<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1999
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 0-22815
Liberty Digital, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE 84-1380293
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
12312 WEST OLYMPIC BLVD.
LOS ANGELES, CA 90064
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (310) 979-5000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Series A Common
Stock, $0.01 Par Value
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that registrant was required
to file such reports), 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. [ ]
Unless otherwise specifically indicated, all monetary references in this filing
are in U.S. dollars.
As of January 31, 2000 the aggregate market value of the Series A Common Stock
of Liberty Digital, Inc. held by non-affiliates was approximately $780,080,765.
Number of shares of Series A Common Stock of Liberty Digital, Inc. outstanding
as of January 31, 2000: 26,638,479.
Number of shares of Series B Common Stock of Liberty Digital, Inc. outstanding
as of January 31, 2000: 171,950,167.
<PAGE> 2
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
TABLE OF CONTENTS
PART III
<TABLE>
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant.....................................III-1
Item 11. Executive Compensation.................................................................III-5
Item 12. Security Ownership of Certain Beneficial Owners and Management.........................III-12
Item 13. Certain Relationships and Related Transactions.........................................III-16
</TABLE>
<PAGE> 3
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The following lists the directors of Liberty Digital, Inc. ("Liberty Digital" or
the "Company"), their birth dates, and a description of their business
experience and positions held as of April 1, 2000. The Board consists of six
directors. Directors are elected to staggered three year terms with
approximately one-third elected annually. The Board is divided into three
classes (Class I, Class II and Class III). Class I Board members consist of
Messrs. Bennett and Kern and their term expires at the 2002 annual meeting or
until their successors are elected and/or qualified. Class II Board members
consist of Messrs. Howard and Wargo and their term expires at the 2001 annual
meeting or until their successors are elected and/or qualified. Class III Board
members consist of Messrs. Koff and Masters and their term expires at the 2000
annual meeting or until their successors are elected and/or qualified.
III-1
<PAGE> 4
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
<TABLE>
<CAPTION>
Name Positions
------------------ ---------------------------------------------------------------------------------------------
<S> <C>
Robert R. Bennett Has served as a director of Liberty Digital since January 1997, and served as acting Chief
Born April 19, 1958 Financial Officer of Liberty Digital from June 1997 until July 1997. Mr. Bennett has served as
President and Chief Executive Officer of Liberty Media Corporation ("Liberty") since April 1997
and a director of Liberty since September 1994. Mr. Bennett served as an Executive Vice
President of Tele-Communications, Inc. ("TCI"), a subsidiary of AT&T, from April 1997 to March
1999. From June 1995 through March 1997, Mr. Bennett was an Executive Vice President, Chief
Financial Officer, Secretary and Treasurer of Liberty. Mr. Bennett served as Senior Vice
President of Liberty from September 1991 to June 1995. Mr. Bennett serves as a director of Ascent
Entertainment Group, Inc., TV Guide, Inc., USANi, LLC and Teligent, Inc.
Gary S. Howard Has served as a director of Liberty Digital since September 10, 1999. Since July 1998, Mr.
Born February 22, 1951 Howard served as Executive Vice President, Chief Operating Officer of Liberty. From June 1997
to September 1997, Mr. Howard served as President of United Video Satellite Group, Inc. From
February 1995 to August 1997, he served as President of TCI Satellite Entertainment, Inc. From
October 1994 to December 1996, Mr. Howard served as Senior Vice President of TCI
Communications, Inc. and from December 1991 to October 1994, he served as its Vice President.
Mr. Howard also serves as a director of Ascent Entertainment Group, Inc., TV Guide, Inc., TCI
Satellite Entertainment, Inc. and Teligent, Inc.
David B. Koff Has served as a director of Liberty Digital since May 1997. Mr. Koff was interim President and
Born December 26, 1958 Chief Executive Officer of Liberty Digital from May 1997 to December 31, 1997. Since December
31, 1997, Mr. Koff has served as a Vice President and Assistant Secretary of Liberty Digital.
He has been a Senior Vice President of Liberty since February 1998. He was Vice President -
Corporate Development of Liberty from August 1994 to February 1998. Mr. Koff has served as Senior
Vice President of Ascent Entertainment Group, Inc. since April 2000.
Peter M. Kern Has served as a director of Liberty Digital since January 1997. Mr. Kern has served as
Born June 2, 1967 President of Gemini Associates, Inc., a firm that provides strategic advisory services primarily
to media companies, since April 1996. From December 1993 to January 1996, he served as Senior
Vice President of Strategic Development and Corporate Finance of Home Shopping Network, Inc.
and served as its Vice President of Strategic Development and Assistant to the Chief Executive
Officer from March 1993 to December 1993. Prior to joining Home Shopping Network, Inc., Mr.
Kern served as Vice President of Corporate Finance and Strategic Development for Whittle
Communications, L.P. and worked at the New York investment banking firm, Bear, Stearns & Co.,
Inc.
Lee Masters Has served as Chairman of the Board of Liberty Digital since January 1999. Mr. Masters was
Born December 26, 1951 appointed President and Chief Executive Officer of the Company in June 1999. From January 1999
to September 1999, Mr. Masters served as President and Chief Executive Officer of Liberty Media
Interactive, Inc., an affiliate of Liberty. From December 1990 to December 1998, Mr. Masters
served as President and CEO of E! Entertainment television, a cable television program network.
From March 1986 to December 1989 he served as Executive Vice President and general manager of
MTV. Prior to his career in television, Mr. Masters had a 20-year career in radio. Mr. Masters'
legal name is Jarl Mohn. Mr. Masters serves as a director of NewStar Media, Inc. (formerly Dove
Audio), Alloy.com, Move.com, BET.com, MTVi and Online Retail Partners, LLC.
J. David Wargo Has served as a director of Liberty Digital since September 10, 1999. Mr. Wargo has served
Born October 1, 1953 as President of Wargo & Company, Inc. since 1993. From 1989 to 1992, he served as Managing
Director, Senior Analyst of The Putnam Companies. From 1986 to 1988, he served as Partner
for Marble Arch Partners and served as a Senior Vice President from 1985 to 1986. Mr. Wargo
serves as a director of TV Guide and On Command Corporation.
</TABLE>
III-2
<PAGE> 5
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
COMPENSATION OF DIRECTORS
Standard Arrangements. Members of the Board of Liberty Digital who are also
full-time employees of Liberty Digital or Liberty, or any of their respective
subsidiaries, do not receive any additional compensation for their services as
directors. Liberty Digital has not established any fees for directors who are
not full-time employees of Liberty Digital or Liberty or any of their respective
subsidiaries. All members of the Board are reimbursed for expenses incurred to
attend any meetings of the Board and any committee thereof.
Other Arrangements. The Board granted, effective as of July 11, 1997, to Mr.
Kern options to purchase 833,334 shares of Liberty Digital Series A Common Stock
and to each of Messrs. Bennett and Koff, options to purchase 100,000 shares of
Liberty Digital Series A Common Stock, at a price of $6.25 per share. Such
options vest in 20% increments, with the first increment vesting as of July 11,
1997. The Board granted, effective as of September 10, 1999, to each of Messrs.
Howard and Wargo, options to purchase 100,000 shares of Liberty Digital Series A
Common Stock at a price of $22.125 per share. Such options vest in 20%
increments, with the first increment vesting as of September 10, 1999.
BOARD MEETINGS
During 1999, the Board of Directors of the Company held five meetings. None of
the directors attended fewer than 75% of the meetings of the Board of Directors
or of any committee of which he is a member.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company has an Audit Committee, Compensation Committee and an Executive
Committee. There is no standing nomination committee of the Company's Board of
Directors.
The members of the Audit Committee are J. David Wargo, Peter M. Kern and Robert
R. Bennett. The duties of the Audit Committee are to review and monitor the
Company's financial reports and accounting practices to ascertain that they are
within acceptable limits of sound practice, to receive and review audit reports
submitted by the Company's independent auditors and by its internal auditing
staff and to make such recommendations to the Board of Directors as may seem
appropriate to the Committee to assure that the interests of the Company are
adequately protected and to review all related party transactions and potential
conflict-of-interest situations. The Audit Committee of the Company did not hold
any meetings during 1999, since matters usually considered by the Audit
Committee were considered by the full Board.
The members of the Compensation Committee are Peter M. Kern, J. David Wargo and
David B. Koff. The functions of the Compensation Committee are to review and
make recommendations to the Board of Directors concerning the compensation of
the officers of the Company, to consider and make recommendations to the Board
of Directors concerning existing and proposed employment agreements between the
Company and its officers and to administer the 1997 Stock Incentive Plan (the
"1997 Plan"). The Compensation Committee of the Company held one meeting during
1999.
The members of the Executive Committee are Peter M. Kern, Lee Masters and Robert
R. Bennett.
III-3
<PAGE> 6
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
EXECUTIVE OFFICERS
The following lists the executive officers of the Company, their birth dates, a
description of their business experience and positions held with the Company as
of April 1, 2000. Information concerning Mr. Koff and Mr. Masters, who are also
directors, is listed under the heading "Directors" above. All officers are
appointed for an indefinite term, serving at the pleasure of the Board of
Directors.
<TABLE>
<CAPTION>
Name Positions
- ---------------------- ---------------------------------------------------------------------------------------------
<S> <C>
Craig Enenstein Has served as Vice President Business Development and Strategy of Liberty Digital since
Born September 29, 1968 September 8, 1999 and was a consultant to Liberty Digital from May 1999 to September 1999. From
January 1998 to May 1999, Mr. Enenstein served at Knowledge Universe LLC, an education
corporation, where he was responsible for direct investments in public and private companies.
Mr. Enenstein served as a strategy consultant for LEK Consulting from July 1996 to January 1998
and Bain and Co. from August 1995 to July 1996.
Lon Troxel Has served as President and Chief Executive Officer of DMX since July 1997. Mr. Troxel
Born October 14, 1947 served as Chief Operating Officer of DMX from April 1997 to July 1997, and served as
Executive Vice President Commercial Division from October 1991 to April 1997. Mr. Troxel
served as director of Liberty Digital from May 1997 to September 1999.
</TABLE>
There are no family relations, of first cousin or closer, among the Company's
directors or executive officers, by blood, marriage or adoption.
During the past five years, none of the executive officers have had any
involvement in such legal proceedings as would be material to an evaluation of
his ability or integrity.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and persons who own more than 10% of a registered class
of the Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission ("SEC") and to furnish the
Company with copies of all such reports. The Company has reviewed the copies of
the Section 16 reports filed by such persons or written representations from
them that no Forms 5 were required to be filed for 1999. Based solely on such
review, the Company believes that all Section 16 filing requirements applicable
to its officers and directors for 1999 were complied with, except for one late
Form 3 filing by each of Messrs. Howard, Masters, Ravenel and Wargo and one late
Form 4 filing by each of Messrs. Howard, Sorrentino and Wargo.
III-4
<PAGE> 7
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table shows, for fiscal 1999, a summary of certain information
regarding all forms of compensation for the Chief Executive Officer, the other
executive officers serving as such at the end of the fiscal 1999 and one former
executive officer (the "named executive officers") whose total annual salary
and bonus exceeded $100,000 during fiscal 1999.
<TABLE>
<CAPTION>
Long Term Compensation Awards
-----------------------------
Securities
Annual Other Underlying
Compensation Annual Restricted Stock All Other
Name and ---------------------- Compensation Stock Options/SARs Compensation
Principal Position Year Salary Bonus $ Awards #(1) $(2)
- --------------------- ---- ------ ----- ------------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Lee Masters 1999 634,615 (3) -- -- -- 15,230,942 --
President and CEO 1998 N/A N/A N/A N/A N/A N/A
Ralph J. Sorrentino 1999 325,000 -- -- -- 50,000 15,000
Executive Vice 1998 174,519 (4) -- -- -- 150,000 (5) 10,000
President and Chief 1997 N/A N/A N/A N/A N/A N/A
Financial Officer
Lon A. Troxel 1999 294,327 25,000 -- 18,750 100,000 10,000
President and CEO of 1998 285,577 15,000 -- 9,230 200,000 (6) 10,000
DMX 1997 189,660 -- -- -- 200,000 (6) --
Bruce Ravenel 1999 847,625 (3) -- -- -- 4,064,251 10,000
Executive Vice 1998 N/A N/A N/A N/A N/A N/A
President
Alan R. McGlade 1999 425,032 (7) -- -- -- 25,000 10,000
Former Executive 1998 273,552 -- 100,000 (8) -- 155,000 (5) 10,000
Officer 1997 88,931 (7) -- -- -- 64,200 (5) --
</TABLE>
(1) For information concerning these awards see "Option/SAR Grants in Last
Fiscal Year" set forth below.
(2) Amounts represent contributions to the Liberty Media 401K Plan. The Liberty
Media 401K Plan provides benefits upon an employee's retirement which
normally is when the employee reaches 65 years of age. Liberty Media 401K
Plan participants may contribute the lessor of 10% of their compensation or
$10,000 pretax and $5,000 post tax and the Company (by annual resolution of
the Board of Directors) may contribute up to a matching 100% of the
participants' contributions. Participant contributions to the Liberty Media
401K Plan are fully vested upon contribution.
Generally, participants acquire a vested right in the Company contributions
as follows:
<TABLE>
<CAPTION>
Vesting
-----------------------------------
Years of Service Percentage
---------------- ----------
<S> <C>
Less than 1 0%
1-2 33%
2-3 66%
3 or more 100%
</TABLE>
The Liberty Media 401K Plan includes a salary deferral feature in respect
of employee contributions. Forfeitures (due to participants' withdrawal
prior to full vesting) are used to reduce the Company's otherwise
determined contributions.
III-5
<PAGE> 8
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Directors who are not employees of the Company are ineligible to
participate in the Liberty Media 401K Plan. Under the terms of the Liberty
Media 401K Plan, employees are eligible to participate after three months
of service. Although the Company has not expressed an intent to terminate
the Liberty Media 401K Plan, it may do so at any time. The Liberty Media
401K Plan provides for full immediate vesting of all participants' rights
upon termination of the Liberty Media 401K Plan.
(3) Represents salary from March 1, 1999. For accounting purposes, the
Contribution Agreement was recorded retroactive to March 1, 1999 to record
the related party transactions at predecessor costs similar to a pooling of
interest. Such predecessor costs also reflect the fair value adjustments
resulting from the AT&T Merger which occurred effective March 9, 1999.
See also Item 13. Certain Relationships and Related Transactions.
(4) Mr. Sorrentino began employment with the Company on May 11, 1998.
Accordingly, the salary information included in the table for 1998
represents only salary from that date through December 31, 1998.
(5) These options were repriced on December 11, 1998. See "Option/SAR
Repricings" as set forth below.
(6) Represents repriced options for 200,000 shares originally granted in fiscal
1997. See "Option/SAR Repricings" as set forth below.
(7) The Box was sold on July 15, 1999. Accordingly, Mr. McGlade's salary
information included in the table represents salary for 1999 up to that
date. Mr. McGlade began employment with the Company on December 16, 1997,
the date the Company acquired The Box. Accordingly, the 1997 salary
information included in the table is from December 16, 1997.
(8) Represents loan by the Company that was forgiven.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table shows all individual grants of stock options and stock
appreciation rights ("SARs") by the Company to each of the named executive
officers during fiscal 1999.
<TABLE>
<CAPTION>
Number of
Securities
Underlying % of Total
Options/ Options/SARs Exercise Grant Date
SARs to Employees Price Expiration Present Value
Name Granted in Fiscal Year ($/sh) Date ($)(1)
- ----------------------------- ------------- -------------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Lee Masters
President and CEO 15,230,942(2) 75.0% 2.46(2) 12/15/03 35,183,476
Ralph J. Sorrentino
Executive Vice President
and Chief Financial
Officer 50,000(3) * 4.00 1/1/09 202,500
Lon A. Troxel
President and CEO of DMX 100,000(3) * 4.00 1/1/09 405,000
Bruce Ravenel
Executive Vice President 4,064,251(2) 20.0% 2.46(2) 12/15/03(2) 9,388,420
Alan R. McGlade
Former Executive Officer 25,000(3) * 4.00 1/1/09 101,250
- --------------
* Less than 1%
</TABLE>
(1) The values shown 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 this calculation include the following:
(a) a 6.50% risk-free interest rate; (b) a 171% volatility factor; (c) a
43.1 month expected life term; (d) a weighted average expected individual
yield of zero; and (d) the closing market price of a share of Liberty
Digital Series A Common Stock on the date of grant, resulting in a weighted
average fair value of the options granted during fiscal 1999 of $9.54 for
the 1997 Plan and $2.31 for the Deferred Compensation and Stock
Appreciation Rights Plan. The actual value the executive may realize will
depend upon the extent to which the stock price exceeds the
III-6
<PAGE> 9
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
exercise price on the date the option is exercised. Accordingly, the value,
if any, realized by the executive will not necessarily be the value
determined by the model.
(2) On September 8, 1999, the Deferred Compensation and Stock Appreciation
Rights Plan (the "Plan") was adopted for Lee Masters and Bruce Ravenel.
This plan is comprised of a deferred compensation component and stock
appreciation rights. The deferred compensation component provides
participants with the right to receive an aggregate of 9.5% of the
appreciation in the market price of the Liberty Digital Series A Common
Stock over $2.46 subject to a maximum amount of $19.125. The stock
appreciation rights provide participants with the appreciation in the
market price of the Liberty Digital Series A Common Stock above $19.125.
Deferred compensation and stock appreciation rights with respect to
19,295,193 shares of Liberty Digital Series A Common Stock subject to the
Plan, all of which were granted in 1999 at an effective exercise price of
$2.46 and a weighted average remaining life of 4.0 years as of December 31,
1999. The deferred compensation and stock appreciation rights components
vest 20% annually beginning with the first vesting date of December 15,
1999. No options were exercised, cancelled or expired during 1999. Mr.
Ravenel terminated his employment on February 15, 2000. As a result,
deferred compensation and stock appreciation rights with respect to
3,251,401 shares of Liberty Digital Series A Common Stock expired in
accordance with their terms. This plan terminates on December 15, 2003. The
Deferred Compensation and Stock Appreciation Rights Plan is more fully
described in the "Report of the Compensation Committee on Executive
Compensation - Compensation Philosophy - Equity-Based Incentives".
(3) All grants of stock options were options to purchase Liberty Digital Series
A Common Stock. All stock options were granted in tandem with SARs. All
options were granted pursuant to the Liberty Digital 1997 Plan, effective
January 1, 1999 and vest in 20% cumulative increments, with the first
increment vesting as of January 1, 2000, with each additional increment
vesting on each of the next four anniversaries thereof. Notwithstanding the
vesting schedule, the option shares become available for purchase if
grantee's employment with the Company terminates as a result of the total
disability or death of the grantee. Further, the option shares will become
available for purchase in the event of an Approved Transaction, Board
Change, or Control Purchase (each as defined in the 1997 Plan), unless, in
the case of an Approved Transaction, the compensation committee under the
circumstances specified in the 1997 Plan, determines otherwise.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION/SAR VALUES
The following table shows certain information with respect to the exercise of
stock options/SARs by the named executive officers during fiscal 1999 and
year-end value of unexercised stock options/SARs at December 31, 1999.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised In
Shares Value Securities Underlying the Money Options/SARs
Acquired on Realized Options/SARs at FY-End(#) at FY-End($)
Name Exercise(#) ($)(1) Exercisable/Unexercisable Exercisable/Unexercisable
- ------------------------------- ------------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Lee Masters
President and CEO -- -- 3,046,188 / 12,184,754 182,283,890 / 729,135,679(2)
Ralph J. Sorrentino
Executive Vice President
and Chief Financial Officer 30,000 1,080,000 0 / 170,000 0 / 12,622,500(3)
Lon A. Troxel
President and CEO of DMX 120,000 4,961,581 0 / 180,000 0 / 13,365,000(3)
Bruce Ravenel
Executive Vice President -- -- 812,850 / 3,251,401 48,640,944 / 194,563,836(2)
Alan R. McGlade
Former Executive Officer 109,800 2,730,825 -- / -- -- / --
</TABLE>
(1) Based on the closing price of the Liberty Digital Series A Common Stock on
the exercise date.
III-7
<PAGE> 10
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
(2) The values indicated represent what would have been realized, pursuant to
the terms of the Plan, had the securities been exercised on December 31,
1999. The calculation is based on the average of the last 20 days trading
prices on the Nasdaq National Market of one share of Liberty Digital Series
A Common Stock as of December 31, 1999 or $62.3000 less the effective
exercise price of $2.46.
(3) The values indicated are based upon the closing price on the Nasdaq
National Market of one share of Liberty Digital Series A Common Stock on
December 31, 1999, or $74.2500.
OPTION/SAR REPRICINGS
The table below sets forth certain information concerning the repricing of stock
options/SARs, held by any executive officer of the Company, which occurred
December 11, 1998. Further explanation concerning these repricings is included
in the "Report of the Compensation Committee on Executive Compensation", below.
<TABLE>
<CAPTION>
Length of
Securities Exercise Original Option
Underlying Market Price of Price Term Remaining
Options/SARs Stock at Time of at time of New Exercise at Date of
Name Date Repriced (#) Repricing ($) Repricing ($) Price ($)(1) Repricing
---------------------- --------- ------------ ---------------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Ralph J. Sorrentino 12/11/98 150,000 $3.90 $6.50 $4.00 9 yrs. 5 mos.
Executive Vice
President and Chief
Financial Officer
Lon A. Troxel 12/11/98 200,000 $3.90 $6.25 $4.00 8 yrs. 7 mos.
President and CEO
of DMX
Alan R. McGlade 12/11/98 21,400 $3.90 $6.25 $4.00 1/2 mo.
Former Executive 21,400 $3.90 $6.25 $4.00 1 year
Officer 21,400 $3.90 $6.25 $4.00 2 years
155,000 $3.90 $6.50 $4.00 9 yrs. 1 mo.
</TABLE>
(1) Represents the average of the closing prices of a share of Liberty Digital
Series A Common Stock over the 60 trading days ending December 10, 1998 and
the 60 calendar days ended December 9, 1998, rounded up to the nearest
cent.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
Masters Employment Agreement
During the term of the Masters Employment Agreement, the Company will pay Mr.
Masters' salary at the rate of $750,000 per annum. That rate is to be increased
annually, on January 1, by the greater of the increase in the Consumer Price
Index ("CPI") for the previous year or 5%. The Board will review Mr. Masters'
compensation annually to determine whether any additional increase in Mr.
Masters' salary is appropriate. Mr. Masters' salary for fiscal 2000 is $787,500.
Mr. Masters' Employment Agreement is for a term through December 15, 2003. His
employment may be terminated by the Company (1) upon the death of Mr. Masters,
(2) upon 180 days prior notice from the Company to Mr. Masters in the event of
an illness or other disability which has incapacitated Mr. Masters from
performing his duties thereunder for at least 180 consecutive days during the 12
calendar months preceding the month in which such notice is given or (3) at any
time upon notice of termination and by paying Mr. Masters in a lump sum on the
effective date all compensation for the remaining term of the Employment
Agreement, calculated at the annual rate then in effect. Mr. Masters may
terminate his employment with the Company at any time by giving notice to the
Company.
If Mr. Masters terminates his employment for good reason (as defined in the
Masters Employment Agreement), Mr. Masters will be entitled to a lump sum
payment of the compensation for the remaining term of the Masters Employment
Agreement, calculated at an annual rate then in effect. If Mr. Masters'
employment is terminated for illness or disability, the Company will continue to
pay his annual salary, at the rate in effect at the time of termination of his
employment, for one year from the date of termination. If Mr. Masters dies while
employed by the Company or during the period he is receiving payments from the
Company on account of termination for illness or disability, the
III-8
<PAGE> 11
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Company will, following his death, pay to Mr. Masters' beneficiary a lump sum
amount equal to one year's compensation, calculated at the annual rate in effect
at the time of death.
The Company will indemnify Mr. Masters to the fullest extent permitted by
applicable law in respect of any claim or threatened claims (including
reasonable counsel fees incurred in connection with the defense thereof) against
him by reason of his being or having been an officer or director of the Company
or any subsidiary of the Company or having served at the request of the Company
as a director, officer, employee or agent of another corporation or of another
entity.
Mr. Masters has agreed that during his employment and, in the case of a
voluntary termination (as defined in the Masters Employment Agreement) by Mr.
Masters or a termination by the Company for cause (as defined in the Masters
Employment Agreement), for a period from the date of termination until the
earlier of December 31, 2003 or the second anniversary of the date of such
termination, he will not directly or indirectly own, manage, operate,
participate in or be employed by or otherwise be interested in or connected in
any manner with any person, firm, corporation or other enterprise that competes
in the United States or elsewhere in the world in any material respect with any
business conducted by the Company or any of its subsidiaries during Mr. Masters
employment, with certain exceptions. In addition, the Masters Employment
Agreement provides that Mr. Masters will not, as long as he is employed by the
Company or thereafter, make use of, divulge to any person and use his best
efforts to prevent the publication or disclosure of confidential or proprietary
information concerning the business of the Company or of the dealings of the
Company or of any of its customers that may have come into his knowledge during
his employment, with certain exceptions.
Sorrentino Employment Agreement
Effective April 1, 2000, Mr. Sorrentino resigned as Executive Vice President,
Chief Financial Officer. In connection with Mr. Sorrentino's resignation, 50,000
of his options were accelerated. All other options will continue to vest and be
exercisable in accordance with the 1997 Plan terms. Following Mr. Sorrentino's
resignation he continued as a full time employee through April 30, 2000 after
which he became an employee/consultant for a term through June 30, 2002. During
Mr. Sorrentino's employee/consultant term, the Company will pay Mr. Sorrentino a
salary at the rate of $81,240 per annum.
In the event of Mr. Sorrentino's death during the term of his employment, the
Company shall pay to Mr. Sorrentino's designated beneficiary or beneficiaries, a
lump sum equal to the compensation that would otherwise be payable to Mr.
Sorrentino had he continued in the employ of the Company until June 30, 2002.
Additionally, all remaining options will become immediately exercisable by his
designated beneficiary or beneficiaries pursuant to the terms of the 1997 Plan.
Troxel Employment Agreement
DMX and Lon A. Troxel are parties to an Employment Agreement dated October 1,
1991, as amended, for a term until May 31, 2002. Pursuant to the Employment
Agreement, Mr. Troxel receives an annual salary of $300,000 from June 1, 1998
through December 31, 1999 and $350,000 thereafter. Pursuant to the Employment
Agreement, Mr. Troxel has agreed not to acquire more than a 10% direct or
indirect ownership in any cable company, other than DMX, without the prior
written consent of DMX. Mr. Troxel receives basic and extended benefits
commensurate with other senior management employees such as vacation pay and
other fringe benefits. If Mr. Troxel becomes disabled during the term of the
agreement, he will receive the same compensation he is entitled to under the
Employment Agreement for a time period not exceeding six months.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
COMPENSATION PHILOSOPHY
The Compensation Committee's compensation philosophy is based on the belief that
a link should exist between executive compensation and the return on investment
provided to stockholders as reflected by the appreciation in the price of the
Company's stock. In applying this philosophy, the Compensation Committee has
developed and implemented a compensation policy which seeks to attract, motivate
and retain highly qualified executives with the business experience and acumen
necessary for achievement of the long-term business objectives of the Company
and to align the financial interests of the Company's senior executives with
those of its stockholders. The Company attempts to realize these goals by
providing competitive compensation and by linking a portion of the compensation
to the enhancement of stockholder value.
III-9
<PAGE> 12
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
The Company's executive compensation is based principally on two components,
base salary and equity-based incentives, each of which is intended to serve the
Company's overall compensation philosophy.
Base Salaries. Base salary for executive officers is generally targeted at the
median for executives with comparable qualifications, experience and
responsibilities at other companies in the industry. In the aggregate, executive
salaries are consistent with this philosophy. Salary levels for executive
officers also reflect the Committee's judgments on appropriate salaries in light
of the duties and responsibilities inherent in the executives' respective
positions. The particular qualifications of an individual holding the position
and his or her level of experience, as well as information concerning
compensation paid by other companies in the industry, are considered in
establishing salary levels. The Committee's assessment of the individual's
performance and contribution to the Company's performance are the primary
criteria influencing decisions regarding salary. For those executives who joined
the Company during the year, the primary factor in setting salary levels was the
Company's desire to provide compensation in amounts sufficient to induce these
individuals to join the Company. Although the 1997 Plan permits cash bonuses and
other performance-based awards, the Company pays a limited number of cash
bonuses to its senior executives.
Annual salary adjustments are recommended by the Chief Executive Officer of
Liberty Digital by evaluating the performance of each executive officer after
considering new responsibilities and the previous year's performance of Liberty
Digital and such executive officer. The Compensation Committee performs a
similar review of the Chief Executive Officer's salary. Individual performance
ratings take into account such factors as achievement of specific goals that are
driven by Liberty Digital's strategic plan and attainment of specific individual
objectives. The factors affecting base salary levels are not assigned specific
weights but are subject to adjustments by the Compensation Committee. Certain
terms of the employment agreements of certain named executive officers are
described in "Employment Agreements and Termination of Employment and Change of
Control Arrangements" above.
Equity-Based Incentives. A key component of executive officers' compensation is
the grant of equity-based incentives under the 1997 Plan.
The Compensation Committee grants equity-based incentives to Liberty Digital's
executives in order to align their interests with those of the stockholders,
primarily stock options and tandem stock appreciation rights ("SARs").
Equity-based incentives are considered by the Compensation Committee to be an
effective long-term incentive because the executives' gains are linked to
increases in the value of Liberty Digital's Series A Common Stock, which in turn
provides stockholder gains. Equity-based incentives also provide executive
officers with the opportunity to acquire and build a meaningful ownership
interest in the Company.
The Compensation Committee generally grants options and tandem SARs to new
executive officers and other key employees upon their commencement of employment
with Liberty Digital, and considers stock option awards throughout the year. In
determining the number of options awarded to an individual executive officer,
the Compensation Committee generally establishes a level of award based upon the
position of the individual and his or her level of responsibility and upon
recommendations made by the Company's Chief Executive Officer. The Committee's
decisions concerning individual option awards are based on its judgment
concerning the appropriate amount of long-term compensation that should be paid
to the executive in question. The Company awarded stock options to acquire an
aggregate of 1,038,500 shares of Common Stock, together with tandem SARs, to
certain executive officers and other employees of the Company during 1999. The
Company also has granted a limited number of restricted stock awards.
Stock options and SARs are generally granted at an exercise price equal to or
near the average market price of a share of Liberty Digital's Series A Common
Stock for a period preceding the date of the grant. Options granted to executive
officers typically vest ratably over a period of five years following the date
of grant and expire after ten years. The full benefit of the options is realized
upon appreciation of the stock price in future periods, thus providing an
incentive to create value for Liberty Digital's stockholders through
appreciation of the stock price. Management of Liberty Digital believes that
stock options and SARs have been helpful in attracting and retaining skilled
executive personnel.
The stock options in tandem with stock appreciation rights and the restricted
stock awards granted are more fully described in "Executive Compensation -
Summary Compensation Table" of the Company and "Executive Compensation -
Option/SAR Grants in Last Fiscal Year" table of the Company.
The Company made the above-described grants after a review of the exercise
prices, numbers and dates of the awards of the stock options, tandem stock
appreciation rights, and restricted stock already held by the Company's
executives and other key employees. The Compensation Committee based its grants
for 1999 in part upon the level of the executive or other key employees'
responsibilities, experience and expertise and the degree to which such person
is in a position to contribute to the achievement or advancement of the
Company's financial and strategic objectives.
III-10
<PAGE> 13
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
On September 8, 1999, the Plan was adopted for Lee Masters and Bruce Ravenel.
This plan is comprised of a deferred compensation component and stock
appreciation rights. The deferred compensation component provides participants
with the right to receive an aggregate of 9.5% 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 stock appreciation rights provide participants
with the appreciation in the market price of the Liberty Digital Series A Common
Stock above $19.125. Deferred compensation and stock appreciation rights with
respect to 15,230,942 and 4,064,251 shares of Liberty Digital Series A Common
Stock were granted to Mr. Masters and Mr. Ravenel, respectively in fiscal 1999.
The deferred compensation and stock appreciation rights components vest 20%
annually beginning December 15, 1999. No options were exercised, cancelled or
expired during 1999. Mr. Ravenel terminated his employment on February 15, 2000.
As a result, deferred compensation and stock appreciation rights with respect to
3,251,401 shares of Liberty Digital Series A Common Stock expired in accordance
with their terms. This plan terminates on December 15, 2003.
CHIEF EXECUTIVE OFFICER COMPENSATION
The executive compensation policy described above is applied in setting Mr.
Masters compensation. Mr. Masters generally participates in the same executive
compensation plans and arrangements available to the other senior executives.
Accordingly, his compensation consists of annual base salary and long-term
equity-linked compensation in the form of SARs. The Compensation Committee's
general approach in establishing Mr. Masters compensation is to be competitive
with peer companies, but to have a large percentage of his target compensation
based upon the long-term performance of Liberty Digital, as reflected in part by
the market price of the Liberty Digital Series A Common Stock.
Mr. Masters compensation for the year ended December 31, 1999 included $634,615
in base salary.
Mr. Masters was also granted deferred compensation and stock appreciation rights
with respect to 15,230,942 shares of Liberty Digital Series A Common Stock, as
described under "Compensation Philosophy" above and in "Executive Compensation -
Summary Compensation Table" of the Company and "Executive Compensation -
Option/SAR Grants in Last Fiscal Year" table of the Company.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Section 162(m) of the Internal Revenue Code (the "Code") and the U.S. Treasury
regulations relating thereto restrict publicly traded companies from claiming or
receiving a tax deduction on compensation paid to an executive officer in excess
of $1 million, unless such compensation is performance-based. As such, many
companies with executive pay levels exceeding the $1 million limit have revised
or amended current compensation programs to qualify the payments thereunder for
deductibility. The Compensation Committee has not conformed the 1997 Plan to
such 162(m) requirements. However, the awards made to Mr. Masters and Mr.
Ravenel under the Plan were structured to comply with the 162(m) requirements.
COMPENSATION COMMITTEE
Peter M. Kern
David B. Koff
J. David Wargo
III-11
<PAGE> 14
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF LIBERTY DIGITAL
The following table sets forth information with respect to the beneficial
ownership of the Liberty Digital Series A Common Stock and Liberty Digital
Series A Preferred Stock of Liberty Digital as of December 31, 1999 by: (i) each
person who is known by Liberty Digital to be the beneficial owner of more than
five percent of any class of the outstanding shares of the Liberty Digital
Series A Common Stock and the Liberty Digital Series B Common Stock ; (ii) each
director of Liberty Digital; (iii) the named executive officers; and (iv) all of
Liberty Digital's directors and executive officers as a group. Liberty
beneficially owns all of the issued and outstanding shares of Series B Preferred
Stock. Each share of Liberty Digital Series B Preferred Stock is convertible
into 171.674 shares of Liberty Digital Series B Common Stock. The table does not
assume conversion of these shares. Shares issuable upon exercise of options
within 60 days of December 31, 1999 are deemed to be outstanding for the purpose
of computing the percentage ownership of persons beneficially owning such
options, but have not been deemed to be outstanding for the purpose of computing
the percentage ownership of any other person. Voting power in the table is
computed with respect to a general election of directors. So far as is known to
Liberty Digital, the persons indicated below have sole voting and investment
power with respect to the shares indicated as owned by them, except as otherwise
stated in the notes to the table. All information is taken from or based upon
ownership filings made by such persons with the SEC or upon information provided
by such persons to the Company. The address of the directors and named executive
officers of Liberty Digital is 12312 West Olympic Blvd., Los Angeles, CA 90064.
III-12
<PAGE> 15
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------------------
Amount and
Nature of
Name and Address of Beneficial Percent of Voting
Beneficial Owner Title of Class Ownership Class (1) Power (1)
------------------------- ----------------- ---------------- ------------ -----------
<S> <C> <C> <C> <C>
Liberty Media Corporation Series A Common 11,919,974 45.0 99.3
9197 South Peoria Street Series B Common 171,950,167 100.0 --
Englewood, CO 80112 Series B Preferred 150,000 100.0 --
Shaw Communications, Inc. Series A Common 1,400,000 (2) 5.3 *
630 Third Avenue Suite 900 Series B Common -- -- --
Calgary, Alberta
CANADA T2P 4L4
Robert R. Bennett Series A Common 60,000 (3) * *
Series B Common -- -- --
Gary S. Howard Series A Common 20,000 (4) * *
Series B Common -- -- --
Peter M. Kern Series A Common 420,000 (5) 1.6 *
Series B Common -- -- --
David B. Koff Series A Common -- -- --
Series B Common -- -- --
Lee Masters Series A Common -- -- *
Series B Common -- -- --
Bruce Ravenel Series A Common -- -- --
Series B Common -- -- --
Ralph J. Sorrentino Series A Common 10,000 (6) * *
Series B Common -- -- --
Lon A. Troxel Series A Common 20,000 (4) * *
Series B Common -- -- --
J. David Wargo Series A Common 20,000 (4) * *
Series B Common -- -- --
Alan R. McGlade Series A Common -- -- --
Series B Common -- -- --
All Directors and Executive Series A Common 550,000 (7) 2.1 *
Officers as a Group Series B Common -- -- --
(11 persons)
---------------
* Less than 1%
</TABLE>
(1) Based upon 26,507,489 shares of Liberty Digital Series A Common Stock,
171,950,167 shares of Liberty Digital Series B Common Stock and 1,617,574
shares of Liberty Digital Preferred Stock outstanding on December 31, 1999.
(2) Shaw is a public company whose non-voting securities are listed on the
Toronto Stock Exchange and the Alberta Stock Exchange. Mr. Shaw, members of
his family and members of Leslie E. Shaw's (Mr. Shaw's brother) family hold
directly and indirectly, a majority of the voting shares of Shaw and such
shares are governed by the terms of a voting trust. Mr. Shaw and members of
his family do not, directly or indirectly, hold a majority of the publicly
traded non-voting shares of Shaw.
(3) Assumes the exercise in full of stock options to acquire 60,000 shares of
Liberty Digital Series A Common Stock which are exercisable within 60 days
of December 31, 1999.
(4) Assumes the exercise in full of stock options to acquire 20,000 shares of
Liberty Digital Series A Common Stock which are exercisable within 60 days
of December 31, 1999.
(5) Assumes the exercise in full of stock options to acquire 420,000 shares of
Liberty Digital Series A Common Stock which are exercisable within 60 days
of December 31, 1999.
III-13
<PAGE> 16
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
(6) Assumes the exercise in full of stock options to acquire 10,000 shares of
Liberty Digital Series A Common Stock which are exercisable within 60 days
of December 31, 1999.
(7) Assumes the exercise in full of stock options held by such persons to
acquire 550,000 shares of Liberty Digital Series A Common Stock which are
exercisable within 60 days of December 31, 1999.
SECURITY OWNERSHIP OF AT&T CORPORATION
The following table sets forth information with respect to the ownership by each
director and each of the named executive officers of Liberty Digital and by all
directors and executive officers of Liberty Digital as a group of shares of AT&T
common stock and Class A and Class B Liberty Media Group tracking stock, the
equity securities of AT&T Corp. ("AT&T"), which owns 100% of the outstanding
common stock of AT&T Broadband, LLC ("AT&T Broadband"), which in turn indirectly
owns 100% of the outstanding common stock of Liberty. The AT&T Liberty Media
Group tracking stock is intended to reflect the separate performance of the
businesses and assets attributed to the Liberty Media Group. Liberty is included
in the Liberty Media Group, and the businesses and assets of Liberty and its
subsidiaries constitute substantially all of the businesses and assets of the
Liberty Media Group.
The AT&T charter provides that, except as otherwise required by New York law or
any special voting rights of AT&T preferred stock, the holders of AT&T common
stock, AT&T Liberty Media Group tracking stock and AT&T preferred stock, if any,
entitled to vote with the common shareholders, vote together as one class. No
separate class vote is required for the approval of any matter except as
described in the next sentence. The following circumstances require the separate
class approval of the AT&T Liberty Media Group tracking stock:
- - any amendment to the AT&T charter that would change the total number of
authorized shares or the par value of AT&T Liberty Media Group tracking
stock or that would adversely change the rights of AT&T Liberty Media Group
tracking stock;
- - a Covered Disposition, which generally includes a sale or transfer by AT&T
of its equity interest in Liberty or Liberty Media Group LLC or a grant of
a pledge or other security interest in the equity interest of AT&T in
Liberty or Liberty Media Group LLC; and
- - any merger or similar transaction in which AT&T Liberty Media Group
tracking stock is converted, reclassified or changed into or otherwise
exchanged for any consideration unless specified requirements are met that
are generally intended to ensure that the rights of the holders are not
materially altered and the composition of the holders is not changed.
The following information is given as of December 31, 1999 and, in the case of
percentage ownership information, is based on 3,196,436,757 shares of AT&T
common stock, 1,156,778,730 shares of AT&T Class A Liberty Media Group tracking
stock, and 108,421,114 shares of AT&T Class B Liberty Media Group tracking stock
outstanding as of December 31, 1999 as reported in AT&T's Annual Report on Form
10-K. Shares of AT&T common stock, AT&T Class A and Class B Liberty Media Group
tracking stock issuable upon exercise or conversion of convertible securities
are deemed to be outstanding for the purpose of computing the percentage
ownership and overall voting power of persons beneficially owning such
convertible securities, but have not been deemed to be outstanding for the
purpose of computing the percentage ownership or overall voting power of any
other person. So far as is known to Liberty, 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-14
<PAGE> 17
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
<TABLE>
<CAPTION>
Amount and
Nature of
Name of Beneficial Percent of Voting
Beneficial Owner Title of Class Ownership Class (1) Power (1)
- ------------------ ------------------------------------------- ------------ ---------- ---------
<S> <C> <C> <C> <C>
Robert R. Bennett AT&T Common Stock 272,721 * *
Series A Liberty Media Group Tracking Stock 3,133,422 * *
Series B Liberty Media Group Tracking Stock 200 * *
Gary S. Howard AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock 44 * *
Series B Liberty Media Group Tracking Stock 227 * *
Peter M. Kern AT&T Common Stock 63,587 (2) * *
Series A Liberty Media Group Tracking Stock 50,534 (2) * *
Series B Liberty Media Group Tracking Stock -- -- --
David B. Koff AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock -- -- --
Series B Liberty Media Group Tracking Stock -- -- --
Lee Masters AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock -- -- --
Series B Liberty Media Group Tracking Stock -- -- --
Bruce Ravenel AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock -- -- --
Series B Liberty Media Group Tracking Stock -- -- --
Ralph J. Sorrentino AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock -- -- --
Series B Liberty Media Group Tracking Stock -- -- --
Lon A. Troxel AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock -- -- --
Series B Liberty Media Group Tracking Stock -- -- --
J. David Wargo AT&T Common Stock -- -- --
Series A Liberty Media Group Tracking Stock 487,167 (3) * *
Series B Liberty Media Group Tracking Stock 2,152 * *
Alan R. McGlade AT&T Common Stock 388 * *
Series A Liberty Media Group Tracking Stock 800 * *
Series B Liberty Media Group Tracking Stock -- -- --
All Directors and Executive AT&T Common Stock 336,308 * *
Officers as a Group Series A Liberty Media Group Tracking Stock 4,007,475 * *
(11 persons) Series B Liberty Media Group Tracking Stock 2,579 * *
- ---------------
* Less than 1%
</TABLE>
(1) Based on 3,196,436,757 shares of AT&T Common Stock outstanding,
1,156,778,730 shares of Series A Liberty Media Group Tracking Stock
outstanding and 108,421,114 shares of Series B Liberty Media Group Tracking
Stock outstanding as of December 31, 1999 as reported in AT&T's Annual
Report on Form 10-K.
(2) Assumes 40% of options granted are vested.
(3) Disclaims beneficial ownership of 325,750 shares of AT&T Common Stock.
III-15
<PAGE> 18
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Liberty beneficially owns approximately 45% of the outstanding shares of Liberty
Digital Series A Common Stock, 100% of the outstanding shares of Liberty Digital
Series B Common Stock, and 100% of the outstanding shares of the Liberty Digital
Series B Preferred Stock, collectively representing 99.3% of the aggregate
voting power related to the outstanding Voting Securities.
DMX, a wholly owned subsidiary of the company, under an agreement with National
Digital Television Center, Inc. ("NDTC"), an indirect wholly owned subsidiary of
Liberty's corporate parent, AT&T, has a capital lease to lease equipment at
NDTC's studio and uplinking facility in Littleton, Colorado, with terms which
extend to October 2001 at an interest rate of 9.5%. Payments made to NDTC during
fiscal 1999 were approximately $541,000. DMX is also obligated to NDTC under
various operating leases for uplinking and satellite services. Payments made
during fiscal 1999 were approximately $5.0 million. Liberty Digital leases
office space at NDTC LA located at 12312 West Olympic Blvd., Los Angeles, CA.
Payments made during fiscal 1999 were insignificant.
DMX has entered into agreements with various platforms of Sky Entertainment
Services in Latin America ("Sky-LA"), pursuant to which the Sky-LA platforms
have been granted the right to carry up to 40 channels of DMX music formats in
Chile, Columbia, Brazil and Mexico. The agreement with Chile and Columbia is
dated November 4, 1999 and expires on December 31, 2003. The agreement with
Brazil is dated July 1, 1999, and expires December 31, 2000. The agreement with
Mexico has expired but exists on a month-to-month basis as DMX is in process of
putting a formal agreement in place. Sky Entertainment Services is the brand
name for the direct-to-home service offered by the strategic alliance formed by
Organzacoes Globo, Brazil's leading entertainment group; Mexico's Grupo Televisa
S.A.; The News Corporation Limited; and Liberty Media International, Inc., a
subsidiary of Liberty.
Shaw Communications, Inc. ("Shaw") beneficially owns approximately 5.3% of the
outstanding shares of Liberty Digital Series A Common Stock. A subsidiary of
Shaw and a subsidiary of DMX, 450714 B.C. Ltd., each own a 50% interest in
DMX-Canada, Ltd., a Canadian partnership, (also referred to herein as
"DMX-Canada"). After Shaw recoups its initial funding, each company will share
in the profits based on their respective equity interests. In March 1992, Shaw,
the second largest cable operator in Canada, entered into a licensing and
distribution agreement with DMX which grants to DMX-Canada Ltd. the exclusive
license and right to distribute DMX's premium service in Canada, which was
amended on November 1, 1994 by the Commercial License and Distribution Agreement
and on April 14, 1997 by the Residential License and Distribution Agreement.
Such licensing and distribution agreement, as amended, provides DMX with a
monthly, per subscriber programming royalty for both residential and commercial
distribution. License fees paid by DMX-Canada to DMX in fiscal 1999 were
approximately $1.0 million.
DMX-Canada and DMX are parties to an agreement to distribute DMX's digital music
services (the "DMX Services") to the Canadian residential cable market. The
service includes a total of 40 formats and is distributed through Shaw cable
systems and their affiliates. DMX received license fees of approximately
$436,000 for the fiscal year ended December 31, 1999 under this agreement.
DMX-Canada also distributes the DMX Service to the commercial sector via direct
broadcast satellite pursuant to a license agreement with DMX that grants
DMX-Canada an exclusive license and right to distribute the DMX Service to
commercial establishments in Canada. The license agreement expires March 31,
2012. DMX received total license fees of approximately $611,000 for the fiscal
year ended December 31, 1998 under the agreement with DMX-Canada.
Liberty Digital and Liberty and AT&T Broadband are parties to a number of
agreements more fully described below covering matters such as the provision of
services and allocation of tax liabilities. Liberty also provides certain
administrative, financial, legal, treasury, accounting, tax and other services
to Liberty Digital and makes available certain of its employee benefit plans to
Liberty Digital's employees. The terms of these arrangements were established by
Liberty and AT&T Broadband in consultation with Liberty Digital and are not the
result of arm's-length negotiations. Accordingly, although Liberty Digital
believes that the terms of these arrangements are reasonable, there is no
assurance that the terms and conditions of these agreements, or the terms of any
future arrangements between Liberty and AT&T Broadband and Liberty Digital, are
as favorable to Liberty Digital as could be obtained from unaffiliated third
parties. In addition, Liberty Digital and AT&T Broadband and Liberty and their
respective subsidiaries and affiliates may from time to time do business with
one another in areas not governed by any of the following agreements.
AT&T Broadband Amended Contribution Agreement. In connection with the Company's
acquisition of DMX, Liberty Digital and AT&T Broadband are parties to a
Contribution Agreement dated July 11, 1997, pursuant to which certain of AT&T
Broadband's affiliates assigned and contributed to Liberty Digital the right to
receive the revenue from sales of the DMX Service net of an amount equal to 10%
of the revenue from such sales to residential subscribers and net of license
fees otherwise payable to DMX for a 10-year period beginning
III-16
<PAGE> 19
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
July 1, 1997, and to transfer certain equipment to DMX useful in DMX's business.
In consideration of such agreement, in connection with the consummation of the
DMX Merger, Liberty Digital delivered to AT&T Broadband, as designee for certain
AT&T Broadband affiliates, 62,500,000 shares of Liberty Digital Series B Common
Stock and a note in the principal amount of $40,000,000. Pursuant to the
Agreement and Plan of Merger dated as of August 12, 1997 (the "Box Merger
Agreement"), the Contribution Agreement was amended, effective as of July 1,
1997 (the "Amended AT&T Broadband Contribution Agreement"), to provide, among
other things, for AT&T Broadband to deliver, or cause certain of its
subsidiaries to deliver, in lieu of AT&T Broadband's obligation to cause its
affiliates to make contributions to Liberty Digital under the Amended AT&T
Broadband Contribution Agreement, to Liberty Digital payments aggregating $18
million, increased annually by the percentage increase, if any, in the CPI for
the prior year, for a term of 20 years. Payments made by AT&T Broadband under
the Contribution Agreement were approximately $19.6 million in fiscal 1999.
Liberty Contribution Agreement. On September 9, 1999, pursuant to an agreement
(the "Contribution Agreement"), Liberty contributed to the Company all of the
outstanding stock of its wholly owned subsidiaries that were formed solely to
hold some of Liberty's investments in interactive programming and content
related assets (the "Contributed Subsidiaries"). In addition, Liberty assigned
to the Company certain of its rights under an access agreement ("Access
Agreement") between Liberty and AT&T entered into in connection with the AT&T
merger regarding the provision of certain interactive video services over the
cable television systems of AT&T and its controlled affiliates (the "AT&T
Systems"). The Access Agreement establishes a framework to negotiate definitive
agreements for digital channel capacity on the AT&T Systems equal to one
six-megahertz channel (which, under current digital compression technology, will
enable carriage of between 12 and 15 video channels) to be used for interactive,
category specific channels providing entertainment, information and merchandise
programming, subject to certain conditions ("Interactive Video Services"). In
connection with the Contribution Agreement, the Board of Directors of Liberty
adopted a policy that the Company will be the primary (but not exclusive)
vehicle for the pursuit of corporate opportunities relating to interactive
programming and content related services in the United States and Canada,
subject to certain limitations. Liberty also contributed to the Company a
combination of cash and notes payable to Liberty or one or more of its
affiliates (which notes were assigned to Liberty prior to the closing of the
transactions under the Contribution Agreement) by the Contributed Subsidiaries
and the Company equal to $150.0 million. Cash contributed retroactive to March
1, 1999 was $121.3 million, net of notes payable assumed by Liberty. In
addition, the Company adopted a Deferred Compensation and Stock Appreciation
Rights Plan and entered into Deferred Compensation and Stock Appreciation Rights
Agreements with Lee Masters, a director, President and Chief Executive Officer
of the Company and Bruce W. Ravenel, then a director and Executive Vice
President of the Company. The Deferred Compensation and Stock Appreciation
Rights Plan is comprised of a deferred compensation component and stock
appreciation rights. The deferred compensation component provides Messrs.
Masters and Ravenel with the right to receive the appreciation in the Series A
Common Stock (as reflected by its market price) over $2.46 per share up to
$19.125; and the stock appreciation rights provide them with the appreciation in
the market price of the Series A Common Stock above $19.125. In consideration of
the foregoing, the Company issued to Liberty (1) 109,450,167 shares of Series B
Common Stock and (2) 150,000 shares of Series B Preferred Stock having an
initial liquidation aggregate preference of $150.0 million.
Affiliation Agreement. In connection with the Company's acquisition of DMX,
effective as of July 1, 1997, DMX and Satellite Services, Inc. ("SSI"), a
subsidiary of AT&T Broadband, entered into an Affiliation Agreement (the
"Affiliation Agreement") pursuant to which DMX granted to SSI and certain of its
affiliates the non-exclusive right to distribute and subdistribute the DMX
Service to commercial and residential cable customers for a 10 year period in
exchange for licensing fees paid by SSI to DMX.
Under the Affiliation Agreement, SSI will pay an annual fee to DMX of $8.5
million for the initial three years, subject to adjustment annually (beginning
July 1, 1998) by the percentage change in the CPI for the prior year and for
changes in the number of subscribers as a result of divestiture or acquisition
of cable systems. During the fourth through tenth years of the term of the
Affiliation Agreement, the annual fee will be further adjusted on a monthly
basis upward or downward, as the case may be, based on an increasing percentage
of the increase or decrease in the actual number of subscribers above or below a
specified number of residential and commercial subscribers, provided that such
fees cannot be reduced below a specified minimum license fee, which minimum fee
is decreased each year in years four through ten. During the fiscal year ended
December 31, 1999, Liberty Digital recognized $8.5 million pursuant to the
Affiliation Agreement. In addition, the Company received subscriber revenue from
AT&T of $2.6 million in connection with the distribution of the DMX Service
through AT&T Broadband.
The Affiliation Agreement between DMX and SSI dated July 6, 1989 (the "Old
Affiliation Agreement"), provides for distribution by SSI-affiliated cable
systems of the DMX Service and the Superaudio service (a basic analog music
service provided through a joint venture between DMX and an affiliate of Jones
Intercable, Inc.). Although the Affiliation Agreement supersedes the Old
Affiliation Agreement with respect to the DMX Service, the Old Affiliation
Agreement remains in effect through May 7, 2000, with respect to the Superaudio
service. The Affiliation Agreement is still in effect, but the transponder
service was terminated January 31, 2000.
III-17
<PAGE> 20
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
Tax Sharing Agreement. The Company was included in the consolidated federal
income tax return of TCI up to February 28, 1999. Starting March 1, 1999, the
Company is included in the consolidated tax return of AT&T and is party to a Tax
Liability Allocation and Indemnification Agreement with its parent, Liberty,
dated September 9, 1999, (the "Tax Sharing Agreement"). The income tax provision
for the Company is calculated based on a hypothetical tax liability determined
as if the Company filed a separate tax return. Under the Tax Sharing Agreement,
the Company will record a current intercompany tax benefit from Liberty in
periods when it generates taxable losses and such losses are utilized by Liberty
to reduce its income tax liability. In periods when the Company generates
taxable income, the Company will record current intercompany tax expense. To the
extent that the cumulative intercompany tax expense is greater than the
cumulative benefit, the Company will settle such excess liability in cash to
Liberty. Further, the Company has agreed to pay Liberty for any income tax
benefits realized with respect to the Plan. At December 31, 1999, the Company
has recorded $210.3 million of deferred tax benefits related to this plan as a
separate component of stockholders' equity.
Services Agreement. Pursuant to a Services Agreement between Liberty (as
successor to AT&T Broadband) and Liberty Digital (the "Services Agreement"),
Liberty provides services to Liberty Digital for administration and operation
of the businesses of Liberty Digital and its subsidiaries as requested by
Liberty Digital from time to time. These services can include: (i) tax
reporting, financial reporting, payroll, employee benefit administration,
workers' compensation administration, telephone, package delivery, management
information systems, billing, lock box, remittance processing and risk
management services, (ii) other services typically performed by Liberty's
accounting, finance, treasury, corporate, legal, tax, benefits, insurance,
facilities, purchasing, and advanced information technology department
personnel, (iii) use of telecommunications and data facilities and of systems
and software developed, acquired or licensed by Liberty from time to time for
financial forecasting, budgeting and similar purposes, including without
limitation any such software for use on personal computers, in any case to the
extent available under copyright law or any applicable third-party contract,
(iv) technology support and consulting services and (v) such other management,
supervisory, strategic planning and other services as Liberty Digital may from
time to time request. Pursuant to the Services Agreement, Liberty also provides
Liberty Digital access to any volume discounts that may be available to Liberty
for the purchase of certain equipment. The Services Agreement also provides that
Liberty, for so long as Liberty continues to beneficially own at least a
majority of the voting power of the outstanding shares of the Voting Securities,
will continue to provide, in the same manner and on the same basis as generally
provided from time to time to other participating Liberty subsidiaries,
benefits and administrative services to Liberty Digital's employees. In this
regard, Liberty Digital will be allocated that portion of Liberty's
compensation expense attributable to benefits extended to employees of Liberty
Digital. Pursuant to the Services Agreement, Liberty Digital from time to time
will reimburse Liberty for all direct expenses incurred by Liberty in
providing such services and a pro rata share of all indirect expenses incurred
by Liberty in connection with the rendering of such services, including a pro
rata share of the salary and other compensation of Liberty employees performing
services for Liberty Digital, general overhead expenses and rental expense for
any physical facilities of Liberty utilized by Liberty Digital. In this regard,
it is anticipated that Liberty Digital will, for the foreseeable future, share
office space with, or sublease office space from, Liberty. The Services
Agreement will continue in effect until terminated by (i) Liberty Digital upon
60 days' prior written notice to Liberty, (ii) Liberty at any time after three
years upon not less than six months prior notice to Liberty Digital, and (iii)
either party if the other party is the subject of certain bankruptcy or
insolvency-related events.
III-18
<PAGE> 21
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Liberty Digital, Inc. has duly caused this amendment to this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
LIBERTY DIGITAL, INC.
(Registrant)
By: /s/ Lee Masters Date: May 1, 2000
---------------------------------
Lee Masters
President and Chief Executive Officer
