for the benefit of LSAT LLC at
the rate of 0.15% per annum. As of June 30, 2003, 1,000,000 shares of XMSR had
been lent under this agreement. The loan has no stated maturity date.
I-11
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
MAGINET CORPORATION, FORMERLY E-ROOM CORPORATION ("MAGINET")
In connection with a first quarter 2001 acquisition of a 7.5% interest in
MagiNet and the settlement of certain litigation, On Command agreed that MagiNet
would have the option during the 15 day period beginning on March 1, 2003 to
cause On Command to repurchase all, but not less than all, of the 275,000 shares
of On Command Common Stock issued to MagiNet at a price of $15 per share. During
the fourth quarter of 2002, On Command repurchased 119,500 of such shares for an
aggregate price of $1,344,000 or $11.25 per share. In connection with this
transaction, the parties agreed to postpone until March 1, 2004 the date on
which On Command can be required to repurchase 119,500 of the remaining shares
subject to repurchase. On Command is not precluded from repurchasing such shares
at an earlier date. The repurchase price for such shares will be $15 per share,
plus an adjustment factor calculated from March 1, 2003 to the date of
repurchase, at a rate of 8% per annum. On March 1, 2003, the date on which the
remaining 36,000 shares will first become subject to repurchase by On Command
was postponed until March 1, 2004. The repurchase price for such shares will
remain at $15 per share. Subsequent to June 30, 2003, MagiNet agreed to assign
the above-described 36,000 shares to the Company in exchange for a $540,000
credit against the cost of equipment to be purchased by MagiNet from the Company
through March 1, 2004. To the extent that MagiNet has not used all of such
credit by March 1, 2004, the remaining credit will be settled in cash.
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS
During the three months ended June 30, 2003 and 2002, the Company recorded
losses of $4,412,000 and $58,948,000, respectively, to reflect nontemporary
declines in the value of its investment in Sky Latin America.
UNREALIZED HOLDING GAIN AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities that are included in accumulated other
comprehensive earnings are summarized below. Such amounts are in addition to the
unrealized gains and losses recognized in LSAT's condensed consolidated
statements of operations.
JUNE 30, DECEMBER 31,
2003 2002
-------- ------------
AMOUNTS IN THOUSANDS
Equity securities
Fair value................................................ $40,347 48,532
======= =======
Gross unrealized holding gains............................ $12,476 1,517
======= =======
Gross unrealized holding losses........................... $ -- --
======= =======
(7) INVESTMENT IN WILDBLUE COMMUNICATIONS, INC.
In December 2002, the Company announced that it had agreed to increase its
investment in WildBlue Communications, Inc. ("WildBlue"). On April 21, 2003,
pursuant to the terms of the new agreement, the Company invested $58 million in
return for senior preferred stock and warrants of WildBlue, which increased its
ownership interest from approximately 16% to approximately 32%. Concurrently,
other existing and new investors invested $98 million in WildBlue for a total
new investment of $156 million. As a result of this transaction, the Company
began using the equity method
I-12
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
to account for its investment in WildBlue. Previously, the Company had carried
such investment at cost, subject to other-than-temporary impairment. WildBlue
currently expects to launch its satellite in the first half of 2004 and begin
the phased introduction of broadband data services in late 2004 or early 2005.
In connection with such additional investments in WildBlue, the Company
entered into a put agreement with KPCB Holdings, Inc. ("KPCB"), one of the
existing WildBlue investors that participated in the recent round of financing.
Pursuant to this put agreement, KPCB has the right to sell its entire interest
in WildBlue to the Company and another WildBlue investor for $10,000,000, the
amount KPCB invested in WildBlue in the recent financing round. The Company and
such other investor are each responsible for $5,000,000 of the aggregate
$10,000,000 put obligation. The put may be exercised at any time within four
years from the closing of the WildBlue transaction. The estimated fair value of
the put obligation at June 30, 2003 ($1,516,000) is included in other
liabilities in the accompanying condensed consolidated balance sheet.
(8) DERIVATIVE INSTRUMENTS
The estimated fair values of the Company's derivative instruments are as
follows:
TYPE OF UNDERLYING JUNE 30, DECEMBER 31,
DERIVATIVE SECURITY 2003 2002
------------------------------ ------------------------------ -------- ------------
AMOUNTS IN THOUSANDS
Equity collar................. Sprint PCS Stock $ -- 280,559
Equity collar................. XMSR 17,557 25,493
Put spread collar............. GMH 20,167 20,004
-------- ---------
Total....................... 37,724 326,056
Less current portion........ (37,724) (317,580)
-------- ---------
Long-term derivative assets... $ -- 8,476
======== =========
Prior to the consummation of the settlement transactions described below,
the Company owned, through its interest in a trust, a beneficial interest in
5,084,745 shares of Sprint PCS Stock, as well as a beneficial interest in an
equity collar between the trust and a financial institution with respect to
5,084,745 shares of Sprint PCS Stock. On March 26, 2003, the Company delivered
2,500,000 shares of Sprint PCS Stock in connection with the settlement of a
portion of the Sprint PCS Stock equity collar. The Company received cash
proceeds of $149,263,000 upon such settlement. On April 9, 2003, the Company
delivered all of its remaining 2,584,745 shares of Sprint PCS Stock in
connection with the settlement of the remaining portion of the Sprint PCS Stock
equity collar and received cash proceeds of $154,323,000.
LSAT LLC has entered into a put spread collar with a financial institution
with respect to the Company's shares of GM Hughes Stock. The collar
(i) provides LSAT LLC with a put option that gives it the right to require its
counterparty to buy 1,821,921 shares of GM Hughes Stock from LSAT LLC in three
tranches in October 2003 for a weighted average price of $26.64, and
(ii) provides the counterparty with a put option that gives it the right to
require LSAT LLC to repurchase the shares of GM Hughes Stock for a weighted
average price of $14.80. LSAT LLC simultaneously sold a call option giving the
counterparty the right to buy the same shares of stock from LSAT LLC in three
tranches in October 2003 for a weighted average price of $54.32 per share.
I-13
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LSAT LLC has entered into an equity collar with a financial institution with
respect to its shares of XMSR common stock. The collar provides LSAT LLC with a
put option that gives it the right to require its counterparty to buy 1,000,000
shares of XMSR common stock from LSAT LLC in three tranches in November 2003,
December 2003 and February 2004 for a weighted average price of $28.55. LSAT LLC
simultaneously sold a call option giving the counterparty the right to buy the
same shares of stock from LSAT LLC in three tranches in November 2003,
December 2003 and February 2004 for a weighted average price of $51.49 per
share.
Prior to January 1, 2003, the Company's equity collars were designated as
fair value hedges. Effective December 31, 2002, the Company elected to no longer
designate its equity collars as fair value hedges. Such election had no effect
on the Company's financial position or results of operations on December 31,
2002. Subsequent to December 31, 2002, changes in the fair value of the
Company's available-for-sale securities that previously had been reported in
earnings due to the designation of equity collars as fair value hedges will be
reported as a component of other comprehensive earnings on the Company's
condensed consolidated balance sheet. Changes in the fair value of the equity
collars will continue to be reported in earnings.
Realized and unrealized gains (losses) on financial instruments are as
follows:
SIX MONTHS ENDED
JUNE 30,
------------------------
2003 2002
-------- ----------
AMOUNTS IN THOUSANDS
Change in fair value of derivatives......................... $(6,168) 112,881
Change in fair value of Sprint PCS Stock and XMSR
common stock.............................................. -- (112,380)
Change in fair value of iBEAM Put Option.................... (1,367) (1,254)
------- ----------
$(7,535) (753)
======= ==========
(9) DEBT
Debt is summarized as follows:
JUNE 30, DECEMBER 31,
2003 2002
--------- ------------
AMOUNTS IN THOUSANDS
On Command Revolving Credit Facility(a)..................... $ 265,633 261,633
PCS Loan Facility(b)........................................ -- 112,503
Capital lease obligations................................... 690 1,146
--------- ---------
266,323 375,282
Less current portion........................................ (266,295) (113,336)
--------- ---------
$ 28 261,946
========= =========
------------------------
(a) On Command's revolving credit facility, as amended, (the "On Command
Revolving Credit Facility") provided for aggregate borrowings of
$275,000,000 at June 30, 2003. Borrowings under the On Command Revolving
Credit Facility are due and payable in July 2004. On Command had
$9,367,000 of remaining availability under the On Command Revolving
Credit
I-14
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Facility at June 30, 2003. On Command's ability to draw additional funds
under the On Command Revolving Credit Facility is subject to On Command's
continued compliance with applicable financial covenants.
Revolving loans extended under the On Command Revolving Credit Facility
bear interest at the London Interbank Offered Rate ("LIBOR") plus a
spread that may range from 1.125% to 3.50% depending on certain operating
ratios of On Command (4.83% effective borrowing rate at June 30, 2003).
In addition, a facility fee ranging from 0.375% to 0.50% per annum is
charged on the On Command Revolving Credit Facility, depending on certain
operating ratios of On Command. The On Command Revolving Credit Facility
contains customary covenants and agreements, most notably the inclusion
of restrictions on On Command's ability to pay dividends or make other
distributions. In addition, On Command is required to maintain leverage
and interest coverage ratios. On Command was in compliance with such
covenants at June 30, 2003, as then in effect. Substantially all of On
Command's assets are pledged as collateral for borrowings under the On
Command Revolving Credit Facility.
On March 28, 2003, On Command and its bank lenders amended the On Command
Revolving Credit Facility to postpone until June 30, 2003 the step down
of the leverage ratio covenant of the On Command Revolving Credit
Facility from 4.25 to 3.50. On June 27, 2003, a similar amendment was
executed to postpone such step down until October 1, 2003. Accordingly,
the maximum leverage ratio permitted under the On Command Revolving
Credit Facility at June 30, 2003 was 4.25, and On Command's actual
leverage ratio was 4.20 as of such date. On Command and its bank lenders
executed an Amended and Restated Credit Agreement on April 17, 2003, and
an amendment thereto on June 27, 2003 (as amended, the "Amended and
Restated Credit Agreement"). The effectiveness of the Amended and
Restated Credit Agreement is contingent upon the contribution of
$40,000,000 by Liberty Media or one of its subsidiaries (collectively,
the "Liberty Media Group") to On Command to be used to repay principal
due, and permanently reduce lender commitments, pursuant to the Amended
and Restated Credit Agreement. However, the Liberty Media Group has no
obligation to make any contribution to On Command, and there can be no
assurance that any such contribution will be made or, if made, what the
form or terms would be. After the proposed reduction of lender
commitments, the Amended and Restated Credit Agreement would constitute a
$235,000,000 senior secured credit facility, consisting of a $50,000,000
revolving credit facility and a $185,000,000 term loan facility. The term
loan would be subject to scheduled amortizations commencing
September 30, 2003, and both facilities would mature on December 31,
2007. If it does not earlier become effective, and if it is not otherwise
amended, the Amended and Restated Credit Agreement will terminate on
September 30, 2003.
Although On Command is in compliance with the leverage ratio covenant of
its existing On Command Revolving Credit Facility at June 30, 2003, and
On Command expects to be in compliance with such covenant at
September 30, 2003, On Command believes that it will be out of compliance
with such covenant after September 30, 2003 if the Amended and Restated
Credit Agreement does not become effective by that date. If the Amended
and Restated Credit Agreement has not become effective by, or is
otherwise terminated prior to, October 1, 2003, On Command anticipates
that it will request a further amendment to its existing On Command
Revolving Credit Facility to postpone the step down of the leverage ratio
covenant. It is uncertain whether On Command's lenders would agree to
such a further amendment and what terms might be imposed by the lenders
in connection with such further amendment. In
I-15
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the event that the Amended and Restated Credit Agreement does not become
effective by the date that the leverage ratio is reduced to 3.50, On
Command anticipates that a default would occur under the On Command
Revolving Credit Facility. Upon the occurrence of a default, if left
uncured, the bank lenders would have various remedies, including
terminating their revolving loan commitment, declaring all outstanding
loan amounts including interest immediately due and payable, and
exercising their rights against their collateral, which consists of
substantially all On Command's assets. No assurance can be given that the
Amended and Restated Credit Agreement will become effective. In addition,
if the Amended and Restated Credit Agreement does not become effective,
no assurance can be given that On Command will be able to successfully
restructure or refinance its existing On Command Revolving Credit
Facility on terms acceptable to On Command, or that On Command will be
able to avoid a default under its existing On Command Revolving Credit
Facility. In light of the uncertainties with respect to the restructuring
of the On Command Revolving Credit Facility, On Command's independent
auditors included an explanatory paragraph in their audit report on the
December 31, 2002 consolidated financial statements of On Command stating
in part that "On Command is seeking to restructure the debt facility and
such restructuring is contingent on certain events, which raises
substantial doubt about On Command's ability to continue as a going
concern."
The Company has classified all borrowings outstanding under the On
Command Revolving Credit Facility as current liabilities in its June 30,
2003 condensed consolidated balance sheet due to the fact that an
amendment was obtained from its lenders that allowed On Command to meet
its leverage ratio covenant at June 30, 2003. In the absence of such
amendment, On Command would not have been in compliance with the leverage
ratio covenant under the On Command Revolving Credit Facility at
June 30, 2003. As the amendment postponed the step down of the leverage
ratio covenant for a period of less than 12 months, the Company has
classified the debt as current in accordance with EMERGING ISSUES TASK
FORCE ISSUE NO. 86-30, CLASSIFICATION OF OBLIGATIONS WHEN A VIOLATION IS
WAIVED BY A CREDITOR, and STATEMENT OF FINANCIAL STANDARDS NO. 6,
CLASSIFICATION OF SHORT-TERM OBLIGATIONS TO BE REFINANCED. Although On
Command has the intent to refinance the On Command Revolving Credit
Facility with long-term borrowings under the Amended and Restated Credit
Agreement, On Command does not now have the unilateral ability to
complete the conditions precedent to the effectiveness of the Amended and
Restated Credit Agreement.
(b) LSAT LLC's revolving credit facility, as amended, provided for maximum
borrowings of $303,000,000 (the "PCS Loan Facility"). On April 9, 2003,
the Company used $114,651,000 of the proceeds received from the
settlement of the Sprint PCS Stock equity collar to repay all principal
and accrued interest due under the PCS Loan Facility. In connection with
such repayment, the PCS Loan Facility was canceled.
The fair value of the Company's debt is estimated based upon the quoted
market prices for the same or similar issues or on the current rates offered
to the Company for debt of the same remaining maturities. Due to its
variable rate nature, the fair value of the Company's debt approximated its
carrying value at June 30, 2003.
(10) STOCK COMPENSATION
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, ("APB Opinion No. 25")
I-16
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and related interpretations, to account for its fixed plan stock options. Under
this method, compensation expense for stock options or awards that are fixed
generally is required to be recognized over the vesting period only if the
current market price of the underlying stock exceeds the exercise price on the
date of grant. Statement of Financial Accounting Standards No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, ("Statement No. 123") established accounting and
disclosure requirements using a fair value-based method of accounting for
stock-based employee compensation plans. As allowed by Statement No. 123, the
Company has elected to continue to apply the intrinsic value-based method of
accounting prescribed by APB Opinion No. 25, and has adopted the disclosure
requirements of Statement No. 123, as amended by Statement of Financial
Accounting Standards No. 148, ACCOUNTING FOR STOCK-BASED
COMPENSATION--TRANSITION AND DISCLOSURE--AN AMENDMENT OF FASB STATEMENT
NO. 123. The following table illustrates the effects on net loss and loss per
share if the Company had applied the fair value recognition provisions of
Statement No. 123 to stock-based employee compensation (amounts in thousands
except per share amounts).
SIX MONTHS ENDED
JUNE 30,
--------------------
2003 2002
-------- ---------
Net loss, as reported....................................... $(35,789) $(215,623)
Stock compensation expense determined under fair value
method, net of taxes.................................... (3,442) (3,190)
-------- ---------
Pro forma net loss...................................... $(39,231) $(218,813)
======== =========
Pro forma net loss applicable to common stockholders.... $(57,291) $(236,873)
======== =========
Loss per share:
Basic and diluted--as reported............................ $ (1.11) $ (5.63)
======== =========
Basic and diluted--pro forma.............................. $ (1.18) $ (5.70)
======== =========
(11) SIGNIFICANT CUSTOMERS
During the six months ended June 30, 2003, hotels owned, managed or
franchised by Marriott International, Inc. ("Marriott"), Hilton Hotels
Corporation ("Hilton"), InterContinental Hotel Group (formerly Six Continents
Hotels, Inc.) ("InterContinental"), Hyatt Hotel Corporation ("Hyatt"), and
Starwood Hotels and Resorts Worldwide, Inc. ("Starwood") accounted for 33%, 14%,
11%, 7% and 7%, respectively, of On Command's total net room revenue.
Accordingly, hotels owned, managed or franchised by On Command's five largest
hotel chain customers accounted for 72% of On Command's total net room revenue
during the six months ended June 30, 2003. The loss of any of these hotel chain
customers, or the loss of a significant number of other hotel chain customers,
could have a material adverse effect on On Command's results of operations and
financial condition.
On Command's master contract with Hilton expired in April 2000, and in
October 2000, Hilton announced that it would not be renewing such master
contract. As a result, domestic hotels owned, managed or franchised by Hilton
are currently subject to a master contract between Hilton and a competitor of On
Command. Accordingly, On Command anticipates that domestic hotels owned by
Hilton will not renew their contracts with On Command as they expire. However,
domestic hotels that are managed or franchised by Hilton are not precluded from
renewing their contracts with On Command, and, although no assurance can be
given, On Command anticipates that certain of those domestic hotels will choose
to renew with On Command. At June 30, 2003, On Command provided service to
approximately 117,000 rooms in 506 domestic hotels that are owned, managed or
franchised
I-17
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
by Hilton. The majority of these rooms are located in managed or franchised
hotels that are not owned by Hilton. Through June 30, 2003, On Command's
contracts with 65 of the aforementioned 506 hotels (16,000 rooms) had expired
and service to these hotels is currently provided under monthly or other
short-term renewals. On Command's individual contracts with the remaining 441
domestic Hilton hotels (101,000 rooms) expire at various dates through 2010,
with 46% of those rooms expiring by 2005. Since January 2002, On Command has
entered into new contracts, or renewed existing contracts, with respect to 9,300
domestic rooms that were franchised by Hilton, and 2,600 domestic rooms that
were managed by Hilton. The net room revenue derived from domestic hotels that
were owned, managed, or franchised by Hilton decreased approximately 18% during
the six months ended June 30, 2003, as compared to the corresponding prior year
period. Over time, On Command anticipates that the revenue it derives from
hotels that are owned, managed or franchised by Hilton will continue to
decrease. However, due to the uncertainties involved, On Command is currently
unable to predict the amount and timing of the revenue decreases.
On Command does not have master contracts with either Starwood or
InterContinental, and On Command's master contract with Hyatt provides for the
simultaneous expiration of On Command's contractual relationships with all of
the individual hotels that are subject to the Hyatt master contract as of
December 31, 2004. At June 30, 2003, On Command provided entertainment services
to approximately 60,000 rooms in hotels that are owned, managed or franchised by
Hyatt, and approximately 176,000 rooms in hotels that are owned, managed or
franchised by Starwood or InterContinental. Agreements with respect to
approximately 45% of such Starwood and InterContinental rooms have already
expired, or will expire by December 31, 2004. At June 30, 2003, approximately
37,000 or 59% of On Command's Starwood rooms were located in Sheraton or Four
Points hotels that, depending on whether such hotels are owned, managed or
franchised by Starwood, may be covered by a master contract with a competitor of
On Command upon the expiration of such hotels' contracts with On Command. On
Command is actively pursuing master agreements with InterContinental, with
Starwood with respect to the Starwood brands that are not already covered by a
competitor's contract, and with Hyatt for the period after December 31, 2004.
In certain cases, On Command is also pursuing direct contractual
relationships with individual hotels that are owned, managed or franchised by
these hotel chains. No assurance can be given that On Command will be successful
in executing master or individual hotel contracts. However, On Command expects
that, regardless of the expiration dates of master contracts or individual
contracts with hotels, On Command will continue to be the provider of in-room
entertainment services for individual hotels that are not under contract until
such time as a competitor's equipment can be installed.
(12) COMMITMENTS AND CONTINGENCIES
COMMITMENTS
On Command is a party to affiliation agreements with programming suppliers.
Pursuant to certain of such agreements, On Command is committed to carry such
suppliers' programming on its video systems. Additionally, certain of such
agreements provide for minimum payments and per room rates that escalate as the
number of rooms receiving the programming decreases.
In certain cases, On Command has entered into master contracts whereby On
Command has agreed to purchase televisions and/or provide other forms of capital
assistance and, to a lesser extent, provide television maintenance services to
hotels during the respective terms of the applicable contracts.
I-18
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In connection with the first quarter 2001 acquisition of Hotel Digital
Network, Inc. ("HDN"), On Command entered into a stockholders agreement (the
"HDN Stockholders Agreement") with the then controlling stockholder of Hotel
Digital Network (the "HDN Stockholder"). The HDN Stockholders Agreement provided
the HDN Stockholder with the right during each of the 30-day periods beginning
on March 1, 2003 and 2004 to require On Command to exchange shares of On Command
Common Stock for all, but not less than all, of the HDN common shares held by
the HDN Stockholder. On March 20, 2003, the HDN Stockholder exercised such
right, and in May 2003, On Command acquired all of the HDN Stockholder's
interests in Hotel Digital Network common stock for cash and certain other
consideration, which in the aggregate was not material to On Command's financial
condition. Such acquisition, which did not require the issuance of any shares of
On Command Common Stock, represented the final settlement of On Command's
purchase obligation under the HDN Stockholders Agreement.
CONTINGENCIES
Liberty Media International, Inc. ("Liberty International"), a subsidiary of
Liberty Media, and other investors in the Sky Latin America businesses have
severally guaranteed obligations of Sky Latin America due under certain
transponder agreements and equipment lease agreements through 2018. The Company
has indemnified Liberty International with respect to Liberty International's
obligations under these guarantees. At June 30, 2003, the portions of the
remaining undiscounted obligations due under such transponder agreements and
equipment lease agreements that were severally guaranteed by Liberty
International aggregated approximately $103,980,000 and $5,757,000,
respectively. During the fourth quarter of 2002, Globo Comunicacoes e
Participacoes ("GloboPar"), an investor in three of the Sky Latin America
entities, announced that it was reevaluating its capital structure. Since that
time, GloboPar has not provided any funding to the three Sky Latin America
entities in which it is an investor.
In the case of one such entity, Sky Multi-Country Partners ("Sky
Multi-Country"), the Company and the other investors in Sky Multi-Country have
each entered into a Forbearance Agreement with respect to Sky Multi-Country's
obligations under a Transponder Services Agreement with PamAmSat Corporation
(successor-in-interest to PamAmSat International, Inc.) ("PamAmSat"). Pursuant
to the Forbearance Agreement, PamAmSat refrained from enforcing its rights under
the Transponder Services Agreement through April 30, 2003, so long as it
received at least 70% of the fees due under the Transponder Services Agreement.
Through July 31, 2003, the Company and the other investors in Sky Multi-Country
have collectively funded at least 70% of the fees due under the Transponder
Service Agreement. The parties are currently finalizing an agreement that would
extend the term of the Forbearance Agreement to October 31, 2003, subject to
certain conditions. At June 30, 2003, the aggregate obligations of Sky
Multi-Country that were severally guaranteed by Liberty International were
$39,080,000. Sky Multi-Country partially funds another Sky Latin America entity
in which GloboPar is an investor. At June 30, 2003, the aggregate obligations of
this entity that are severally guaranteed by Liberty International were
$5,757,000. In the case of Sky Brasil Servicos Limitada ("Sky Brasil"), another
entity in which GloboPar is an investor, an investor other than the Company had
previously agreed in July 2002 to assume up to $50,000,000 of GloboPar's funding
obligations through 2003 in exchange for increased ownership and governance
rights. At June 30, 2003, the aggregate obligations of Sky Brasil that are
severally guaranteed by Liberty International were $40,040,000.
As detailed above, the three entities in which GloboPar is an investor
account for approximately $84,877,000 of the aggregate obligations guaranteed by
Liberty International at June 30, 2003. To the
I-19
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
extent that the Company or other investors do not fully assume GloboPar's
funding obligations, any funding shortfall could lead to defaults under
applicable transponder agreements and equipment lease agreements. With respect
to the equipment lease agreements, default also includes bankruptcy, debt
default, or material adverse change in the business or financial condition of
any guarantor that materially adversely affects the ability of any such
guarantor to perform its obligations under the guarantee. In the event any such
defaults were to occur, the default provisions of the applicable agreements
would determine the ultimate amount to be paid by the Company. The Company
believes that the maximum amount of the Company's aggregate exposure under the
default provisions of the various agreements is not in excess of the
undiscounted remaining obligations guaranteed by the Company, as set forth
above. The Company cannot currently predict if, and to what extent, it will be
required to perform under any of such guarantees.
On Command has received a series of letters from Acacia Media Technologies
Corporation ("Acacia") regarding a portfolio of patents owned by Acacia. Acacia
has alleged that its patents cover certain activities performed by On Command
and has proposed that On Command take a license under those patents. On Command
has reviewed Acacia's patents and believes there are substantial arguments that
Acacia's claims lack merit.
The Company has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible the Company 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 the amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
(13) INFORMATION ABOUT OPERATING SEGMENTS
LSAT identifies its reportable segments as those consolidated subsidiaries
that represent 10% or more of its combined revenue, net earnings or loss, or
total assets. The Company's investments in equity affiliates are considered
reportable segments if the Company's investment in, or share of losses of, any
equity affiliate represents 10% or more of the Company's total assets or pre-tax
earnings or loss, respectively. Subsidiaries and affiliates not meeting this
threshold are aggregated together for segment reporting purposes. The segment
presentation for prior periods has been conformed to the current period segment
presentation.
For the six months ended June 30, 2003, LSAT had two operating segments: "On
Command" and "Other." On Command provides in-room, on-demand entertainment and
information services to hotels, motels and resorts primarily in the United
States and is majority-owned and consolidated by LSAT. "Other" includes LSAT's
non-consolidated investments and corporate.
LSAT evaluates performance and allocates resources to its subsidiaries and
affiliates based in part on the measures of revenue and operating cash flow.
LSAT defines operating cash flow as operating income before deducting stock
compensation, depreciation and amortization, and asset impairments and other
charges. LSAT's definition of operating cash flow may differ from cash flow
measurements provided by other public companies. Operating cash flow should not
be considered as a substitute for, operating income, net income, cash flow
provided by operating activities and other measures of financial performance
prepared in accordance with generally accepted accounting principles. LSAT
generally accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current prices.
I-20
LIBERTY SATELLITE & TECHNOLOGY, INC. AND SUBSIDIAIRES
(A CONSOLIDATED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LSAT utilizes the following financial information for purposes of making
decisions about allocating resources to a segment and assessing a segment's
performance:
ON COMMAND OTHER TOTAL
---------- -------- --------
AMOUNTS IN THOUSANDS
PERFORMANCE MEASURES:
Six months ended June 30, 2003
Revenue................................................... $116,272 210 116,482
Operating cash flow (deficit)............................. $ 29,759 (1,201) 28,558
Six months ended June 30, 2002
Revenue................................................... $118,382 210 118,592
Operating cash flow (deficit)............................. $ 32,133 (1,404) 30,729
BALANCE SHEET INFORMATION:
As of June 30, 2003
Total assets.............................................. $366,454 322,844 689,298
The following table provides a reconciliation of segment operating cash flow
to loss before income taxes and minority interest:
SIX MONTHS ENDED JUNE 30,
---------------------------
2003 2002
---------- -----------
AMOUNTS IN THOUSANDS
Segment operating cash flow................................. $ 28,558 30,729
Stock compensation.......................................... (89) (146)
Depreciation and amortization............................... (52,014) (67,268)
Asset impairments and other charges......................... (1,256) (7,650)
Interest expense............................................ (7,423) (9,786)
Share of losses of affiliates............................... (208) (3,358)
Realized and unrealized losses on financial instruments,
net....................................................... (7,535) (753)
Nontemporary declines in fair values of investments......... (4,412) (58,948)
Other, net.................................................. 813 299
-------- ---------
Loss before income taxes and minority interests........... $(43,566) (116,881)
======== =========
I-21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The following discussion and analysis provides information concerning the
financial condition and results of operations of the Company and should be read
in conjunction with the accompanying condensed consolidated financial statements
of the Company, as well as the Company's Annual Report on Form 10-K for the year
ended December 31, 2002.
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, the Company expresses an expectation or belief as to
future results or events, such expectation or belief is expressed in good faith
and believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:
- General economic and business conditions, particularly trends in the
telecommunications, travel and entertainment industries;
- The regulatory and competitive environment of the industries in which the
Company, and the entities in which it has interests, operate;
- Uncertainties inherent in new business strategies, product launches,
development plans and investments, including LSAT's recent investment in
WildBlue, its proposed investment in ASTROLINK International LLC, and On
Command's strategy to expand its target market to include smaller hotels;
- Uncertainties inherent in the completion and successful launch of
WildBlue's satellite;
- Uncertainties associated with the Company's contingent obligations with
respect to its investments in satellite television operators in Latin
America;
- The acquisition, development and/or financing of telecommunications
networks and services;
- Trends in hotel occupancy rates and business and leisure travel patterns,
including the potential impacts that actual or threatened terrorist
attacks and national security responses thereto, wars, contagious diseases
such as severe acute respiratory syndrome or other events might have on
such occupancy rates and travel patterns;
- Uncertainties inherent in On Command's efforts to renew or enter into
agreements on acceptable terms with its significant hotel chain customers
and their owned, managed and franchised hotels;
- On Command's ability to access quality movies, programming networks and
other content on acceptable terms;
- The potential impact that any negative publicity, lawsuits, or boycotts by
opponents of mature-themed programming content distributed by On Command
could have on the willingness of hotel industry participants to deliver
such content to guests;
- The potential for increased government regulation and enforcement actions,
and the potential for changes in laws that would restrict or otherwise
inhibit On Command's ability to make mature-themed programming content
available over its video systems;
I-22
- Uncertainties regarding the acceptance and buy rates for mature-themed
programming content distributed by On Command;
- Competitive threats posed by rapid technological changes;
- The development, provision and marketing of On Command's new platforms and
services, and customer acceptance, usage rates, and profitability of such
platforms and services;
- The development and provision of new services, such as On Command's
television-based Internet service, short subject, video game and digital
music products, and customer acceptance and usage rates of such services;
- Uncertainties inherent in On Command's future operating results and
capital expenditure requirements;
- Uncertainties inherent in On Command's ability to execute planned upgrades
of its video systems, including uncertainties associated with operational,
economic and other factors;
- The ability of vendors to deliver required equipment, software and
services;
- Availability of qualified personnel;
- Uncertainties inherent in the ability of On Command to satisfy the
conditions for the effectiveness of the Amended and Restated Credit
Agreement (including the required $40,000,000 contribution from the
Liberty Media Group) on a timely basis, and if not satisfied, the ability
of On Command to restructure or refinance the On Command Revolving Credit
Facility;
- The ability of LSAT to secure long-term financing on acceptable terms; and
- Other factors discussed in this Report.
These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this Quarterly Report, and the Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein, to reflect any
change in our expectations with regard thereto, or any other change in events,
conditions or circumstances on which any such statement is based.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
REVENUE
IN-ROOM ENTERTAINMENT REVENUE
On Command's in-room entertainment revenue consists primarily of fees
collected from hotels for in-room services provided to hotel guests by On
Command ("room revenue"). Services provided by On Command to hotel guests
include pay-per-view movies and short subjects, free-to-guest programming, video
games, Internet service and digital music. On Command also earns revenue from
the sale of video and music systems to third parties, the sale of video
equipment to hotels, and from other sources ("other entertainment revenue").
In-room entertainment revenue, comprised of room revenue and other
entertainment revenue, decreased $2,110,000 or 1.8% during the six months ended
June 30, 2003, as compared to the corresponding prior year period. The decrease
in net in-room entertainment revenue during the six-month 2003 period is
primarily attributable to the net effect of (i) a decrease attributable to a
lower volume of pay-per-view buys; (ii) an increase attributable to higher
average rates for certain pay-per-view products (iii) a $2,066,000 increase in
the aggregate revenue derived from short subject, digital music and
television-based Internet products; (iv) a $1,395,000 increase in free-to-guest
I-23
programming revenue that is primarily the result of rate increases; and (v) a
$951,000 decrease in other entertainment revenue. On Command believes that the
decrease in pay-per-view buys is attributable to the combined effect of (i) a
decrease in buy rates for mature-themed pay-per-view products; (ii) a decrease
in occupancy rates (as further discussed below); (iii) a change in occupancy
mix; and (iv) a reduction in the average number of rooms served by On Command.
The 4.1% decline in the average number of rooms served by On Command during the
2003 period is attributable to (i) the sale of On Command's European operations;
(ii) the loss of rooms to competitors; and (iii) the discontinuance of service
to certain non-profitable hotels. In-room entertainment revenue decreased
$1,447,000 or 2.4% during the three months ended June 30, 2003, as compared to
the corresponding prior year period. The decrease in in-room entertainment
revenue during the three-month period generally is attributable to the same
factors that are described above with respect to the six-month period.
Overall hotel occupancy rates, as reported by Smith Travel Research,
declined 1.5% during the six months ended June 30, 2003, as compared to the
corresponding prior year period. In addition, occupancy rates for hotels in the
top 25 markets, as reported by Smith Travel Research, declined 1.7% over the
same period. Since On Command derives a significant portion of its revenue from
hotels located in the top 25 markets, On Command believes that the occupancy
rate for this segment is the best indicator of the impact changes in hotel
occupancy are having on On Command's business. Hotel occupancy rates are outside
of On Command's control, and changes in hotel occupancy rates can have a
significant impact on On Command's results of operations.
During the six months ended June 30, 2003, hotels owned, managed or
franchised by Marriott, Hilton, Six Continents, Hyatt, and Starwood accounted
for 33%, 14%, 11%, 7% and 7%, respectively, of On Command's total net room
revenue. The loss of any of these hotel chain customers, or the loss of a
significant number of other hotel chain customers, could have a material adverse
effect on On Command's results of operations and financial condition. For
additional information concerning On Command's relationships with its
significant customers, see note 11 to the accompanying condensed consolidated
financial statements.
OPERATING COSTS
During the six months ended June 30, 2003 and 2002, the Company's operating
costs were entirely comprised of On Command's in-room entertainment operating
costs. In-room entertainment operating costs consist primarily of fees paid to
movie and other content providers, hotel commissions, direct costs associated
with On Command's television-based Internet product, costs associated with video
and music systems sold to third parties, costs associated with the repair,
maintenance and support of video systems and other room service equipment, and
costs associated with research and development activities.
In-room entertainment operating costs increased $736,000 or 1.9% during the
three months ended June 30, 2003, and decreased $598,000 or less than 1% during
the six months ended June 30, 2003, as compared to the corresponding prior year
periods. Such fluctuations include (i) increases in (a) royalties associated
with mature-themed pay-per-view movies, (b) duplication and distribution costs
(c) costs associated with other entertainment revenue and (d) hotel commissions;
and (ii) decreases due to (a) lower occupancy costs and other cost saving
measures related to On Command's field operations and (b) the sale of On
Command's European operations in July 2002. The increases in mature-themed
royalties are the result of an increase in the quality and quantity of
mature-themed movies available through the Company's video systems due to the
initiation of a new vendor relationship in March 2003 and increases in the
capacity of certain of the Company's video systems. The increase in system
duplication and distribution expense is due to an increase in the quantity of
videocassettes duplicated and shipped and an increase in the frequency of title
exchanges. The decrease in costs associated with other entertainment revenue is
attributable to the combined effect of lower music and video system sales and
improved margins on video system sales. Free-to-guest programming costs remained
relatively
I-24
constant during the 2003 and 2002 periods as higher rates from programmers were
offset by cost savings resulting from the optimization of certain channel
line-ups and changes in certain distribution agreements. Certain of On Command's
content fees and other in-room service costs do not vary with room revenue and
occupancy rates.
On Command is a party to various agreements with programming suppliers that
permit On Command to distribute movies and programming networks. On Command
expects that the cost of such movies and programming networks will increase in
future periods as contracts expire and renewals are negotiated. Certain of On
Command's contracts with hotel customers limit the amount of any cost increases
that can be passed on to any such hotels. Any cost increases that On Command is
not able to pass on to its customers would result in increased pressure on On
Command's operating margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense increased $835,000 or 13.4% and
$602,000 or 4.7% during the three and six months ended June 30, 2003,
respectively, as compared to the corresponding prior year periods. Such
increases are attributable primarily to individually insignificant increases in
various components of this line item offset in part by reductions in the amounts
accrued by On Command for employee bonuses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization decreased $14,109,000 or 42.0% and $15,254,000
or 22.7% during the three and six months ended June 30, 2003, respectively, as
compared to the corresponding prior year periods. Such decreases include
$13,583,000 related to the amortization of the Company's intangible asset
related to On Command's hotel contracts. Such intangible asset became fully
depreciated on March 31, 2003. The remaining decreases represent the net effect
of reductions to On Command's depreciable asset base that were only partially
offset by increases attributable to capital expenditures. The decrease in On
Command's depreciable asset base is attributable to (i) assets becoming fully
depreciated or amortized, and (ii) asset dispositions.
ASSET IMPAIRMENTS AND OTHER CHARGES
On Command recorded impairment and other charges of $1,256,000 and
$7,650,000 during the six months ended June 30, 2003 and 2002, respectively. The
2002 amount includes a loss of $5,103,000 related to the July 2002 sale of On
Command's European operations, and a loss of $1,411,000 relating to a
transaction in which certain equipment was transferred to STSN, Inc. The 2003
charges and the remaining 2002 charges are comprised of amounts related to
obsolete materials and equipment, and losses on various dispositions of property
and equipment, and other assets.
INTEREST EXPENSE
Interest expense decreased $1,785,000 or 37.8% and $2,363,000 or 24.1%
during the three and six months ended June 30, 2003, respectively, as compared
to the corresponding prior year periods. The decrease in interest expense during
the 2003 periods is primarily attributable to a reduction in the Company's
weighted average debt balance as a result of the repayment of $163,371,000 of
debt during March and April 2003. Decreases in the Company's weighted average
interest rate and increases in the amortization of On Command's deferred
financing fees also contributed to the variances between the 2003 and 2002
periods.
SHARE OF LOSSES OF AFFILIATES
During the six months ended June 30, 2003 and 2002, the Company's share of
losses of affiliates aggregated $208,000 and $3,358,000, respectively. The 2003
losses relate to the Company's investment
I-25
in WildBlue, and $2,711,000 of the 2002 losses relate to the Company's
investment in Aerocast.com, Inc. ("Aerocast"). As the Company wrote-off its
remaining investment in Aerocast during the fourth quarter of 2002, and as the
Company has no obligation to make further investments in Aerocast, the Company
no longer uses the equity method to account for its investment in Aerocast.
REALIZED AND UNREALIZED LOSSES ON FINANCIAL INSTRUMENTS
Realized and unrealized gains (losses) on financial instruments are as
follows:
SIX MONTHS ENDED
JUNE 30,
-----------------------
2003 2002
-------- ---------
AMOUNTS IN THOUSANDS
Change in fair value of derivatives......................... $(6,168) 112,881
Change in fair value of Sprint PCS Stock and XMSR common
stock..................................................... -- (112,380)
Change in fair value of iBEAM put option.................... (1,367) (1,254)
------- ---------
$(7,535) (753)
======= =========
Prior to January 1, 2003, the Company's equity collars were designated as
fair value hedges. Effective December 31, 2002, the Company elected to no longer
designate its equity collars as fair value hedges. Such election had no effect
on the Company's financial position or results of operations on December 31,
2002. Subsequent to December 31, 2002, changes in the fair value of the
Company's available-for-sale securities that previously had been reported in
earnings due to the designation of equity collars as fair value hedges will be
reported as a component of other comprehensive earnings on the Company's
condensed consolidated balance sheet. Changes in the fair value of the equity
collars will continue to be reported in earnings.
NONTEMPORARY DECLINES IN FAIR VALUES OF INVESTMENTS
During the three months ended June 30, 2003 and 2002, the Company recorded
losses of $4,412,000 and $58,948,000, respectively, to reflect nontemporary
declines in the value of its investment in Sky Latin America.
INCOME TAXES
The Company recognized income tax benefits of $8,189,000 and $6,712,000
during the six months ended June 30, 2003 and 2002, respectively. The 2002
benefit includes a $5,666,000 tax refund received by LSAT as a result of a
change in tax law that occurred during the first quarter of 2002. Such change
resulted in the elimination of restrictions on the use of net operating loss
carryforwards to offset alternative minimum tax liabilities. The 2003 and 2002
income tax benefits also include deferred tax benefits associated with losses
recognized by the Company. At June 30, 2003, The Company's deferred tax
liability was $10,595,000. The Company is only able to recognize income tax
benefits for financial reporting purposes to the extent that such benefits
offset recorded income tax liabilities or the Company generates taxable income.
Since April 1, 2002, the Company and its 80%-or-more owned subsidiaries have
been included in Liberty Media's consolidated tax return, and the Company and
Liberty Media have entered into a Tax Liability Allocation and Indemnification
Agreement. For additional information, see note 2 to the accompanying condensed
consolidated financial statements.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
Pursuant to the transitional provisions of Statement of Financial Accounting
Standards No. 142, ACCOUNTING FOR GOODWILL AND OTHER INTANGIBLE ASSETS
("Statement No. 142"), the Company recorded a $105,837,000 reduction of goodwill
in 2002. Such goodwill was originally recorded by Liberty Media in
I-26
connection with the March 2000 Ascent Entertainment acquisition. In accordance
with Statement No. 142, this goodwill reduction has been recorded as the
cumulative effect of an accounting change.
MATERIAL CHANGES IN FINANCIAL CONDITION
LSAT is a holding company that does not generate positive cash flow at the
LSAT parent level. The only subsidiary of LSAT that generates significant
revenue is On Command. Due to covenant restrictions contained in the On Command
Revolving Credit Facility, LSAT generally is not entitled to the cash resources
or cash generated by the operations of On Command. The sources of liquidity
available to LSAT at the LSAT parent level are described below.
On a consolidated basis, the Company used cash provided by operating
activities of $18,617,000 and cash provided by investing activities of
$209,972,000 to fund financing activities of $158,419,000 and a $70,170,000
increase in cash and cash equivalents. The Company's investing activities
included $303,586,000 of proceeds received in connection with the disposition of
the Company's Sprint PCS Stock and the related equity collar, as further
described below.
CORPORATE
In March 2003, the Company settled a portion of its Sprint PCS Stock equity
collar by delivering 2,500,000 shares of Sprint PCS Stock to the counterparty.
In return, the Company received $149,263,000 in cash. The Company used
$48,526,000 of such proceeds to repay all principal and accrued interest due
under its note payable to Liberty Media. In April 2003, the Company settled the
remaining portion of its Sprint PCS Stock equity collar by delivering all of its
remaining 2,584,745 shares of Sprint PCS Stock to the counterparty. The Company
received cash proceeds of $154,323,000 in connection with such settlement. Also
in April 2003, the Company used $114,651,000 of the cash proceeds from the
settlement of the Sprint PCS Stock equity collar to repay all principal and
accrued interest due under the PCS Loan Facility. In connection with such
repayment, the PCS Loan Facility was cancelled. The net impact of the foregoing
transactions was a $140,409,000 increase to LSAT's cash and cash equivalents.
In March 2000, the Company acquired an approximate 31.5% ownership interest
in ASTROLINK International LLC ("Astrolink"). Astrolink, a developmental stage
entity, was originally established to build a global telecom network using
Ka-band geostationary satellites to provide broadband data communications
services. Astrolink's original business plan required substantial financing.
During the fourth quarter of 2001, certain of the members of Astrolink informed
Astrolink that they did not intend to provide any of Astrolink's remaining
required financing. In light of this decision, Astrolink and the Astrolink
members considered several alternatives with respect to Astrolink's proposed
business plan.
During the second quarter of 2002, the Company signed a non-binding letter
of intent with the other members of Astrolink in connection with a proposed
restructuring of Astrolink. In January 2003, the Company announced that it had
reached agreement with the other members of Astrolink in connection with such
proposed restructuring (the "Astrolink Restructuring"). As a part of the
Astrolink Restructuring, Astrolink redeemed the interest of one member in
January 2003 and another member in April 2003. As a result of such redemptions,
the Company's ownership interest in Astrolink has increased to 50.3%, and the
ownership interest of the other remaining member has increased to 49.7%.
Notwithstanding the Company's ownership interest in Astrolink, the Company does
not have a controlling financial interest in Astrolink due to the significant
participatory rights of the other remaining Astrolink member. Accordingly, the
Company will continue to use the equity method to account for its investment in
Astrolink.
Under the agreement (the "Astrolink Restructuring Agreement"), the Company
would acquire substantially all of the assets of Astrolink, subject to the
closing conditions and other terms and conditions provided for therein.
Astrolink simultaneously signed agreements with Lockheed Martin
I-27
Corporation and Northrop Grumman Space & Mission Systems Corp. for completion of
two satellites. The parties also reached agreement on the settlement of all
claims related to the previous termination of Astrolink's major procurement
contracts and all other major third party creditor claims. The closing of the
Company's acquisition of the Astrolink business is subject to the Company
obtaining satisfactory funding for the business from additional investors, third
party sources of financing, or firm capacity commitments from prospective
customers. The closing is also subject to regulatory approvals and other closing
conditions. Subject to the satisfaction of these closing conditions, the closing
is expected to occur on or before October 31, 2003. The United States Federal
Communications Commission granted its approval with respect to the the Astrolink
Restructuring on May 22, 2003.
If the closing occurs, the Company would pay approximately $43 million in
cash and would issue approximately $3 million in value of Series A Common Stock
as total consideration for the Astrolink assets, including certain existing
satellite and launch contracts, and the settlement of all claims against
Astrolink. In addition, pursuant to the Astrolink Restructing Agreement, the
Company agreed to provide additional interim funding for Astrolink pending
closing. If the transactions are consummated, Liberty Media would make a capital
contribution to the Company in an amount equal to 10% of the estimated fair
value of Liberty Media's equity holdings in the Company at the time of closing,
up to a maximum commitment of $55 million, in exchange for shares of the
Company's Series B Common Stock.
The Company currently plans to pursue a revised operating plan for the new
Astrolink system, taking into account financial and market factors. The revised
operating plan currently contemplates launching one or two Ka-band satellites to
provide enterprise customers in up to two of North America, Europe or Asia with
virtual private networks and related advanced services, and to provide various
government agencies with a solution to their expanding needs for bandwidth.
If the Astrolink Restructuring is not consummated due to lack of financing
or other closing conditions, the Company would receive $7.8 million in exchange
for its ownership interest in Astrolink and for all notes evidencing interim
loans made by the Company to Astrolink as prescribed in the Astrolink
Restructuring Agreement.
In March 2000, LSAT issued 150,000 shares of Series A 12% Cumulative
Preferred Stock ("Series A Preferred Stock") and 150,000 shares of Series B 8%
Cumulative Convertible Voting Preferred Stock ("Series B Preferred Stock") to
Liberty Media in exchange for shares of Sprint PCS Stock. On the date of
issuance, each such series of preferred stock had an aggregate stated value of
$150,000,000. The Series A Preferred Stock and Series B Preferred Stock, which
were each issued at a discount to their stated values, are redeemable at the
option of Liberty Media on or after April 1, 2020 at a price equal to stated
value plus all accrued and unpaid dividends. Subsequent to March 31, 2003, all
dividends on the Series A Preferred Stock and Series B Preferred Stock, which
aggregate $7,500,000 each quarter, are to be paid in cash. Accrued and unpaid
dividends on the Series A Preferred Stock and Series B Preferred Stock
aggregated $15,000,000 at June 30, 2003.
Effective September 29, 2000, LSAT LLC acquired a 1% managing common
interest in IB2 LLC from a subsidiary of Liberty Digital for $652,000. Liberty
Digital retained a Preferred Interest in IB2 LLC, which owns approximately
360,000 shares of iBEAM Stock. The Preferred Interest had an initial liquidation
value of $64,574,000 and is entitled to a return of 9%, compounded annually. As
part of the transaction, LSAT LLC granted Liberty Digital the right to put the
Preferred Interest to LSAT LLC for a purchase price equal to $26,000,000 (the
value of iBEAM Stock on September 29, 2000) plus a 9% return, compounded
annually (the "iBEAM Put Option"). LSAT LLC has the right to call Liberty
Digital's Preferred Interest at a price equal to the initial liquidation value
plus a return of 9%, compounded annually. Both the iBEAM Put Option and call
option are exercisable on September 29, 2008. Under certain limited
circumstances, including iBEAM's bankruptcy, LSAT LLC can force Liberty Digital
to exercise the iBEAM Put Option prior to September 29, 2008. During the fourth
I-28
quarter of 2001, iBEAM filed for bankruptcy under Chapter 11 of the Bankruptcy
Code. As a result of such bankruptcy filing, the Company began carrying the
iBEAM Put Option liability at an amount ($32,418,000 at June 30, 2003), which
represents the iBEAM Put Option purchase price to LSAT LLC plus an accrued
return to Liberty Digital of 9%, compounded annually. The Company anticipates
that future losses with respect to the iBEAM Put Option will be limited to
Liberty Digital's 9% return on the iBEAM Put Option liability.
LSAT's primary sources of liquidity for the remainder of 2003 include its
unrestricted cash and cash equivalent balances ($80,742,000 at June 30, 2003)
and proceeds to be received during the fourth quarter of 2003 in connection with
the settlement of certain derivative instruments. The Company believes that such
sources of liquidity will be sufficient to fund LSAT's expected cash
requirements during the remainder of 2003. LSAT's liquidity requirements during
the remainder of 2003 are expected to include (i) its preferred stock dividend
requirements; (ii) its capital contributions to Sky Latin America; (iii) its
interim funding commitments to Astrolink; and (iv) its operating deficit. In
addition, in the event the Astrolink Restructuring closes, as discussed above,
the Company would be required to fund a $43 million cash investment, and Liberty
Media would be required to make a capital contribution to the Company. The
amount and form of any such Liberty Media capital contribution have not yet been
determined. LSAT does not expect Ascent Entertainment or its principal operating
subsidiary, On Command, to provide any of LSAT's financial resources during
2003. The financial resources and requirements of On Command are described
below.
ON COMMAND
The On Command Revolving Credit Facility, as amended, provided for aggregate
borrowings of $275,000,000 at June 30, 2003. Borrowings under the On Command
Revolving Credit Facility are due and payable in July 2004. On Command had
$9,367,000 of remaining availability under the On Command Revolving Credit
Facility at June 30, 2003. On Command's ability to draw additional funds under
the On Command Revolving Credit Facility is subject to On Command's continued
compliance with applicable financial covenants.
Revolving loans extended under the On Command Revolving Credit Facility bear
interest at the LIBOR plus a spread that may range from 1.125% to 3.50%
depending on certain operating ratios of On Command (4.83% effective borrowing
rate at June 30, 2003). In addition, a facility fee ranging from 0.375% to 0.50%
per annum is charged on the On Command Revolving Credit Facility, depending on
certain operating ratios of On Command. The On Command Revolving Credit Facility
contains customary covenants and agreements, most notably the inclusion of
restrictions on On Command's ability to pay dividends or make other
distributions. In addition, On Command is required to maintain leverage and
interest coverage ratios. On Command was in compliance with such covenants at
June 30, 2003, as then in effect. Substantially all of On Command's assets are
pledged as collateral for borrowings under the On Command Revolving Credit
Facility.
On March 28, 2003, On Command and its bank lenders amended the On Command
Revolving Credit Facility to postpone until June 30, 2003 the step down of the
leverage ratio covenant of the On Command Revolving Credit Facility from 4.25 to
3.50. On June 27, 2003, a similar amendment was executed to postpone such step
down until October 1, 2003. Accordingly, the maximum leverage ratio permitted
under the On Command Revolving Credit Facility at June 30, 2003 was 4.25, and On
Command's actual leverage ratio was 4.20 as of such date. On Command and its
bank lenders executed an Amended and Restated Credit Agreement on April 17,
2003, and an amendment thereto on June 27, 2003. The effectiveness of the
Amended and Restated Credit Agreement is contingent upon the contribution of
$40,000,000 by the Liberty Media Group to On Command to be used to repay
principal due, and permanently reduce lender commitments, pursuant to the
Amended and Restated Credit Agreement. However, the Liberty Media Group has no
obligation to make any contribution to On Command, and there can be no assurance
that any such contribution will be made or, if made,
I-29
what the form or terms would be. After the proposed reduction of lender
commitments, the Amended and Restated Credit Agreement would constitute a
$235,000,000 senior secured credit facility, consisting of a $50,000,000
revolving credit facility and a $185,000,000 term loan facility. The term loan
would be subject to scheduled amortizations commencing September 30, 2003, and
both facilities would mature on December 31, 2007. If it does not earlier become
effective, and if it is not otherwise amended, the Amended and Restated Credit
Agreement will terminate on September 30, 2003.
Although On Command is in compliance with the leverage ratio covenant of its
existing On Command Revolving Credit Facility at June 30, 2003, and On Command
expects to be in compliance with such covenant at September 30, 2003, On Command
believes that it will be out of compliance with such covenant after
September 30, 2003 if the Amended and Restated Credit Agreement does not become
effective by that date. If the Amended and Restated Credit Agreement has not
become effective by, or is otherwise terminated prior to, October 1, 2003, On
Command anticipates that it will request a further amendment to its existing On
Command Revolving Credit Facility to postpone the step down of the leverage
ratio covenant. It is uncertain if On Command's lenders would agree to such a
further amendment and what terms might be imposed by the lenders in connection
with such further amendment. In the event that the Amended and Restated Credit
Agreement does not become effective by the date that the leverage ratio is
reduced to 3.50, On Command anticipates that a default would occur under the On
Command Revolving Credit Facility. Upon the occurrence of a default, if left
uncured, the bank lenders would have various remedies, including terminating
their revolving loan commitment, declaring all outstanding loan amounts
including interest immediately due and payable, and exercising their rights
against their collateral, which consists of substantially all On Command's
assets. No assurance can be given that the Amended and Restated Credit Agreement
will become effective. In addition, if the Amended and Restated Credit Agreement
does not become effective, no assurance can be given that On Command will be
able to successfully restructure or refinance its existing On Command Revolving
Credit Facility on terms acceptable to On Command, or that On Command will be
able to avoid a default under its existing On Command Revolving Credit Facility.
In light of the uncertainties with respect to the restructuring of the On
Command Revolving Credit Facility, On Command's independent auditors included an
explanatory paragraph in their audit report on the December 31, 2002
consolidated financial statements of On Command stating in part that "On Command
is seeking to restructure the debt facility and such restructuring is contingent
on certain events, which raises substantial doubt about On Command's ability to
continue as a going concern."
The Company has classified all borrowings outstanding under the On Command
Revolving Credit Facility as current liabilities in its June 30, 2003 condensed
consolidated balance sheet due to the fact that an amendment was obtained from
its lenders that allowed On Command to meet its leverage ratio covenant at
June 30, 2003. In the absence of such amendment, On Command would not have been
in compliance with the leverage ratio covenant under the On Command Revolving
Credit Facility at June 30, 2003. As the amendment postponed the step down of
the leverage ratio covenant for a period of less than 12 months, the Company has
classified the debt as current in accordance with EMERGING ISSUES TASK FORCE
ISSUE NO. 86-30, CLASSIFICATION OF OBLIGATIONS WHEN A VIOLATION IS WAIVED BY A
CREDITOR, and STATEMENT OF FINANCIAL STANDARDS NO. 6, CLASSIFICATION OF
SHORT-TERM OBLIGATIONS TO BE REFINANCED. Although On Command has the intent to
refinance the On Command Revolving Credit Facility with long-term borrowings
under the Amended and Restated Credit Agreement, On Command does not now have
the unilateral ability to complete the conditions precedent to the effectiveness
of the Amended and Restated Credit Agreement.
In connection with a first quarter 2001 acquisition of a 7.5% interest in
MagiNet and the settlement of certain litigation, On Command agreed that MagiNet
would have the option during the 15 day period beginning on March 1, 2003 to
cause On Command to repurchase all, but not less than all, of the 275,000 shares
of On Command Common Stock issued to MagiNet at a price of $15 per share. During
the fourth quarter of 2002, On Command repurchased 119,500 of such shares for an
I-30
aggregate price of $1,344,000 or $11.25 per share. In connection with this
transaction, the parties agreed to postpone until March 1, 2004 the date on
which On Command can be required to repurchase 119,500 of the remaining shares
subject to repurchase. On Command is not precluded from repurchasing such shares
at an earlier date. The repurchase price for such shares will be $15 per share,
plus an adjustment factor calculated from March 1, 2003 to the date of
repurchase, at a rate of 8% per annum. On March 1, 2003, the date on which the
remaining 36,000 shares will first become subject to repurchase by On Command
was postponed until March 1, 2004. The repurchase price for such shares will
remain at $15 per share. Subsequent to June 30, 2003, MagiNet agreed to assign
the above-described 36,000 shares to the Company in exchange for a $540,000
credit against the cost of equipment to be purchased by MagiNet from the Company
through March 1, 2004. To the extent that MagiNet has not used all of such
credit by March 1, 2004, the remaining credit will be settled in cash.
Historically, On Command has required external financing to fund the cost of
installing and upgrading video systems in hotels. However, during 2002 On
Command was able to manage its operations and capital expenditures such that On
Command was able to rely on internally generated funds and existing sources of
liquidity to finance its installation and upgrade activities. During 2003 and
future periods, On Command intends to continue to focus its efforts on
increasing revenue while containing, and wherever possible, reducing expenses
and capital expenditures. On Command expects that it will be able to rely on
cash provided by operations, existing availability under the On Command
Revolving Credit Facility, and existing cash and cash equivalent balances to
fund its capital expenditures and other anticipated liquidity requirements
during 2003. To the extent that On Command was to experience a revenue shortfall
or any other unfavorable variance from its 2003 operating plan, On Command would
seek to reduce expenses and/or capital expenditures to compensate for any such
shortfall or unfavorable variance. Accordingly, On Command believes, although no
assurance can be given, that it will not require additional sources of liquidity
to fund its capital expenditures and anticipated liquidity requirements during
2003. Notwithstanding the foregoing, On Command anticipates that it will require
a $40,000,000 contribution from the Liberty Media Group in order to satisfy one
of the conditions for the effectiveness of the Amended and Restated Credit
Agreement, and that it would require additional external financing to (i) fund
any significant new growth initiatives or unanticipated liquidity requirements;
or (ii) refinance the On Command Revolving Credit Facility, if the Amended and
Restated Credit Agreement does not become effective on a timely basis (as
discussed above). No assurance can be given that On Command will not be required
to seek external financing during 2003, and if external financing is required,
no assurance can be given that any such financing would be available on terms
acceptable to On Command or at all.
OFF-BALANCE SHEET ARRANGEMENTS
Liberty International, a subsidiary of Liberty Media, and other investors in
the Sky Latin America businesses have severally guaranteed obligations of Sky
Latin America due under certain transponder agreements and equipment lease
agreements through 2018. The Company has indemnified Liberty International with
respect to Liberty International's obligations under these guarantees. At
June 30, 2003, the portions of the remaining undiscounted obligations due under
such transponder agreements and equipment lease agreements that were severally
guaranteed by Liberty International aggregated approximately $103,980,000 and
$5,757,000, respectively. During the fourth quarter of 2002, GloboPar, an
investor in three of the Sky Latin America entities, announced that it was
reevaluating its capital structure. Since that time, GloboPar has not provided
any funding to the three Sky Latin America entities in which it is an investor.
In the case of one such entity, Sky Multi-Country, the Company and the other
investors in Sky Multi-Country have each entered into a Forbearance Agreement
with respect to Sky Multi-Country's obligations under a Transponder Services
Agreement with PamAmSat. Pursuant to the Forbearance Agreement, PamAmSat
refrained from enforcing its rights under the Transponder Services Agreement
I-31
through April 30, 2003, so long as it received at least 70% of the fees due
under the Transponder Services Agreement. Through July 31, 2003, the Company and
the other investors in Sky Multi-Country have collectively funded at least 70%
of the fees due under the Transponder Service Agreement. The parties are
currently finalizing an agreement that would extend the term of the Forbearance
Agreement to October 31, 2003, subject to certain conditions. At June 30, 2003,
the aggregate obligations of Sky Multi-Country that were severally guaranteed by
Liberty International were $39,080,000. Sky Multi-Country partially funds
another Sky Latin America entity in which GloboPar is an investor. At June 30,
2003, the aggregate obligations of this entity that are severally guaranteed by
Liberty International were $5,757,000. In the case of Sky Brasil, another entity
in which GloboPar is an investor, an investor other than the Company had
previously agreed in July 2002 to assume up to $50,000,000 of GloboPar's funding
obligations through 2003 in exchange for increased ownership and governance
rights. At June 30, 2003, the aggregate obligations of Sky Brasil that are
severally guaranteed by Liberty International were $40,040,000.
As detailed above, the three entities in which GloboPar is an investor
account for approximately $84,877,000 of the aggregate obligations guaranteed by
Liberty International at June 30, 2003. To the extent that the Company or other
investors do not fully assume GloboPar's funding obligations, any funding
shortfall could lead to defaults under applicable transponder agreements and
equipment lease agreements. With respect to the equipment lease agreements,
default also includes bankruptcy, debt default, or material adverse change in
the business or financial condition of any guarantor that materially adversely
affects the ability of any such guarantor to perform its obligations under the
guarantee. In the event any such defaults were to occur, the default provisions
of the applicable agreements would determine the ultimate amount to be paid by
the Company. The Company believes that the maximum amount of the Company's
aggregate exposure under the default provisions of the various agreements is not
in excess of the undiscounted remaining obligations guaranteed by the Company,
as set forth above. The Company cannot currently predict if, and to what extent,
it will be required to perform under any of such guarantees.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2003, the Company had $265,633,000 of variable-rate liabilities.
Exclusive of facility fees, such liabilities had a weighted-average interest
rate of 4.83% as of such date. Accordingly, the Company is exposed to interest
rate risk. To date, the Company has not entered into any derivative instruments
to manage its interest rate exposure. Assuming no increase or decrease in the
amount outstanding, a hypothetical 100 basis point increase (or decrease) in
interest rates at June 30, 2003 would increase (or decrease) the Company's
annual interest expense and cash outflows by approximately $2,656,000.
The Company is exposed to changes in stock prices primarily as a result of
its holdings in publicly traded securities. The Company uses equity collars and
a put spread collar to hedge market risk with respect to certain of its publicly
traded securities. At June 30, 2003, the aggregate fair market value of the
Company's publicly traded securities (excluding the fair value of related hedge
instruments) was $40,347,000. At June 30, 2003, the fair value of the Company's
equity collar was $17,557,000 and the fair value of the Company's put spread
collar was $20,167,000. At June 30, 2003, the fair market value of the GM Hughes
Stock that is the subject of the put spread collar was $23,339,000. Among other
things, the GM Hughes Stock put spread collar (i) provides the Company with the
right to require a counterparty to purchase shares of GM Hughes Stock for a
weighted average price of $26.64 per share in October 2003; and (ii) provides a
counterparty with the right to require the Company to repurchase shares of GM
Hughes Stock for a weighted average price of $14.80 per share in October 2003.
At June 30, 2003, the per share market value of GM Hughes Stock was $12.81. In
addition, the Company owned $2,891,000 of publicly traded securities at
June 30, 2003 that were not hedged.
I-32
The Company uses equity collars and a put spread collar to hedge market risk
with respect to certain of its publicly traded securities. Although the
Company's equity collars and put spread collar provide protection against market
risk, such derivative instruments may involve elements of credit risk and market
risk in excess of what is recognized in the Company's condensed consolidated
financial statements. The Company monitors its positions and the credit quality
of counterparties, consisting primarily of major financial institutions and does
not anticipate nonperformance by any counterparty.
On Command's foreign operations are located primarily in Canada and Mexico.
In addition, the Sky Latin America entities operate satellite television systems
in Mexico, Brazil, Chile and Colombia. The Company has a 10% beneficial interest
in each of the Sky Latin America businesses. The Company believes the risks of
foreign exchange rate fluctuations on its present operations are not material to
the Company's overall financial condition. However, the Company will consider
using foreign currency contracts, swap arrangements, or other financial
instruments designed to limit exposure to foreign exchange rate fluctuations, if
deemed prudent.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of
management, including its president and chief financial officer (the
"Executive"), of the effectiveness of its disclosure controls and procedures as
of the end of the period covered by this report. Based on that evaluation, the
Executive concluded that the Company's disclosure controls and procedures were
effective as of June 30, 2003 to provide reasonable assurance that information
required to be disclosed in its reports filed or submitted under the Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There has been no change in the Company's internal controls over financial
reporting that occurred during the three months ended June 30, 2003 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.
I-33
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material changes to pending legal proceedings to which the
Company is a party or to which any of its property is subject, except as
follows:
In July 2003, Broadcast Music, Inc. ("BMI") and various other plaintiffs
filed suit against On Command in the United States District Court for the
Southern District of New York, Case Number 03 CV 5531, for willful copyright
infringement. The plaintiffs allege that On Command has failed to obtain
permission to publicly perform BMI musical works contained in the motion
pictures and videos On Command transmits to hotels and motels for viewing in
guest rooms on a pay-per-view basis. On Command has been in negotiations with
BMI for a performance license and intends to continue such negotiations. On
Command does not believe that the ultimate resolution of this matter will have a
material adverse effect on its financial condition or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
31 Rule 13a-14(a)/15d-14(a) Certification.
32 Section 1350 Certification.
(b) Reports on Form 8-K filed during quarter ended June 30, 2003:
DATE FILED ITEMS REPORTED FINANCIAL STATEMENTS FILED
--------------------- -------------- --------------------------
April 2, 2003 Items 7 and 9 None
II-1
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 SATELLITE & TECHNOLOGY, INC.
Date: August 15, 2003 By: /s/ KENNETH G. CARROLL
------------------------------------------------
Kenneth G. Carroll
President, Chief Financial Officer and
Treasurer (Principal Financial Officer and
Principal Accounting Officer)
II-2
ANNEX III
DELAWARE APPRAISAL RIGHTS STATUTE
ANNEX III
Section 262 of the Delaware General Corporation Law
DELAWARE GENERAL CORPORATION LAW
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
ss.262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to ss. 228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to ss.ss. 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under ss. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsection (b) or (c) hereof that appraisal rights are available
for any or all of the shares of the constituent corporations, and shall
include in such notice a copy of this section. Each stockholder electing to
demand the appraisal of such stockholder's shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of such stockholder's shares. Such demand will
be sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the merger
or consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to ss. 228 or
ss. 253 of this title, then, either a constituent corporation before the
effective date of the merger or consolidation, or the surviving or resulting
corporation within 10 days thereafter, shall notify each of the holders of
any class or series of stock of such constituent corporation who are
entitled to appraisal rights of the approval of the merger or consolidation
and that appraisal rights are available for any or all shares of such class
or series of stock of such constituent corporation, and shall include in
such notice a copy of this section. Such notice may, and, if given on or
after the effective date of the merger or consolidation, shall, also notify
such stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date
of mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal
of such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the effective date
of the merger or consolidation notifying each of the holders of any class or
series of stock of such constituent corporation that are entitled to
appraisal rights of the effective date of the merger or consolidation or
(ii) the surviving or resulting corporation shall send such a second notice
to all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second
notice need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in accordance
with this subsection. An affidavit of the secretary or assistant secretary
or of the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be not
more than 10 days prior to the date the notice is given, provided, that if
the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day
on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings and
may proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on the
list filed by the surviving or resulting corporation pursuant to subsection
(f) of this section and who has submitted such stockholder's certificates of
stock to the Register in Chancery, if such is required, may participate fully in
all proceedings until it is finally determined that such stockholder is not
entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
ANNEX IV
OPINION OF MORGAN STANLEY & CO. INCORPORATED
1585 Broadway
New York, NY 10036
[Morgan Stanley Logo]
August 22, 2003
Special Committee of the Board of Directors
Liberty Satellite & Technology, Inc.
12300 Liberty Boulevard
Englewood, CO 80112
Members of the Special Committee of the Board:
We understand that Liberty Satellite & Technology, Inc. ("LSAT" or the
"Company"), Liberty Media Corporation ("Liberty"), and Liberty Satellite
Acquisition Co., a wholly owned subsidiary of Liberty ("Merger Sub"), propose to
enter into an Agreement and Plan of Merger, substantially in the form of the
draft dated August 20, 2003 (the "Merger Agreement"), which provides, among
other things, for the merger of Merger Sub with and into the Company (the
"Merger"). Pursuant to the Merger, the Company will become a wholly owned
subsidiary of Liberty, and each outstanding share of Series A common stock of
LSAT, par value $1.00 per share (the "Series A Common Stock"), and each
outstanding share of Series B common stock of LSAT, par value $1.00 per share
(the "Series B Common Stock" and in the aggregate with the Series A Common
Stock, the "Company Common Stock"), other than shares held in treasury or by
Liberty or any affiliate of Liberty or LSAT or as to which dissenters' rights
have been perfected, will be converted into the right to receive 0.2750 shares
(the "Exchange Ratio") of Series A common stock of Liberty, par value $0.01 per
share (the "Liberty Common Stock"). We understand that Liberty presently owns
approximately 87% of the Series A Common Stock and approximately 99% of the
Series B Common Stock. We also understand that Liberty on March 31, 2003,
proposed to acquire the outstanding common stock of On Command Corporation, a
subsidiary of the Company, but that such proposal is not a condition of or
conditioned on the consummation of the Merger. The terms of the Merger are more
fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Exchange Ratio pursuant to the
Merger Agreement is fair from a financial point of view to the holders of shares
of the Company Common Stock (other than Liberty and its affiliates).
For purposes of the opinion set forth herein, we have:
(i) reviewed certain publicly available financial statements and other
information of LSAT and Liberty, respectively;
(ii) reviewed certain internal financial statements and other financial and
operating data concerning LSAT and its interests in other companies
including, among others, On Command Corporation and WildBlue
Communications, Inc. (collectively, the "LSAT Investments") prepared by
the management of LSAT and certain of the LSAT Investments;
(iii) reviewed certain financial forecasts related to LSAT and certain of the
LSAT Investments, as prepared by the managements of LSAT and certain of
the LSAT Investments, respectively;
1
[Morgan Stanley Logo]
(iv) discussed the past and current operations and financial condition and
the prospects of LSAT and the LSAT Investments with senior executives
of LSAT and certain of the LSAT Investments, respectively;
(v) considered information relating to certain strategic, financial and
operational benefits anticipated from the Merger, prepared by the
managements of LSAT and certain of the LSAT Investments;
(vi) reviewed the reported prices and trading activity of the Company Common
Stock, the Liberty Common Stock and certain of the LSAT Investments;
(vii) compared the financial performance of LSAT, Liberty and, if applicable,
the LSAT Investments and the prices and trading activity of the Company
Common Stock, the Liberty Common Stock, and, if applicable, the common
stock of certain of the LSAT Investments with that of certain
comparable publicly-traded companies and their securities;
(viii) reviewed the financial terms, to the extent publicly available, of
selected minority buy-back transactions;
(ix) participated in discussions and negotiations among representatives of
LSAT and Liberty Media and their legal advisors;
(x) reviewed the Merger Agreement and certain related documents; and
(xi) performed such other analyses and considered such other factors as we
have deemed appropriate.
We have assumed and relied upon, without independent verification, the accuracy
and completeness of the information reviewed by us for the purposes of this
opinion. With respect to the internal financial statements, other financial and
operating data, and financial forecasts, including certain strategic, financial
and operational benefits anticipated from the Merger, we have assumed that they
have been reasonably prepared on bases reflecting management's best currently
available estimates and judgments of the future financial performance of the
Company and certain of the LSAT Investments, respectively. We have not made any
independent valuation or appraisal of the assets or liabilities or technology of
the Company, the LSAT Investments or Liberty, nor have we been furnished with
any such appraisals. In arriving at our opinion, we have relied on publicly
available information on Liberty provided by Liberty or equity research analysts
who cover Liberty. In addition, we have assumed that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement
without material modification or waiver. Our opinion is necessarily based on
financial, economic, market and other conditions as in effect on, and the
information made available to us as of, the date hereof.
In arriving at our opinion, we were not authorized to solicit, and did not
solicit interest from any party with respect to the acquisition, business
combination or the extraordinary transaction involving the Company or the LSAT
Investments or its or their assets.
We have acted as financial advisor to the Special Committee of the Board of
Directors of the Company in connection with the Merger and will receive a fee
for our services. In the past, Morgan Stanley & Co. Incorporated and its
affiliates have provided financing services for Liberty and have received fees
for the rendering of those services.
2
[Morgan Stanley Logo]
It is understood that this letter is for the information of the Special
Committee of the Board of Directors of the Company appointed to evaluate and
review the Merger and may not be used for any other purpose without our prior
written consent, except that a copy of our opinion may be included in its
entirety in any documents required to be filed by the Company with the
Securities and Exchange Commission with respect to the Merger. This opinion is
not intended to be and shall not constitute a recommendation to any holder of
Company Common Stock regarding their vote on the Merger. In addition, this
opinion does not in any manner address the prices at which the Liberty Common
Stock or the Company Common Stock will actually trade at any time or the
relative fairness of the Merger to the Series A Common Stock and the Series B
Common Stock.
Based upon and subject to the foregoing, we are of the opinion on the date
hereof that the Exchange Ratio pursuant to the Merger Agreement is fair from a
financial point of view to the holders of shares of the Company Common Stock
(other than Liberty and its affiliates).
Very truly yours,
MORGAN STANLEY & CO. INCORPORATED
By: /s/ RICHARD BRAIL
------------------------------
Richard Brail
Executive Director
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("DGCL") provides,
generally, that a corporation shall have the power to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding (except actions by or in the right of
the corporation) by reason of the fact that such person is or was a director,
officer, employee or agent of the corporation against all expenses, judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful. A corporation may similarly indemnify such person for
expenses actually and reasonably incurred by such person in connection with the
defense or settlement of any action or suit by or in the right of the
corporation, provided that such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and, in the case of claims, issues and matters as to which such
person shall have been adjudged liable to the corporation, provided that a court
shall have determined, upon application, that, despite the adjudication of
liability but in view of all of the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
Section 102(b)(7) of the DGCL provides, generally, that the certificate of
incorporation may contain a provision eliminating or limiting the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, provided that such provision
may not eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 174 of Title 8 of the DGCL, or
(iv) for any transaction from which the director derived an improper personal
benefit. No such provision may eliminate or limit the liability of a director
for any act or omission occurring prior to the date when such provision became
effective.
Article V, Section E of the Restated Certificate of Incorporation, as
amended (the "Liberty Media Charter"), of Liberty Media Corporation provides as
follows:
1. LIMITATION ON LIABILITY. To the fullest extent permitted by the DGCL as
the same exists or may hereafter be amended, a director of Liberty Media shall
not be liable to Liberty Media or any of its stockholders for monetary damages
for breach of fiduciary duty as a director. Any repeal or modification of this
paragraph 1 shall be prospective only and shall not adversely affect any
limitation, right or protection of a director of Liberty Media existing at the
time of such repeal or modification.
2. INDEMNIFICATION.
(a) RIGHT TO INDEMNIFICATION. Liberty Media shall indemnify and
hold harmless, to the fullest extent permitted by applicable law as it
presently exists or may hereafter be amended, any person who was or is
made or is threatened to be made a party or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a person
for whom he is the legal representative, is or was a director or officer
of Liberty Media or is or was serving at the request of Liberty Media as
a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all
liability and loss suffered and expenses (including attorneys' fees)
reasonably incurred by such person. Such right of indemnification
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shall inure whether or not the claim asserted is based upon matters which
antedate the adoption of Section E of the Liberty Media Charter. Liberty
Media shall be required to indemnify or make advances to a person in
connection with a proceeding (or part thereof) initiated by such person
only if the proceeding (or part thereof) was authorized by the board of
directors of Liberty Media.
(b) PREPAYMENT OF EXPENSES. Liberty Media shall pay the expenses
(including attorneys' fees) incurred by a director or officer in
defending any proceeding in advance of its final disposition, provided,
however, that the payment of expenses incurred by a director or officer
in advance of the final disposition of the proceeding shall be made only
upon receipt of an undertaking by the director or officer to repay all
amounts advanced if it should be ultimately determined that the director
or officer is not entitled to be indemnified under this paragraph or
otherwise.
(c) CLAIMS. If a claim for indemnification or payment of expenses
under this paragraph is not paid in full within 60 days after a written
claim therefor has been received by Liberty Media, the claimant may file
suit to recover the unpaid amount of such claim and, if successful in
whole or in part, shall be entitled to be paid the expense of prosecuting
such claim. In any such action, Liberty Media shall have the burden of
proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
(d) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person
by this paragraph shall not be exclusive of any other rights which such
person may have or hereafter acquire under any statute, provision of the
Liberty Media Charter, Liberty Media's Bylaws, agreement, vote of
stockholders or resolution of disinterested directors or otherwise.
(e) OTHER INDEMNIFICATION. Liberty Media's obligation, if any, to
indemnify any person who was or is serving at its request as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust, enterprise or nonprofit entity shall be reduced by any
amount such person may collect as indemnification from such other
corporation, partnership, joint venture, trust, enterprise or nonprofit
entity.
3. AMENDMENT OR REPEAL. Any amendment, modification or repeal of the
foregoing provisions of Section E of the Liberty Media Charter shall not
adversely affect any right or protection hereunder of any person in respect of
any act or omission occurring prior to the time of such amendment, modification
or repeal.
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ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed herewith or incorporated herein by
reference:
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
2.1 Agreement and Plan of Merger dated as of August 26, 2003, by
and among Liberty Media Corporation, Liberty Satellite
Acquisition Co. and Liberty Satellite & Technology, Inc.
(included as Annex I to this Registration Statement) (the
registrant agrees to furnish supplementally a copy of the
schedules omitted from this Exhibit 2.1 to the Securities
and Exchange Commission upon request).
3.1 Restated Certificate of Incorporation of Liberty Media
Corporation, dated August 9, 2001 (incorporated by reference
to Exhibit 3.2 to the Registration Statement on Form S-1 of
Liberty Media Corporation, File No. 333-55998, as filed on
February 21, 2001 (the "Split Off S-1 Registration
Statement")).
3.2 Bylaws of Liberty Media Corporation, as adopted August 9,
2001 (incorporated by reference to Exhibit 3.4 to the Split
Off S-1 Registration Statement).
4.1 Specimen certificates for shares of Series A common stock,
par value $.01 per share, of Liberty Media Corporation
(incorporated by reference to Exhibit 4.1 to the Split Off
S-1 Registration Statement).
5.1 Opinion of Sherman & Howard L.L.C., as to the legality of
the securities being registered (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Consent of KPMG Audit Plc (filed herewith).
23.3 Consent of KPMG LLP (filed herewith).
23.4 Consent of KPMG LLP (filed herewith).
23.5 Consent of Sherman & Howard L.L.C. (included in Exhibit
5.1).
24.1 Power of attorney (previously filed).
99.1 Opinion of Morgan Stanley & Co. Incorporated (included as
Annex IV to this Registration Statement).
99.2 Consent of Morgan Stanley & Co. Incorporated (included in
Exhibit 99.1).
ITEM 22. UNDERTAKINGS
A. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
B. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this registration statement through
the date of responding to the request.
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C. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this registration statement when it became effective.
D. The undersigned registrant hereby undertakes as follows:
1. That prior to any public reoffering of the securities registered
hereunder through the use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters in addition to the information called for by the other Items of
the applicable form.
2. That every prospectus (i) that is filed pursuant to paragraph D.1.
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act of 1933 and is used in connection
with an offering of securities subject to Rule 415, will be filed as a part
of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
E. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Englewood, State of Colorado, on October 6, 2003.
LIBERTY MEDIA CORPORATION
By: /s/ ROBERT R. BENNETT
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Robert R. Bennett
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
*
------------------------------------ Chairman of the Board October 6, 2003
John C. Malone
* President, Chief Executive Officer
------------------------------------ and Director October 6, 2003
Robert R. Bennett (Principal Executive Officer)
------------------------------------ Executive Vice President, Chief
Gary S. Howard Operating Officer and Director
*
------------------------------------ Senior Vice President and Treasurer October 6, 2003
David J.A. Flowers (Principal Financial Officer)
*
------------------------------------ Senior Vice President and Controller October 6, 2003
Christopher W. Shean (Principal Accounting Officer)
*
------------------------------------ Director October 6, 2003
Paul A. Gould
*
------------------------------------ Director October 6, 2003
Donne F. Fisher
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SIGNATURE CAPACITY DATE
--------- -------- ----
*
------------------------------------ Director October 6, 2003
Jerome H. Kern
*
------------------------------------ Director October 6, 2003
David E. Rapley
*
------------------------------------ Director October 6, 2003
Larry E. Romrell
*
------------------------------------ Director October 6, 2003
M. LaVoy Robison
/s/ ELIZABETH M. MARKOWSKI
------------------------------------
Elizabeth M. Markowski October 6, 2003
ATTORNEY IN FACT
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