UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
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 0-20421
LIBERTY MEDIA CORPORATION
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(Exact name of Registrant as specified in its charter)
State of Delaware 84-1288730
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12300 Liberty Boulevard
Englewood, Colorado 80112
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of exchange
Title of each class on which registered
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Series A Common Stock, par value $.01 per share New York Stock Exchange
Series B Common Stock, par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by nonaffiliates of
Liberty Media Corporation computed by reference to the last sales price of such
stock, as of the closing of trading on February 28, 2002, was approximately
$33,355,000,000.
The number of shares outstanding of Liberty Media Corporation's common
stock as of February 28, 2002 was:
Series A Common Stock - 2,377,258,560 shares; and
Series B Common Stock - 212,045,288 shares.
LIBERTY MEDIA CORPORATION
2001 ANNUAL REPORT ON FORM 10-K
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Table of Contents
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Part I Page
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Item 1. Business...................................................... I-1
Item 2. Properties.................................................... I-37
Item 3. Legal Proceedings............................................. I-37
Item 4. Submission of Matters to a Vote of Security Holders........... I-38
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-19
Item 8. Financial Statements and Supplementary Data................... II-21
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... II-21
Part III
Item 10. Directors and Executive Officers of the Registrant............ III-1
Item 11. Executive Compensation........................................ III-4
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................... III-9
Item 13. Certain Relationships and Related Transactions................ III-18
Part IV
Item 14. Exhibits, Financial Statements and Financial Statement
Schedules and Reports on Form 8-K............................ IV-1
PART I
Item 1 Business.
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(a) General Development of Business
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Liberty Media Corporation owns interests in a broad range of video
programming and communications businesses in the United States, Europe, South
America and Asia. Liberty Media's principal assets include interests in Starz
Encore Group LLC, Liberty Livewire Corporation, On Command Corporation,
Discovery Communications, Inc., AOL Time Warner Inc., QVC, Inc., USA Networks,
Inc., Telewest Communications plc, Motorola, Inc., Sprint PCS Group and The News
Corporation Limited.
From March 9, 1999 through August 9, 2001 we were a wholly-owned
subsidiary of AT&T Corp. On March 9, 1999, AT&T acquired by merger our parent
company, the former Tele-Communications, Inc. (TCI), which was converted to a
limited liability company and renamed AT&T Broadband, LLC. As part of that
merger, AT&T issued its Class A and Class B Liberty Media Group tracking stock,
which was designed to reflect the economic performance of the businesses and
assets of AT&T attributed to its "Liberty Media Group." We were a member of
Liberty Media Group since the AT&T merger.
On May 7, 2001, AT&T contributed to us assets that were attributed to
the Liberty Media Group but not previously owned by us. These assets included
(i) preferred stock and common stock interests in a subsidiary of IDT
Corporation, a multinational telecommunications services provider and (ii) an
approximate 8% indirect common equity interest in Liberty Digital, Inc.
Subsequent to this contribution, our businesses and assets constituted all of
the businesses and assets of Liberty Media Group.
Effective August 10, 2001, AT&T effected the split-off of Liberty
pursuant to which our common stock was recapitalized, and each share of AT&T
Class A Liberty Media Group tracking stock was redeemed for one share of our
Series A common stock, and each share of AT&T Class B Liberty Media Group
tracking stock was redeemed for one share of our Series B common stock.
Following the split off, we are no longer a subsidiary of AT&T and no
shares of AT&T Liberty Media Group tracking stock remain outstanding.
Recent Developments
In January 2001, we issued $600 million of 3-1/2% Senior Exchangeable
Debentures due 2031. Interest is payable on January 15 and July 15 of each year.
Each $1,000 debenture is exchangeable at the holder's option for the value of
36.8189 shares of Motorola common stock. Such exchange value is payable, at our
option, in cash, Motorola stock or a combination thereof. On or after January
15, 2006, we, at our option, may redeem the debentures for cash.
In January 2001, BET Holdings, II, Inc. was acquired by Viacom, Inc.
in exchange for shares of Class B common stock of Viacom. As a result of the
merger, we received approximately 15.2 million shares of Viacom's Class B common
stock in exchange for our 35% interest in BET Holdings II, Inc.
In January 2001, America Online, Inc. completed its merger with Time
Warner Inc. to form AOL Time Warner Inc. In connection with the merger, each
share of Time Warner common stock held by us was converted into 1.5 shares of an
identical series of AOL Time Warner stock. Upon completion of this transaction,
we hold a total of 171 million shares in AOL Time Warner.
In March 2001, we issued $817.7 million of 3-1/4% Senior Exchangeable
Debentures due 2031. Interest is payable on March 15 and September 15 of each
year. Each $1,000 debenture is exchangeable at the holder's option for the value
of 18.5666 shares of Viacom Class B common stock. After January 23, 2003, such
exchange value is payable at our option in cash, Viacom stock or a combination
thereof. Prior to such date, the exchange value must be paid in cash. On or
after March 15, 2006, we, at our option, may redeem the debentures for cash.
I-1
On September 27, 2000, we entered into a letter agreement with News Corp.
with respect to (1) the transfer of all of our equity interests in Gemstar-TV
Guide International, Inc. and (2) the assignment of substantially all of our
rights under the stockholders agreement we entered into with News Corp.,
Gemstar-TV Guide and Henry C. Yuen (Chief Executive Officer of Gemstar-TV
Guide), to subsidiaries of News Corp. in a series of transactions. In the first
transaction, which was consummated in May 2001, we exchanged 70.7 million shares
of common stock of Gemstar-TV Guide for 121.5 million American Depository Shares
("ADSs") representing preferred limited voting ordinary shares of News Corp. In
connection with this transaction, we assigned substantially all of our rights
under the stockholders agreements to News Corp. and caused persons designated by
News Corp. to replace our designees on the board of Gemstar-TV Guide.
In the second transaction, which was consummated in December 2001, we
exchanged our remaining 16.8 million shares of Gemstar-TV Guide common stock for
28.8 million News Corp. ADSs. In addition, in a separate transaction, we
exchanged our investment in International Sports Programming LLC for an
additional 3.7 million News Corp. ADSs.
In December 2001, we entered into an agreement with USA Networks, Barry
Diller and Vivendi Universal, S.A., pursuant to which USA Networks will
contribute substantially all of its entertainment assets, consisting of its
cable television network assets (including USA Network, Sci-Fi Channel and
others), its television production and distribution assets and its filmed
entertainment production and distribution assets, to a partnership controlled by
Vivendi Universal. Vivendi Universal will contribute its Universal Entertainment
Group assets and businesses to the partnership and will deliver to USA Networks
shares of common stock and securities exchangeable into common stock aggregating
320.9 million shares of USA Networks common stock. In connection with the
transaction, we entered into a separate agreement with Vivendi Universal,
pursuant to which Vivendi Universal will acquire from us 25 million shares of
common stock of USA Networks, approximately 38.7 million shares of USANi LLC,
which are exchangeable for an equal number of shares of USA Networks common
stock, and all of our 30% interest in multiThematiques S.A., a European supplier
of multichannel programming, together with certain liabilities with respect
thereto, in exchange for ADSs representing approximately 37.4 million Vivendi
Universal ordinary shares, subject to adjustment. The closing of our transaction
with Vivendi Universal and the closing of Vivendi Universal's transaction with
USA Networks are conditioned on one another. Subsequent to the Vivendi Universal
transaction with USA Networks, USA Networks will change its name to USA
Interactive. Although no assurance can be given, the transaction is expected to
be completed in the second quarter of 2002. Upon completion we will own an
approximate 3% equity interest in Vivendi Universal and an approximate 20%
equity interest in USA Interactive. For more information regarding these
transactions, please see "--Narrative Description of Business--USA Networks,
Inc.--Ownership Interest" below.
On January 30, 2002, we completed a transaction, initially announced in
2000, involving UnitedGlobalCom, Inc., a corporation formed for purposes of the
transactions described below, which corporation was previously known as "New
UnitedGlobalCom, Inc." We refer to UnitedGlobalCom, Inc. as "New United." In
connection with the transaction, we contributed to New United, prior to the
merger described in the following sentence, all of the Class B common stock of
UGC Holdings, Inc., which corporation was formerly known as "UnitedGlobalCom,
Inc." and which we refer to as "UnitedGlobalCom," held by us, as well as some of
the shares of UnitedGlobalCom's Class A common stock held by us, in exchange for
newly issued shares of New United's common stock. Immediately after these
contributions and contributions to New United by certain other major
stockholders of UnitedGlobalCom, which major stockholders we refer to as the
"Founders," New United acquired substantially all of the outstanding stock of
UnitedGlobalCom by merger of a subsidiary of New United with and into
UnitedGlobalCom. As a result of the merger, New United became a publicly traded
company. Immediately following the merger, we contributed to New United (1) $200
million in cash, (2) an exchangeable note issued by Belmarken Holding B.V., an
indirect subsidiary of UnitedGlobalCom, and United Pan-Europe Communications
N.V., an indirect subsidiary of UnitedGlobalCom, which we refer to as "UPC,"
having an approximate accreted value on January 30, 2002 of $892 million, and
(3) senior notes and senior discount notes issued by UPC having an aggregate
principal amount at maturity of approximately $1,435 million and euro 263
million, all in exchange for additional shares of New United's common stock.
After giving effect to these transactions, we own approximately 72% of New
United's outstanding equity and approximately 94% of the voting power of New
United's outstanding common stock, subject to limitations on our voting rights.
I-2
Also on January 30, 2002 and prior to the merger described in the
immediately preceding paragraph, New United acquired from us (1) all of the
equity and debt of IDT United, Inc. held by us and (2) approximately $751
million principal amount at maturity of UnitedGlobalCom's $1,375 million
principal amount at maturity 10-3/4% senior secured discount notes due 2008 (the
"2008 Notes"), which amount of 2008 Notes had been distributed to us previously
in redemption of a portion of our equity interest in IDT United and as
prepayment of a portion of the debt of IDT United held by us. The aggregate
purchase price paid by New United for all of the equity and debt of IDT United
held by us and the 2008 Notes held by us was approximately $449 million, which
amount was equal to the aggregate amount of our investment in IDT United, plus
interest. Approximately $305 million of the purchase price was paid by the
assumption by New United of debt owed by us to a subsidiary of UnitedGlobalCom,
and the remainder was credited against the $200 million cash contribution by us
to New United described above. In connection with the January 30 transaction,
one of our subsidiaries agreed to loan to a subsidiary of New United up to $105
million. Pursuant to this loan, as of February 28, 2002, a subsidiary of New
United has borrowed approximately $103 million from one of our subsidiaries. A
portion of such loan has been used to acquire additional shares of preferred
stock and promissory notes issued by IDT United. The 2008 Notes owned by IDT
United, together with the 2008 Notes acquired by New United directly from us as
described above, all of which remain outstanding, represent approximately 98.2%
of the outstanding 2008 Notes. IDT United was formed as an indirect subsidiary
of IDT Corporation for purposes of conducting the tender offer described above.
On March 14, 2002, we consummated the merger of Liberty Digital and LDIG
Merger Sub, Inc., a newly formed subsidiary of ours. In the merger, all of the
outstanding shares of Liberty Digital common stock not owned by us and not
subject to appraisal demands were converted into shares of Liberty Series A
common stock at a rate of 0.25 of a share of Liberty Series A common stock for
each share of Liberty Digital. As a result of this merger transaction, Liberty
Digital ceased to be a publicly traded company and is a wholly-owned subsidiary
of ours.
* * * * *
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. In particular, statements under
Item 1. "Business," Item 2. "Properties," Item 3. "Legal Proceedings" and Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" contain forward-looking statements. 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. 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 and industry trends;
. the regulatory and competitive environment of the industries in which
we, and the entities in which we have interests, operate;
. 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;
. availability of qualified personnel;
. changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission ("FCC"), and adverse outcomes from
regulatory proceedings;
. changes in the nature of key strategic relationships with partners and
joint venturers;
I-3
. 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 such products and services.
These forward-looking statements and such risks, uncertainties and other factors
speak only as of the date of this Annual Report, and 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.
This Annual Report includes information concerning UnitedGlobalCom, Inc.,
USA Networks, Inc., Telewest Communications plc and other public companies that
file reports and other information with the SEC in accordance with the
Securities Exchange Act of 1934. Information contained in this Annual Report
concerning those companies has been derived from the reports and other
information filed by them with the SEC. We had no part in the preparation of
those reports and other information, nor we do incorporate them by reference in
this Annual Report.
(b) Financial Information about Operating Segments
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We are a holding company with a variety of subsidiaries and investments
operating in the media, communications and entertainment industries. Each of
these businesses is separately managed. We identify our reportable segments as
those consolidated subsidiaries that represent 10% or more of our combined
revenue and those equity method affiliates whose share of earnings or losses
represent 10% or more of our pre-tax earnings or loss. Subsidiaries and
affiliates not meeting this threshold are aggregated together for segment
reporting purposes. For the year ended December 31, 2001, we had five operating
segments: Starz Encore Group, Liberty Livewire, On Command, Telewest and Other.
Financial information related to our operating segments can be found in note 15
to our consolidated financial statements found in Part II of this report.
(c) Narrative Description of Business
---------------------------------
The first table below sets forth information concerning our consolidated
subsidiaries and certain of our more significant business affiliates. The second
table below sets forth information concerning other public companies in which we
hold minority interests. We hold our interests either directly or indirectly
through partnerships, joint ventures, common stock investments or instruments
convertible or exchangeable into common stock. Ownership percentages in the
table are approximate, calculated as of February 28, 2002, and, where applicable
and except as otherwise noted, assume conversion to common equity by us and, to
the extent known by us, other holders. In some cases, our interest may be
subject to buy/sell procedures, repurchase rights or, under certain
circumstances, dilution. In some cases our voting interest may be greater than
our ownership interest.
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ATTRIBUTED
OWNERSHIP/(1)/
ENTITY at 2/28/02
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VIDEO PROGRAMMING AND INTERACTIVE TELEVISION SERVICES
Consolidated Subsidiaries
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Starz Encore Group LLC 100%
Liberty Digital, Inc. 84%
Liberty Livewire Corporation (Nasdaq: LWIRA) 85%
On Command Corporation (Nasdaq: ONCO) 63%
Pramer S.C.A. (Argentina) 100%
I-4
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ATTRIBUTED
OWNERSHIP/(1)/
ENTITY at 2/28/02
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Equity Method Affiliates
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Discovery Communications, Inc. 50%
QVC Inc. 42%
Jupiter Programming Co., Ltd. (Japan) 50%
USA Networks, Inc. (Nasdaq: USAI) 20%
Telewest Communications plc - Content Division (UK) (LN:TWT) (Nasdaq:TWSTY) 25%
Torneos y Competencias, S.A. (Argentina) 40%
COMMUNICATIONS SERVICES
Consolidated Subsidiaries
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Liberty Cablevision of Puerto Rico, Inc. 100%
Liberty Satellite & Technology, Inc. (OTC:LSATA/LSATB) 27%
TruePosition, Inc. 89%
Equity Method Affiliates
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Telewest Communications plc - Cable Division (UK) (LN: TWT) (Nasdaq: TWSTY) 25%
Jupiter Telecommunications Co., Ltd. (Japan) 35%
UnitedGlobalCom, Inc. (Nasdaq: UCOMA) 72%
Cablevision S.A. (Argentina) 50%
Metropolis-Intercom, S.A. (Chile) 50%
Chorus Communication Limited (Ireland) 50%
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ATTRIBUTED
OWNERSHIP/(1)/
ENTITY BUSINESS DESCRIPTION at 2/28/02
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AOL Time Warner Inc. (NYSE: Entity formed in the January 2001 merger of America Online, Inc. and 4%/(2)/
AOL) Time Warner Inc. Provides interactive services under such brand
names as AOL, Netscape and Moviefone. Operates cable television
systems. Publishes books and magazines such as Time, People and
Sports Illustrated. Publishes music under such record labels as
Atlantic, Elektra and Warner Bros. Records. Operates television
networks such as TNT, Cartoon Network, CNN and HBO. Produces filmed
entertainment under the brand names Warner Bros. Pictures and New
Line Cinema.
Cendant Corporation Franchiser of hotels, rental car agencies, tax preparation services 5%
(NYSE:CD) and real estate brokerage offices. Provides access to insurance,
travel, shopping, auto and other services primarily through its
buying clubs. Provides vacation time share services, mortgage
services and employee relocation.
Corus Entertainment Inc. (TSE: Canadian provider of communication and broadcasting services. 17%
CJR.B) (NYSE: CJR) Operates such television networks as YTV, Treehouse TV, Country
Music Television, the Women's Television Network and Telelatino.
I-5
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ATTRIBUTED
OWNERSHIP/(1)/
ENTITY BUSINESS DESCRIPTION at 2/28/02
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Crown Media Holdings, Inc. Operator of television networks focusing on family-oriented 9%/(3)/
(Nasdaq: CRWN) programming under the brand names Hallmark Entertainment and Odyssey.
IDT Corporation (Nasdaq:IDTC) Provider of international and domestic long-distance telephone 9%/(4)/
service, Internet access and global Internet telephony services.
Motorola, Inc. Provider of integrated communications solutions and embedded 3%
(NYSE: MOT) electronic solutions.
The News Corporation Limited A diversified international communications company. Produces and 18%/(5)/
(NYSE: NWS.A; ASX: NCPDP) distributes motion pictures and television programming. Provides
broadcast television, satellite and cable services. Publishes
newspapers, magazines and books.
Sprint Corporation PCS Group Operator of a 100% digital PCS wireless network in the United States 19%/(6)/
(NYSE: PCS) with licenses to provide service nationwide using a single frequency
band and a single technology.
Viacom, Inc. (NYSE:VIA.B) A diversified entertainment company. Operates cable television *1%
networks such as Showtime, The Movie Channel, MTV; Nickelodeon, VH1,
TNN and BET. Operates broadcast television networks such as CBS and
UPN. Produces and distributes motion pictures under the brand name
Paramount Pictures. Publishes and distributes books and CD-ROM
products under the brand name Simon & Schuster.
(1) If we or any of our wholly owned subsidiaries hold a direct ownership
interest in an entity listed in the table, our attributed interest in the
listed entity equals our direct ownership interest therein. However, if we
or any of our wholly owned subsidiaries hold an indirect ownership interest
in an entity listed in the table, our attributed interest in the listed
entity is calculated by multiplying our direct interest in the applicable
intermediary entity (or entities) by such intermediary entity's (or
entities') direct interest in the listed entity. Please see the discussion
below for additional information, including pending transactions, with
respect to our interest in each of our consolidated subsidiaries and
certain of our more significant business affiliates.
(2) Our interest in AOL Time Warner is subject to a consent decree with the
Federal Trade Commission that was entered into in 1996 when Time Warner
acquired Turner Broadcasting Systems. Pursuant to that decree, we are
effectively prohibited from owning voting securities of AOL Time Warner
other than securities that have limited voting rights. As a result, we hold
approximately 171 million shares of a low-vote series of AOL Time Warner
common stock. Subject to applicable communications laws and the consent
decree, the shares are convertible at our option into shares of ordinary
AOL Time Warner common stock on a one-for-one basis, and are mandatorily
convertible into shares of ordinary AOL Time Warner common stock upon
transfer to a non-affiliate of Liberty. We have filed an application with
the FTC to set aside the consent decree as it applies to us. The public
comment period on our application expires on April 22, 2002.
(3) Our interest in Crown Media is subject to a stockholders agreement,
pursuant to which we are entitled to certain preemptive rights, to nominate
one member of Crown Media's board of
* Denotes less than
I-6
directors and to participate in any sale by Hallmark Entertainment of
20% or more of the outstanding shares of Crown Media, subject to
certain exceptions.
(4) We also own equity interests in one of IDT's operating subsidiaries
and one of its holding company subsidiaries. Pursuant to our
subscription agreement with IDT, we are entitled to nominate one
member of IDT's board of directors.
(5) In connection with the transaction in which we acquired certain of our
News Corp. ADSs, we agreed to restrictions on our ability to transfer
certain of the ADSs and the underlying News Corp. shares prior to May
2003. We have also agreed to limitations on our ability to engage in
the program guide business, within or outside the United States, until
July 2005, and on our ability to engage in any sports programming
service in the United States and its territories (excluding Puerto
Rico) or in Canada until July 2004, in each case subject to certain
exceptions.
(6) Sprint PCS stock is a tracking stock intended to reflect the
performance of Sprint Corporation's Sprint PCS Group. We own shares of
Sprint PCS Group common stock -- Series 2 (which have limited voting
rights and automatically convert into full voting Sprint PCS Group
common stock -- Series 1 upon our transfer of the shares to a third
party) and warrants and shares of convertible preferred stock
exercisable for or convertible into these shares. All of our interests
in the Sprint PCS Group are held, on our behalf, by a trust, which was
formed pursuant to a final judgment agreed to by TCI, AT&T and the
United States Department of Justice in connection with the merger of
TCI and AT&T. The trust agreement requires the trustee, on or before
May 23, 2002, to dispose of a portion of the Sprint PCS Group
securities held by the trust sufficient to cause us to beneficially
own no more than 10% of the Sprint PCS Group stock that would be
outstanding on a fully diluted basis on such date. On or before May
23, 2004, the trustee is required to divest the remainder of the
Sprint PCS Group securities held by the trust. The trust agreement
provides for the trustee to vote the Sprint PCS Group securities
beneficially owned by us in the same proportion as other holders of
Sprint PCS Group stock. The final judgment also prohibits our
acquisition of additional Sprint PCS Group securities without the
prior written consent of the Department of Justice, subject to limited
exceptions. At our request, the Department of Justice has joined us
and AT&T in a joint motion to terminate the final judgment. Under the
terms of the final judgment, the obligation of the trustee to dispose
of the first tranche of shares by May 23, 2002 will be stayed while
the District Court considers the joint motion. We are also seeking the
approval of the Federal Communications Commission to the stay of the
trustee's obligation to dispose of the first tranche of shares pending
the District Court's determination of the joint motion.
Business Operations
We are engaged principally in two fundamental areas of business:
. Video Programming and Interactive Television Services, consisting
principally of interests in video programming services; and
. Communications, consisting principally of interests in cable
television systems, telephone and satellite systems
Our principal assets and consolidated subsidiaries are described in
greater detail below.
Video Programming and Interactive Television Services
Programming networks distribute their services through a number of
distribution technologies, including cable television, direct-to-home satellite,
broadcast television and the Internet. Programming services may be delivered to
subscribers as part of a video distributor's basic package of programming
services for a fixed monthly fee, or may be delivered as a ''premium''
programming service for an additional monthly charge. Whether a programming
service is on a basic or premium tier, the programmer generally enters into
separate multi-year agreements, known as ''affiliation agreements,'' with those
distributors that agree to carry the service. Basic programming services derive
their revenues principally from the sale of advertising time on their networks
and from per subscriber license fees
I-7
received from distributors. Premium services do not sell advertising and
primarily generate their revenues from subscriber fees.
Relationship with AT&T Broadband. Most of our affiliated networks have
entered into affiliation agreements with Satellite Services, Inc. ("SSI") a
company owned by AT&T Broadband, the successor company to TCI. SSI purchases
programming services from programming suppliers and then makes such services
available to cable television systems owned by or affiliated with AT&T
Broadband. Each of Starz Encore Group and Liberty Digital, Inc. has entered into
long term, fixed rate affiliation agreements with AT&T Broadband pursuant to
which AT&T Broadband pays monthly fixed amounts in exchange for unlimited access
to certain programming services of these companies. For the year ended December
31, 2001, these fixed rate affiliation fees represented approximately 30% and
13% of the total revenues of Starz Encore Group and Liberty Digital,
respectively.
Consolidated Subsidiaries
-------------------------
Starz Encore Group LLC
Starz Encore Group LLC provides premium movie networks distributed by
cable, direct-to-home satellite and other distribution media in the United
States. It currently owns and operates 13 full-time domestic movie channels,
consisting of Encore, which airs first-run movies and classic contemporary
movies; STARZ!, a first-run movie service; a number of thematic multiplex
channels; and MOVIEplex, a "theme by day" channel featuring a different Encore
or thematic multiplex channel each day, on a weekly rotation. At December 31,
2001, Starz Encore Group had 114.1 million subscription units of which
approximately two-thirds were subscription units for the thematic multiplex
channels and the remainder were comprised of subscription units for STARZ!,
Encore and MOVIEplex.
The costs of acquiring rights to programming are Starz Encore Group's
principal expenses. In order to exhibit theatrical motion pictures, Starz Encore
Group enters into agreements to acquire rights from major and independent motion
picture producers. Starz Encore Group currently has access to approximately
7,500 movies through long-term licensing agreements. Seventy-six percent of the
first-run output titles available to Starz Encore Group for airing are available
pursuant to exclusive licenses from Hollywood Pictures, Touchstone, Miramax,
Universal Studios, New Line Cinema and Fine Line Cinema. Starz Encore Group also
has exclusive rights to air first-run output from four independent studios and
has licensed the exclusive rights to first-run output from Sony's Columbia
Pictures, Screen Gems and Sony Classics for pay television availabilities
beginning on January 1, 2006. These output agreements expire between 2003 and
2011. Starz Encore Group is not committed to or dependent upon any one source of
film productions, and has affiliations with every major Hollywood studio, either
through long-term output agreements or library access arrangements. Starz Encore
Group also engages in original programming production.
Starz Encore Group uplinks its programming to eight transponders on three
domestic communications satellites. Starz Encore Group leases these transponders
under long-term lease agreements, generally 10-12 years in length. At December
31, 2001, Starz Encore Group's transponder leases had termination dates ranging
from 2004 to 2006. Starz Encore Group transmits to these transponders from its
uplink center in Englewood, Colorado. Starz Encore Group completed construction
of its corporate headquarters and uplink center in the first quarter of 2002.
Prior to that time, Starz Encore Group leased uplink facilities from a
subsidiary of AT&T.
Starz Encore Group's premium movie networks are carried through long-term
affiliation agreements on most cable systems and direct broadcast satellite
systems, including AT&T Broadband, AOL Time Warner, Charter Communications,
Comcast Cable, DIRECTV, Echostar, Cox Communications, Adelphia Communications,
Cablevision Systems, Insight Communications, Mediacom Communications, the
National Cable Television Cooperative and Superstar/Netlink Group. The agreement
with AT&T Broadband expires in July 2022. The other agreements have terms
expiring between December 2003 and May 2007.
Liberty Digital, Inc.
Liberty Digital, Inc. (formerly known as TCI Music, Inc.) is a media
company focused on interactive media and music business segments. In September
1999, we and certain of our affiliates
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contributed to TCI Music substantially all of our respective Internet content
and interactive television programming assets and certain access rights to AT&T
cable systems, which now comprise the assets of Liberty Digital's interactive
segment, other than its interest in the Game Show Network.
Liberty Digital's interactive media segment develops and invests in
interactive television and new media businesses. This segment is in the
development stage and has not yet generated revenue. Liberty Digital currently
owns 50% of the Game Show Network, LLC, a programming service focused
exclusively on game playing and game shows. The Game Show Network offers 24-hour
cable programming consisting of original game shows and interactive games, as
well as syndicated game shows from a library of over 55,000 game show episodes
spanning five decades. Liberty Digital also owns interests in interactive
television technology, content and e-commerce businesses, including ACTV, Inc.,
Alloy Online, Inc., Food.com, Inc., Lightspan, Inc. and RespondTV, Inc., and
rights to provide interactive television channels on AT&T's cable television
systems.
Liberty Digital's music segment was expanded by the completion in May 2001
of a transaction combining DMX, Inc., a subsidiary of Liberty Digital, with AEI
Music Network, Inc. Liberty Digital owns a 56% interest in the resulting
company, Maxide Acquisition, Inc., the provider of the DMX/AEI Music service.
The DMX/AEI music service delivers professionally programmed commercial-free
music to homes and businesses around the world via the Internet, satellite and
broadband networks. The DMX/AEI Music service offers a variety of music formats
which are generally updated daily by a full-time programming staff.
Liberty Digital distributes the DMX/AEI Music service by satellite to cable
operators and directly to residential and commercial subscribers with satellite
dishes. Liberty Digital subleases satellite transponder capacity from seven
satellite providers, with the principal sublease from the National Digital
Television Center, an AT&T subsidiary. This sublease extends to the earlier of
the life of the satellite or November 2017. Cable operators distribute the
DMX/AEI Music service primarily through digital compression technology through
AT&T Broadband's Headend in the Sky. The DMX/AEI Music service is included in
digital cable packages distributed by AT&T Broadband and other multiple system
operators.
Liberty Digital's affiliation agreements with cable operators generally
provide for the cable operator to pay a fee per subscriber that purchases a
digital cable package including the DMX/AEI Music service. Cable operators also
distribute the DMX/AEI Music service through analog technology, in which case
the service is offered as a separate premium service to subscribers, and Liberty
Digital is paid a per subscriber license fee under its affiliation agreements
with cable operators. Liberty Digital has a separate agreement with AT&T
Broadband relating to sales of analog music services by certain AT&T Broadband
affiliates that is not subject to these arrangements. Under its agreement with
AT&T Broadband, Liberty Digital receives monthly payments through June 2017.
These payments, which are adjusted annually for inflation, totaled approximately
$19.8 million in 2001. Liberty Digital also receives annual license fees and
subscriber revenue from affiliates of AT&T Broadband relating to distribution of
digital music services to commercial and residential customers.
Ownership Interest. On March 14, 2002, we completed the merger of Liberty
Digital with one of our newly formed subsidiaries. In the merger, each share of
Liberty Digital common stock, other than shares beneficially owned by us or
shares subject to appraisal demands, was converted into 0.25 shares of our
Series A common stock. As a result of this transaction, Liberty Digital ceased
to be a publicly traded company and became wholly owned by us.
Liberty Livewire Corporation
Liberty Livewire Corporation, through its Pictures Group, Media Group and
Networks Group, provides content preparation (audio and visual post-production),
content management (film, tape, and digital asset content management, including
archiving and mastering), and content distribution (freight, fiber, satellite,
Internet and interactive television) services to major motion picture studios,
independent producers, cable and broadcast networks, advertising agencies, and
other companies that produce, own and/or distribute entertainment content
worldwide. Liberty Livewire's assets are primarily comprised of those of the
Todd-AO Corporation, Four Media Company, the sound editorial division of
SounDelux Entertainment Group, Triumph Communications and Video Services
Corporation, all acquired in 2000, and Ascent Network Services and Group W
Network Services, acquired in 2001.
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Liberty Livewire's Pictures Group includes three divisions - audio
services, entertainment television, and commercial television. Liberty Livewire
is an independent provider of audio services to the entertainment industry for
feature films, television series, television specials, movies-of-the-week,
trailers, television commercials and new digital media in the United States and
Europe, with facilities in California, New York and London. These services
include music design and supervision, score production, creation of sound
effects, replacement of dialogue and re-recording of audio elements. Liberty
Livewire's entertainment television and commercial television group provides
producers of original television programming and television commercials with
technical and creative services that are necessary to conform original film or
video principal photography into a final product suitable for airing on
television. These services include developing negatives; transferring film to
digital media; creating visual effects; and assembling source material into its
final form, including integration of sound and visual effects. The staff of
Liberty Livewire and its predecessors have been the recipient of numerous
technical awards, including several Academy Awards(R) and Emmy Awards(R).
The Media Group provides owners of video and film libraries with a full
complement of state-of-the-art facilities and services necessary to manage,
format, archive, store and distribute film and video content. This segment's
services include the storage and handling of video tape and film elements in
secure, environmentally controlled facilities, restoration of damaged content,
transfers and conversions of film to video (and vice versa), audio restoration
and integration and standards conversion and professional duplication.
The Networks Group provides the facilities and services necessary to
assemble and distribute programming content for cable and broadcast networks via
fiber, satellite and the Internet to viewers in North America, Europe and Asia.
These services principally include production support and facilities for the
timely creation of original programming such as hosted and news segments and
live shows; language translation and subtitling; assembly, origination and
distribution; fiber transport; uplink and satellite transponder services; and
broadcast and industrial video equipment rentals. For this segment, Liberty
Livewire has production studios in Connecticut and Singapore, satellite
facilities in California, New York, New Jersey, Connecticut, London and
Singapore and Internet hosting facilities in New York and California, as well as
point-of-presence facilities in the top forty U.S. markets. Liberty Livewire
also has a small interactive media group, which includes Hyper TV(R), a joint
venture with ACTV, Inc. that provides for the integration and simulcast of
television and Internet broadcasts.
No single customer accounted for more than 10% of Liberty Livewire's
consolidated revenue in 2001.
The demand for Liberty Livewire's motion picture services has historically
been seasonal, with higher demand in the spring (second fiscal quarter) and fall
(fourth fiscal quarter) preceding the summer theatrical releases and Christmas
holiday season, respectively. Demand has been lower in the winter and summer,
corresponding to Liberty Livewire's first and third quarters, respectively.
Accordingly, Liberty Livewire has historically experienced, and expects to
continue to experience, quarterly fluctuations in revenue and net income.
The businesses in which Liberty Livewire operates are highly competitive
and service oriented. Liberty Livewire has few long-term or exclusive service
agreements with its customers. Business generation is based primarily on
customer satisfaction with reliability, timeliness, quality and price. Liberty
Livewire's primary competitors in the post-production business are the motion
picture studios, many of which perform these services "in-house". The motion
picture studios with in-house post-production capabilities generally operate at
or near capacity, and therefore outsource some of their requirements, usually to
independent providers like Liberty Livewire. If there were a significant decline
in the number of motion pictures or the amount of original television
programming produced or if the studios or other customers either established new
in-house post-production facilities or significantly expanded their in-house
capabilities, Liberty Livewire's operations could be materially and adversely
affected. The data transmission industry is currently saturated with companies
providing services similar to the content distribution services provided by
Liberty Livewire.
Ownership Interest. We own shares of Liberty Livewire's common stock
including all of its outstanding Class B common stock, representing an 85%
equity interest and a 98% voting interest in Liberty Livewire, on a fully
diluted basis. In addition, we have made convertible subordinated loans to
Liberty Livewire under a $214 million First Amended and Restated Credit
Agreement between our company and Liberty Livewire, dated as of December 22,
2000, in connection with certain of Liberty Livewire's acquisitions. Liberty
Livewire executed and delivered three promissory notes evidencing these loans in
2001, in the aggregate original principal amount of $206 million. The notes are
convertible at our option into shares of Liberty Livewire Class B common stock
at a conversion price of $10.00 per share, at any time until June 30, 2008,
which is the maturity date of the notes. Interest on the loans, which accrues at
the rate of 10% per annum, is payable in cash or, under certain circumstances,
shares of Class B common stock. Liberty Livewire may borrow the remaining
availability under the First Amended
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and Restated Credit Agreement for other purposes allowed under the terms of that
agreement. Each share of Liberty Livewire Class B common stock has 10 votes per
share and is convertible into one share of Liberty Livewire Class A common
stock, which has one vote per share.
On Command Corporation
On Command Corporation is the leading provider (based on number of hotel
rooms served) of in-room video entertainment and information services to hotels,
motels and resorts (which we refer to as hotels) in the United States. On
Command's base of installed rooms was approximately 926,000 rooms at December
31, 2001, of which approximately 894,000 rooms are served by on-demand systems.
On Command provides in-room video entertainment and information services on
three technology platforms: the OCX video system, the OCV video system, and the
SpectraVision video system. The OCX video system is a digital platform that
provides enhanced multimedia applications, including an improved graphical
interface for movies and games, digital music, television-based Internet with a
wireless keyboard and other guest services. At December 31, 2001, On Command had
installed the OCX video system in approximately 217,000 hotel rooms. The OCV
video system is a video selection and distribution technology platform that
allows hotel guests to select, at any time, movies and games through the
television sets in their hotel rooms. At December 31, 2001, On Command had
installed OCV video systems in approximately 644,000 hotel rooms. The
SpectraVision video system, which provides in-room movie entertainment on a
rolling schedule basis, and in some upgraded variations on an on-demand basis,
was, as of December 31, 2001, installed in approximately 65,000 hotel rooms. The
SpectraVision video system generally offers fewer movie choices than the OCV or
OCX video systems.
In addition to the services described above, On Command's platforms provide
for in-room viewing of select cable channels (such as HBO, Starz, ESPN, Disney
Channel and Discovery). On Command primarily provides its services under long-
term contracts to hotel chains, hotel management companies, and individually
owned and franchised hotel properties. On Command's services are offered
predominantly in the large deluxe, luxury, and upscale hotel categories serving
business travelers, such as Marriott, Hilton, Six Continents, Hyatt, Wyndham,
Starwood, Radisson, Fairmont, Four Seasons and other select hotels.
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, 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.
On Command typically negotiates and enters into a separate contract with
each hotel for the service provided. However, for some of its large hotel
management customers, On Command negotiates and enters into a single master
contract for the provision of services for all of the corporate-owned hotels of
such management company. In the case of franchised, managed or independently
owned hotels, the contracts are generally negotiated separately with each hotel.
Existing contracts generally have a term of five to seven years from the date
the system becomes operational. Under these contracts, On Command installs its
system into the hotel at On Command's cost, which represents a significant
investment, and On Command retains ownership of all its equipment used in
providing the service. In certain cases, On Command has provided hotels with
televisions which significantly increases On Command's cost per installed room,
but in other cases On Command has required the hotels to provide televisions. On
Command's contracts with hotels generally provide that On Command will be the
exclusive provider of in-room, pay-per-view video entertainment services to the
hotel and generally permit On Command to set the movie price. Under certain
circumstances, certain hotels may have the right to prior approval of the price
increases, which approval may not be unreasonably withheld. The hotels collect
movie-viewing charges from their guests and retain a commission equal to a
negotiated percentage of the net revenue generated from the room, which varies
in relationship with the size and profitability of the system. 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 December 31,
2001, contracts covering approximately 41% of the Company's installed rooms
expire, if not otherwise renewed, during the two-year period ending December 31,
2003.
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On Command's master contract with Hilton Hotels Corporation expired on
April 27, 2000. In October 2000, Hilton announced that it would not be renewing
its master contract with On Command. On Command currently provides service to
approximately 7,500 Hilton owned rooms and approximately 66,500 Hilton managed
and franchised rooms. Hotel contracts are written at the individual hotel level
and expirations occur over an extended period of time depending on the
installation date of the individual hotel. On Command expects that hotels owned
by Hilton will not renew their contracts as they expire. Hotels that are
managed or franchised by Hilton are not precluded from renewing their contracts
with On Command, but On Command cannot predict the number of managed and
franchised Hilton hotels that will renew.
On Command has a master contract in place with Promus Hotel Corporation,
which expires on May 25, 2002. Promus owns, manages and franchises the
DoubleTree, Embassy Suites, Hampton Inn and Homewood hotel chains. Promus was
acquired by the Hilton Corporation in late 1999. On Command currently services
approximately 6,200 Promus-owned rooms and 62,300 Promus managed and franchised
rooms. Individual contracts with Promus owned, managed and franchised hotels
expire over the next nine years.
In March 2001, On Command and Marriott International, Inc. entered into a
definitive agreement pursuant to which On Command will distribute its
interactive television platform in approximately 165,000 U.S. and Canadian hotel
rooms owned or managed by Marriott. In addition, On Command has the opportunity
to negotiate agreements to provide its interactive television platform to
approximately 135,000 additional U.S. and Canadian hotel rooms franchised by
Marriott.
Marriott, Hilton and Six Continents accounted for approximately 27%, 19%
and 12% respectively, of On Command's room revenues for the year ended December
31, 2001. These revenue percentages represent all chain affiliations including
owned, managed and franchised hotels.
At December 31, 2001, approximately 89% of On Command's 926,000 installed
rooms were located in the United States, with the balance located primarily in
Canada, Mexico and Europe. In addition to installing systems in hotels that it
serves, On Command sells its systems to other providers of in-room
entertainment, including ALLIN Interactive, which is licensed to install On
Command's systems on cruise ships.
The market for in-room entertainment and information is 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.
Ownership Interest. In connection with our acquisition of Ascent
Entertainment Group, Inc. in March 2000, we acquired an approximate 58%
ownership interest in On Command Corporation. In 2001, Ascent Entertainment
purchased from On Command shares of various series of preferred stock of On
Command for an aggregate cash purchase price of $85 million. Also in 2001,
Ascent Entertainment purchased from Jerome H. Kern, one of our directors and a
former officer and director of On Command, approximately 2.3 million shares of
On Command common stock for an aggregate purchase price of $25.2 million. As a
result of the foregoing transactions, our ownership interest in On Command has
increased to approximately 63%.
We have entered into definitive agreements with Liberty Satellite and
Technology, Inc. whereby we will contribute to LSAT our 100% ownership interest
in Ascent Entertainment (which owns substantially all of our 63% interest in On
Command) and other assets in exchange for 340 million shares of LSAT Series B
common stock. Subsequent to the consummation of this transaction, we will hold
equity securities representing 84% of the common equity and 98% of the
outstanding voting power of LSAT. This transaction is subject to customary
closing conditions, including LSAT shareholder approval. We anticipate that
this transaction will be consummated in April 2002.
Pramer S.C.A.
Pramer S.C.A. supplies programming services to cable television and direct-
to-home satellite distributors in Argentina. Pramer currently owns ten channels
and represents 13 additional channels, including two of Argentina's four
terrestrial broadcast stations. Total subscription units for 2001 (which
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equals the sum of the total number of subscribers to each of Pramer's owned and
represented channels) were approximately 60.9 million, with the number of
subscribers per channel ranging from less than 10,000 for the smallest premium
service to over 6.0 million for the most popular basic service. Pramer's owned
channels include Canal (a), the first Latin-American quality arts channel, Film
& Arts, offering quality films, concerts, operas and interviews with artists,
and elgourmet.com, a channel for the lovers of "the good things in life", all of
which are offered as basic television services. Approximately 60% of Pramer's
total revenues for 2001 were generated by owned channels. Pramer's represented
channels include USA Networks and Hallmark. Pramer handles affiliate sales for
the 13 channels it represents and advertising sales for 10 of such channels.
Pramer collects the revenues for the represented channels and pays the channel
owners either a fixed fee or a fee based on amounts collected. Representation
agreements typically have terms of two to five years. Advertising revenue
accounted for approximately 12% of Pramer's total revenue for 2001.
Of the 23 channels owned and/or represented by Pramer, 13 channels are also
distributed outside of Argentina, principally in Chile, Mexico and Venezuela.
For 2001, approximately 20% of Pramer's affiliate revenue was derived from the
distribution of channels outside of Argentina.
Pramer's affiliation agreements with cable television and satellite
distributors typically have terms of one to five years. Pramer's current
affiliation agreements expire between 2002 and 2005. The only distributor that
represented more than 10% of Pramer's total revenue for 2001 was Cablevision
S.A., which represented approximately 10% - 20% of Pramer's total revenue.
Pramer's affiliation agreement with Cablevision expires in December 2003.
Pramer has two sources of content: film rights that are purchased from
various distributors and its own productions. Contracts with producers of films
or distributors usually have terms of two to four years. Pramer's own
productions are usually contracted with independent producers.
Approximately one-third of Pramer's satellite transponder capacity is
provided pursuant to contracts expiring in 2003, with the remaining two-thirds
provided pursuant to contracts expiring in 2012. At present, satellite
transponders are available to replace those provided pursuant to the expiring
contracts.
Equity Method Affiliates
------------------------
Discovery Communications, Inc.
Discovery Communications, Inc. is a global media and entertainment company.
Discovery has grown from its core property, Discovery Channel, to current global
operations in over 150 countries across six continents, with over 670 million
total subscriptions, including over 80 million subscriptions to channels
distributed by ventures in which Discovery has less than a majority ownership.
Discovery's programming is tailored to the specific needs of viewers around the
globe, and distributed through 77 separate feeds in 33 languages. Discovery's 33
networks of distinctive programming represent 14 entertainment brands including
TLC, Animal Planet, Travel Channel, Discovery Health Channel, Discovery Kids,
and a family of digital channels. Discovery's other properties consist of
Discovery.com and approximately 170 retail outlets. Discovery also distributes
BBC America in the United States.
Ownership Interest. We hold a 49.8% interest in Discovery. Cox
Communications, Inc., Advance/ Newhouse Communications and Discovery's founder
and Chairman, John S. Hendricks, hold interests in Discovery of 24.9%, 24.9% and
0.4%, respectively.
Discovery is managed by its stockholders rather than a board of directors.
Generally, all actions to be taken by Discovery require the approval of the
holders of a majority of Discovery's shares, subject to certain exceptions,
including certain fundamental actions, which require the approval of the holders
of at least 80% of Discovery's shares. The stockholders of Discovery have agreed
that they will not be required to make additional capital contributions to
Discovery unless they all consent. They have also agreed not to own another
basic programming service carried by domestic cable systems that consists
primarily of documentary, science and nature programming, subject to certain
exceptions.
Each stockholder has been granted preemptive rights on share issuances by
Discovery. Any proposed transfer of Discovery shares by a stockholder will be
subject to rights of first refusal in favor of
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the other stockholders, subject to certain exceptions, with our right of first
refusal being secondary under certain circumstances. In addition, we are not
permitted to hold in excess of 50% of Discovery's stock unless our increased
ownership results from exercises of our preemptive rights or rights of first
refusal.
QVC, Inc.
QVC, Inc. markets and sells a wide variety of consumer products and
accessories primarily by means of televised shopping programs on the QVC network
and via the Internet through iQVC. QVC operates shopping networks in the United
States, Germany, Japan and the United Kingdom. QVC purchases, or obtains on
consignment, products from domestic and foreign manufacturers and wholesalers,
often on favorable terms based upon the volume of the transactions. QVC does not
depend upon any one particular supplier for any significant portion of its
inventory.
QVC distributes its television programs, via satellite, to affiliated video
program distributors for retransmission to subscribers. In return for carrying
QVC, each domestic programming distributor receives an allocated portion, based
upon market share, of up to 5% of the net sales of merchandise sold to customers
located in the programming distributor's service area.
Ownership Interest. We own approximately 42% of QVC, and Comcast owns the
remaining 58%. QVC is managed on a day-to-day basis by Comcast, and Comcast has
the right to appoint all of the members of the QVC board of directors. Our
interests are represented by two members on QVC's five-member management
committee. Generally, QVC's management committee votes on every matter
submitted, or required to be submitted, to a vote of the QVC board, and we and
Comcast are required to use our respective best efforts to cause QVC to follow
the direction of any resolution of the management committee. We also have veto
rights with respect to certain fundamental actions proposed to be taken by QVC.
We have been granted a tag-along right that will apply if Comcast proposes
to transfer control of QVC, and Comcast may require us to sell our QVC stock as
part of the transaction, under certain circumstances and subject to certain
conditions. In addition, we have the right to initiate a put/call procedure with
Comcast in respect of our interest in QVC.
We and Comcast have certain mutual rights of first refusal and mutual
rights to purchase the other party's QVC stock following certain events,
including change of control events affecting either stockholder. We and Comcast
also have registration rights.
Jupiter Programming Co., Ltd.
Jupiter Programming Co., Ltd. is a joint venture between us and Sumitomo
Corporation that was formed to develop, manage and distribute cable and
satellite television channels in Japan. As of December 31, 2001, Jupiter
Programming owned four channels through wholly- or majority-owned subsidiaries
and had investments ranging from approximately 10% to 50% in ten additional
channels. Jupiter Programming's majority owned channels include a movie channel
(CSN1), a golf channel (Golf Network), a shopping channel (Shop Channel, in
which Home Shopping Network has a 30% interest), and a women's channel (LaLa
TV). Channels in which Jupiter Programming holds investments include three
sports channels owned by JSkySports, a joint venture with News Television B.V.,
Sony Broadcast Media Co. Ltd, Fuji Television Network, Inc. and SOFTBANK
Broadmedia Corporation, in which Jupiter Programming owns an indirect 29%
interest and we own an additional indirect 14% interest; Animal Planet Japan, a
one-third owned joint venture with Discovery and BBC Worldwide; and Discovery
Channel Japan, a 50% owned joint venture with Discovery. Jupiter Programming
provides affiliate sales services and in some cases advertising sales and other
services to channels in which it has investments for a fee.
The market for multi-channel television services in Japan is highly complex
with multiple cable systems and direct-to-home satellite platforms. Cable
systems in Japan served approximately 10.5 million homes at December 31, 2001. A
large percentage of these homes, however, are served by systems (referred to as
compensation systems) whose service principally consists of retransmitting free
TV services to homes whose reception of such broadcast signals has been
disrupted. Higher capacity systems and larger cable systems that offer a full
complement of cable and broadcast channels, of which Jupiter Telecommunications
Co., Ltd. is the largest in terms of subscribers, currently serve approximately
3.9 million households. All of the channels in which Jupiter Programming holds a
20% or greater interest
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are marketed as basic television services to cable system operators, with
distribution at December 31, 2001 ranging from approximately 10 million homes
for Shop Channel (which is carried in many compensation systems and on UHF as
well as in multi-channel cable systems) to approximately 1.1 million homes for
more recently launched channels, such as LaLaTV and Animal Planet Japan.
Currently Jupiter Programming has affiliation agreements with approximately 380
cable systems. Its affiliation agreement with Jupiter Telecommunications expires
in 2010 but provides for renegotiation of the affiliate fees for the channels
every three years.
All of the channels in which Jupiter Programming has interests are also
currently offered on Sky PerfecTV, a digital satellite platform that delivers
approximately 140 channels a-la-carte and in an array of basic and premium
packages, from two satellites operated by JSAT Corporation (which we refer to as
JSAT). Currently there are two other satellite platforms in Japan, delivering a
significantly smaller number of channels. Under Japan's complex regulatory
scheme for satellite broadcasting, each channel obtains a broadcast license
which is perpetual, although subject to revocation by the relevant governmental
agency, and leases from the satellite operator the bandwidth capacity on the
applicable satellites necessary to transmit the licensed channel to cable and
other distributors and direct-to-home satellite subscribers. In the case of
Jupiter Programming's 33% or greater owned channels, these licenses and
satellite capacity leases are held through its affiliate, Jupiter Satellite
Broadcasting Corporation (which we refer to as JSBC). JSBC's leases with JSAT
for bandwidth capacity on JSAT's two satellites expire in 2007. JSBC and other
licensed broadcasters then contract with the platform operator, such as
SkyPerfecTV, for customer management and marketing services (sales and
marketing, billing and collection) and for encoding services (compression,
encoding and multiplexing of signals for transmission) on behalf of the licensed
channels. JSBC's customer management and marketing contracts typically have
terms of three to five years, with renewal provisions, and variable fees and
commissions. Encoding contracts generally have terms that are coextensive with
the satellite bandwidth capacity leases, and provide for fixed rate fees.
Although the SkyPerfecTV platform served approximately three million direct-to-
home satellite subscribers at December 31, 2001, the subscriber penetration for
individual channels is significantly less because of complex customer offerings
resulting from the licensing scheme and regulations mandating that each channel
must be offered a la carte. In May 2002, a fourth satellite platform with
interactive features, known as CS 110 Digital, is expected to be launched.
Twelve of the channels in which Jupiter Programming has interests will be
carried on this platform. The satellite broadcast licenses for Jupiter
Programming's 33% or greater owned channels with respect to this platform are
held by two other companies that are wholly or majority owned by unaffiliated
entities. Several of Jupiter Programming's channels also operate sites on
Japan's advanced DoCoMo i-mode wireless service and provide content to Japan's
nascent broadband platform operators.
Approximately 78% of Jupiter Programming's consolidated revenues for 2001
were attributable to retail revenues generated by the Shop Channel. Cable
operators are paid distribution fees to carry the Shop Channel, which are either
a fixed rate per subscriber or the greater of a fixed rate per subscriber and a
percentage of revenue generated through sales in the cable operator's territory.
Jupiter Telecommunications and SkyPerfecTV are the largest distributors of
Jupiter Programming's channels. Jupiter Telecommunication's subscribers
accounted for approximately 25% of 2001 revenues generated by the Shop Channel.
Revenue from satellite subscriptions and cable affiliate fees accounted for
approximately 5% and 10%, respectively, of Jupiter Programming's consolidated
revenues for 2001. After Shop Channel, JSky Sports generates the most revenues
of the channels in which Jupiter Programming has an interest, the majority of
which revenues are derived from satellite subscriptions. Currently, advertising
sales are not a significant component of Jupiter Programming's revenues.
Ownership Interest. Pursuant to a shareholders agreement we entered into
with Jupiter Programming and Sumitomo, we and Sumitomo each have preemptive
rights to maintain our respective equity interests in Jupiter Programming, and
we and Sumitomo each have the right to elect and remove one director for each
16.6% equity interest in Jupiter Programming that we or Sumitomo, as applicable,
hold. In addition, we have the right to appoint one part-time statutory auditor
for so long as we own at least 25% of Jupiter Programming's equity, and Sumitomo
has the right to appoint one part-time and one full-time statutory auditor for
so long as it owns at least 50% of Jupiter Programming's equity. No board
action may be taken with respect to certain material matters without the
unanimous approval of the directors appointed by us and Sumitomo, provided that
we and Sumitomo each own 30% of Jupiter Programming's equity at the time of any
such action. These material matters include, among other things: (1) the
admission of a new shareholder, (2) any merger, consolidation or similar
transaction, (3) any material change to the trade or business of Jupiter
Programming, (4) the amendment of any material
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contract, (5) the declaration of any dividend and (6) the incurrence of any
indebtedness. We and Sumitomo each hold a right of first refusal with respect to
the other's interests in Jupiter Programming, and we and Sumitomo have agreed to
provide Jupiter Programming with a right of first opportunity with respect to
the acquisition of more than a 10% equity position in, or the management of or
any similar participation in, any programming business or service in Japan and
any other country to which Jupiter Programming distributes its signals, in each
case subject to specified limitations.
USA Networks, Inc.
USA Networks is a company focused on the convergence of information, direct
selling and entertainment. USA Networks has organized its business into two
groups: USA Entertainment Group and USA Interactive Group.
USA Entertainment Group consists of:
. Cable and Studios, which consists of USA Cable, an operator of cable
networks, including USA Network, Sci Fi Channel, and the emerging
networks, Trio, NewsWorlds International and Crime, and Studios USA, a
producer and distributor of television programming.
. Filmed Entertainment, consisting primarily of USA Films, which is in
the film distribution and production businesses, and USA Home
Entertainment, which is in the home video distribution business.
USA Cable has the full-time use of four transponders on two domestic
communications satellites. As a result, USA Cable's four networks are
distributed in all 50 states and Puerto Rico via satellite for distribution by
cable television systems and direct broadcast satellite systems, and for
satellite antenna owners by means of satellite transponders owned or leased by
USA Cable.
Studios USA produces television programs for United States broadcast
networks for prime time television exhibition. Generally, Studios USA enters
into network licenses which give the networks the exclusive right to telecast
new episodes of a given series for a period of time, generally four to five
years. In addition, Studios USA allows some of its productions to be
distributed on a "dual platform" basis, which allows more than one network to
share a production's initial exhibition window. Studios USA licenses television
film products to independent stations and directly to network affiliated
stations in return for cash or advertising time which may be sold for cash. In
addition to producing television programs and films, Studios USA distributes its
current programming domestically. USA Networks and Vivendi Universal have
agreed that Studios USA will have the exclusive right through February 2012 to
distribute Vivendi Universal's large television library domestically. In
addition, USA Networks and Vivendi Universal have agreed that Vivendi Universal
will have the exclusive right, with limited exceptions, to distribute all
Studios USA programming internationally. Universal has already entered into
several output and volume agreements with international television broadcasters
that include programming produced by Studios USA.
USA Interactive Group consists of offline and online ticketing operations
(primarily through Ticketmaster which operates Ticketmaster.com), Expedia, a
leading online travel service, a hotel reservations network that consolidates
hotel rooms for resale in the consumer market, a program for outsourcing
customer care for both large corporations and high-growth Internet-focused
companies, an online network by the name of Citysearch that provides locally
oriented services and information to users, an online personals business, an
electronic commerce solutions business, a facilitator of e-commerce websites and
Internet enabled applications by the name of Styleclick and Home Shopping
Network and America's Store, which are engaged in the electronic retailing
business.
Ownership Interest. Currently our interest in USA Networks consists of
shares of USA Networks common stock held by us and our subsidiaries, shares of
USA Networks common stock held by certain entities in which we have an equity
interest but only limited voting rights, and securities of certain subsidiaries
of USA Networks which are exchangeable for shares of USA Networks common stock.
Assuming the exchange of these securities and the conversion or exchange of
certain securities owned by Vivendi Universal and certain of its affiliates for
USA Networks common stock, we and Vivendi Universal would own approximately 20%
and 41%, respectively, of USA Networks.
I-16
USA Networks, Vivendi Universal, we and Mr. Barry Diller have entered into
several agreements involving governance matters relating to USA Networks and
stockholder arrangements. With respect to governance matters, Mr. Diller
generally has full authority to operate the day-to-day business affairs of USA
Networks and has an irrevocable proxy over all USA Networks securities owned by
Vivendi Universal, us and certain of Vivendi Universal's and our respective
affiliates for all matters except for certain matters relating to fundamental
changes in USA Networks and its business. However, we, Vivendi Universal and Mr.
Diller each have veto rights with respect to certain fundamental changes
relating to USA Networks and its subsidiaries. If Mr. Diller and Vivendi
Universal agree to certain fundamental changes that we do not agree to, Vivendi
Universal will be entitled to purchase our entire equity interest in USA
Networks, subject to certain conditions, at a price determined by an independent
appraiser taking into account a number of agreed upon factors.
We currently have the right to designate up to two directors to the USA
Networks board of directors, which right we have exercised. We retain this
right as long as our stock ownership in USA Networks remains at certain levels.
We and Vivendi Universal each have a preemptive right with respect to
future issuances of USA Networks' capital stock, subject to certain limitations.
We have agreed with Vivendi Universal that we will not acquire beneficial
ownership of shares of USA Networks if such acquisition would result in us
having beneficial ownership of more than 20% of the outstanding common stock of
USA Networks, subject to specified exceptions. This agreement will terminate on
the earlier of such time as we beneficially own less than 5% of the outstanding
shares of USA Networks common stock or the date that Vivendi Universal
beneficially owns fewer shares than we beneficially own. Also, we have agreed
not to propose to the board of directors of USA Networks our acquisition of the
outstanding USA Networks securities or to otherwise influence the management of
USA Networks, including by proposing or supporting certain transactions relating
to USA Networks that are not supported by USA Networks' board of directors.
We are subject to a number of agreements that limit or control our ability
to transfer our USA Networks securities. Each of Vivendi Universal and Mr.
Diller has a right of first refusal with respect to certain sales of USA
Networks securities by the other party. Our rights in this regard are secondary
to any Vivendi Universal right of first refusal on transfers by Mr. Diller.
Also, we and Mr. Diller each generally have a right of first refusal on certain
transfers by the other party, subject to certain exceptions. We have tag-along
sale rights on certain sales of USA Networks stock by Mr. Diller and in the
event Vivendi Universal transfers a substantial amount of its USA Networks
stock. We, Vivendi Universal and Mr. Diller have agreed to certain put and call
arrangements with Vivendi Universal, pursuant to which we have the right to sell
(or Vivendi Universal has the right to acquire) shares of USA Networks stock
held by us, at a price determined by an independent appraiser taking into
account a number of agreed upon factors.
As described under "--General Development of the Business - Recent
Developments" above, we have entered into an agreement with USA Networks, Barry
Diller and Vivendi Universal, pursuant to which a new partnership will be formed
to hold substantially all of USA Networks' entertainment assets, television
production and distribution assets and filmed entertainment production and
distribution assets and Vivendi Universal's Universal Entertainment Group assets
and businesses. In connection with the formation of the partnership, Vivendi
Universal will receive common interests constituting 93.06% of the common
interest of such partnership, USA Networks will receive 5.44% of the common
interests of such partnership and Barry Diller, in consideration of his becoming
chief executive officer of the partnership, will receive 1.50% of the common
interests of such partnership. In addition, USA Networks will issue to Vivendi
Universal ten-year warrants to purchase an aggregate of approximately 60.6
million shares of USA Networks at exercise prices ranging between $27.50 and
$37.50. In addition to its common interest in the partnership, USA Networks
will receive a cash distribution of approximately $1.6 billion, and will receive
Class A preferred interests of the partnership having a face value of $750
million and Class B preferred interests of the partnership having a face value
of $1.75 billion. The Class A preferred interests mature 20 years from the date
of issuance and have an annual pay-in-kind dividend of 5%, accruing quarterly.
On the maturity date, the Class A preferred interests will be entitled to
receive an amount in cash equal to the face amount plus accrued and unpaid
dividends. The Class B preferred interests have a face amount of $1.75 billion,
bear an annual pay-in-kind dividend of 1.4%, accruing quarterly, and an annual
cash dividend of 3.6%, aggregating a 5% annual dividend. The Class B preferred
interests are not redeemable by the partnership; however, USA Networks has the
right to put such interests to the partnership, and the partnership has the
right to call such interests, at any time after the 20th
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anniversary of issuance, for a price equal to the face amount plus accrued and
unpaid dividend. Such price is payable in shares of USA Networks common stock,
valued at fair market value, subject to a maximum of 56,611,308 shares of USA
Networks common stock being payable upon such redemption of the Class B
preferred interests. The Class A preferred interests and the Class B preferred
interests will rank equally and will be the most senior equity interests in the
partnership as to distributions and upon liquidation.
Also as described under "--General Development of the Business - Recent
Developments" above, we have entered into a separate agreement with Vivendi
Universal, pursuant to which Vivendi Universal will acquire from us certain
assets, including a portion of our beneficial ownership interests in USA
Networks, in exchange for Vivendi Universal ADSs. In connection with this
transaction, we have agreed not to purchase additional shares of Vivendi
Universal for a period of four years following the closing, subject to certain
exceptions. The Vivendi Universal ADSs we receive will be registered under the
Securities Act for resale by us, but a portion of the ADSs will be subject to
certain transfer restrictions.
The closing of our transaction with Vivendi Universal and the closing of
Vivendi Universal's transaction with USA Networks are conditioned on one
another. If the foregoing transactions are consummated, the governance and
stockholders agreements that we have entered into with USA Networks, Vivendi
Universal and Mr. Diller will be amended. As a result, some of our rights under
these agreements would change. Among other things, the amended agreements would
limit our veto rights with respect to certain fundamental changes relating to
USA Networks. In addition, under the amended agreements we will retain our
right to designate two directors to the USA Networks board of directors for so
long as we continue to beneficially own 75% of the USA Networks equity
securities that we own at the time of the closing of the foregoing transactions
and we continue to meet other ownership thresholds. If, however, we cease to
beneficially own 75% of the USA Networks equity securities that we own at the
time of the closing of the foregoing transactions but we continue to own at
least 50% of such securities and we beneficially own at least 5% of the total
outstanding equity securities of USA Networks, we will have the right to
designate one director to the USA Networks' board of directors. Certain of our
rights under the agreements, such as rights of first refusal on sales by Mr.
Diller and Vivendi Universal, tag-along rights and drag-along rights, would
continue under the amended agreements; however, Vivendi Universal's right to
call, and our right to put, our interest in USA Networks would terminate, as
would the restriction on our ability to acquire more than 20% of the outstanding
common stock of USA Networks, and Vivendi Universal would cease to have a right
of first refusal on certain transfers of USA Networks shares by us. In
addition, if the foregoing transactions are consummated, USA Networks' exclusive
distribution of television programming produced by Universal and Universal's
exclusive international distribution of television programming produced by USA
Networks shall be terminated. If the foregoing transactions are not completed,
the existing agreements will remain in effect. The closing of the foregoing
transactions is subject to the approval of 66-2/3% of the outstanding voting
securities held by unaffiliated stockholders of USA Networks.
Upon completion of the foregoing transactions, USA Networks will change its
name to "USA Interactive" and will be focused on integrating interactive assets
across multiple lines of business, including ticketing, online travel, online
dating, teleservices, electronic retailing and other interactive commerce
services. We will own approximately 20% of USA Interactive and approximately 3%
of Vivendi Universal.
Telewest Communications plc - Content Division
Telewest Communications is one of the United Kingdom's leading broadband
communications and media groups and is comprised of two divisions: the Cable
Division and the Content Division. For a discussion of Telewest's Cable
Division, please see "Communications--Equity Method Affiliates--Telewest
Communications plc- Cable Division" below.
Telewest's Content Division supplies entertainment content, information and
interactive services to the United Kingdom's multichannel television and on-line
marketplace. Telewest is the largest supplier of basic (i.e. non-premium)
thematic channels to the U.K. pay-television market, supplying approximately
20.4% of U.K. basic pay-television viewing in 2001 as measured by Broadcasters'
Audience Research Board, Ltd. Telewest has four wholly owned channels and is
BBC Worldwide's partner in UKTV, which currently has seven channels. Telewest
provides management services to UKTV for a fee.
I-18
Depending upon the affiliation agreement with the platform operator and the
package chosen by the customer, Telewest's wholly owned and UKTV channels are
available to customers of Telewest's own analog and digital cable systems, the
digital satellite platform of British Sky Broadcasting Group plc (BSkyB), the
analog and digital cable systems of NTL Incorporated, and the digital platform
of ONdigital (a joint venture between Carlton Communications plc and Granada
Group plc). These channels generate revenue based on the number of customers
subscribing to programming packages carried by the relevant platform operators
and by the sale of air time and sponsorship to advertisers and advertising
agencies by Telewest's in-house advertising sales department. As of December 31,
2001, Telewest's wholly owned and UKTV channels were available to 10.4 million
households. Telewest's advertising sales department represents the TV Travel
Shop channel and Extreme Sports Channel, in addition to Telewest's wholly owned
and UKTV channels. Advertising revenues represented approximately 28% of the
Content Division's total 2001 revenues, including affiliate revenues from
Telewest's Cable Division. Of the Content Division's 2001 affiliate revenues,
approximately 53% was attributable to BSkyB, 25% to NTL and 22% to Telewest's
Cable Division. The term of Telewest's affiliation agreements with BSkyB and NTL
expire in December 2006 and in April 2002, respectively.
Telewest's Content Division also has interests in transactional services,
including an approximate 36% interest in sit-up Limited, which operates the U.K.
home shopping channel, Screenshop, and bid-up.tv, an interactive auction
channel, and an approximate 38% interest in TV Travel Shop Limited, the U.K.'s
first home shopping travel channel. These services generate transactional
revenues based on their sale of products and services through television and
online. Telewest also has investments in other programming and production
facilities, including Scottish Media Group plc and Maidstone Studios.
Telewest's Content Division currently broadcasts its analog and digital
services with Astra satellite transponders leased from Societe Europeene des
Satellites pursuant to an agreement that expires in 2008.
Ownership Interest. The core business of Telewest's Content Division is
operated through its wholly owned subsidiary Flextech plc. Prior to April 2000,
we held a 37% equity interest in Flextech, representing a 50% voting interest.
In April 2000, Telewest acquired Flextech in a stock for stock transaction and
integrated Flextech's business into Telewest's Content Division.
Torneos y Competencias S.A.
Torneos y Competencias is an independent producer of Argentine sports and
entertainment programming that, through various affiliates, operates a sports
programming cable channel; commercializes rights to televise sporting events via
cable, satellite and broadcast television; sells billboard advertising; and owns
interests in a radio station and a sports magazine. Torneos's emphasis is on
soccer, and it has an exclusive agreement (except for certain cable broadcast
rights held by an affiliate) with the Asociacion del Futbol Argentino (AFA) to
produce and distribute matches between clubs in the Argentine professional
soccer leagues. This agreement expires in 2010 unless extended to 2014 at
Torneos's request. Torneos produces or coproduces, through its three television
studios and the production facilities of its production partners, a number of
successful soccer-based programs, including Futbol de Primera, El Clasico del
Domingo and Futbol de Verano.
Torneos's 50%-owned affiliate, Television Satelital Codificada S.A. (TSC),
holds the commercial rights, with certain exceptions, in Argentina to certain
official soccer matches of AFA's Premier League, which rights were assigned to
it by its stockholders. TSC sells the right to televise specific matches to
cable operators in the interior of Argentina, to an over-the-air broadcast
television channel in the City of Buenos Aires and the greater Buenos Aires
metropolitan area and, in certain cases, exclusively to the TyC Sports Channel.
Another 50%-owned affiliate of Torneos, Tele-Red Imagen S.A. (Trisa), owns the
TyC Sports Channel, the first dedicated sports cable channel in Argentina, which
packages soccer programming coproduced by Torneos and other sporting events to
which Trisa holds commercial rights, including non-AFA soccer cup games, hockey,
volleyball and tennis. Trisa also holds commercial rights to produce and
distribute certain motor racing, basketball and boxing events. Trisa coproduces
motor racing events for distribution through over-the-air television in the City
of Buenos Aires and the greater Buenos Areas metropolitan area and through cable
operators in the interior of Argentina and produces a weekly basketball and a
weekly boxing event for cable exclusive distribution.
I-19
Torneos's magazine and sporting newspaper, El Grafico, covers Argentine and
international sports, with special emphasis on soccer. Torneos also owns a 50%
interest in T&T Sports Marketing Ltd., which owns the television rights until
2007, for the principal South American soccer tournament, the Copa Libertadores
de America, a regional championship played by the champion and the runner-up
soccer team of each country affiliated with the South American Soccer
Confederation. Fox Pan American Sports LLC acquired the other 50% interest in
T&T Sports Marketing in January 2002.
Fox Pan American Sports LLC is a joint venture formed in January 2002 among
us, Fox Sports International (a subsidiary of News Corp.), which is an operator
of sports services in Latin America and throughout the world, and Hicks, Muse,
Tate & Furst, Incorporated, an investment conglomerate with media holdings
throughout Latin America and Europe. We own an approximate 11% interest in Fox
Pan American Sports which was formed for the purpose of distributing Spanish
language subscription television services comprised predominantly of sports
programming in Latin America. Since its formation Fox Pan American Sports has
been (and prior to such formation Fox Sports International was) a principal
customer of Torneos. Torneos supplies most of the sports production for Fox Pan
American Sports' Latin American signal, sells it soccer distribution rights and
provides advertising and affiliate sales services. Through Fox Pan American
Sports, Torneos anticipates a growing distribution for its programming outside
of Argentina.
Cablevision S.A., the Argentine cable company in which we own a 50%
interest, also purchases programming from Torneos pursuant to affiliation
agreements with TSC and Trisa. We have agreed with News Corp. and Torneos that
we will exercise any control we have over Cablevision to cause Cablevision to
comply with these affiliation agreements.
Ownership Interest. We own a direct 40% interest in Torneos; an affiliate
of Hicks Muse owns 20%, an affiliate of Telefonica S.A. owns 20% and the
remaining 20% is owned by a joint venture between one of the founding
shareholders of Torneos and us. Through this joint venture we hold an
additional 14% interest in Torneos.
Pursuant to a stockholders agreement among Liberty Media International (one
of our subsidiaries) and the founding stockholders of Torneos, Liberty Media
International retains, among others, (1) the right to participate with Torneos
in any joint ventures formed to distribute sports programming in Argentina,
Bolivia, Paraguay and Uruguay, (2) the right to use Torneos trademarks in
connection with any such sports programming, (3) the right to match third party
offers for direct-to-home distribution of Argentine Soccer Association events,
(4) the right to match third party offers to the remaining founder of Torneos
for its shares in Torneos, and (5) the right to purchase as many Torneos shares
as required to increase Liberty Media International's ownership in Torneos to
50%, at the price paid by Liberty Media International for its initial 35%
interest.
We are also party to other agreements with Torneos and affiliates of News
Corp., which predate the formation of Fox Pan American Sports, pursuant to
which, an affiliate of Fox Sports International is entitled to a right of first
refusal to purchase sports programming for non-broadcast television in Latin
America from Torneos and a right of first opportunity with respect to the
creation, acquisition of a controlling interest in or management of any non-
broadcast television channel that carries programming consisting predominantly
of sports events, sports news and sports-related information by Torneos, subject
to certain limitations. The foregoing rights will terminate at such time as we
contribute our interest in Torneos to Fox Pan American Sports.
In connection with the formation of Fox Pan American Sports, we and Hicks
Muse entered into an agreement, pursuant to which we and Hicks Muse have agreed
(1) subject to the satisfaction of specified conditions, to contribute our
interest in Torneos to Fox Pan American Sports, and (2) to vote all of our
respective Torneos shares and to cause our respective nominees to Torneos' board
of directors to vote their shares, in each case in a manner agreed upon by us
and Hicks Muse, to the extent that any such shares are not held through Fox Pan
American Sports. We and Hicks Muse also agreed to a mutual right of first offer
relating to our respective Torneos shares, to the extent that the Torneos
stockholders agreement terminates and we or Hicks Muse desire to transfer all of
our respective Torneos shares (other than any such shares held through Fox Pan
American Sports), and in connection with any such transfer in which the right of
first offer is not exercised, the transferring party may compel the other party
to sell its shares to the third party buyer.
I-20
Communications
Cable television systems deliver multiple channels of television
programming to subscribers who pay a monthly fee for the service. Video, audio
and data signals are received at the cable system head-end over-the-air or via
satellite delivery by antennas, microwave relay stations and satellite earth
stations and are modulated, amplified and distributed over a network of coaxial
and fiber optic cable to the subscribers' television sets. Cable television
providers in most markets are currently upgrading their cable systems to deliver
new technologies, products and services to their customers. These upgraded
systems allow cable operators to expand channel offerings, add new digital video
services, offer high-speed data services and, where permitted, provide telephony
services. The implementation of digital technology significantly enhances the
quantity and quality of channel offerings, allows the cable operator to offer
video-on-demand, additional pay-per-view offerings, premium services and
incremental niche programming. Upgraded systems also enable cable networks to
transmit data and gain access to the Internet at significantly faster speeds, up
to 100 times faster, than data can be transmitted over conventional dial-up
connections. Lastly, cable providers have been developing the capability to
provide telephony services to residential and commercial users at rates well
below those offered by incumbent telephone providers. Each of these businesses
represents a significant opportunity for cable providers to increase their
revenue and operating cash flow from the traditional pay television services
currently offered today.
Telephony providers offer local, long distance, switched services, private
line and advanced networking features to customers who pay a monthly fee for the
service, generally based upon usage. Wireless telecommunications networks use a
variety of radio frequencies to transmit voice and data in place of, or in
addition to, standard landline telephone networks. Wireless telecommunications
technologies include two-way radio applications, such as cellular, personal
communications services, specialized mobile radio and enhanced specialized
mobile radio networks, and one-way radio applications, such as paging services.
Each application operates within a distinct radio frequency block. As a result
of advances in digital technology, digital-based wireless system operators are
able to offer enhanced services, such as integrated voicemail, enhanced custom-
calling and short-messaging, high-speed data transmissions to and from
computers, advanced paging services, facsimile services and Internet access
service. Wireless subscribers generally are charged for service activation,
monthly access, air time, long distance calls and custom-calling features.
Wireless system operators pay fees to local exchange companies for access to
their networks and toll charges based upon standard or negotiated rates. When
wireless operators provide service to roamers from other systems, they generally
charge roamer air time usage rates, which usually are higher than standard air
time usage rates for their own subscribers, and additionally may charge daily
access fees.
Consolidated Subsidiaries
-------------------------
Liberty Cablevision of Puerto Rico, Inc.
Liberty Cablevision of Puerto Rico, Inc. is one of Puerto Rico's largest
cable television operators based on number of customers. Liberty Cablevision of
Puerto Rico operates three head ends, serving approximately 125,000 basic
subscribers in the communities of Luquillo, Arecibo, Florida, Caguas, Humacao,
Cayey and Barranquitas.
At December 31, 2001, 100% of Liberty Cablevision of Puerto Rico's network
had been rebuilt utilizing a minimum of 550 MHz bandwidth capacity. At December
31, 2001, Liberty Cablevision of Puerto Rico provided subscribers with 63 analog
channels. In some service areas, Liberty Cablevision of Puerto Rico offers 165
digital channels.
A significant portion of Liberty Cablevision of Puerto Rico's cable network
consists of fiber-optic and coaxial cable. This infrastructure allows Liberty
Cablevision of Puerto Rico to offer enhanced entertainment information and
telecommunications services and, when and to the extent permitted by law, cable
telephony services. Liberty Cablevision of Puerto Rico currently offers its
subscribers pay-per-view events, digital cable and premium movies. As it
introduces new revenue generating products and services, such as interactive
services, Liberty Cablevision of Puerto Rico expects to market aggressively
those products and services to its subscribers in areas with sufficient
bandwidth capacity. Liberty Cablevision of Puerto Rico expects to begin offering
high speed data transmission services and Internet access using high speed cable
modems to its subscribers during the first half of 2002.
I-21
Liberty Satellite & Technology, Inc.
Currently, Liberty Satellite & Technology, Inc. conducts its business as
the general manager of Liberty Satellite LLC, a joint venture between us and
LSAT, and 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 in which
LSAT has strategic investments are in the development stage and operate at
substantial losses.
Concurrent with our March 2000 investment in LSAT described below, we
formed Liberty Satellite LLC to hold and manage interests in entities engaged
globally in the distribution of Internet data and other content via satellite
and related businesses. We contributed cash and interests in XM Satellite Radio
Holdings Inc., Wildblue Communications, Inc., LSAT Astro LLC and the Sky Latin
America satellite businesses in exchange for an approximate 89% ownership
interest in the joint venture. LSAT contributed its interest in JATO
Communications Corp. and General Motors Class H common stock (net of LSAT's
liability for any stock appreciation right relating to those shares) in exchange
for an approximate 11% ownership interest in the joint venture. LSAT manages the
business and affairs of Liberty Satellite LLC. In a related transaction, LSAT
paid us $60 million in the form of an unsecured promissory note in exchange for
an approximate 14% managing ownership interest in LSAT Astro LLC, a limited
liability company that owns an approximate 32% interest in ASTROLINK
International LLC. The remaining 86% of LSAT Astro LLC was contributed by us to
Liberty Satellite LLC, as indicated above.
Ownership Interest. In March 2000, we completed a transaction with LSAT in
which we purchased shares of LSAT's Series A 12% Cumulative Preferred Stock with
a liquidation value of $150 million and shares of LSAT's Series B 8% Cumulative
Convertible Voting Preferred Stock with a liquidation value of $150 million in
exchange for our economic interest in 5,084,745 shares of Sprint PCS Group
stock, valued at approximately $300 million as of March 14, 2000. This preferred
stock is senior to all other classes and series of capital stock of LSAT. The
Series A preferred stock does not have voting rights and is not convertible into
common stock. The holders of the Series B preferred stock have voting rights
representing, in the aggregate, approximately 85% of the total voting power of
LSAT and vote together with the holders of all other classes or series of voting
stock of LSAT, except as required by law. In addition, the Series B preferred
stock is convertible at the option of the holder into shares of Series B common
stock at a conversion price of $8.84 per share of Series B common stock, subject
to adjustments as described in the Certificate of Designation for the Series B
preferred stock.
We have entered into definitive agreements with LSAT whereby we will
contribute to LSAT our 100% ownership interest in Ascent Entertainment (which
owns substantially all of our 63% interest in On Command) and our 89% ownership
interest in LSAT LLC in exchange for 340 million shares of LSAT Series B common
stock. Subsequent to the consummation of this transaction, we will hold equity
securities representing 84% of the common equity and 98% of the outstanding
voting power of LSAT. This transaction is subject to customary closing
conditions, including LSAT shareholder approval. We anticipate that this
transaction will be consummated in April 2002.
TruePosition, Inc.
TruePosition, Inc. develops and markets technology for locating wireless
phones and other wireless devices, enabling wireless carriers, application
providers and other enterprises to provide E-911 and other location-based
services to mobile users worldwide. "E-911" or "Enhanced 911" refers to an FCC
mandate requiring wireless carriers to implement wireless location technology.
In August 2001, TruePosition entered into a deployment agreement with Cingular
Wireless.
The TruePosition(R) Wireless Location System(TM) is a passive overlay
system designed to enable mobile wireless service providers to determine the
location of any wireless device, including cellular and PCS telephones. Using
patented time difference of arrival (TDOA) and angle of arrival (AOA)
technology, the TruePosition Wireless Location System calculates the latitude
and longitude of any designated wireless telephone or transmitter and forwards
this information in real time to any desired application software. TruePosition
measures transmissions occurring on the reverse control or voice channel of
wireless telephones and uses TDOA and AOA techniques to calculate the geographic
location, as well as the direction of travel and velocity of a telephone or
other wireless transmitter. TruePosition technology
I-22
offerings cover all of the major wireless air interfaces such as Time Division
Multiple Access (TDMA), Code Division Multiple Access (CDMA), Analog Mobile
Phone Service (AMPS) and Global System Mobile (GSM).
Equity Method Affiliates
------------------------
Telewest Communications plc - Cable Division
Telewest Communications is one of the United Kingdom's leading broadband
communications and media groups and is comprised of two divisions: the Cable
Division and the Content Division. For a discussion of Telewest's Content
Division, please see "Video Programming and Interactive Television Services--
Equity Method Affiliates--Telewest Communications plc - Content Division" above.
Telewest's Cable Division provides cable television services, residential
and business cable telephone services and Internet access to subscribers in the
United Kingdom. Telewest provides cable television services over a broadband
network that consists of a national digital head-end, regional head-ends,
multiple fiber-optic cables that transmit signals from the regional head-ends to
fiber-nodes, and high bandwidth coaxial cable that distributes the signals to
individual customer homes. In 1999, Telewest began offering Internet access
through a national Internet Protocol network that provides the basis for
Telewest's interactive services platform. Telewest's network has a high
bandwidth with 64% of the network operating at 750 MHz capacity, 6% of the
network operating at 650 MHz capacity, 23% of the network operating at 600 MHz
capacity, and 7% of the network operating on a "Switchedstar" capacity (a term
used to connote a unique network architecture that remains in three of its
franchises). Telewest's broadband network offers both analog cable and digital
television. As of December 31, 2001, 54% of Telewest's approximately 1.3
million cable subscribers subscribed to Telewest's digital television service.
As of December 31, 2001, Telewest's franchised service areas covered
approximately 37% of the homes in areas of the United Kingdom for which cable
franchises have been awarded. At that date, these franchises together included
approximately 6.3 million homes and over 445,000 businesses. As of December 31,
2001, the network in these franchises passed approximately 4.9 million homes,
and Telewest marketed its services to approximately 4.7 million of these homes.
Telewest holds a franchise-specific telecommunications license for each of
its cable franchises, pursuant to which it is authorized to operate and install
the physical network used to provide cable television and telecommunications
services in each franchise area. It also holds two national telecommunications
licenses which allow it to provide telecommunications networks and services
outside its franchise areas. Telewest's franchise specific telecommunications
licenses were awarded for periods of between 15 and 23 years and its national
telecommunications licenses were awarded for 25 years each. Telewest's
telecommunications licenses are non-exclusive. On expiration, a
telecommunications license cannot be extended and application must be made for a
new license.
Telewest uses its own broadband network, together with twisted-pair copper
wire connections for final delivery to the customer premises, to provide
telephony services to its customers. Telewest has installed its own telephone
switches, which permit it to minimize fees otherwise charged by public telephone
companies and to offer a variety of value-added services without relying on
public telephone operators for implementation. As of December 31, 2001,
Telewest's Cable Division had approximately 1.8 million residential telephone
lines and 445,000 business telephone lines.
Telewest also offers home access to the Internet in all of its franchises.
Telewest offers both high speed cable modem and dial up Internet services to its
customers. As of December 31, 2001, Telewest had 388,000 Internet subscribers
including 85,000 high-speed customers. Telewest reports that approximately 69%
of its customers subscribe for any two or more of its cable television,
telephony and high speed Internet services.
Telewest's Cable Division obtains some of its programming from Telewest's
Content Division and the balance from a variety of sources, including BSkyB,
terrestrial broadcasters and other programming suppliers. Contracts with
programming suppliers generally run from six months to five years, and provide
for the payment by Telewest of fees based on the number of its customers
subscribing to a particular channel. Like all U.K. cable operators, Telewest
obtains a significant amount of its premium programming and some of its basic
programming from BSkyB, historically the exclusive supplier of most premium
programming in the U.K., including Sky Sports and the most popular premium
subscription
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film channels available in the U.K. Telewest purchases premium programming from
BSkyB pursuant to an industry rate card. The industry rate card sets out the
terms and conditions for the supply of programming by BSkyB to U.K. cable
operators that do not have separate agreements with BSkyB. In addition to
providing programming to cable operators, BSkyB competes with Telewest and other
U.K. cable operators by offering its programming directly to its own analog and
digital satellite customers. Certain programming carried by BSkyB's digital
service, including a popular sports program, is not available to Telewest's
digital subscribers.
Terms of Ownership. By virtue of the Articles of Association of Telewest
and a relationship agreement among Telewest, Microsoft Corporation (which owns
approximately 23.6% of the common equity of Telewest) and us, for so long as we
or Microsoft holds 15% of the ordinary shares of Telewest, we or Microsoft, as
applicable, each has the right to appoint and remove three of the 16 members of
Telewest's board of directors and the consent of each of us is required for
certain fundamental matters. Such fundamental matters include material
acquisitions and dispositions, borrowings in excess of specified amounts,
issuances of additional shares, the appointment or removal of the chief
executive and an increase in the number of directors. The consent of each of us
is also required for the appointment of any of the independent directors of
Telewest. We and Microsoft have agreed to exercise our voting rights as
stockholders, and to cause our representatives to Telewest's board to vote
(subject to their fiduciary duties), in such manner as we may agree or, if we
are unable to agree, in the manner most likely to continue the status quo.
This voting agreement does not extend to the fundamental matters referred to
above or the approval of independent directors. We understand, however, that in
response to regulatory concerns Microsoft has made commitments to the effect
that it will not withhold its consent to the appointment of any independent
director, will not veto the appointment or removal of the chief executive
officer and will vote its shares (and cause its board representatives to vote)
in the manner recommended by Telewest's independent directors, unless we do not
agree to vote in accordance with the independent directors' recommendation and
require Microsoft pursuant to our relationship agreement to vote in the manner
most likely to continue the status quo. Telewest has granted Microsoft and us
certain preemptive rights on specified share issuances and has agreed to certain
restrictions on its ability to engage in businesses in the United Kingdom
outside of cable television, cable telephony and wireless telephony.
We and Microsoft have agreed that any proposed transfer of our respective
Telewest shares will be subject to rights of first refusal in favor of the other
party, subject to certain exceptions. In addition, we each have the right to
trigger a put/call procedure in the event the other is deemed to undergo a
change of control. For so long as MediaOne, a subsidiary of AT&T that holds
less than 2% of the common equity of Telewest, retains any equity interest in
Telewest, that interest will be subject to substantially similar terms as those
described in this paragraph with respect to our and Microsoft's interest in
Telewest.
Jupiter Telecommunications Co., Ltd.
Jupiter is a broadband provider of integrated entertainment, information
and communication services in Japan and is currently the largest provider of
cable television services in Japan based upon the number of customers served.
Jupiter operates its broadband networks through 19 individually managed
cable franchises. Jupiter is the largest stockholder in each of these managed
franchises. Each managed franchise consists of headend facilities receiving
television programming from satellites, traditional terrestrial television
broadcasters and other sources. Jupiter's distribution network, which is
composed of a combination of fiber-optic and coaxial cable, transmits signals
between the headend facility and the customer locations. Of Jupiter's network,
95% operates at 750MHz capacity and 5% operates at 450MHz capacity. Jupiter
provides traditional analog cable services in all of its managed franchises and,
in 2001, began providing digital and interactive television services in some of
its franchises. As of December 31, 2001, Jupiter's network passed approximately
5.6 million homes and served 1,192,000 basic cable subscribers.
Jupiter currently offers telephony services over its own network in ten of
its franchise areas. In the franchise areas where telephony services are
available, Jupiter's headend facilities contain equipment that routes calls from
the local network to Jupiter's telephony switches, which in turn transmit voice
signals and other information over the network. As of December 31, 2001,
Jupiter had 166,000 telephony subscribers. Jupiter currently provides only a
single line to its telephony customers, most of whom are residential customers.
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Jupiter currently owns a 50% interest in @Home Japan Co., Limited, a joint
venture with Sumitomo Corporation and At Home Asia-Pacific, L.P. Jupiter also
owns a 25.8% interest in Kansai Multimedia Services, a provider of high-speed
Internet access for cable system operators in the Kansai region of Japan. In
association with these joint ventures, Jupiter offers high-speed Internet access
in all of its managed franchises. As of December 31, 2001, Jupiter had 321,000
subscribers to its high speed Internet access service.
In addition to its 21 managed franchises, Jupiter owns non-controlling
equity interests, between 8% and 20%, in three cable franchises that are
operated and managed by third-party franchise operators. As of December 31,
2001, the non-managed investments passed approximately 1.1 million homes and
served 175,000 cable television and 58,000 high-speed Internet customers.
Jupiter sources its programming through multiple suppliers including its
affiliate, Jupiter Programming Co., Ltd. Jupiter's relationship with Jupiter
Programming enables Jupiter to provide cost effective programming to its
customers. We own 50% of Jupiter Programming. See "Jupiter Programming Co.,
Ltd." above for more information on Jupiter Programming.
Ownership Interest. At December 31, 2001, we held an approximate 35%
interest in Jupiter, Sumitomo held an approximate 38% interest in Jupiter and
Microsoft Corporation held an approximate 15% interest in Jupiter. Microsoft
was the majority stockholder of Titus Communications Corporation prior to its
acquisition by Jupiter in September 2000. Titus was a major broadband provider
of cable television, telephony and high-speed Internet access services in Japan.
In March 2002, we acquired from Sumitomo, by means of a tender offer, a 1.28%
equity interest in Jupiter for (Yen)2.731 billion (or approximately $21 million
based on estimated exchange rates). As a result of this acquisition, our equity
interest in Jupiter has increased to 36.28%, and Sumitomo's equity interest in
Jupiter has decreased to 36.28%.
In June 2001, we entered into a stockholder agreement pursuant to which we,
Sumitomo and Microsoft have agreed that we will not transfer our interests in
Jupiter, prior to an initial public offering of Jupiter stock, to a third party,
without the other parties' written consent. In addition, with respect to any
new issue of Jupiter securities, we are entitled to subscribe for a number of
shares that would allow us to maintain our voting interest in Jupiter. We,
Sumitomo and Microsoft have agreed that certain specified actions by Jupiter
will require unanimous consent of the three parties.
Jupiter's board of directors consists of thirteen members, of which we have
the sole right to nominate three non-executive directors. In addition, we have
the sole right (1) to nominate a person to fulfill the position of chief
operating officer if that position is vacant and (2) to remove a person serving
as chief operating officer from office for any reason, including a reason other
than for cause. Sumitomo holds similar rights with respect to the Chief
Executive Officer of Jupiter; and Sumitomo and we hold joint rights to appoint
certain other executive officers of Jupiter. Furthermore, we, Sumitomo and
Microsoft have agreed not to acquire or invest, to the extent of more than a 10%
equity interest, in any broadband businesses serving residential customers in
Japan without first offering such an acquisition or investment opportunity to
Jupiter. The shareholders agreements expire March 31, 2002, but may be
extended.
UnitedGlobalCom, Inc.
UnitedGlobalCom, Inc. is one of the largest broadband communications
providers outside the United States based upon the number of customers served.
UnitedGlobalCom provides video distribution services in 26 countries worldwide
and telephone and Internet access services in a growing number of international
markets. UnitedGlobalCom's operations are grouped into three major geographic
regions: Europe, Asia/Pacific and Latin America.
European Operations
UnitedGlobalCom's European operations are conducted through its 53.1%
owned, publicly traded subsidiary UPC, which is one of the largest Pan-European
broadband communications companies (in terms of number of customers) providing
video, telephone and Internet access services to 17 countries in Europe and
Israel. As of December 31, 2001, UPC's operating systems had approximately 7.2
million
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aggregate subscribers to their basic cable video services. UPC's operations are
organized into three principal divisions: UPC Distribution, Priority Telecom
CLEC and UPC Media.
UPC Distribution comprises UPC's local operating systems, which deliver
video and, in many of UPC's Western European systems, telephone and Internet
services to residential customers. UPC offers advanced analog video services,
a range of pay-per-view services and a large choice of radio programs. UPC began
offering digital video services in the Netherlands, its largest market, during
2000 and currently offers digital video services in the Netherlands, France,
Austria, Norway and Sweden. The rollout of digital services will involve
significant capital investment and the use of new technologies. UPC may not be
able to complete the rollout of digital services on its planned schedule.
UPC offers local telephone services over its network, under the brand name
Priority Telecom, to the residential market in its Austrian, Dutch, French and
Norwegian systems. UPC also has a traditional switched telephone network in
Hungary and the Czech Republic. Each of UPC's operating companies that offers
telephone services has entered into an interconnection agreement with the
incumbent national telecommunications service provider. UPC has experienced, and
may continue to experience, difficulties in operating under its interconnection
agreements with incumbent telecommunications carriers, including in Austria.
Priority Telecom N.V. is a subsidiary of UPC that is a publicly listed
competitive local exchange carrier. Priority Telecom provides telephone services
to business customers in metropolitan areas in the Netherlands, Austria and
Norway, with approximately 7,800 business customers at December 31, 2001.
Priority Telecom also manages the interconnection relationships for UPC's local
operating systems.
UPC Media operates UPC's Internet and video content and programming
businesses. During most of 2001, UPC Media also operated all aspects of UPC's
Internet business (chello broadband) for residential customers. UPC's local
operating companies have entered into franchise agreements with chello
broadband, which provides UPC's local systems with product development, customer
support, local language broadband portals, and marketing support and until
December 2001, Internet access, including high speed connectivity and caching,
for a fee based upon a percentage of subscription and installation revenue. The
Internet access, network and technological aspects of UPC's Internet business
are now operated by the UPC Distribution division, with chello broadband
managing the portal and content aspect of the business. At December 31, 2001,
UPC's local operating systems had approximately 510,600 residential subscribers
to its high speed Internet access service (which we refer to in the table below
as chello broadband service).
The following table describes UPC's offerings throughout Europe:
Country Services
------- --------
Western Europe
Austria UPC Telekabel Group, consists of five Austrian
corporations each of which own a cable television
operating system. UPC owns 95% of, and manages, each
UPC Telekabel Group company, with the respective cities
in which the operating systems are located owning the
remaining 5% in each company. UPC Telekabel Group
provides cable television and communications services
to Vienna and other Austrian cities. Telekabel's
upgraded networks offer analog cable service, digital
cable service, pay-per-view services, Internet access
(including chello broadband) services, and cable
telephone services.
Belgium UPC owns 100% of UPC Belgium, which services selected
areas of Brussels and Leuven. UPC Belgium offers analog
cable service, pay-per-view services and Internet
access (including chello broadband) service.
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France UPC owns 92% of UPC France, one of the largest cable
television providers in France, whose major operations
are located in suburban Paris, the Marne-la-Valle area
east of Paris and Lyon, among other areas. UPC France
offers analog cable service. In some of its systems,
UPC France offers pay-per-view services, telephony
service and chello broadband Internet access service.
In 2001, UPC France launched a digital video product.
UPC France holds a license to provide telephony
services to an area covering 1.5 million homes in the
eastern suburbs of Paris, which expires in 2013.
Germany UPC owns 51% of UPC Germany, which owns the fourth
largest independent German broadband cable operator
with cable operations throughout Germany and its
greatest concentration of operations in Nordrhein-
Westfalen, Berlin/Brandenberg and Sachsen/Thueringen.
In addition, UPC Germany holds an approximate 25%
interest in another German cable operator. UPC Germany
offers analog cable service and has recently introduced
telephony service in Berlin on a trial basis. Of the
shares of UPC Germany held by UPC, 22% are subject to a
call by the minority shareholders for nominal
consideration. On March 5, 2002, UPC received notice of
the exercise of such call right, which if consummated
will reduce its interest in UPC Germany to 29%.
The Netherlands UPC owns 100% of UPC Nederland, which holds UPC's
largest group of cable television systems. UPC
Nederland, which services the major cities of
Amsterdam, Rotterdam and Eindhoven, among others, has
constructed a national fiber backbone to interconnect
its regional networks. Throughout these networks, UPC
Nederland offers analog cable service and pay-per-view
services. Some of these networks offer cable telephony
service and chello broadband Internet access service.
In 2001, UPC commenced the roll-out of digital video
services.
Norway UPC owns 100% of UPC Norge, which is Norway's largest
cable television provider. Throughout its Norwegian
service areas, UPC Norge offers multiple tiers of
analog cable service. In the upgraded portions of its
network, UPC Norge offers cable telephony service and
chello broadband Internet access service. In 2001, UPC
commenced the roll-out of digital video services.
Sweden UPC owns 100% of UPC Sweden, which operates cable
television systems servicing the greater Stockholm
area. UPC Sweden offers analog cable service, and in
some of its operating areas, offers Internet services.
In 2001, UPC commenced the roll-out of digital video
services. UPC Sweden leases some of its fiber optic
cables from a city-controlled entity under a long-term
arrangement and leases the rest of its fiber optic
cables under several short-term arrangements.
Central and Eastern Europe
Czech Republic UPC owns 100% of UPC Czech, which provides cable
television services in the cities of Prague and Brno.
UPC Czech offers analog cable services and, through the
Polish platform described below, direct-to-home
satellite service. During 2001, UPC launched Internet
services.
Hungary UPC owns 100% of UPC Magyarorszag, which offers analog
cable service, direct-to-home satellite service through
the Polish platform described below, and chello
broadband Internet service. UPC owns 98.9% of Monor, a
provider of traditional telephone service.
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Poland UPC owns 100% of UPC Polska, which owns and operates
the largest cable television system in Poland through
regional clusters encompassing eight of the ten largest
cities in Poland. Over 80% of UPC Polska's cable
network uses pre-existing conduits of the Polish
national telephone company pursuant to a series of
agreements, allowing such use for an indefinite period
or for fixed periods up to 20 years. A substantial
portion of these contracts are terminable by the
telephone company without penalty upon breaches of
specified regulations. Certain of the agreements limit
the use of the conduits for the delivery of cable
television services. UPC Polska also offered
direct-to-home satellite service until December 2001.
UPC Polska sold its direct-to-home satellite business
and assets to a subsidiary of Canal+ Group that
conducts its Polish direct-to-home satellite business
in exchange for a 25% equity interest in such
subsidiary and cash.
Romania UPC owns 100% of a cable television operator in
Romania, having acquired the 30% interest held by the
minority owners in the first quarter of 2002.
Slovak Republic UPC is the largest cable operator in the Slovak
Republic, offering analog cable service and, though the
Polish platform, direct-to-home satellite service.
Latin American Operations
UnitedGlobalCom's primary Latin American operation is VTR GlobalCom S.A., a
wholly owned multi-channel television provider and a growing provider of voice
services in Chile. VTR is the largest provider (based on number of customers) of
wireline cable television, multichannel multipoint distribution service (or
MMDS) and direct-to-home technologies in Chile. Wireline cable television is
VTR's primary business representing approximately 95% of VTR's video
subscribers. VTR's channel line-up consists of 50 to 65 channels segregated
into two tiers of service, a basic tier offering 40 to 50 channels and a premium
tier offering 14 channels. As of December 31, 2001, VTR had an estimated 56%
market share of cable television services throughout Chile. VTR markets cable
telephone service to its residential customers in several communities. As of
December 31, 2001, approximately 51.4% of VTR's television homes passed were
able to use VTR's telephone services. VTR has the necessary interconnect
agreements with local carriers, cellular operators and long distance carriers to
allow VTR to provide its telephone services. Inter-connect agreements are
mandatory for all local carriers. In portions of its network, VTR also offers
high speed Internet access, with 24,800 customers at the end of 2001. All
Internet customers are required to take VTR's video service.
UnitedGlobalCom provides content to various Latin American countries
through its 50% ownership interest in MGM Networks LA, which currently produces
and distributes three pan-regional channels that are currently distributed on
most major cable and satellite systems in 17 countries throughout Latin America.
UnitedGlobalCom also has a 49% interest in Jundiai, which holds
nonexclusive cable licenses for the city of Jundiai in southern Brazil, a 100%
interest in TV Show Brasil, an owner and operator of a 31-channel exclusively
licensed MMDS system in Fortaleza, on the Northeast coast of Brazil, a 90.3%
interest in Telecable, a regional cable television system based in Cuernavaca,
Mexico and a 100% ownership interest in Star GlobalCom, a cable television
system in Peru.
Asia/Pacific Operations
UnitedGlobalCom's Asia/Pacific operations are primarily conducted through Austar
United Communications Limited, a 55.8% owned publicly traded affiliate. Austar
United owns the largest provider (based on number of customers) of subscription
television services in regional Australia with a service area encompassing
approximately 2.1 million homes and an approximate 41.6% interest in
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TelstraClear, New Zealand's second largest full service communications company,
providing telephone, cable television and Internet services to its residential
and commercial customers.
Austar primarily uses digital direct-to-home satellite and, to a lesser
extent, wireless cable and cable distribution technologies for delivery of
subscription television services.
Austar has entered into programming agreements with Foxtel, a subsidiary of
News Corp. and C&W Optus with remaining terms of two to five years. Pursuant to
one of its agreements with Foxtel and its agreements with a subsidiary of News
Corp., Austar has the exclusive rights to distribute the programs that are
subject to the agreements, including Showtime, Encore and Fox Sports, via
direct-to-home satellite and wireless cable within Austar's service area.
Austar also has exclusive rights in its service area to distribute, via direct-
to-home satellite and wireless cable, six channels of programming supplied by
XYZ Entertainment, including Discovery Channel and Nickelodeon.
Ownership Interest. At December 31, 2001, we owned an approximate 20%
common equity interest representing an approximate 40% voting interest in
UnitedGlobalCom. Following consummation of the merger and other transactions
described under "General Development of the Business - Recent Developments"
above, we currently own an approximate 72% common equity interest, representing
an approximate 94% voting interest, in New United. New United owns 99.5% of the
common stock of UnitedGlobalCom, which has 50% of the voting power of the
outstanding stock of UnitedGlobalCom in the election of directors and 99.5% of
the voting power on all other matters.
Our interest in New United is subject to the terms of New United's restated
certificate of incorporation and bylaws, as well as certain stockholders and
standstill agreements entered into in connection with the consummation of the
transactions with New United. Pursuant to those arrangements, until June 2010,
unless the agreements are earlier terminated, we will control the election of
four members of New United's 12-member board of directors, and the Founders will
control the election of the remaining eight members of New United's board of
directors. In addition, New United may not take certain actions without first
receiving the consent of a majority of the New United directors elected, or
designated for election, by us. Subject to certain exceptions, we have agreed
to vote our shares of New United common stock either as recommended by New
United's board of directors or in the same proportion as all other holders of
New United common stock on all matters submitted to a vote of stockholders,
other than the election or removal of directors, or a merger, sale or similar
transaction involving New United. We have agreed to vote our shares against any
merger, consolidation, dissolution or sale of all or substantially all of New
United's assets not approved by New United's board of directors. We are
entitled to exchange shares of low-vote New United common stock held by us for
high-vote shares on a one-for-one basis. We are also entitled to exchange
shares of common stock of UPC or any other affiliate of New United acquired from
UPC or such affiliate for high-vote shares of New United common stock on terms
specified in the stockholders agreement. We are entitled to preemptive rights
in the event of certain issuances of New United common stock that would dilute
our economic interest in New United by a specified amount, and a proportional
purchase right to acquire additional high-vote securities in the event of
certain issuances of shares of high-vote common stock by New United. We have
agreed to certain limitations on our ability to acquire additional common stock
of New United and to take certain other actions with respect to New United, such
as soliciting proxies, soliciting or encouraging offers for New United and
exercising appraisal rights. We have also agreed to certain limitations on our
ability to transfer equity securities of New United, other than to our
affiliates or in compliance with the stockholders agreement, or to convert our
high-vote stock to low-vote stock. Pursuant to the stockholders agreement, we
are subject to a right of first offer in favor of the Founders in connection
with proposed transfers by us of shares of high-vote New United common stock to
a third party or proposed conversions by us of high-vote New United common stock
to low-vote New United common stock. We are entitled to a right of first offer
in connection with proposed transfers by the Founders of shares of high-vote New
United common stock to a third party or proposed conversions by the Founders of
high-vote New United common stock to low-vote New United common stock. If we or
the Founders decline to exercise the right of first offer, then the party
proposing to transfer shares of high-vote New United common stock must first
convert the shares to low-vote New United common stock, unless in the case of a
proposed transfer by the Founders, the shares being transferred represent at
least a majority of all high-vote shares owned by the Founders, their permitted
transferees and any other person that the Founders have designated to purchase
shares from us under the Founders' right of first offer. If we propose to
transfer a majority of the shares of high-vote New United common stock held by
us to a third party, the Founders are entitled to "tag-along" rights to sell a
proportional amount of the shares of high-vote New United common stock
I-29
held by them. We are entitled to substantially similar "tag-along" rights if the
Founders propose to transfer a majority of the shares of high-vote New United
common stock held by them to a third party. In addition, if the Founders propose
to transfer a majority of the shares of high-vote New United common stock held
by them to a third party, the Founders may exercise "drag-along" rights to cause
us to sell, at our election, either all of the shares of high-vote New United
common stock held by us, all of the shares of New United common stock held by
us, or a proportionate amount of each class of New United common stock that we
own.
Cablevision S.A.
Cablevision S.A. is one of the largest cable television operators in
Argentina in terms of customers served. Approximately 52% of Cablevision's
distribution network operates at 750MHz capacity, 18% operates at 550MHz
capacity and 30% operates at 450MHz capacity. Cablevision holds non-exclusive
licenses to provide cable television services in the city of Buenos Aires and
the surrounding metropolitan area, which is the wealthiest and most populous
region in Argentina, as well as in Rosario, Santa Fe, Parana, Chaco, Misiones,
Bahia Blanca, Cordoba and Salta. As of December 31, 2001, Cablevision's network
passed approximately 3.5 million homes, and Cablevision had 1.4 million analog
cable subscribers. Cablevision offers high-speed data transmission and Internet
access using two-way, high-speed cable modems, and is able to offer interactive
services, in each case, in areas where its distribution system has been built to
750 MHz. As of December 31, 2001, Cablevision had 50,000 Internet subscribers.
Ownership Interest. Prior to April 2001, we held an approximate 28%
interest in Cablevision, a subsidiary of Hicks Muse held an approximate 36%
interest in Cablevision and a subsidiary of Telefonica S.A., the Spanish
telephone company, held an approximate 36% interest in Cablevision. In April
2001, the three stockholders effected a restructuring pursuant to which we and
Hicks Muse each purchased a portion of Telefonica's interest in Cablevision. As
a result of this transaction, we and Hicks Muse each indirectly own a 50% equity
interest in Cablevision.
Our interest in Cablevision is subject to a stockholders' agreement entered
into with the affiliates of Hicks Muse that hold the other 50% interest in
Cablevision. Pursuant to the stockholders' agreement, we may currently
designate five of the ten members of the board of directors of Cablevision and
affiliates of Hicks Muse may designate the other five members. In addition, for
so long as we and Hicks Muse each own at least 40% of Cablevision, either we or
Hicks Muse may designate the chairman with the other designating the vice
chairman in alternating years. In 2001, our affiliates designated the chairman
and affiliates of Hicks Muse designated the vice-chairman, and, pursuant to a
parents' agreement entered in connection with the formation of Fox Pan American
Sports, we and Hicks Muse have agreed to extend the term of office of our
designated chairmen until April 2003. Following that time, the alternating
designation rights with respect to chairmanship provided for in the
stockholders' agreement shall resume. Pursuant to the stockholders' agreement,
our interest in Cablevision and that of Hicks Muse is subject to a right of
first refusal in favor of the other. Following April 30, 2002, our respective
interests are also subject to a buy/sell provision, pursuant to which either
stockholder, if it holds at least 40% of Cablevision at the time, may exercise
its right to force the other stockholder, at the price designated by the
exercising stockholder, to buy all of the exercising stockholder's interest in
Cablevision or to sell to the exercising stockholder all of the non-exercising
stockholder's interest in Cablevision, at the option of the non-exercising
stockholder. We and Hicks Muse have also agreed that if either of us wishes to
pursue a business opportunity that would compete with Cablevision's primary
businesses, then that stockholder shall notify the board of directors of
Cablevision of the opportunity and the board will have the right to decide
whether to pursue the opportunity. If the board decides not to pursue the
opportunity, the stockholder is free to pursue the opportunity without the
involvement of Cablevision.
Metropolis-Intercom S.A.
Metropolis-Intercom S.A. is Chile's second largest cable operator based on
the number of subscribers served. Approximately 77% of Metropolis-Intercom's
distribution network operates at 750MHz capacity, 16% operates at 550MHz and 7%
operates at 450MHz. Seventy seven percent of the network offers 80 channels at
200 MHz digital compression; 16% of the network offers 80 channels via standard
analog transmission; and 6% of the network offers 63 channels via standard
analog transmission. Metropolis-Intercom operates cable systems in nine of the
most densely populated cities
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within Chile, including Santiago (the capital of Chile), Vina del Mar and
Temuco. As of December 31, 2001, Metropolis-Intercom had 272,000 cable
television subscribers.
Metropolis-Intercom also offers high speed Internet access throughout its
network. As of December 31, 2001, Metropolis-Intercom had 10,000 Internet
subscribers.
Ownership Interest. We own an indirect 50% interest in Metropolis-
Intercom, which is owned 98% by Cordillera Comunicaciones Limitada, a
partnership between us and Cristalerias de Chile, a large, publicly traded
Chilean company with significant media interests. The remaining interests are
owned, in equal portions, by one of our affiliates and an affiliate of
Cristalerias.
The board of directors of Metropolis-Intercom consists of ten members, all
of whom are designated by Cordillera. We and Cristalerias each designate one-
half of the managers of Cordillera and all actions by the managers require the
consent of representatives of each partner. With certain exceptions, we,
Cristalerias and Cordillera have each agreed not to compete with Metropolis-
Intercom and not to pursue telephony opportunities in Chile. However, each
partner in Cordillera has the unilateral right to terminate these non-
competition covenants at any time, and we have agreed to a mutual waiver of the
enforceability of these covenants through April 23, 2002.
In addition, in May 2000 we entered into an agreement with Cristalerias,
and certain related parties pursuant to which Cristalerias has the right to
cause us to purchase from Cristalerias, at fair market value as determined by an
independent investment bank, its indirect 50% interest in Metropolis-Intercom at
any time prior to May 17, 2010. As part of this agreement we also gave
Cristalerias the right to control the day to day operations of Metropolis-
Intercom.
Chorus Communication Limited
Chorus Communication Limited is Ireland's largest cable and MMDS company
outside Dublin based on number of customers served. Fifty percent of Chorus'
network operates at 300MHz capacity, 40% operates at 540 MHz capacity and the
remaining 10% operates at 750MHz capacity. Chorus provides multi-channel cable
television, through wireless local loop and hybrid fiber-coaxial cable. Thirty-
nine percent of Chorus' network offers cable service, and 61% of its network
offers MMDS. As of December 31, 2001, Chorus had 227,000 cable and MMDS
subscribers.
Chorus currently owns and operates 39 cable television franchises and 9
MMDS licenses covering 24 geographical areas across Ireland, of which 22 are
currently operational.
Chorus also provides telephony services over portions of its network. As
of December 31, 2001, Chorus had 10,000 telephony subscribers.
Ownership Interest. We and Independent News and Media plc each own 50% of
Princes Holding Limited, of which Chorus Communications Limited is a wholly
owned operating subsidiary. Our interest in Princes Holding is subject to a
shareholders agreement that we entered into with Independent News and Princes
Holdings. Pursuant to the shareholders agreement, we and Independent News are
each entitled to appoint and remove one director for each 16.67% equity interest
in Princes Holdings that we or Independent News, as applicable, hold at the time
of any election or removal of directors. As a result, we currently have the
right to appoint and remove three of Princes Holdings' six board members, and
Independent News currently has the right to appoint and remove the remaining
three board members. In addition, for so long as we and Independent News each
own at least 30% of Princes Holdings, either we or Independent News may
designate the non-voting chairman of the board of Princes Holdings in
alternating two year periods. Pursuant to the shareholders agreement, no board
action may be taken with respect to certain material matters without the
unanimous approval of the directors appointed by us and Independent News,
provided that we and Independent News each own 30% of Princes Holdings' equity
at the time of any such action. These material matters include, among other
things: (1) requiring any shareholder to make a capital contribution to Princes
Holdings, (2) admitting a new shareholder, (3) effecting a merger,
consolidation or similar transaction, (4) making any material change to the
trade or business of Princes Holdings, (5) amending any material contract of
Princes Holdings and (6) declaring any dividends. In addition, we and
Independent News each have pre-emptive rights to purchase our pro
I-31
rata share of any new issuance of Princes Holdings' equity, and we and
Independent News each hold a right of first refusal with respect to any sale to
a third party by the other shareholder of such other shareholder's interests in
Princes Holdings, subject to specified exceptions. In addition, for so long as
the selling shareholder holds at least a 50% equity interest in Princes
Holdings, we and Independent News have tag along rights with respect to any sale
to a third party by the other shareholder of at least a 5% equity interest in
Princes Holdings. We and Independent News have agreed to provide Princes
Holdings with a right of first opportunity with respect to the participation or
investment in, or management of, any business in Ireland that competes with the
business of Princes Holdings, and neither we nor Independent News may pursue any
such opportunity unless Princes Holdings first declines to purse the
opportunity, in each case subject to specified exceptions.
Regulatory Matters
Domestic Video Programming, Interactive Television Services and
Communications
Programming
In the United States, the FCC regulates the providers of satellite
communications services and facilities for the transmission of programming
services, the cable television systems that carry such services, and, to some
extent, the availability of the programming services themselves through its
regulation of program licensing. Cable television systems in the United States
are also regulated by municipalities or other state and local government
authorities. Cable television companies are currently subject to federal rate
regulation on the provision of basic service, and continued rate regulation or
other franchise conditions could place downward pressure on the fees cable
television companies are willing or able to pay for programming services in
which we have interests. Regulatory carriage requirements also could adversely
affect the number of channels available to carry the programming services in
which we have an interest.
Regulation of Program Licensing. The Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Cable Act) directed the FCC to promulgate
regulations regarding the sale and acquisition of cable programming between
multi-channel video programming distributors (including cable operators) and
satellite-delivered programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations adopted
by the FCC preclude virtually all exclusive programming contracts between cable
operators and satellite programmers affiliated with any cable operator (unless
the FCC first determines the contract serves the public interest) and generally
prohibit a cable operator that has an attributable interest in a satellite
programmer from improperly influencing the terms and conditions of sale to
unaffiliated multi-channel video programming distributors. Further, the 1992
Cable Act requires that such affiliated programmers make their programming
services available to cable operators and competing multi-channel video
programming distributors such as multi-channel multi-point distribution systems,
which we refer to as MMDS, and direct broadcast satellite distributors on terms
and conditions that do not unfairly discriminate among distributors. The
Telecommunications Act of 1996 has extended these rules to programming services
in which telephone companies and other common carriers have attributable
ownership interests. The FCC revised its program licensing rules by implementing
a damages remedy in situations where the defendant knowingly violates the
regulations and by establishing a timeline for the resolution of such
complaints, among other things. Even though we split off from AT&T, our
ownership of Liberty Cablevision of Puerto Rico, Inc. presently subjects us and
satellite-delivered programming services in which we have an interest to these
rules.
Regulation of Carriage of Programming. Under the 1992 Cable Act, the FCC
has adopted regulations prohibiting cable operators from requiring a financial
interest in a programming service as a condition to carriage of such service,
coercing exclusive rights in a programming service or favoring affiliated
programmers so as to restrain unreasonably the ability of unaffiliated
programmers to compete.
Regulation of Ownership. The 1992 Cable Act required the FCC, among other
things, (1) to prescribe rules and regulations establishing reasonable limits on
the number of channels on a cable system that will be allowed to carry
programming in which the owner of such cable system has an attributable interest
and (2) to consider the necessity and appropriateness of imposing limitations on
the degree to which multi-channel video programming distributors (including
cable operators) may engage in the creation or production of video programming.
In 1993, the FCC adopted regulations limiting carriage
I-32
by a cable operator of national programming services in which that operator
holds an attributable interest to 40% of the first 75 activated channels on each
of the cable operator's systems. The rules provided for the use of two
additional channels or a 45% limit, whichever is greater, provided that the
additional channels carried minority-controlled programming services. The
regulations also grandfathered existing carriage arrangements that exceeded the
channel limits, but required new channel capacity to be devoted to unaffiliated
programming services until the system achieved compliance with the regulations.
These channel occupancy limits applied only up to 75 activated channels on the
cable system, and the rules did not apply to local or regional programming
services. However, on March 2, 2001, the United States Court of Appeals for the
District of Columbia Circuit found that the FCC had failed to justify adequately
the channel occupancy limit, reversed the FCC's decision and remanded the rule
to the FCC for further consideration. Even if these rules were readopted by the
FCC upon remand, because of our split off from AT&T, they would have little
impact on programming companies in which we have interests based upon our
current attributable ownership interests in cable systems. In the original
rulemaking, the FCC concluded that additional restrictions on the ability of
multi-channel distributors to engage in the creation or production of video
programming were then unwarranted.
In its March 2, 2001 decision, the Court of Appeals also reversed the FCC's
rule imposing a thirty percent limit on the number of subscribers served by
systems in which a multiple system operator can have an attributable ownership
interest. The FCC presently is conducting a rulemaking regarding this ownership
limitation.
The FCC's rules also generally had prohibited common ownership of a cable
system and broadcast television station with overlapping service areas.
However, on February 19, 2002, the United States Court of Appeals for the
District of Columbia Circuit held that the FCC's decision to retain the
cable/broadcast cross-ownership rule was arbitrary and capricious and vacated
the rule. The FCC may pursue Supreme Court review and/or initiate a new
proceeding to consider other rules. Again, in view of our split off from AT&T,
any such restrictions would have little impact on us based on our present
ownership of cable systems. The FCC rules continue to prohibit common ownership
of a cable system and MMDS with overlapping service areas.
In August 1999, the FCC revised the attribution standards, which are used
to implement the FCC's ownership rules, and adopted new attribution standards
based upon a combination of equity, debt and other indicia of influence. On
December 14, 2000, the FCC adopted further revised attribution standards. The
new attribution criteria could limit our ability to engage in certain
transactions involving broadcast stations, cable systems and MMDS systems. The
ownership attribution standards used to enforce other rules, including the
horizontal cable system ownership, channel occupancy limits, program access and
program carriage rules, also were revised in October 1999. The Court of Appeals
reversed these revised standards, in part, in its March 2, 2001 decision. The
FCC is reviewing the horizontal ownership limitation and ownership attribution
rules in its current notice of proposed rulemaking.
Regulation of Carriage of Broadcast Stations. The 1992 Cable Act granted
broadcasters a choice of must carry rights or retransmission consent rights. The
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast signals
selecting must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the Cable Communications
Policy Act of 1984, which require cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial use
by unaffiliated third parties and permit franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public,
educational and government access channels, could adversely affect some or
substantially all of the programming companies in which we have interests by
limiting the carriage of such services in cable systems with limited channel
capacity. On January 18, 2001, the FCC adopted rules relating to the cable
carriage of digital television signals. Among other things, the rules clarify
that a digital-only television station can assert a right to analog or digital
carriage on a cable system. The FCC initiated a further proceeding to determine
whether television stations may assert rights to carriage of both analog and
digital signals during the transition to digital television. The imposition of
such additional must carry regulation, in conjunction with the current limited
cable system channel capacity, would make it likely that cable operators will be
forced to drop cable programming services, which may have an adverse impact on
the programming companies in which we have interests.
I-33
Closed Captioning and Video Description Regulation. The Telecommunications
Act of 1996 also required the FCC to establish rules and an implementation
schedule to ensure that video programming is fully accessible to the hearing
impaired through closed captioning. The rules adopted by the FCC will require
substantial closed captioning over an eight to ten year phase-in period, which
began in 2000, with only limited exemptions. As a result, the programming
companies in which we have interests are expected to incur significant
additional costs for closed captioning. In July 2000, the FCC also adopted rules
requiring certain broadcasters and the largest national video programming
services to begin to provide audio descriptions of visual events for the
visually impaired on the secondary audio program.
Copyright Regulation. Liberty Digital's DMX/AEI Music service involves the
distribution of copyrighted music. Liberty Digital has entered into a number of
license agreements for distribution of copyrighted music. Under these
agreements, Liberty Digital pays royalties for all music played on its services
in the United States through residential, commercial or Internet distribution.
Liberty Digital also has obtained the applicable licenses for distribution of
commercial and residential music services outside the United States through
various licensing agencies located in the foreign territories where its services
are distributed. Certain license agreements with major music licensing
organizations are being negotiated on an industry-wide basis and may require
retroactive rate increases.
Satellites and Uplink. In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry. The FCC also regulates the earth stations uplinking to
and/or downlinking from such satellites.
Interactive Television. On January 18, 2001, the FCC released a Notice of
Inquiry regarding interactive television services over cable television. The
FCC sought comment on, among other things, an appropriate definition of
interactive television services, whether access to a high speed connection is
necessary to realize interactive television capabilities, and whether a
nondiscrimination rule is necessary and/or appropriate. The outcome of this
proceeding and any rules ultimately adopted by the FCC could affect carriage of
our contemplated interactive television services and the implementation of our
access agreement with AT&T.
Telephony Systems
The FCC regulates the licensing, construction, operation, acquisition,
resale and interconnection arrangements of domestic wireless telecommunications
systems. The activities of wireless service providers, such as the Sprint PCS
Group of Sprint Corporation, are subject to regulation in varying degrees,
depending on the jurisdiction, by state and local regulatory agencies as well.
The FCC, in conjunction with the U.S. Federal Aviation Administration, also
regulates tower marking and lighting, and FCC environmental rules may cause
certain PCS network facilities to become subject to regulation under the
National Environmental Policy Act and the National Historic Preservation Act.
We also hold interests in various entities that provide domestic interstate
and intrastate telephony services, including competitive local exchange,
exchange access and interexchange services. Interstate telephone services are
regulated at the federal level pursuant to the Communications Act and the rules
of the FCC. Intrastate telephone services are regulated to varying degrees by
the public utility commissions of the respective states.
Broadcasters
We also have nonattributable minority ownership interests in group owners
of broadcast television stations. The FCC extensively regulates the ownership
and operation of such stations through a variety of rules. Among other things,
FCC regulations: (1) limit the number of television stations in which a person
or entity may hold an attributable interest in local markets; (2) limit the
common ownership of television stations and radio stations in a particular
market; and (3) prohibit the common ownership of a broadcast station and a daily
newspaper published in a community over which that station places a broadcast
signal of certain strength. On February 19, 2002, the United States Court of
Appeals for the
I-34
District of Columbia Circuit held that the FCC's decision to retain the national
television station ownership rule was arbitrary and capricious and remanded the
rule to the FCC for further consideration. The rule prohibited an entity from
controlling television stations with a combined potential audience reach
exceeding 35% of the aggregate national audience. The FCC has not announced
whether it will pursue Supreme Court review and/or attempt to justify the
existing rule, to revise the rule, or to eliminate it. The FCC also initiated a
rulemaking proceeding on September 13, 2001, to reexamine the restriction on the
ownership of a broadcast station and daily newspaper in the same community.
Internet Services
The Internet companies in which we have interests are subject, both
directly and indirectly, to various laws and governmental regulations relating
to their respective businesses. There are currently few laws or regulations
directly applicable to access to or commerce on commercial online services or
the Internet. For example, the Digital Millennium Copyright Act, enacted into
law in 1998, protects certain qualifying online service providers from copyright
infringement liability, the Internet Tax Freedom Act, also enacted in 1998 and
extended through November 1, 2003 by recently enacted legislation, placed a
three year moratorium on new state and local taxes on Internet access and
commerce, and, under the Communications Decency Act, an Internet service
provider will not be treated as the publisher or speaker of any information
provided by another information content provider. 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. On March 14, 2002, the FCC issued a declaratory
ruling that cable modem service is properly classified as an interstate
information service (as distinguished from a "cable service" or a
"telecommunication service") and is subject to FCC jurisdiction. Cable modem
service provides high speed access to the Internet over cable system facilities,
as well as many applications or functions that can be used with such access.
The FCC has initiated a rulemaking proceeding to examine issues such as: (1)
scope of the FCC's jurisdiction to regulate cable modem service; (2) whether it
is necessary or appropriate to require access by multiple Internet service
providers; (3) whether there are legal or policy reasons for different
regulatory approaches to wireline broadband and cable modem service; and (4)
role of state and local franchising authorities in regulating cable modem
service. We cannot predict what, if any, impact this ruling and rulemaking may
have on Internet companies and services in which we have an interest.
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 the services and
products of the Internet companies in which we have interests and increase such
companies' costs of doing business or otherwise have an adverse effect on their
businesses, operating results and financial conditions. 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 these companies to substantial liability.
International Video Programming, Interactive Television Services and
Communications
Some of the foreign countries in which we have, or propose to make, an
investment regulate, in varying degrees, (1) the granting of cable and telephony
franchises, the construction of cable and telephony systems and the operations
of cable, other multi-channel television operators and telephony operators and
service providers, as well as the acquisition of, and foreign investments in,
such operators and service providers, (2) the granting of broadcast licenses and
the applicable terms and regulations, and (3) the distribution and content of
programming and Internet services and foreign investment in programming
companies. Regulations or laws may cover wireline and wireless telephony,
satellite and cable communications and Internet services, among others.
Regulations or laws that exist at the time we make an investment in a foreign
subsidiary or business affiliate may thereafter change, and there can be no
assurance that material and adverse changes in the regulation of the services
provided by our subsidiaries and business affiliates will not occur in the
future. Regulation can take the form of price controls, service requirements,
programming and other content restrictions, and restrictions on permissible
levels of foreign ownership among others. Moreover, some countries do not issue
exclusive licenses to provide multi-channel television services within a
geographic area, and in those instances we may be adversely affected by an
overbuild by one or more competing cable operators. In certain countries where
multi-channel television is less developed, there is minimal regulation of cable
television, and,
I-35
hence, the protections of the cable operator's investment available in the
United States and other countries (such as rights to renewal of franchises and
utility pole attachment) may not be available in these countries. Foreign
regulation, and changes in foreign regulation, could have an adverse effect on
our business and the value of our investments.
Proposed Changes in Regulation
The regulation of programming services, cable television systems, satellite
carriers and television stations 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 our business will not be adversely affected by future legislation, new
regulation or deregulation.
Competition
Video Programming and Interactive Television Services
The business of distributing programming for cable and satellite television
is highly competitive, both in the United States and in foreign countries. The
programming companies in which we have interests directly compete with other
programmers for distribution on a limited number of channels. Increasing
concentration in the multichannel video distribution industry, including the
proposed combinations of AT&T Broadband and Comcast Cable and of Echostar and
DirecTV, could adversely affect the programming companies in which we have
interests by reducing the number of distributors to whom they sell their
programming, subjecting more of their programming sales to volume discounts and
increasing the distributors' bargaining power in negotiating new affiliation
agreements. Once distribution is obtained, our programming services and our
business affiliates' programming services compete, in varying degrees, for
viewers and advertisers with other cable and off-air broadcast television
programming services as well as with other entertainment media, including home
video (generally video rentals), pay-per-view services, online activities,
movies and other forms of news, information and entertainment. The programming
companies in which we have interests also compete, to varying degrees, for
creative talent and programming content. Our management believes that important
competitive factors include the prices charged for programming, the quantity,
quality and variety of the programming offered and the effectiveness of
marketing efforts. In addition, HSN and QVC operate in direct competition with
businesses that are engaged in retail merchandising.
Communications
The cable television systems and other forms of media distribution in which
we have interests directly compete for viewer attention and subscriptions in
local markets with other providers of entertainment, news and information,
including other cable television systems in those countries that do not grant
exclusive franchises, broadcast television stations, direct-to-home satellite
companies, satellite master antenna television systems, multi-channel multi-
point distribution systems and telephone companies, other sources of video
programs (such as videocassettes) and additional sources for entertainment news
and information, including the Internet. Cable television systems also face
strong competition from all media for advertising dollars. Our management
believes that important competitive factors include fees charged for basic and
premium services, the quantity, quality and variety of the programming offered,
the quality of signal reception, customer service and the effectiveness of
marketing efforts.
In addition, there is substantial competition in the domestic wireless
telecommunications industry, and it is expected that such competition will
intensify as a result of the entrance of new competitors and the increasing pace
of development of new technologies, products and services. Each of the markets
in which the Sprint PCS Group competes is served by other two-way wireless
service providers, including cellular and PCS operators and resellers. A
majority of the markets will have five or more commercial mobile radio service
providers and each of the top 50 metropolitan markets have at least one other
PCS competitor in addition to two cellular incumbents. Many of these
competitors have been operating for a number of years and currently service a
significant subscriber base.
I-36
Internet Services and Technology
The markets for Internet services, online content and products are
relatively new, intensely competitive and rapidly changing. Since the
Internet's commercialization in the early 1990's, the number of Internet
companies and web sites competing for consumers' attention and spending has
proliferated with no substantial barriers to entry, and we expect that
competition will continue to intensify in the future. The Internet companies
and web sites in which we have interests compete, directly and indirectly, for
members, visitors, advertisers, content providers and merchandise sales with
many categories of companies, including: other Internet companies and web
sites; publishers and distributors of traditional off-line media, such as
television, radio and print; general purpose consumer online services, such as
America Online and Microsoft Network; and vendors of information, merchandise,
products and services distributed through other means, including retail stores,
mail, facsimile and private bulletin board services. Liberty anticipates that
the number of such competitors will increase in the future.
The technology companies in which we have interests compete with a
substantial number of foreign and domestic companies, and the rapid
technological changes occurring in such companies' markets are expected to lead
to the entry of new competitors. The ability of the technology companies in
which we have interests to anticipate technological changes and introduce
enhanced products on a timely basis will be a significant factor in their
ability to expand and remain competitive. Existing competitors' actions and new
entrants may have an adverse impact on these companies' sales and profitability.
Employees
As of December 31, 2001, we had approximately 55 employees, and our
consolidated subsidiaries had an aggregate of approximately 7,400 employees.
Approximately 200 employees of Liberty Livewire, one of our consolidated
subsidiaries, are represented by the International Alliance of Theatrical and
Stage Employees. We believe that our employee relations are good.
Item 2. Properties
------- -----------
We own our corporate headquarters in Englewood, Colorado. All of our
other real or personal property is owned or leased though our subsidiaries and
business affiliates.
Liberty Livewire owns or leases over 100 facilities throughout the
world. Domestically, Liberty Livewire leases facilities with approximately 1.1
million square feet and owns facilities with approximately 450,000 square feet.
Outside of the United States, Liberty Livewire leases facilities with
approximately 300,000 square feet and owns facilities with 50,000 square feet.
Nearly all of Liberty Livewire's facilities are built specifically for their
technical and creative service operations.
On Command leases its corporate headquarters in Denver, Colorado; and
has leased 58,000 square feet and 131,000 square feet of light manufacturing and
storage space in Denver, Colorado and San Jose, California, respectively. On
Command also has a number of small leases throughout the United States, Canada,
Mexico and Europe.
Starz Encore Group owns its corporate headquarters in Englewood,
Colorado. In addition, Starz Encore Group leases office space for its sales
staff at 10 locations throughout the United States.
Our other subsidiaries and business affiliates own or lease the fixed
assets necessary for the operation of their respective businesses, including
office space, transponder space, headends, cable television and
telecommunications distribution equipment, telecommunications switches and
customer equipment (including converter boxes). Our management believes that
our current facilities are suitable and adequate for our business operations for
the foreseeable future.
Item 3. Legal Proceedings
------- ------------------
Klesch & Company Limited v. Liberty Media Corporation, John C. Malone
---------------------------------------------------------------------
and Robert R. Bennett. On September 4, 2001, we entered into agreements with
----------------------
Deutsche Telekom AG pursuant to which we
I-37
would purchase its entire interest in six of nine regional cable television
companies in Germany. In February 2002, we failed to receive regulatory approval
for our proposed acquisition. On July 27, 2001, Klesch & Company Limited
initiated a lawsuit against us, our chairman, John C. Malone, and our chief
executive officer, Robert R. Bennett, in the United States District Court for
the District of Colorado alleging, among other things, breach of fiduciary duty,
fraud and breach of contract in connection with actions alleged to have been
taken by us with respect to what then was a proposed transaction with Deutsche
Telekom. Klesch is seeking damages in an unspecified amount. We believe all such
claims to be without merit and, together with Messrs. Malone and Bennett, have
filed an answer denying any liability to Klesch. We also have asserted
counterclaims against Klesch seeking, among other things, a declaratory judgment
to the effect that because Klesch has breached and repudiated an agreement that
we entered into with Klesch in June 2001, we are relieved of any obligations
that we might have to Klesch under that agreement. Those obligations would
include, among other things, the obligation in certain events to pay to Klesch,
as its sole compensation, fees equal to 3% of the value of specified assets
acquired by us from Deutsche Telekom before the second anniversary of the date
of that agreement, subject to an aggregate cap of Euro 165 million. Klesch has
filed a reply denying all our counterclaims.
Starz Encore Group LLC v. AT&T Broadband LLC and Satellite Services,
--------------------------------------------------------------------
Inc. Starz Encore Group entered into a 25-year affiliation agreement in 1997
----
with TCI. TCI cable systems subsequently acquired by AT&T in the TCI merger
operate under the name AT&T Broadband. Starz Encore Group receives fixed monthly
payments in exchange for unlimited access to all of the existing Encore and
STARZ! services. The payment from AT&T Broadband can be adjusted if AT&T
acquires or disposes of cable systems. The affiliation agreement further
provides that to the extent Starz Encore Group's programming costs increase
above or decrease below amounts specified in the agreement, then AT&T
Broadband's payments under the affiliation agreement will be increased or
decreased in an amount equal to a proportion of the excess or shortfall. Starz
Encore Group requested payment from AT&T Broadband of its proportionate share of
excess programming costs during the first quarter of 2001 (which amount
aggregated approximately $32 million for the year 2001). Excess programming
costs payable by AT&T Broadband could be significantly larger in future years.
By letter dated May 29, 2001, AT&T Broadband has disputed the
enforceability of the excess programming costs pass through provisions of the
affiliation agreement and questioned whether the affiliation agreement, as a
whole, is "voidable." In addition, AT&T Broadband raised certain issues
concerning the interpretation of the contractual requirements associated with
the treatment of acquisitions and dispositions. Starz Encore Group believes the
position expressed by AT&T Broadband in that letter to be without merit. On
July 10, 2001, Starz Encore Group initiated a lawsuit against AT&T Broadband and
Satellite Services, Inc., a subsidiary of AT&T Broadband that is also a party to
the affiliation agreement, in Arapahoe County District Court, Colorado for
breach of contract. Starz Encore Group is seeking a judgment of specific
performance of the contract, damages and costs.
On October 19, 2001, Starz Encore Group entered into a standstill and
tolling agreement whereby the parties agreed to move the court to stay the
lawsuit until August 31, 2002 to permit the parties an opportunity to resolve
their dispute. This agreement provides that either party may unilaterally
petition the court to lift the stay after April 30, 2002 and proceed with the
litigation. The court granted the stay on October 30, 2001. In conjunction
with this agreement, we and AT&T Broadband entered into various agreements
whereby Starz Encore Group will indirectly receive payment for AT&T Broadband's
proportionate share of the programming costs pass through for 2001.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
None.
I-38
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
------ ---------------------------------------------------------------------
From March 9, 1999 to August 10, 2001, we were a wholly-owned
subsidiary of AT&T Corp. Effective August 10, 2001, AT&T effected our split-off
pursuant to which our capital stock was recapitalized, and each outstanding
share of AT&T Class A Liberty Media Group tracking stock was redeemed for one
share of Liberty Series A common stock and each outstanding share of AT&T Class
B Liberty Media Group tracking stock was redeemed for one share of Liberty
Series B common stock. As a result of this split-off, our common stock began
trading on the New York Stock Exchange on August 10, 2001 under the symbols
LMC.A and LMC.B. Effective January 2, 2002, we changed the ticker symbol for our
Series A common stock to "L." The following table sets forth the range of high
and low sales prices of shares of our Series A and Series B common stock for the
period from August 10, 2001 to December 31, 2001; and for AT&T Class A and Class
B Liberty Media Group tracking stock for the year ended December 31, 2000 and
for the period from January 1, 2001 to August 9, 2001.
Series A Series B
-------------------- ------------------
High Low High Low
---------- ------- -------- -------
2001
----
First quarter $ 17.25 11.88 18.69 14.20
Second quarter 18.04 11.50 18.82 12.50
Third quarter 17.85 9.75 18.35 12.00
Fourth quarter 14.46 11.17 15.50 12.30
2000
----
First quarter 30.72 24.44 36.56 27.00
Second quarter 29.94 19.19 32.69 22.13
Third quarter 26.56 17.44 32.63 18.75
Fourth quarter 19.25 10.75 20.63 12.75
As of February 28, 2002, there were approximately 6,600 and 400 record
holders of our 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).
We have not paid any cash dividends on our Series A common stock and
Series B common stock, and we have no present intention of so doing. Payment of
cash dividends, if any, in the future will be determined by our Board of
Directors in light of our earnings, financial condition and other relevant
considerations.
II-1
Item 6. Selected Financial Data.
------ -----------------------
The following tables present selected historical information relating
to our financial condition and results of operations for the past five years.
The following data should be read in conjunction with our consolidated financial
statements. We were a wholly-owned subsidiary of Tele-Communications, Inc.
("TCI") from August 1994 to March 9, 1999. On March 9, 1999, AT&T Corp. acquired
TCI in a merger transaction (the "AT&T Merger"). For financial reporting
purposes, the AT&T Merger is deemed to have occurred on March 1, 1999. In
connection with the merger, our assets and liabilities were adjusted to their
respective fair values pursuant to the purchase method of accounting. For
periods prior to March 1, 1999, our assets and liabilities and the related
consolidated results of operations are referred to below as "Old Liberty," and
for periods subsequent to February 28, 1999, our assets and liabilities and the
related consolidated results of operations are referred to as "New Liberty." In
connection with the merger, TCI effected an internal restructuring as a result
of which certain assets and approximately $5.5 billion in cash were contributed
to us.
New Liberty Old Liberty
--------------------------- -----------------
December 31, December 31,
--------------------------- -----------------
2001 2000 1999 1998 1997
------- ------ ------- ------- ------
amounts in millions
Summary Balance Sheet Data
--------------------------
Investment in affiliates $10,076 20,464 15,922 3,079 2,359
Investments in available-for-sale
securities and other cost
investments $23,544 19,035 28,593 10,539 3,971
Total assets $48,539 54,268 58,658 15,783 7,735
Debt, including current portion
and call option obligations $ 7,227 6,363 3,277 2,096 785
Stockholder's equity $30,123 34,109 38,408 8,820 4,707
New Liberty Old Liberty
------------------------------------------- ----------------------------------------
Year Year Ten months Two months Years ended
Ended Ended ended ended December 31,
December 31, December 31, December 31, February 28, -------------------------
2001 2000 1999 1999 1998 1997
------------ ---------- ----------- ---------- ---------- ----------
amounts in millions
Summary Statement of
--------------------
Operations Data:
----------------
Revenue $ 2,059 1,526 729 235 1,359 1,225
Operating income (loss) $ (1,127) 436 (2,214) (158) (431) (260)
Interest expense $ (525) (399) (135) (26) (104) (40)
Share of losses of
affiliates, net $ (4,906) (3,485) (904) (66) (1,002) (785)
Gains (losses) on
dispositions, net $ (310) 7,340 4 14 2,449 406
Net earnings (loss) $ (6,203) 1,485 (2,021) (70) 622 (470)
Pro forma basic and diluted
net earnings (loss) per
common share (1) $ (2.40) .57 (.78) (.03) .24 (.18)
-------------------
(1) The pro forma basic and diluted net earnings (loss) per common share
for periods prior to our split off from AT&T is based upon 2,588
million shares of Liberty Series A and Series B common stock issued
upon consummation of the split off.
II-2
Item 7. Management's Discussion and Analysis of Financial Condition and
------ ----------------------------------------------------------------
Results of Operations.
---------------------
The following discussion and analysis provides information concerning
our results of operations and financial condition. This discussion should be
read in conjunction with our accompanying consolidated financial statements and
the notes thereto.
From March 9, 1999 through August 9, 2001, AT&T Corp. ("AT&T") owned
100% of our outstanding common stock. During such time, the AT&T Class A Liberty
Media Group common stock and the AT&T Class B Liberty Media Group common stock
(together, the AT&T Liberty Media Group tracking stock) were tracking stocks of
AT&T designed to reflect the economic performance of the businesses and assets
of AT&T attributed to the Liberty Media Group. We were included in the Liberty
Media Group.
On May 7, 2001, AT&T contributed to us assets that were attributed to
the Liberty Media Group but not previously owned by us (the "Contributed
Assets"). These assets included (i) preferred stock and common stock interests
in a subsidiary of IDT Corporation, a multinational telecommunications services
provider and (ii) an approximate 8% indirect common equity interest in Liberty
Digital, Inc. ("Liberty Digital"). Subsequent to these contributions, our
businesses and assets and those of our subsidiaries constituted all of the
businesses and assets of the Liberty Media Group. The contributions have been
accounted for in a manner similar to a pooling of interests and, accordingly,
our financial statements for periods prior to the contributions have been
restated to include the financial position and results of operations of the
Contributed Assets.
Effective August 10, 2001, AT&T effected our split-off pursuant to
which our common stock was recapitalized, and each outstanding share of AT&T
Class A Liberty Media Group tracking stock was redeemed for one share of Liberty
Series A common stock and each outstanding share of AT&T Class B Liberty Media
Group tracking stock was redeemed for one share of Liberty Series B common stock
(the "Split Off Transaction"). Subsequent to the Split Off Transaction, we are
no longer a subsidiary of AT&T and no shares of AT&T Liberty Media Group
tracking stock remain outstanding. The Split Off Transaction has been accounted
for at historical cost.
Our domestic subsidiaries generally operate or hold interests in
businesses which provide programming services including production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software. In
addition, certain of our subsidiaries hold interests in technology and Internet
businesses, as well as interests in businesses engaged in wireless telephony,
electronic retailing, direct marketing and advertising sales relating to
programming services, infomercials and transaction processing. We also have
significant interests in foreign affiliates, which operate in cable television,
programming and satellite distribution.
Our most significant consolidated subsidiaries at December 31, 2001,
were Starz Encore Group LLC ("Starz Encore Group"), Liberty Livewire Corporation
("Liberty Livewire") and On Command Corporation ("On Command"). These businesses
are either wholly or majority owned and are controlled by us and, accordingly,
the results of operations of these businesses are included in our consolidated
results for the periods in which they are wholly or majority owned and
controlled.
A significant portion of our operations are conducted through entities
in which we do not have a controlling financial interest but do have the ability
to exercise significant influence over the operating and financial policies of
the investee. In these instances we use the equity method of accounting.
Accordingly, our share of the results of operations of these businesses is
reflected in our consolidated results as earnings or losses of affiliates.
Included in our investments in affiliates at December 31, 2001 were USA
Networks, Inc. ("USAI"), Discovery Communications, Inc. ("Discovery"), QVC, Inc.
("QVC"), UnitedGlobalCom, Inc. ("UnitedGlobalCom") and Telewest Communications
plc ("Telewest").
We also hold ownership interests in companies in which we do not have
significant influence. The most significant of these include AOL Time Warner
Inc. ("AOL Time Warner"), Sprint Corporation ("Sprint"), The News Corporation
Limited ("News Corp.") and Motorola, Inc. ("Motorola") These investments are
classified as available-for-sale securities and are carried at fair value.
Realized gains and losses on disposition are determined on an average cost
basis.
II-3
AT&T's acquisition of Tele-Communications, Inc. ("TCI"), our former
parent, by merger (the "AT&T Merger") on March 9, 1999 was accounted for using
the purchase method. Accordingly, at the time of the merger, our assets and
liabilities were adjusted to their respective fair values resulting in a new
cost basis. For financial reporting purposes the AT&T Merger is deemed to have
occurred on March 1, 1999. Accordingly, for periods prior to March 1, 1999, our
assets and liabilities and the related consolidated financial statements are
sometimes referred to herein as "Old Liberty," and for periods subsequent to
February 28, 1999, our assets and liabilities and the related consolidated
financial statements are sometimes referred to herein as "New Liberty."
"Liberty" refers to both New Liberty and Old Liberty.
Summary Of Operations
Starz Encore Group provides premium programming distributed by cable,
direct-to-home satellite and other distribution media throughout the United
States. Liberty Livewire provides sound, video and ancillary post production and
distribution services to the motion picture and television industries in the
United States, Europe, Asia and Mexico. On Command provides in-room, on-demand
video entertainment and information services to hotels, motels and resorts
primarily in the United States. To enhance the reader's understanding, separate
financial data has been provided in the table below, for the periods in which
they were consolidated, for Starz Encore Group, Liberty Livewire and On Command
due to the significance of those operations. The table sets forth, for the
periods indicated, certain financial information and the percentage relationship
that certain items bear to revenue, and includes purchase accounting adjustments
related to On Command that have not been "pushed down" to On Command's publicly
available financial statements. Included in the other category are our other
consolidated subsidiaries and corporate expenses. Some of our significant other
consolidated subsidiaries include Liberty Digital, Inc., Pramer S.C.A. and
Liberty Cablevision of Puerto Rico. Liberty Digital is principally engaged in
programming, distributing and marketing digital and analog music services to
homes and businesses. Pramer is an owner and distributor of video programming
services primarily in Argentina. Liberty Cablevision of Puerto Rico provides
cable television and other broadband services in Puerto Rico. The results of TV
Guide are included for the two months ended February 28, 1999, after which time
we began accounting for this investment using the equity method of accounting.
We hold significant equity investments, the results of which are not a component
of operating income, but are discussed below under "Investments in Affiliates
Accounted for Under the Equity Method." Other items of significance are also
discussed separately below.
II-4
In order to provide a meaningful basis for comparing the years ended
December 31, 2001, 2000 and 1999, the operating results of New Liberty for the
ten months ended December 31, 1999 have been combined with the operating results
of Old Liberty for the two months ended February 28, 1999, for purposes of the
following table and discussion. Depreciation, amortization and certain other
line items included in the operating results presented below are not comparable
between periods as a result of the effects of purchase accounting adjustments
related to the AT&T Merger. The combining of predecessor and successor
accounting periods is not permitted by generally accepted accounting principles.
Combined Liberty
-------------------------------------------------------------------------------------
Year Year Year
ended ended ended
December 31, % of December 31, % of December 31, % of
2001 revenue 2000 revenue 1999 revenue
---------- ---------- ---------- ---------- ---------- ----------
dollar amounts in millions
Starz Encore Group
Revenue $ 863 100% $ 733 100% $ 640 100%
Operating, selling, general
and administrative (550) (64) (498) (68) (475) (74)
Stock compensation (88) (10) (163) (22) (286) (45)
Depreciation and
amortization (157) (18) (157) (21) (149) (23)
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) $ 68 8% $ (85) (11)% $ (270) (42)%
========== ========== ========== ========== ========== ==========
Liberty Livewire
Revenue $ 593 100% $ 295 100% $ -- --
Operating, selling, general
and administrative (504) (85) (251) (85) -- --
Stock compensation (3) (1) 42 14 -- --
Depreciation and
amortization (136) (23) (55) (19) -- --
Impairment of assets (313) (54) -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) $ (363) (63)% $ 31 10% $ -- --
========== ========== ========== ========== ========== ==========
On Command
Revenue $ 239 100% $ 200 100% $ -- --
Operating, selling, general
and administrative (195) (82) (151) (76) -- --
Depreciation and
amortization (141) (59) (108) (54) -- --
---------- ---------- ---------- ---------- ---------- ----------
Operating loss $ (97) (41)% $ (59) (30)% $ -- --
========== ========== ========== ========== ========== ==========
Other
Revenue $ 364 (a) $ 298 (a) $ 324 (a)
Operating, selling, general
and administrative (433) (286) (309)
Stock compensation (41) 1,071 (1,682)
Depreciation and
amortization (550) (534) (435)
Impairment of assets (75) -- --
---------- ---------- ----------
Operating income (loss) $ (735) $ 549 $ (2,102)
========== ========== ==========
--------------------
(a) Not meaningful.
II-5
Certain of our consolidated subsidiaries and equity affiliates (the
"Programming Affiliates") are dependent on the entertainment industry for
entertainment and for educational and informational programming. In addition, a
significant portion of certain of the Programming Affiliates' revenue is
generated by the sale of advertising on their networks. A prolonged downturn in
the economy could have a negative impact on the revenue and operating income of
the Programming Affiliates. Such an event could reduce the development of new
television and motion picture programming, thereby adversely impacting the
Programming Affiliates' supply of service offerings. In addition, a soft economy
could reduce consumer disposable income and consumer demand for the products and
services of the Programming Affiliates.
We have one consolidated subsidiary (Pramer) and two equity affiliates
(Torneos y Competencias S.C.A. and Cablevision S.A.) located in Argentina. While
Argentina has been in a recession for the past four years, the Argentine
government has historically maintained an exchange rate of one Argentine peso to
one U.S. dollar (the "peg rate"). Due to worsening economic and political
conditions in late 2001, the Argentine government eliminated the peg rate
effective January 11, 2002. The value of the Argentine peso dropped
significantly on the day the peg rate was eliminated and has dropped further
since that date. In addition, the Argentine government placed restrictions on
the payment of obligations to foreign creditors. While we cannot predict what
future impact these economic events will have on our Argentine businesses, we
note that during 2001 these businesses experienced significant adverse effects
as customers began extending payments and lenders began tightening credit
criteria. See additional discussion below.
Consolidated Subsidiaries
Starz Encore Group. The majority of Starz Encore Group's revenue is
derived from the delivery of movies to subscribers under affiliation agreements
with cable operators and satellite direct-to-home distributors. In 1997, Starz
Encore Group entered into a 25-year affiliation agreement with TCI. TCI cable
systems were subsequently acquired by AT&T in the AT&T Merger and operate under
the name AT&T Broadband. Under this affiliation agreement with AT&T Broadband,
AT&T Broadband pays fixed monthly payments in exchange for unlimited access to
all of the existing Encore and STARZ! services. The payment from AT&T Broadband
can be adjusted, in certain instances, if AT&T acquires or disposes of cable
systems or if Starz Encore Group's programming costs increase above certain
specified levels. As a result of AT&T's acquisition of MediaOne Group, Inc. on
June 15, 2000, the contracted payment amount increased by approximately 20%.
After adjusting for the elimination of the former MediaOne contract, the net
payment amount from the combined AT&T companies increased by approximately 10%.
Substantially all of Starz Encore Group's other affiliation agreements generally
provide for payments based on the number of subscribers that receive Starz
Encore Group's services.
By letter dated May 29, 2001, AT&T Broadband has disputed the
enforceability of the excess programming costs pass through provisions of the
affiliation agreement and questioned whether the affiliation agreement, as a
whole, is "voidable." In addition, AT&T Broadband raised certain issues
concerning the interpretation of the contractual requirements associated with
the treatment of acquisitions and dispositions. Starz Encore Group believes the
position expressed by AT&T Broadband to be without merit. On July 10, 2001,
Starz Encore Group initiated a lawsuit against AT&T Broadband and Satellite
Services, Inc., a subsidiary of AT&T Broadband that is also a party to the
affiliation agreement, for breach of contract and collection of damages and
costs.
On October 19, 2001, Starz Encore Group entered into a standstill and
tolling agreement whereby the parties agreed to move the court to stay the
lawsuit until August 31, 2002 to permit the parties an opportunity to resolve
their dispute. This agreement provides that either party may unilaterally
petition the court to lift the stay after April 30, 2002 and proceed with the
litigation. The court granted the stay on October 30, 2001. In conjunction with
this agreement, we and AT&T Broadband entered into various agreements whereby
Starz Encore Group will indirectly receive payment for AT&T Broadband's
proportionate share of the programming costs pass through for 2001.
Revenue increased 18% and 15% in 2001 and 2000, respectively, as
compared to the corresponding prior year. Such increases are due to increases in
subscription units from all forms of distribution. At December 31, 2001, Starz
Encore Group had 114.1 million subscription units, as compared to 87.9 million
units at December 31, 2000 and 58.3 million at December 31, 1999. Such increases
in subscription units were due primarily to an increase in subscribers to Starz
Encore Group's thematic multiplex service, which increased from 27.6 million
subscribers at December 31, 1999 to 52.5
II-6
million subscribers at December 31, 2000 and 76.0 million subscribers at
December 31, 2001. Over the two-year period Encore, Movieplex, and Starz!
subscribers increased (decreased) 37%, (7%), and 29%, respectively. At December
31, 2001, AT&T Broadband customers represented 16% of Starz Encore Group's total
subscription units; and other cable, DBS, and other distribution represented
41%, 42% and 1%, respectively. AT&T Broadband customers generated $259 million
or 30% of Starz Encore Group's revenue for the year ended December 31, 2001.
Operating, selling, general and administrative expenses increased 10%
and 5% during 2001 and 2000, respectively, as compared to the corresponding
prior year, primarily due to an increase in programming expenses. Programming
expenses increased due to an increase in programming license fees resulting from
increased use of more expensive first-run films from certain movie studios.
Higher marketing expenses and higher salaries and related payroll expenses also
contributed to the increase in operating, selling, general and administrative
expenses in 2001.
Starz Encore Group has granted phantom stock appreciation rights to
certain of its officers. Compensation relating to the phantom stock appreciation
rights has been recorded based upon the fair value of Starz Encore Group as
determined by a third-party appraisal. The amount of expense associated with the
phantom stock appreciation rights is generally based on the vesting of such
rights and the change in the fair value of Starz Encore Group.
As a result of the implementation of new accounting standards and the
resulting elimination of goodwill amortization, we expect Starz Encore Group to
generate improved operating income during 2002, as compared to 2001.
Liberty Livewire. In April 2000, we acquired all of the outstanding
common stock of Four Media Company in exchange for AT&T Class A Liberty Media
Group common stock and cash. In June 2000, we acquired a controlling interest in
The Todd-AO Corporation in exchange for AT&T Class A Liberty Media Group common
stock. Immediately following the closing of such transaction, we contributed
100% of the capital stock of Four Media Company to Todd-AO in exchange for
additional Todd-AO common stock. Following these transactions, Todd-AO changed
its name to Liberty Livewire. In July 2000, we purchased all of the assets
relating to the post production, content and sound editorial businesses of
SounDelux Entertainment Group, and contributed such assets to Liberty Livewire
for additional Liberty Livewire stock. Following these transactions, we owned
approximately 88% of the equity and controlled approximately 99% of the voting
power of Liberty Livewire, and as a result, began to consolidate the operations
of Liberty Livewire during the quarter ended June 30, 2000. Liberty Livewire is
dependent on the television and movie production industries and the commercial
advertising market for a substantial portion of its revenue.
During 2001, Liberty Livewire consummated several smaller acquisitions
for an aggregate purchase price of $140 million. Increases in Liberty Livewire's
revenue and expenses that are included in our consolidated results of operations
for the year ended December 31, 2001 are due to (i) the inclusion of Liberty
Livewire for a full year in 2001, as compared to six months in 2000 and (ii) the
acquisitions made by Liberty Livewire in 2001.
On a pro forma basis and assuming that all of the 2000 and 2001
acquisitions had been consummated on January 1, 2000, Liberty Livewire's revenue
decreased $33 million or 5% in 2001, as compared to 2000; and expenses decreased
$26 million or 5% in 2001. The decrease in revenue is due to weakness in the
economy in general, and specifically in the entertainment and advertising
industries in 2001. This weakness was magnified by the events of September 11,
2001. We believe that this pro forma discussion provides information that is
useful in analyzing Liberty Livewire's business. However, pro forma operating
results should be considered in addition to, and not as a substitute for, actual
results.
As a result of the weakness in the economy and in the entertainment and
advertising industries discussed above, Liberty Livewire did not meet its 2001
operating objectives and has reduced its 2002 expectations. Accordingly, Liberty
Livewire assessed the recoverability of its property and equipment and
intangible assets and determined that an impairment adjustment was necessary. In
addition, in the fourth quarter, Liberty Livewire made the decision to
consolidate certain of its operations and close certain facilities. In
connection with these initiatives, Liberty Livewire recorded a restructuring
charge related to lease cancellation fees and an additional impairment charge
related to its property and
II-7
equipment. All of the foregoing charges are included in impairment of long-lived
assets in our statement of operations.
On Command. On March 28, 2000, we announced that we had completed our
cash tender offer for the outstanding common stock of Ascent Entertainment
Group, Inc. Approximately 85% of the outstanding shares of common stock of
Ascent were tendered in the offer. On June 8, 2000, we acquired the remaining
15% of Ascent. On Command is a majority owned subsidiary of Ascent. On Command's
principal business is providing pay-per-view entertainment and information
services to hotels, motels and resorts. Upon completion of the tender offer, we
consolidated the operations of On Command.
The increase in On Command's revenue and expenses is due primarily to
having 12 months of operations in our 2001 consolidated results, as compared to
nine months of operations in our 2000 consolidated results. However, for the
full year ended December 31, 2001, On Command experienced a 10% decrease in
revenue and a 5% decrease in operating, selling, general and administrative
expenses. The decrease in revenue is due primarily to a decrease in hotel
occupancy rates in 2001. The lower hotel occupancy rates are attributable to a
decrease in travel due to the events of September 11, 2001, as well as the
downturn in the U.S. economy. Cost control measures instituted in the second
half of 2001 by On Command resulted in the decrease in expenses. As a percentage
of revenue, operating, selling, general and administrative expenses increased
from 72% in 2000 to 76% in 2001 because certain of On Command's content fees and
other room services costs do not vary with revenue or occupancy. Although, no
assurance can be given, On Command anticipates that its cost control measures
will result in improved margins in 2002.
Other. Included in this information are the results of our other
consolidated subsidiaries and corporate expenses.
Revenue increased 22% and decreased 8% in 2001 and 2000, respectively,
as compared to the corresponding prior year. The 2001 increase is attributable
primarily to an increase in revenue at Liberty Digital due to the acquisition of
AEI Network, Inc. in 2001. The 2000 decrease is primarily due to the
deconsolidation of TV Guide on March 1, 1999, which accounted for $97 million of
the decrease. The effect of the deconsolidation of TV Guide was partially offset
by a $12 million increase in revenue at Pramer, a $20 million increase in
revenue at Liberty Digital and a $12 million increase in revenue at other
international subsidiaries. Ascent Network Services, Inc. which was acquired
during March 2000 as part of the Ascent transaction, also contributed $17
million in additional revenue.
Operating, selling, general and administrative expenses increased 51%
and decreased 7% in 2001 and 2000, respectively, as compared to the
corresponding prior year. The increase in 2001 is due primarily to increases in
expenses at Liberty Digital of $54 million and True Position of $30 million. In
addition, we incurred expenses related to our split off from AT&T which
aggregated $11 million, and we incurred higher legal and consulting fees in 2001
related to our transaction with UnitedGlobalCom and our unsuccessful acquisition
of six German cable systems. The 2000 decrease in expenses is primarily due to
the deconsolidation of TV Guide, which accounted for $76 million of the
decrease. The effect of the TV Guide deconsolidation was offset by start up
expenses of $26 million at True Position, Inc. which was acquired on January 14,
2000 as part of the Associated Group transaction, increased expenses of $9
million at each of Pramer and Liberty Digital, and $11 million of expenses
associated with the acquisition of Ascent Network Services.
Depreciation and amortization were comparable over the 2001 and 2000
periods. Depreciation and amortization increased $99 million to $534 million in
2000 from $435 million in 1999. This increase was a result of the effects of
purchase accounting adjustments related to the AT&T Merger and other
acquisitions.
The amount of expense associated with stock compensation is generally
based on the vesting of the related stock options and stock appreciation rights
and the market price of the underlying common stock. The expense reflected in
the table is based on the market price of the underlying common stock as of the
date of the financial statements and is subject to future adjustment based on
market price fluctuations, vesting percentages and, ultimately, on the final
determination of market value when the rights are exercised.
II-8
Other Income and Expense
Interest expense was $525 million, $399 million, $135 million and $26
million for the years ended December 31, 2001 and 2000, the ten month period
ending December 31, 1999 and the two month period ending February 28, 1999,
respectively. The increase in 2001 is due to the issuance of our exchangeable
debentures in 2000 and 2001, as well as the issuance of notes payable to
UnitedGlobalCom in 2001. We repaid these notes payable in late 2001 and early
2002. The increase in interest expense during 2000 was a result of increased
borrowings during the second half of 1999 and the first quarter of 2000.
Dividend and interest income was $272 million, $301 million, $242
million and $10 million for the years ended December 31, 2001 and 2000, the ten
months ended December 31, 1999 and the two months ended February 28, 1999,
respectively. The decrease in 2001 is primarily attributable to lower interest
rates on our invested cash balances, combined with the elimination of Time
Warner dividends subsequent to the merger of Time Warner and AOL. These
decreases were partially offset by interest earned on certain debt securities
that we purchased in the second and third quarter of 2001. The majority of these
debt securities were contributed to UnitedGlobalCom in January 2002. The
increase in dividend and interest income during the year ended December 31, 2000
primarily represents interest earned on our cash and cash equivalents, increased
dividends from investments in News Corp. and Motorola and interest earned on
cash balances at Ascent and Liberty Satellite and Technology, Inc. ("LSAT").
During 2001 and 2000, we determined that certain of our cost
investments experienced other-than temporary ("nontemporary") declines in value.
As a result, the cost bases of such investments were adjusted to their
respective fair values based primarily on recent quoted market prices. These
adjustments are reflected as nontemporary declines in fair value of investments
in the consolidated statements of operations. The following table identifies
such adjustments attributable to each of the individual investments as follows:
Year ended December 31,
-----------------------
Investments 2001 2000
----------- --------- ---------
amounts in millions
AOL Time Warner $ 2,052 --
News Corp. 915 --
Viacom, Inc. ("Viacom") 201 --
United Pan-Europe Communications, N.V 195 --
Antec Corporation 127 --
Motorola 232 1,276
Primedia -- 103
Others 379 84
-------- --------
$ 4,101 1,463
======== ========
We consider a number of factors in our determination of fair value
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 conditions, industry specific or investee specific; (iii)
analysts' ratings and estimates of 12 month share price targets for the
investee; (iv) the length of time that the fair value of the investment is below
our carrying value; and (v) our intent and ability to hold the investment for a
period of time sufficient to allow for a recovery in fair value. In situations
where the fair value of an investment is not evident due to lack of a public
market price or other factors, we use our best estimates and assumptions to
arrive at the estimated fair value of such investment. As our assessment of the
fair value of our investments and any resulting impairment losses requires a
high degree of judgment and includes significant estimates and assumptions,
actual results could differ materially from our estimates and assumptions.
Accordingly, we believe this policy is one of our critical accounting policies.
II-9
Aggregate gains (losses) from dispositions during the years ended
December 31, 2001 and 2000, the ten month period ended December 31, 1999 and the
two month period ended February 28, 1999 were $(310) million, $7,340 million, $4
million and $14 million, respectively. The following table provides information
regarding significant components of gains (losses) from dispositions for the
years ended December 31, 2001 and 2000.
Year ended December 31,
----------------------
Transaction 2001 2000
----------- --------- --------
amounts in millions
Merger of Viacom and BET Holdings II, Inc. $ 559 --
Merger of AOL and Time Warner 253 --
Exchange of our Gemstar common stock for
News Corp. ADSs (965) --
Merger of Motorola and General Instruments -- 2,233
Merger of Telewest and Flextech -- 649
Merger of TV Guide and Gemstar -- 4,391
Other (157) 67
-------- --------
Total $ (310) 7,340
======== ========
In all of the above exchange transactions, the gains or losses were
calculated based upon the difference between the carrying value of the assets
relinquished, as determined on an average cost basis, compared to the fair value
of the assets received.
We recognized a gain on issuance of equity by affiliates and
subsidiaries of $372 million during the two months ended February 28, 1999, in
connection with the acquisition by United Video Satellite Group of the TV Guide
properties. Such gain is included in other, net in the accompanying consolidated
statement of operations. Subsequent to the AT&T Merger, changes in our
proportionate share of the underlying equity of one of our subsidiaries or
equity method investees which result from the issuance of additional equity
securities of such subsidiary or investee are recognized as increases or
decreases in our consolidated statements of stockholders' equity.
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133"), which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. All derivatives,
whether designated in hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated as a fair
value hedge, the changes in the fair value of the derivative and of the hedged
item attributable to the hedged risk are recognized in earnings. If the
derivative is designated as a cash flow hedge, the effective portions of changes
in the fair value of the derivative are recorded in other comprehensive earnings
and are recognized in the statement of operations when the hedged item affects
earnings. Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings. If the derivative is not designated as a hedge,
changes in the fair value of the derivative are recognized in earnings.
We use various derivative instruments including equity collars, put
spread collars, bond swaps and foreign exchange contracts to manage fair value
and cash flow risk associated with many of our investments, some of our variable
rate debt and forecasted transactions to be denominated in foreign currencies.
Each of these derivative instruments is executed with a counterparty, generally
well known major financial institutions. While we believe these derivative
instruments effectively manage the risks highlighted above, they are subject to
counterparty credit risk. Counterparty credit risk is the risk that the
counterparty is unable to perform under the terms of the derivative instrument
upon settlement of the derivative instrument. To protect ourselves against
credit risk associated with these counterparties we:
. Execute our derivative instruments with several different
counterparties, and
. Execute derivative instrument agreements which contain a
provision that requires the counterparty to post the "in the
money" portion of the derivative instrument into a cash
collateral account for our benefit, if the respective
counterparty's credit rating were to reach
II-10
certain levels, generally a rating that is below Standard &
Poor's rating of A- or Moody's rating of A3
Due to the importance of these derivative instruments to our risk
management strategy, we actively monitor the creditworthiness of each of these
counterparties. Based on our analysis, we consider nonperformance by any of our
counterparties to be unlikely.
Our counterparty credit risk by financial institution is summarized
below:
Aggregate fair value
of derivative instruments at
Counterparty December 31, 2001
------------ ------------------------------
amounts in millions
Counterparty A $ 752
Counterparty B 619
Counterparty C 279
Counterparty D 181
Other 232
-----------
$ 2,063
===========
The adoption of Statement 133 on January 1, 2001, resulted in a
cumulative increase in net earnings of $545 million (after tax expense of $356
million) and an increase in other comprehensive loss of $87 million. The
increase in net earnings was mostly attributable to separately recording the
fair value of our embedded call option obligations associated with our senior
exchangeable debentures. The increase in other comprehensive loss relates
primarily to changes in the fair value of our warrants and options to purchase
certain available-for-sale securities.
Realized and unrealized gains on financial instruments for the year
ended December 31, 2001 included a $167 million unrealized gain related to call
option obligations, a $616 million unrealized net loss for changes in the fair
value of derivative instruments related to available-for-sale securities and
other derivatives not designated as hedging instruments, and a $275 million
unrealized net gain for changes in the time value of options for fair value
hedges. During the year ended December 31, 2001, we received cash proceeds of
$329 million as a result of unwinding certain of our equity collars. Pursuant to
Statement 133, the proceeds received less the offsetting impact of hedge
accounting on the underlying securities resulted in $162 million of realized and
unrealized gains on financial instruments in our consolidated statement of
operations for the year ended December 31, 2001.
We use the Black-Scholes model to estimate the fair value of our
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. We select a volatility
rate at the inception of the derivative instrument based on the historical
volatility of the underlying security and on the term of the derivative
instrument. The volatility assumption is generally not changed during the term
of the derivative instrument unless there is an indication that the historical
volatility is no longer appropriate. Considerable management judgment is
required in estimating the Black-Scholes variables. Actual results upon
settlement or unwinding of our derivative instruments may differ materially from
these estimates. Accordingly, we consider accounting for our derivative
instruments to be one of our critical accounting policies.
Prior to the adoption of Statement 133, the carrying amount of the
senior exchangeable debentures was adjusted based on the fair value of the
underlying security. Increases or decreases in the value of the underlying
security above the principal amount of the senior exchangeable debentures were
recorded as unrealized gains or losses on financial instruments in the
consolidated statements of operations. If the value of the underlying security
decreased below the principal amount of the senior exchangeable debentures there
was no effect on the principal amount of the debentures.
Upon adoption of Statement 133, the call option feature of the
exchangeable debentures is reported separately in the consolidated balance sheet
at fair value. Changes in the fair value of the call option obligations
subsequent to January 1, 2001 are recognized as unrealized gains (losses) on
financial instruments in our consolidated statements of operations. During the
year ended December 31, 2001, we recorded unrealized gains of $167 million
related to the call option obligations.
II-11
Investments in Affiliates Accounted for Under the Equity Method
Our share of losses of affiliates was $4,906 million, $3,485 million,
$904 million and $66 million during the years ended December 31, 2001 and 2000,
the ten months ended December 31, 1999 and the two months ended February 28,
1999, respectively. A summary of our share of losses of affiliates, including
nontemporary declines in value and excess cost amortization, is included below:
New Liberty Old Liberty
-------------------------------------------------------- -------------
Percentage Year Year Ten months Two months
Ownership at ended ended ended ended
December 31, December 31, December 31, December 31, February 28,
2001 2001 2000 1999 1999
----------- ----------- ----------- ----------- -----------
amounts in millions
Discovery 50% $ (293) (293) (269) (8)
QVC 42% 36 (12) (11) 13
USAI and related investments 20% 35 (36) (20) 10
UnitedGlobalCom 20% (751) (211) 23 --
Telewest 25% (2,538) (441) (222) (38)
Jupiter Telecommunications Co.,
Ltd. ("Jupiter") 35% (90) (114) (54) (7)
Cablevision S.A. ("Cablevision") 50% (476) (49) (28) (3)
ASTROLINK International LLC
("Astrolink") 32% (417) (8) -- --
Teligent, Inc. ("Teligent") N/A (85) (1,269) -- --
Gemstar N/A (133) (254) -- --
Other Various (194) (798) (323) (33)
---------- ---------- ---------- ----------
$ (4,906) (3,485) (904) (66)
========== ========== ========== ==========
At December 31, 2001, the aggregate carrying amount of our investments
in affiliates exceeded our proportionate share of our affiliates' net assets by
$7,766 million. This excess basis is being amortized over estimated useful lives
of up to 20 years. Such amortization was $798 million, $1,058 million, $463
million and $9 million for the years ended December 31, 2001 and 2000, the ten
months ended December 31, 1999 and the two months ended February 28, 1999,
respectively. Such excess basis amortization is included in our share of losses
of affiliates. Also included in share of losses for the years ended December 31,
2001 and 2000, are adjustments for nontemporary declines in value aggregating
$2,396 million and $1,324 million, respectively. We expect to continue to record
shares of losses in affiliates for the foreseeable future.
Discovery. Our share of Discovery's net loss was $293 million, $293
million, $269 million, and $8 million for the years ended December 31, 2001 and
2000, the ten months ended December 31, 1999 and the two months ended February
28, 1999, respectively. Our share of losses for the years ended December 31,
2001 and 2000 and the ten months ended December 31, 1999, included $188 million,
$187 million and $155 million, respectively, in excess basis amortization.
Exclusive of the excess basis amortization, our share of losses of Discovery was
$105 million, $106 million and $122 million for the years ended December 31,
2001, 2000 and 1999, respectively. The reduction in Discovery's 2000 net loss
was the net effect of lower operating expenses as Discovery cut back on its
online initiatives partially offset by increased interest expense.
QVC. Our share of QVC's net earnings (loss) was $36 million, $(12)
million, $(11) million and $13 million for the years ended December 31, 2001 and
2000, the ten months ended December 31, 1999 and the two months ended February
28, 1999, respectively, including excess basis amortization of $110 million,
$110 million and $92 million, respectively. Excluding the effect of excess basis
amortization, our share of QVC's earnings was $146 million, $98 million and $94
million in 2001, 2000 and 1999, respectively. The increase in QVC's net income
in 2001 and 2000 principally resulted from increased revenue and operating
margins at QVC's domestic operations.
II-12
USA Networks, Inc. Our share of USA Networks, Inc.'s net earnings
(loss) was $35 million, $(36) million, $(20) million and $10 million for the
years ended December 31, 2001 and 2000, the ten month period ended December 31,
1999 and the two month period ended February 28, 1999, respectively. Our share
of losses for the years ended December 31, 2001 and 2000 and the ten months
ended December 31, 1999, included $64 million, $64 million and $53 million,
respectively, in excess basis amortization. Exclusive of the excess basis
amortization, our share of earnings of USA Networks was $99 million, $28 million
and $43 million for the years ended December 31, 2001, 2000 and 1999,
respectively. Such increase in 2001 is due to USA Networks' increased operating
income and gains from dispositions of assets.
UnitedGlobalCom. Our share of UnitedGlobalCom's net earnings (loss) was
$(751) million, $(211) million and $23 million for the years ended December 31,
2001 and 2000 and for the ten months ended December 31, 1999, respectively. Our
share of UnitedGlobalCom's operations included $51 million, $46 million and $6
million in excess basis amortization for the years ended December 31, 2001 and
2000 and the ten months ended December 31, 1999, respectively. Exclusive of the
excess basis amortization, our share of earnings (losses) of UnitedGlobalCom was
$(700) million, $(165) million and $29 million for the years ended December 31,
2001, 2000 and 1999, respectively. The increased loss in 2001 is due to charges
recorded by UnitedGlobalCom for impairment of long-lived assets, which
aggregated $1,426 million. In addition, UnitedGlobalCom incurred higher
depreciation charges and interest expense in 2001, and recognized impairment
losses on certain of its investments. Our recorded share of earnings in 1999 was
due to gains that UnitedGlobalCom recorded during the fourth quarter of 1999
resulting from sales of investments in affiliates. Such gains recorded by
UnitedGlobalCom in 1999 were non-recurring.
Telewest. Our share of Telewest's net losses was $2,538 million, $441
million, $222 million and $38 million for the years ended December 31, 2001 and
2000, the ten month period ended December 31, 1999 and the two month period
ended February 28, 1999, respectively. Our share of losses for the years ended
December 31, 2001 and 2000 and the ten month period ended December 31, 1999
includes $109 million, $164 million and $73 million, respectively, in excess
basis amortization. During the year ended December 31, 2001, we determined that
our investment in Telewest experienced a nontemporary decline in value. As a
result, the carrying value of Telewest was adjusted to its estimated fair value,
and we recorded an impairment charge of $1,801 million. Such charge is included
in share of losses of affiliates. Excluding the effects of excess basis
amortization and the nontemporary decline in value adjustment, our share of
Telewest's losses were $628 million, $277 million and $187 million in 2001, 2000
and 1999, respectively. Telewest's net loss increased in 2001 primarily due to a
charge of $1,112 million related to the impairment of Telewest's long-lived
assets recorded in the fourth quarter.
Cablevision. Cablevision provides cable television and high speed data
services in Argentina. The Argentine government has historically maintained an
exchange rate of one Argentine peso to one U.S. dollar (the "peg rate"). Due to
deteriorating economic and political conditions in Argentina in late 2001, the
Argentine government eliminated the peg rate effective January 11, 2002. The
value of the Argentine peso dropped significantly on the day the peg rate was
eliminated and has dropped further since that date. In addition, the Argentine
government placed restrictions on the payment of obligations to foreign
creditors. As a result of the devaluation of the Argentine peso, Cablevision
recorded foreign currency translation losses of $393 million in the fourth
quarter of 2001. At December 31, 2001, we determined that our investment in
Cablevision had experienced a nontemporary decline in value, and accordingly,
recorded an impairment charge of $195 million. Such charge is included in shares
of losses of affiliates. Our share of losses in 2001, when combined with foreign
currency translation losses recorded in other comprehensive loss at December 31,
2001, reduced the carrying value of our investment to zero as of December 31,
2001. Included in accumulated other comprehensive earnings at December 31, 2001,
is $257 million of unrealized foreign currency translation losses related to our
investment in Cablevision.
Astrolink. Astrolink, a developmental stage entity, originally intended
to build a global telecom network using Ka-band geostationary satellites to
provide broadband data communications services. Astrolink's original business
plan required significant additional financing over the next several years.
During the fourth quarter of 2001, two of the members of Astrolink informed
Astrolink that they do not intend to provide any of Astrolink's required
financing. In light of this decision, Astrolink is considering several
alternatives with respect to its proposed business plan, including, but not
limited to, seeking alternative funding sources, scaling back their proposed
business plan, and liquidating the venture
II-13
entirely. There can be no assurance that Astrolink will be able to obtain the
necessary financing on acceptable terms, or that it will be able to fulfill the
business plan as originally proposed, or at all.
During the second quarter of 2001, we determined that our investment in
Astrolink experienced a nontemporary decline in value. Accordingly, the carrying
amount of such investment was adjusted to its then estimated fair value
resulting in a recognized loss of $155 million. Such loss is included in share
of losses of affiliates. Based on a fourth quarter 2001 assessment of
Astrolink's remaining sources of liquidity and Astrolink's inability to obtain
financing for its business plan, we concluded that the carrying value of our
investment in Astrolink should be further reduced to reflect a fair value that
assumes the liquidation of Astrolink. Accordingly, we wrote-off all of our
remaining investment in Astrolink during the fourth quarter of 2001. The
aggregate amount required to reduce our investment in Astrolink to zero was $250
million. Including such fourth quarter amount, we recorded losses and charges
relating to our investment in Astrolink aggregating $417 million during the year
ended December 31, 2001.
Teligent. In January 2000, we acquired a 40% equity interest in
Teligent, a full-service facilities based communications company through our
acquisition of Associated Group, Inc. During the year ended December 31, 2000,
we determined that our investment in Teligent experienced a nontemporary decline
in value. As a result, the carrying amount of this investment was adjusted to
its estimated fair value resulting in a charge of $839 million. The balance of
our share of loss results from recording our 40% share of their net loss for the
year 2000. This impairment charge is included in share of losses of affiliates.
In April 2001, we exchanged our investment in Teligent for shares of IDT
Investments, Inc., a subsidiary of IDT Corporation. As the fair value of the
consideration received in the exchange approximated the carrying value of our
inves tment in Teligent, no gain or loss was recognized on the transaction.
Gemstar. On July 12, 2000, TV Guide and Gemstar completed a merger
whereby Gemstar acquired TV Guide. As a result of this transaction, 133 million
shares of TV Guide held by us were exchanged for 87.5 million shares of Gemstar
common stock. Following the merger, we owned approximately 21% of Gemstar. Our
share of Gemstar's net loss was $254 million from the date of acquisition
through December 31, 2000 and included excess basis amortization of $199
million.
During 2001, we exchanged all of our Gemstar common stock for American
Depositary Shares of News Corp. We recorded share of losses of $133 million
prior to such exchange.
Liquidity and Capital Resources
Although our sources of funds include our available cash balances, net
cash from operating activities, dividend and interest receipts, and proceeds
from asset sales, we are primarily dependent upon our financing activities to
generate sufficient cash resources to meet our future cash requirements and
planned commitments. Our borrowings of debt aggregated $2,667 million, $4,597
million, $3,187 million and $155 million for the years ended December 31, 2001
and 2000, the ten months ended December 31, 1999 and the two months ended
February 28, 1999. Due to covenant restrictions in the bank credit facilities of
our subsidiaries, we are generally not entitled to the cash resources or cash
generated by operations of our subsidiaries and business affiliates.
In January 2001, we received net cash proceeds of $588 million (after
underwriter fees of $12 million) from the issuance of our 3-1/2% senior
exchangeable debentures due 2031. These debentures are exchangeable, at the
option of the holder, for the value of 36.8189 shares of Motorola stock. We may
pay such value in cash, with a number of shares of Motorola stock or a
combination of cash and stock, as determined in the debentures.
In March 2001, we received net cash proceeds of $801 million (after
underwriter fees of $17 million) from the issuance of our 3-1/4% senior
exchangeable debentures due 2031. These debentures are exchangeable, at the
option of the holder, for the value of 18.5666 shares of Viacom stock. We may
pay such value in cash, with a number of shares of Viacom stock or a combination
of cash and stock, as determined in the debentures.
In December 2001, we issued $237.8 million of 7-3/4% Senior Notes due
2009 for cash proceeds of $238.4 million. We used such cash proceeds to repay a
portion of our notes payable to UnitedGlobalCom.
II-14
Prior to the Split Off Transaction, we were entitled to the benefit of
all of the net operating loss carryforwards available to the entities included
in TCI's consolidated income tax return as of the date of the AT&T merger. In
addition, under the tax sharing agreement with AT&T, we received a cash payment
from AT&T in periods when we generated taxable losses and those taxable losses
were utilized by AT&T to reduce the consolidated income tax liability.
Subsequent to the Split Off Transaction, we are no longer entitled to such cash
payments.
In connection with the Split Off Transaction, we have also been
deconsolidated from AT&T for federal income tax purposes. As a result, AT&T was
required to pay us an amount equal to 35% of the amount of the net operating
loss carryforward reflected in TCI's final federal income tax return that has
not been used as an offset to our obligations under the AT&T Tax Sharing
Agreement and that has been, or is reasonably expected to be, utilized by AT&T.
The $803 million payment was received by us prior to the Split Off Transaction
and has been reflected as an increase to additional paid-in-capital in the
accompanying consolidated statement of stockholders' equity. In addition,
certain deferred intercompany gains will be includible in AT&T's taxable income
as a result of the Split Off Transaction, and AT&T will be entitled to
reimbursement from us for the resulting tax liability of approximately $115
million. Such tax liability has been accrued as of December 31, 2001 and has
been reflected as a reduction in additional paid-in-capital in the accompanying
consolidated statement of stockholders' equity.
AT&T, as the successor to TCI, is the subject of an Internal Revenue
Service ("IRS") audit for the 1993-1995 tax years. The IRS has notified AT&T and
us that it is considering proposing income adjustments and assessing certain
penalties in connection with TCI's 1994 tax return. The IRS's position could
result in recognition of up to approximately $305 million of additional income,
resulting in as much as $107 million of additional tax liability, plus interest.
In addition, the IRS may assert certain penalties. AT&T and we do not agree with
the IRS's proposed adjustments and penalties, and AT&T and we intend to
vigorously defend our position. Pursuant to the AT&T Tax Sharing Agreement, we
may be obligated to reimburse AT&T for any tax that is ultimately assessed as a
result of this audit. We are currently unable to estimate a range of any such
reimbursement, but we believe that any such reimbursement would not be material
to our financial position.
In connection with the private letter ruling received by AT&T with
respect to the tax consequences of the Split Off Transaction, we represented to
the Internal Revenue Service that, within one year following the Split Off
Transaction, we will issue, subject to market and business conditions, at least
$250 million to $500 million of equity for cash or other assets, and, within two
years following the Split Off Transaction, we will issue at least $500 million
to $1 billion of equity (including any equity issued during the first year) for
cash or other assets. During the period from August 10, 2001 to December 31,
2001, we did not issue any common stock.
Our primary uses of cash in recent years have been investments in and
advances to affiliates and acquisitions of consolidated subsidiaries. In this
regard, our investments in and advances to cost and equity method affiliates
aggregated $2,579 million, $3,359 million, $2,596 million, and $51 million for
the years ended December 31, 2001 and 2000, the ten months ended December 31,
1999 and the two months ended February 28, 1999, respectively. Our cash paid for
acquisitions aggregated $113 million, $735 million and $109 million for the
years ended December 31, 2001 and 2000 and the ten months ended December 31,
1999, respectively. In addition, we had debt repayments of $1,048 million,
$2,156 million, $2,211 million, and $145 million during the years ended December
31, 2001 and 2000, the ten months ended December 31, 1999 and the two months
ended February 28, 1999, respectively.
We anticipate that we will continue to fund our existing investees as
they develop and expand their businesses, and that such investments and advances
to affiliates will aggregate $1.0 to $1.5 billion in 2002. Although we may
invest additional amounts in new or existing ventures in 2002, we are unable to
quantify such investments at this time. In addition, we have $1,143 million of
debt that is required to be repaid or refinanced in 2002. We intend to fund such
investing and financing activities with a combination of available cash and
short term investments, borrowings under existing credit facilities,
monetization of existing marketable securities, proceeds from the sale of
assets, and the issuance of debt and equity securities.
At December 31, 2001, we and our consolidated subsidiaries had bank
credit facilities which provided for borrowings of up to $2,202 million.
Borrowings under these facilities of $1,985 million were outstanding at December
31, 2001. Certain assets of our consolidated subsidiaries serve as collateral
for
II-15
borrowings under these bank credit facilities. Also, these bank credit
facilities contain provisions which limit additional indebtedness, sale of
assets, liens, guarantees, and distributions by the borrowers.
Based on currently available information and expected future
transactions, we expect to receive approximately $180 million in dividend and
interest income during the year ended December 31, 2002. Based on current debt
levels and current interest rates, we expect to make interest payments of
approximately $400 million during the year ended December 31, 2002.
Various partnerships and other affiliates of ours accounted for using
the equity method finance a substantial portion of their acquisitions and
capital expenditures through borrowings under their own credit facilities and
net cash provided by their operating activities. Notwithstanding the foregoing,
certain of our affiliates may require additional capital to finance their
operating or investing activities. In addition, we are party to stockholder and
partnership agreements that provide for possible capital calls on stockholders
and partners. In the event our affiliates require additional financing and we
fail to meet a capital call, or other commitment to provide capital or loans to
a particular company, such failure 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.
Pursuant to a proposed final judgment agreed to by TCI, AT&T and the
United States Department of Justice on December 30, 1998, we transferred all of
our beneficially owned securities of Sprint PCS to a trustee prior to the AT&T
merger. The Final Judgment, which was entered by the United States District
Court for the District of Columbia on August 23, 1999, requires the Trustee, on
or before May 23, 2002, to dispose of a portion of the Sprint PCS Group common
stock held by the trust sufficient to cause us to beneficially own no more than
10% of the outstanding Sprint PCS Group common stock-Series 1 on a fully diluted
basis on such date. On or before May 23, 2004, the trustee must divest the
remainder of the Sprint securities beneficially owned by us. At our request, the
Department of Justice has joined us and AT&T in a joint motion to terminate the
Final Judgment which was filed in the District Court in February 2002. Under the
terms of the Final Judgement, the obligation of the trustee to dispose of the
first tranche of shares by May 23, 2002 will be stayed while the District Court
considers the joint motion. We are also seeking the approval of the Federal
Communications Commission to the stay of the Trustee's obligation to dispose of
the first tranche of shares pending the District Court's determination of the
joint motion.
On January 30, 2002, we completed a transaction with UnitedGlobalCom
(the "New United Transaction") pursuant to which a new holding company ("New
United") was formed to own UnitedGlobalCom, and all shares of UnitedGlobalCom
common stock were exchanged for shares of common stock of New United. In
addition, we contributed (i) cash consideration of $200 million; (ii) a note
receivable from Belmarken Holding B.V., a subsidiary of UnitedGlobalCom, with an
accreted value of $892 million and (iii) Senior Notes and Senior Discount Notes
of United-Pan Europe Communications N.V., a subsidiary of UnitedGlobalCom,
comprised of U.S. dollar denominated notes with a face amount of $1,435 million
and euro denominated notes with a face amount of euro 263 million, which we
acquired in the fourth quarter of 2001, to New United in exchange for 281.3
million shares of Class C common stock of New United. Upon consummation of the
New United transaction, we own an approximate 72% economic interest and a 94%
voting interest in New United. Pursuant to certain voting and standstill
arrangements entered into at the time of closing, we are unable to exercise
control of New United, and accordingly, we will continue to use the equity
method of accounting for our investment.
Also on January 30, 2002, New United acquired from us our debt and
equity interests in IDT United, Inc. and $751 million principal amount at
maturity of UnitedGlobalCom's $1,375 million 10-3/4% senior secured discount
notes due 2008 (the "2008 Notes"), which had been distributed to us in
redemption of a portion of our interest in IDT United. IDT United was formed as
an indirect subsidiary of IDT Corporation for purposes of effecting a tender
offer for all outstanding 2008 Notes at a purchase price of $400 per $1,000
principal amount at maturity, which tender offer expired on February 1, 2002.
The aggregate purchase price for our interest in IDT United of $449 million
equaled the aggregate amount we had invested in IDT United, plus interest.
Approximately $305 million of the purchase paid was paid by the assumption by
New United of debt owed by us to a subsidiary of UnitedGlobalCom and the
remainder was credited against the $200 million cash contribution by us to New
United described above. In connection with the
II-16
New United Transaction, one of our subsidiaries agreed to loan to a subsidiary
of New United up to $105 million. As of February 28, 2002, such subsidiary of
New United has borrowed $103 million from our subsidiary to acquire additional
shares of preferred stock and promissory notes issued by IDT United. The 2008
Notes owned by IDT United, together with 2008 Notes acquired by New United
directly from us referred to above, all of which remain outstanding, represent
approximately 98.2% of the outstanding 2008 Notes.
UnitedGlobalCom and its significant operating subsidiaries have
incurred losses since their formation, as they have attempted to expand and
develop their businesses and introduce new services. In November 2001, United
Australia/Pacific, Inc. ("UAP"), a 50% owned affiliate of UnitedGlobalCom,
failed to make interest payments on certain of its senior notes. Following such
default, the trustee of the Indenture for UAP's senior notes declared the
principal and interest due and payable. In February 2002, United Pan-Europe
Communications N.V. ("UPC"), a majority-owned consolidated subsidiary of
UnitedGlobalCom, failed to make required interest payments on certain of its
senior notes. Both UAP and UPC are negotiating the restructuring of their
respective debt instruments. No assurance can be given that such negotiations
will be successful. In addition, certain other UnitedGlobalCom subsidiaries do
not have sufficient working capital to service their debt or other liabilities
when due during the next year. As a result of the foregoing, there is
substantial doubt about UnitedGlobalCom's ability to continue as a going
concern. UnitedGlobalCom's management is taking steps to address these matters.
However, no assurance can be given that such steps will be successful.
We have guaranteed $619 million of the bank debt of Jupiter, an equity
affiliate that provides broadband services in Japan. Approximately $343 million
of such guaranteed amount is due and payable by Jupiter during the first quarter
of 2002. Jupiter is currently negotiating the refinancing of substantially all
of its long-term and short-term debt. We anticipate that we and the other
Jupiter shareholders will make equity contributions to Jupiter in connection
with such refinancing, and that our share of such equity contributions will be
approximately $450 million. Upon such refinancing, we anticipate that our
guarantee of Jupiter debt would be cancelled.
We have also guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain other
affiliates. At December 31, 2001, the Guaranteed Obligations aggregated
approximately $170 million. Currently, we are not certain of the likelihood of
being required to perform under such guarantees.
Information concerning the amount and timing of required payments under
our contractual obligations is summarized below:
Payments due by period
--------------------- ----------------------------------------------
Less than After
1 year 1-3 years 4-5 years 5 years Total
----------- ----------- ---------- ------------ ------------
Contractual obligation amounts in millions
----------------------
Long-term debt (1) $ 1,143 332 1,024 5,665 8,164
Operating lease obligations 70 115 71 115 371
Film Licensing Obligations (2) 405 378 191 388 1,362
----------- ----------- ---------- ------------ ------------
Total contractual payments $ 1,618 825 1,286 6,168 9,897
=========== =========== ========== ============ ============
--------------------
(1) Includes all debt instruments, including the call option feature
related to our exchangeable debentures. Amounts are stated at the face
amount at maturity and may differ from the amounts stated in our
consolidated balance sheet to the extent debt instruments (i) were
issued at a discount or premium or (ii) are reported at fair value in
our consolidated balance sheet. Also includes capital lease
obligations.
(2) Starz Encore Group is obligated to pay fees for the rights to exhibit
certain films that are released by various producers through 2014. The
amounts in the table represent the minimum obligation based on the
number of Starz Encore subscribers at December 31, 2001. The amount of
the total obligation is not currently estimable because such amount is
dependent upon the number
II-17
of qualifying films released theatrically by certain motion picture
studios as well as the domestic theatrical exhibition receipts upon the
release of such qualifying films.
We have contingent liabilities related to legal proceedings and other
matters arising in the ordinary course of business. Although it is reasonably
possible we 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.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 141, Business Combinations ("Statement 141"), and Statement
No. 142, Goodwill and Other Intangible Assets ("Statement 142"). Statement 141
requires that the purchase method of accounting be used for all business
combinations. Statement 141 also specifies criteria that intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. Statement 142 will require that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that intangible
assets with estimable useful lives be amortized over their respective estimated
useful lives to their estimated residual values, and reviewed for impairment in
accordance with SFAS Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
We adopted the provisions of Statement 141 effective July 1, 2001, and
are required to adopt Statement 142 effective January 1, 2002.
Statement 141 requires upon adoption of Statement 142, that we evaluate
our existing intangible assets and goodwill that were acquired in prior purchase
business combinations, and to make any necessary reclassifications in order to
conform with the new criteria in Statement 141 for recognition apart from
goodwill. Upon adoption of Statement 142, we will be required to reassess the
useful lives and residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by the end of the first interim period
after adoption. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, we will be required to test the intangible
asset for impairment in accordance with the provisions of Statement 142 within
the first interim period. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment
evaluation, Statement 142 will require us to perform an assessment of whether
there is an indication that goodwill and equity-method goodwill is impaired as
of the date of adoption. To accomplish this, we must identify our reporting
units and determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible assets,
to those reporting units as of the date of adoption. We will then have up to six
months from the date of adoption to determine the fair value of each reporting
unit and compare it to the reporting unit's carrying amount. To the extent a
reporting unit's carrying amount exceeds its fair value, an indication exists
that the reporting unit's goodwill may be impaired and we must perform the
second step of the transitional impairment test. In the second step, we must
compare the implied fair value of the reporting unit's goodwill, determined by
allocating the reporting unit's fair value to all of its assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with Statement 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in our statement of operations.
As of the date of adoption, we will have unamortized goodwill in the
amount of $9,191 million, unamortized identifiable intangible assets in the
amount of $831 million, and unamortized equity-method excess costs in the amount
of $7,766 million, all of which will be subject to the transition provisions of
Statements 141 and 142. Amortization expense related to goodwill was $617
million and $587 million for the years ended December 31, 2001 and 2000,
respectively; and amortization of equity-method excess costs (included in share
of losses of affiliates) aggregated $798 million and $1,058 million for the
years ended December 31, 2001 and 2000, respectively. We currently estimate that
upon adoption of
II-18
Statement 142, we will be required to recognize a $1.5 - $2.0 billion
transitional impairment loss as the cumulative effect of a change in accounting
principle. The foregoing estimate does not include an adjustment for our
proportionate share of any transition adjustments that our equity method
affiliates may record, as we are currently unable to estimate the amount of such
adjustment.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets," which addresses financial accounting and reporting for the impairment
or disposal of long-lived assets. This statement supercedes prior statements
that address the disposal of a segment of a business, and eliminates the
exception to consolidation for subsidiaries for which control is likely to be
temporary. This statement retains the prior statement's fundamental provisions
for the recognition and measurement of impairment of long-lived assets to be
held and used, as well as the measurement of long-lived assets to be disposed of
by sale. The statement is effective for fiscal years beginning after December
15, 2001. We have not determined the impact that adoption of this statement will
have on its financial position, results of operations or cash flow.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
-------- -----------------------------------------------------------
We are exposed to market risk in the normal course of business due to
our investments in different foreign countries and ongoing investing and
financial activities. Market risk refers to the risk of loss arising from
adverse changes in foreign currency exchange rates, interest rates and stock
prices. The risk of loss can be assessed from the perspective of adverse changes
in fair values, cash flows and future earnings. We have established policies,
procedures and internal processes governing our management of market risks and
the use of financial instruments to manage our exposure to such risks.
Investments in and advances to our foreign affiliates are denominated
in foreign currencies. Therefore, we are exposed to changes in foreign currency
exchange rates. We do not hedge the majority of our foreign currency exchange
risk because of the long-term nature of our interests in foreign affiliates.
During 2001, we entered into a definitive agreement to acquire six regional
cable television systems in Germany. A portion of the consideration for such
acquisition was to be denominated in euros. In order to reduce our exposure to
changes in the euro exchange rate, we had entered into forward purchase
contracts with respect to euro 3,243 million as of December 31, 2001. Such
contracts generally have terms ranging from 90 to 120 days and can be renewed at
their expiration at our option. At December 31, 2001, we had recorded a
liability of $24 million representing unrealized losses related to these
contracts. In February 2002, we failed to receive regulatory approval for our
proposed German cable acquisition. From time to time we evaluate potential
European acquisitions that may require euro currency, and accordingly, we
currently intend to renew our euro forward purchase contracts in order to limit
our exposure to increases in the euro exchange rate. We may also choose to
settle certain of our euro forward purchase contracts depending on the value of
the euro. No assurance can be given regarding the future value of the euro, and
we continue to be subject to risk of further devaluation of the euro. If the
price of the euro had been 10% lower at December 31, 2001, we would have
recognized an unrealized loss on financial instruments of $289 million. We
continually evaluate our foreign currency exposure based on current market
conditions and the business environment in each country in which we operate.
We are exposed to changes in interest rates primarily as a result of
our borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this appropriate
mix by (i) issuing fixed rate debt that we believe has a low stated interest
rate and significant term to maturity and (ii) issuing short-term variable rate
debt to take advantage of historically low short-term interest rates. As of
December 31, 2001, $3,727 million or 63% of our debt was composed of fixed rate
debt with a weighted average stated interest rate of 5.8%. Our variable rate
debt of $2,180 million had a weighted average interest rate of 3.8% at December
31, 2001. Had market interest rates been 100 basis points higher (representing
an approximate 26% increase over our variable rate debt effective cost of
borrowing) throughout the year ended December 31, 2001, we would have recognized
approximately $19 million of additional interest expense. Had the price of the
securities underlying the call option obligations associated with our senior
exchangeable debentures been 10% higher during the year ended
II-19
December 31, 2001, we would have recognized an additional unrealized loss on
financial instruments of $165 million.
We are exposed to changes in stock prices primarily as a result of our
significant holdings in publicly traded securities. We continually monitor
changes in stock markets, in general, and specifically changes in the stock
prices of our holdings. We believe that changes in stock prices can be expected
to vary as a result of general market conditions, technological changes,
specific industry changes and other factors. We use equity collars, put spread
collars and other financial instruments to manage market risk associated with
certain investment positions. These instruments are recorded at fair value based
on option pricing models. Equity collars provide us with a put option that gives
us the right to require the counterparty to purchase a specified number of
shares of the underlying security at a specified price (the "Company Put Price")
at a specified date in the future. Equity collars also provide the counterparty
with a call option that gives the counterparty the right to purchase the same
securities at a specified price at a specified date in the future. The put
option and the call option generally are equally priced at the time of
origination resulting in no cash receipts or payments. Our equity collars are
accounted for as fair value hedges.
Put spread collars provide us and the counterparty with put and call
options similar to equity collars. In addition, put spread collars provide the
counterparty with a put option that gives it the right to require us to purchase
the underlying securities at a price that is lower than the Company Put Price.
The inclusion of the secondary put option allows us to secure a higher call
option price while maintaining net zero cost to enter into the collar. However,
the inclusion of the secondary put exposes us to market risk if the underlying
security trades below the put spread price. Our put spread collars have not been
designated as fair value hedges.
The following table provides information regarding our equity and put
spread collars at December 31, 2001:
No. of Weighted Weighted Weighted Weighted
underlying average average average average
Type of shares put spread put price call price years to
Security collar (000's) price per share per share per share maturity
---------------- --------------- ------------- ----------------- ------------- ------------- -----------
AOL Equity collar 36,100 N/A $ 47 $ 96 3.6
AOL Put spread 21,538 $ 28 $ 49 $ 118 3.2
Sprint PCS Equity collar 156,506 N/A $ 26 $ 41 6.2
News Corp. Equity collar 5,000 N/A $ 45 $ 85 3.2
News Corp. Put spread 6,916 $ 20 $ 33 $ 79 3.8
Motorola Equity collar 67,624 N/A $ 24 $ 44 2.1
Cendant Equity collar 26,357 N/A $ 19 $ 33 3.4
Priceline Equity collar 3,125 N/A $ 37 $ 92 3.5
At December 31, 2001, the fair value of the securities underlying the
equity and put spread collars in the foregoing table was $7,536 million,
(excluding the fair value of the related equity and put spread collars) and the
total value of our available-for-sale equity securities was $19,537 million. Had
the market price of our unhedged available-for-sale securities been 10% lower at
December 31, 2001, the aggregate value of such securities would have been $1,200
million lower resulting in an increase to unrealized losses in other
comprehensive earnings.
Had the stock price of our publicly traded investments accounted for
using the equity method been 10% lower at December 31, 2001, there would have
been no impact on the carrying value of such investments.
From time to time we enter into total return debt swaps in connection
with our purchase of our own or third-party public and private indebtedness.
Under these arrangements, we direct a counterparty to purchase a specified
amount of the underlying debentures for our benefit. We post collateral with the
counterparty equal to 10% of the value of the purchased securities We earn
interest income based upon the face amount and stated interest rate of the debt
securities, and we pay interest expense at market rates on the amount funded by
the counterparty. In the event the fair value of the underlying debentures
declines, we are required to post cash collateral for the decline, and we record
an unrealized loss on financial instruments. At December 31, 2001, the aggregate
purchase price of debt securities underlying
II-20
total return debt swap arrangements was $118 million. As of such date, we had
posted cash collateral equal to $59 million. In the event the fair value of the
purchased debt securities were to fall to zero, we would be required to post
additional cash collateral of $59 million.
We measure the effectiveness of our derivative financial instruments
through comparison of the blended rates achieved by those derivative financial
instruments to the historical trends in the underlying market risk hedged. With
regard to interest rate swaps, we monitor the fair value of interest rate swaps
as well as the effective interest rate the interest rate swap yields, in
comparison to historical interest rate trends. We believe that any losses
incurred with regard to interest rate swaps would be offset by the effects of
interest rate movements on the underlying hedged facilities. With regard to
equity collars, we monitor historical market trends relative to values currently
present in the market. We believe that any unrealized losses incurred with
regard to equity collars and swaps would be offset by the effects of fair value
changes on the underlying assets. These measures allow our management to measure
the success of its use of derivative instruments and to determine when to enter
into or exit from derivative instruments.
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
The consolidated financial statements of Liberty Media Corporation are
filed under this Item, beginning on Page II-22. The financial statement
schedules required by Regulation S-X are filed under Item 14 of this Annual
Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
------ ---------------------------------------------------------------
Financial Disclosure.
---------------------
None.
II-21
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Directors and Stockholder
Liberty Media Corporation:
We have audited the accompanying consolidated balance sheets of Liberty Media
Corporation and subsidiaries ("New Liberty" or "Successor") as of December 31,
2001 and 2000, and the related consolidated statements of operations,
comprehensive earnings, stockholders' equity, and cash flows for the years ended
December 31, 2001 and 2000 and the period from March 1, 1999 to December 31,
1999 (Successor periods) and from January 1, 1999 to February 28, 1999
(Predecessor period). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the aforementioned Successor consolidated financial statements
present fairly, in all material respects, the financial position of New Liberty
as of December 31, 2001 and 2000, and the results of their operations and their
cash flows for the Successor periods, in conformity with accounting principles
generally accepted in the United States of America. Further, in our opinion, the
aforementioned Predecessor consolidated financial statements present fairly, in
all material respects, the results of their operations and their cash flows for
the Predecessor period, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in notes 3 and 8 to the consolidated financial statements, the
Company changed its method of accounting for derivative instruments and hedging
activities in 2001.
As discussed in note 1 to the consolidated financial statements, effective March
9, 1999, AT&T Corp., the former parent company of New Liberty, acquired
Tele-Communications, Inc., the former parent company of Liberty Media
Corporation, in a business combination accounted for as a purchase. As a result
of the acquisition, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
KPMG LLP
Denver, Colorado
March 8, 2002
II-22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000 *
-------- --------
amounts in millions
Assets
Current assets:
Cash and cash equivalents $ 2,077 1,295
Short-term investments 397 500
Trade and other receivables, net 356 307
Prepaid expenses and program rights 352 283
Deferred income tax assets (note 9) 311 242
Other current assets 38 73
-------- --------
Total current assets 3,531 2,700
-------- --------
Investments in affiliates, accounted for using the
equity method, and related receivables (note 5) 10,076 20,464
Investments in available-for-sale securities and
other cost investments (note 6) 23,544 19,035
Property and equipment, at cost 1,190 976
Accumulated depreciation (249) (131)
-------- --------
941 845
-------- --------
Intangible assets:
Excess cost over acquired net assets 10,752 10,896
Franchise costs 190 190
-------- --------
10,942 11,086
Accumulated amortization (1,588) (998)
-------- --------
9,354 10,088
-------- --------
Other assets, at cost, net of accumulated amortization 1,093 1,136
-------- --------
Total assets $ 48,539 54,268
======== ========
(continued)
II-23
LIBERTY MEDIA CORPORATION AND SUBIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
2001 2000 *
-------- --------
amounts in millions
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 127 148
Accrued interest payable 159 105
Other accrued liabilities 278 401
Accrued stock compensation (note 11) 833 1,216
Program rights payable 240 179
Current portion of debt 1,143 1,094
-------- --------
Total current liabilities 2,780 3,143
-------- --------
Long-term debt (note 8) 4,764 5,269
Call option obligations (note 8) 1,320 --
Deferred income tax liabilities (note 9) 8,977 11,337
Other liabilities 442 62
-------- --------
Total liabilities 18,283 19,811
-------- --------
Minority interests in equity of subsidiaries 133 348
Stockholders' equity (note 10):
Preferred stock, $.01 par value. Authorized
50,000,000 shares; no shares issued and
outstanding -- --
Series A common stock $.01 par value. Authorized
4,000,000,000 shares; issued and outstanding
2,378,127,544 shares at December 31, 2001 24 --
Series B common stock $.01 par value. Authorized
400,000,000 shares; issued and outstanding
212,045,288 shares at December 31, 2001 2 --
Additional paid-in capital 35,996 35,042
Accumulated other comprehensive earnings (loss),
net of taxes (note 13) 840 (397)
Accumulated deficit (6,739) (536)
-------- --------
Total stockholders' equity 30,123 34,109
-------- --------
Commitments and contingencies (note 14)
Total liabilities and stockholders' equity $ 48,539 54,268
======== ========
---------------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
II-24
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
New Liberty Old Liberty
------------------------------------------ ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 * 1999 * 1999
------------ ------------ ------------ ------------
amounts in millions
(note 2)
Revenue:
Unaffiliated parties $ 1,849 1,283 549 192
Related parties (note 10) 210 243 180 43
---------- ---------- ---------- ----------
2,059 1,526 729 235
---------- ---------- ---------- ----------
Operating costs and expenses:
Operating 1,089 801 343 95
Selling, general and administrative ("SG&A") 573 348 229 87
Charges from related parties (note 10) 20 37 24 6
Stock compensation-SG&A (note 11) 132 (950) 1,785 183
Depreciation 209 122 19 7
Amortization 775 732 543 15
Impairment of long-lived assets (note 3) 388 -- -- --
---------- ---------- ---------- ----------
3,186 1,090 2,943 393
---------- ---------- ---------- ----------
Operating income (loss) (1,127) 436 (2,214) (158)
Other income (expense):
Interest expense (525) (399) (135) (26)
Dividend and interest income 272 301 242 10
Share of losses of affiliates, net (note 5) (4,906) (3,485) (904) (66)
Nontemporary declines in fair value of
investments (note 6) (4,101) (1,463) -- --
Realized and unrealized gains (losses) on
financial instruments, net (note 3) (174) 223 (153) --
Gains (losses) on dispositions, net (notes 5
and 6) (310) 7,340 4 14
Other, net (11) 3 (4) 363
---------- ---------- ---------- ----------
(9,755) 2,520 (950) 295
---------- ---------- ---------- ----------
Earnings (loss) before income taxes and
minority interest (10,882) 2,956 (3,164) 137
Income tax benefit (expense) (note 9) 3,908 (1,534) 1,097 (211)
Minority interests in losses of subsidiaries 226 63 46 4
---------- ---------- ---------- ----------
Earnings (loss) before cumulative effect of
accounting change (6,748) 1,485 (2,021) (70)
Cumulative effect of accounting change, net of taxes
(notes 3 and 8) 545 -- -- --
---------- ---------- ---------- ----------
Net earnings (loss) $ (6,203) 1,485 (2,021) (70)
========== ========== ========== ==========
Pro forma earnings (loss) per common share (note 3):
Pro forma basic and diluted earnings (loss)
before cumulative effect of accounting change $ (2.61) .57 (.78) (.03)
Cumulative effect of accounting change, net of
taxes .21 -- -- --
---------- ---------- ---------- ----------
Pro forma basic and diluted net earnings (loss) $ (2.40) .57 (.78) (.03)
========== ========== ========== ==========
Pro forma number of common shares outstanding 2,588 2,588 2,588 2,588
========== ========== ========== ==========
--------------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
II-25
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
New Liberty Old Liberty
------------------------------------------ ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 * 1999 * 1999
------------ ------------ ------------ ------------
amounts in millions
Net earnings (loss) $ (6,203) 1,485 (2,021) (70)
---------- ---------- ---------- ----------
Other comprehensive earnings, net of taxes (note 13):
Foreign currency translation adjustments (359) (202) 60 (15)
Unrealized holding gains (losses) arising during
the period (1,013) (6,115) 6,488 885
Recognition of previously unrealized losses
(gains) on available-for-sale securities, net 2,696 (635) 7 --
Cumulative effect of accounting change (notes 3
and 8) (87) -- -- --
---------- ---------- ---------- ----------
Other comprehensive (loss) earnings 1,237 (6,952) 6,555 870
---------- ---------- ---------- ----------
Comprehensive earnings (loss) $ (4,966) (5,467) 4,534 800
========== ========== ========== ==========
--------------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
II-26
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common stock Additional
Preferred ------------------- paid-in
stock Series A Series B capital
------------ -------- -------- ---------
amounts in millions
Balance at January 1, 1999 $ -- -- -- 4,682
Net loss -- -- -- --
Other comprehensive earnings -- -- -- --
Other transfers from related parties, net -- -- -- 430
------------ ------- ------- -------
Balance on February 28, 1999 $ -- -- -- 5,112
============ ======= ======= =======
Balance at March 1, 1999 (as restated, see note 2) $ -- -- -- 33,500
Net loss -- -- -- --
Other comprehensive earnings -- -- -- --
Transfer from related party for redemption of
debentures -- -- -- 354
Gains in connection with issuances of stock of
affiliates and subsidiaries, net of taxes
(note 10) -- -- -- 108
Utilization of net operating losses of Liberty by
AT&T (note 9) -- -- -- (88)
------------ ------- ------- -------
Balance at December 31, 1999 -- -- -- 33,874
------------ ------- ------- -------
Net earnings -- -- -- --
Other comprehensive loss -- -- -- --
Issuance of AT&T Class A Liberty Media Group common
stock for acquisitions (note 7) -- -- -- 1,064
Gains in connection with issuances of stock by
affiliates and subsidiaries, net of taxes (note 10) -- -- -- 355
Utilization of net operating losses of Liberty by AT&T
(note 9) -- -- -- (38)
Other transfers to related parties, net -- -- -- (213)
------------ ------- ------- -------
Balance at December 31, 2000 -- -- -- 35,042
------------ ------- ------- -------
Net loss -- -- -- --
Other comprehensive earnings -- -- -- --
Issuance of common stock upon consummation of Split
Off Transaction (note 2) -- 24 2 (26)
Contribution from AT&T upon consummation of Split
Off Transaction (note 2) -- -- -- 803
Accrual of amounts due to AT&T for taxes on deferred
intercompany gains (note 2) -- -- -- (115)
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes (note 10) -- -- -- (8)
Utilization of net operating losses of Liberty by
AT&T prior to Split Off Transaction (note 9) -- -- -- (2)
Stock option exercises and issuance of restricted
stock prior to Split Off Transaction -- -- -- 302
------------ ------- ------- -------
Balance at December 31, 2001 $ -- 24 2 35,996
============ ======= ======= =======
Accumulated
other
comprehensive
earnings, Accumulated Total
net (deficit) stockholders'
of taxes earnings equity
------- ---------- ------------
amounts in millions
Balance at January 1, 1999 3,186 952 8,820
Net loss -- (70) (70)
Other comprehensive earnings 870 -- 870
Other transfers from related parties, net -- -- 430
----- ------ ------
Balance on February 28, 1999 4,056 882 10,050
===== ====== ======
Balance at March 1, 1999 (as restated, see note 2) -- -- 33,500
Net loss -- (2,021) (2,021)
Other comprehensive earnings 6,555 -- 6,555
Transfer from related party for redemption of
debentures -- -- 354
Gains in connection with issuances of stock of
affiliates and subsidiaries, net of taxes
(note 10) -- -- 108
Utilization of net operating losses of Liberty by
AT&T (note 9) -- -- (88)
----- ------ ------
Balance at December 31, 1999 6,555 (2,021) 38,408
----- ------ ------
Net earnings -- 1,485 1,485
Other comprehensive loss (6,952) -- (6,952)
Issuance of AT&T Class A Liberty Media Group common
stock for acquisitions (note 7) -- -- 1,064
Gains in connection with issuances of stock by
affiliates and subsidiaries, net of taxes (note 10) -- -- 355
Utilization of net operating losses of Liberty by AT&T
(note 9) -- -- (38)
Other transfers to related parties, net -- -- (213)
----- ------ ------
Balance at December 31, 2000 (397) (536) 34,109
----- ------ ------
Net loss -- (6,203) (6,203)
Other comprehensive earnings 1,237 -- 1,237
Issuance of common stock upon consummation of Split
Off Transaction (note 2) -- -- --
Contribution from AT&T upon consummation of Split
Off Transaction (note 2) -- -- 803
Accrual of amounts due to AT&T for taxes on deferred
intercompany gains (note 2) -- -- (115)
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes (note 10) -- -- (8)
Utilization of net operating losses of Liberty by
AT&T prior to Split Off Transaction (note 9) -- -- (2)
Stock option exercises and issuance of restricted
stock prior to Split Off Transaction -- -- 302
----- ------ ------
Balance at December 31, 2001 840 (6,739) 30,123
===== ====== ======
See accompanying notes to consolidated financial statements.
II-27
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
New Liberty Old Liberty
---------------------------------------- -----------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 * 1999 * 1999
----------- ----------- ------------- ----------
amounts in millions
(note 4)
Cash flows from operating activities:
Net earnings (loss) $ (6,203) 1,485 (2,021) (70)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Cumulative effect of accounting change, net of taxes (545) -- -- --
Depreciation and amortization 984 854 562 22
Impairment of long-lived assets 388 -- -- --
Stock compensation 132 (950) 1,785 183
Payments of stock compensation (244) (319) (111) (126)
Share of losses of affiliates, net 4,906 3,485 904 66
Nontemporary decline in fair value of investments 4,101 1,463 -- --
Realized and unrealized losses (gains) on financial
instruments, net 174 (223) 153 --
Losses (gains) on disposition of assets, net 310 (7,340) (4) (14)
Minority interests in losses of subsidiaries (226) (63) (46) (4)
Deferred income tax expense (benefit) (3,613) 1,821 (1,025) 212
Intergroup tax allocation (222) (294) (75) (1)
Payments from AT&T pursuant to tax sharing agreement 166 414 1 --
Other noncash charges (income) 40 15 3 (354)
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions:
Receivables 30 (116) 7 33
Prepaid expenses and program rights (148) (121) (119) (23)
Payables and other current liabilities (4) 88 119 (31)
---------- ---------- ---------- ----------
Net cash provided (used) by operating activities 26 199 133 (107)
---------- ---------- ---------- ----------
Cash flows from investing activities:
Cash paid for acquisitions (113) (735) (109) --
Capital expended for property and equipment (358) (221) (40) (15)
Investments in and loans to equity affiliates (1,031) (1,568) (1,090) (30)
Investments in and loans to cost investments (1,548) (1,791) (1,506) (21)
Purchases of marketable securities (269) (848) (7,757) (3)
Sales and maturities of marketable securities 615 1,820 5,725 9
Cash proceeds from dispositions 471 456 130 43
Other investing activities, net (5) 21 (11) (62)
---------- ---------- ---------- ----------
Net cash used by investing activities (2,238) (2,866) (4,658) (79)
---------- ---------- ---------- ----------
Cash flows from financing activities:
Borrowings of debt 1,639 4,597 3,187 155
Proceeds attributed to call option obligations
upon issuance of senior exchangeable debentures 1,028 -- -- --
Repayments of debt (1,048) (2,156) (2,211) (145)
Net proceeds from issuance of stock by subsidiaries -- 121 123 --
Premium proceeds from financial instruments 383 -- -- --
Proceeds from settlement of financial instruments, net 366 -- -- --
Payment from AT&T related to Split Off Transaction 803 -- -- --
Cash transfers (to) from related parties (157) (286) (159) 31
Other financing activities, net (20) (28) (20) (52)
---------- ---------- ---------- ----------
Net cash provided (used) by financing activities 2,994 2,248 920 (11)
---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 782 (419) (3,605) (197)
Cash and cash equivalents at beginning of period 1,295 1,714 5,319 228
---------- ---------- ---------- ----------
Cash and cash equivalents at end of period $ 2,077 1,295 1,714 31
========== ========== ========== ==========
-----------------
* as restated, see note 2
See accompanying notes to consolidated financial statements.
II-28
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2001, 2000 and 1999
(1) Basis of Presentation
---------------------
The accompanying consolidated financial statements include the accounts
of Liberty Media Corporation ("Liberty" or the "Company") and those of
all majority-owned and controlled subsidiaries. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
Liberty's domestic subsidiaries generally operate or hold interests in
businesses which provide programming services including production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software. In addition, certain of Liberty's subsidiaries hold interests
in businesses engaged in wireless telephony, electronic retailing,
direct marketing and advertising sales relating to programming
services, infomercials and transaction processing. Liberty also has
significant interests in foreign affiliates which operate in cable
television, programming and satellite distribution.
(2) AT&T Ownership of Liberty
--------------------------
On March 9, 1999, AT&T Corp. ("AT&T") acquired Tele-Communications,
Inc. ("TCI"), the former parent company of Liberty, in a merger
transaction (the "AT&T Merger"). As a result of the AT&T Merger, each
series of TCI common stock was converted into a class of AT&T common
stock subject to applicable exchange ratios. The AT&T Merger was
accounted for using the purchase method. Accordingly, at the time of
the AT&T Merger, Liberty's assets and liabilities were recorded at
their respective fair values resulting in a new cost basis. For
financial reporting purposes the AT&T Merger is deemed to have occurred
on March 1, 1999. Accordingly, for periods prior to March 1, 1999 the
assets and liabilities of Liberty and the related consolidated
financial statements are sometimes referred to herein as "Old Liberty,"
and for periods subsequent to February 28, 1999 the assets and
liabilities of Liberty and the related consolidated financial
statements are sometimes referred to herein as "New Liberty." The
"Company" and "Liberty" refer to both New Liberty and Old Liberty.
II-29
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table represents the summary balance sheet of Old Liberty
at February 28, 1999, prior to the AT&T Merger and the opening summary
balance sheet of New Liberty subsequent to the AT&T Merger. Certain
pre-merger transactions occurring between March 1, 1999, and March 9,
1999, that affected Old Liberty's equity, gains on issuance of equity
securities by affiliates and subsidiaries, and stock compensation have
been reflected in the two-month period ended February 28, 1999.
New Liberty Old Liberty
----------- -----------
amounts in millions
Assets:
Cash and cash equivalents $ 5,319 31
Other current assets 434 1,011
Investments in affiliates 17,116 3,971
Investments in available-for-sale securities 13,094 11,974
Property and equipment, net 125 111
Intangibles and other assets 11,159 389
-------- --------
$ 47,247 17,487
======== ========
Liabilities and Equity:
Current liabilities $ 1,872 1,051
Long-term debt 1,845 2,087
Deferred income taxes 9,972 4,147
Other liabilities 19 90
-------- --------
Total liabilities 13,708 7,375
-------- --------
Minority interests in equity of subsidiaries 39 62
Stockholder's equity 33,500 10,050
-------- --------
$ 47,247 17,487
======== ========
From March 9, 1999 through August 9, 2001, AT&T owned 100% of the
outstanding common stock of Liberty. During such time, the AT&T Class A
Liberty Media Group common stock and the AT&T Class B Liberty Media
Group common stock (together, the AT&T Liberty Media Group tracking
stock) were tracking stocks of AT&T designed to reflect the economic
performance of the businesses and assets of AT&T attributed to the
Liberty Media Group. Liberty was included in the Liberty Media Group.
On May 7, 2001, AT&T contributed to Liberty assets that were attributed
to the Liberty Media Group but not previously owned by Liberty (the
"Contributed Assets"). These assets included (i) preferred stock and
common stock interests in a subsidiary of IDT Corporation, a
multinational telecommunications services provider and (ii) an
approximate 8% indirect common equity interest in Liberty Digital, Inc.
("Liberty Digital"). Subsequent to these contributions, the businesses
and assets of Liberty and its subsidiaries constituted all of the
businesses and assets of the Liberty Media Group. The contributions
have been accounted for in a manner similar to a pooling of interests
and, accordingly, the financial statements of Liberty for periods prior
to the contributions have been restated to include the financial
position and results of operations of the Contributed Assets.
Effective August 10, 2001, AT&T effected the split-off of Liberty
pursuant to which Liberty's common stock was recapitalized, and each
outstanding share of AT&T Class A Liberty Media Group tracking stock
was redeemed for one share of Liberty Series A common stock and each
outstanding share of AT&T Class B Liberty Media Group tracking stock
was redeemed for one share of Liberty Series B common stock (the "Split
Off Transaction"). Subsequent to the Split Off Transaction, Liberty is
no longer a subsidiary of AT&T and no shares of AT&T Liberty Media
Group tracking stock remain outstanding. The Split Off Transaction has
been accounted for at historical cost.
II-30
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In connection with the Split Off Transaction, Liberty has also been
deconsolidated from AT&T for federal income tax purposes. As a result,
AT&T was required to pay Liberty an amount equal to 35% of the amount
of the net operating loss carryforward reflected in TCI's final federal
income tax return that has not been used as an offset to Liberty's
obligations under the AT&T Tax Sharing Agreement and that has been, or
is reasonably expected to be, utilized by AT&T. The $803 million
payment was received by Liberty prior to the Split Off Transaction and
has been reflected as an increase to additional paid-in-capital in the
accompanying consolidated statement of stockholders' equity. In
addition, certain deferred intercompany gains will be includible in
AT&T's taxable income as a result of the Split Off Transaction, and
AT&T will be entitled to reimbursement from Liberty for the resulting
tax liability of approximately $115 million. Such tax liability has
been accrued as of December 31, 2001 and has been reflected as a
reduction in additional paid-in-capital in the accompanying
consolidated statement of stockholders' equity.
(3) Summary of Significant Accounting Policies
------------------------------------------
Cash and Cash Equivalents
Cash equivalents consist of investments which are readily convertible
into cash and have maturities of three months or less at the time of
acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance at December 31, 2001 and 2000 was not material.
Program Rights
Prepaid program rights are amortized on a film-by-film basis over the
anticipated number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated cost of the programs when
the film is available for airing less prepayments. These amounts are
amortized on a film-by-film basis over the anticipated number of
exhibitions.
Investments
All marketable equity and debt securities held by the Company are
classified as available-for-sale and are carried at fair value.
Unrealized holding gains and losses on securities that are classified
as available-for-sale ("AFS Securities") and are hedged with a
derivative financial instrument that qualifies as a fair value hedge
under Statement of Financial Accounting Standards No. 133 "Accounting
for Derivative Instruments and Hedging Activities" ("Statement 133")
are recognized in the Company's consolidated statement of operations.
Unrealized holding gains and losses of AFS Securities that are not
hedged pursuant to Statement 133 are carried net of taxes as a
component of accumulated other comprehensive earnings in stockholder's
equity. Realized gains and losses are determined on an average cost
basis. Other investments in which the Company's ownership interest is
less than 20% and are not considered marketable securities are carried
at the lower of cost or net realizable value.
For those investments in affiliates in which the Company has the
ability to exercise significant influence, the equity method of
accounting is used. Under this method, the investment, originally
recorded at cost, is adjusted to recognize the Company's share of net
earnings or losses of the affiliates as they occur rather then as
dividends or other distributions are received, limited to the extent of
the Company's investment in, advances to and commitments for the
investee. The Company's share of net earnings or losses of affiliates
includes the amortization of the difference between the Company's
investment and its share of the net assets of the investee and also
includes any nontemporary declines in fair value recognized during the
period.
II-31
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Subsequent to the AT&T Merger, changes in the Company's proportionate
share of the underlying equity of a subsidiary or equity method
investee, which result from the issuance of additional equity
securities by such subsidiary or equity investee, are recognized as
increases or decreases in the Company's consolidated statements of
stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The Company considers a number of factors in its
determination including (i) the financial condition, operating
performance and near term prospects of the investee; (ii) the reason
for the decline in fair value, be it general market conditions,
industry specific or investee specific; (iii) analysts' ratings and
estimates of 12 month share price targets for the investee; (iv) the
length of time that the fair value of the investment is below the
Company's carrying value; and (v) the Company's intent and ability to
hold the investment for a period of time sufficient to allow for a
recovery in fair value. If the decline in fair value is deemed to be
other than temporary, the cost basis of the security is written down to
fair value. In situations where the fair value of an investment is not
evident due to a lack of a public market price or other factors, the
Company uses its best estimates and assumptions to arrive at the
estimated fair value of such investment. The Company's assessment of
the foregoing factors involves a high degree of judgment and
accordingly, actual results may differ materially from the Company's
estimates and judgments. Writedowns for cost investments and AFS
Securities are included in the consolidated statements of operations as
nontemporary declines in fair values of investments. Writedowns for
equity method investments are included in share of losses of
affiliates.
Property and Equipment
Property and equipment, including significant improvements, is stated
at cost. Depreciation is computed using the straight-line method using
estimated useful lives of 3 to 20 years for support equipment and 10 to
40 years for buildings and improvements.
Excess Cost Over Acquired Net Assets
Excess cost over acquired net assets consists of the difference between
the cost of acquiring non-cable entities and amounts assigned to their
tangible assets. Such amounts are amortized using the straight-line
method over periods ranging from 5 to 20 years.
Franchise Costs
Franchise costs generally include the difference between the cost of
acquiring cable companies and amounts allocated to their tangible
assets. Such amounts are amortized using the straight-line method over
20 years.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of its property
and equipment and its intangible assets to determine whether current
events or circumstances indicate that such carrying amounts may not be
recoverable. If the carrying amount of the asset is greater than the
expected undiscounted cash flows to be generated by such asset, an
impairment adjustment is to be recognized. Such adjustment is measured
by the amount that the carrying value of such assets exceeds their fair
value. The Company generally measures fair value by considering sale
prices for similar assets or by discounting estimated future cash flows
using an appropriate discount rate. Considerable management judgment is
necessary to estimate the fair value of assets, accordingly, actual
results could vary significantly from such estimates. Assets to be
disposed of are carried at the lower of their financial statement
carrying amount or fair value less costs to sell.
II-32
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
As a result of the weakness in the economy in 2001 certain subsidiaries
of the Company did not meet their 2001 operating objectives and have
reduced their 2002 expectations. Accordingly, the subsidiaries assessed
the recoverability of their property and equipment and intangible
assets and determined that impairment adjustments were necessary. In
addition, in the fourth quarter, a subsidiary made the decision to
consolidate certain of its operations and close certain facilities. In
connection with these initiatives, the subsidiary recorded a
restructuring charge related to lease cancellation fees and an
additional impairment charge related to its property and equipment. All
of the foregoing charges are included in impairment of long-lived
assets in the Company's statement of operations.
Minority Interests
Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable
portion of the common equity of those subsidiaries. Further, the
minority interests' share of losses is not recognized if the minority
holders of common equity of subsidiaries have the right to cause the
Company to repurchase such holders' common equity.
Preferred stock (and accumulated dividends thereon) of subsidiaries are
included in minority interests in equity of subsidiaries. Dividend
requirements on such preferred stocks are reflected as minority
interests in earnings of subsidiaries in the accompanying consolidated
statements of operations and comprehensive earnings.
Foreign Currency Translation
The functional currency of the Company is the United States ("U.S.")
dollar. The functional currency of the Company's foreign operations
generally is the applicable local currency for each foreign subsidiary
and foreign equity method investee. Assets and liabilities of foreign
subsidiaries and foreign equity investees are translated at the spot
rate in effect at the applicable reporting date, and the consolidated
statements of operations and the Company's share of the results of
operations of its foreign equity affiliates are translated at the
average exchange rates in effect during the applicable period. The
resulting unrealized cumulative translation adjustment, net of
applicable income taxes, is recorded as a component of accumulated
other comprehensive earnings in stockholder's equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the accompanying
consolidated statements of operations and comprehensive earnings as
unrealized (based on the applicable period end exchange rate) or
realized upon settlement of the transactions.
Unless otherwise indicated, convenience translations of foreign
currencies into U.S. dollars are calculated using the applicable spot
rate at December 31, 2001, as published in The Wall Street Journal.
Derivative Instruments and Hedging Activities
The Company uses various derivative instruments including equity
collars, put spread collars, bond swaps and foreign exchange contracts
to manage fair value and cash flow risk associated with many of its
investments, some of its variable rate debt and forecasted transactions
to be denominated in foreign currencies. Each of these derivative
instruments is executed with a counterparty, generally well known major
financial institutions. While Liberty believes these derivative
instruments effectively manage the risks highlighted above, they are
subject to counterparty credit risk. Counterparty credit risk is the
risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To
protect itself against credit risk associated with these counterparties
the Company:
II-33
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
. Executes its derivative instruments with several different
counterparties, and
. Executes derivative instrument agreements which contain a
provision that requires the counterparty to post the "in the
money" portion of the derivative instrument into a cash
collateral account for the Company's benefit, if the respective
counterparty's credit rating were to reach certain levels,
generally a rating that is below Standard & Poor's rating of A-
or Moody's rating of A3.
Due to the importance of these derivative instruments to its risk
management strategy, Liberty actively monitors the creditworthiness of
each of these counterparties. Based on its analysis, the Company
considers nonperformance by any of its counterparties to be unlikely.
Effective January 1, 2001, Liberty adopted Statement 133, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. All derivatives, whether
designated in hedging relationships or not, are required to be recorded
on the balance sheet at fair value. If the derivative is designated as
a fair value hedge, the changes in the fair value of the derivative and
of the hedged item attributable to the hedged risk are recognized in
earnings. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are
recorded in other comprehensive earnings and are recognized in the
statement of operations when the hedged item affects earnings.
Ineffective portions of changes in the fair value of cash flow hedges
are recognized in earnings. If the derivative is not designated as a
hedge, changes in the fair value of the derivative are recognized in
earnings. Currently, the only instruments designated as hedges are the
Company's equity collars, which are designated as fair value hedges.
The fair value of derivative instruments is estimated using the
Black-Scholes model. The Black-Scholes model incorporates a number of
variables in determining such fair values, including expected
volatility of the underlying security and an appropriate discount rate.
The Company selects a volatility rate at the inception of the
derivative instrument based on the historical volatility of the
underlying security and on the term of the derivative instrument. The
volatility assumption is generally not changed during the term of the
derivative instrument unless there is an indication that the historical
volatility is no longer appropriate. Considerable management judgment
is required in estimating the Black-Scholes variables. Actual results
upon settlement or unwinding of derivative instruments may differ
materially from these estimates.
Derivative gains and losses included in other comprehensive earnings
are reclassified into earnings at the time the sale of the hedged item
or transaction is recognized.
Prior to the adoption of Statement 133, changes in the fair value of
the Company's equity collars were reported as a component of
comprehensive earnings (in unrealized gains) along with changes in the
fair value of the underlying securities. Changes in the fair value of
put spread collars were recorded as unrealized gains (losses) on
financial instruments in the consolidated statements of operations.
The adoption of Statement 133 on January 1, 2001, resulted in a
cumulative increase in net earnings of $545 million, or $0.21 per
common share, (after tax expense of $356 million) and an increase in
other comprehensive loss of $87 million. The increase in net earnings
was mostly attributable to separately recording the fair value of the
embedded call option obligations associated with the Company's senior
exchangeable debentures. The increase in other comprehensive loss
relates primarily to changes in the fair value of the Company's
warrants and options to purchase certain available-for-sale securities.
The Company assesses the effectiveness of equity collars by comparing
changes in the intrinsic value of the equity collar to changes in the
fair value of the underlying security. For derivatives designated as
fair value hedges, changes in the time value of the derivatives, which
are excluded
II-34
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
from the assessment of hedge effectiveness, are recognized currently in
earnings as a component of realized and unrealized gains (losses) on
financial instruments. Hedge ineffectiveness, determined in accordance
with Statement 133, had no impact on earnings for the year ended
December 31, 2001.
For the year ended December 31, 2001, realized and unrealized gains on
financial instruments included a $167 million unrealized gain related
to call option obligations, a $616 million unrealized net loss for
changes in the fair value of derivative instruments related to
available-for-sale securities and other derivatives not designed as
hedging instruments, and a $275 million unrealized net gain for changes
in the time value of options for fair value hedges. During the year
ended December 31, 2001, the Company received cash proceeds of $329
million as a result of unwinding certain of its equity collars.
Pursuant to Statement 133, the proceeds received less the offsetting
impact of hedge accounting on the underlying securities resulted in
$162 million of realized and unrealized gains on financial instruments
in the consolidated statement of operations for the year ended December
31, 2001.
Revenue Recognition
Programming revenue is recognized in the period during which
programming is provided, pursuant to affiliation agreements.
Advertising revenue is recognized, net of agency commissions, in the
period during which underlying advertisements are broadcast. Revenue
from post-production services is recognized in the period the services
are rendered. Cable and other distribution revenue is recognized in the
period that services are rendered. Cable installation revenue is
recognized in the period the related services are provided to the
extent of direct selling costs. Any remaining amount is deferred and
recognized over the estimated average period that customers are
expected to remain connected to the cable distribution system.
Advertising Costs
Advertising costs generally are expensed as incurred. Advertising
expense aggregated $43 million, $35 million, $18 million and $4 million
for the years ended December 31, 2001 and 2000, the ten months ended
December 31, 1999 and the two months ended February 28, 1999,
respectively.
Stock Based Compensation
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("Statement 123"), establishes financial
accounting and reporting standards for stock-based employee
compensation plans as well as transactions in which an entity issues
its equity instruments to acquire goods or services from non-employees.
As allowed by Statement 123, Liberty continues to account for
stock-based compensation pursuant to Accounting Principles Board
Opinion No. 25 ("APB Opinion No. 25").
Agreements that may require Liberty to reacquire interests in
subsidiaries held by officers and employees in the future are
marked-to-market at the end of each reporting period with corresponding
adjustments being recorded to stock compensation expense.
Pro Forma Earnings (Loss) Per Common Share
Pro forma basic earnings (loss) per common share is computed by
dividing net earnings (loss) by the pro forma number of common shares
outstanding. The pro forma number of outstanding common shares for
periods prior to the Split Off Transaction is based upon the number of
shares of Series A and Series B Liberty common stock issued upon
consummation of the Split Off Transaction. Pro forma diluted earnings
(loss) per common share presents the dilutive effect on a per share
basis of potential common shares as if they had been converted at the
beginning of the
II-35
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
periods presented. Excluded from diluted earnings per share for the
year ended December 31, 2001, are 76 million potential common shares
because their inclusion would be anti-dilutive.
Reclassifications
Certain prior period amounts have been reclassified for comparability
with the 2001 presentation.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Recent Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement No. 141, Business Combinations ("Statement 141"), and
Statement No. 142, Goodwill and Other Intangible Assets ("Statement
142"). Statement 141 requires that the purchase method of accounting be
used for all business combinations. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from
goodwill. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead
tested for impairment at least annually in accordance with the
provisions of Statement 142. Statement 142 will also require that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values,
and reviewed for impairment in accordance with SFAS Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of.
The Company adopted the provisions of Statement 141 effective July 1,
2001, and is required to adopt Statement 142 effective January 1, 2002.
Statement 141 requires upon adoption of Statement 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired
in prior purchase business combinations, and make any necessary
reclassifications in order to conform with the new criteria in
Statement 141 for recognition apart from goodwill. Upon adoption of
Statement 142, the Company will be required to reassess the useful
lives and residual values of all intangible assets acquired, and make
any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible
asset is identified as having an indefinite useful life, the company
will be required to test the intangible asset for impairment in
accordance with the provisions of Statement 142 within the first
interim period. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period.
In connection with Statement 142's transitional goodwill impairment
evaluation, Statement 142 will require the Company to perform an
assessment of whether there is an indication that goodwill and
equity-method goodwill is impaired as of the date of adoption. To
accomplish this, the Company must identify its reporting units and
determine the carrying value of each reporting unit by assigning the
assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units as of the date of adoption. The
Company will then have up to six months from the date of adoption to
determine the fair value of each reporting unit and compare it to the
reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeds its fair value, an indication exists that the
reporting unit's goodwill may be impaired and the Company must perform
the second step of the transitional impairment test. In the second
step, the Company must compare the implied fair value of the reporting
unit's goodwill, determined by
II-36
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a
purchase price allocation in accordance with Statement 141, to its
carrying amount, both of which would be measured as of the date of
adoption. This second step is required to be completed as soon as
possible, but no later than the end of the year of adoption. Any
transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement
of earnings.
As of the date of adoption, the Company will have unamortized goodwill
in the amount of $9,191 million, unamortized identifiable intangible
assets in the amount of $831 million, and unamortized equity-method
excess costs in the amount of $7,766 million, all of which will be
subject to the transition provisions of Statements 141 and 142.
Amortization expense related to goodwill was $617 million and $587
million for the years ended December 31, 2001 and 2000, respectively;
and amortization of equity-method excess costs (included in share of
losses of affiliates) aggregated $798 million and $1,058 million for
the years ended December 31, 2001 and 2000, respectively. The Company
currently estimates that upon adoption of Statement 142, it will be
required to recognize a $1.5 - $2.0 billion transitional impairment
loss as the cumulative effect of a change in accounting principle. The
foregoing estimate does not include an adjustment for the Company's
proportionate share of any transition adjustments that its equity
method affiliates may record, as the Company is currently unable to
estimate the amount of such adjustment.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets," which addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. This statement
supercedes prior statements that address the disposal of a segment of a
business, and eliminates the exception to consolidation for
subsidiaries for which control is likely to be temporary. This
statement retains the prior statement's fundamental provisions for the
recognition and measurement of impairment of long-lived assets to be
held and used, as well as the measurement of long-lived assets to be
disposed of by sale. The statement is effective for fiscal years
beginning after December 15, 2001. The Company has not determined the
impact that adoption of this statement will have on its financial
position, results of operations or cash flow.
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
-----------------------------------------------------------------
New Liberty Old Liberty
------------------------------------------- ------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ----------- ------------- -----------
amounts in millions
Cash paid for acquisitions:
Fair value of assets acquired $ 264 3,733 122 --
Net liabilities assumed (136) (1,208) (13) --
Deferred tax liability (7) (281) -- --
Minority interest (8) (445) -- --
Contribution to equity for acquisitions -- (1,064) -- --
---------- ---------- ---------- ----------
Cash paid for acquisitions $ 113 735 109 --
========== ========== ========== ==========
Cash paid for interest $ 451 335 93 32
========== ========== ========== ==========
Cash paid for income taxes $ 9 2 1 --
========== ========== ========== ==========
II-37
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
During the ten months ended December 31, 1999, certain subsidiaries
with a carrying value of $135 million were exchanged for a cost method
investment in an online music venture.
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
Cash and cash equivalents prior to the AT&T Merger $ 31
Cash contribution in connection with the AT&T Merger 5,464
Cash paid to TCI for certain warrants (176)
---------
Cash and cash equivalents subsequent to the AT&T Merger $ 5,319
=========
(5) Investments in Affiliates Accounted for Using the Equity Method
---------------------------------------------------------------
Liberty has various investments accounted for using the equity method.
The following table includes Liberty's carrying amount and percentage
ownership of the more significant investments in affiliates at December
31, 2001 and the carrying amount at December 31, 2000:
December 31, December 31,
2001 2000
-------------------------- ------------
Percentage Carrying Carrying
Ownership Amount Amount
--------- ------------- ------------
dollar amounts in millions
Discovery Communications, Inc. ("Discovery") 50% $ 2,900 3,133
QVC, Inc. ("QVC") 42% 2,543 2,508
USA Networks, Inc. ("USAI") and related investments 20% 2,857 2,824
UnitedGlobalCom, Inc. ("UnitedGlobalCom") 20% (418) 314
Telewest Communications plc ("Telewest") 25% 97 2,712
Jupiter Telecommunications Co., Ltd. ("Jupiter") 35% 407 575
Gemstar-TV Guide International, Inc. ("Gemstar") N/A -- 5,855
Other various 1,690 2,543
----------- -----------
$ 10,076 20,464
=========== ===========
II-38
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table reflects Liberty's share of earnings (losses) of
affiliates including excess basis amortization and nontemporary
declines in value:
New Liberty Old Liberty
------------------------------------------ -------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ -------------
amounts in millions
Discovery $ (293) (293) (269) (8)
QVC 36 (12) (11) 13
USAI and related investments 35 (36) (20) 10
UnitedGlobalCom (751) (211) 23 --
Telewest (2,538) (441) (222) (38)
Jupiter (90) (114) (54) (7)
Cablevision S.A. ("Cablevision") (476) (49) (28) (3)
ASTROLINK International LLC
("Astrolink") (417) (8) -- --
Teligent, Inc. ("Teligent") (85) (1,269) -- --
Gemstar (133) (254) -- --
Other (194) (798) (323) (33)
------------ ------------ ------------ ------------
$ (4,906) (3,485) (904) (66)
============ ============ ============ ============
At December 31, 2001, the aggregate carrying amount of Liberty's
investments in its affiliates exceeded Liberty's proportionate share of
its affiliates' net assets by $7,766 million. Such excess is being
amortized over estimated useful lives of up to 20 years. Such
amortization was $798 million, $1,058 million, $463 million and $9
million for the years ended December 31, 2001 and 2000, the ten months
ended December 31, 1999 and the two months ended February 28, 1999,
respectively, and is included in share of losses of affiliates.
Certain of Liberty's affiliates are general partnerships and, as such,
Liberty is liable as a matter of partnership law for all debts (other
than non-recourse debts) of that partnership in the event liabilities
of that partnership were to exceed its assets.
USAI
USAI owns and operates businesses in network and television production,
electronic retailing, ticketing operations, and internet services. At
December 31, 2001, Liberty held 74.4 million shares of USAI's common
stock. In addition, at December 31, 2001, Liberty held shares and other
equity interests in certain subsidiaries of USAI that are exchangeable
for an aggregate of 79.0 million shares of USAI common stock. The
exchange of such shares and interests is subject to certain conditions
including that Liberty's ownership of USAI's common stock issuable upon
such exchange not being restricted by Federal Communications Commission
("FCC") regulations. On August 28, 2001, USAI gave Liberty notice that
on August 21, 2001 USAI had sold its television broadcast stations and
associated broadcast licenses and as a result of such sale, FCC
regulations no longer restricted Liberty's ownership of shares of
USAI's common stock issuable upon such exchange and, accordingly, that
USAI was exercising its right to require that Liberty exchange such
stock and other interests of such subsidiaries for shares of USAI
common stock (the "USAI Exchange").
If the USAI Exchange had been completed at December 31, 2001, Liberty
would have owned 153.4 million shares or approximately 20% (on a
fully-diluted basis) of USAI common stock. The closing price of USAI's
common stock on December 31, 2001 was $27.31 per share.
II-39
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In December 2001, Liberty entered into an agreement with USAI and
Vivendi Universal, S.A. ("Vivendi"), pursuant to which USAI will
contribute substantially all of its entertainment assets to a
partnership controlled by Vivendi. In connection with the transaction,
Liberty entered into a separate agreement with Vivendi, pursuant to
which Vivendi will acquire from Liberty 25 million shares of common
stock of USAI, approximately 38.7 millions shares of USANi LLC, which
are exchangeable, on a one-for-one basis, for shares of USAI common
stock, and all of its approximate 30% interest in multiThematiques
S.A., together with certain liabilities with respect thereto, in
exchange for ADSs representing approximately 37.4 million Vivendi
ordinary shares, subject to adjustment. The closing of Liberty's
transaction with Vivendi and the closing of Vivendi's transaction with
USAI are conditioned on one another. Subsequent to the Vivendi
transaction with USAI, USAI will be renamed USA Interactive. The
Company anticipates that the Vivendi transaction will be consummated in
the second quarter of 2002. Upon completion Liberty will own
approximately 3% of Vivendi and 20% of USA Interactive.
UnitedGlobalCom
UnitedGlobalCom is a global broadband communications provider of video,
voice and data services with operations in over 25 countries throughout
the world. At December 31, 2001, Liberty owned an approximate 20%
economic ownership interest representing an approximate 40% voting
interest in UnitedGlobalCom. Liberty owns 9.9 million shares of
UnitedGlobalCom Class B common stock and 13.1 million shares of
UnitedGlobalCom Class A common stock. The UnitedGlobalCom Class B
common stock is convertible, on a one-for-one basis, into
UnitedGlobalCom Class A common stock. The closing price of
UnitedGlobalCom's Class A common stock on December 31, 2001 was $5.00
per share.
On January 30, 2002, the Company and UnitedGlobalCom completed a
transaction (the "New United Transaction") pursuant to which a new
holding company ("New United") was formed to own UnitedGlobalCom, and
all shares of UnitedGlobalCom common stock were exchanged for shares of
common stock of New United. In addition, the Company contributed (i)
cash consideration of $200 million; (ii) a note receivable from
Belmarken Holding B.V., a subsidiary of UnitedGlobalCom, with an
accreted value of $892 million and (iii) Senior Notes and Senior
Discount Notes of United-Pan Europe Communications N.V., a subsidiary
of UnitedGlobalCom, comprised of U.S. dollar denominated notes with a
face amount of $1,435 million and euro denominated notes with a face
amount of euro 263 million to New United in exchange for 281.3 million
shares of Class C common stock of New United. Upon consummation of the
New United Transaction, Liberty owns an approximate 72% economic
interest and a 94% voting interest in New United. Pursuant to certain
voting and standstill arrangements entered into at the time of closing,
Liberty is unable to exercise control of New United, and accordingly,
Liberty will continue to use the equity method of accounting for its
investment. Due to the Company's commitment to increase its investment
in UnitedGlobalCom, as evidenced by the New United Transaction, the
Company recognized its share of UnitedGlobalCom's losses such that its
investment in UnitedGlobalCom was less than zero at December 31, 2001.
As the Company's investment in United Pan-Europe Communications, N.V.,
a subsidiary of UnitedGlobalCom, has a carrying value of $718 million
at December 31, 2001, the Company continues to include the negative
carrying value of its UnitedGlobalCom investment in investments
accounted for using the equity method.
Also on January 30, 2002, New United acquired from Liberty its debt and
equity interests in IDT United, Inc. and $751 million principal amount
at maturity of UnitedGlobalCom's $1,375 million 10-3/4% senior secured
discount notes due 2008 (the "2008 Notes"), which had been distributed
to Liberty in redemption of a portion of its interest in IDT United.
IDT United was formed as an indirect subsidiary of IDT Corporation for
purposes of effecting a tender offer for all outstanding 2008 Notes at
a purchase price of $400 per $1,000 principal amount at maturity, which
tender offer expired on February 1, 2002. The aggregate purchase price
for the Company's interest in IDT United of approximately $449 million
was equal to the aggregate amount Liberty had invested in IDT United,
plus interest. Approximately $305 million of the purchase paid was paid
by the assumption by New United of
II-40
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
debt owed by Liberty to a subsidiary of UnitedGlobalCom, and the
remainder was credited against the $200 million cash contribution by
Liberty to New United described above. In connection with the New
United Transaction, a subsidiary of Liberty agreed to loan to a
subsidiary of New United up to $105 million. As of February 28, 2002,
such subsidiary of New United has borrowed $103 million from the
Liberty subsidiary to acquire additional shares of preferred stock and
promissory notes issued by IDT United. The 2008 Notes owned by IDT
United, together with 2008 Notes acquired by New United directly from
Liberty referred to above, all of which remain outstanding, represent
approximately 98.2% of the outstanding 2008 Notes.
Telewest
Telewest currently operates and constructs cable television and
telephone systems in the UK. In April 2000, Telewest acquired Flextech
p.l.c. ("Flextech") which develops and sells a variety of television
programming in the UK. Prior to the acquisition, Liberty owned an
approximate 37% equity interest in Flextech and a 22% equity interest
in Telewest. As a result of the acquisition, Liberty owns an
approximate 25% equity interest in Telewest. Liberty recognized a $649
million gain (excluding related tax expense of $227 million) on the
acquisition based on the difference between the carrying value of
Liberty's interest in Flextech and the fair value of the Telewest
shares received. At December 31, 2001 Liberty indirectly owned 744.4
million of the issued and outstanding Telewest ordinary shares. The
closing price of Telewest's ordinary shares on December 31, 2001 was
$0.94 per share.
During the year ended December 31, 2001, Liberty determined that its
investment in Telewest experienced a nontemporary decline in value. As
a result, the carrying value of Telewest was adjusted to its estimated
fair value, and the Company recorded a charge of $1,801 million. Such
charge is included in share of losses of affiliates. Summarized
financial information for Telewest is as follows:
December 31,
-------------------------
2001 2000
---------- ----------
amounts in millions
Financial Position
------------------
Investments $ 795 377
Property and equipment, net 5,051 5,078
Intangibles, net 2,752 4,666
Other assets, net 611 586
---------- ----------
Total assets $ 9,209 10,707
========== ==========
Debt $ 7,122 6,360
Other liabilities 1,431 1,080
Owners' equity 656 3,267
---------- ----------
Total liabilities and equity $ 9,209 10,707
========== ==========
Years ended December 31,
----------------------------------------
2001 2000 1999
---------- ---------- ----------
amounts in millions
Results of Operations
---------------------
Revenue $ 1,811 1,623 1,064
Operating expenses (1,380) (1,293) (777)
---------- ---------- ----------
Operating cash flow (as defined by Liberty) 431 330 287
Depreciation and amortization (941) (863) (475)
Impairment of long-lived assets (1,112) -- --
Interest expense (681) (585) (350)
Other, net (217) (27) (155)
---------- ---------- ----------
Net loss $ (2,520) (1,145) (693)
========== ========== ==========
II-41
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Gemstar
Gemstar is a global technology and media company focused on consumer
entertainment. The common stock of Gemstar is publicly traded. On July
12, 2000, Gemstar acquired TV Guide, Inc. ("TV Guide"). TV Guide
shareholders received .6573 shares of Gemstar common stock in exchange
for each share of TV Guide. As a result of this transaction, 133
million shares of TV Guide held by Liberty were exchanged for 87.5
million shares or 21% of Gemstar common stock. Liberty recognized a
$4,391 million gain (before deferred tax expense of $1,737 million) on
such transaction during the third quarter of 2000 based on the
difference between the carrying value of Liberty's interest in TV Guide
and the fair value of the Gemstar securities received.
In May 2001, Liberty consummated a transaction ("Exchange Transaction")
with The News Corporation Limited ("News Corp.") whereby Liberty
exchanged 70.7 million shares of Gemstar for 121.5 million News Corp.
American Depository Shares ("ADSs") representing preferred, limited
voting, ordinary shares of News Corp. Liberty recorded a loss of $764
million in connection with the Exchange Transaction as the fair value
of the securities received by Liberty was less than the carrying value
of the Gemstar shares. In December 2001, Liberty exchanged its
remaining Gemstar shares for 28.8 million additional News Corp. ADSs
and recorded an additional loss of $201 million.
Cablevision
Cablevision provides cable television and high speed data services in
Argentina. At December 31, 2001, the Company has a 50% ownership in
Cablevision. The Argentine government has historically maintained an
exchange rate of one Argentine peso to one U.S. dollar (the "peg
rate"). Due to deteriorating economic and political conditions in
Argentina in late 2001, the Argentine government eliminated the peg
rate effective January 11, 2002. The value of the Argentine peso
dropped significantly on the day the peg rate was eliminated. In
addition, the Argentine government placed restrictions on the payment
of obligations to foreign creditors. As a result of the devaluation of
the Argentine peso, Cablevision recorded foreign currency translation
losses of $393 million in the fourth quarter of 2001. At December 31,
2001, the Company determined that its investment in Cablevision had
experienced a nontemporary decline in value, and accordingly, recorded
an impairment charge of $195 million. Such charge is included in share
of losses of affiliates. The Company's share of losses in 2001, when
combined with foreign currency translation losses recorded in other
comprehensive loss at December 31, 2001, reduced the carrying value of
its investment in Cablevision to zero as of December 31, 2001. Included
in accumulated other comprehensive earnings at December 31, 2001 is
$257 million of unrealized foreign currency translation losses related
to the Company's investment in Cablevision.
Astrolink
Astrolink, a developmental stage entity, originally intended to build a
global telecom network using Ka-band geostationary satellites to
provide broadband data communications services. Astrolink's original
business plan required significant additional financing over the next
several years. During the fourth quarter of 2001, two of the members of
Astrolink informed Astrolink that they do not intend to provide any of
Astrolink's required financing. In light of this decision, Astrolink is
considering several alternatives with respect to its proposed business
plan, including, but not limited to, seeking alternative funding
sources, scaling back their proposed business plan, and liquidating the
venture entirely. There can be no assurance that Astrolink will be able
to obtain the necessary financing on acceptable terms, or that it will
be able to fulfill the business plan as originally proposed, or at all.
During the second quarter of 2001, the Company determined that its
investment in Astrolink experienced a nontemporary decline in value.
Accordingly, the carrying amount of such investment was adjusted to its
then estimated fair value resulting in a recognized loss of $155
million. Such loss is included in share of losses of affiliates. Based
on a fourth quarter 2001
II-42
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
assessment of Astrolink's remaining sources of liquidity and
Astrolink's inability to obtain financing for its business plan, the
Company concluded that the carrying value of its investment in
Astrolink should be further reduced to reflect a fair value that
assumes the liquidation of Astrolink. Accordingly, the Company
wrote-off all of its remaining investment in Astrolink during the
fourth quarter of 2001. The aggregate amount required to reduce its
investment in Astrolink to zero was $250 million. Including such fourth
quarter amount, the Company recorded losses and charges relating to its
investment in Astrolink aggregating $417 million during the year ended
December 31, 2001.
Teligent
In January 2000, the Company acquired a 40% equity interest in
Teligent, a full-service facilities based communications company.
During the nine months ended September 30, 2000, the Company determined
that its investment in Teligent experienced a nontemporary decline in
value. As a result, the carrying amount of this investment was adjusted
to its estimated fair value resulting in a charge of $839 million. This
impairment charge is included in share of losses of affiliates. In
April 2001, the Company exchanged its investment in Teligent for shares
of IDT Investments, Inc., a subsidiary of IDT Corporation. As the fair
value of the consideration received in the exchange approximated the
carrying value of the Company's investment in Teligent, no gain or loss
was recognized on the transaction. The Company accounts for its
investment in IDT Investments, Inc. using the cost method.
Summarized unaudited combined financial information for affiliates
other than Telewest is as follows:
December 31,
-------------------------
2001 2000
---------- ----------
amounts in millions
Combined Financial Position
---------------------------
Investments $ 872 1,776
Property and equipment, net 7,060 8,294
Intangibles, net 15,183 26,763
Other assets, net 10,837 11,603
---------- ----------
Total assets $ 33,952 48,436
========== ==========
Debt $ 17,262 18,351
Other liabilities 14,075 15,904
Owners' equity 2,615 14,181
---------- ----------
Total liabilities and equity $ 33,952 48,436
========== ==========
Years ended December 31,
---------------------------------------
2001 2000 1999
---------- ---------- ----------
amounts in millions
Combined Operations
-------------------
Revenue $ 15,132 14,626 10,787
Operating expenses (13,381) (13,511) (9,401)
Depreciation and amortization (2,703) (2,718) (1,087)
Impairment charges (1,426) -- --
---------- ---------- ----------
Operating income (loss) (2,378) (1,603) 299
Interest expense (1,639) (1,616) (599)
Other, net (685) 174 (75)
---------- ---------- ----------
Net loss $ (4,702) (3,045) (375)
========== ========== ==========
II-43
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(6) Investments in Available-for-Sale Securities and Other Cost Investments
-----------------------------------------------------------------------
Investments in available-for-sale securities and other cost investments
are summarized as follows:
December 31,
-------------------------
2001 2000
---------- ----------
amounts in millions
Sprint Corporation ("Sprint") $ 5,697 5,192
AOL Time Warner Inc. ("AOL Time Warner") 6,236 --
News Corp. 6,118 2,342
Motorola, Inc. ("Motorola") 1,773 1,982
Viacom, Inc. ("Viacom") 670 --
United Pan-Europe Communications N.V. ("UPC") 718 203
Time Warner Inc. ("Time Warner") -- 6,325
Other available-for-sale securities 2,386 2,989
Other investments, at cost, and related receivables 343 502
---------- ----------
23,941 19,535
Less short-term investments (397) (500)
---------- ----------
$ 23,544 19,035
========== ==========
Sprint PCS
Liberty and certain of its consolidated subsidiaries collectively are
the beneficial owners of approximately 197 million shares of Sprint PCS
Group Stock and certain other instruments convertible into such
securities (the "Sprint Securities"). The Sprint PCS Group Stock is a
tracking stock intended to reflect the performance of Sprint's domestic
wireless PCS operations. Liberty accounts for its investment in the
Sprint Securities as an available-for-sale security.
Pursuant to a final judgment (the "Final Judgment") agreed to by
Liberty, AT&T and the United States Department of Justice (the "DOJ")
on December 31, 1998, Liberty transferred all of its beneficially owned
Sprint Securities to a trustee (the "Trustee") prior to the AT&T
Merger. The Final Judgment, which was entered by the United States
District Court of the District of Columbia on August 23, 1999, requires
the Trustee, on or before May 23, 2002, to dispose of a portion of the
Sprint Securities sufficient to cause Liberty to beneficially own no
more than 10% of the outstanding Sprint PCS Group common stock - Series
1 on a fully diluted basis on such date. On or before May 23, 2004, the
Trustee must divest the remainder of the Sprint Securities beneficially
owned by Liberty. As of December 31, 2001, Liberty beneficially owned
approximately 19% of Sprint PCS Group common stock - Series 2.
The Final Judgment requires that the Trustee vote the Sprint Securities
beneficially owned by Liberty and its consolidated subsidiaries in the
same proportion as other holders of Sprint Securities so long as such
securities are held by the trust. The Final Judgment also prohibits the
acquisition by Liberty of additional Sprint Securities, with certain
exceptions, without the prior written consent of the DOJ. At Liberty's
request, the Department of Justice has joined Liberty and AT&T in a
joint motion to terminate the Final Judgment which was filed in the
District Court in February 2002. Under the terms of the Final Judgment,
the obligation of the trustee to dispose of the first tranche of shares
by May 23, 2002 will be stayed while the District Court considers the
joint motion. Liberty is also seeking the approval of the Federal
Communications Commission to the stay of the trustee's obligation to
dispose of the first tranche of shares pending the District Court's
determination of the joint motion.
II-44
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
AOL Time Warner
On January 11, 2001, America Online, Inc. completed its merger with
Time Warner to form AOL Time Warner. In connection with the merger,
each share of Time Warner common stock held by Liberty was converted
into 1.5 shares of an identical series of AOL Time Warner stock. Upon
completion of this transaction, Liberty holds a total of 171 million
shares in AOL Time Warner. Liberty recognized a $253 million gain
(before deferred tax expense of $100 million) based upon the difference
between the carrying value of Liberty's interest in Time Warner and the
fair value of the AOL Time Warner securities received.
News Corp.
In May and December of 2001, Liberty acquired an aggregate of 154
million News Corp. ADSs in exchange for its shares of Gemstar common
stock and another equity investment. Liberty recorded a loss of $965
million in connection with these exchanges based on the difference
between the fair value of the News Corp. ADSs received and the carrying
value of the Gemstar investment. In connection with this transaction,
the Company agreed to restrictions on its ability to transfer certain
of the ADSs prior to May 2003. Liberty had previously acquired 51.8
million News Corp. ADSs in 1999 in exchange for Liberty's 50% interest
in Fox/Liberty Networks, and had acquired 28.1 million ADSs for $695
million in cash. Liberty recognized a $13 million gain on the 1999
exchange. At December 31, 2001, Liberty owned 236 million ADSs or
approximately 18% of the outstanding equity of News Corp. Liberty
accounts for its investment in News Corp. as an available-for-sale
security.
Motorola
On January 5, 2000, Motorola acquired General Instrument Corporation
("General Instrument"). In connection with such acquisition, Liberty
received 54 million shares of Motorola common stock and warrants to
purchase an additional 37 million shares in exchange for its holdings
in General Instrument. Liberty recognized a $2,233 million gain (before
deferred tax expense of $883 million) on such transaction during the
first quarter of 2000 based on the difference between the carrying
value of Liberty's interest in General Instrument and the fair value of
the Motorola securities received. At December 31, 2001 Liberty holds
approximately 71 million shares of Motorola common stock and vested
warrants to purchase an additional 18 million shares of such common
stock at $8.26 per share. Such warrants expire on June 30, 2002.
Viacom
On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by
Viacom in exchange for shares of Class B common stock of Viacom. As a
result of the merger, Liberty received 15.2 million shares of Viacom's
Class B common stock (less than 1% of Viacom's common equity) in
exchange for its 35% ownership interest in BET, which investment had
been accounted for using the equity method. Liberty accounts for its
investment in Viacom as an available-for-sale security. Liberty
recognized a gain of $559 million (before deferred tax expense of $221
million) in the first quarter of 2001 based upon the difference between
the carrying value of Liberty's interest in BET and the value of the
Viacom securities received.
UPC
In May 2001, the Company entered into a loan agreement with UPC and
Belmarken Holding B.V. ("Belmarken"), a subsidiary of UPC, pursuant to
which the Company loaned Belmarken $857 million, which represented a
30% discount to the face amount of the loan of $1,225 million (the
"Belmarken Loan"). UPC is a consolidated subsidiary of UnitedGlobalCom.
The loan accrues interest at 6% per annum, and all principal and
interest are due in May 2007. After May 29, 2002, the loan is
exchangeable, at the option of the Company, into shares of ordinary
common stock of UPC at a rate of $6.85 per share. At inception, Liberty
recorded the conversion feature of
II-45
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
the loan at its estimated fair value of $420 million, and the $437
million remaining balance as a loan receivable. Liberty accounts for
the convertible feature of the Belmarken Loan as a derivative security
under Statement 133, and records the convertible feature at fair value
with periodic market adjustments recorded in the statement of
operations as unrealized gains or losses. The discounted loan
receivable is being accreted up to the $1,225 million face amount over
its term. Such accretion, which includes the stated interest of 6%, is
being recognized in interest income over the term of the loan. Upon
consummation of the New United Transaction, the Company contributed the
Belmarken Loan to New United in exchange for Class C shares of New
United. Liberty had previously purchased exchangeable preferred stock
and warrants of UPC in December 2000 for $203 million.
During 2001, the Company acquired certain outstanding senior notes and
senior discount notes of UPC. Liberty acquired approximately $1,435
million face amount of U.S. dollar denominated notes and euro 263
million face amount of euro denominated notes for an aggregate purchase
price of $358 million. Such notes were contributed to New United in
connection with the New United Transaction on January 30, 2002.
Nontemporary Decline in Fair Value of Investments
During the years ended December 31, 2001 and 2001, Liberty determined
that certain of its AFS Securities and cost investments experienced
nontemporary declines in value. As a result, the cost bases of such
investments were adjusted to their respective fair values based
primarily on recent quoted market prices. These adjustments are
reflected as nontemporary declines in fair value of investments in the
consolidated statements of operations. The following table identifies
the realized losses attributable to each of the individual investments
as follows:
Year ended
December 31,
-------------------------
2001 2000
---------- ----------
amounts in millions
Investments
-----------
AOL Time Warner $ 2,052 --
News Corp. 915 --
Viacom 201 --
UPC preferred stock 195 --
Antec Corporation 127 --
Motorola 232 1,276
Primedia -- 103
Others 379 84
---------- ----------
$ 4,101 1,463
========== ==========
Equity Collars and Put Spread Collars
The Company has entered into equity collars, put spread collars and
other financial instruments to manage market risk associated with its
investments in certain marketable securities. These instruments are
recorded at fair value based on option pricing models. Equity collars
provide the Company with a put option that gives the Company the right
to require the counterparty to purchase a specified number of shares of
the underlying security at a specified price (the "Company Put Price")
at a specified date in the future. Equity collars also provide the
counterparty with a call option that gives the counterparty the right
to purchase the same securities at a specified price at a specified
date in the future. The put option and the call option generally are
equally priced at the time of origination resulting in no cash receipts
or payments. The Company's equity collars are accounted for as fair
value hedges.
Put spread collars provide the Company and the counterparty with put
and call options similar to equity collars. In addition, put spread
collars provide the counterparty with a put option that gives it the
right to require the Company to purchase the underlying securities at a
price that is
II-46
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
lower than the Company Put Price. The inclusion of the secondary put
option allows the Company to secure a higher call option price while
maintaining net zero cost to enter into the collar. The Company's put
spread collars have not been designated as fair value hedges.
Investments in available-for-sale securities at December 31, 2001 and
2000 are summarized as follows:
December 31, 2001
-------------------------------------------------------------
Put
Equity Equity spread Debt
securities collars collars securities Total
----------- ----------- ----------- ----------- ---------
amounts in millions
Cost basis $ 19,310 -- -- 1,457 20,767
Gross gains recognized in earnings 84 1,800 263 -- 2,147
Gross losses recognized in earnings (1,542) -- -- -- (1,542)
Gross unrealized holding gains 2,185 -- -- 94 2,279
Gross unrealized holding losses (500) -- -- (46) (546)
----------- ----------- ----------- ----------- ---------
Fair value $ 19,537 1,800 263 1,505 23,105
=========== =========== =========== =========== =========
December 31, 2000
-------------------------------------------------------------
Put
Equity Equity spread Debt
securities collars collars securities Total
----------- ----------- ----------- ----------- ---------
amounts in millions
Cost basis $ 17,640 -- -- 1,533 19,173
Gross gains recognized in earnings -- -- 188 -- 188
Gross unrealized holding gains 1,003 1,080 -- 86 2,169
Gross unrealized holding losses (2,636) -- -- (64) (2,700)
----------- ----------- ----------- ----------- ---------
Fair value $ 16,007 1,080 188 1,555 18,830
=========== =========== =========== =========== =========
Management estimates that the fair market value of all of its
investments in available-for-sale securities and others aggregated
$23,760 million and $19,664 million at December 31, 2001 and December
31, 2000, respectively. Management calculates market values using a
variety of approaches including multiple of cash flow, per subscriber
value, a value of comparable public or private businesses or publicly
quoted market prices. No independent appraisals were conducted for
those assets.
Forward Foreign Exchange Contracts
The Company does not hedge the majority of its foreign currency
exchange risk because of the long term nature of its interests in
foreign affiliates. During 2001, the Company entered into a definitive
agreement to acquire six regional cable television systems in Germany.
A portion of the consideration for such acquisition was to be
denominated in euros. In order to reduce its exposure to changes in the
euro exchange rate, Liberty had entered into forward purchase contracts
with respect to euro 3,243 million as of December 31, 2001. Such
contracts generally have terms ranging from 90 to 120 days and can be
renewed at their expiration at Liberty's option. Liberty is not
accounting for the forward purchase contracts as hedges. At December
31, 2001, the Company had recorded a liability of $24 million
representing unrealized losses related to these contracts due to a
decrease in the value of the euro compared to the U.S. dollar.
Total Return Debt Swaps
From time to time the Company enters into total return debt swaps in
connection with its purchase of its own or third-party public and
private indebtedness. Under these arrangements, Liberty directs a
counterparty to purchase a specified amount of the underlying debt
security for the benefit of the Company. The Company posts collateral
with the counterparty equal to 10% of
II-47
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
the value of the purchased securities. The Company earns interest
income based upon the face amount and stated interest rate of the
debentures, and pays interest expense at market rates on the amount
funded by the counterparty. In the event the fair value of the
underlying debentures declines, the Company is required to post cash
collateral for the decline, and the Company records an unrealized loss
on financial instruments. Liberty has the contractual right to net
settle the total return debt swaps, and currently, intends to do so.
Accordingly, Liberty records the net asset related to the total return
debt swaps.
At December 31, 2001, the aggregate purchase price of debt securities
underlying Liberty's total return debt swap arrangements was $118
million. As of such date, the Company had posted cash collateral equal
to $59 million. In the event the fair value of the purchased debt
securities were to fall to zero, the Company would be required to post
additional cash collateral of $59 million.
(7) Acquisitions and Dispositions
-----------------------------
2000
----
Associated Group, Inc. ("Associated Group")
On January 14, 2000, Liberty completed its acquisition of Associated
Group pursuant to a merger agreement among AT&T, Liberty and Associated
Group. Under the merger agreement, each share of Associated Group's
Class A common stock and Class B common stock was converted into
0.49634 shares of AT&T common stock and 2.41422 shares of AT&T Class A
Liberty Media Group common stock. Prior to the merger, Associated
Group's primary assets were (1) 19.7 million shares of AT&T common
stock, (2) 46.8 million shares of AT&T Class A Liberty Media Group
common stock, (3) 10.6 million shares of AT&T Class B Liberty Media
Group common stock, (4) 21.4 million shares of common stock of
Teligent, and (5) all of the outstanding shares of common stock of
TruePosition, Inc., which provides location services for wireless
carriers and users designed to determine the location of any wireless
transmitter, including cellular and PCS telephones. Immediately
following the completion of the merger, all of the assets and
businesses of Associated Group were transferred to Liberty. All of the
shares of AT&T common stock, AT&T Class A Liberty Media Group common
stock and AT&T Class B Liberty Media Group common stock previously held
by Associated Group were retired by AT&T.
The acquisition of Associated Group was accounted for as a purchase,
and the $17 million excess of the fair value of the net assets acquired
over the purchase price is being amortized over ten years. As a result
of the issuance of AT&T Class A Liberty Media Group common stock, net
of the shares of AT&T Class A Liberty Media Group common stock acquired
in this transaction, Liberty recorded a $778 million increase to
additional paid-in-capital, which represents the total purchase price
of this acquisition.
Liberty Satellite & Technology, Inc.
On March 16, 2000, Liberty purchased shares of preferred stock in TCI
Satellite Entertainment, Inc. in exchange for Liberty's economic
interest in approximately 5 million shares of Sprint PCS Group stock,
which had a fair value of $300 million. During the third quarter of
2000, TCI Satellite Entertainment, Inc. changed its name to Liberty
Satellite & Technology, Inc. ("LSAT"). Liberty received 150,000 shares
of LSAT Series A 12% Cumulative Preferred Stock and 150,000 shares of
LSAT Series B 8% Cumulative Convertible Voting Preferred Stock. The
Series A preferred stock does not have voting rights, while the Series
B preferred stock gives Liberty approximately 85% of the voting power
of LSAT. In connection with this transaction, Liberty realized a $211
million gain (before related tax expense of $84 million) based on the
difference between the cost basis and fair value of the economic
interest in the Sprint PCS Group stock exchanged.
II-48
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Ascent Entertainment Group, Inc. ("Ascent")
On March 28, 2000, Liberty completed its cash tender offer for the
outstanding common stock of Ascent at a price of $15.25 per share.
Approximately 85% of the outstanding shares of common stock of Ascent
were tendered in the offer and Liberty paid approximately $385 million.
On June 8, 2000, Liberty completed its acquisition of 100% of Ascent
for an additional $67 million. The total purchase price for the
acquisition was $452 million. Such transaction was accounted for as a
purchase, and the $228 million excess of the purchase price over the
fair value of the net assets acquired is being amortized over five
years.
Liberty Livewire Corporation ("Liberty Livewire")
On April 10, 2000, Liberty acquired all of the outstanding common stock
of Four Media Company ("Four Media") for total consideration of $462
million comprised of $123 million in cash, $194 million of assumed
debt, 6.4 million shares of AT&T Class A Liberty Media Group common
stock and a warrant to purchase approximately 700,000 shares of AT&T
Class A Liberty Media Group common stock at an exercise price of $23
per share. Four Media provides technical and creative services to
owners, producers and distributors of television programming, feature
films and other entertainment products both domestically and
internationally.
On June 9, 2000, Liberty acquired a controlling interest in The Todd-AO
Corporation ("Todd-AO"), in exchange for approximately 5.4 million
shares of AT&T Class A Liberty Media Group common stock valued at $106
million. Todd-AO provides sound, video and ancillary post production
and distribution services to the motion picture and television
industries in the United States and Europe.
Immediately following the closing of such transaction, Liberty
contributed to Todd-AO 100% of the capital stock of Four Media, in
exchange for approximately 16.6 million shares of the Class B Common
Stock of Todd-AO increasing Liberty's ownership interest in Todd-AO to
approximately 84% of the equity and approximately 98% of the voting
power. Following Liberty's acquisition of Todd-AO, and the contribution
by Liberty to Todd-AO of Liberty's ownership in Four Media, Todd-AO
changed its name to Liberty Livewire.
On July 19, 2000, Liberty purchased all of the assets relating to the
post production, content and sound editorial businesses of SounDelux
Entertainment Group for $90 million in cash, and contributed such
assets to Liberty Livewire in exchange for approximately 8.2 million
additional shares of Liberty Livewire Class B Common Stock. Following
this contribution, Liberty's ownership in Liberty Livewire increased to
approximately 88% of the equity and approximately 99% of the voting
power of Liberty Livewire.
Each of the foregoing acquisitions was accounted for as a purchase. In
connection therewith, Liberty recorded an aggregate increase to
additional paid-in-capital of $251 million. The $452 million excess
purchase price over the fair value of the net assets acquired is being
amortized over 20 years.
1999
----
TV Guide
--------
On March 1, 1999, United Video Satellite Group, Inc. ("UVSG"), a
consolidated subsidiary of Liberty, and News Corp. completed a
transaction whereby UVSG acquired News Corp.'s TV Guide properties and
UVSG was renamed TV Guide. Upon completion of this transaction, and
another transaction completed by TV Guide on the same date, Liberty
owned an economic interest of approximately 44% and controlled
approximately 49% of the voting power of TV Guide. In connection with
the increase in TV Guide's equity, net of dilution of Liberty's
ownership interest in TV Guide, Liberty recognized a gain of $372
million (before deducting deferred income taxes of
II-49
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
$147 million). Upon consummation, Liberty began accounting for its
interest in TV Guide under the equity method of accounting.
Pro Forma Information
The following unaudited pro forma information for the year ended
December 31, 2000 was prepared assuming the 2000 acquisitions discussed
above occurred on January 1, 2000. These pro forma amounts are not
necessarily indicative of operating results that would have occurred if
the acquisitions discussed above had occurred on January 1, 2000.
Revenue $ 1,769
Net earnings $ 1,413
Pro forma basic and diluted
earnings per common share $ 0.55
(8) Long-Term Debt
--------------
Debt is summarized as follows:
Weighted
average
interest December 31,
rate -------------------------
2001 2001 2000
---------- ---------- ----------
amounts in millions
Parent company debt:
Senior notes 7.8% $ 982 742
Senior debentures 8.3% 1,486 1,486
Senior exchangeable debentures 3.7% 858 1,679
Bank credit facilities 2.6% 675 475
Other debt 8.0% 288 580
---------- ----------
4,289 4,962
Debt of subsidiaries:
Bank credit facilities 4.3% 1,310 1,129
Senior notes N/A -- 179
Other debt, at varying rates 308 93
---------- ----------
1,618 1,401
---------- ----------
Total debt 5,907 6,363
Less current maturities 4.5% (1,143) (1,094)
---------- ----------
Total long-term debt $ 4,764 5,269
========== ==========
Senior Notes and Debentures
In July 1999, Liberty issued $750 million of 7-7/8% Senior Notes due
2009 and issued $500 million of 8-1/2% Senior Debentures due 2029 for
aggregate cash proceeds of $741 million and $494 million, respectively.
Interest on both issuances is payable on January 15 and July 15 of each
year.
In February 2000, Liberty issued $1 billion of 8-1/4% Senior Debentures
due 2030 for aggregate cash proceeds of $983 million. Interest on these
debentures is payable on February 1 and August 1 of each year.
II-50
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In December 2001, the Company issued $237.8 million of 7-3/4% Senior
Notes due 2009 for cash proceeds of $238.4 million. Interest on these
notes is payable on January 15 and July 15 of each year.
The senior notes and debentures are stated net of an aggregate
unamortized discount of $19 million and $22 million at December 31,
2001 and 2000, respectively, which is being amortized to interest
expense in the consolidated statements of operations.
Senior Exchangeable Debentures
In November 1999, Liberty issued $869 million of 4% Senior Exchangeable
Debentures due 2029. Interest is payable on May 15 and November 15 of
each year. Each $1,000 debenture is exchangeable at the holder's option
for the value of 22.9486 shares of Sprint PCS Group stock. After the
later of December 31, 2001 or the date Liberty's ownership level in the
Sprint PCS Group falls below a specified level, Liberty may, at its
election, pay the exchange value in cash, Sprint PCS Group stock or a
combination thereof. Prior to such time, the exchange value must be
paid in cash.
In February and March 2000, Liberty issued an aggregate of $810 million
of 3-3/4% Senior Exchangeable Debentures due 2030. Interest is payable
on February 15 and August 15 of each year. Each $1,000 debenture is
exchangeable at the holder's option for the value of 16.7764 shares of
Sprint PCS Group stock. After the later of February 15, 2002 or the
date Liberty's ownership level in the Sprint PCS Group falls below a
specified level, Liberty may, at its election, pay the exchange value
in cash, Sprint PCS Group stock or a combination thereof. Prior to such
time, the exchange value must be paid in cash.
In January 2001, Liberty issued $600 million of 3-1/2% Senior
Exchangeable Debentures due 2031. Interest is payable on January 15 and
July 15 of each year. Each $1,000 debenture is exchangeable at the
holder's option for the value of 36.8189 shares of Motorola common
stock. Such exchange value is payable, at Liberty's option, in cash,
Motorola stock or a combination thereof. On or after January 15, 2006,
Liberty, at its option, may redeem the debentures for cash.
In March 2001, Liberty issued $817.7 million of 3-1/4% Senior
Exchangeable Debentures due 2031. Interest is payable on March 15 and
September 15 of each year. Each $1,000 debenture is exchangeable at the
holder's option for the value of 18.5666 shares of Viacom Class B
common stock. After January 23, 2003, such exchange value is payable at
Liberty's option in cash, Viacom stock or a combination thereof. Prior
to such date, the exchange value must be paid in cash. On or after
March 15, 2006, Liberty, at its option, may redeem the debentures for
cash.
Prior to the adoption of Statement 133, the carrying amount of the
senior exchangeable debentures was adjusted based on the fair value of
the underlying security. Increases or decreases in the value of the
underlying security above the principal amount of the senior
exchangeable debentures were recorded as unrealized gains or losses on
financial instruments in the consolidated statements of operations. If
the value of the underlying security decreased below the principal
amount of the senior exchangeable debentures there was no effect on the
principal amount of the debentures.
Upon adoption of Statement 133, the call option feature of the
exchangeable debentures is reported separately in the consolidated
balance sheet at fair value. Accordingly, at January 1, 2001, Liberty
recorded a transition adjustment to reflect the call option obligations
at fair value ($459 million) and to recognize in net earnings the
difference between the fair value of the call option obligations at
issuance and the fair value of the call option obligations at January
1, 2001. Such adjustment to net earnings aggregated $757 million
(before tax expense of $299 million) and is included in cumulative
effect of accounting change. Changes in the fair value of the call
option obligations subsequent to January 1, 2001 are recognized as
unrealized gains (losses) on
II-51
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
financial instruments in Liberty's consolidated statements of
operations. During the year ended December 31, 2001, Liberty recorded
unrealized gains of $167 million related to the call option
obligations.
Under Statement 133, the reported amount of the long-term debt portion
of the exchangeable debentures is calculated as the difference between
the face amount of the debentures and the fair value of the call option
feature on the date of issuance. The fair value of the call option
obligations related to the $1,418 million of exchangeable debentures
issued during the year ended December 31, 2001, aggregated $1,028
million on the date of issuance. Accordingly, the long-term debt
portion was recorded at $390 million. The long-term debt is accreted to
its face amount over the term of the debenture using the effective
interest method. Such accretion aggregated $6 million during the year
ended December 31, 2001, and is included in interest expense. The
transition adjustment noted above resulted in a decrease in the
carrying value of the long-term debt portion of the senior exchangeable
debentures of $1,216 million on January 1, 2001.
Bank Credit Facilities
At December 31, 2001, Liberty and its subsidiaries had approximately
$217 million in unused lines of credit under their respective bank
credit facilities. The bank credit facilities generally contain
restrictive covenants which require, among other things, the
maintenance of certain financial ratios, and include limitations on
indebtedness, liens, encumbrances, acquisitions, dispositions,
guarantees and dividends. The borrowers were in compliance with their
debt covenants at December 31, 2001. Additionally, the bank credit
facilities require the payment of fees ranging from .15% to .375% per
annum on the average unborrowed portions of the total commitments.
The U.S. dollar equivalent of the annual maturities of Liberty's debt
for each of the next five years are as follows (amounts in millions):
2002 $ 1,143
2003 211
2004 121
2005 435
2006 589
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to
Liberty for debt of the same remaining maturities. The fair value of
Liberty's publicly traded debt at December 31, 2001 is as follows
(amounts in millions):
Senior notes of parent company $ 1,024
Senior debentures of parent company 1,438
Senior exchangeable debentures of parent company,
including call option liability 2,323
Liberty believes that the carrying amount of the remainder of its debt,
which is comprised primarily of variable rate debt, approximated its
fair value at December 31, 2001.
II-52
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
A reconciliation of the carrying value of the Company's debt to the
face amount at maturity is as follows (amounts in millions):
Carrying value at December 31, 2001 $ 5,907
Add:
Unamortized issue discount on Senior Notes
and Debentures 19
Unamortized discount attributable to call option
feature of exchangeable debentures 2,238
----------
Face amount at maturity $ 8,164
==========
(9) Income Taxes
------------
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was
a party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing
Agreement"). Liberty calculated its respective tax liability on a
separate return basis. The income tax provision for Liberty was
calculated based on the increase or decrease in the tax liability of
the AT&T consolidated group resulting from the inclusion of those items
in the consolidated tax return of AT&T which were attributable to
Liberty.
Under the AT&T Tax Sharing Agreement, Liberty received a cash payment
from AT&T in periods when it generated taxable losses and such taxable
losses were utilized by AT&T to reduce the consolidated income tax
liability. This utilization of taxable losses was accounted for by
Liberty as a current federal intercompany income tax benefit. To the
extent such losses were not utilized by AT&T, such amounts were
available to reduce federal taxable income generated by Liberty in
future periods, similar to a net operating loss carryforward, and were
accounted for as a deferred federal income tax benefit.
In periods when Liberty generated federal taxable income, AT&T agreed
to satisfy such tax liability on Liberty's behalf up to a certain
amount. Thereafter, Liberty was required to make cash payments to AT&T
for federal tax liabilities of Liberty. The reduction of such computed
tax liabilities was accounted for by Liberty as an increase to
additional paid-in-capital.
To the extent AT&T utilized existing net operating losses of Liberty,
such amounts were accounted for by Liberty as a reduction of additional
paid-in-capital. Net operating losses of Liberty with a tax effected
carrying value of $2 million, $38 million and $88 million were recorded
as a reduction to additional paid-in-capital during the seven months
ended July 31, 2001, the year ended December 31, 2000 and the ten
months ended December 31, 1999, respectively.
Liberty generally made cash payments to AT&T related to states where it
generated taxable income and received cash payments from AT&T in states
where it generates taxable losses.
Prior to the AT&T Merger, Liberty was included in TCI's consolidated
tax return and was a party to the TCI tax sharing agreements.
II-53
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Income tax benefit (expense) consists of:
New Liberty Old Liberty
------------------------------------------ -------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
amounts in millions
Current:
Federal $ 297 277 75 1
State and local (2) 10 (3) --
------------ ------------ ------------ ------------
295 287 72 1
------------ ------------ ------------ ------------
Deferred:
Federal 3,166 (1,490) 873 (168)
State and local 447 (331) 152 (44)
------------ ------------ ------------ ------------
3,613 (1,821) 1,025 (212)
------------ ------------ ------------ ------------
Income tax benefit (expense) $ 3,908 (1,534) 1,097 (211)
============ ============ ============ ============
Income tax benefit (expense) differs from the amounts computed by
applying the U.S. federal income tax rate of 35% as a result of the
following:
New Liberty Old Liberty
------------------------------------------ -------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
amounts in millions
Computed expected tax
benefit expense) $ 3,809 (1,035) 1,107 (49)
Dividends excluded for
income tax purposes 18 22 11 2
Amortization not deductible
for income tax purposes (260) (187) (122) (4)
State and local income
taxes, net of federal
income taxes 289 (204) 102 (29)
Recognition of difference
in income tax basis of
investments in
subsidiaries 21 (69) -- (130)
Effect of change in
estimated state tax rate 91 -- -- --
Change in valuation
allowance (71) (50) -- --
Other, net 11 (11) (1) (1)
---------- ---------- ---------- ----------
$ 3,908 (1,534) 1,097 (211)
========== ========== ========== ==========
II-54
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
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, 2001 and 2000 are presented below:
December 31,
-------------------------
2001 2000
---------- ----------
amounts in millions
Deferred tax assets:
Net operating and capital loss carryforwards $ 370 363
Accrued stock compensation 296 247
Other future deductible amounts 31 --
---------- ----------
Deferred tax assets 697 610
Valuation allowance (273) (202)
---------- ----------
Net deferred tax assets 424 408
---------- ----------
Deferred tax liabilities:
Investments 8,422 11,255
Intangible assets 164 218
Discount on exchangeable debentures 455 --
Other 49 30
---------- ----------
Deferred tax liabilities 9,090 11,503
---------- ----------
Net deferred tax liabilities $ 8,666 11,095
========== ==========
At December 31, 2001, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $1,016
million which, if not utilized to reduce taxable income in future
periods, will expire as follows: 2004: $1 million; 2005: $16 million;
2006: $14 million; 2007: $16 million; 2008: $12 million; 2009: $27
million; 2010: $6 million; and beyond 2010: $924 million. These net
operating losses are subject to certain rules limiting their usage.
AT&T, as the successor to TCI, is the subject of an Internal Revenue
Service ("IRS") audit for the 1993-1995 tax years. The IRS has notified
AT&T and Liberty that it is considering proposing income adjustments
and assessing certain penalties in connection with TCI's 1994 tax
return. The IRS's position could result in recognition of up to
approximately $305 million of additional income, resulting in as much
as $107 million of additional tax liability, plus interest. In
addition, the IRS may assert certain penalties. AT&T and Liberty do not
agree with the IRS's proposed adjustments and penalties, and AT&T and
Liberty intend to vigorously defend their position. Pursuant to the
AT&T Tax Sharing Agreement, Liberty may be obligated to reimburse AT&T
for any tax that AT&T is ultimately assessed as a result of this audit.
Liberty is currently unable to estimate a range of any such
reimbursement, but believes that any such reimbursement would not be
material to its financial position.
(10) Stockholder's Equity
--------------------
Preferred Stock
The Preferred Stock is issuable, from time to time, with such
designations, preferences and relative participating, option or other
special rights, qualifications, limitations or restrictions thereof, as
shall be stated and expressed in a resolution or resolutions providing
for the issue of such Preferred Stock adopted by the Board. As of
December 31, 2001, no shares of preferred stock were issued.
Common Stock
Prior to the Split Off Transaction, Liberty had 1,000 shares of each of
Class A, Class B and Class C common stock outstanding. In connection
with the Split Off Transaction, the Class A and Class B common stock
were reclassified into Series A common stock and the Class C common
II-55
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
stock was reclassified into Series B common stock. The Series A common
stock has one vote per share, and the Series B common stock has ten
votes per share. Each share of the Series B common stock is
exchangeable at the option of the holder for one share of Series A
common stock.
As of December 31, 2001, there were 75 million shares of Liberty Series
A common stock reserved for issuance under exercise privileges of
outstanding stock options.
Stock Issuances of Subsidiaries and Equity Affiliates
Certain consolidated subsidiaries and equity affiliates of Liberty have
issued shares of common stock in connection with acquisitions and the
exercise of employee stock options. In connection with the increase in
the issuers' equity, net of the dilution of Liberty's ownership
interest, that resulted from such stock issuances, Liberty recorded
increases (decreases) to additional paid-in-capital as follows:
Ten months
Year ended Year ended ended
December 31, December 31, December 31,
2001 2000 1999
------------ ------------ ------------
amounts in millions
Stock issuances by consolidated
subsidiaries $ (8) 212 107
Stock issuances by equity affiliates
(net of deferred income taxes of $ 75
million and $1 million, respectively) -- 143 1
------------ ------------ ------------
$ (8) 355 108
============ ============ ============
Transactions with Officers and Directors
During the second quarter of 2001, Liberty purchased 2,245,155 shares
of common stock of On Command Corporation ("On Command"), a
consolidated subsidiary of Liberty, from an executive officer and
director of On Command, who is also a director of Liberty, for
aggregate cash consideration of $25.2 million. Such purchase price
represents a per share price of $11.22. The closing market price for On
Command common stock on the day the transaction was signed was $7.77.
The Company has included the difference between the aggregate market
value of the shares purchased and the cash consideration paid in
selling, general and administrative expenses in the accompanying
consolidated statement of operations.
In November 2000, Liberty granted certain officers, a director of
Liberty (the "Liberty Director"), and a board member of Liberty
Livewire an aggregate 4.0725% common stock interest in Liberty LWR,
Inc. ("LWR"), which owned a direct interest in Liberty Livewire. The
common stock interest granted to these individuals had a value of
approximately $400,000. LWR also awarded the Liberty Director a
deferred bonus in the initial total amount of approximately $3.4
million, which amount will decrease by an amount equal to any increase
over the five-year period from the date of the award in the value of
certain of the common shares granted to the Liberty Director. Liberty
and the individuals entered into a stockholders' agreement in which the
individuals could require Liberty to repurchase, after five years, all
or part of their common stock interest in exchange for Series A Liberty
stock at its then fair market value. In addition, Liberty has the right
to repurchase, in exchange for Series A Liberty common stock, the
common stock interests held by the individuals at fair market value at
any time.
In July 2001, LWR formed Liberty Livewire Holdings, Inc. ("Livewire
Holdings") as a wholly owned subsidiary. LWR then sold to certain
officers and the Liberty Director an aggregate 19.872% common stock
interest in Livewire Holdings with an aggregate value of $600. Liberty,
LWR and
II-56
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
these individuals entered into a stockholders agreement pursuant to
which the individuals can require Liberty to purchase, after five
years, all or part of their common stock interest in Livewire Holdings,
in exchange for Liberty common stock, at its then-fair market value. In
addition, Liberty has the right to purchase, in exchange for its common
stock, their common stock interests in Livewire Holdings for fair
market value at any time.
In August 2001, in connection with the termination of Liberty
Livewire's director and chief executive officer, LWR purchased his
common stock interest in LWR. In October 2001, LWR purchased from the
Liberty officers and the Liberty Director their respective common stock
interests in LWR. In connection with the purchase of his common stock
interest in LWR, the Liberty Director waived the right to receive his
deferred bonus. Upon the completion of these purchases, LWR became a
wholly owned subsidiary of the Company.
In October 2000, Liberty restructured its ownership interests in
certain assets into a new consolidated subsidiary. Liberty then sold a
preferred interest in such subsidiary to Liberty's Chairman of the
Board of Directors in exchange for approximately 540,000 shares of LSAT
Series A common stock, approximately 3.3 million shares of LSAT Series
B common stock and cash consideration of approximately $88 million. No
gain or loss was recognized due to the related party nature of such
transaction. The preferred interest has a liquidation value of $106
million and accrues dividends at 9% per annum payable quarterly in
cash.
In September 2000, certain officers of Liberty purchased a 6% common
stock interest in a subsidiary for $1.3 million. Such subsidiary owns
an indirect interest in an entity that holds certain of Liberty's
investments in satellite and technology related assets. Liberty and the
officers entered into a shareholders agreement in which the officers
could require Liberty to purchase, after five years, all or part of
their common stock interest in exchange for Series A Liberty stock at
the then fair market value. In addition, Liberty has the right to
purchase, in exchange for Series A Liberty common stock, the common
stock interests held by the officers at fair market value at any time.
During 2001, two of the officers resigned their positions with the
Company, and the Company purchased their respective interests in the
subsidiary for the original purchase price plus 6% interest.
In August 2000, a subsidiary of Liberty sold shares of such
subsidiary's Series A Convertible Participating Preferred Stock (the
"Preferred Shares") to a director of Liberty, who was also the Chairman
and Chief Executive Officer of such subsidiary, for a $21 million note.
The Preferred Shares are convertible into 1.4 million shares of the
subsidiary's common stock. The note is secured by the Preferred Shares
or the proceeds from the sale of such shares and the director's
personal obligations under such loan are limited. The note, which
matures on August 1, 2005, may not be prepaid and interest on the note
accrues at a rate of 7% per annum.
In May 2000, Liberty's President and Chief Executive Officer, certain
officers of a subsidiary and another individual purchased an aggregate
20% common stock interest in a subsidiary for $800,000. This subsidiary
owns a 7% interest in Jupiter Telecommunications Co., Inc. Liberty and
the individuals entered into a shareholders agreement in which the
individuals could require Liberty to purchase, after five years, all or
part of their common stock interest in exchange for Series A Liberty
common stock at its then fair market value. In addition, Liberty has
the right to purchase, in exchange for Series A Liberty common stock,
the common stock interests held by the officers at fair market value at
any time. Liberty recognized $ 4 million and $3 million of compensation
expense related to changes in the market value of its contingent
liability to reacquire the common stock interests held by these
officers during the years ended December 31, 2001 and 2000,
respectively.
In connection with the AT&T Merger, Liberty paid two of its directors
and one other individual, all three of whom were directors of TCI, an
aggregate of $12 million for services rendered in connection with the
AT&T Merger. Such amount is included in operating, selling, general and
II-57
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
administrative expenses for the two months ended February 28, 1999 in
the accompanying consolidated statements of operations.
Liberty is party to a call agreement with certain shareholders of
Series B Liberty common stock, including the Chairman of the Board of
Directors, which grants Liberty a right to acquire all of the Series B
Liberty common stock held by such shareholders in certain
circumstances. The price of acquiring such shares is generally limited
to the market price of the Series A Liberty common stock, plus a 10%
premium.
Transactions with AT&T and Other Related Parties
Certain subsidiaries of Liberty produce and/or distribute programming
and other services to cable distribution operators (including AT&T) and
others pursuant to long term affiliation agreements. Charges to AT&T
are based upon customary rates charged to others. Amounts included in
revenue for services provided to AT&T were $210 million, $243 million,
$180 million and $43 million for the seven months ended July 31, 2001,
the year ended December 31, 2000, the ten months ended December 31,
1999 and the two months ended February 28, 1999, respectively.
Prior to the Split Off Transaction, AT&T allocated certain corporate
general and administrative costs to Liberty pursuant to an intergroup
agreement. Management believes such allocation methods were reasonable
and materially approximated the amount that Liberty would have incurred
on a stand-alone basis. In addition, there are arrangements between
subsidiaries of Liberty and AT&T and its other subsidiaries for
satellite transponder services, marketing support, programming, and
hosting services. These expenses aggregated $20 million, $37 million,
$24 million and $6 million during the seven months ended July 31, 2001
(the period immediately prior to the Split Off Transaction), the year
ended December 31, 2000, the ten months ended December 31, 1999 and the
two months ended February 28, 1999, respectively.
On April 8, 1999, Liberty redeemed all of its outstanding 4-1/2%
convertible subordinated debentures. The debentures were convertible
into shares of AT&T Liberty Media Group Class A common stock at a
conversion price of $11.77, or 84.96 shares per $1,000 principal
amount. Certain holders of the debentures had exercised their rights to
convert their debentures and 29.2 million shares of AT&T Liberty Media
Group tracking stock were issued to such holders. In connection with
such issuance of AT&T Liberty Media Group tracking stock, Liberty
recorded an increase to additional paid-in-capital of $354 million.
(11) Stock Options and Stock Appreciation Rights
-------------------------------------------
Liberty
-------
Effective with the Split Off Transaction, Liberty assumed from AT&T the
Amended and Restated AT&T Corp. Liberty Media Group 2000 Incentive Plan
and renamed it the Liberty Media Corporation 2000 Incentive Plan (the
"Liberty Incentive Plan"). Grants by TCI of options and options with
tandem stock appreciation rights ("SARs") with respect to shares of
Liberty Media Group stock prior to 1999 were assumed by Liberty under
the Liberty Incentive Plan. Grants of free standing SARs made under the
Plan in 2000 and in 2001 prior to the Split Off Transaction were
converted into options upon assumption by Liberty.
The Liberty Incentive Plan provides for awards to be made in respect of
a maximum of 160 million shares of common stock of Liberty. Awards may
be made as grants of stock options, SARs, restricted shares, stock
units, cash or any combination thereof.
Effective February 28, 2001 (the "Effective Date"), the Company
restructured the options and options with tandem SARs to purchase AT&T
common stock and AT&T Liberty Media Group tracking stock (collectively
the "Restructured Options") held by certain executive officers of the
II-58
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Company. Pursuant to such restructuring, all Restructured Options
became exercisable on the Effective Date, and each executive officer
was given the choice to exercise all of his Restructured Options. Each
executive officer who opted to exercise his Restructured Options
received consideration equal to the excess of the closing price of the
subject securities on the Effective Date over the exercise price. The
exercising officers received (i) a combination of cash and AT&T Liberty
Media Group tracking stock for Restructured Options that were vested
prior to the Effective Date and (ii) cash for Restructured Options that
were previously unvested. The executive officers used the cash proceeds
from the previously unvested options to purchase restricted shares of
AT&T Liberty Media Group tracking stock. Such restricted shares are
subject to forfeiture upon termination of employment. The forfeiture
obligation will lapse according to a schedule that corresponds to the
vesting schedule applicable to the previously unvested options.
In addition, each executive officer was granted free-standing SARs
equal to the total number of Restructured Options exercised. The
free-standing SARs were tied to the value of AT&T Liberty Media Group
tracking stock and will vest as to 30% in year one and 17.5% in years
two through five. The free-standing SARs have an exercise price of
$14.70 and had a fair value of $9.56 on the date of the grant. Upon
completion of the Split Off Transaction, the free-standing SARs
automatically converted to options to purchase Liberty Series A common
stock. Prior to the Effective Date, the Restructured Options were
accounted for using variable plan accounting pursuant to APB Opinion
No. 25. Accordingly, the above-described transaction did not have a
significant impact on Liberty's results of operations.
The following table presents the number and weighted average exercise
price ("WAEP") of certain options and options with tandem SARs to
purchase Liberty Series A common stock granted to certain officers and
other key employees of the Company.
Liberty
Series A
common
stock WAEP
---------- -------------
amounts in thousands, except
for WAEP
Outstanding at January 1, 1999 78,158 $ 23.19
Granted 1,244 18.43
Exercised (7,510) 5.02
Adjustment for transfer of employees (1,158) 6.70
----------
Outstanding at December 31, 1999 70,734 6.97
Granted 2,341 21.73
Exercised (7,214) 5.69
Canceled (479) 9.45
Options issued in mergers 12,134 4.75
----------
Outstanding at December 31, 2000 77,516 7.20
Granted 49,087 14.72
Exercised (50,315) 7.62
Canceled (1,167) 16.88
----------
Outstanding at December 31, 2001 75,121 11.69
==========
Exercisable at December 31, 1999 14,341
==========
Exercisable at December 31, 2000 52,856
==========
Exercisable at December 31, 2001 23,494
==========
Vesting period 5 yrs
II-59
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table provides certain information about the Company's
outstanding options at December 31, 2001.
No. of Weighted No. of
outstanding Range of WAEP of average exercisable WAEP of
options exercise outstanding remaining options exercisable
(000's) prices options life (000's) options
--------------- ------------------ -------------- ------------- --------------- -----------
17,566 $ 1.08 -$ 5.00 $ 2.04 4.0 yrs 17,534 $ 2.04
1,180 $ 6.30 -$ 9.95 $ 7.05 5.1 yrs 1,043 $ 7.00
53,336 $ 10.81 -$ 14.75 $ 14.47 8.9 yrs 4,126 $ 12.25
3,039 $ 16.35 -$ 28.40 $ 20.59 8.6 yrs 791 $ 20.11
------------- -------------
75,121 23,494
============= =============
As permitted by Statement 123, the Company accounts for stock-based
compensation pursuant to the intrinsic value method prescribed by APB
Opinion No. 25 and its interpretations. In accordance with APB Opinion
No. 25, Liberty accounts for stock options with tandem SARs granted to
its employees as variable plan awards. Liabilities and the related
compensation expense under these awards are subject to future
adjustment based upon vesting provisions and the market value of the
underlying security and, ultimately, on the final determination of
market value when the rights are exercised. The Company accounts for
stand-alone options as fixed plan awards, and accordingly, no
compensation is recognized for these awards. If the Company had
determined compensation expense based upon the grant-date fair value
method pursuant to Statement 123, the Company's 2001 net loss and pro
forma net loss per common share would have been $6,335 million and
$2.45, respectively. The Company's net earnings (loss) and pro forma
net earnings (loss) per share for 2000 and 1999 would not have been
significantly different from what has been reflected in the
accompanying consolidated financial statements as substantially all of
Liberty's stock option awards had tandem SARs in 2000 and 1999.
In addition to the SARs issued in the aforementioned option
restructuring, during 2001 and pursuant to the Liberty Incentive Plan,
Liberty awarded 2,104,000 options to purchase Liberty Series A common
stock to certain officers and key employees of the Company. Such
options have exercise prices ranging from $12.40 to $16.35, vest as to
25% in each of years 2 through 5 after the date of grant, and had a
weighted-average grant date fair value of $9.40.
The estimated fair values of the options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a
present value basis. The key assumptions used in the model for purposes
of these calculations generally include the following: (a) a discount
rate equal to the 10-year Treasury rate on the date of grant; (b) a 45%
volatility factor, (c) the 10-year option term; (d) the closing price
of the respective common stock on the date of grant; and (e) an
expected dividend rate of zero.
Liberty Digital, Inc.
---------------------
Deferred Compensation and Stock Option Plan. On September 8, 1999,
Liberty Digital adopted the Deferred Compensation and Stock
Appreciation Rights Plan for key executives. This plan is comprised of
a deferred compensation component and SARs grants. The deferred
compensation component provides participants with the right to receive
an aggregate of nine and one half percent of the appreciation in the
Liberty Digital Series A common stock market price over $2.46 subject
to a maximum amount of $19.125. The SARs provide participants with the
appreciation in the market price of the Liberty Digital Series A common
stock above the maximum amount payable under the deferred compensation
component. Obligations to the executives under both the deferred
compensation and SAR elements of this plan are accounted for as
variable award plans.
II-60
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
There are 19,295,193 shares subject to this plan all of which were
granted in 1999 at an effective exercise price of $2.46 and a weighted
average remaining life of 3 years at year end. The deferred
compensation and SARs components vest 20% annually beginning with the
first vesting date of December 15, 1999. Fully vested unexercised SARs
total 3,046,188 at year-end. During the year ended December 31, 1999,
there were no exercises, cancellations or expirations. During 2000
there were 3,859,038 options exercised, and 3,251,401 options
cancelled. This plan terminates on December 15, 2003.
Subsequent to December 31, 2001, Liberty effected a short form merger
with Liberty Digital whereby Liberty Digital shareholders received 0.25
shares of Liberty Series A common stock for each share of Liberty
Digital Series A common stock held. Subsequent to this merger Liberty
owns 100% of Liberty Digital. In connection with this merger, all
outstanding Liberty Digital SARs were converted to Liberty SARs at the
rate of 0.25 for 1. In addition, all amounts accrued under the deferred
compensation plan were paid, and the deferred compensation plan was
terminated.
During the first quarter of 2000, an executive officer of Liberty
Digital elected to exercise certain of his SARs that had been granted
by Liberty Digital. In order to satisfy Liberty Digital's obligations
under the stock option agreement, LDIG and Liberty offered to issue,
and the executive agreed to accept, a combination of cash and AT&T
Liberty Media Group tracking stock in lieu of a cash payment.
Accordingly, Liberty paid cash of $50 million and issued 5.8 million
shares to the executive officer in the first quarter of 2001.
Starz Encore Group
Starz Encore Group Phantom Stock Appreciation Rights Plan. During 2000
and 1999 Starz Encore Group granted Phantom Stock Appreciation Rights
(PSARS) to certain of its officers under this plan. PSARS granted under
the plan generally vest over a five year period. Compensation under the
PSARS is computed based upon a formula derived from the appraised fair
value of the net assets of Starz Encore Group. All amounts earned under
the plan are payable in cash.
Other
Certain of the Company's subsidiaries have stock based compensation
plans under which employees and non-employees are granted options or
similar stock based awards. Awards made under these plans vest and
become exercisable over various terms. The awards and compensation
recorded, if any, under these plans is not significant to Liberty.
(12) Employee Benefit Plans
----------------------
Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Plan"), which provides employees an opportunity for
ownership in the Company and creates a retirement fund. The Liberty
401(k) Plan provides for employees to contribute up to 10% of their
compensation to a trust for investment in Liberty common stock, as well
as several mutual funds. The Company, by annual resolution of the
Board, generally contributes up to 100% of the amount contributed by
employees. Certain of the Company's subsidiaries have their own
employee benefit plans. Contributions to all plans aggregated $10
million, $7 million, $3 million and $1 million for the years ended
December 31, 2001 and 2000, the ten months ended December 31, 1999 and
the two months ended February 28, 1999, respectively.
(13) Other Comprehensive Earnings
----------------------------
Accumulated other comprehensive earnings included in Liberty's
consolidated balance sheets and consolidated statements of
stockholder's equity reflect the aggregate of foreign currency
translation adjustments and unrealized holding gains and losses on
securities classified as
II-61
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
available-for-sale. The change in the components of accumulated other
comprehensive earnings, net of taxes, is summarized as follows:
Accumulated
other
Foreign comprehensive
currency Unrealized earnings
translation gains on (loss), net
adjustments securities of taxes
------------ ------------ ------------
amounts in millions
Balance at January 1, 1999 $ 5 3,181 3,186
Other comprehensive earnings (loss) (15) 885 870
------------ ------------ ------------
Balance at February 28, 1999 $ (10) 4,066 4,056
============ ============ ============
-------------------------------------------------------------------------------------------
Balance at March 1, 1999 $ -- -- --
Other comprehensive earnings 60 6,495 6,555
------------ ------------ ------------
Balance at December 31, 1999 60 6,495 6,555
Other comprehensive loss (202) (6,750) (6,952)
------------ ------------ ------------
Balance at December 31, 2000 (142) (255) (397)
Other comprehensive loss (359) 1,596 1,237
------------ ------------ ------------
Balance at December 31, 2001 $ (501) 1,341 840
============ ============ ============
II-62
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The components of other comprehensive earnings are reflected in
Liberty's consolidated statements of comprehensive earnings, net of
taxes. The following table summarizes the tax effects related to each
component of other comprehensive earnings.
Tax
Before-tax (expense) Net-of-tax
amount benefit amount
---------- ---------- ----------
amounts in millions
Year ended December 31, 2001:
-----------------------------
Foreign currency translation adjustments $ (588) 229 (359)
Unrealized holding losses on securities arising
during period (1,661) 648 (1,013)
Reclassification adjustment for losses realized
in net loss 4,420 (1,724) 2,696
Cumulative effect of accounting change (143) 56 (87)
---------- ---------- ----------
Other comprehensive earnings $ 2,028 (791) 1,237
========== ========== ==========
Year ended December 31, 2000:
-----------------------------
Foreign currency translation adjustments $ (334) 132 (202)
Unrealized holding losses on securities arising
during period (10,116) 4,001 (6,115)
Reclassification adjustment for gains realized
in net earnings (1,050) 415 (635)
---------- ---------- ----------
Other comprehensive loss $ (11,500) 4,548 (6,952)
========== ========== ==========
Ten months ended December 31, 1999:
-----------------------------------
Foreign currency translation adjustments $ 99 (39) 60
Unrealized holding gains on securities arising
during period 10,733 (4,245) 6,488
Reclassification adjustment for losses realized
in net loss 12 (5) 7
---------- ---------- ----------
Other comprehensive earnings $ 10,844 (4,289) 6,555
========== ========== ==========
---------------------------------------------------------------------------------------------------------
Two months ended February 28, 1999:
-----------------------------------
Foreign currency translation adjustments $ (25) 10 (15)
Unrealized holding gains arising during period 1,464 (579) 885
---------- ---------- ----------
Other comprehensive earnings $ 1,439 (569) 870
========== ========== ==========
(14) Commitments and Contingencies
-----------------------------
Starz Encore Group LLC, a wholly owned subsidiary of Liberty, provides
premium programming distributed by cable, direct satellite, TVRO and
other distributors throughout the United States. Starz Encore Group is
obligated to pay fees for the rights to exhibit certain films that are
released by various producers through 2014 (the "Film Licensing
Obligations"). The aggregate amount of the Film Licensing Obligations
under these license agreements is not currently estimable because such
amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying
films. Nevertheless, required aggregate payments under the Film
Licensing Obligations could prove to be significant. Starz Encore
Group's estimate, based on customer levels at December 31, 2001, of the
future minimum obligation related to the Film Licensing Obligations for
the five years after 2001 and thereafter are as follows (amounts in
millions):
2002 $ 405
2003 224
2004 154
2005 88
2006 103
Thereafter 388
II-63
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Liberty has guaranteed $619 million of the bank debt of Jupiter, an
equity affiliate that provides broadband services in Japan.
Approximately $343 million of such guaranteed amount is due and payable
by Jupiter during the first quarter of 2002. Jupiter is currently
negotiating the refinancing of substantially all of its long-term and
short-term debt. Liberty anticipates that it and the other Jupiter
shareholders will make equity contributions to Jupiter in connection
with such refinancing, and that Liberty's share of such equity
contributions will be approximately $450 million. Upon such
refinancing, Liberty anticipates that its guarantee of Jupiter debt
would be cancelled.
Liberty has also guaranteed various loans, notes payable, letters of
credit and other obligations (the "Guaranteed Obligations") of certain
other affiliates. At December 31, 2001, the Guaranteed Obligations
aggregated approximately $170 million. Currently, Liberty is not
certain of the likelihood of being required to perform under such
guarantees.
Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounts to $76
million, $50 million, $30 million and $9 million for the years ended
December 31, 2001 and 2000, for the ten months ended December 31, 1999
and the two months ended February 28, 1999, respectively.
A summary of future minimum lease payments under noncancelable
operating leases as of December 31, 2001 follows (amounts in millions):
Years ending December 31:
2002 $ 70
2003 63
2004 52
2005 40
2006 31
Thereafter 115
It is expected that in the normal course of business, leases that
expire generally will be renewed or replaced by leases on other
properties; thus, it is anticipated that future minimum lease
commitments will not be less than the amount shown for 2001.
Starz Encore Group LLC v. AT&T Broadband LLC and Satellite Services,
-------------------------------------------------------------------
Inc. Starz Encore Group entered into a 25-year affiliation agreement in
---
1997 with TCI. TCI cable systems subsequently acquired by AT&T in the
TCI merger operate under the name AT&T Broadband. Starz Encore Group
receives fixed monthly payments in exchange for unlimited access to all
of the existing Encore and STARZ! services. The payment from AT&T
Broadband can be adjusted if AT&T acquires or disposes of cable
systems. The affiliation agreement further provides that to the extent
Starz Encore Group's programming costs increase above or decrease below
amounts specified in the agreement, then AT&T Broadband's payments
under the affiliation agreement will be increased or decreased in an
amount equal to a proportion of the excess or shortfall. Starz Encore
Group requested payment from AT&T Broadband of its proportionate share
of excess programming costs during the first quarter of 2001 (which
amount aggregated approximately $32 million for the year 2001). Excess
programming costs payable by AT&T Broadband could be significantly
larger in future years.
By letter dated May 29, 2001, AT&T Broadband has disputed the
enforceability of the excess programming costs pass through provisions
of the affiliation agreement and questioned whether the affiliation
agreement, as a whole, is "voidable." In addition, AT&T Broadband
raised certain issues concerning interpretations of the contractual
requirements associated with the treatment of acquisitions and
dispositions. Starz Encore Group believes the position expressed by
AT&T Broadband to be without merit. On July 10, 2001, Starz Encore
Group initiated a lawsuit
II-64
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
against AT&T Broadband and Satellite Services, Inc., a subsidiary of
AT&T Broadband that is also a party to the affiliation agreement, in
Arapahoe County District Court, Colorado for breach of contract. Starz
Encore Group is seeking a judgment of specific performance of the
contract, damages and costs.
On October 19, 2001, Starz Encore Group entered into a standstill and
tolling agreement whereby the parties agreed to move the court to stay
the lawsuit until August 31, 2002 to permit the parties an opportunity
to resolve their dispute. This agreement provides that either party may
unilaterally petition the court to lift the stay after April 30, 2002
and proceed with the litigation. The court granted the stay on October
30, 2001. In conjunction with this agreement, AT&T Broadband and the
Company entered into various agreements whereby Starz Encore Group will
indirectly receive payment for AT&T Broadband's proportionate share of
the programming costs pass through for 2001.
Liberty has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible Liberty may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In
the opinion of management, it is expected that amounts, if any, which
may be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
(15) Information about Liberty's Operating Segments
----------------------------------------------
Liberty is a holding company with a variety of subsidiaries and
investments operating in the media, communications and entertainment
industries. Each of these businesses is separately managed. Liberty
identifies its reportable segments as those consolidated subsidiaries
that represent 10% or more of its combined revenue and those equity
method affiliates whose share of earnings or losses represent 10% or
more of its pre-tax earnings or loss. Subsidiaries and affiliates not
meeting this threshold are aggregated together for segment reporting
purposes. The segment presentation for prior periods has been conformed
to the current period segment presentation.
For the year ended December 31, 2001, Liberty had five operating
segments: Starz Encore Group, Liberty Livewire, On Command Corporation
("On Command"), Telewest and Other. Starz Encore Group provides premium
programming distributed by cable, direct-to-home satellite and other
distribution media throughout the United States and is wholly owned and
consolidated by Liberty. Liberty Livewire provides sound, video and
ancillary post production and distribution services to the motion
picture and television industries in the United States and Europe and
is majority owned and consolidated by Liberty. On Command provides
in-room, on-demand video entertainment and information services to
hotels, motels and resorts primarily in the United States and is
majority owned and consolidated by Liberty. Telewest, an equity method
affiliate, operates and constructs cable television and telephone
systems in the UK. Other includes Liberty's non-consolidated
investments, corporate and other consolidated businesses not
representing separately reportable segments.
The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of
significant accounting policies. Liberty evaluates performance based on
the measures of revenue and operating cash flow (as defined by
Liberty), appreciation in stock price and non-financial measures such
as average prime time rating, prime time audience delivery, subscriber
growth and penetration, as appropriate. Liberty believes operating cash
flow is a widely used financial indicator of companies similar to
Liberty and its affiliates, which should be considered in addition to,
but not as a substitute for, operating income, net income, cash flow
provided by operating activities and other measures of financial
performance prepared in accordance with generally accepted accounting
principles. Liberty generally accounts for intersegment sales and
transfers as if the sales or transfers were to third parties, that is,
at current prices.
II-65
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each segment requires different technology, distribution channels and
marketing strategies.
Liberty utilizes the following financial information for purposes of
making decisions about allocating resources to a segment and assessing
a segment's performance:
Consolidated Subsidiaries Equity
------------------------------------- method
Starz affiliate
Encore Liberty On ----------
Group Livewire Command Other Telewest Eliminations Total
----------- ----------- ---------- ---------- ---------- ------------ -------
amounts in millions
Performance Measures:
---------------------
Year ended December 31, 2001
Revenue $ 863 593 239 364 1,811 (1,811) 2,059
Operating cash flow 313 89 44 (69) 431 (431) 377
Year ended December 31, 2000
Revenue 733 295 200 298 1,623 (1,623) 1,526
Operating cash flow 235 44 49 12 330 (330) 340
Ten months ended December 31, 1999
Revenue 539 -- -- 190 857 (857) 729
Operating cash flow 124 -- -- 9 235 (235) 133
Two months ended February 28, 1999
Revenue 101 -- -- 134 207 (207) 235
Operating cash flow 41 -- -- 6 52 (52) 47
Balance Sheet Information:
--------------------------
As of December 31, 2001
Total assets 2,861 915 433 44,330 9,209 (9,209) 48,539
Investments in affiliates 138 -- -- 9,938 795 (795) 10,076
As of December 31, 2000
Total assets 2,754 1,141 439 49,934 10,707 (10,707) 54,268
Investments in affiliates 155 8 2 20,299 377 (377) 20,464
II-66
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table provides a reconciliation of segment operating cash
flow to earnings before income taxes:
New Liberty Old Liberty
------------------------------------------ --------------
Year Year Ten months Two months
ended ended ended ended
December 31, December 31, December 31, February 28,
2001 2000 1999 1999
------------ ------------ ------------ ------------
amounts in millions
Segment operating cash flow $ 377 340 133 47
Stock compensation (132) 950 (1,785) (183)
Depreciation and amortization (984) (854) (562) (22)
Impairment of long-lived assets (388) -- -- --
Interest expense (525) (399) (135) (26)
Share of losses of affiliates (4,906) (3,485) (904) (66)
Nontemporary declines in fair
value of investments (4,101) (1,463) -- --
Gains (losses) on dispositions,
net (310) 7,340 4 14
Other, net 87 527 85 373
------------ ------------ ------------ ------------
Earnings (loss) before income
taxes and minority interest $ (10,882) 2,956 (3,164) 137
============ ============ ============ ============
During the year ended December 31, 2001, Liberty derived 13.6% its
total revenue from a single customer. Such revenue is attributable to
the Starz Encore Group segment and the Other segment.
(16) Quarterly Financial Information (Unaudited)
-------------------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------- ---------- ---------- ----------
amounts in millions
2001:
-----
Revenue $ 504 513 521 521
========== ========== ========== ==========
Operating loss $ (207) (195) (51) (674)
========== ========== ========== ==========
Loss before cumulative effect of
accounting change $ (697) (2,125) (215) (3,711)
========== ========== ========== ==========
Net loss $ (152) (2,125) (215) (3,711)
========== ========== ========== ==========
Pro forma basic and diluted loss
before cumulative effect of
accounting change per common
share $ (.27) (.82) (.08) (1.43)
========== ========== ========== ==========
Pro forma basic and diluted net
loss per common share $ (.06) (.82) (.08) (1.43)
========== ========== ========== ==========
2000:
-----
Revenue $ 235 382 436 473
========== ========== ========== ==========
Operating income (loss) $ (83) 67 147 305
========== ========== ========== ==========
Net earnings (loss) $ 939 267 1,756 (1,477)
========== ========== ========== ==========
Pro forma basic and diluted net
earnings (loss) per common
share $ .36 .10 .68 (.57)
========== ========== ========== ==========
II-67
PART III.
Item 10. Directors and Executive Officers of the Registrant.
-------- --------------------------------------------------
The following table sets forth certain information concerning the
directors and executive officers of the Company, including a five year
employment history and any directorships held in public companies:
Name Positions
----------------------------- -----------------------------------------------
John C. Malone Chairman of the Board and a director of Liberty
Born March 7, 1941 since 1990. Dr. Malone served as Chairman of
the Board and a director of Liberty Satellite &
Technology, Inc. from December 1996 to August
2000. Dr. Malone also served as Chairman of the
Board of TCI from November 1996 to March 1999,
as Chief Executive Officer of TCI from January
1994 to March 1999, and as President of TCI
from January 1994 to March 1997. Dr. Malone is
a director of The Bank of New York, USA
Networks, Inc., UnitedGlobalCom, Inc. and
Cendant Corporation.
Robert R. Bennett President and Chief Executive Officer of
Born April 10, 1958 Liberty since April 1997 and a director of
Liberty since September 1994. Mr. Bennett
served as Executive Vice President of TCI from
April 1997 to March 1999. Mr. Bennett served as
Executive Vice President, Secretary and
Treasurer of Liberty from June 1995 through
March 1997, Chief Financial Officer from May
1996 through March 1997, and in various
executive positions since Liberty's inception
in 1990. Mr. Bennett also served as acting
Chief Financial Officer of Liberty Digital,
Inc. from June 1997 to July 1997. Mr. Bennett
is a director of Liberty Digital, Inc., Liberty
Livewire Corporation, Liberty Satellite &
Technology, Inc., USA Networks, Inc.,
UnitedGlobalCom, Inc. and Telewest
Communications plc. Mr. Bennett serves as
Chairman of the Board of Liberty Digital, Inc.
Gary S. Howard Executive Vice President, Chief Operating
Born February 22, 1951 Officer and a director of Liberty since July
1998. Mr. Howard served as Chief Executive
Officer of Liberty Satellite & Technology, Inc.
from December 1996 to April 2000. Mr. Howard
also served as Executive Vice President of TCI
from December 1997 to March 1999; as Chief
Executive Officer, Chairman of the Board and a
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
served as President of TV Guide, Inc. from June
1997 to September 1997, and as President of
Liberty Satellite & Technology, Inc. from
February 1995 through August 1997. Mr. Howard
is a director of Liberty Digital, Inc., Liberty
Livewire Corporation, Liberty Satellite &
Technology, Inc., UnitedGlobalCom, Inc. and On
Command Corporation. Mr. Howard serves as
Chairman of the Board of Liberty Satellite &
Technology, Inc. and On Command Corporation.
David J.A. Flowers A Senior Vice President of Liberty since
Born May 17, 1954 October 2000 and Treasurer of Liberty since
April 1997. Mr. Flowers served as a Vice
President of Liberty from June 1995 to October
2000.
Elizabeth M. Markowski A Senior Vice President of Liberty since
Born October 26, 1948 November 2000. Prior to joining Liberty, Ms.
Markowski was a partner in the law firm of
Baker Botts L.L.P for more than five years.
(continued)
III-1
Name Positions
----------------------------- -----------------------------------------------
Christopher W. Shean A Senior Vice President of Liberty since
Born July 16, 1965 January 2002 and Controller of Liberty since
October 2000. Mr. Shean served as a Vice
President of Liberty from October 2000 to
January 2002. Prior to joining Liberty, Mr.
Shean served in the assurance practice of the
accounting firm of KPMG for more than five
years, most recently as a partner.
Charles Y. Tanabe Secretary of Liberty since April 2001 and a
Born November 27, 1951 Senior Vice President and General Counsel of
Liberty since January 1999. Prior to joining
Liberty, Mr. Tanabe was a member of Sherman &
Howard L.L.C., a law firm based in Denver,
Colorado, for more than five years.
Peter N. Zolintakis Senior Vice President of Tax Strategy of
Born July 10, 1957 Liberty since November 1998. Prior to joining
Liberty, Mr. Zolintakis was a partner of
PricewaterhouseCoopers, where he specialized,
for more than five years, in the tax issues
relating to corporate mergers, acquisitions,
divestitures and restructurings for clients
primarily in the cable television and high
technology industries. Mr. Zolintakis has
informed Liberty that he intends to resign his
position effective April 1, 2002.
Donne F. Fisher A director of Liberty since October 2001. Mr.
Born May 24, 1938 Fisher has served as President of Fisher
Capital Partners, Ltd., a venture capital
partnership, since December 1991. Mr. Fisher
served as an Executive Vice President of TCI
from January 1994 to January 1996 and since
1996 has served as a consultant to AT&T
Broadband. Mr. Fisher is a director of General
Communication, Inc. and Sorrento Networks
Corporation.
Paul A. Gould A director of Liberty since March 1999. Mr.
Born September 27, 1945 Gould has also served as a Managing Director
and Executive Vice President of Allen & Company
Incorporated, an investment banking services
company, for more than the last five years. Mr.
Gould is a director of On Command Corporation.
Jerome H. Kern A director of Liberty since March 1999. Mr.
Born June 1, 1937 Kern served as the Chairman of the board of
directors of On Command Corporation from April
2000 through May 2001, and as its Chief
Executive Officer from April 2000 through April
2001. Mr. Kern has also served as a consultant
with Kern Consulting LLC since July 2001. Mr.
Kern served as Vice Chairman and as a
consultant of TCI from June 1998 to March 1999.
Prior to joining TCI, Mr. Kern was Special
Counsel with the law firm of Baker Botts L.L.P.
from July 1996 to June 1998, and a senior
partner of Baker Botts L.L.P. from September
1992 to July 1996.
Larry E. Romrell A director of Liberty since March 1999. Mr.
Born December 30, 1939 Romrell has also served as a consultant to
Liberty since March 1999. Mr. Romrell served as
an Executive Vice President of TCI from January
1994 to March 1999 and since March 1999 has
served as a consultant to AT&T Broadband. Mr.
Romrell also served, from December 1997 to
March 1999, as Executive Vice President and
Chief Executive Officer of TCI Business
Alliance and Technology Co.; from December 1997
to March 1999, as Senior Vice President of TCI
Ventures Group, LLC; and, from September 1994
to October 1997, as President of TCI Technology
Ventures, Inc. Mr. Romrell is a director of
Liberty Livewire Corporation.
III-2
The executive officers named above will serve in such capacities until
the next annual meeting of our board of directors, or until their respective
successors have been duly elected and have been qualified, or until their
earlier death, resignation, disqualification or removal from office. There is no
family relationship between any of the directors, by blood, marriage or
adoption.
During the past five years, none of the above persons has had any
involvement in such legal proceedings as would be material to an evaluation of
his or her ability or integrity.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires our executive officers and directors, and persons who own more than ten
percent of a registered class of our equity securities, to file reports of
ownership and changes in ownership with the SEC. Officers, directors and greater
than ten-percent shareholders are required by SEC regulation to furnish us with
copies of all Section 16 forms they file.
Based solely on a review of the copies of these Forms 3, 4 and 5 and
amendments to those forms furnished to us with respect to our most recent fiscal
year, or written representations that no Forms 5 were required, we believe that,
during the year ended December 31, 2001, all Section 16(a) filing requirements
applicable to our officers, directors and greater than ten-percent beneficial
owners were complied with.
Board Composition
Our restated certificate of incorporation provides for a classified
board of directors of not less than three members, with the exact number of
directors to be fixed by resolution of our board. Our charter further provides
that each class shall consist, as nearly as possible, of a number of directors
equal to one-third of the total authorized number of directors. We currently
have seven directors on our board, and those directors are divided among three
classes. Our Class I directors, whose term will expire at the annual meeting of
our stockholders in 2002, are Jerome H. Kern and Larry E. Romrell. Our Class II
directors, whose term will expire at the annual meeting of our stockholders in
2003, are Donne F. Fisher and Gary S. Howard. Our Class III directors, whose
term will expire at the annual meeting of our stockholders in 2004, are Robert
R. Bennett, Paul A. Gould and John C. Malone. At each annual meeting of our
stockholders, the successors of that class of directors whose term(s) expire at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of our stockholders held in the third year following the year of their
election. The directors of each class will hold office until their respective
death, resignation or removal and until their respective successors are elected
and qualified.
Committees of the Board
Our board of directors has established an executive committee, whose
members are Robert R. Bennett, Paul A. Gould and John C. Malone. Except as
specifically prohibited by the General Corporation Law of the State of Delaware,
the executive committee may exercise all the powers and authority of our board
in the management of our business and affairs, including the power and authority
to authorize the issuance of shares of our capital stock.
Our board of directors has established a compensation committee, whose
members are Donne F. Fisher, Paul A. Gould, John C. Malone and Larry E. Romrell.
This compensation committee reviews and makes recommendations to our board
regarding all forms of compensation provided to our executive officers and
directors. In addition, the compensation committee reviews and makes
recommendations on bonus and stock compensation arrangements for all of our
employees. Our board of directors has also established an incentive plan
committee, which is a subcommittee of the compensation committee. The members of
the incentive plan committee are Donne F. Fisher and Paul A. Gould. The
incentive plan committee has sole responsibility for the administration of our
incentive plan.
Our board of directors has established an audit committee, whose
members are Donne F. Fisher and Paul A. Gould. The audit committee reviews and
monitors the corporate financial reporting and the internal and external audits
of our company. The committee's functions include:
. recommending annually to our board of directors the appointment
of our independent auditors;
III-3
. discussing and reviewing in advance the scope and the fees of our
annual audit and reviewing the results of our audits with our
independent auditors;
. reviewing and approving non-audit services of our independent
auditors;
. reviewing compliance with our existing major accounting and
financial reporting policies;
. reviewing the adequacy of major accounting and financial
reporting policies;
. reviewing our management's procedures and policies relating to
the adequacy of our internal accounting controls and compliance
with applicable laws relating to accounting practices;
. reviewing compliance with applicable Securities and Exchange
Commission and stock exchange rules regarding audit committees;
and
. preparing a report for our annual proxy statement.
The board, by resolution, may from time to time establish certain other
committees of the board, consisting of one or more of our directors. Any
committee so established will have the powers delegated to it by resolution of
the board, subject to applicable law.
Item 11. Executive Compensation.
------- ----------------------
(a) Summary Compensation Table of Liberty Media Corporation
-------------------------------------------------------
The following tables set forth information relating to compensation
including grants of stock options and stock appreciation rights ("SARs") in
respect of our common stock for:
. our Chief Executive Officer; and
. our four other most highly compensated executive officers for the
fiscal year ended December 31, 2001.
These executive officers are collectively referred to as our "named executive
officers".
Summary Compensation Table. The following table sets forth information
concerning the compensation paid to the named executive officers by us for the
three years ended December 31, 2001.
Summary Compensation Table
Long-Term
Annual Compensation
Compensation Securities
-------------------------------------------------- Underlying
Name and Principal Other Options/SARs All Other
Position Annual (# in Compensation
with Liberty Year Salary ($) Bonus ($) Compensation thousands) ($)
--------------------------- ----- ------------ ------------ ---------------- ---------------- ----------------
Robert R. Bennett 2001 $ 1,000,000 $ -- $ 61,239 (2) 16,264 (5) $ 30,497 (6)(7)
President and Chief 2000 $ 1,000,000 $ -- $ -- -- $ 47,013 (6)(7)
Executive Officer 1999 $ 1,000,000 $ -- $ -- -- $ 47,013 (6)(7)
Gary S. Howard 2001 $ 787,500 $ -- $ -- 8,535 (5) $ 17,500 (7)
Executive Vice President 2000 $ 786,058 $ -- $ -- -- $ 15,000 (7)
and Chief Operating 1999 $ 750,000 $ 23,210 $ -- -- $ 15,000 (7)
Officer
Elizabeth M. Markowski 2001 $ 600,000 $ -- $ 72,391 (3) 200 $ 17,500 (7)
Senior Vice President 2000 $ 87,714 (1) $ -- $ 62,625 (4) 1,000 $ --
Charles Y. Tanabe 2001 $ 600,000 $ -- $ -- 1,920 (5) $ 17,500 (7)
Senior Vice President 2000 $ 524,039 $ -- $ -- -- $ 15,000 (7)
and General Counsel 1999 $ 492,308 $ -- $ -- -- $ 15,000 (7)
Peter N. Zolintakis 2001 $ 562,805 $ -- $ -- 1,920 (5) $ 17,500 (7)
Senior Vice President 2000 $ 485,692 $ -- $ -- -- $ 15,000 (7)
1999 $ 496,865 $ -- $ -- -- $ 15,000 (7)
III-4
(1) Ms. Markowski's employment with the Company commenced on November 1,
2000. Accordingly, the 2000 compensation included in the table
represents two months of employment.
(2) Includes $52,000 of compensation related to Mr. Bennett's personal use
of the Company's aircraft.
(3) Includes $72,173 of compensation related to reimbursement of Ms.
Markowski's relocation expenses.
(4) Amount represents a .6263% common stock interest granted to Ms.
Markowski in Liberty LWR, Inc., one of our subsidiaries that owned a
direct interest in Liberty Livewire. Such grant was made in November
2000.
(5) Effective February 28, 2001 (the "Effective Date"), we restructured the
options and options with tandem SARs to purchase AT&T Liberty Media
Group tracking stock (collectively the "Restructured Options") held by
certain of our executive officers. Pursuant to such restructuring, all
Restructured Options became exercisable on the Effective Date, and each
executive officer was given the choice to exercise all of his
Restructured Options. Each executive officer who opted to exercise his
Restructured Options received consideration equal to the excess of the
closing price of the subject securities on the Effective Date over the
exercise price. The exercising officers received (i) a combination of
cash and AT&T Liberty Media Group tracking stock for Restructured
Options that were vested prior to the Effective Date and (ii) cash for
Restructured Options that were previously unvested. The executive
officers used the cash proceeds from the previously unvested options to
purchase restricted shares of AT&T Liberty Media Group tracking stock.
Such restricted shares are subject to forfeiture upon termination of
employment. The forfeiture obligation will lapse according to a
schedule that corresponds to the vesting schedule applicable to the
previously unvested options.
In addition, each executive officer was granted free-standing SARs
equal to the total number of Restructured Options exercised. The
free-standing SARs were tied to the value of AT&T Liberty Media Group
tracking stock and will vest as to 30% in year one and 17.5% in years
two through five. Upon the completion of our split off from AT&T, the
free-standing SARs automatically converted to options to purchase
Liberty Series A common stock.
(6) Includes $12,997, $32,013 and $32,013 which consists of the amounts of
premiums we paid in fiscal 2001, 2000 and 1999, respectively, pursuant
to split dollar, whole life insurance policies for the insured
executive officer. We will pay a portion of the premiums annually until
the first to occur of:
. 10 years from the date of the policy;
. the insured executive's death;
. the premiums are waived under a waiver of premium provision;
. the policy is terminated as set forth below; and
. premiums are prepaid in full for the 10-year period as set forth
below.
The insured executive has granted an assignment of policy benefits in
our favor in the amounts of the premiums paid by us. At the end of such
10-year period or upon acceleration of premiums as described below, the
entire policy vests to the sole benefit of the insured executive, and
we will remove or cancel the assignment in our favor against the
policy. In the event of a change of control of Liberty, liquidation of
Liberty or sale of substantially all of our assets, the policy will
immediately be prepaid in full through the tenth year, prior to such
event. Similarly, if the insured executive is dismissed for any reason
(except for conviction of a felony class miscarriage of
responsibilities as a Liberty officer), we will immediately prepay and
fully fund the policy through the tenth year. Upon any of the foregoing
events, the policy will vest to the sole benefit of the insured
executive. If, however, the insured executive voluntarily chooses to
terminate employment (and that decision is not a result of pressure
from us to resign or a resignation related to an adverse change in us
or our affiliates) without cause, we will have no further obligation to
fund premiums, but the policy will vest to the sole benefit of the
insured executive.
III-5
(7) Amounts represent contributions to the Liberty Media 401(k) Savings
Plan (the "Liberty Savings Plan"). The Liberty Savings Plan provides
employees with an opportunity to save for retirement. The Liberty
Savings Plan participants may contribute up to 10% of their
compensation and Liberty contributes a matching contribution of 100% of
the participants' contributions. Participant contributions to the
Liberty Savings Plan are fully vested upon contribution.
Generally, participants acquire a vested right in Liberty contributions
as follows:
Years of service Vesting Percentage
---------------- ------------------
Less than 1 0%
1-2 33%
2-3 66%
3 or more 100%
With respect to Liberty contributions made to the Liberty Savings Plan
in 2001, 2000 and 1999, Messrs. Bennett, Howard, Tanabe and Zolintakis
are fully vested.
Directors who are not our employees are ineligible to participate in
the Liberty Savings Plan. Under the terms of the Liberty Savings Plan,
employees are eligible to participate after three months of service.
(b) Option and SAR Grants in Last Fiscal Year. The following table
-----------------------------------------
discloses information regarding stock options granted during the year ended
December 31, 2001 to each of our named executive officers in respect of shares
of Series A common stock (number of shares and dollar amounts in thousands,
unless otherwise noted).
Percent of
Number of total
securities options/SARs Exercise
underlying granted to or base
options/SARs employees in price Grant date
granted fiscal year ($/sh) (2) Expiration date present value
----------------- --------------- ------------- ------------------- ---------------
Robert R. Bennett 16,264 (1) 33.1% $ 14.70 February 27, 2011 $ 155,475
Gary S. Howard 8,535 (1) 17.4% $ 14.70 February 27, 2011 $ 81,590
Elizabeth M. Markowski 200 0.4% $ 14.70 February 27, 2011 $ 1,912
Charles Y. Tanabe 1,920 (1) 3.9% $ 14.70 February 27, 2011 $ 18,355
Peter N. Zolintakis 1,920 (1) 3.9% $ 14.70 February 27, 2011 $ 18,355
(1) Effective February 28, 2001, we restructured the options and options
with tandem SARs to purchase AT&T Liberty Media Group tracking stock
held by certain of our executive officers. Pursuant to such
restructuring, all Restructured Options became exercisable on the
Effective Date, and each executive officer was given the choice to
exercise all of his Restructured Options. Each executive officer who
opted to exercise his Restructured Options received consideration equal
to the excess of the closing price of the subject securities on the
Effective Date over the exercise price. The exercising officers
received (i) a combination of cash and AT&T Liberty Media Group
tracking stock for Restructured Options that were vested prior to the
Effective Date and (ii) cash for Restructured Options that were
previously unvested. The executive officers used the cash proceeds from
the previously unvested options to purchase restricted shares of AT&T
Liberty Media Group tracking stock. Such restricted shares are subject
to forfeiture upon termination of employment. The forfeiture obligation
will lapse according to a schedule that corresponds to the vesting
schedule applicable to the previously unvested options.
In addition, each executive officer was granted free-standing SARs
equal to the total number of Restructured Options exercised. The
free-standing SARs were tied to the value of AT&T Liberty Media Group
tracking stock and will vest as to 30% in year one and 17.5% in years
two through five. Upon the completion of our split off from AT&T, the
free-standing SARs automatically converted to options to purchase
Liberty Series A common stock.
III-6
(2) Represents the closing market price per share of AT&T Liberty Media
Group tracking stock on February 28, 2001.
(3) The value shown is based upon the Black-Scholes model and is stated in
current annualized dollars on a present value basis. The key
assumptions used in the model for purposes of this calculation include
the following: (a) a 4.99% discount rate; (b) a 46.9% volatility
factor; (c) the 10-year option term; (d) the closing price of AT&T
Liberty Media Group tracking stock on February 28, 2001; and (e) a per
share exercise price of $14.70. The actual value realized will depend
upon the extent to which the stock price exceeds the exercise price on
the date the option is exercised. Accordingly, the realized value, if
any, will not necessarily be the value determined by the model.
(c) Aggregated Option/SAR Exercises and Fiscal Year-End Option/SAR Values.
---------------------------------------------------------------------
The following table sets forth information concerning exercises of stock options
and SARs with respect to Series A common stock by the named executive officers
during the year ended December 31, 2001 (numbers of securities and dollar
amounts in thousands).
Aggregated Option/SAR Exercises in the Last Fiscal Year and
Fiscal Year-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired Value December 31, 2001 (#) December 31, 2001
on Exercise Realized Exercisable/ ($)Exercisable/
Name (#) (1) ($) Unexercisable Unexercisable
----- ---------------- ---------------- ----------------------- ------------------
Robert R. Bennett
Exercisable 16,193 $ 94,046 -- $ --
Unexercisable -- -- 16,264 $ --
Gary S. Howard
Exercisable 8,465 $ 34,145 -- $ --
Unexercisable -- -- 8,535 $ --
Elizabeth M. Markowski
Exercisable -- $ -- 200 $ --
Unexercisable -- -- 1,000 $ --
Charles Y. Tanabe
Exercisable 1,920 $ 7,469 -- $ --
Unexercisable -- -- 1,920 $ --
Peter N. Zolintakis
Exercisable 1,920 $ 7,469 -- $ --
Unexercisable -- -- 1,920 $ --
-----------------------
(1) Represents the number of shares underlying SARs which were exercised in
2001.
(d) Compensation of directors. No member of our board of directors
-------------------------
receives any compensation from us for serving on our board. However, we
reimburse members of our board for travel expenses incurred to attend any
meetings of our board or any committee thereof.
(e) Employment Contracts and Termination of Employment and Change in
----------------------------------------------------------------
Control Arrangements. Except as described below, we have no employment
--------------------
contracts, termination of employment agreements or change of control agreements
with any of our named executive officers.
In connection with the merger of TCI and AT&T, an employment agreement
between Dr. Malone and TCI was assigned to us. The term of Dr. Malone's
employment agreement is extended daily so that
III-7
the remainder of the employment term is five years. The employment agreement was
amended in June 1999 to provide for, among other things, an annual salary of
$2,600, subject to increase upon approval of our board. Additionally, the
employment agreement provides for personal use of our aircraft and flight crew,
limited to an aggregate value of $200,000 per year, and payment or reimbursement
of professional fees and expenses incurred by Dr. Malone for estate and tax
planning services.
Dr. Malone's employment agreement provides, among other things, for
deferral of a portion (not in excess of 40%) of the monthly compensation payable
to him. The deferred amounts will be payable in monthly installments over a
20-year period commencing on the termination of Dr. Malone's employment,
together with interest thereon at the rate of 8% per annum compounded annually
from the date of deferral to the date of payment.
Dr. Malone's employment agreement also provides that, upon termination
of his employment by us (other than for cause, as defined in the agreement) or
if Dr. Malone elects to terminate the agreement because of a change in control
of our company, all remaining compensation due under the agreement for the
balance of the employment term shall be immediately due and payable.
Dr. Malone's agreement provides that, during his employment with us and
for a period of two years following the effective date of his termination of
employment with us, unless termination results from a change in control of our
company, he will not be connected with any entity in any manner specified in the
agreement, which competes in a material respect with our business. The agreement
provides, however, that Dr. Malone may own securities of any corporation listed
on a national securities exchange or quoted in The Nasdaq Stock Market to the
extent of an aggregate of 5% of the amount of such securities outstanding.
For a period of 12 months following a change in control, as defined in
Dr. Malone's employment agreement, our ability to terminate Dr. Malone's
employment for cause will be limited to situations in which Dr. Malone has
entered a plea of guilty to, or has been convicted of, the commission of a
felony offense.
Dr. Malone's agreement also provides that in the event of termination
of his employment with us, he will be entitled to receive 240 consecutive
monthly payments of $15,000 (increased at the rate of 12% per annum compounded
annually from January 1, 1988 to the date payment commences), the first of which
will be payable on the first day of the month succeeding the termination of Dr.
Malone's employment. In the event of Dr. Malone's death, his beneficiaries will
be entitled to receive the foregoing monthly payments.
Dr. Malone deferred a portion of his monthly compensation under his
previous employment agreement. We assumed the obligation to pay that deferred
compensation in connection with the merger of AT&T and TCI. The compensation
that he deferred (together with interest on that compensation at the rate of 13%
per annum compounded annually from the date of deferral to the date of payment)
will continue to be payable under the terms of the previous agreement. The rate
at which interest accrues on the previously deferred compensation was
established in 1983 pursuant to the previous agreement.
(f) Compensation Committee Interlocks and Insider Participation in
--------------------------------------------------------------
Compensation Decisions.
----------------------
The members of the Compensation Committee are Dr. John C. Malone and
Messrs. Donne F. Fisher, Paul A. Gould and Larry E. Romrell. The members of our
incentive plan committee, which is a subcommittee of our compensation committee,
are Messrs. Paul A Gould and Donne F. Fisher. Mr. Fisher serves on the
compensation committee of General Communications, Inc. Dr Malone has served as
the Chairman of the board of directors of our company since 1990 and continues
to serve as our Chairman. Prior to calendar year 2001, Dr. Malone served as the
Chairman of the board of directors of our subsidiary, Liberty Satellite &
Technology, Inc. Except for Dr. Malone, no member of our compensation committee
or our incentive plan committee is or was an officer of our company or any of
our subsidiaries.
III-8
Item 12. Security Ownership of Certain Beneficial Owners and Management.
------- --------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners. The following
table sets forth information concerning shares of our common stock beneficially
owned by each person or entity (excluding any of our directors and executive
officers) known by us to own more than five percent of the outstanding shares of
Liberty common stock, based upon filings pursuant to Section 13(d) or (g) under
the Securities Exchange Act.
The percentage ownership information is based upon 2,378,127,544 shares
of Liberty Series A common stock and 212,045,288 shares of Liberty Series B
common stock outstanding as of December 31, 2001. Unless otherwise indicated in
the footnotes below, each person or entity has sole voting power and investment
power with respect to the shares of common stock set forth opposite such
person's or entity's name. 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, 2001, are deemed to be outstanding and to be beneficially owned by
the person holding the options, warrants or convertible
III-9
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.
Name and Address of Series of Number of Percent of
Beneficial Owner Stock Shares Class
-------------------------- ------------- -------------- ----------
AXA (1) Series A 198,603,701 8.4%
9 Place Vendome
75001 Paris France
Gary Magness (2)(6) Series A 131,926,644 5.5%
c/o Baker & Hostetler LLP Series B 94,410,004 44.5%
Suite 1100
303 East 17th Avenue
Denver, CO 80203
Kim Magness (3)(6) Series A 131,520,552 5.5%
c/o Baker & Hostetler LLP Series B 94,109,890 44.4%
Suite 1100
303 East 17th Avenue
Denver, CO 80203
Estate of Bob Magness (4)(6) Series A 97,183,020 4.1%
c/o Baker & Hostetler LLP Series B 70,850,108 33.4%
Suite 1100
303 East 17th Avenue
Denver, CO 80203
Magness Securities, LLC (5)(6) Series A 31,128,720 1.3%
c/o Baker & Hostetler LLP Series B 21,632,096 10.2%
Suite 1100
303 East 17th Avenue
Denver, CO 80203
-----------------
(1) Based upon a Schedule 13G/A jointly filed on February 12, 2002, by AXA
Assurances I.A.R.D. Mutuelle (IARD), AXA Assurances Vie Mutuelle
(AAVM), AXA Conseil Vie Assurance Mutuelle (ACVAM), AXA Courtage
Assurance Mutuelle (ACAM), AXA (AXA), and AXA Financial, Inc. (AFI):
. each of IARD, AAVM, ACVAM, ACAM and AXA beneficially owns
198,603,701 shares of Liberty Series A common stock and has sole
voting power with respect to 71,818,923 shares, shared voting
power with respect to 60,793,669 shares, sole dispositive power
with respect to 198,322,398 shares and shared dispositive power
with respect to 281,303 shares, including the following AXA
entities having sole voting and dispositive power: AXA Investment
Managers--Hong Kong, 61,575 shares; and AXA Investment
Managers--U.K., 5,050 shares;
. AFI beneficially owns 198,537,076 shares of Liberty Series A
common stock and has sole voting power with respect to 71,752,298
shares, shared voting power with respect to 60,793,669 shares,
sole dispositive power with respect to 198,255,773 shares and
shared dispositive power with respect to 281,303 shares; and
. the following subsidiaries of AFI beneficially own shares of
Liberty Series A common stock: (A) Alliance Capital Management
L.P. (194,674,200 shares, as to which such entity will exercise
sole voting power with respect to 71,398,398 shares, shared
voting power with respect to 60,793,669 shares, sole dispositive
power with respect to 194,392,897 shares and shared dispositive
power with respect to 281,303 shares), and (B) the Equitable Life
Assurance Society of the United States (3,862,876 shares, as to
which such entity will exercise sole voting power with respect to
353,900 shares and sole dispositive power with respect to
3,862,876 shares).
III-10
Addresses of the joint filers: IARD, AAVM and ACVAM, 370 rue Saint
Honore, 75001 Paris, France; ACAM, 26, rue Louis le Grand, 75002 Paris
France; and AFI, 1290 Avenue of the Americas, New York, NY 10104.
(2) Based upon a Schedule 13D filed on September 28, 2001, Gary Magness
beneficially owns
. 131,926,644 shares of Liberty Series A common stock with sole
voting power with respect to 2,570,912 shares, shared voting
power with respect to 97,183,020 shares, sole dispositive power
with respect to 2,570,912 shares and shared dispositive power
with respect to 129,355,732 shares; and
. 94,410,004 shares of Liberty Series B common stock with sole
voting power with respect to 1,927,800 shares, shared voting
power with respect to 70,850,108 shares, sole dispositive power
with respect to 1,927,800 shares and shared dispositive power
with respect to 92,482,204 shares.
Gary Magness is the holder of a 50% membership interest in Magness
Securities, LLC. The following shares beneficially owned by Magness
Securities, LLC are reflected in full in Gary Magness' share
information: 31,128,720 shares of Liberty Series A common stock and
21,632,096 shares of Liberty Series B common stock. The shares shown as
beneficially owned by Gary Magness include shares also shown as
beneficially owned by Kim Magness and the Estate of Bob Magness.
Gary Magness is a holder of a 50% membership interest in FT LLC, and
shares, with Kim Magness, certain dispositive power over Liberty common
stock held by FT LLC. Accordingly, the 1,043,992 shares of Series A
Common Stock beneficially owned by FT LLC are reflected in full in Gary
Magness's and Kim Magness's share information.
(3) Based upon a Schedule 13D filed on September 28, 2001, Kim Magness
beneficially owns
. 131,520,552 shares of Liberty Series A common stock with sole
voting power with respect to 34,337,532 shares, shared voting
power with respect to 97,183,020 shares, sole dispositive power
with respect to 2,164,820 shares and shared dispositive power
with respect to 129,355,732 shares; and
. 94,109,890 shares of Liberty Series B common stock with sole
voting power with respect to 23,259,782 shares, shared voting
power with respect to 70,850,108 shares, sole dispositive power
with respect to 1,627,686 shares and shared dispositive power
with respect to 92,482,204 shares.
Kim Magness is the manager and a holder of a 50% membership interest in
Magness Securities, LLC. The following shares beneficially owned by
Magness Securities, LLC are reflected in full in Kim Magness' share
information: 31,128,720 shares of Liberty Series A common stock, and
21,632,096 shares of Liberty Series B common stock. The shares shown as
beneficially owned by Kim Magness include shares also shown as
beneficially owned by Gary Magness and the Estate of Bob Magness.
(4) Based upon a Schedule 13D filed on September 28, 2001, the Estate of
Bob Magness beneficially owns
. 97,183,020 shares of Liberty Series A common stock with sole
voting power and sole dispositive power with respect to all such
shares; and
. 70,850,108 shares of Liberty Series B common stock with sole
voting power and sole dispositive power with respect to all such
shares.
Kim Magness and Gary Magness are the co-personal representatives of the
Bob Magness Estate and share both voting and dispositive power over the
shares held by the Bob Magness Estate.
III-11
The shares shown as beneficially owned by the Estate of Bob Magness
include shares also shown as beneficially owned by Gary Magness and Kim
Magness.
(5) Based upon Schedule 13D filed on September 28, 2001, Magness
Securities, LLC beneficially owns
. 31,128,720 shares of Liberty Series A common stock with sole
voting power and sole dispositive power with respect to all such
shares; and
. 21,632,096 shares of Liberty Series B common stock with sole
voting power and sole dispositive power with respect to all such
shares.
Kim Magness is the manager and a holder of a 50% membership interest in
Magness Securities, LLC. Gary Magness is also a holder of a 50%
membership interest in Magness Securities, LLC.
Gary Magness is a holder of a 50% membership interest in FT LLC, and
shares, with Kim Magness, certain dispositive power over Liberty common
stock held by FT LLC. Accordingly, the 1,043,992 shares of Series A
Common Stock beneficially owned by FT LLC are reflected in full in Gary
Magness's and Kim Magness's share information.
(6) We are party to a call agreement with the Estate of Bob Magness, the
Estate of Betsy Magness, Gary Magness (individually and in certain
representative capacities) and Kim Magness (individually and in certain
representative capacities) (collectively, the Magness Group) pursuant
to which we have the right, under certain circumstances, to acquire
shares of Liberty Series B common stock owned by the Magness Group.
John C. Malone, our Chairman of the Board, is party to a stockholders
agreement pursuant to which Dr. Malone has an irrevocable proxy, under
certain circumstances, to vote shares of Liberty Series B common stock
or any super voting class of equity securities issued by us and
beneficially owned by each of Gary Magness, Kim Magness and the Estate
of Bob Magness. For more information regarding these agreements, see
footnote (4) to the beneficial ownership table included under "--
Security Ownership of Management" below.
(b) Security Ownership of Management. The following table sets forth
information with respect to the ownership by each director and each of our named
executive officers and by all of our directors and executive officers as a group
of shares of our Series A and our Series B common stock. The table also sets
forth information with respect to the ownership by each director and each of our
named executive officers and by all of our directors and executive officers as a
group of shares of (1) Series A common stock of Liberty Digital, Inc., (2)
Series A common stock of Liberty Livewire Corporation, (3) Series A and Series B
common stock of Liberty Satellite & Technology, Inc. and (4) common stock of On
Command Corporation. Each of the corporations named in the immediately preceding
sentence is a controlled subsidiary of ours and was publicly traded as of
December 31, 2001.
The following information is given as of December 31, 2001 and, in the
case of percentage ownership information, is based on (1) 2,378,127,544 shares
of Series A Liberty common stock and 212,045,288 shares of Series B Liberty
common stock; (2) 32,243,874 shares of Liberty Digital Series A common stock;
(3) 5,335,530 shares of Liberty Livewire Series A common stock; (4) 67,531,018
shares of LSAT Series A common stock and 7,718,286 shares of LSAT Series B
common stock; and (5) 30,876,197 shares of On Command common stock, in each case
outstanding on that date. On March 14, 2002, we consummated the merger of
Liberty Digital with one of our newly formed subsidiaries. In the merger, each
share of Liberty Digital common stock not owned by us and not subject to an
appraisal demand was converted into .25 shares of Liberty Series A common stock.
The following table does not reflect the effects of the merger.
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, 2001, 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. So far as is known to us, the persons indicated
below have sole voting power with respect to the shares indicated as owned by
them except as otherwise stated in the notes to the table.
III-12
Amount and
Nature of
Beneficial Percent
Name of Ownership of Voting
Beneficial Owner Title of Class (in thousands) Class Power
----------------------------- -------------------------------- --------------------- ----------- ----------
John C. Malone Liberty Series A 15,379 /1//2//3/ * 44.6%
Liberty Series B 199,042 /1//4/ 93.9%
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 370 /5/ * *
LSAT Series B 117 /6/ 1.5%
On Command 0
Robert R. Bennett Liberty Series A 8,502 /7//8//9/ * *
Liberty Series B 0
Liberty Digital Series A 100 /10/ * *
Liberty Livewire Series A 0
LSAT Series A 5 /11/ * *
LSAT Series B 0
On Command 0
Donne F. Fisher Liberty Series A 1,429 /12/ * *
Liberty Series B 641 *
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 25 /13/ *
LSAT Series B 0
On Command 0
Paul A. Gould Liberty Series A 1,505 * *
Liberty Series B 457 *
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 0
LSAT Series B 0
On Command 13 /14/
Gary S. Howard Liberty Series A 3,969 /15//16//17/ * *
Liberty Series B 0
Liberty Digital Series A 40 /18/ * *
Liberty Livewire Series A 0
LSAT Series A 428 /19/ * *
LSAT Series B 0
On Command 0
Jerome H. Kern Liberty Series A 311 /20//21/ * *
Liberty Series B 0
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 110 /22/ * *
LSAT Series B 0
On Command 1,350 /23/ 4.4% 4.4%
III-13
Amount and
Nature of
Beneficial Percent
Name of Ownership of Voting
Beneficial Owner Title of Class (in thousands) Class Power
----------------------------- -------------------------------- --------------------- ----------- ----------
Larry E. Romrell Liberty Series A 352 * *
Liberty Series B 3 *
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 742 /24/ 1.1% *
LSAT Series B 0
On Command 0
Elizabeth M. Markowski Liberty Series A 263 /25//26//27/ * *
Liberty Series B 0
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 0
LSAT Series B 0
On Command 25 /28/ * *
Charles Y. Tanabe Liberty Series A 861 /29//30//31//32/ * *
Liberty Series B 0
Liberty Digital Series A 0
Liberty Livewire Series A 0
LSAT Series A 0
LSAT Series B 0
On Command 0
Peter N. Zolintakis Liberty Series A 860 /33//34//35/ * *
Liberty Series B 0
Liberty Digital Series A 0
Liberty Livewire Series A 1 * *
LSAT Series A 0
LSAT Series B 0
On Command 0
All directors and Liberty Series A 34,375 /36//37//38//39/ 1.4% 45.1%
executive officers as a group (12 Liberty Series B 200,144 /4//36/ 94.4%
persons) Liberty Digital Series A 140 /40/ * *
Liberty Livewire Series A 1 * *
LSAT Series A 1,680 /36//41/ 2.4% *
LSAT Series B 117 /36/ 1.5%
On Command 1,400 /23//42/ 4.5% 4.5%
------------------------
* Less than one percent
(1) Includes 1,307,299 shares of Liberty Series A common stock and
3,409,436 shares of Liberty Series B common stock held by Dr. Malone's
wife, Mrs. Leslie Malone, as to which shares Dr. Malone has disclaimed
beneficial ownership.
(2) Includes 778,806 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Dr. Malone's beneficial ownership in these
shares is limited to his ability to direct the voting thereof pursuant
to the terms of the savings plan.
III-14
(3) Includes beneficial ownership of 3,359,614 shares of Liberty Series A
common stock which may be acquired within 60 days after December 31,
2001, pursuant to stock options.
(4) In February 1998, in connection with the settlement of certain legal
proceedings relative to the Estate of Bob Magness, the late founder and
former Chairman of the Board of TCI, TCI entered into a call agreement
with Dr. Malone and Dr. Malone's wife, and a call agreement with the
Magness Group. In connection with AT&T's acquisition of TCI, TCI
assigned to us its rights under these call agreements. As a result, we
have the right, under certain circumstances, to acquire shares of
Liberty Series B common stock owned by the Malones and the Magness
Group. We may not exercise our call right with respect to the Malones
or the Magness Group, unless we also exercise our call right with
respect to the other group. Each call agreement also prohibits any
member of the Magness Group or the Malones from disposing of their
shares of Liberty Series B common stock, except for certain exempt
transfers (such as transfers to related parties or to the other group
or public sales of up to an aggregate of 5% of their shares of Liberty
Series B common stock after conversion to shares of Liberty Series A
common stock) and except for a transfer made in compliance with our
call rights.
Also in February 1998, TCI, the Magness Group and the Malones entered
into a stockholders' agreement which provides for, among other things,
certain participation rights by the Magness Group with respect to
transactions by Dr. Malone, and certain "tag-along" rights in favor of
the Magness Group and certain "drag-along" rights in favor of the
Malones. In connection with AT&T's acquisition of TCI, TCI assigned to
us its rights under the stockholders agreement. The agreement provides
that a representative of Dr. Malone and a representative of the Magness
Group will consult with each other on all matters to be brought to a
vote of our stockholders, but if a mutual agreement on how to vote
cannot be reached, Dr. Malone will vote the shares of Liberty Series B
common stock owned by the Magness Group pursuant to an irrevocable
proxy granted by the Magness Group. As a result, Dr. Malone's
beneficial ownership of Liberty Series B common stock includes
96,037,690 shares held by the Magness Group.
(5) Includes beneficial ownership of 250,000 shares of Liberty Satellite &
Technology, Inc. Series A common stock which may be acquired within 60
days after December 31, 2001, pursuant to stock options (200,000 of
which were granted in tandem with SARs).
(6) Includes 117,300 shares of Liberty Satellite & Technology, Inc. Series
B Common stock held by Dr. Malone's wife, Mrs. Leslie Malone, as to
which shares Dr. Malone has disclaimed beneficial ownership.
(7) Includes 902,767 restricted shares of Liberty Series A common stock,
none of which is currently vested.
(8) Includes beneficial ownership of 4,879,052 shares of Liberty Series A
common stock which may be acquired within 60 days after December 31,
2001, pursuant to stock options.
(9) Includes 20,099 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Mr. Bennett's beneficial ownership in
these shares is limited to his ability to direct the voting thereof
pursuant to the terms of the savings plan.
(10) Includes beneficial ownership of 100,000 shares of Liberty Digital,
Inc. Series A common stock which may be acquired within 60 days of
December 31, 2001, pursuant to stock options.
(11) Includes beneficial ownership of 5,000 shares of Liberty Satellite &
Technology, Inc. Series A common stock which may be acquired within 60
days after December 31, 2001, pursuant to stock options granted in
tandem with SARs.
(12) Includes beneficial ownership of 112,500 shares of Liberty Series A
common stock which may be acquired within 60 days after December 31,
2001, pursuant to stock options.
(13) Includes beneficial ownership of 25,000 shares of Liberty Satellite &
Technology, Inc. Series A common stock which may be acquired within 60
days of December 31, 2001, pursuant to stock options (20,000 of which
were issued in tandem with SARs).
(14) Includes beneficial ownership of 12,500 shares of On Command
Corporation common stock which may be acquired within 60 days of
December 31, 2001, pursuant to stock options.
(15) Includes 582,177 restricted shares of Liberty Series A common stock,
none of which is currently vested.
III-15
(16) Includes beneficial ownership of 2,560,431 shares of Liberty Series A
common stock which may be acquired within 60 days of December 31, 2001,
pursuant to stock options.
(17) Includes 38,337 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Mr. Howard's beneficial ownership in these
shares is limited to his ability to direct the voting thereof pursuant
to the terms of the savings plan.
(18) Includes beneficial ownership of 40,000 shares of Liberty Digital, Inc.
Series A common stock, which may be acquired within 60 days of December
31, 2001, pursuant to stock options.
(19) Includes beneficial ownership of 347,038 shares of Liberty Satellite &
Technology, Inc. Series A common stock which may be acquired within 60
days after December 31, 2001, pursuant to stock options (15,000 of
which were granted in tandem with SARs).
(20) Includes beneficial ownership of 58,000 shares of Liberty Series A
common stock which may be acquired within 60 days after December 31,
2001, pursuant to stock options.
(21) Includes 80,400 shares of Liberty Series A common stock held by Mr.
Kern's wife, Mary Rossick Kern, as to which shares Mr. Kern has
disclaimed beneficial ownership.
(22) Includes beneficial ownership of 100,000 shares of Liberty Satellite &
Technology, Inc. Series A common stock which may be acquired within 60
days after December 31, 2001, pursuant to stock options granted in
tandem with SARs.
(23) Assumes the conversion of 13,500 shares of On Command Corporation
Series A preferred stock into 1,350,000 shares of On Command
Corporation common stock at any time at the right of the holder
thereof.
(24) Includes beneficial ownership of 734,076 shares of Liberty Satellite &
Technology, Inc. Series A common stock which may be acquired within 60
days after December 31, 2001, pursuant to stock options (70,000 of
which were granted in tandem with SARs).
(25) Includes 2,268 shares of Liberty Series A common stock held by Ms.
Markowski's husband, Thomas Markowski, as to which shares Ms. Markowski
has disclaimed beneficial ownership.
(26) Includes beneficial ownership of 200,000 shares of Liberty Series A
common stock which may be acquired within 60 days of December 31, 2001,
pursuant to stock options.
(27) Includes 406 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Ms. Markowski's beneficial ownership in
these shares is limited to her ability to direct the voting thereof
pursuant to the terms of the savings plan.
(28) Includes 20,000 restricted shares of On Command Corporation common
stock, none of which is currently vested.
(29) Includes 3,068 shares of Liberty Series A common stock held by Mr.
Tanabe's wife, Arlene Bobrow, as to which shares Mr. Tanabe has
disclaimed beneficial ownership.
(30) Includes 139,722 restricted shares of Liberty Series A common stock,
none of which is currently vested.
(31) Includes beneficial ownership of 576,000 shares of Liberty Series A
common stock which may be acquired within 60 days of December 31, 2001,
pursuant to stock options.
(32) Includes 1,589 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Mr. Tanabe's beneficial ownership in these
shares is limited to his ability to direct the voting thereof pursuant
to the terms of the savings plan.
(33) Includes 139,722 restricted shares of Liberty Series A common stock,
none of which is currently vested.
III-16
(34) Includes beneficial ownership of 576,000 shares of Liberty Series A
common stock which may be acquired within 60 days of December 13, 2001,
pursuant to stock options.
(35) Includes 3,202 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Mr. Zolintakis' beneficial ownership in
these shares is limited to his ability to direct the voting thereof
pursuant to the terms of the savings plan.
(36) Includes 1,401,383 shares of Liberty Series A common stock, 3,409,436
shares of Liberty Series B common stock, 200 shares of Liberty
Satellite & Technology, Inc. Series A common stock and 117,300 shares
of Liberty Satellite & Technology, Inc. Series B common stock held by
relatives of certain directors and executive officers, as to which
shares beneficial ownership by such directors and executive officers
has been disclaimed.
(37) Includes beneficial ownership of 12,808,597 shares of Liberty Series A
common stock which may be acquired within 60 days after December 31,
2001, pursuant to stock options.
(38) Includes 1,817,113 restricted shares of Liberty Series A common stock,
none of which is currently vested.
(39) Includes 852,811 shares of Liberty Series A common stock held by the
Liberty 401(k) Savings Plan. Ownership in these shares is limited to
the ability to direct the voting thereof pursuant to the terms of the
savings plan.
(40) Includes beneficial ownership of 140,000 shares of Liberty Digital,
Inc. Series A common stock which may be acquired within 60 days of
December 31, 2001, pursuant to stock options.
(41) Includes beneficial ownership of 1,461,114 shares of Liberty Satellite
& Technology, Inc. Series A common stock which may be acquired within
60 days after December 31, 2001, pursuant to stock options (410,000 of
which were granted in tandem with SARs.)
(42) Includes 20,000 restricted shares of On Command Corporation common
stock and beneficial ownership of 25,000 shares of On Command
Corporation common stock which may be acquired within 60 days of
December 31, 2001, pursuant to stock options.
Certain of our directors and named executive officers also hold
interests in some of our privately-held, controlled subsidiaries.
Liberty Jupiter, Inc. Mr. Bennett holds 180 shares of common stock of
--------------------
Liberty Jupiter, one of our subsidiaries, representing a 4.5% common equity
interest and less than a 1% voting interest in Liberty Jupiter based on 4,000
shares of common stock outstanding, as of December 31, 2001. Liberty Jupiter
owns a 7% interest in Jupiter Telecommunications Co., Ltd.
Liberty Livewire Holdings, Inc. Ms. Markowski holds 397.44 shares of
------------------------------
common stock of Liberty Livewire Holdings, one of our subsidiaries, representing
a 3.9744% common equity interest and a 2.36% voting interest in Liberty Livewire
Holdings, and Mr. Romrell holds 794.88 shares of common stock of Liberty
Livewire Holdings, representing a 7.9488% common equity interest and a 4.72%
voting interest in Liberty Livewire Holdings, in each case based on 10,000
shares of common stock outstanding, as of December 31, 2001. All of our
directors and executive officers as a group own 1,192.32 shares of common stock
of Liberty Livewire Holdings, representing a 11.9232% common equity interest and
a 7.08% voting interest. Liberty Livewire Holdings owns an approximate 6.04%
common equity interest and a 6.87% voting interest in Liberty Livewire, as of
December 31, 2001.
Satellite MGT, Inc. Mr. Flowers holds 100 shares of common stock of
------------------
Satellite MGT; Ms. Markowski holds 200 shares of common stock of Satellite MGT;
Mr. Tanabe holds 150 shares of common stock of Satellite MGT; and Mr. Zolintakis
holds 150 shares of common stock of Satellite MGT. In each of the foregoing
cases, the shares held represent a less than 1% equity and voting interest based
on 21,400 shares of common stock outstanding, as of December 31, 2001. All of
our directors and executive officers as a group own 600 shares of common stock
of Satellite MGT, representing a 2.8% common equity interest and less than a 1%
voting interest. Satellite MGT owns 100% of LMC/LSAT Holdings, Inc., which
III-17
has several wholly owned subsidiaries that hold, in the aggregate, approximately
62% of the outstanding ownership interests of Liberty Satellite LLC, a joint
venture between us and LSAT. LMC/LSAT Holdings is party to an agreement pursuant
to which it will contribute all of its wholly owned subsidiaries to LSAT in
exchange for approximately 174.3 million shares of LSAT Series B common stock,
which will be LMC/LSAT Holdings' sole asset following the contribution. The
contribution is subject to customary closing conditions.
Liberty TP Management, Inc. Dr. Malone holds all of the outstanding
--------------------------
common stock of TP Investment, Inc. TP Investment owns 10,602 shares of Class B
preferred stock of Liberty TP Management, Inc., one of our subsidiaries, and a
5% membership interest, representing a 50% voting interest, in Liberty TP LLC.
Liberty TP LLC holds 12,000 shares of Class B common stock of Liberty TP
Management, which currently represents 20.6% of the common equity and 27.2% of
the voting power of the outstanding voting stock of Liberty TP Management. We
own the remaining membership interests in Liberty TP LLC. Liberty TP Management
owns our investment in True Position and certain equity interests (including
rights to acquire equity interests) in Sprint PCS Group, LSAT, IDT Investments,
Inc. and priceline.com, Inc. The shares of Class B preferred stock of Liberty TP
Management held by Dr. Malone have an aggregate liquidation value of $106.02
million, plus accrued but unpaid dividends, accrue dividends at the rate of 9%
per annum, payable quarterly, and provide for mandatory redemption on April 30,
2021. The Class B preferred stock votes generally with the common stock and
currently represents 12% of the voting power of the outstanding voting stock of
Liberty TP Management.
(c) Change of Control. Except as discussed below, we know of no
-----------------
arrangements, including any pledge by any person of our securities, the
operation of which may at a subsequent date result in a change in control of the
Company.
On August 10, 2001, AT&T effected the split off of its Liberty Media
Group, pursuant to the terms of its charter, by redeeming all of its outstanding
AT&T Liberty Media Group tracking stock in exchange for shares of our common
stock. As a result of the split off, we became an independent, publicly traded
company, and all of our outstanding common stock is owned by the former
shareholders of AT&T Liberty Media Group tracking stock.
Item 13. Certain Relationships and Related Transactions.
------- ----------------------------------------------
(a) Transactions with Management and Others.
---------------------------------------
Relationship Between AT&T and Our Company After the Split Off
Relationship with AT&T
Following the merger of TCI and AT&T and prior to our split off from
AT&T, we were a wholly owned subsidiary of AT&T Broadband, LLC, of which AT&T
was the sole member. At the time of our split off, our businesses and assets and
those of our subsidiaries constituted all of the businesses and assets of AT&T's
Liberty Media Group, which was created in connection with the merger.
In connection with the merger, a number of agreements were entered into
to address the relationship between AT&T and its Common Stock Group (including
AT&T's Wireless Stock Group), on the one hand, and our company and the other
members of AT&T's Liberty Media Group, on the other hand. Certain of those
agreements were amended prior to the split off to reflect the relationship
between the parties following the split off. A summary of the material
provisions of the foregoing agreements that survived the split off is set forth
below.
Inter-Group Agreement
The inter-group agreement, as amended and supplemented, provided for
the arrangements between AT&T's Common Stock Group and AT&T's Liberty Media
Group concerning, among other things, the responsibility of each group for any
claims, obligations or liabilities arising from that group's operations and
restrictions on the ability of either group to enter into transactions that
involve or bind the other group. In general, each group was solely responsible
for all claims, obligations or liabilities arising
III-18
from that group's operations, whether arising before or after the merger or the
split off, and is required to indemnify the other group and to hold the other
group harmless against all claims, liabilities, losses and expenses allocated to
the indemnifying group.
Intercompany Agreement
We are entitled to the following benefits under the intercompany
agreement:
Preferred Vendor Status. We are granted preferred vendor status with
-----------------------
respect to access, timing and placement of new programming services. This means
that AT&T uses its reasonable efforts to provide digital basic distribution of
new services created by us and our affiliates, on mutual "most favored nation"
terms and conditions and otherwise consistent with industry practices, subject
to the programming meeting standards that are consistent with the type, quality
and character of AT&T's cable services as they may evolve over time.
Extension Of Term Of Affiliation Agreements. AT&T has agreed to extend
-------------------------------------------
any existing affiliation agreement of us and our affiliates that expires on or
before March 9, 2004, to a date not before March 9, 2009, if most favored nation
terms are offered and the arrangements are consistent with industry practice.
Interactive Video Services. AT&T has agreed to enter into arrangements
--------------------------
with us for interactive video services under one of the following two
arrangements, which will be at the election of AT&T:
. Pursuant to a five-year arrangement, renewable for an additional
four-year period on then-current most favored nation terms, AT&T
will make available to us capacity equal to one 6 megahertz
channel (in digital form and including interactive enablement,
first screen access and hot links to relevant web sites -- all to
the extent implemented by AT&T cable systems) to be used for
interactive, category-specific video channels that will provide
entertainment, information and merchandising programming. The
foregoing, however, will not compel AT&T to disrupt other
programming or other channel arrangements. The services are to be
accessible through advanced set-top devices or boxes deployed by
AT&T, except that, unless specifically addressed in a mutually
acceptable manner, AT&T will have no obligation to deploy set-top
devices or boxes of a type, design or cost materially different
from that it would otherwise have deployed. The content
categories may include, among others, music, travel, health,
sports, books, personal finance, automotive, home video sales and
games; or
. AT&T may enter into one or more mutually agreeable ventures with
us for interactive, category-specific video channels that will
provide entertainment, information and merchandising programming.
Each venture will be structured as a 50/50 venture for a
reasonable commercial term and provide that we and AT&T will not
provide interactive services in the category(s) of interactive
video services provided through the venture for the duration of
such term other than the joint venture services in the applicable
categories. When the distribution of interactive video services
occurs through a venture arrangement, AT&T will share in the
revenue and expense of the provision of the interactive services
pro rata to its ownership interest in lieu of the commercial
arrangements described in the preceding paragraph. At the third
anniversary of the formation of any such venture, AT&T may elect
to purchase our ownership interest in the venture at fair market
value. The parties will endeavor to make any such transaction tax
efficient to us.
At the date of this Annual Report on Form 10-K, we have not entered
into any further agreements with AT&T regarding the distribution of specific
interactive television channels. As a result, the exact terms under which AT&T
will provide carriage of these channels has not been determined, and AT&T has
not made any elections between the alternative carriage arrangements described
above. Although we will continue to endeavor to negotiate agreements with AT&T
concerning distribution of interactive channels within the framework of the
intercompany agreement, there can be no assurance that we will be able to
conclude any such agreement on acceptable terms.
III-19
Tax Sharing Agreement
We entered into a tax sharing agreement with AT&T, which remained in
effect following the split off. The tax sharing agreement provides, among other
things, that:
. to the extent that the inclusion of AT&T's Liberty Media Group
within the consolidated U.S. federal income tax return (or any
combined, consolidated or unitary tax return) filed by a member
of AT&T's Common Stock Group increases tax liability for any
period, we will be responsible for paying AT&T an amount equal to
the increased tax liability; and
. to the extent that the inclusion of AT&T's Liberty Media Group
within the consolidated U.S. federal income tax return (or any
combined, consolidated or unitary tax return) filed by a member
of AT&T's Common Stock Group reduces tax liability for any
period, AT&T will be responsible for paying us an amount equal to
the reduced tax liability.
The net operating loss for U.S. federal income tax purposes of the
affiliated group of which TCI was the common parent at the time of the merger of
TCI and AT&T (the TCI Affiliated Group) will be allocated to us (the Allocated
NOL) to offset any obligations we would otherwise incur under the tax sharing
agreement for periods subsequent to March 9, 1999 (the date of the merger).
Certain other tax carryovers of the TCI Affiliated Group will be allocated to
AT&T to offset any obligations it would otherwise incur under the tax sharing
agreement for periods subsequent to the merger on March 9, 1999. At the time of
the split off, the companies attributed to AT&T's Liberty Media Group were
deconsolidated for U.S. federal income tax purposes from the affiliated group of
which AT&T is the parent corporation. As a result, AT&T paid us an amount equal
to 35% of the amount of the Allocated NOL that had not been used as an offset to
our obligations under the tax sharing agreement, and that had been, or was
reasonably expected to be, utilized by AT&T.
In general, with respect to the TCI Affiliated Group, for periods
ending on or prior to March 9, 1999, the tax sharing agreement provides that:
. we pay AT&T any portion of regular tax liability attributable to
TCI's former Liberty Media Group or the TCI Ventures Group;
. any regular tax losses or other tax attributes may be used by us
or AT&T without compensation to any other group; and
. if the TCI Affiliated Group has an alternative minimum tax
liability, the group, if any, generating alternative minimum tax
losses will be paid for such losses to the extent that such
losses reduce alternative minimum tax liability of the TCI
Affiliated Group but we will not otherwise be required to pay our
share of such alternative minimum tax liability.
If the split off were not to qualify as a tax-free transaction to AT&T,
AT&T would recognize taxable gain equal to the excess of the fair market value
of our common stock distributed in exchange for AT&T's Liberty Media Group
tracking stock over AT&T's tax basis in our common stock. Under the tax sharing
agreement, we may be required to indemnify AT&T for certain tax liabilities that
are incurred by AT&T with respect to the split off, which amounts could be
substantial. The tax sharing agreement also allocates responsibility for certain
liabilities associated with deferred intercompany transactions triggered into
income as a result of the deconsolidation. In the case of deferred intercompany
transactions for which AT&T's Liberty Media Group is responsible, we were
required to pay AT&T an amount equal to the tax (or reduction in any tax refund,
credit or other benefit) attributable thereto. We also were required to pay AT&T
for the tax (or reduction in any tax refund, credit or other benefit)
attributable to any excess loss accounts with respect to the stock of members of
AT&T's Liberty Media Group. In addition, upon deconsolidation, we were required
to pay AT&T for certain deferred payments pursuant to a 1995 tax sharing
agreement with TCI.
Facilities and Services Agreement
During 2001, we and AT&T Broadband were parties to a facilities and
services agreement. Pursuant to the agreement, AT&T Broadband provided us with
office space and related services at AT&T
III-20
Broadband's facilities. Pursuant to the agreement, we reimbursed AT&T Broadband
for all direct expenses incurred by AT&T Broadband in providing services
thereunder and a pro rata share of all indirect expenses incurred by AT&T
Broadband in connection with the rendering of such services. The obligations of
AT&T Broadband to provide services under the agreement terminated on December
31, 2001. We were allocated $1 million in corporate and general and
administrative costs by AT&T Broadband for the period from January 1, 2001
through July 31, 2001.
Affiliation Agreements
AT&T Broadband is party to affiliation agreements pursuant to which it
purchases programming from our subsidiaries and affiliates. Certain of these
agreements provide for penalties and charges in the event the supplier's
programming is not carried on AT&T Broadband's cable systems or not delivered to
a contractually specified number of customers. Charges to AT&T Broadband for
such programming is generally based upon customary rates and often provide for
payments to AT&T Broadband by our subsidiaries and business affiliates for
marketing support.
In July 1997, AT&T Broadband's predecessor, TCI, entered into a 25 year
affiliation agreement with Starz Encore Group (formerly Encore Media Group)
pursuant to which AT&T Broadband is obligated to pay monthly fixed amounts in
exchange for unlimited access to Encore and STARZ! programming. The affiliation
agreement further provides that to the extent Starz Encore Group's programming
costs increase above amounts specified in the agreement, then AT&T Broadband's
payments under the affiliation agreement will be increased in an amount equal to
a proportion of the excess. Starz Encore Group requested payment from AT&T
Broadband of its proportionate share of Starz Encore Group's excess programming
costs during the first quarter of 2001 (which amount aggregated approximately
$32 million for the year 2001). Excess programming costs payable by AT&T
Broadband could be significantly larger in future years. By letter dated May 29,
2001, AT&T Broadband has disputed the enforceability of the excess programming
costs pass through provisions of the affiliation agreement and questioned
whether the affiliation agreement, as a whole, is "voidable." For additional
information regarding the affiliation agreement, please see information included
under the caption Item 3 "Legal Proceeding."
Also in 1997, in connection with the merger of Liberty Digital and DMX,
TCI transferred to Liberty Digital the right to receive payments from AT&T
Broadband relating to sales of DMX analog music services to AT&T Broadband's
residential and commercial subscribers. Liberty Digital also receives annual
license fees and subscriber revenue from AT&T Broadband relating to distribution
of digital music services to commercial and residential customers.
We received $210 million in revenue for programming services provided
to AT&T Broadband for the period from January 1, 2001 through July 31, 2001.
Other Transactions
NDTC. National Digital Television Center, a subsidiary of AT&T
----
Broadband, leases transponder facilities to certain of our subsidiaries. Charges
by NDTC for such arrangements were $8 million for the period from January 1,
2001 through July 31, 2001.
Other Related Party Transactions
Business Relationships with Directors and Officers.
In May 2001, we purchased 2,245,155 shares of common stock of On
Command from Jerome H. Kern, one of our directors and the then-Chairman of the
Board of On Command, for aggregate cash consideration of $25.2 million. Such
purchase price represents a per share price of $11.22. The closing market price
for On Command common stock on the day the transaction was signed was $7.77. The
proceeds were used to repay the outstanding balance under a line of credit
extended to Mr. Kern by The Bank of New York which we guaranteed. To secure Mr.
Kern's repayment of any amount paid by us under the guaranty, Mr. Kern had
granted to us a security interest in all of his stock options and tandem
III-21
or free-standing SARs with respect to shares of Liberty common stock and shares
of AT&T's common stock. As a result of the repayment, our guaranty under that
line of credit was cancelled, and our security interest in Mr. Kern's shares was
terminated.
Indemnification of Certain of Our Employees. In connection with the
merger of AT&T and TCI, certain employees (including directors and executive
officers) of Liberty who were officers or directors of TCI prior to the merger
received undertakings of indemnification from TCI with respect to the effects of
U.S. federal excise taxes that may become payable by them as a result of the
merger and the resulting change in control of TCI. Pursuant to the Inter-Group
Agreement, we and AT&T are responsible for all obligations to our respective
officers and employees.
We believe that the foregoing business dealings with management were
based upon terms no less advantageous to us than those which would be available
in dealing with unaffiliated persons.
III-22
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
------- ----------------------------------------------------------------
(a) (1) Financial Statements
Included in Part II of this Report: Page No.
--------
Liberty Media Corporation:
Independent Auditors' Report II-22
Consolidated Balance Sheets,
December 31, 2001 and 2000 II-23 to II-24
Consolidated Statements of Operations, Years
ended December 31, 2001
and 2000, Ten months ended December 31, 1999,
Two months ended February 28, 1999 II-25
Consolidated Statements of Comprehensive Earnings,
Years ended December
31, 2001 and 2000, Ten months ended December 31, 1999,
Two months ended February 28, 1999 II-26
Consolidated Statements of Stockholder's Equity, Years
ended December 31, 2001 and 2000, Ten months ended
December 31, 1999,
Two months ended February 28, 1999 II-27
Consolidated Statements of Cash Flows, Years Ended
December 31, 2001 and 2000, Ten months ended
December 31, 1999,
Two months ended February 28, 1999 II-28
Notes to Consolidated Financial Statements,
December 31, 2001, 2000 and 1999 II-29 to II-67
(a) (2) Financial Statement Schedules
-----------------------------
Included in Part IV of this Report:
(i) All schedules have been omitted because they are
not applicable, or the required information is set
forth in the financial statements or notes
thereto.
(ii) Separate financial statements for Telewest
Communications plc: Page No.
--------
Independent Auditors' Report IV-6
Consolidated Statements of Operations IV-7
Consolidated Balance Sheets IV-8
Consolidated Statements of Cash Flows IV-9
Consolidated Statements of Shareholders' Equity and
Comprehensive Income IV-11
Notes to the Consolidated Financial Statements IV-12 to IV-44
IV-1
(iii) Separate financial statements of Teligent, Inc. were included in
Liberty's Registration Statement on Form S-1 related to its split
off from AT&T Corp. On May 21, 2001, Teligent and all of its
direct and indirect domestic subsidiaries filed voluntary
petitions for relief under chapter 11 of the U.S. Bankruptcy Code
in the United States Bankruptcy Court for the Southern District
of New York. Accordingly, Teligent's financial statements are not
included herein.
(a) (3) Exhibits
--------
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3 - Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of Liberty, 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, as adopted August 9, 2001 (incorporated by
reference to Exhibit 3.4 of the Split Off S-1 Registration
Statement).
4 - Instruments Defining the Rights of Securities Holders, including Indentures:
4.1 Specimen certificate for shares of Series A common stock, par
value $.01 per share, of the Registrant (incorporated by
reference to Exhibit 4.1 to the Split Off S-1 Registration
Statement).
4.2 Specimen certificate for shares of Series B common stock, par
value $.01 per share, of the Registrant (incorporated by
reference to Exhibit 4.2 to the Split Off S-l Registration
Statement).
4.3 Liberty undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with
respect to long-term debt not filed herewith.
10 - Material Contracts:
10.1 Contribution Agreement dated March 9, 1999, by and among Liberty
Media Corporation, Liberty Media Management LLC, Liberty Media
Group LLC and Liberty Ventures Group LLC (incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form
S-4 of Liberty Media Corporation (File No. 333-86491) as filed
on September 3, 1999, the "Liberty S-4 Registration
Statement").
10.2 Inter-Group Agreement dated as of March 9, 1999, between AT&T
Corp. and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.2 to the Liberty S-4
Registration Statement).
10.3 Intercompany Agreement dated as of March 9, 1999, between Liberty
and AT&T Corp. (incorporated by reference to Exhibit 10.3 to
the Liberty S-4 Registration Statement).
10.4 Tax Sharing Agreement dated as of March 9, 1999, by and among
AT&T Corp., Liberty Media Corporation, Tele-Communications,
Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI
Starz Inc., TCI CT Holdings, Inc. and each Covered Entity
listed on the signature pages thereof (incorporated by
reference to Exhibit 10.4 to the Liberty S-4 Registration
Statement).
IV-2
10 - Material Contracts:
10.5 First Amendment to Tax Sharing Agreement dated as of May 28,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.5 to the Liberty S-4
Registration Statement).
10.6 Second Amendment to Tax Sharing Agreement dated as of September
24, 1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Liberty Media Corporation (File No.
333-93917) as filed on December 30, 1999 (the "Liberty S-1
Registration Statement)).
10.7 Third Amendment to Tax Sharing Agreement dated as of October 20,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.7 to the Liberty S-l
Registration Statement).
10.8 Fourth Amendment to Tax Sharing Agreement dated as of October 28,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.8 to the Liberty S-l
Registration Statement).
10.9 Fifth Amendment to Tax Sharing Agreement dated as of December 6,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.9 to the Liberty S-l
Registration Statement).
10.10 Sixth Amendment to Tax Sharing Agreement dated as of December 10,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.10 to the Liberty S-l
Registration Statement).
10.11 Seventh Amendment to Tax Sharing Agreement dated as of December
30, 1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.11 to the Liberty S-l
Registration Statement).
10.12 Eighth Amendment to Tax Sharing Agreement dated as of July 25,
2000, by and among AT&T Corp., Liberty Media Corporation, AT&T
Broadband LLC, Liberty Ventures Group LLC, Liberty Media Group
LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered
Entity listed on the signature pages thereof (incorporated by
reference to Exhibit 10.12 to the Split Off Registration
Statement).
10.13 Instrument dated January 14, 2000, adding The Associated Group,
Inc. as a party to the Tax Sharing Agreement dated as of March
9, 1999, as amended, among The Associated Group, Inc., AT&T
Corp., Liberty Media Corporation, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz,
Inc., TCI CT Holdings, Inc. and each Covered Entity listed on
the signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Liberty S-1 Registration Statement).
IV-3
10 - Material Contracts:
10.14 Amended and Restated Contribution Agreement dated January 14,
2000, by and among Liberty Media Corporation, Liberty Media
Management LLC, Liberty Media Group LLC, Liberty Ventures Group
LLC, The Associated Group, Inc. and Liberty AGI, Inc.
(incorporated by reference to Exhibit 10.13 to the Liberty S-1
Registration Statement).
10.15 First Supplement to Inter-Group Agreement dated as of May 28,
1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.14 to the
Liberty S-1 Registration Statement).
10.16 Second Supplement to Inter-Group Agreement dated as of September
24, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.15 to the
Liberty S-1 Registration Statement).
10.17 Third Supplement to Inter-Group Agreement dated as of October 20,
1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.16 to the
Liberty S-1 Registration Statement).
10.18 Fourth Supplement to Inter-Group Agreement dated as of December
6, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.17 to the
Liberty S-1 Registration Statement).
10.19 Fifth Supplement to Inter-Group Agreement dated as of December
10, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.18 to the
Liberty S-1 Registration Statement).
10.20 Sixth Supplement to Inter-Group Agreement dated as of December
30, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.19 to the
Liberty S-1 Registration Statement).
10.21 Seventh Supplement to Inter-Group Agreement dated as of July 25,
2000, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.21 to the
Split Off Registration Statement).
10.22 Instrument dated January 14, 2000, adding The Associated Group,
Inc. as a party to the Inter-Group Agreement dated as of March
9, 1999, as supplemented, between and among AT&T Corp., on the
one hand, and Liberty Media Corporation, Liberty Media Group
LLC and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.20 to the Liberty S-1 Registration Statement).
10.23 Restated and Amended Employment Agreement dated November 1, 1992,
between Tele-Communications, Inc. and John C. Malone (assumed
by Liberty as of March 9, 1999), and the amendment thereto
dated June 30, 1999 and effective as of March 9, 1999, between
Liberty and John C. Malone (incorporated by reference to
Exhibit 10.6 to the Liberty S-4 Registration Statement).
IV-4
10 - Material Contracts:
10.24 Eighth Supplement to Inter-Group Agreement dated as of November
20, 2000, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.24 to the
Registration Statement on Form S-1 of Liberty Media Corporation
(File No. 333-66034) as filed on July 27, 2001, the "Shelf S-1
Registration Statement).
10.25 Ninth Supplement to Inter-Group Agreement dated as of June 14,
2001, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc.,
on the other hand (incorporated by reference to Exhibit 10.25
to the Shelf S-1 Registration Statement).
10.26 Amended and Restated Agreement and Plan of Restructuring and
Merger among UnitedGlobalCom, Inc., New UnitedGlobalCom, Inc.,
United/New United Merger Sub, Inc., Liberty Media Corporation,
Liberty Media International, Inc. and Liberty Global, Inc.,
dated December 31, 2001 (incorporated by reference to Current
Form 8-K filed by Liberty Media Corporation on January 9, 2002,
Commission File No. 0-20421).
21 - Subsidiaries of Liberty Media Corporation.
23.1 Consent of KPMG LLP
23.2 Consent of KPMG Audit Plc
(b) Reports on Form 8-K filed during the quarter ended December 31, 2001:
Item
Date of Report Reported Financial Statements Filed
--------------------- -------- --------------------------
October 10, 2001 Items 5 and 7 None
November 13, 2001 Items 5 and 7 None
December 3, 2001 Items 5 and 7 None
December 5, 2001 Items 5 and 7 None
December 5, 2001 Items 5 and 7 None
December 27, 2001 Items 5 and 7 None
IV-5
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Auditor's Report
To the Board of Directors and shareholders of Telewest Communications plc
We have audited the accompanying consolidated balance sheets of Telewest
Communications plc and subsidiaries as of December 31, 2001 and 2000, 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, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards
in the United Kingdom and 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 on pages IV-7 to IV-44
present fairly, in all material respects, the financial position of Telewest
Communications plc and subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2001 in conformity with generally accepted
accounting principles in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company
changed its method of accounting for derivative instruments and hedging
activities in 2001.
KPMG Audit Plc
KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
February 28, 2002
IV-6
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Consolidated Statements of Operations (years ended December 31)
(Note 2)
2001 2001 2000 1999
Notes $m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------
Revenue - continuing operations
Cable television 478 329 279 258
Consumer telephony 710 488 445 334
Internet and other 58 40 16 17
---------------------------------------------------------------------------------------------------------------------------
Total Consumer Division 1,246 857 740 609
Business Services Division 390 268 248 177
---------------------------------------------------------------------------------------------------------------------------
Total Cable Division 1,636 1,125 988 786
Content Division 188 129 81 -
---------------------------------------------------------------------------------------------------------------------------
Total revenue 1,824 1,254 1,069 786
---------------------------------------------------------------------------------------------------------------------------
Operating costs and expenses
Consumer programming expenses (206) (142) (132) (132)
Business and consumer telephony expenses (342) (235) (235) (158)
Content expenses (121) (83) (46) -
Selling, general and administrative expenses (723) (497) (445) (307)
Depreciation (682) (469) (423) (305)
Amortization of goodwill (266) (183) (147) (62)
Impairment of goodwill (1,114) (766) - -
---------------------------------------------------------------------------------------------------------------------------
(3,454) (2,375) (1,428) (964)
---------------------------------------------------------------------------------------------------------------------------
Operating loss (1,630) (1,121) (359) (178)
Other income/(expense)
Interest income (including (Pounds)12m, (Pounds)15m and
(Pounds)3m in 2001, 2000 and 1999, respectively, from
related parties) 21 22 15 15 7
Interest expense (including amortization of debt discount) (686) (472) (385) (293)
Foreign exchange losses, net - - (15) (49)
Share of net losses of affiliates and impairment (314) (216) (15) (6)
Other, net (4) (3) (3) (1)
Minority interests in losses/(profits)
of consolidated subsidiaries, net 1 1 1 (1)
---------------------------------------------------------------------------------------------------------------------------
Loss before income taxes (2,611) (1,796) (761) (521)
Income tax benefit 16 102 70 6 -
---------------------------------------------------------------------------------------------------------------------------
Net loss before extraordinary item (2,509) (1,726) (755) (521)
Extraordinary loss on extinguishment of debt (22) (15) - (20)
---------------------------------------------------------------------------------------------------------------------------
Net loss after extraordinary item (2,531) (1,741) (755) (541)
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per ordinary share
Net loss before extraordinary item $ (0.86) (Pounds)(0.59) (Pounds)(0.28) (Pounds)(0.24)
Extraordinary loss $ (0.01) (Pounds)(0.01) - (Pounds)(0.01)
---------------------------------------------------------------------------------------------------------------------------
Net loss after extraordinary item $ (0.87) (Pounds)(0.60) (Pounds)(0.28) (Pounds)(0.25)
---------------------------------------------------------------------------------------------------------------------------
Weighted average number of ordinary shares
outstanding (millions) 2,880 2,880 2,705 2,197
All income is derived from continuing operations.
See accompanying notes to the consolidated financial statements
IV-7
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Consolidated Balance Sheet (years ended December 31)
(Note 2)
2001 2001 2000
Note $m (Pounds)m (Pounds)m
-------------------------------------------------------------------------------------------------------------------------
Assets
Cash and cash equivalents 20 14 60
Secured cash deposits restricted for more than one year 20 29 20 12
Trade receivables (net of allowance for doubtful accounts
of (Pounds)16m and (Pounds)19m) 11 169 116 115
Other receivables 8 163 112 108
Prepaid expenses 48 33 37
-------------------------------------------------------------------------------------------------------------------------
Total current assets 429 295 332
Investment in affiliates, accounted for under the equity
method, and related receivables 9 795 547 784
Property and equipment (less accumulated depreciation of
(Pounds)1,873m and (Pounds)1,411m) 10 5,051 3,473 3,289
Goodwill (less accumulated amortization of(Pounds)382m and
(Pounds)291m) 5 2,752 1,892 2,803
Inventory 13 98 67 69
Other assets (less accumulated amortization of (Pounds) 47m and
(Pounds)36m) 12 84 58 47
-------------------------------------------------------------------------------------------------------------------------
Total assets 9,209 6,332 7,324
-------------------------------------------------------------------------------------------------------------------------
Liabilities and shareholders' funds
Accounts payable 159 109 96
Other liabilities 14 762 524 403
-------------------------------------------------------------------------------------------------------------------------
Total current liabilities 921 633 499
Deferred tax 16 164 113 183
Debt 15 7,122 4,897 4,254
Capital lease obligations 346 238 245
-------------------------------------------------------------------------------------------------------------------------
Total liabilities 8,553 5,881 5,181
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Minority interests - - (2)
-------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Ordinary shares, 10p par value; 4,300 million
authorized; 2,873 and 2,886 million issued
in 2001 and 2000 respectively 417 287 288
Limited voting convertible ordinary shares 10p par value;
300 million authorized and 82 million and 63 million
outstanding in 2001 and 2000 respectively 12 8 6
Additional paid in capital 6,143 4,224 4,216
Accumulated deficit (5,968) (4,104) (2,363)
Accumulated other comprehensive income 53 37 -
-------------------------------------------------------------------------------------------------------------------------
657 452 2,147
Ordinary shares held in trust for the Telewest
Restricted Share Scheme and the Telewest Long-Term
Incentive Plan; 1 million shares in 2001 and 2000 18 (1) (1) (2)
-------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 656 451 2,145
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity 9,209 6,332 7,324
-------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
IV-8
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (year's ended December 31)
(Note 2)
2001 2001 2000 1999
$m (pound)m (pound)m (pound)m
-----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net loss (2,531) (1,741) (755) (541)
Adjustments to reconcile net loss to net cash
provided/(utilized) by operating activities
Depreciation 682 469 423 305
Amortization and impairment of goodwill 1,380 949 147 62
Amortization of deferred financing costs and issue discount on
Senior Discount Debentures 144 99 147 147
Deferred tax credit (102) (70) - -
Unrealized (gain)/loss on foreign currency translation (15) (10) 20 49
Non-cash accrued share based compensation cost 1 1 5 26
Termination of sale and leaseback - - - 9
Extraordinary loss on extinguishment of debt 22 15 - 20
Share of net losses of affiliates and impairment 314 216 15 6
Loss on disposal of assets 6 4 - 1
Minority interests in (losses)/profits of consolidated
subsidiaries (1) (1) (1) 1
Changes in operating assets and liabilities net of effect of
acquisition of subsidiaries
Change in receivables 19 13 (19) (20)
Change in prepaid expenses 9 6 (19) 11
Change in accounts payable 4 3 (2) (22)
Change in other liabilities 68 47 70 35
Change in other assets 1 1 (46) (55)
-----------------------------------------------------------------------------------------------------------------
Net cash provided/(utilized) by operating activities 1 1 (15) 34
-----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Cash paid for property and equipment (797) (548) (527) (468)
Cash paid for acquisition of subsidiaries, net of cash
acquired (8) (6) (24) (393)
Additional investments in and loans to affiliates (38) (26) (10) (3)
Repayment of loans made to joint ventures (net) 30 21 14 -
Proceeds from disposal of assets 3 2 2 5
Disposal of subsidiary undertaking, net of cash disposed 12 8 - -
-----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (798) (549) (545) (859)
-----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from rights issue - - - 416
Proceeds from exercise of share options 8 6 3 13
Share issue costs - - (13) (3)
Proceeds from issue of Senior Discount Notes 2009 - - - 399
Proceeds from issue of Senior Convertible Notes 2007 - - - 300
Proceeds from issue of Senior Discount Notes and Senior
Notes 2010 - - 544 -
IV-9
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Consolidated Statements of Cash Flows (years ended December 31) (continued)
(Note 2)
2001 2001 2000 1999
$m (Pounds)m (Pounds)m (Pounds)m
--------------------------------------------------------------------------------------------------------------------------
Proceeds from issue of Senior Convertible Notes 2005 - - 330 -
Proceeds from issue of Accreting Convertible Notes 2003 44 30 20 -
Issue costs of Notes and credit facility arrangement costs (59) (41) - -
Net proceeds from maturity of forward contracts - - 107 -
(Placement)/release of restricted deposits (12) (8) - 175
Repayments from borrowings under old credit facilities (1,198) (824) (141) (583)
Repayment of old facilities upon refinancing - - - (597)
Proceeds/(repayment) from borrowings under new credit facility 2,025 1,393 (260) 951
Capital element of finance lease repayments (78) (54) (35) (222)
--------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 730 502 555 849
--------------------------------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (67) (46) (5) 24
Cash and cash equivalents at beginning of year 87 60 65 41
--------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year 20 14 60 65
--------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the consolidated financial statements
IV-10
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Ordinary Limited Shares Additional Other Accumulated Total
shares voting held in paid-in comprehensive deficit
shares trust capital income
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 214 - (2) 1,896 - (1,067) 1,041
Ordinary shares issued on exercise of -
share options 1 - - 12 - 13
Redesignation of ordinary shares (6) 6 - - - - -
Shares issued under the rights issue to
fund acquisition of Cable London plc 19 - - 394 - - 413
Ordinary shares issued on conversion of
Senior Convertible Notes 2007 - - - 1 - - 1
Accrued share based compensation cost - - - 25 - - 25
Net loss - - - - - (541) (541)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 228 6 (2) 2,328 - (1,608) 952
Ordinary shares issued on exercise of -
share options - - - 3 - 3
Shares issued to acquire Flextech Plc -
net of issue costs 60 - - 1,873 - 1,933
Accrued share based compensation cost - - - 5 - - 5
Unrealised gain on deemed disposal of
shares in an affiliate - - - 7 - - 7
Net loss - - - - - (755) (755)
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 288 6 (2) 4,216 - (2,363) 2,145
Unrealised gain/(loss) on derivative
financial instruments:
Cumulative effects of accounting change - - - - (16) - (16)
Amounts reclassified into earnings - - - - (5) - (5)
Current period increase in fair value - - - - 57 - 57
Net loss - - - - - (1,741) (1,741)
-----------------------------------------------------------------------------------
Total comprehensive loss (1,705)
-----------------------------------------------------------------------------------
Unrealised gain on deemed partial
disposal of investment - - - - 1 - 1
Ordinary shares issued on exercise of
share options 1 - 1 6 - - 8
Gain on retranslation of investment in an
overseas subsidiary - - - 1 - - 1
Redesignation of ordinary shares (2) 2 - - - - -
Accrued share based compensation cost - - - 1 - - 1
----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 287 8 (1) 4,224 37 (4,104) 451
----------------------------------------------------------------------------------------------------------------------------------
There was no other comprehensive income in either the year ended December 31,
1999 or 2000.
See accompanying notes to the consolidated financial statements
IV-11
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements (years ended December 31, 2001,
2000 and 1999)
1 Organization and History
Telewest Communications plc ("the Company") and its subsidiary undertakings
(together "the Group") provide cable television, telephony and internet services
to business and residential customers in the United Kingdom ("UK"). The Group
derives its cable television revenues from installation fees, monthly basic and
premium service fees and advertising charges. The Group derives its telephony
revenues from connection charges, monthly line rentals, call charges, special
residential service charges and interconnection fees payable by other operators.
The Group derives its internet revenues from installation fees and monthly
subscriptions to its ISP. The cable television, telephony and internet services
account in 2001 for approximately 26%, 60% and 2%, respectively, of the Group's
revenue.
The Group is also engaged in broadcast media activities, being the supply of
entertainment content, interactive and transactional services to the UK pay-TV
and internet markets. The Group operates a portfolio of thematic subscription
and transactional channels. It also operates on the internet and has additional
investments in production facilities and programming. The Content Division
accounts in 2001 for approximately 10% of the Group's revenue.
2 Basis of Preparation
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States of America ("US
GAAP"). The preparation of financial statements in conformity with US GAAP
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 revenues and expenses during the reporting period. The
Group's significant estimates and assumptions include capitalisation of labor
and overhead costs; impairment of goodwill and long-lived assets (see note 5);
and accounting for debt and financial instruments (see note 4). Actual results
could differ from those estimates.
The financial statements have been prepared on a going concern basis. The
directors consider that the current credit facilities of the Group which were
approved in February 2001, provide sufficient funding to finance its existing
business plans, satisfy working capital requirements and pay interest on
existing debt instruments.
The Group regularly monitors its ongoing ability to draw down under the
facilities, which is dependent on satisfying financial covenants. As with most
growth businesses, further increases in business performance and profitability
are necessary to ensure continued compliance with the terms of the covenants.
The Group's existing business plan and projections demonstrate that the forecast
growth in business performance will be sufficient to allow the Group to continue
to meet its current covenant obligations for a period of at least twelve months
from the date of approval of these statements.
However, as with any forecast information, the principal assumptions are clearly
subject to a high degree of risk, in particular the Group's ability to increase
revenues in accordance with its plans.
The directors have considered all of these factors and they have a reasonable
expectation that the Group has adequate resources to continue in operational
existence for the foreseeable future. Therefore they have continued to adopt the
going concern basis in preparing the accounts.
The Group faces the following significant risks and uncertainties:
.. Continued ability to raise finance to fund its operations
.. Successful execution of its long term business plan, which in turn will
affect the Group's ability to raise further finance under the Senior
Secured Facility (see note 15)
.. The need to meet financial and other covenants relating to debt instruments
which have already been issued.
The economic environment and currency in which the Group operates is the UK and
hence its reporting currency is Pounds Sterling ((Pounds)). Certain financial
information for the year ended December 31, 2001 has been translated into US
Dollars ($), with such US Dollar amounts being unaudited and presented solely
for the convenience of the reader, at the rate of $1.4543=(Pounds)1.00, the Noon
Buying Rate of the Federal Reserve Bank of New York on December 31, 2001. The
presentation of the US Dollar amounts should not be construed as a
representation that the Pounds Sterling amounts could be so converted into US
Dollars at the rate indicated or at any other rate.
IV-12
-------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
-------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
3 Summary of Significant Accounting Policies
Principles of consolidation
The consolidated financial statements include the accounts of the Company and
those of its majority-owned subsidiaries. All significant inter-company accounts
and transactions have been eliminated upon consolidation. All acquisitions have
been accounted for under the purchase method of accounting. Under this method,
the results of subsidiaries and affiliates acquired in the year are included in
the consolidated statement of operations from the date of acquisition.
Impairment of long lived assets and goodwill
The Group applies Statement of Financial Accounting Standard ("SFAS") No. 121,
Accounting for Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of. SFAS 121 requires that long-lived assets and certain identifiable
intangibles, including goodwill, to be held and used by an entity, be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Indications of impairment
are determined by reviewing undiscounted projected future cash flows. If
impairment is indicated, the amount of the impairment is determined by
discounting projected future cash flows to calculate a value in use. An
impairment charge is made to write assets down to their value in use.
Goodwill, arising from a purchased business combination and representing the
excess of the fair value of the consideration given over the fair value of the
identifiable net assets acquired, is amortized over the acquisition's useful
life. The Group assesses the recoverability of this intangible asset by
determining whether the amortization of the goodwill balance over its remaining
life can be recovered through projected undiscounted future operating cash flows
of the acquired operations. The assessment of the recoverability of goodwill
will be impacted if projected future operating cash flows are not achieved. The
amount of goodwill impairment, if any, is measured based on the projected
discounted future operating cash flows using a rate commensurate with the risks
associated with the assets.
Cash and cash equivalents
Cash and cash equivalents include highly liquid investments with original
maturities of three months or less that are readily convertible into cash.
Derivatives and hedging
At January 1, 2001, the Group adopted SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by SFAS 137 and 138. SFAS 133
established accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts and hedging
activities. It requires the recognition at fair value of all derivative
instruments as assets or liabilities in the Group's balance sheet. The
accounting treatment of changes in fair value is dependent on whether or not a
derivative instrument is designated a hedge and, if so, the type of hedge and
its effectiveness as a hedge.
For derivatives, which are not designated as hedges, changes in fair value are
recorded immediately in earnings.
For derivatives designated as cash flow hedges, changes in fair value on the
effective portion of a hedge are recorded within other comprehensive income
until the hedged transaction occurs and are then recorded within earnings.
Changes in the ineffective portion of a hedge are recorded immediately in
earnings.
For derivatives designated as fair value hedges, changes in fair value are
recorded immediately in earnings. The Group did not have any fair value hedges
during the year ended December 31, 2001.
The Company discontinues hedge accounting prospectively when it is determined
that the derivative is no longer effective in offsetting changes in the fair
value or cash flows of the hedged item, the derivative expires or is sold,
terminated, or exercised, the derivative is dedesignated as a hedging
instrument, because it is unlikely that a forecasted transaction will occur, a
hedged firm commitment no longer meets the definition of a firm commitment, or
management determines that designation of the derivative as a hedging instrument
is no longer appropriate.
Adoption of SFAS 133 on January 1, 2001 resulting in the Group recording
(Pounds)16 million of decline in fair value to accumulated other comprehensive
income, consisting of a decline of (Pounds)28 million to short term derivative
liabilities and a (Pounds)12 million gain to long term derivative assets.
Prior to adoption of SFAS 133 the Group had the following accounting policies in
respect of financial instruments: foreign currency forward contracts, options
and swaps, which were used to reduce the exchange risk on the principal amounts
and early call premiums on certain foreign currency borrowings, were recorded on
the balance sheet at their fair value. Gains and losses arising from changes in
fair value were recorded immediately within earnings. Such gains and losses were
offset to some extent by gains and losses arising from retranslating the
principal amounts of the
IV-13
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
3 Summary of Significant Accounting Policies
Derivatives and hedging (continued)
foreign currency borrowings.
The Group also used foreign currency forward contracts and cross currency
interest rate swaps to reduce its exposure to adverse changes in exchange rates
associated with the interest payments on certain foreign currency borrowings.
Such foreign currency forward contracts and cross currency interest rate swaps
were accounted for using the accruals method.
The Group also used interest rate swap agreements and an interest rate collar to
manage interest rate risk on the Group's borrowings. Net income or expense
resulting from the differential between exchanging floating and fixed interest
payments was recorded within the consolidated statement of operations on an
accruals basis from the effective date of the interest rate swap agreements and
interest rate collar.
Other interest rate swaps which did not qualify as hedges, were recorded on the
balance sheet at fair value with gains and losses arising from changes in fair
value recorded immediately within earnings.
IV-14
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
3 Summary of Significant Accounting Policies (continued)
Investments
Generally, investments in partnerships, joint ventures and subsidiaries in which
the Group's voting interest is 20% to 50%, and others where the Group has
significant influence, are accounted for using the equity method. Investments
which do not have a readily determinable fair value, in which the Group's voting
interest is less than 20%, and in which the Group does not have significant
influence, are carried at cost and written down to the extent that there has
been an other-than-temporary diminution in value. The Group accounts for certain
investments in which the Group's ownership is greater than 50% using the equity
method. This method is used for such subsidiaries where the minorities have
substantive participating rights such as veto over key operational and financial
matters and equal representation on the board of directors.
The Group reviews the carrying values of its investments in affiliates,
including any associated goodwill, to ensure that the carrying amount of such
investments are stated at no more than their recoverable amounts. The Group
assesses the recoverability of its investments by determining whether the
carrying value of the investments can be recovered through projected discounted
future operating cash flows (excluding interest) of the operations underlying
the investments. The assessment of the recoverability of the investments will be
impacted if projected future operating cash flows are not achieved. The amount
of impairment, if any, is measured based on the projected discounted future
operating cash flows using a rate commensurate with the risks associated with
the assets.
Advertising costs
Advertising costs are expensed as incurred. The amount of advertising costs
expensed was (pound)48 million, (pound)38 million, and (pound)27 million for the
years ended December 31, 2001, 2000, and 1999, respectively.
Property and equipment
Property and equipment is stated at cost. Depreciation is provided to write off
the cost, less estimated residual value, of property and equipment by equal
instalments over their estimated useful economic lives as follows:
Freehold and long leasehold buildings 50 years
Cable and ducting 20 years
Electronic equipment
System electronics 8 years
Switching equipment 8 years
Subscriber electronics 5 years
Headend, studio, and playback
facilities 5 years
Other equipment
Office furniture and fittings 5 years
Motor vehicles 4 years
The Group accounts for costs, expenses and revenues applicable to the
construction and operation of its cable systems in accordance with SFAS 51
Financial Reporting by Cable Television Companies.
Franchise costs
Expenditure incurred on successful applications for franchise licences is
included in property and equipment and is amortized over the remaining life of
the original franchise term. Costs relating to unsuccessful applications are
charged to the consolidated statement of operations.
IV-15
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
3 Summary of Significant Accounting Policies (continued)
Deferred financing costs
Direct costs incurred in raising debt are deferred and recorded on the
consolidated balance sheet in other assets. The costs are amortized to the
consolidated statement of operations at a constant rate to the carrying value of
the debt over the life of the obligation.
Minority interests
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
Foreign currencies
Transactions in foreign currencies are recorded using the rate of exchange in
effect at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated using the rate of exchange
prevailing at the balance sheet date and the gains or losses on translation are
included in the consolidated statement of operations.
Revenue recognition
Revenues are recognized as network communication services are provided. Credit
risk is managed by disconnecting services to customers who are delinquent.
Connection and activation fees relating to cable television, telephony and
internet are recognized in the period of connection to the extent that such fees
are less than direct selling costs.
Occasionally the Group sells capacity on its network to other telecommunications
providers. Sales of capacity are accounted for as sales-type leases, operating
leases, or service agreements depending on the terms of the transaction. Revenue
for sales of capacity, which meet the criteria of a sales-type lease, is
recognized as revenue using the percentage-of-completion method. If title is not
transferred or if the other requirements of sales-type lease accounting are not
met, revenues are recognized rateably over the term of the agreement.
Programming revenues are recognized in accordance with Statement of Position
("SOP") 00 - 2, Accounting by Producers or Distributors of Films. Revenue on
transactional and interactive sales is recognized as and when the services are
delivered. Advertising sales revenue is recognized at estimated realizable
values when the advertising is aired.
Recognition of contract costs
Certain of the sales of network capacity referred to above involve the Group
constructing new capacity. Where the Group retains some of this new capacity,
either for subsequent resale or for use within the business, then an element of
the construction costs is retained within inventory or equipment, respectively.
The allocation of construction cost between costs expensed to the statement of
operations and costs capitalized within inventory or equipment is based upon the
ratio of capacity sold and retained.
Pension costs
The Group operates a defined contribution scheme (the Telewest Communications
plc Pension Trust) or contributes to third-party schemes on behalf of employees.
The amount included in expenses in 2001, 2000 and 1999 of (Pounds)10 million,
(Pounds)8 million and (Pounds)5 million, respectively, represents the
contributions payable to the selected schemes in respect of the relevant
accounting periods.
IV-16
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
3 Summary of Significant Accounting Policies (continued)
Income taxes
Under the asset and liability method of SFAS 109 Accounting for Income Taxes,
deferred tax assets and liabilities are recognized for the 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
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered.
The Group recognises deferred tax assets only where it is more likely than not
that the benefit will be realized through future taxable income. Otherwise a
valuation allowance is established to provide against deferred tax assets.
Share-based compensation
SFAS 123, Accounting for Stock-Based Compensation, encourages, but does not
require, companies to record compensation costs for share-based employee
compensation plans at fair value. The Group has chosen to continue to account
for share-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. ("APB") 25, Accounting for Stock Issued
to Employees and related interpretations. Accordingly, compensation cost for
fixed plan share options is measured as the excess, if any, of the quoted market
price of the Company's shares at the date of the grant over the amount an
employee must pay to acquire the shares. Compensation cost for variable plan
share options is measured each period using the intrinsic value method until the
variable or performance features of the plan become fixed. Compensation expense
is recognized over the applicable vesting period.
Shares purchased by the trustees in connection with the Telewest Restricted
Share Scheme and certain LTIP awards, are valued at cost and are reflected as a
reduction of shareholders' equity in the consolidated balance sheet. This equity
account is reduced when the shares are issued to employees based on the original
cost of the shares to the trustees.
Earnings per share
Basic earnings per share has been computed by dividing net loss available to
ordinary shareholders by the weighted average number of ordinary shares
outstanding during the year. Diluted earnings per share is computed by adjusting
the weighted average number of ordinary shares outstanding during the year for
all dilutive potential ordinary shares outstanding during the year and adjusting
the net loss for any changes in income or loss that would result from the
conversion of such potential ordinary shares. There is no difference in net loss
and number of shares used for basic and diluted net loss per ordinary share, as
potential ordinary share equivalents for employee share options and convertible
debt are not included in the computation as their effect would be to decrease
the loss per share. The number of potential ordinary shares was 393 million, 464
million and 82 million in 2001, 2000 and 1999, respectively.
Inventories
Inventories of equipment, held for use in the maintenance and expansion of the
Group's telecommunications systems, are stated at cost, including appropriate
overheads, less provision for deterioration and obsolescence. Network capacity
and ducting held for resale are stated at the lower of cost and net realizable
value.
IV-17
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
3 Summary of Significant Accounting Policies (continued)
New Accounting Standards Applicable to the Group
Business Combinations and Goodwill and Other Intangible Assets - SFAS 141 and
SFAS 142
In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS 141,
Business Combinations and SFAS 142, Goodwill and Other Intangible Assets. SFAS
141 requires all business combinations undertaken after June 30, 2001 to be
accounted for using the purchase method. Under SFAS 142, goodwill arising from
business combinations and intangible assets with indefinite lives are no longer
amortized but are subject to annual review for impairment (or more frequently
should indications of impairment arise). Goodwill associated with equity method
investments will also no longer be amortized upon adoption of SFAS 142, but will
be subject to impairment testing as part of the investment to which it relates
in accordance with APB 18, The Equity Method of Accounting for Investments in
Common Stock. Separable intangible assets that do not have indefinite lives will
continue to be amortized over their estimated useful lives and will be subject
to review for impairment in accordance with SFAS 144 (see below). The
amortization provisions of SFAS 142 apply to goodwill and intangible assets
acquired after June 30, 2001. For goodwill and intangible assets acquired prior
to July 1, 2001, the Group is required to adopt SFAS 142 effective January 1,
2002. As of January 1, 2002 the Group has (Pounds)2,199 million of unamortized
goodwill, (Pounds)1,892 million of which relates to business combinations and
(Pounds)307 million of which relates to equity method investments. The Group
does not believe that the adoption of this standard will have a material impact
on its financial position or results of operations.
Accounting for Asset Retirement Obligations - SFAS 143
In July 2001, the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations. SFAS 143, which is effective for fiscal years beginning after June
15, 2002, requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. When the liability
is initially recorded, an entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. The Group is required to adopt this standard from January 1,
2003. The Group has not yet determined the impact, if any, the adoption of this
standard will have on its financial position or results of operations.
Accounting for Impairment or Disposal of Long-Lived Assets - SFAS 144
In October 2001, the FASB issued SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. While SFAS 144 supersedes SFAS 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of the fundamental provisions of that Statement. SFAS 144
also supersedes the accounting and reporting provisions of APB 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment and extends that reporting to a
component of an entity that either has been disposed of (by sale, abandonment,
or in a distribution to owners) or is classified as held for sale. SFAS 144 is
effective for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Group is required to adopt this standard from
January 1, 2002, and has not yet determined the impact, if any, the adoption of
this standard will have on its financial position or results of operations.
IV-18
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
4 Financial instruments
The Group holds derivative financial instruments solely to hedge specific risks
and does not hold such instruments for trading purposes. The derivatives are
held to hedge against the variability in cash flows arising from the effect of
fluctuations of GBP:USD exchange rate on its US dollar denominated debt and from
changes in interest rates on its variable rate bank debt.
Cash flow hedges
Hedges of US dollar denominated debt
The Group has issued US dollar denominated debt instruments with a range of
maturities. The Group generally hedges the principal amounts of these
instruments up to their first call dates or other such dates where the Group may
at its option redeem the instrument before maturity. This is because the Group
expects to either repay or refinance the debt before the debt matures. The
exception is the principal amount of the Senior Convertible Notes 2005 for which
no forward contracts are in place, as the expectation is that these Notes will
convert before the maturity date or be refinanced in US dollars before the
maturity date.
In addition the Group hedges the interest payments on its US dollar denominated
debt, usually up to the first call date of the debt instruments. The Group
assesses the effectiveness and ineffectiveness of these derivative instruments
on a quarterly basis.
Hedges of the US dollar denominated debt comprise foreign currency swaps, and
foreign exchange forward contracts. The aggregate notional principal amounts of
these hedges are $2,325 million. The average exchange rates are between $1.418
and $1.646 with maturity dates between October 1, 2002 and February 1, 2005.
During the year ended December 31, 2001, these hedges were deemed effective as
the critical terms of these hedges matched those of the underlying debt.
Therefore gains and losses arising from changes in the fair values of these
hedges have been recorded within other comprehensive income for the period. The
ineffective portion of these hedges was not significant.
In addition the Group holds derivative financial instruments which have not been
designated as hedges. Such instruments comprise foreign exchange forward
contracts. These have an aggregate notional principal amount of $1,567 million.
The exchange rates are between $1.3696 and $1.4685 and have maturity dates
between January 1, 2002 and October 1, 2003.
Of these contracts $1,537 million are associated with the Senior Discount
Debenture 2007, but cover a range of dates between April 1, 2002 and October 1,
2003. The Senior Discount Debenture 2007 is callable at any time at the
Company's option; these contracts were entered into to provide the Company with
flexibility in timing of an early call. The balance of $30 million is associated
with forecast purchases of inventory. As these contracts have not been
designated hedges, gains or losses arising from the change in fair value of
these contracts, are recorded immediately in the statement of operations within
foreign exchange gains and losses. For the year ended December 31, 2001, a gain
of (Pounds)47 million was recorded on these contracts.
Amounts recorded within other comprehensive income will be reclassified into
earnings where there is ineffectiveness, when the hedged transaction takes place
or where there is a change in the Group's circumstances that support the
effectiveness of the hedges. An estimated loss of (Pounds)3 million is expected
to be reclassified into earnings within the next 12 months.
IV-19
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
4 Financial instruments (continued)
Hedges of variable rate debt
As described in note 15 to the consolidated financial statements, the Group has
a Senior Secured Facility with a syndicate of banks and an Institutional
Tranche. Draw downs under the Senior Secured Facility and the Institutional
Tranche bear interest at 0.5% to 2.25% above LIBOR and up to 4% above LIBOR
respectively, so the Group is exposed to variable cash flows arising from
changes in LIBOR. The Group hedges these variable cash flows by the use of
interest rate swaps. The interest rate swaps can be summarised as follows:
---------------------------------------------------------------------------------------------------------------------
Effective dates Maturities Notional principal Receives Pays
---------------------------------------------------------------------------------------------------------------------
1/2/1997 - 7/1/2002 3/28/2002 - 1/1/2005 (Pounds)700m 6-month LIBOR 5.71% - 7.835%
---------------------------------------------------------------------------------------------------------------------
4/1/2002 1/1/2005 (Pounds)200m 3-month LIBOR 5.7% - 5.75%
---------------------------------------------------------------------------------------------------------------------
The Group assesses the effectiveness and ineffectiveness of these derivative
instruments on a quarterly basis. The ineffective portion of the Group's
interest rate swaps was not significant.
..Amounts recorded within other comprehensive income will be reclassified into
earnings where there is ineffectiveness, when the hedged transaction takes place
or where there is a change in the Group's circumstances that support the
effectiveness of the hedges. An estimated (pound)2 million is expected to be
reclassified into earnings within the next 12 months.
Fair value of financial instruments
SFAS 107, Disclosures about Fair Value of Financial Instruments requires
disclosure of an estimate of the fair values of financial instruments. SFAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties
other than in a forced sale. Fair value estimates are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates are subjective in nature and involve
uncertainties and matters of significant judgement, and therefore cannot be
determined precisely. Changes in assumptions could significantly affect the
estimates.
IV-20
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
4 Financial instruments (continued)
At December 31, 2001 the Group's significant financial instruments include cash
and cash equivalents, trade receivables, foreign currency swaps, interest rate
swaps, foreign exchange forward contracts, trade payables and long-term
borrowings. The following table summarizes the fair value of certain instruments
held by and obligations of the Group. The fair value of the other financial
instruments held by the Group approximates their recorded carrying amount due to
the short maturity of these instruments and these instruments are not presented
in the following table:
-----------------------------------------------------------------------------------------------------------------------
At
At December December
31, 2001 31, 2000
Carrying amount Fair value Carrying amount Fair value
-----------------------------------------------------------------------------------------------------------------------
(Pounds)m (Pounds)m (Pounds)m (Pounds)m
Financial instruments - assets:
Foreign exchange forward contracts 131 131 - -
Foreign currency swaps 15 15 7 7
-----------------------------------------------------------------------------------------------------------------------
Financial instruments - liabilities
Interest rate swap agreements (25) (25) - (33)
Foreign exchange forward contracts (4) (4) (8) (14)
-----------------------------------------------------------------------------------------------------------------------
Debt obligations
Accreting Convertible Notes 2003 268 268 225 225
Senior Convertible Notes 2005 344 234 334 234
Senior Debentures 2006 206 155 200 173
Senior Convertible Notes 2007 300 174 300 179
Senior Discount Debentures 2007 1,059 803 1,078 920
Senior Notes 2008 226 185 235 207
Senior Discount Notes 2009 505 308 473 312
Senior Notes 2010 378 315 388 352
Senior Discount Notes 2010 185 136 178 135
Senior Secured Facility 1,360 1,360 690 690
Flextech facility - - 116 116
Other debt 66 66 37 37
-----------------------------------------------------------------------------------------------------------------------
The estimated fair values of the financial instruments specified above are based
on quotations received from independent, third party financial institutions and
represents the net amounts receivable or payable to terminate the position. The
estimated fair values of the Debentures and Notes are also based on quotations
from independent third party financial institutions and are based on discounting
the future cash flows to net present values using appropriate market interest
rates prevailing at the year end. The directors consider that the fair value of
the Accreting Convertible Notes 2003 is not materially different from the
carrying value, as the Notes may not be traded and must be held until maturity.
Market risk and concentrations of credit risk
Market risk is the sensitivity of the value of the financial instruments to
changes in related currency and interest rates. Generally, the Group is not
exposed to such market risk because gains and losses on the underlying assets
and liabilities offset gains and losses on the financial instruments.
The Group may be exposed to potential losses due to the credit risk of
non-performance by the financial institution counterparties to its portfolio of
derivative financial instruments However such losses are not anticipated as
these counterparties are major international financial institutions and the
portfolio is spread over a wide range of institutions.
Temporary cash investments also potentially expose the Group to concentrations
of credit risk, as defined by SFAS 133. The Group places its temporary cash
investments with major international financial institutions and limits the
amount of credit exposure to any one financial institution. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers comprising the Group's customer base. At December 31, 2001,
the Group had no significant concentration of credit risk.
IV-21
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
5 Impairment of assets
During the year ended December 31, 2001, the Group undertook an impairment
review of its network assets, of goodwill arising on recent acquisitions and of
its investments in affiliates acquired in recent years. The review covered the
Cable and Content Divisions. The principal reasons for the review were: a share
price decline indicative of a fall in the values of the underlying assets and a
softening of the ad-sales market.
The review found evidence of impairment in the value of goodwill arising on the
core Content business and in the value of two affiliated undertakings, UKTV and
SMG. In order to write these down to their value in use, which was determined
using projected future cashflows at a discount rate of 11.5%, commensurate with
the risks associated with the assets, a charge of (Pounds)766 million was taken
against goodwill and a charge of (Pounds)202 million was written off the value
of its investment in affiliated undertakings. These charges have been included
in the statement of operations within impairment of goodwill and share of net
losses of affiliates respectively.
No impairment in the carrying value of the network assets was required.
6 Business combinations
On May 30, 2001, the Group acquired 51% of the issued share capital of Rapid
Travel Solutions Limited ("Rapid Travel") and was granted a series of call
options by and granted a series of put options to the vendors in respect of the
balance of 49%. Assuming that either party exercises these options, the Group
will acquire the remainder of the share capital in tranches ending on November
30, 2003 for total consideration of (Pounds)4 million. The acquisition has been
accounted for using the purchase method of accounting. Goodwill arising on the
acquisition was (Pounds)7 million, which is being amortized over 20 years.
If the Group had acquired Rapid Travel at the beginning of 2000 and 2001, the
Group's results would not have been materially different from the actual results
as disclosed in these financial statements.
On April 19, 2000 the Company acquired the entire issued share capital of
Flextech Plc ("Flextech"), a company engaged in broadcast media activities, for
a total consideration of (Pounds)1,978 million. This comprised 601 million
shares of 10p each and acquisition costs of (Pounds)31 million. The value
attributed to the shares issued was 323.85p per share, being the average share
market price for a five day period around December 17, 1999, the day the terms
of the acquisitions were agreed to and announced. The acquisition was accounted
for using the purchase method of accounting. The goodwill arising on acquisition
of Flextech was (Pounds)1,382 million, which is being amortized over its
estimated useful life of 20 years. As described in note 5, the Group has
undertaken an impairment review of goodwill. As a result of the review, a charge
of (Pounds)766 million has been made.
On November 1, 2000 the Company acquired the entire issued share capital of
Eurobell (Holdings) PLC ("Eurobell"), from Deutsche Telekom ("DT") and agreed to
pay initial and deferred consideration to DT, (as discussed below), in the form
of 5% Accreting Convertible Notes due 2003. The aggregate principal amount of
such Notes, following agreement of the deferred consideration is (Pounds)254
million. The terms of the Accreting Convertible Notes are described in note 15
to these financial statements.
Upon completion of the acquisition, the Company issued a (Pounds)220 million
Accreting Convertible Note to DT in consideration for: Eurobell's entire issued
share capital, (Pounds)72 million, the assignment of an inter-company loan
previously owed by Eurobell to DT, (Pounds)128 million, and a cash payment
remitted to Eurobell by DT shortly after the acquisition, (Pounds)20 million.
Subsequently, on January 15, 2001 DT remitted a further cash payment, (Pounds)30
million, to Eurobell and the Company issued an additional Accreting Convertible
Note to DT for (Pounds)30 million.
In addition under the terms of the acquisition, the Company was obliged to
provide deferred consideration, contingent on Eurobell's turnover for the year
ended December 31, 2000 exceeding a certain target. As a result, an additional
(Pounds)3.5 million Accreting Convertible Note, dated April 2, 2001 was issued
to DT. This deferred consideration was accrued for at December 31, 2000.
Goodwill of (Pounds)1 million arose on the acquisition which is being amortized
over 20 years.
If the Company had acquired Flextech and Eurobell on January 1, 2000 the Group's
net loss of (Pounds)755 million and loss per share of (Pounds)0.28 would have
been (Pounds)820 million and (Pounds)0.28, respectively.
On November 23, 1999 the Company acquired the remaining 50% of the issued share
capital of Cable London PLC ("Cable London") which it did not already own, for
cash consideration of (Pounds)389 million plus acquisition costs of (Pounds)5
million and assumption of debt of (Pounds)39 million. The acquisition has been
accounted for using the purchase method of accounting. The goodwill arising on
acquisition was (Pounds)438 million and is being amortized on a straight-line
basis over 20 years which is the average remaining useful life of the network
assets acquired with Cable London.
IV-22
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
7 Supplemental disclosures to consolidated statements of cash flows
Cash paid for interest was (Pounds)335 million, (Pounds)164 million and
(Pounds)124 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
Significant non-cash investing activities are described below. The amounts
stated for 2001 represent the purchase of Rapid Travel. The amounts stated for
2000 represent the purchase of Flextech and Eurobell. The amounts stated for
1999 represent the purchase of Cable London. These transactions are described in
note 6 to the consolidated financial statements.
Year ended December 31
2001 2000 1999
(Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------
Acquisitions:
Assets 1 1,104 180
Liabilities assumed (2) (172) (117)
Debt assumed - (261) (126)
----------------------------------------------------------------------------------------------------------------------
Net (liabilities)/assets (contributed)/ assumed (1) 671 (63)
Less:
Previously accounted for:
Equity investment in Cable London - - (32)
Share of cumulative losses of Cable London - - 51
Goodwill arising 7 1,383 438
----------------------------------------------------------------------------------------------------------------------
6 2,054 394
----------------------------------------------------------------------------------------------------------------------
Share consideration/capital contribution - 1,946 -
Debt consideration - 75 -
Purchase of shares 2 - 389
Option consideration 4 - -
Direct costs of acquisition - 33 5
----------------------------------------------------------------------------------------------------------------------
6 2,054 394
----------------------------------------------------------------------------------------------------------------------
In 2001 the Group entered into capital lease obligations with a total capital
value of (Pounds)47 million. In addition the Group entered into vendor financing
arrangements, under which it had a remaining financed balance of (Pounds)23
million at December 31, 2001. At December 31, 2001, the Group had accrued a
further (Pounds)35 million of capital expenditure for property and equipment.
In 2000, (Pounds)114 million of goodwill was allocated to investments in
affiliates.
At December 31
2001 2000
8 Other receivables (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------
Value Added Tax refund - 4
Interconnection receivables 2 6
Accrued income 68 60
Other 27 31
Foreign currency swap 15 7
----------------------------------------------------------------------------------------------------------------------
112 108
----------------------------------------------------------------------------------------------------------------------
Accrued income primarily represents telephone calls made by Cable Division
subscribers and income accrued under Business Services Division contracts that
have not been billed as at the accounting period end.
IV-23
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
9 Investments
The Group has investments in affiliates accounted for under the equity method at
December 31, 2001 and 2000 as follows:
Percentage ownership at December 31
2001 2000
----------------------------------------------------------------------------------------------------------------------
Front Row Television Limited 50.0% 53.0%
Blueyonder Workwise Limited 70.0% 70.0%
UKTV 50.0% 50.0%
SMG plc 16.9% 17.2%
Summarized combined financial information for such affiliates which operate
principally in the cable television, broadcasting and interactive media
industries is as follows:
At December 31
2001 2000
(Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------
Combined financial position
Property and equipment, net 54 57
Intangible assets, net 112 360
Other assets, net 169 268
----------------------------------------------------------------------------------------------------------------------
Total assets 335 685
----------------------------------------------------------------------------------------------------------------------
Debt 66 -
Other liabilities 690 626
Owners' equity (421) 59
----------------------------------------------------------------------------------------------------------------------
Total liabilities and equity 335 685
----------------------------------------------------------------------------------------------------------------------
Year ended December 31
2001 2000 1999
(Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------
Combined operations
Revenue 408 406 10
Operating expenses (324) (343) (9)
----------------------------------------------------------------------------------------------------------------------
Operating profit 84 63 1
Interest expense (38) (30) -
----------------------------------------------------------------------------------------------------------------------
Net profit 46 33 1
----------------------------------------------------------------------------------------------------------------------
At December 31
2001 2000
(Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------
The Group's investments in affiliates are comprised as
follows:
Goodwill 27 114
Loans 260 267
Share of net assets 260 403
----------------------------------------------------------------------------------------------------------------------
547 784
----------------------------------------------------------------------------------------------------------------------
Included within investments in affiliates is(Pounds)80 million (2000:(Pounds)148
million) in respect of listed investments. The aggregate market value of these
listed investments at December 31, 2001 was(Pounds)80 million (2000:(Pounds)146
million). In addition,(Pounds)18 million (2000:(Pounds)nil) of the investment in
SMG plc provides security for a loan.
IV-24
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
10 Property and equipment
Land Buildings Cable and Electronic
ducting equipment Other equipment Total
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------------
Acquisition costs
Balance at January 1, 2001 6 119 2,630 1,393 552 4,700
Additions - 14 556 31 52 653
Disposals - - - - (7) (7)
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 6 133 3,186 1,424 597 5,346
----------------------------------------------------------------------------------------------------------------------------
Accumulated depreciation
Balance at January 1, 2001 - 35 546 605 225 1,411
Charge for the year - 10 348 56 55 469
Disposals - - - - (7) (7)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001 - 45 894 661 273 1,873
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
2001 Net book value 6 88 2,292 763 324 3,473
============================================================================================================================
Acquisition costs
Balance at January 1, 2000 6 100 2,267 1,063 372 3,808
On acquisition - 4 188 92 17 301
Additions - 15 176 239 165 595
Disposals - - (1) (1) (2) (4)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 6 119 2,630 1,393 552 4,700
----------------------------------------------------------------------------------------------------------------------------
Accumulated depreciation
Balance at January 1, 2000 - 28 398 409 155 990
Charge for the year - 7 148 197 71 423
Disposals - - - (1) (1) (2)
----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 - 35 546 605 225 1,411
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
2000 Net book value 6 84 2,084 788 327 3,289
============================================================================================================================
Cable and ducting consists principally of civil engineering and fiber optic
costs. In addition, cable and ducting includes net book value of pre-
construction and franchise costs of (Pounds)14 million and (Pounds)16 million as
of December 31, 2001 and 2000, respectively. Electronic equipment includes the
Group's switching, headend and converter equipment. Other equipment consists
principally of motor vehicles, office furniture and fixtures and leasehold
improvements.
Additions
charged to
Balance at Acquisition of costs and Balance at
January 1 subsidiaries expenses Deductions December 31
11 Valuation and qualifying accounts (Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
---------------------------------------------------------------------------------------------------------------------------
2001 Deferred tax valuation allowances 733 - 168 - 901
Allowance for doubtful accounts 19 - 3 (6) 16
----------------------------------------------------------------------------------------------------------------------------
2000 Deferred tax valuation allowances 491 38 204 - 733
Allowance for doubtful accounts 13 5 14 (13) 19
----------------------------------------------------------------------------------------------------------------------------
1999 Deferred tax valuation allowances 369 39 83 - 491
Allowance for doubtful accounts 14 2 14 (17) 13
----------------------------------------------------------------------------------------------------------------------------
IV-25
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
12 Other assets
At December 31
2001 2000
The components of other assets, net of amortization, are as follows: (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Deferred financing costs of debentures 22 32
Deferred financing costs of Senior Secured Facility 36 15
-----------------------------------------------------------------------------------------------------------------------
58 47
-----------------------------------------------------------------------------------------------------------------------
As described in note 15, the Group entered into a new Senior Secured credit
facility on March 16, 2001. As a result the deferred financing costs included
within other assets at December 31, 2000 were written off.
2001 2000
13 Inventory (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Raw materials and consumables 1 2
Inventories of spare capacity and duct held for re-sale 36 36
Programming inventory 30 31
-----------------------------------------------------------------------------------------------------------------------
67 69
-----------------------------------------------------------------------------------------------------------------------
At December
31
14 Other liabilities 2001 2000
Other liabilities are summarized as follows: (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Deferred income 114 83
Accrued construction costs 67 30
Accrued programming costs 24 33
Accrued interconnect costs 39 37
Accrued interest 111 85
Accrued staff costs 35 24
Accrued expenses 41 67
Other liabilities 93 44
------------------------------------------------------------------------------------------------------------------------
524 403
------------------------------------------------------------------------------------------------------------------------
IV-26
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
15 Debt
Weighted
average
Debt is summarized as follows at interest rate 2001 2000
December 31, 2001 and 2000: 2001 2000 1999 (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------
Accreting Convertible Notes 2003 5% 5% - 268 225
Senior Convertible Notes 2005 6% 6% - 344 334
Senior Debentures 2006 9.625% 9.625% 9.625% 206 200
Senior Convertible Notes 2007 5.25% 5.25% 5.25% 300 300
Senior Discount Debentures 2007 11% 11% 11% 1,059 1,078
Senior Notes 2008 11.25% 11.25% 11.25% 226 235
Senior Discount Notes 2009 9.25% 9.25% 9.25% 261 237
Senior Discount Notes 2009 9.875% 9.875% 9.875% 244 236
Senior Notes 2010 9.875% 9.875% - 378 388
Senior Discount Notes 2010 11.375% 11.375% - 185 178
Senior Secured Facility 7.265% 7.553% 8.777% 1,360 690
Flextech facility - 6.712% - - 116
Cable London facility - - 6.684% - -
Other debt 6.767% 7.432% 7.5% 66 37
------------------------------------------------------------------------------------------------------------------------
4,897 4,254
------------------------------------------------------------------------------------------------------------------------
Notes and debentures
---------------------------------------------------------------------------------------------------------------------
Principal Maturity date Earliest redemption Interest
m date rate
---------------------------------------------------------------------------------------------------------------------
Accreting Convertible Notes 2003 GBP 294 November 1, 2003 November 1, 2003 5%
Senior Convertible Notes 2005 USD 500 July 7, 2005 July 7, 2003 6%
Senior Debentures 2006 USD 300 October 1, 2006 October 1, 2000 9.625%
Senior Convertible Notes 2007 GBP 300 February 19, 2007 March 9, 2003 5.25%
Senior Discount Debentures 2007 USD 1,537 October 1, 2007 October 1, 2000 11%
Senior Notes 2008 USD 350 November 1,2008 November 1, 2003 11.25%
Senior Discount Notes 2009 GBP 325 April 15, 2009 April 15, 2004 9.875%
Senior Discount Notes 2009 USD 500 April 15, 2009 April 15, 2004 9.25%
Senior Notes 2010 GBP 180 February 1, 2010 February 1, 2005 9.875%
Senior Notes 2010 USD 350 February 1, 2010 February 1, 2005 9.875%
Senior Discount Notes 2010 USD 450 February 1, 2010 February 1, 2005 11.375%
---------------------------------------------------------------------------------------------------------------------
The Debentures and Notes are unsecured liabilities of the Group.
The Senior Convertible Notes 2005 are convertible into 114 million ordinary
shares of the Group at a conversion price of 288p per ordinary share. Conversion
is at the holders' option at any time up to the close of business on June 22,
2005. The Senior Convertible Notes 2007 are convertible into 92 million ordinary
shares of the Group at a conversion price of 325p per ordinary share. Conversion
is at the holders' option at any time up to close of business on February 2,
2007. If Notes are called for redemption prior to maturity, each holder has the
right to convert Notes into ordinary shares. The Accreting Convertible Notes
2003 are convertible into 162 million ordinary shares of the Group at an initial
conversion price of 156.56p per ordinary share. Conversion is at maturity, at
the holder's option but the Group can elect to settle in cash, in whole but not
in part, at any time at 100% of the accreted value provided that for a certain
10 day period prior to redemption, the price per ordinary share has been at
least 130% of the average conversion price in effect on each day during the 10
day period.
On January 15, 2001, DT remitted a cash payment of (Pounds)30 million to its
former subsidiary Eurobell, under the terms of the acquisition of Eurobell by
the Company on November 1, 2000. In consideration the Company issued additional
Accreting Convertible Notes 2003 for the same amount. In addition, under the
terms of the acquisition, the Company was obliged to provide deferred
consideration, contingent on Eurobell's turnover for the year ended December 31,
2000 exceeding a certain target. As a result additional (Pounds)3.5 million
Accreting Convertible Notes 2003, dated April 2, 2001, were issued to DT.
IV-27
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
15 Debt (continued)
The unamortized portion of the discounts on issue on the Senior Discount Notes
2009 and Senior Discount Notes 2010 was (Pounds)123 million and (Pounds)101
million respectively. The discount on issue is being amortized up to the first
call dates of the bonds, such as to produce a constant rate of return on the
carrying amount.
The indentures under which the Debentures and Notes were issued contain various
covenants, which among other things, restrict the ability of the Group to incur
additional indebtedness, pay dividends, create certain liens, enter into certain
transactions with shareholders or affiliates, or sell certain assets. The Group
was in compliance with the covenants at December 31, 2001.
The Group hedges its exposure to movements in the USD:GBP exchange rate through
the use of foreign currency swaps and foreign exchange forward contracts. These
contracts are typically designed to match the first call date of the debt or
where this date has already passed, a specified date in the future. Details of
these derivative instruments are disclosed in note 5.
Senior Secured Facility
On March 16, 2001 the Group entered into a new senior secured credit facility
(the "Senior Secured Facility") with a syndicate of banks for (Pounds)2 billion,
of which (Pounds)1,360 million was drawn down at December 31, 2001. The Group is
also able to raise a further (Pounds)250m from institutional investors (the
"Institutional Tranche") of which (Pounds)125 million was drawn down at December
31, 2001. The first draw downs under the Senior Secured Facility were used to
repay amounts owed under the old senior secured credit facilities.
Borrowings under the Senior Secured Facility are secured on the assets of the
Group including the partnership interests and shares of subsidiaries and bear
interest at 0.5% to 2.25% over LIBOR (depending on the ratio of borrowings to
quarterly, annualized, consolidated net operating cash flow). Borrowings under
the Institutional Tranche bear interest at up to 4% above LIBOR.
The Group's ability to borrow under the Senior Secured Facility and the
Institutional Tranche is subject to, amongst other things, its compliance with
the financial and borrowing conditions contained therein. There are three
covenants, which are applied as follows:
. Interest charged on the senior debt facility compared with earnings
before interest, tax, depreciation and amortization ('EBITDA');
. Cash-paying interest compared with EBITDA; and
. Senior debt compared with EBITDA
At December 31, 2001, the Group was in compliance with these covenants and
conditions and expects to be in compliance throughout 2002.
Vendor financing
The Group has entered into vendor financing arrangements to fund its purchase of
equipment from certain suppliers. Under the terms of these arrangements the
Group defers payment for periods up to 36 months. Interest is charged on these
arrangements at a rate that is fixed for the life of the arrangements. The
balance on these arrangements at December 31, 2001 was (Pounds)23 million.
SMG loan
On July 11, 2001, the Group entered into a contract with Toronto Dominion Bank
("TD"), whereby TD provides a loan to the Group, in return for security over 55%
of the Group's shareholding in SMG plc. The arrangement matures after one year,
but can be extended for up to three years by mutual agreement. The balance on
the loan at December 31, 2001 was (Pounds)33 million.
Bank loans
Bank loans are property loans secured on certain freehold and long leasehold
land and buildings held by the Group. The balance at December 31, 2001 was
(Pounds)10 million.
Other loans
At December 31, 2000 the Group had a credit facility with Liberty Media. The
balance at that date was (Pounds)17 million. The Group also had a standby credit
facility of (Pounds)2 million made available by Vivendi SA. These two loans were
repaid during the year.
IV-28
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
15 Debt (continued)
The Maturity Profile of the Group's long-term debt is as follows:
2001
(Pounds)m
----------------------------------------------------------------
2002 60
2003 268
2004 1
2005 345
2006 598
2007 and thereafter 3,625
----------------------------------------------------------------
4,897
----------------------------------------------------------------
16 Income taxes
Loss before income taxes is solely attributable to the UK: 2001 2000 1999
The provisions for income taxes follow: (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------
Income tax benefit/(expense) - - -
Deferred tax benefit 70 6 -
------------------------------------------------------------------------------------------------------------------------
70 6 -
------------------------------------------------------------------------------------------------------------------------
A reconciliation of income taxes determined using the statutory UK rate of 30%
(2000: 30%) to the effective rate of income tax is as follows:
Year ended
December 31
2001 2000 1999
% % %
-----------------------------------------------------------------------------------------------------------------------
Corporate tax at UK statutory rates (30) (30) (30)
Change in valuation allowance 34 31 30
-----------------------------------------------------------------------------------------------------------------------
4 1 -
-----------------------------------------------------------------------------------------------------------------------
Deferred income tax assets and liabilities at December 31, 2001 and 2000 are
summarized as follows:
2001 2000
(Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Deferred tax assets relating to:
Fixed assets 410 304
Net operating loss carried forward 465 402
Other - investments 26 27
-----------------------------------------------------------------------------------------------------------------------
Deferred tax asset 901 733
Valuation allowance (901) (733)
-----------------------------------------------------------------------------------------------------------------------
- -
-----------------------------------------------------------------------------------------------------------------------
Investments in affiliates (113) (183)
-----------------------------------------------------------------------------------------------------------------------
Deferred tax liability per balance sheet (113) (183)
-----------------------------------------------------------------------------------------------------------------------
IV-29
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
16 Income taxes (continued)
At December 31, 2001 the Group estimates that it has, subject to Inland Revenue
agreement, net operating losses ("NOLs") of (Pounds)1,550 million available to
relieve against future profits. This excludes capital allowances on assets which
are available to the Group, but have not been claimed, amounting to
(Pounds)4,410 million.
Due to a history of operating losses the Group has established a valuation
allowance with respect to deferred tax assets.
The NOLs have an unlimited carry forward period under UK tax law, but are
limited to their use to the type of business which has generated the loss.
17 Shareholders' equity
Movement in share capital
On November 23, 1999, the Company completed its acquisition of the 50% of Cable
London not already owned from NTL (Bermuda) Limited, a subsidiary of NTL
Communications Corporation. The acquisition was mainly funded by the proceeds of
a rights issue to existing Telewest shareholders. Under the terms of the rights
issue shareholders were able to acquire one new ordinary share for every 11
shares held, at a price of 213 pence per new share. Under the rights issue 190
million ordinary shares were issued. In addition 6 million ordinary shares were
redesignated into 6 million limited voting convertible ordinary shares.
On March 31, 2000 the authorized share capital of the Company was increased to
(Pounds)460 million divided into 4,300 million ordinary shares of 10 pence each
and 300 million limited voting convertible ordinary shares of 10 pence each.
On April 19, 2000 the Company issued 601 million ordinary shares of 10 pence
each in consideration for the entire issued share capital of Flextech. Also in
2000, 4 million ordinary shares of 10 pence each were issued in consideration of
(Pounds)3 million on exercise of employee share options.
During 2001 the Company issued 7 million ordinary shares of 10 pence each upon
exercise of employee share options. Total consideration received was (Pounds)6
million. In addition the Company redesignated 20 million ordinary shares of
10pence each into 20 million limited voting convertible ordinary shares of 10
pence each.
Limited voting convertible ordinary shares
The ordinary shares and the limited voting convertible ordinary shares have the
same rights, except that the limited voting convertible ordinary shares do not
confer the right to vote on resolutions to appoint, re-appoint, elect or remove
directors of Telewest. No application will be made for the limited voting
convertible ordinary shares to be listed or dealt in on any stock exchange.
Holders of limited voting convertible ordinary shares are entitled to convert
all or some of their limited voting convertible ordinary shares into fully paid
ordinary shares, provided that the conversion would not result in a change of
control of the Company for the purposes of the indentures governing certain
Notes and Debentures. The limited voting convertible ordinary shares are
convertible into ordinary shares at the Company's option at any time, subject to
certain conditions. The sole holders of the limited voting convertible ordinary
shares are Liberty Media and Microsoft.
Members of the Liberty Media Group and/or the Microsoft Group can re-designate
all or any of their ordinary shares into limited voting convertible ordinary
shares. This is to ensure that, on any future purchase of ordinary shares by
members of the Microsoft Group and/or members of the Liberty Media Group, they
will, at that time, be able to re-designate such number of their then existing
holding of ordinary shares so as to avoid a change of control of the Company for
the purposes of the Notes and Debentures.
Future purchases of ordinary shares and/or limited voting convertible ordinary
shares by members of the Liberty Media Group and/or the Microsoft Group will,
however, be subject to Rule 9 of the UK's City Code on Take-overs and Mergers
because both classes of shares are treated as voting shares for that purpose.
Under Rule 9, when any person acquires, whether by a series of transactions over
a period of time or not, shares which (taken together with shares held or
acquired by persons acting in concert with him) carry 30% or more (but less than
50%) of the voting rights of a public company, that person is normally required
to make a general offer to shareholders for the entire share capital of the
company then in issue. Any person, or group of persons acting in concert, owning
shares carrying 50% or more of the voting rights of a public company, subject to
their own individual limits, is free to acquire further shares in that
IV-30
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
public company without giving rise to the requirement to make a general offer
for the entire issued share capital of that company.
17 Shareholders' equity (continued)
In May 2001, Liberty Media increased its shareholding in the Company as result
of the purchase of 20 million ordinary shares of 10p each. Prior to the increase
in shareholding, Liberty Media redesignated 20 million ordinary shares of 10
pence each as limited voting convertible ordinary shares of 10 pence each. As a
result Liberty Media and Microsoft's combined shareholdings remained below 50%
of the issued ordinary share capital, above which level a change of control for
the purposes of the Group's debt securities may occur.
18 Share-based compensation plans
At December 31, 2001, the Company operated five types of share-based
compensation plans: the Executive Share Option Schemes, the Sharesave Schemes,
the Telewest Restricted Share Scheme ("RSS"), the Telewest Long Term Incentive
Plan ("LTIP") and an Equity Participation Plan ("EPP").
The Company applies APB Opinion Bulletin 25 and related interpretations in
accounting for its share-based compensation plans. Compensation cost is
recognized over the estimated service period in respect of performance based
share option grants to the extent that the market value of the Company's
ordinary shares exceeds the exercise price at the earlier of the vesting date or
the Balance Sheet date. Compensation cost is recognized for awards over ordinary
shares made under the RSS since the awards have no exercise price. Compensation
cost is recognized over the estimated service period in respect of the LTIP to
the extent that the market value of the Company's ordinary shares exceeds the
exercise price at the earlier of the vesting date or the Balance Sheet date.
Compensation cost recognized for share option grants and awards is as follows:
2001 2000 1999
(Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------
RSS - - -
LTIP - 5 1
Executive Share Option Schemes 1 2 23
EPP 1 1 -
------------------------------------------------------------------------------------------------------------------------
2 8 24
------------------------------------------------------------------------------------------------------------------------
If compensation costs for share option grants and awards under the RSS, LTIP,
Executive Option Schemes and EPP had been determined based on their fair value
at the date of grant for 2001, 2000 and 1999 consistent with the method
prescribed by SFAS 123, the Group's net loss and basic and diluted loss per
share would have been adjusted to the pro forma amounts set out below:
2001 2000 1999
(Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------
Net loss - As reported (1,741) (755) (541)
- Pro forma (1,750) (757) (519)
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
(Pounds) (Pounds) (Pounds)
Basic and diluted loss per share - As reported (0.60) (0.28) (0.25)
- Pro forma (0.61) (0.28) (0.24)
------------------------------------------------------------------------------------------------------------------------
IV-31
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
The fair value of each option grant in all plans was estimated as at the date of
grant using a Black-Scholes option-pricing model. The model used a
weighted-average, risk-free interest rate of 5.5%, 5.8% and 6.8% for grants in
2001, 2000 and 1999 respectively, and an expected volatility of 55%. The Group
does not expect to pay a dividend on its ordinary shares at any time during the
expected life of any outstanding option. The Group expects options to be held
until maturity.
18 Share-based compensation plans (continued)
Performance-based share option compensation plans
The Group has two performance-based share option plans: the 1995 (No. 1)
Executive Share Option Scheme and the 1995 (No. 2) Executive Share Option
Scheme. Under both plans, certain officers and employees are granted options to
purchase ordinary shares of the Company. The exercise price of each option
generally equals the market price of the Company's ordinary shares on the date
of grant. The options are exercisable between three and ten years after the date
of the grant with exercise conditional on the Company's shares out-performing by
price the FTSE100 Index over any three-year period preceding exercise. The
Company may grant options for up to 295 million ordinary shares.
A summary of the status of the Company's performance-based share option plans as
of December 31, 2001, 2000 and 1999 and the changes during the years ended on
those dates are presented below:
2001 2000 1999
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
---------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 52,503,409 173.2p 17,028,622 110.0p 26,165,744 118.9p
Adjustments during the year - - 4,457,322 143.8p 1,365,978 105.0p
Granted 53,709,994 98.8p 35,154,239 205.1p 1,163,027 265.4p
Exercised (1,210,816) 78.2p (2,501,964) 114.9p (8,566,437) 136.0p
Forfeited (7,302,750) 134.3p (1,634,810) 208.8p (3,099,690) 108.4p
---------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 97,699,837 136.4p 52,503,409 173.2p 17,028,622 110.0p
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 16,577,655 132.0p 14,938,772 129.8p 2,386,230 116.8p
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year 69.7p 33.9p 201.4p
---------------------------------------------------------------------------------------------------------------------
The adjustments during 2000 arose as a result of the transfer in of former
Flextech outstanding options (1999-compensating option holders for the dilutive
effect of the rights issue in that year).
Share options are forfeited due to employees leaving the Group before their
share options become exercisable.
The following table summarizes information about the Company's performance-based
share options outstanding at December 31, 2001.
Options Options
outstanding exercisable
----------------------------------------------------------------------------------------------------------------------
Number Weighted Weighted Number Weighted
outstanding average average exercisable average
at remaining exercise at exercise
December contractual price December price
31, life 31,
Range of exercise prices 2001 2001
----------------------------------------------------------------------------------------------------------------------
65.7 - 76.8p 14,813,365 8.2 yrs 74.2p 4,028,801 72.1p
81.5 - 82.5p 2,175,831 9.6 yrs 81.7p - -
84.6 - 99.9p 3,122,542 3.5 yrs 90.2p 3,122,542 90.2p
102.0 - 109.1p 34,373,272 9.2 yrs 103.7p 828,028 108.7p
114.0 - 125.9p 12,605,878 8.1 yrs 119.8p 1,635,814 124.6p
130.4 - 142.9p 2,899,478 3.1 yrs 139.7p 2,899,478 139.7p
156.6 - 170.0p 1,601,198 8.2 yrs 165.8p 172,307 159.8p
IV-32
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
202.4 - 235.0p 24,794,408 8.5 yrs 228.9p 3,675,233 226.0p
237.3 - 249.4p 543,216 8.1 yrs 239.7p 79,086 244.7p
274.3 - 276.5p 381,810 8.4 yrs 276.3p 19,978 275.3p
289.0 - 294.8p 388,839 7.8 yrs 291.2p 116,388 291.3p
----------------------------------------------------------------------------------------------------------------------
65.7 - 294.8p 97,699,837 8.3 yrs 136.4p 16,577,655 132.0p
----------------------------------------------------------------------------------------------------------------------
IV-33
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
18 Share-based compensation plans (continued)
Fixed share option compensation plans
The Company also operates the Sharesave Scheme, a fixed share option
compensation scheme. Under this plan, the Company grants options to employees to
purchase ordinary shares at up to a 20% discount to market price. These options
can be exercised only with funds saved by employees over time in a qualified
savings account. The options are exercisable between 37 and 66 months after
commencement of the savings contracts.
A summary of the status of the Company's fixed share option compensation scheme
as of December 31, 2001, 2000, and 1999 and the changes during the years ended
on those dates are presented below:
2001 2000 1999
Weighted Weighted Weighted
average average average
Number exercise Number exercise Number exercise
of shares price of shares price of shares price
----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 26,635,135 91.1p 11,679,289 116.9p 9,460,336 84.7p
Adjustments during the year - - 654,868 126.2p 469,470 67.9p
Granted 9,205,135 60.3p 17,946,934 88.3p 2,775,602 236.5p
Exercised (4,380,809) 57.3p (876,216) 98.1p (30,719) 88.8p
Forfeited (9,940,127) 100.4p (2,769,740) 187.6p (995,400) 88.2p
----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 21,519,334 80.5p 26,635,135 91.1p 11,679,289 116.9p
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 72,926 98.0p 4,443,443 57.1p - -
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Weighted average fair value of
options granted during the year 33.3p 39.1p 153.4p
----------------------------------------------------------------------------------------------------------------------
The adjustments during 2000 arose as a result of the transfer in of former
Flextech outstanding options (1999-compensating option holders for the dilutive
effect of the rights issue in that year).
Share options are forfeited due to employees leaving the Group before their
share options become exercisable.
The following table summarizes information about the Company's fixed share
options outstanding at December 31, 2001.
Options
outstanding
-----------------------------------------------------------------------------------------------------------------------
Number Weighted
outstanding average
at remaining
December contractual
Range of exercise prices 31, life
2001
-----------------------------------------------------------------------------------------------------------------------
53.6 - 88.3p 19,178,335 3.0 yrs
103.9 - 115.9p 1,875,842 0.6 yrs
128.6 - 161.9p 76,965 1.1 yrs
191.0 - 236.5p 388,192 1.6 yrs
-----------------------------------------------------------------------------------------------------------------------
53.6 - 236.5p 21,519,334 2.8 yrs
-----------------------------------------------------------------------------------------------------------------------
IV-34
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
18 Share-based compensation plans (continued)
Telewest Restricted Share Scheme ("RSS")
The Company operates the RSS in conjunction with an employment trust, the
Telewest 1994 employees' Share Ownership Plan Trust (the "Telewest ESOP"), which
has been designed to provide incentives to executives of the Company. Under the
RSS, executives may be granted awards over ordinary shares of the Company based
on a percentage of salary. The awards are made for no consideration. The awards
generally vest three years after the date of the award and are exercisable for
up to seven years after the date when they vest. Awards granted under the RSS
may be made over a maximum of 4.0 million ordinary shares of the Company.
The compensation charge related to each award is based on the share price of the
ordinary shares on the date the award was made.
A summary of the status of the RSS at December 31, 2001, 2000 and 1999 and the
changes during the years ended on those dates are presented below:
2001 2000 1999
Number Number Number
of shares of shares of shares
----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 358,316 576,333 416,186
Adjustments during the year - - 21,612
Granted 248,595 - 447,532
Exercised (76,056) (131,394) (122,157)
Forfeited - (86,623) (186,840)
----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 530,855 358,316 576,333
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Awards exercisable at year end 38,338 86,989 33,283
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Weighted average fair value of awards granted during the year (Pounds)1.10 - (Pounds)2.18
----------------------------------------------------------------------------------------------------------------------
The adjustments in 1999 compensated award holders for the dilutive effect of the
rights issue in that year.
Share options are forfeited due to employees leaving the Group before their
share options become exercisable.
At December 31, 2001, the 530,855 awards outstanding and the 38,338 awards
exercisable have weighted average remaining contractual lives of 8.4 years and
5.4 years respectively.
IV-35
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
18 Share-based compensation plans (continued)
Long Term Incentive Plan ("LTIP")
The LTIP provides for share awards to executive directors and senior executives.
Under the LTIP, an executive will be awarded the provisional right to receive,
for no payment, a number of Telewest shares with a value equating to a
percentage of base salary. The shares will not vest unless certain performance
criteria, based on total shareholder return assessed over a three-year period
are met. The percentage of salary will be determined by the Remuneration
Committee and will be up to 100% of base salary for executive directors.
A summary of the status of the Company's LTIP at December 31, 2001, 2000 and
1999 and the changes during the years ended on those dates are presented below:
2001 2000 1999
Number Number Number
of shares of shares of shares
----------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,714,552 4,005,075 3,796,733
Adjustments during the year - - 188,468
Granted 910,730 816,175 196,139
Exercised (1,220,362) (1,152,826) -
Forfeited (838,413) (953,872) (176,265)
----------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 1,566,507 2,714,552 4,005,075
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Awards exercisable at year end 265,939 1,058,542 -
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
Weighted average fair value of awards granted during the year (Pounds)1.09 (Pounds)0.24 (Pounds)1.93
----------------------------------------------------------------------------------------------------------------------
The adjustments in 1999 compensated award holders for the dilutive effect of the
rights issue in that year.
Share options are forfeited due to employees leaving the Group before their
share options become exercisable or due to performance criteria not being met.
At December 31, 2001, the 1,566,507 awards outstanding and the 265,939 awards
exercisable have weighted average remaining contractual lives of 2.5 years and
1.1 years respectively.
Deferred compensation cost relating to the LTIP is (Pounds)189,000.
IV-36
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
18 Share-based compensation plans (continued)
Equity Participation Plan ("EPP")
The Remuneration Committee has provided that, under the EPP, an employee with
two years service or at manager level or above, can use up to 100% of the
pre-tax or post-tax Short Term Incentive Plan ("STIP") bonus payable to the
employee to acquire Telewest shares ("bonus shares"). The employee must deposit
the bonus shares with the Trustee of the existing Telewest ESOP. In return, the
employee is provisionally allocated for no payment a matching number of Telewest
shares. Provided the bonus shares are retained for three years and the employee
remains employed by the Company for three years, the bonus and matching shares
would thereafter be released to the employee.
A summary of the status of the Company's EPP at December 31, 2001, 2000 and 1999
and the changes during the years ended on those dates are presented below:
2001 2000 1999
Number Number Number
of shares of shares of shares
---------------------------------------------------------------------------------------------
Outstanding at beginning of year 1,193,839 1,074,150 676,504
Adjustments during the year - - 57,664
Granted - 267,524 495,964
Exercised (579,430) (130,576) (67,336)
Forfeited (42,356) (17,259) (88,646)
---------------------------------------------------------------------------------------------
Outstanding at end of year 572,053 1,193,839 1,074,150
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Awards exercisable at year end 26,443 288,253 312,718
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Weighted average fair value of awards granted during
the year - (Pounds)2.49 (Pounds)1.83
---------------------------------------------------------------------------------------------
The adjustments in 1999 compensated award holders for the dilutive effect of the
rights issue in that year.
Share options are forfeited due to employees leaving the Group before their
share options become exercisable.
At December 31, 2001, the 572,053 awards outstanding and 26,443 awards
exercisable have weighted average remaining contractual lives of 4.5 years and
3.3 years respectively.
Deferred compensation cost relating to the EPP is (Pounds)419,000.
19 Accumulated other comprehensive income
Gains/(losses) on mark to
market of cashflow hedges
----------------------------------------------------------------------------------
Balance at January 1, 2001 -
Cumulative effect of accounting change (16)
Amounts reclassified into earnings (5)
Current period (decrease)/increase in fair value 57
----------------------------------------------------------------------------------
Balance at December 31, 2001 36
==================================================================================
IV-37
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
20 Commitments and contingencies
Restricted cash
At December 31,2001, the Group has cash restricted as to use of (Pounds)20
million. Of this amount, (Pounds)12 million provides security for leasing
obligations and (Pounds)8 million guarantees a temporary overdraft of TV Travel
Group Limited, an affiliate.
Other commitments
Under the terms of the investment agreement relating to the Group's investment
in Imagine Broadband, the Group committed to spend (Pounds)17 million on Imagine
Broadband services on or before June 30, 2003. At the year end the unspent
balance of this commitment was (Pounds)4 million.
The amount of capital expenditure authorized by the Group for which no provision
has been made in the consolidated financial statements is as follows:
2001 2000
-------------------------------------------------------------------
(Pounds)m (Pounds)m
Contracted 28 43
-------------------------------------------------------------------
In addition the Group has contracted to buy (Pounds)14 million of programming
rights for which the license period has not yet started.
Also at December 31, 2001 the Group is committed to providing funding to its
affiliates as follows:
Company Committed cash
(Pounds)m
Blueyonder Workwise 3
iSee Ventures 1
Vis iTV 1
------------------------------------------------------------------
5
------------------------------------------------------------------
Capital and operating leases
The Group leases a number of assets under arrangements accounted for as capital
leases, as follows:
Acquisition Accumulated Net book
costs depreciation value
(Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------
At December 31, 2001
Electronic equipment 290 (187) 103
Other equipment 109 (43) 66
At December 31, 2000
Electronic equipment 268 (161) 107
Other equipment 104 (36) 68
------------------------------------------------------------------------
Depreciation charged on these assets was (Pounds)45 million and (Pounds)64
million for the years ended December 31, 2001 and 2000 respectively.
The Group leases business offices and uses certain equipment under lease
arrangements accounted for as operating leases. Minimum rental expense under
such arrangements amounted to (Pounds)19 million, (Pounds)17 million and
(Pounds)7 million for the years ended December 31, 2001, 2000 and 1999,
respectively.
IV-38
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
20 Commitments and contingencies (continued)
Capital and operating leases (continued)
Future minimum lease payments under capital and operating leases are summarized
as follows as of December 31, 2001:
Capital leases Operating leases
(Pounds)m (Pounds)m
-----------------------------------------------------------------
2002 63 24
2003 55 24
2004 47 18
2005 43 13
2006 33 12
2007 and thereafter 51 96
-----------------------------------------------------------------
292
Imputed interest (54)
-----------------------------------------------------------------
238
-----------------------------------------------------------------
It is expected that, in the normal course of business, expiring leases will be
renewed or replaced.
The Group leases capacity on its network to other telecommunications companies.
These leases are accounted for as operating leases and revenues received are
recognized over the life of the leases as follows:
(Pounds)m
----------------------------------------------------------------------
2002 4
2003 5
2004 4
2005 4
2006 2
2007 and thereafter 15
----------------------------------------------------------------------
The assets held under these leases are accounted for as follows:
Acquisition costs Accumulated depreciation NBV
(Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------
At December 31, 2001
Cable and ducting 45 (3) 42
At December 31, 2000
Cable and ducting 18 (1) 17
----------------------------------------------------------------------------------------------------
Depreciation charged on these assets was (Pounds)2 million and (Pounds)1 million
for the years ended December 31, 2001 and 2000 respectively.
Contingent liabilities
The Group has provided performance bonds in respect of its national licence and
to local authorities up to a maximum amount of (Pounds)7 million (2000:
(Pounds)7 million).
HM Customs and Excise have raised an assessment against the Group for (Pounds)8
million. Independent legal counsel has advised that the assessment is likely to
be set aside on appeal. Accordingly no provison has been made in these accounts.
The Group is a party to various other legal proceedings in the ordinary course
of business which it does not believe will result, in aggregate, in a material
adverse effect on its financial condition or results of operations.
IV-39
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
21 Related Party Transactions
Identity of relevant related parties
Liberty Media, Inc ("Liberty"), Microsoft and MediaOne International
("MediaOne") are related parties of the Group, in that they control or
controlled, directly or indirectly, more than 20% of the voting rights of the
Company in 2001, 2000 and 1999.
Cable London up to its acquisition on November 23, 1999, was a related party of
the Group by virtue of its status as an associated company.
Flextech up to its acquisition on April 19, 2000 was a related party of the
Group as Liberty owned more than 20% of the voting rights of Flextech.
UKTV and TV Travel Group Limited ("TVT") became related parties of the Group
with the Flextech acquisition as the Group owns 50% and 37.95% of the voting
rights respectively.
During the year Screenshop Limited ("Screenshop") became a related party when
the Group sold its shareholding in Screenshop to sit-up Limited in return for a
36.36% shareholding in sit-up Limited.
Nature of transactions
The Group had a (Pounds)10 million loan facility with Liberty. Interest charged
on this loan was (Pounds)nil (2000:(Pounds)1 million). The balance due to
Liberty at December 31, 2000 was (Pounds)17 million including accrued interest
and was repaid during the year.
Additionally, the Group purchases software and consultancy services from
Microsoft, on normal commercial terms. Purchases in the year ended December 31,
2001 amounted to (Pounds)2 million (2000: (Pounds)2 million). The balance
outstanding in respect of these purchases was (Pounds)nil at December 31, 2001
and 2000.
The Group, in the normal course of providing cable television services,
purchases certain of its programming from Flextech. Such programming is
purchased on commercially-available terms. Total purchases in the period to
acquisition in 2000 and in the year ended December 31, 1999 amounted to
(Pounds)4 million and (Pounds)9 million respectively.
The Group made loans to Cable London prior to its acquisition in November 1999.
Interest charged on these loans in the year ended December 31, 1999 was
(Pounds)3 million.
The Group has charged management fees to UKTV of (Pounds)nil (2000: (Pounds)3
million). In addition the Group has recharged overheads and costs incurred on
their behalf to UKTV, TVT and Screenshop of (Pounds)8 million, (Pounds)3 million
and (Pounds)1 million (2000: (Pounds)7 million, (Pounds)10 million and
(Pounds)nil) respectively. The Group has also made a loan to UKTV. Interest
charged on this loan was (Pounds)12 million (2000: (Pounds)15 million). Amounts
due from UKTV, TVT and Screenshop at December 31, 2001 were (Pounds)124 million,
(Pounds)5 million and (Pounds)8 million respectively (2000: (Pounds)229 million,
(Pounds)31 million and (Pounds)nil respectively).
In the normal course of its business the Group purchases programming from UKTV.
Purchases in the year ended December 31, 2001 were(Pounds)5 million
(2000:(Pounds)4 million, 1999:(Pounds)2 million). The balance due to UKTV at
December 31, 2001 was(Pounds)2 million (2000:(Pounds)nil).
IV-40
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
22 Quarterly Financial Information (unaudited)
2001
Fourth Third Second First
Total quarter* quarter quarter quarter
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------------------------
Revenue 1,254 329 312 315 298
Operating loss (1,121) (844) (83) (87) (107)
Finance expenses, net (457) (131) (104) (95) (127)
Net loss after extraordinary item (1,741) (1,122) (192) (185) (242)
Basic and diluted loss per ordinary
share after extraordinary item (60p) (38p) (7p) (6p) (9p)
-----------------------------------------------------------------------------------------------------------------------
* In the fourth quarter the Group recorded a goodwill impairment charge of
(Pounds)766 million and wrote down the value of its investments in affiliates by
(Pounds)202 million..
2000
Fourth Third Second First
Total quarter quarter quarter quarter
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
------------------------------------------------------------------------------------------------------------------------
Revenue 1,069 289 280 264 236
Operating loss (359) (147) (75) (61) (76)
Finance expenses, net (385) (67) (105) (101) (112)
Net loss after extraordinary item (755) (226) (178) (163) (188)
Basic and diluted loss per ordinary
share after extraordinary item (28p) (8p) (6p) (6p) (8p)
Finance expenses include foreign exchange gains and losses on the retranslation
or valuation of non-sterling denominated financial instruments using period end
exchange rates and market valuations.
IV-41
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
23 Segmental information
The Group applies SFAS 131, Disclosures about Segments of an Enterprise and
Related Information. SFAS 131 establishes standards for reporting information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, and geographic
areas. Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker, or decision-making group, in deciding how to
allocate resources and in assessing performance. The Group's chief operating
decision-making group is the Board of Directors. The operating segments are
managed separately because each operating segment represents a strategic
business unit that offers different products and services in different markets.
The Group operates in two main segments: Cable and Content. The Cable segment of
our business can be subdivided, for revenue purposes only, between four product
ranges: Cable Television, Consumer Telephony, Internet and other, and Business
Services. The Internet and Other unit comprises internet sales and sales of
cable publications. The Content segment provides entertainment content,
interactive and transactional services to the UK pay-TV and internet markets.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. The Group has
changed the structure of its segmental analysis and certain corresponding
information from the previous years has been restated to reflect the change in
structure.
IV-42
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Notes to the Consolidated Financial Statements
23 Segmental information (continued)
The following tables present summarized financial information relating to the
reportable segments for each of the three years ended December 31, 2001:
Note 2
2001 2001 2000 1999
$m (Pounds)m (Pounds)m (Pounds)m
-----------------------------------------------------------------------------------------------------
CABLE
Cable television 478 329 279 258
Consumer telephony 710 488 445 334
Internet and other 58 40 16 17
-----------------------------------------------------------------------------------------------------
Total Consumer Division 1,246 857 740 609
Business Services Division 390 268 248 177
-----------------------------------------------------------------------------------------------------
Third party revenue 1,636 1,125 988 786
Operating costs and expenses (1,196) (822) (757) (597)
Depreciation (658) (453) (392) (305)
Amortization of goodwill (119) (82) (86) (62)
-----------------------------------------------------------------------------------------------------
Operating loss (337) (232) (247) (178)
=====================================================================================================
Additions to property and equipment 944 649 587 500
Total assets 7,407 5,093 5,146 4,568
CONTENT
Content division 208 143 88 -
Inter-segmental/1/ (20) (14) (7) -
-----------------------------------------------------------------------------------------------------
Third party revenue 188 129 81 -
Operating costs and expenses (196) (135) (101) -
Depreciation (24) (16) (31) -
Amortization of goodwill/2/ (1,261) (867) (61) -
-----------------------------------------------------------------------------------------------------
Operating loss (1,293) (889) (112) -
=====================================================================================================
Additions to property and equipment 6 4 8 -
Total assets 1,802 1,239 2,178 -
TOTAL
Cable television 478 329 279 258
Consumer telephony 710 488 445 334
Internet and other 58 40 16 17
-----------------------------------------------------------------------------------------------------
Total Consumer Division 1,246 857 740 609
Business Services Division 390 268 248 177
-----------------------------------------------------------------------------------------------------
Total Cable Division 1,636 1,125 988 786
Content division 208 143 88 -
Inter-segmental/1/ (20) (14) (7) -
----------------------------------------------------------------------------------------------- ------
Total revenue 1,824 1,254 1,069 786
Operating costs and expenses (1,392) (957) (858) (597)
Depreciation (682) (469) (423) (305)
Amortization of goodwill/2/ (1,380) (949) (147) (62)
-----------------------------------------------------------------------------------------------------
Operating loss (1,630) (1,121) (359) (178)
Other expense/2/ (981) (675) (402) (343)
Income tax benefit 102 70 6 -
-----------------------------------------------------------------------------------------------------
Net loss before extraordinary loss (2,509) (1,726) (755) (521)
=====================================================================================================
Additions to property and equipment 950 653 595 500
Total assets 9,209 6,332 7,324 4,568
/1/Inter-segmental revenues are revenues from sales in our Content Division
which are costs in our Cable Division and are eliminated on consolidation.
/2/In the fourth quarter of 2001, the Group recorded a goodwill impairment
charge of (Pounds)766 million and wrote down the value of its investments in
affiliates by (Pounds)202 million.
IV-43
--------------------------------------------------------------------------------
Telewest Communications plc
US GAAP
--------------------------------------------------------------------------------
Supplementary Financial Information - Five Year Summary (years ended December
31, 2001, 2000, 1999, 1998, 1997)
Group
2001 2000/3/ 1999/2/ 1998/1/ 1997
(Pounds)m (Pounds)m (Pounds)m (Pounds)m (Pounds)m
----------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Property and equipment (net) 3,473 3,289 2,818 2,457 1,706
Total assets 6,332 7,324 4,568 3,978 2,413
Investment in affiliates 547 784 4 27 60
Total debt and capital leases/4/ 5,135 4,499 3,268 2,626 1,449
Equity 451 2,145 953 1,041 739
STATEMENT OF OPERATIONS DATA
Cable television 329 279 258 202 160
Consumer telephony 488 445 334 233 167
Internet and other 40 16 17 20 16
Business Services Division 268 248 177 84 44
Content Division 129 81 - - -
----------------------------------------------------------------------------------------------------------------------
TOTAL REVENUE 1,254 1,069 786 539 387
----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES
Consumer programming expenses (142) (132) (132) (103) (93)
Business and consumer telephony expenses (235) (235) (158) (82) (50)
Content expenses (83) (46) - - -
Selling, general and administrative (497) (445) (307) (208) (194)
Depreciation (469) (423) (305) (224) (177)
Amortization/5/ (949) (147) (62) (36) (27)
----------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (1,121) (359) (178) (114) (154)
----------------------------------------------------------------------------------------------------------------------
Share of net loss of affiliates/5/ (216) (15) (6) (19) (22)
Financial expenses, net (457) (385) (335) (201) (156)
Extraordinary loss (15) - (20) - -
Net loss (1,741) (755) (541) (333) (332)
Basic and diluted loss per ordinary share
Before extraordinary loss (59p) (28p) (24p) (23p) (32p)
Extraordinary loss (1p) - (1p) - -
Net loss (60p) (28p) (25p) (23p) (32p)
/1/ Includes results of General Cable and Birmingham Cable beginning September
1, 1998 (the date they were acquired by the Company)
/2/ Includes results of Cable London beginning November 23, 1999 (the date it
was acquired by the Company)
/3/ Includes results of Flextech from April 19, 2000 and Eurobell from November
1, 2000 (the dates they were acquired by the Company)
/4/ See note 15 (Debt) and note 20 (Commitments and contingencies) to the US
GAAP Consolidated Financial Statements
/5/ In the fourth quarter of 2001 the Group recorded a goodwill impairment
charge of (Pounds)766 million and wrote down the value of its investments in
affiliates by (Pounds)202 million.
IV-44
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 MEDIA CORPORATION
Dated: April 1, 2002 By /s/ CHARLES Y. TANABE
--------------------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Signature Title Date
--------- ----- ----
/s/ JOHN C. MALONE Chairman of the Board, April 1, 2002
------------------------------ and Director
John C. Malone
/s/ ROBERT R. BENNETT Director, President and Chief April 1, 2002
------------------------------ Executive Officer
Robert R. Bennett
/s/ GARY S. HOWARD Director, Executive Vice April 1, 2002
------------------------------ President and Chief
Gary S. Howard Operating Officer
/s/ JEROME H. KERN Director April 1, 2002
------------------------------
Jerome H. Kern
/s/ PAUL A. GOULD Director April 1, 2002
------------------------------
Paul A. Gould
/s/ LARRY E. ROMRELL Director April 1, 2002
------------------------------
Larry E. Romrell
/s/ DONNE F. FISHER Director April 1, 2002
------------------------------
Donne F. Fisher
/s/ DAVID J.A. FLOWERS Senior Vice President and April 1, 2002
------------------------------ Treasurer (Principal Financial
David J.A. Flowers Officer)
/s/ CHRISTOPHER W. SHEAN Senior Vice President and April 1, 2002
------------------------------ Controller (Principal
Christopher W. Shean Accounting Officer)
IV-45
EXHIBIT INDEX
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3 - Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of Liberty, 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, as adopted August 9, 2001 (incorporated by
reference to Exhibit 3.4 of the Split Off S-1 Registration
Statement).
4 - Instruments Defining the Rights of Securities Holders, including Indentures:
4.1 Specimen certificate for shares of Series A common stock, par
value $.01 per share, of the Registrant (incorporated by
reference to Exhibit 4.1 to the Split Off S-1 Registration
Statement).
4.2 Specimen certificate for shares of Series B common stock, par
value $.01 per share, of the Registrant (incorporated by
reference to Exhibit 4.2 to the Split Off S-l Registration
Statement).
4.3 Liberty undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with
respect to long-term debt not filed herewith.
10 - Material Contracts:
10.1 Contribution Agreement dated March 9, 1999, by and among Liberty
Media Corporation, Liberty Media Management LLC, Liberty Media
Group LLC and Liberty Ventures Group LLC (incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form
S-4 of Liberty Media Corporation (File No. 333-86491) as filed
on September 3, 1999, the "Liberty S-4 Registration
Statement").
10.2 Inter-Group Agreement dated as of March 9, 1999, between AT&T
Corp. and Liberty Media Corporation, Liberty Media Group LLC
and each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.2 to the Liberty S-4
Registration Statement).
10.3 Intercompany Agreement dated as of March 9, 1999, between Liberty
and AT&T Corp. (incorporated by reference to Exhibit 10.3 to
the Liberty S-4 Registration Statement).
10.4 Tax Sharing Agreement dated as of March 9, 1999, by and among
AT&T Corp., Liberty Media Corporation, Tele-Communications,
Inc., Liberty Ventures Group LLC, Liberty Media Group LLC, TCI
Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity
listed on the signature pages thereof (incorporated by
reference to Exhibit 10.4 to the Liberty S-4 Registration
Statement).
10.5 First Amendment to Tax Sharing Agreement dated as of May 28,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.5 to the Liberty S-4
Registration Statement).
10 - Material Contracts:
10.6 Second Amendment to Tax Sharing Agreement dated as of September
24, 1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Liberty Media Corporation (File No.
333-93917) as filed on December 30, 1999 (the "Liberty S-1
Registration Statement)).
10.7 Third Amendment to Tax Sharing Agreement dated as of October 20,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.7 to the Liberty S-l
Registration Statement).
10.8 Fourth Amendment to Tax Sharing Agreement dated as of October 28,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.8 to the Liberty S-l
Registration Statement).
10.9 Fifth Amendment to Tax Sharing Agreement dated as of December 6,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.9 to the Liberty S-l
Registration Statement).
10.10 Sixth Amendment to Tax Sharing Agreement dated as of December 10,
1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.10 to the Liberty S-l
Registration Statement).
10.11 Seventh Amendment to Tax Sharing Agreement dated as of December
30, 1999, by and among AT&T Corp., Liberty Media Corporation,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.11 to the Liberty S-l
Registration Statement).
10.12 Eighth Amendment to Tax Sharing Agreement dated as of July 25,
2000, by and among AT&T Corp., Liberty Media Corporation, AT&T
Broadband LLC, Liberty Ventures Group LLC, Liberty Media Group
LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered
Entity listed on the signature pages thereof (incorporated by
reference to Exhibit 10.12 to the Split Off Registration
Statement).
10.13 Instrument dated January 14, 2000, adding The Associated Group,
Inc. as a party to the Tax Sharing Agreement dated as of March
9, 1999, as amended, among The Associated Group, Inc., AT&T
Corp., Liberty Media Corporation, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz,
Inc., TCI CT Holdings, Inc. and each Covered Entity listed on
the signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Liberty S-1 Registration Statement).
10.14 Amended and Restated Contribution Agreement dated January 14,
2000, by and among Liberty Media Corporation, Liberty Media
Management LLC, Liberty Media Group LLC, Liberty Ventures Group
LLC, The Associated Group, Inc. and Liberty AGI, Inc.
(incorporated by reference to Exhibit 10.13 to the Liberty S-1
Registration Statement).
10 - Material Contracts:
10.15 First Supplement to Inter-Group Agreement dated as of May 28,
1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.14 to the
Liberty S-1 Registration Statement).
10.16 Second Supplement to Inter-Group Agreement dated as of September
24, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.15 to the
Liberty S-1 Registration Statement).
10.17 Third Supplement to Inter-Group Agreement dated as of October 20,
1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.16 to the
Liberty S-1 Registration Statement).
10.18 Fourth Supplement to Inter-Group Agreement dated as of December
6, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.17 to the
Liberty S-1 Registration Statement).
10.19 Fifth Supplement to Inter-Group Agreement dated as of December
10, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.18 to the
Liberty S-1 Registration Statement).
10.20 Sixth Supplement to Inter-Group Agreement dated as of December
30, 1999, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.19 to the
Liberty S-1 Registration Statement).
10.21 Seventh Supplement to Inter-Group Agreement dated as of July 25,
2000, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.21 to the
Split Off Registration Statement).
10.22 Instrument dated January 14, 2000, adding The Associated Group,
Inc. as a party to the Inter-Group Agreement dated as of March
9, 1999, as supplemented, between and among AT&T Corp., on the
one hand, and Liberty Media Corporation, Liberty Media Group
LLC and each Covered Entity listed on the signature pages
thereof, on the other hand (incorporated by reference to
Exhibit 10.20 to the Liberty S-1 Registration Statement).
10.23 Restated and Amended Employment Agreement dated November 1, 1992,
between Tele-Communications, Inc. and John C. Malone (assumed
by Liberty as of March 9, 1999), and the amendment thereto
dated June 30, 1999 and effective as of March 9, 1999, between
Liberty and John C. Malone (incorporated by reference to
Exhibit 10.6 to the Liberty S-4 Registration Statement).
10 - Material Contracts:
10.24 Eighth Supplement to Inter-Group Agreement dated as of November
20, 2000, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof, on the
other hand (incorporated by reference to Exhibit 10.24 to the
Registration Statement on Form S-1 of Liberty Media Corporation
(File No. 333-66034) as filed on July 27, 2001, the "Shelf S-1
Registration Statement).
10.25 Ninth Supplement to Inter-Group Agreement dated as of June 14,
2001, between and among AT&T Corp., on the one hand, and
Liberty Media Corporation, Liberty Media Group LLC, AGI LLC,
Liberty SP, Inc., LMC Interactive, Inc. and Liberty AGI, Inc.,
on the other hand (incorporated by reference to Exhibit 10.25
to the Shelf S-1 Registration Statement).
10.26 Amended and Restated Agreement and Plan of Restructuring and
Merger among UnitedGlobalCom, Inc., New UnitedGlobalCom, Inc.,
United/New United Merger Sub, Inc., Liberty Media Corporation,
Liberty Media International, Inc. and Liberty Global, Inc.,
dated December 31, 2001 (incorporated by reference to Current
Form 8-K filed by Liberty Media Corporation on January 9, 2002,
Commission File No. 0-20421).
21 - Subsidiaries of Liberty Media Corporation.
23.1 Consent of KPMG LLP
23.2 Consent of KPMG Audit Plc