<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number 0-20421
LIBERTY MEDIA CORPORATION
-------------------------------------------------
(Exact name of Registrant as specified in its charter)
State of Delaware 84-1288730
------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
9197 So. Peoria Street
Englewood, Colorado 80112
---------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-5400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------------
amounts in millions
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,271 1,714
Cash collateral under securities lending agreement
(note 6) 423 --
Short-term investments 369 378
Trade and other receivables, net 243 116
Prepaid expenses and committed program rights 517 405
Deferred income tax assets 595 750
Other current assets 15 5
------- -------
Total current assets 3,433 3,368
------- -------
Investments in affiliates, accounted for under the
equity method, and related receivables (note 3) 16,741 15,922
Investments in available-for-sale securities and others
(notes 4, 5 and 6) 29,567 28,593
Property and equipment, at cost 783 162
Less accumulated depreciation 84 19
------- -------
699 143
------- -------
Intangible assets:
Excess cost over acquired net assets 10,946 9,966
Franchise costs 269 273
------- -------
11,215 10,239
Less accumulated amortization 735 454
------- -------
10,480 9,785
------- -------
Other assets, at cost, net of accumulated amortization 897 839
------- -------
Total assets $61,817 58,650
======= =======
</TABLE>
(continued)
I-1
<PAGE> 3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- ------------
amounts in millions
<S> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $ 81 44
Accrued liabilities 355 201
Accrued stock compensation 1,978 2,405
Program rights payable 179 166
Current portion of debt 203 554
-------- --------
Total current liabilities 2,796 3,370
-------- --------
Long-term debt (note 6) 6,340 2,723
Deferred income tax liabilities 13,775 14,103
Other liabilities 32 23
-------- --------
Total liabilities 22,943 20,219
-------- --------
Minority interests in equity of subsidiaries 283 23
Stockholder's equity (note 7):
Preferred stock, $.0001 par value
Authorized 100,000 shares; no shares
issued and outstanding -- --
Class A common stock $.0001 par value
Authorized 1,000,000 shares; issued and
outstanding 1,000 shares -- --
Class B common stock $.0001 par value
Authorized 1,000,000 shares; issued and
outstanding 1,000 shares -- --
Class C common stock, $.0001 par value
Authorized 1,000,000 shares; issued and
outstanding 1,000 shares -- --
Additional paid-in capital 34,203 33,838
Accumulated other comprehensive earnings,
net of taxes 4,984 6,518
Accumulated deficit (680) (1,975)
-------- --------
38,507 38,381
Due to related parties 84 27
-------- --------
Total stockholder's equity 38,591 38,408
-------- --------
Commitments and contingencies (note 8)
Total liabilities and stockholder's equity $ 61,817 $ 58,650
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-2
<PAGE> 4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statements Of Operations And Comprehensive Earnings
(unaudited)
<TABLE>
<CAPTION>
Three months Three months
ended ended
June 30, 2000 June 30, 1999
------------- -------------
amounts in millions
<S> <C> <C>
Revenue $ 382 221
Operating costs and expenses:
Operating, selling, general and
administrative 295 184
Stock compensation (216) 496
Depreciation and amortization 236 177
------- -------
315 857
------- -------
Operating income (loss) 67 (636)
Other income (expense):
Interest expense (100) (33)
Adjustment to interest expense for contingent
portion of exchangeable debentures (note 6) 200 --
Dividend and interest income 86 82
Share of losses of affiliates, net (note 3) (331) (279)
Minority interests in losses (earnings) of
subsidiaries 36 12
Gains (losses) on dispositions, net (note 3) 611 (2)
Other, net 3 (4)
------- -------
505 (224)
------- -------
Earnings (loss) before income taxes 572 (860)
Income tax (expense) benefit (254) 317
------- -------
Net earnings (loss) $ 318 (543)
------- -------
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments (87) (55)
Unrealized holding gains (losses) arising
during the period, net of reclassification
adjustments (3,196) 1,138
------- -------
Other comprehensive earnings (loss) (3,283) 1,083
------- -------
Comprehensive earnings (loss) $(2,965) 540
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-3
<PAGE> 5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statements Of Operations And Comprehensive Earnings
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
------------------------------ -----------------
(note 1) (note 1)
Six months Four months Two months
ended ended ended
June 30, 2000 June 30, 1999 February 28, 1999
------------- ------------- -----------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 617 292 235
Operating costs and expenses:
Operating, selling, general and
administrative 469 240 188
Stock compensation (239) 455 183
Depreciation and amortization 403 230 22
------- ------- -------
633 925 393
------- ------- -------
Operating loss (16) (633) (158)
Other income (expense):
Interest expense (175) (46) (26)
Adjustment to interest expense for
contingent portion of exchangeable
debentures (note 6) (164) -- --
Dividend and interest income 165 106 10
Share of losses of affiliates, net (note 3) (642) (359) (66)
Minority interests in losses of subsidiaries 24 12 4
Gains (losses) on dispositions, net
(notes 3, 4 and 5) 3,052 (2) 14
Gains on issuance of equity by affiliates
and subsidiaries (note 3) -- -- 372
Other, net 7 (4) (9)
------- ------- -------
2,267 (293) 299
------- ------- -------
Earnings (loss) before income taxes 2,251 (926) 141
Income tax (expense) benefit (956) 325 (211)
------- ------- -------
Net earnings (loss) $ 1,295 (601) (70)
------- ------- -------
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments (118) (43) (15)
Unrealized holding gains (losses) arising
during the period, net of
reclassification adjustments (1,416) 2,006 885
------- ------- -------
Other comprehensive earnings (loss) (1,534) 1,963 870
------- ------- -------
Comprehensive earnings (loss) $ (239) 1,362 800
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-4
<PAGE> 6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statement Of Stockholder's Equity
(unaudited)
<TABLE>
<CAPTION>
Accumulated
other
Common stock Additional comprehensive
Preferred ----------------------------- paid-in earnings,
stock Class A Class B Class C capital net of taxes
----------- ------- ------- ------- ---------- -------------
amounts in millions
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ -- -- -- -- 33,838 6,518
Net earnings -- -- -- -- -- --
Foreign currency translation adjustments
-- -- -- -- -- (118)
Recognition of previously unrealized gains
on available-for-sale securities, net
-- -- -- -- -- (1,479)
Unrealized gains on available-for-sale
securities -- -- -- -- -- 63
Issuances of common stock by subsidiaries and
affiliates, net of taxes
-- -- -- -- 171 --
Contribution to equity from related party for
acquisitions, net (note 5)
-- - -- -- 177 --
Utilization of net operating losses of
Liberty by AT&T -- -- -- -- (4) --
Other transfers from related parties, net
-- -- -- -- 21 --
----------- ------- ------- ------- --------- ------
Balance at June 30, 2000 $ -- -- -- -- 34,203 4,984
=========== ======= ======= ======= ========= ======
<CAPTION>
Due to Total
Accumulated related stockholder's
deficit parties equity
------------ ------- -------------
<S> <C> <C> <C>
Balance at January 1, 2000 (1,975) 27 38,408
Net earnings 1,295 -- 1,295
Foreign currency translation adjustments
-- -- (118)
Recognition of previously unrealized gains
on available-for-sale securities, net
-- -- (1,479)
Unrealized gains on available-for-sale
securities -- -- 63
Issuances of common stock by subsidiaries and
affiliates, net of taxes
-- -- 171
Contribution to equity from related party for
acquisitions, net (note 5)
-- -- 177
Utilization of net operating losses of
Liberty by AT&T -- -- (4)
Other transfers from related parties, net
-- 57 78
------- ---- --------
Balance at June 30, 2000 (680) 84 38,591
======= ==== ========
</TABLE>
See accompanying notes to consolidated financial statements.
I-5
<PAGE> 7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Statements Of Cash Flows
(unaudited)
<TABLE>
<CAPTION>
New Liberty Old Liberty
------------------------------ -----------------
(note 1) (note 1)
Six months Four months Two months
ended ended ended
June 30, 2000 June 30, 1999 February 28, 1999
------------- ------------- -----------------
amounts in millions
<S> <C> <C> <C>
Cash flows from operating activities: (note 2)
Net earnings (loss) $ 1,295 (601) (70)
Adjustments to reconcile net earnings (loss) to net
cash used by operating activities:
Depreciation and amortization 403 230 22
Stock compensation (239) 455 183
Payments of stock compensation (283) (27) (126)
Share of losses of affiliates, net 642 359 66
Deferred income tax expense (benefit) 992 (314) 212
Intergroup tax allocation (34) (14) (1)
Cash receipt from AT&T pursuant to tax sharing agreement 123 45 --
Minority interests in losses of subsidiaries (24) (12) (4)
Losses (gains) on disposition of assets, net (3,052) 2 (14)
Noncash interest 169 -- --
Gains on issuance of equity by affiliates and subsidiaries -- -- (372)
Other noncash charges -- -- 18
Changes in operating assets and liabilities, net of the effect
of acquisitions and dispositions:
Change in receivables 6 (12) 33
Change in prepaid expenses and committed program rights (103) (7) (23)
Change in payables and accruals 89 67 (31)
------- ------- -------
Net cash provided (used) by operating activities (16) 171 (107)
------- ------- -------
Cash flows from investing activities:
Cash paid for acquisitions (546) (1) --
Capital expended for property and equipment (82) (16) (15)
Investments in and loans to affiliates and others (2,336) (434) (51)
Purchases of marketable securities (735) (6,172) (3)
Sales and maturities of marketable securities 1,326 2,759 9
Cash proceeds from dispositions 79 2 43
Cash balances of deconsolidated subsidiaries -- -- (53)
Other, net 8 (12) (9)
------- ------- -------
Net cash used by investing activities (2,286) (3,874) (79)
------- ------- -------
Cash flows from financing activities:
Borrowings of debt 3,022 495 155
Repayments of debt (1,123) (463) (145)
Cash transfers to related parties (41) (160) 31
Repurchase of stock of subsidiary -- -- (45)
Other, net 1 16 (7)
------- ------- -------
Net cash provided (used) by financing activities 1,859 (112) (11)
------- ------- -------
Net decrease in cash and cash equivalents (443) (3,815) (197)
Cash and cash equivalents at beginning of year 1,714 5,319 228
------- ------- -------
Cash and cash equivalents at end of year $ 1,271 1,504 31
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE> 8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2000
(unaudited)
(1) Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Liberty Media Corporation ("Liberty" or the "Company") and those of
all of its majority-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Effective March 9, 1999, AT&T Corp. ("AT&T") indirectly owns 100% of
the outstanding common stock of Liberty. Previously, Liberty was a
wholly owned subsidiary of Tele-Communications, Inc. ("TCI").
Liberty's domestic subsidiaries generally operate or hold interests in
businesses which provide programming services including production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software. In addition, certain of Liberty's subsidiaries hold interests
in technology and Internet businesses, as well as interests in
businesses engaged in wireless telephony, electronic retailing, direct
marketing and advertising sales relating to programming services,
infomercials and transaction processing. Liberty also has significant
interests in foreign affiliates which operate in cable television,
programming and satellite distribution.
On March 9, 1999, AT&T acquired TCI in a merger transaction (the "AT&T
Merger") whereby a wholly owned subsidiary of AT&T merged with and into
TCI, and TCI thereby became a subsidiary of AT&T. The AT&T Merger has
been accounted for using the purchase method. Accordingly, Liberty's
assets and liabilities have been recorded at their respective fair
values therefor, creating 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" refers
to both New Liberty and Old Liberty.
The accompanying interim consolidated financial statements are
unaudited but, in the opinion of management, reflect all adjustments
(consisting of normal recurring accruals) necessary for a fair
presentation of the results for such periods. The results of operations
for any interim period are not necessarily indicative of results for
the full year. These consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto contained in Liberty's Report on Form 10-K for the year ended
December 31, 1999.
(continued)
I-7
<PAGE> 9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Certain prior period amounts have been reclassified for comparability
with the 2000 presentation.
(2) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for interest was $121 million, $58 million and $32 million
for the six months ended June 30, 2000, the four months ended June 30,
1999 and the two months ended February 28, 1999, respectively. Cash
paid for income taxes during the six months ended June 30, 2000, the
four months ended June 30, 1999 and the two months ended February 28,
1999 was not material.
<TABLE>
<CAPTION>
New Liberty Old Liberty
-------------------------- -----------
(note 1) (note 1)
Six months Four months Two months
ended ended ended
June 30, June 30, February 28,
2000 1999 1999
----------- ----------- ------------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions (note 5):
Fair value of assets acquired $ 2,027 3 --
Net liabilities assumed (1,119) (2) --
Deferred tax asset recorded 194 -- --
Minority interests in equity of
acquired subsidiaries (379) -- --
Contribution to equity for
acquisitions (177) -- --
------- ------- -----
Cash paid for acquisitions $ 546 1 --
======= ======= =====
</TABLE>
The following table reflects the change in cash and cash equivalents
resulting from the AT&T Merger and related restructuring transactions
(amounts in millions):
<TABLE>
<S> <C>
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 (note 4) (176)
------
Cash and cash equivalents subsequent to the AT&T Merger $5,319
======
</TABLE>
(continued)
I-8
<PAGE> 10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liberty ceased to include TV Guide, Inc. ("TV Guide") in its
consolidated financial results and began to account for TV Guide using
the equity method of accounting, effective March 1, 1999 (see note 3).
The effect of changing the method of accounting for Liberty's ownership
interest in TV Guide from the consolidation method to the equity method
is summarized below (amounts in millions):
<TABLE>
<S> <C>
Assets (other than cash and cash equivalents)
reclassified to investments in affiliates $ (200)
Liabilities reclassified to investments in affiliates 190
Minority interests in equity of subsidiaries
reclassified to investments in affiliates 63
------
Decrease in cash and cash equivalents $ 53
======
</TABLE>
(3) Investments in Affiliates Accounted for under the Equity Method
Liberty has various investments accounted for under the equity method.
The following table includes Liberty's carrying amount of the more
significant investments in affiliates:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
amounts in millions
<S> <C> <C>
USA Networks, Inc. ("USAI") and
related investments $ 2,848 2,699
Telewest Communications plc
("Telewest") 3,048 1,996
Discovery Communications, Inc.
("Discovery") 3,313 3,441
TV Guide 1,708 1,732
QVC Inc. ("QVC") 2,510 2,515
Flextech p.l.c. ("Flextech") -- 727
UnitedGlobalCom, Inc.
("UnitedGlobalCom") 445 505
Various foreign equity investments
(other than Telewest and Flextech) 1,536 1,463
Other 1,333 844
------- -------
$16,741 15,922
======= =======
</TABLE>
(continued)
I-9
<PAGE> 11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table reflects Liberty's share of earnings (losses) of
affiliates:
<TABLE>
<CAPTION>
New Liberty Old Liberty
-------------------------- -----------
(note 1) (note 1)
Six months Four months Two months
ended ended ended
June 30, June 30, February 28,
2000 1999 1999
----------- ----------- ------------
amounts in millions
<S> <C> <C> <C>
USAI and related investments $ (16) (9) 10
Telewest (168) (97) (38)
Discovery (128) (76) (8)
TV Guide (25) (11) --
QVC (5) (9) 13
Flextech (18) (13) (5)
UnitedGlobalCom (88) -- --
Other foreign investments (130) (56) (22)
Other (64) (88) (16)
----- ----- -----
$(642) (359) (66)
===== ===== =====
</TABLE>
Summarized unaudited combined financial information for affiliates is
as follows:
<TABLE>
<CAPTION>
New Liberty Old Liberty
-------------------------- -----------
(note 1) (note 1)
Six months Four months Two months
ended ended ended
June 30, June 30, February 28,
2000 1999 1999
----------- ----------- ------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 7,841 4,060 2,341
Operating expenses (7,017) (3,451) (1,894)
Depreciation and amortization (1,502) (520) (353)
------- ------- -------
Operating income (loss)
(678) 89 94
Interest expense (1,117) (323) (281)
Other, net 148 (244) (127)
------- ------- -------
Net loss $(1,647) (478) (314)
======= ======= =======
</TABLE>
(continued)
I-10
<PAGE> 12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
USAI owns and operates businesses in network and television production,
television broadcasting, electronic retailing, ticketing operations,
and internet services. At June 30, 2000, Liberty directly and
indirectly held 74.4 million shares of USAI's common stock. Liberty
also held shares directly in certain subsidiaries of USAI which are
exchangeable into 79.0 million shares of USAI common stock. Liberty's
direct ownership of USAI is currently restricted by Federal
Communications Commission ("FCC") regulations. The exchange of these
shares can be accomplished only if there is a change to existing
regulations or if Liberty obtains permission from the FCC. If the
exchange of subsidiary stock into USAI common stock was completed at
June 30, 2000, Liberty would own 153.4 million shares or approximately
21% (on a fully-diluted basis) of USAI common stock. USAI's common
stock reported a closing price of $21-5/8 per share on June 30, 2000.
Telewest currently operates and constructs cable television and
telephone systems in the UK. Flextech develops and sells a variety of
television programming in the UK. In April 2000, Telewest acquired
Flextech. As a result, each share of Flextech was exchanged for 3.78
new Telewest shares. Prior to the acquisition, Liberty owned an
approximate 37% equity interest in Flextech and a 22% equity interest
in Telewest. As a result of the acquisition, Liberty owns an
approximate 24.6% equity interest in Telewest. Liberty recognized a
$649 million gain (excluding related tax expense of $227 million) on
the acquisition during the second quarter of 2000 based on the
difference between the carrying value of Liberty's interest in Flextech
and the fair value of the Telewest shares received. At June 30, 2000
Liberty indirectly owned 724 million of the issued and outstanding
Telewest ordinary shares. Telewest's ordinary shares reported a closing
price of $3.46 per share on June 30, 2000.
On March 1, 1999, United Video Satellite Group, Inc. ("UVSG") and The
News Corporation Limited ("News Corp.") completed a transaction whereby
UVSG acquired News Corp.'s TV Guide properties, creating a broader
platform for offering television guide services to consumers and
advertisers, and UVSG was renamed TV Guide. News Corp. received total
consideration of $1.9 billion including $800 million in cash, 45
million shares of TV Guide's Class A common stock and 75 million shares
of TV Guide's Class B common stock valued at an average of $9.325 per
share. In addition, News Corp. purchased approximately 13 million
additional shares of TV Guide's Class A common stock for $129 million
in order to equalize its ownership with that of Liberty. As a result of
these transactions, and another transaction completed on the same date,
News Corp, Liberty and TV Guide's public stockholders own on an
economic basis approximately 44%, 44% and 12%, respectively, of TV
Guide. Following such transactions, News Corp. and Liberty each have
approximately 49% of the voting power of TV Guide's outstanding stock.
In connection with the increase in TV Guide's equity, net of dilution
of Liberty's ownership interest in TV Guide, Liberty recognized a gain
of $372 million (before deducting deferred income taxes of $147
million).
The Class A common stock of TV Guide is publicly traded. At June 30,
2000, Liberty held 58 million shares of TV Guide Class A common stock
and 75 million shares of TV Guide Class B common. The TV Guide Class B
common stock is convertible, one-for-one, into TV Guide Class A common
stock. TV Guide's Class A common stock reported a closing price of
$34.25 per share on June 30, 2000.
(continued)
I-11
<PAGE> 13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
UnitedGlobalCom is the largest global broadband communications provider
of video, voice and data services with operations in over 20 countries
throughout the world. At June 30, 2000, Liberty owned an approximate
11% economic ownership interest representing an approximate 37% voting
interest in UnitedGlobalCom. UnitedGlobalCom's Class A common stock
reported a closing price of $46.75 per share on June 30, 2000. Liberty
owns 9.9 million shares of UnitedGlobalCom Class B common stock, which
stock is convertible, on a one-for-one basis, into UnitedGlobalCom
Class A common stock.
The $12 billion aggregate excess of Liberty's aggregate carrying amount
in its affiliates over Liberty's proportionate share of its affiliates'
net assets is being amortized over an estimated useful life of 20
years.
(4) Investments in Available-for-sale Securities and Others
Investments in available-for-sale securities and others are summarized
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
amounts in millions
<S> <C> <C>
Sprint Corporation ("Sprint") $11,575 10,186
Time Warner, Inc. ("Time Warner") 8,564 8,202
News Corp. 2,804 2,403
Motorola, Inc. ("Motorola") 2,059 3,430
Other available-for-sale securities 3,806 3,765
Other investments, at cost, and related receivables 1,128 985
------- -------
29,936 28,971
Less short-term investments 369 378
------- -------
$29,567 28,593
======= =======
</TABLE>
On January 5, 2000, Motorola completed the acquisition of General
Instrument Corporation ("General Instrument") through a merger of
General Instrument with a wholly owned subsidiary of Motorola. In the
merger, each outstanding share of General Instrument common stock was
converted into the right to receive 1.725 shares (as adjusted for a
subsequent stock split) of Motorola common stock. In connection with
the merger Liberty received 54 million shares (as adjusted for a
subsequent stock split) and warrants to purchase 37 million shares (as
adjusted for a subsequent stock split) of Motorola common stock in
exchange for its holdings in General Instrument. Liberty recognized a
$2.2 billion gain (excluding related 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.
Liberty's right to exercise warrants to purchase 18.4 million shares
(as adjusted for a subsequent stock split) of Motorola common stock is
subject to AT&T satisfying the terms of a purchase commitment in 2000.
AT&T has agreed to pay Liberty $4.78 (as adjusted for a subsequent
stock split) for each warrant that does not vest as a result of the
purchase commitment not being met.
(continued)
I-12
<PAGE> 14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Investments in available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
amounts in millions
<S> <C> <C>
Equity securities:
Fair value $ 25,834 24,464
Gross unrealized holding gains 10,730 11,453
Gross unrealized holding losses (2,388) (646)
Debt securities:
Fair value 1,410 1,995
Gross unrealized holding gains 35 --
Gross unrealized holding losses (51) (22)
</TABLE>
Management of Liberty estimates the market value, calculated 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, of all of Liberty's investments in
available-for-sale securities and others aggregated $30.9 billion and
$29.2 billion at June 30, 2000 and December 31, 1999, respectively. No
independent appraisals were conducted for those assets.
(5) Acquisitions
On January 14, 2000, AT&T completed the acquisition of Associated
Group, Inc. ("Associated Group"). Each share of Associated Group's
common stock was converted into shares of AT&T tracking stock, subject
to applicable exchange ratios. Prior to the merger, Associated Group's
primary assets were shares of AT&T tracking stock, an approximate 40%
interest in Teligent, Inc. ("Teligent") and 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 other than the AT&T
tracking stock and the equity interest in Teligent were transferred to
Liberty.
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. In
connection with the net liability contributed to Liberty in this
transaction, Liberty recorded a $69 million decrease to
paid-in-capital.
On March 16, 2000, Liberty purchased shares of preferred stock in TCI
Satellite Entertainment, Inc. ("TSAT") in exchange for Liberty's
economic interest in approximately 5 million shares of Sprint PCS Group
Stock, valued at $300 million. Liberty received 150,000 shares of TSAT
Series A 12% Cumulative Preferred Stock and 150,000 shares of TSAT
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
TSAT. In connection with this transaction, Liberty realized a $211
million gain (before related tax expense of $84 million) during the
first quarter of 2000 based on the difference between the cost basis
and fair value of the economic interest in the Sprint PCS Group Stock
exchanged.
(continued)
I-13
<PAGE> 15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On March 28, 2000, Liberty announced that it had completed its cash
tender offer for the outstanding common stock of Ascent Entertainment
Group, Inc. ("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 28,
2000, Liberty completed its acquisition of 100% of Ascent for an
additional $67 million. Such transaction was accounted for as a
purchase and the $283 million excess of the purchase price over the
fair value of the net assets acquired is being amortized over 20 years.
On April 10, 2000, Liberty acquired all of the outstanding common stock
of Four Media Company ("Four Media") in exchange for approximately $123
million, 6.4 million shares of AT&T Class A Liberty Media Group
tracking stock and a warrant to purchase approximately 700,000 shares
of AT&T Class A Liberty Media Group tracking stock at an exercise price
of $23 per share. The acquisition was accounted for as a purchase. In
connection with the AT&T Liberty Media Group tracking stock issued in
this transaction, Liberty recorded a $145 million increase to
paid-in-capital and the $307 million excess of the purchase price over
the fair value of the net assets acquired is being amortized over 20
years. 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"), consisting of approximately 6.5 million shares
of Class B Common Stock of Todd-AO, representing 60% of the equity and
approximately 94% of the voting power of Todd-AO outstanding
immediately prior to the closing, in exchange for approximately 5.4
million shares of AT&T Class A Liberty Media Group tracking stock. The
acquisition was accounted for as a purchase. In connection with the
AT&T Liberty Media Group tracking stock issued in this transaction,
Liberty recorded a $101 million increase to paid-in-capital and the $94
million excess of the purchase price over the fair value of the net
assets acquired is being amortized over 20 years. 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 of Todd-AO outstanding immediately following the closing.
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 Corporation ("Liberty Livewire").
(continued)
I-14
<PAGE> 16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(6) Long-Term Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
-------- -----------
amounts in millions
<S> <C> <C>
Parent company debt:
Senior notes $ 741 741
Senior debentures (a) 1,486 494
Senior exchangeable debentures (b) 1,996 1,022
Securities lending agreement (c) 1,026 --
Bank credit facilities -- 390
------ ------
5,249 2,647
Debt of subsidiaries:
Bank credit facilities 924 573
Senior notes 170 --
Other debt, at varying rates 200 57
------ ------
1,294 630
------ ------
Total debt 6,543 3,277
Less current maturities 203 554
------ ------
Total long-term debt $6,340 2,723
====== ======
</TABLE>
(a) On February 2, 2000, Liberty received net cash proceeds of
approximately $983 million from the issuance of 8-1/4% Senior
Debentures due 2030. The senior debentures have an aggregate
principal amount of $1 billion. Interest on the senior
debentures is payable on February 1 and August 1 of each year.
(b) On February 10, 2000, Liberty received net cash proceeds of
$735 million from the issuance of $750 million principal
amount of 3-3/4% Senior Exchangeable Debentures due 2030. On
March 8, 2000, Liberty received net cash proceeds of $59
million from the issuance of an additional $60 million
principal amount of 3-3/4% Senior Exchangeable Debentures due
2030. Each debenture has a $1,000 face amount and is
exchangeable at the holder's option for the value of 16.7764
shares of Sprint PCS Group Stock. This amount will be paid
only in cash until the later of February 15, 2002 and the date
the direct and indirect ownership level of Sprint PCS Group
Stock owned by Liberty falls below a designated level, after
which, at Liberty's election, Liberty may pay the amount in
cash, Sprint PCS Group Stock or a combination thereof.
Interest on these exchangeable debentures is payable on
February 15 and August 15 of each year. The carrying amount of
the exchangeable debentures in excess of the principal amount
(the "Contingent Portion) is based on the fair value of the
underlying Sprint PCS Group Stock. The increase or decrease in
the Contingent Portion is recorded as an adjustment to
interest expense in the consolidated statement of operations
and comprehensive earnings.
(continued)
I-15
<PAGE> 17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(c) On January 7, 2000, a trust, which holds Liberty's investment
in Sprint, entered into agreements to loan 18 million shares
of Sprint PCS Group Stock to a third party, as Agent. The
obligation to return those shares is secured by cash
collateral equal to 100% of the market value of that stock.
During the period of the loan, which is terminable by either
party at any time, the cash collateral is to be
marked-to-market daily. The trust, for the benefit of Liberty,
has the use of 80% of the cash collateral plus any interest
earned thereon during the term of the loan, and is required to
pay a rebate fee equal to the Federal funds rate less 30 basis
points to the borrower of the loaned shares. The cash
collateral of $423 million at June 30, 2000 included $205
million of restricted cash. At June 30, 2000, Liberty had
utilized $603 million of the cash collateral under the
securities lending agreement.
At June 30, 2000, Liberty had approximately $236 million in unused
lines of credit under its bank credit facilities. The bank credit
facilities of Liberty 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. Liberty was in
compliance with its debt covenants at June 30, 2000. Additionally,
Liberty pays fees ranging from .15% to .375% per annum on the average
unborrowed portions of the total amounts available for borrowings under
bank credit facilities.
Based on quoted market prices, the fair value of Liberty's debt at June
30, 2000 is as follows (amounts in millions):
<TABLE>
<S> <C>
Senior notes of parent company $ 720
Senior debentures of parent company 1,392
Senior exchangeable debentures of parent company 2,134
Senior notes of subsidiary 183
</TABLE>
Liberty believes that the carrying amount of the remainder of its debt
approximated its fair value at June 30, 2000.
(7) 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 June
30, 2000, no shares of preferred stock were issued.
Common Stock
The Class A Stock has one vote per share, and each of the Class B and
Class C Stock has ten votes per share.
As of June 30, 2000, all of the issued and outstanding common stock of
Liberty was held by AT&T.
(continued)
I-16
<PAGE> 18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Stock Issuances by Subsidiary
During the six months ended June 30, 2000, Liberty Digital, Inc.
("Liberty Digital") issued approximately 4.2 million shares of common
stock in connection with certain acquisitions and the exercise of
certain employee stock options. In connection with the increase in
Liberty Digital's equity, net of the dilution of Liberty's interest in
Liberty Digital, that resulted from such stock issuances, Liberty
recorded a $155 million increase to paid-in-capital.
Transactions with Officers and Directors
In connection with the AT&T Merger, Liberty paid two of its directors
and one other individual, all three of whom were directors of TCI, an
aggregate of $12 million for services rendered in connection with the
AT&T Merger. Such amount is included in operating, selling, general and
administrative expenses for the two months ended February 28, 1999 in
the accompanying consolidated statements of operations and
comprehensive earnings.
Transactions with AT&T
Certain AT&T corporate general and administrative costs are charged to
Liberty based on the cost of services provided. Management believes
this allocation method is reasonable. During the six months ended June
30, 2000, the four months ended June 30, 1999 and the two months ended
February 28, 1999 Liberty was charged less than $1 million, less than
$1 million and $2 million, respectively, in corporate general and
administrative costs by AT&T. These costs are included in operating
expenses in the accompanying consolidated statements of operations and
comprehensive earnings.
Certain subsidiaries of Liberty produce and/or distribute programming
and other services to cable distribution operators (including AT&T) and
others. Charges to AT&T are based upon customary rates charged to
others. Amounts included in revenue for services provided to AT&T were
$111 million, $71 million and $43 million for the six months ended June
30, 2000, the four month period ending June 30, 1999 and the two month
period ending February 28, 1999, respectively.
Subsidiaries of Liberty lease satellite transponder facilities from a
subsidiary of AT&T. Charges for such arrangements and other related
operating expenses for the six months ended June 30, 2000, the four
months ended June 30, 1999 and the two months ended February 28, 1999
aggregated $9 million, $10 million and $4 million, respectively, and
are included in operating expenses in the accompanying consolidated
statements of operations and comprehensive earnings.
Liberty makes marketing support payments to AT&T. Charges by AT&T for
such arrangements were $1 million for the six months ended June 30,
2000, and less than $1 million for each of the four months ended June
30, 1999 and the two months ended February 28, 1999.
(continued)
I-17
<PAGE> 19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A certain subsidiary of Liberty purchases programming services from
AT&T. The charges, which approximate AT&T's cost and are based on the
aggregate number of subscribers served by the subsidiary, aggregated $4
million, $2 million and $1 million during the six months ended June 30,
2000, the four months ended June 30, 1999 and the two months ended
February 28, 1999, respectively, and are included in operating expenses
in the accompanying consolidated statements of operations and
comprehensive earnings.
During the quarter ended June 30, 2000, a subsidiary of Liberty entered
into an agreement for AT&T to provide dedicated hosting services to the
subsidiary. As of June 30, 2000, no amounts have been paid to AT&T for
such services.
Due to Related Parties
The amounts included in "Due to related parties" represent a
non-interest bearing intercompany account which includes income tax
allocations that are to be settled at some future date. All other
amounts included in the intercompany account are to be settled within
thirty days following notification.
(8) Commitments and Contingencies
Starz Encore Group LLC ("Starz Encore Group"), 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 2017 (the "Film Licensing Obligations"). Based on customer
levels at June 30, 2000, these agreements require minimum payments
aggregating approximately $1.2 billion. The aggregate amount of the
Film Licensing Obligations under these license agreements is not
currently estimable because such amount is dependent upon the number of
qualifying films released theatrically by certain motion picture
studios as well as the domestic theatrical exhibition receipts upon the
release of such qualifying films. Nevertheless, required aggregate
payments under the Film Licensing Obligations could prove to be
significant.
Liberty has guaranteed various loans, notes payable, letters of credit
and other obligations (the "Guaranteed Obligations") of certain
affiliates. At June 30, 2000, the Guaranteed Obligations aggregated
approximately $774 million. Currently, Liberty is not certain of the
likelihood of being required to perform under such guarantees.
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
securities (the "Sprint Securities") of Sprint to a trustee (the
"Trustee") prior to the AT&T Merger. The Final Judgment, which was
entered by the United States District Court for the District of
Columbia on August 23, 1999, requires the Trustee, on or before May 23,
2002, to dispose of a portion of the Sprint Securities sufficient to
cause Liberty to beneficially own no more than 10% of the outstanding
Series 1 PCS Stock of Sprint 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.
(continued)
I-18
<PAGE> 20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Final Judgment requires that the Trustee vote the Sprint Securities
beneficially owned by Liberty in the same proportion as other holders
of Sprint's PCS Group Stock so long as such securities are held by the
trust. The Final Judgment also prohibits the acquisition by Liberty of
additional Sprint Securities, with certain exceptions, without the
prior written consent of the DOJ.
Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses certain equipment under lease
arrangements.
Liberty has contingent liabilities related to legal proceedings and
other matters arising in the ordinary course of business. Although it
is reasonably possible Liberty may incur losses upon conclusion of such
matters, an estimate of any loss or range of loss cannot be made. In
the opinion of management, it is expected that amounts, if any, which
may be required to satisfy such contingencies will not be material in
relation to the accompanying consolidated financial statements.
(9) Information about Liberty's Operating Segments
Liberty is a holding company with a variety of subsidiaries and
investments operating in the media, communications and entertainment
industries. Each of these businesses is separately managed. Liberty
identifies its reportable segments as those consolidated subsidiaries
that represent 10% or more of its consolidated revenue and those equity
method affiliates whose share of earnings or losses represent 10% or
more of 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 match the current period segment presentation.
For the six months ended June 30, 2000, Liberty had four operating
segments: Starz Encore Group, Liberty Livewire, On Command Corporation
("On Command") and Other. Starz Encore Group owns and operates cable
and satellite-delivered premium movie networks in 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, a
majority owned subsidiary of Ascent, provides in-room on-demand video
entertainment and information services to the domestic lodging industry
and is majority owned and consolidated by Liberty. Other includes
Liberty's non-consolidated investments, corporate and other
consolidated businesses not representing separately reportable
segments.
The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in Liberty's summary of
significant accounting policies. Liberty evaluates performance based on
the measures of revenue and operating cash flow (as defined by
Liberty), appreciation in stock price along with other non-financial
measures such as average prime time rating, prime time audience
delivery, subscriber growth and penetration, as appropriate. Liberty
believes operating cash flow is a widely used financial indicator of
companies similar to Liberty and its affiliates, which should be
considered in addition to, but not as a substitute for, operating
income, net income, cash 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.
(continued)
I-19
<PAGE> 21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each segment requires different technology and marketing strategies.
Liberty utilizes the following financial information for purposes of
making decisions about allocating resources to a segment and assessing
a segment's performance:
<TABLE>
<CAPTION>
Starz
Encore Liberty On
Group Livewire Command Other Total
------ -------- ------- ----- -----
amounts in millions
<S> <C> <C> <C> <C> <C>
Six months ended June 30, 2000
Segment revenue from external
customers including intersegment
revenue $ 353 69 66 129 617
Segment operating cash flow 117 11 19 1 148
As of June 30, 2000
Segment assets 2,645 796 418 57,958 61,817
Investments in affiliates -- -- -- 16,741 16,741
Investments in available-for-sale
securities and others 9 13 2 29,543 29,567
Four months ended June 30, 1999
Segment revenue from external
customers including intersegment
revenue 211 -- -- 81 292
Segment operating cash flow (deficit) 53 -- -- (1) 52
-------------------------------------------------------------------------------------------------
Two months ended February 28, 1999
Segment revenue from external
customers including intersegment
revenue $ 101 -- -- 134 235
Segment operating cash flow 41 -- -- 6 47
</TABLE>
(continued)
I-20
<PAGE> 22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table provides a reconciliation of segment operating cash
flow to earnings before income taxes:
<TABLE>
<CAPTION>
New Liberty Old Liberty
-------------------------- -----------
(note 1) (note 1)
Six months Four months Two months
ended ended ended
June 30, June 30, February 28,
2000 1999 1999
----------- ----------- ------------
amounts in millions
<S> <C> <C> <C>
Segment operating cash flow $ 148 52 47
Stock compensation 239 (455) (183)
Depreciation and amortization (403) (230) (22)
Interest expense (175) (46) (26)
Segment equity in losses of affiliates (642) (359) (66)
Gains (losses) on dispositions, net 3,052 (2) 14
Gain on issuance of equity by
affiliates and subsidiaries -- -- 372
Other, net 32 114 5
------ ----- -----
Earnings (loss) before income taxes $2,251 (926) 141
====== ===== =====
</TABLE>
I-21
<PAGE> 23
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
The following discussion and analysis provides information concerning
our results of operations and financial condition. This discussion should be
read in conjunction with our accompanying consolidated financial statements and
the notes thereto.
Liberty's domestic subsidiaries generally operate or hold interests in
businesses which provide programming services including production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software. In
addition, certain of Liberty's subsidiaries hold interests in technology and
Internet businesses, as well as interests in businesses engaged in wireless
telephony, electronic retailing, direct marketing and advertising sales relating
to programming services, infomercials and transaction processing. Liberty also
has significant interests in foreign affiliates, which operate in cable
television, programming and satellite distribution.
Liberty's most significant consolidated subsidiaries at June 30, 2000,
were Starz Encore Group LLC, Liberty Livewire Corporation and On Command
Corporation. These businesses are either wholly or majority owned and,
accordingly, the results of operations of these businesses are included in the
consolidated results of Liberty for the periods in which they were wholly or
majority owned.
A significant portion of Liberty's operations are conducted through
entities in which Liberty holds a 20%-50% ownership interest. These businesses
are accounted for using the equity method of accounting and, accordingly, are
not included in the consolidated results of Liberty except as they affect
Liberty's interest in earnings or losses of affiliates for the period in which
they were accounted for using the equity method. Included in Liberty's
investments in affiliates at June 30, 2000 were USA Networks, Inc., Discovery
Communications, Inc., TV Guide, Inc., QVC Inc., UnitedGlobalCom, Inc. and
Telewest Communications plc.
Liberty holds interests in companies that are neither consolidated
subsidiaries nor affiliates accounted for using the equity method. The most
significant of these include Time Warner, Sprint Corporation and Motorola, Inc.
(successor to General Instrument Corporation). The Time Warner stock, Sprint
Corporation tracking stock and Motorola stock that Liberty holds are classified
as available-for-sale securities and are carried at fair value. Unrealized
holding gains and losses on these securities are carried net of taxes as a
component of accumulated other comprehensive earnings in stockholder's equity.
Realized gains and losses are determined on a specific-identification basis.
As a result of AT&T's acquisition of Tele-Communications, Inc. ("TCI")
by merger on March 9, 1999, the shares of each series of TCI common stock were
converted into shares of a class of AT&T common stock, subject to applicable
exchange ratios. The AT&T merger has been accounted for using the purchase
method. Accordingly, Liberty's assets and liabilities have been recorded at
their respective fair values therefor creating 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." "Liberty" refers
to both New Liberty and Old Liberty.
I-22
<PAGE> 24
SUMMARY OF OPERATIONS
Starz Encore Group provides premium programming distributed by cable,
direct-to-home satellite and other distribution media throughout the United
States. Liberty Livewire provides sound, video and ancillary post production and
distribution services to the motion picture and television industries in the
United States and Europe. On Command provides in-room on-demand video
entertainment and information services to the domestic lodging industry. To
enhance the reader's understanding, separate financial data has been provided
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. Liberty holds
significant equity investments, the results of which are not a component of
operating income, but are discussed below under "Investments in Affiliates
Accounted for Under the Equity Method." Other items of significance are
discussed separately below.
<TABLE>
<CAPTION>
New Liberty
-----------------------------------------
Quarter Quarter
ended % of ended % of
June 30, total June 30, total
2000 revenue 1999 revenue
------ ------- ------ -------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Starz Encore Group
Revenue $ 177 100% $ 159 100%
Operating, selling, general and
administrative 123 70 120 76
Stock compensation 5 3 -- --
Depreciation and amortization 38 21 48 30
------ ------ ------ ------
Operating income (loss) $ 11 6% $ (9) (6)%
====== ====== ====== ======
Liberty Livewire
Revenue $ 69 100% $ -- --
Operating, selling, general and
administrative 58 84 -- --
Depreciation and amortization 14 20 -- --
------ ------ ------ ------
Operating loss $ (3) (4)% $ -- --
====== ====== ====== ======
On Command
Revenue $ 66 100% $ -- --
Operating, selling, general and
administrative 47 71 -- --
Depreciation and amortization 22 33 -- --
------ ------ ------ ------
Operating loss $ (3) (4)% $ -- --
====== ====== ====== ======
Other
Revenue $ 70 (a) $ 62 (a)
Operating, selling, general and
administrative 67 64
Stock compensation (221) 496
Depreciation and amortization 162 129
------ ------
Operating income (loss) $ 62 $ (627)
====== ======
</TABLE>
---------------
(a) Not meaningful.
Due to the consummation of the AT&T merger, Liberty's statements of
operations include information reflecting the six month period ended June 30,
2000, the four month period ended June 30, 1999, and the two month period ended
February 28, 1999. The following discussion of Liberty's results of operations
includes a section that addresses the combined operating results of "Old
Liberty" and "New Liberty," collectively "Combined Liberty."
I-23
<PAGE> 25
<TABLE>
<CAPTION>
New Liberty Old Liberty
--------------------------------------------- ---------------------
Six months Four months Two months
ended % of ended % of ended % of
June 30, total June 30, total February 28, total
2000 revenue 1999 revenue 1999 revenue
---------- ------- ----------- ------- ------------ -------
(dollar amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Starz Encore Group
Revenue $ 353 100% $ 211 100% $ 101 100%
Operating, selling, general and
administrative 236 67 158 75 60 59
Stock compensation 5 2 -- -- 3 3
Depreciation and amortization 79 22 60 28 1 1
----- ----- ----- ----- ----- -----
Operating income (loss) $ 33 9% $ (7) (3)% $ 37 37%
===== ===== ===== ===== ===== =====
Liberty Livewire
Revenue $ 69 100% $ -- -- $ -- --
Operating, selling, general and
administrative 58 84 -- -- -- --
Depreciation and amortization 14 20% -- -- -- --
----- ----- ----- ----- ----- -----
Operating loss $ (3) (4)% $ -- -- $ -- --
===== ===== ===== ===== ===== =====
On Command
Revenue $ 66 100% $ -- -- $ -- --
Operating, selling, general and
administrative 47 71 -- -- -- --
Depreciation and amortization 22 33 -- -- -- --
----- ----- ----- ----- ----- -----
Operating loss $ (3) (4)% $ -- -- $ -- --
===== ===== ===== ===== ===== =====
Other
Revenue $ 129 (a) $ 81 (a) $ 134 (a)
Operating, selling, general and
administrative 128 82 128
Stock compensation (244) 455 180
Depreciation and amortization 288 170 21
----- ----- -----
Operating loss $ (43) $(626) $(195)
===== ===== =====
</TABLE>
----------------
(a) Not meaningful.
I-24
<PAGE> 26
In order to provide a meaningful basis for comparing the six months
ended June 30, 2000 and 1999 for purposes of the following table and discussion,
the operating results of Combined Liberty for the four months ended June 30,
1999 have been combined with the operating results of Combined Liberty for the
two months ended February 28, 1999, and the resulting six month operating
results are compared to the operating results for the six months ended June 30,
2000. Depreciation, amortization and certain other line items included in the
operating results of Combined Liberty are not comparable between periods as the
two-month predecessor period ended February 28, 1999 does not include the
effects of purchase accounting adjustments related to the AT&T merger, and
subsequent periods do include the effects of purchase accounting adjustments
related to the AT&T merger. The combining of predecessor and successor
accounting periods is not acceptable under generally accepted accounting
principles.
<TABLE>
<CAPTION>
Combined Liberty
-------------------------------------------
Six months Six months
ended % of ended % of
June 30, total June 30, total
2000 revenue 1999 revenue
---------- ------- ----------- -------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Starz Encore Group
Revenue $ 353 100% $ 312 100%
Operating, selling, general and
administrative 236 67 218 70
Stock compensation 5 2 3 1
Depreciation and amortization 79 22 61 19
----- ----- ----- -----
Operating income $ 33 9% $ 30 10%
===== ===== ===== =====
Liberty Livewire
Revenue $ 69 100 $ -- --
Operating, selling, general and
administrative 58 84 -- --
Depreciation and amortization 14 20 -- --
----- ----- ----- -----
Operating loss $ (3) (4)% $ -- --
===== ===== ===== =====
On Command
Revenue $ 66 100% $ -- --
Operating, selling, general and
administrative 47 71 -- --
Depreciation and amortization 22 33 -- --
----- ----- ----- -----
Operating loss $ (3) (4)% $ -- --
===== ===== ===== =====
Other
Revenue $ 129 (a) $ 215 (a)
Operating, selling, general and
administrative 128 210
Stock compensation (244) 635
Depreciation and amortization 288 191
----- -----
Operating loss $ (43) $(821)
===== =====
</TABLE>
---------------
(a) Not meaningful.
I-25
<PAGE> 27
QUARTER AND SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO QUARTER AND SIX
MONTHS ENDED JUNE 30, 1999
CONSOLIDATED SUBSIDIARIES
Starz Encore Group. The majority of Starz Encore Group's revenue is
derived from the delivery of movies to subscribers under affiliation agreements
between Starz Encore Group and cable operators and satellite direct-to-home
distributors. Starz Encore Group entered into a 25-year affiliation agreement in
1997 with TCI. TCI cable systems subsequently acquired by AT&T in the AT&T
merger operate under the name AT&T Broadband. Under this affiliation agreement
with AT&T Broadband, Starz Encore Group receives fixed monthly payments in
exchange for unlimited access to all of the existing Encore and STARZ! services.
The payment from AT&T Broadband is 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. Starz Encore Group's other
affiliation agreements generally provide for payments based on the number of
subscribers that receive Starz Encore Group's services.
Revenue increased to $177 million for the quarter ended June 30, 2000,
from $159 million for the corresponding quarter of 1999. Revenue increased to
$353 million for the six months ended June 30, 2000 from $312 million for the
corresponding period of 1999. The increase in revenue is primarily due to
increases in subscription units from all forms of distribution. These increases
are due to subscription unit increases of 42% for Encore Thematic Multiplex, and
13% for STARZ!
Operating expenses increased by 3% and 8% for the quarter and six
months ended June 30, 2000, respectively, as compared to the corresponding
periods in 1999. The increase in operating expense is due to an increase in
spending on affiliate marketing efforts related to higher revenue and
subscription units, as well as an increase in national branding efforts, offset
by a decrease in programming expenses.
Depreciation and amortization decreased from $48 million for the
quarter ended June 30, 1999 to $38 million for the quarter ended June 30, 2000.
Depreciation and amortization increased from $61 million for the six months
ended June 30, 1999 to $79 million for the corresponding period in 2000. The
fluctuations in depreciation and amortization are a direct result of the effects
of purchase accounting adjustments related to the AT&T merger.
Liberty Livewire. On April 10, 2000, Liberty acquired all of the
outstanding common stock of Four Media Company in exchange for AT&T Liberty
Media Group tracking stock and cash. On June 9, 2000 Liberty acquired a
controlling interest in The Todd-AO Corporation in exchange for AT&T Liberty
Media Group tracking stock. Immediately following the closing of such
transaction, Liberty contributed 100% of the capital stock of Four Media Company
to Todd-AO in exchange for additional Todd-AO common stock. Following these
transactions, Todd-AO changed its name to Liberty Livewire. Liberty owns
approximately 84% of the equity and controls approximately 98% 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.
On Command. On March 28, 2000, Liberty announced that it had completed
its 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 Command's principal business is providing
pay-per-view entertainment and information services through its majority owned
subsidiary, On Command Corporation. Upon completion of the tender offer, Liberty
consolidated the operations of On Command.
I-26
<PAGE> 28
Other. Included in this information are the results of Liberty's
consolidated subsidiaries and corporate expenses. The results of TV Guide are
included for the two months ended February 28, 1999, after which time Liberty
began accounting for this investment under the equity method of accounting (see
note 3 to the accompanying consolidated financial statements).
Revenue increased 13% to $70 million for the quarter ended June 30,
2000 as compared to $62 million for the corresponding period in 1999 due to
revenue growth at Liberty Cablevision of Puerto Rico and Pramer, as well as
revenue from Cable Management Ireland Limited which was acquired during November
1999. Revenue decreased 40% to $129 million for the six months ended June 30,
2000 as compared to $215 million in the corresponding period of 1999 primarily
due to the deconsolidation of TV Guide on March 1, 1999.
Operating, selling, general and administrative expenses increased 5% to
$67 million for the quarter ended June 30, 2000 compared to $64 million for the
same period in 1999. Operating, selling, general and administrative expenses
decreased 39% to $128 million for the six months ended June 30, 2000 as compared
to $210 million for the corresponding period of 1999. The increase in expenses
for the quarter ended June 30, 2000 is due to start up losses of True Position,
Inc. which was acquired on January 14, 2000. The decrease in expenses for the
six months ended June 30, 2000 is primarily due to the deconsolidation of TV
Guide on March 1, 1999.
Depreciation and amortization increased $33 million to $162 million for
the quarter ended June 30, 2000 from $129 million for the corresponding period
in 1999 due to recent acquisitions. Depreciation and amortization increased $97
million to $288 million for the six months ended June 30, 2000 from $191 million
for the corresponding period in 1999. The increase for the six months ended June
30, 2000 was a result of the effects of purchase accounting adjustments related
to the AT&T merger as well as recent 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 and, ultimately, on the final determination of market
value when the rights are exercised.
Other Income and Expense. Interest expense for the quarters ended June
30, 2000 and June 30, 1999 was $100 million and $33 million, respectively.
Interest expense was $175 million, $46 million and $26 million for the six month
period ending June 30, 2000, the four month period ending June 30, 1999 and the
two month period ending February 28, 1999, respectively. The increase in
interest expense is due to increased borrowings during 1999 and the first
quarter of 2000.
The carrying amount of Liberty's senior exchangeable debentures in
excess of the principal amount is based on the fair value of the underlying
Sprint PCS Group Stock. The increase or decrease in this excess amount is
recorded as an adjustment to interest expense in the consolidated statement of
operations and comprehensive earnings.
Dividend and interest income for the quarters ended June 30, 2000 and
1999 was $86 million and $82 million, respectively. Dividend and interest income
was $165 million, $106 million and $10 million for the six month period ending
June 30, 2000, the four month period ended June 30, 1999 and the two month
period ending February 28, 1999, respectively. The increase in dividend and
interest income during 2000 primarily represents dividends and interest income
from the investment of the $5.5 billion received in connection with the AT&T
merger.
I-27
<PAGE> 29
Aggregate gains (losses) from dispositions and issuance of equity by
affiliates and subsidiaries during the six month period ended June 30, 2000, the
four month period ended June 30, 1999 and the two month period ended February
28, 1999 were approximately $3.1 billion, $(2) million and $386 million,
respectively. Liberty recognized a gain of $2.2 billion (before deducting
deferred income tax expense of $883 million) during the six months ended June
30, 2000, in connection with the acquisition of General Instrument by Motorola
(see note 4 of the accompanying consolidated financial statements). Liberty also
recognized a $211 million gain (before deducting deferred income taxes of $84
million) during the six months ended June 30, 2000, in connection with the TCI
Satellite Entertainment ("TSAT") transaction (see note 5 of the accompanying
consolidated financial statements). The gain was calculated based on the
difference between the cost basis and fair value of the Sprint PCS Group Stock
exchanged for two series of TSAT preferred stock. Liberty recognized a gain of
$649 million (before deducting deferred income tax expense of $227 million)
during the six months ended June 30, 2000, in connection with the acquisition of
Flextech by Telewest (see note 3 of the accompanying consolidated financial
statements). The gain was calculated based on the difference between the
carrying value of Liberty Media Group's interest in Flextech and the fair value
of the Telewest shares received. Liberty recognized a gain of $372 million
(before deducting deferred income taxes of $147 million) during the two months
ended February 28, 1999, in connection with the acquisition by United Video
Satellite Group of the TV Guide properties (see note 3 of the accompanying
consolidated financial statements).
INVESTMENTS IN AFFILIATES ACCOUNTED FOR UNDER THE EQUITY METHOD
Liberty's share of losses of affiliates for the quarters ended June 30,
2000 and 1999 was $331 million and $279 million, respectively. Liberty's share
of losses of affiliates was $642 million, $359 million and $66 million during
the six month period ending June 30, 2000, the four month period ended June 30,
1999 and the two month period ending February 28, 1999, respectively.
Discovery. Discovery's revenue increased $89 million or 25% from $350
million for the quarter ended June 30, 1999, to $439 million for the quarter
ended June 30, 2000. Discovery's revenue increased $159 million or 25% from $648
million for the six months ended June 30, 1999, to $807 million for the six
months ended June 30, 2000. The increase in revenue resulted from increases in
rates charged to affiliates and increases in advertising rates due to higher
ratings and a generally strong advertising sales market. Subscriber growth at
Discovery's international and developing networks also contributed to the
increase in revenue. Earnings before interest, taxes, depreciation and
amortization ("Operating Cash Flow") increased $10 million or 29% from $34
million for the quarter ended June 30, 1999, to $44 million for the quarter
ended June 30, 2000. Operating Cash Flow increased by $14 million or 20% from
$69 million for the six months ended June 30, 1999, to $83 million for the six
months ended June 30, 2000. The increase in Operating Cash Flow was due to
increases in revenue offset by increased programming and marketing expenses.
Marketing expenses have increased as Discovery continued the rollout of Travel
Channel and launched other developing networks. Discovery's net loss increased
$10 million or 37% from $27 million for the quarter ended June 30, 1999, to $37
million for the quarter ended June 30, 2000. Discovery's net loss increased $63
million or 140% from $45 million for the six months ended June 30, 1999, to $108
million for the six months ended June 30, 2000. The increase in the net loss is
due to increased interest expense and launch amortization due to the company's
efforts to increase launch support related to developing networks. Liberty's
share of Discovery's net loss was approximately $65 million and $60 million for
the quarters ended June 30, 2000 and 1999, respectively. Liberty's share of
Discovery's net loss was approximately $128 million, $76 million and $8 million
for the six month period ended June 30, 2000, the four month period ended June
30, 1999 and the two month period ended February 28, 1999, respectively.
Liberty's share of losses for the six month period ended June 30, 2000, and the
four months ended June 30, 1999 included $93 million and $62 million,
respectively, in amortization related to purchase accounting adjustments
associated with Liberty's investment in Discovery in connection with the AT&T
merger.
I-28
<PAGE> 30
USA Networks, Inc. USA Network's revenue increased $321 million or 41%
from $777 million for the quarter ended June 30, 1999, to $1,098 million for the
quarter ended June 30, 2000. Revenue increased $595 million or 40% from $1,506
million for the six months ended June 30, 1999, to $2,101 million for the six
months ended June 30, 2000. The increase was due to increased advertising
revenue from the networks and studios businesses of USA Networks, increased
revenue from The Hotel Reservation Network acquisition, increased international
electronic retailing revenue due to the Home Order Television acquisition,
increased online ticketing revenue and increased domestic electronic retailing
revenue due to increased sales volume. Operating Cash Flow increased $44 million
or 33% from $135 million for the quarter ended June 30, 1999, to $179 million
for the quarter ended June 30, 2000. Operating Cash Flow increased $91 million
or 33% from $272 million for the six months ended June 30, 1999, to $363 million
for the six months ended June 30, 2000. The increase in Operating Cash Flow was
largely due to the increase in revenue offset by increased cost of goods sold at
the domestic and international electronic retailing units due to the increased
sales and increased expenses associated with USA Networks continued development
of new businesses. USA Network's net loss increased $19 million or 190% from $10
million for the quarter ended June 30, 1999, to $29 million for the quarter
ended June 30, 2000. USA's net loss increased from $2 million for the six months
ended June 30, 1999, to a net loss of $47 million for the six months ended June
30, 2000, representing an increase of $45 million. The increase in net loss is
primarily due to an increase in amortization of goodwill resulting from
acquisitions. Liberty's share of USA Network's net loss was approximately $9
million and $12 million for the quarters ended June 30, 2000 and 1999,
respectively. Liberty's share of USA Networks, Inc.'s net (loss) earnings was
approximately $(16) million, $(9) million and $10 million for the six month
period ended June 30, 2000, the four month period ended June 30, 1999 and the
two month period ended February 28, 1999, respectively. Liberty's share of
losses for the six month period ended June 30, 2000, and the four months ended
June 30, 1999 included $32 million and $21 million, respectively, in
amortization related to purchase accounting adjustments associated with
Liberty's investment in USA Networks in connection with the AT&T merger.
QVC. Revenue increased by $68 million or 10% from $703 million for the
quarter ended June 30, 1999, to $771 million for the quarter ended June 30,
2000. Revenue increased by $167 million or 12% from $1,425 million for the six
months ended June 30, 1999, to $1,592 million for the six months ended June 30,
2000. The increase in revenue is due to increased subscribers for each of QVC's
domestic, U.K. and German operations, as well as an increase in sales per home
at QVC's domestic operations. Operating Cash Flow increased by $12 million or
10% from $122 million for the quarter ended June 30, 1999, to $134 million for
the quarter ended June 30, 2000. Operating Cash Flow increased by 11% or $27
million from $252 million for the six months ended June 30, 1999 to $279 million
for the six months ended June 30, 2000, due to the revenue increase and the
corresponding increase in cost of goods sold, offset further by higher variable
costs and additional costs associated with QVC's expansion in the UK and
Germany. Net earnings increased by $12 million or 27% from $45 million for the
quarter ended June 30, 1999, to $57 million for the quarter ended June 30, 2000.
Net earnings increased by $24 million or 25% to $119 million for the six months
ended June 30, 2000, as compared to $95 million for the six months ended June
30, 1999. The increase in net income was due to the increase in Operating Cash
Flow offset by increased income tax expense. Liberty's share of QVC's net losses
was approximately $4 million and $8 million for the quarters ended June 30, 2000
and 1999, respectively. Liberty's share of QVC's net (losses) earnings was
approximately $(5) million, $(9) million and $13 million for the six month
period ended June 30, 2000, the four month period ended June 30, 1999 and the
two month period ended February 28, 1999, respectively. Liberty's share of
losses for the six month period ended June 30, 2000, and the four month period
ended June 30, 1999 included $55 million and $37 million, respectively, in
amortization related to purchase accounting adjustments associated with
Liberty's investment in QVC in connection with the AT&T merger.
I-29
<PAGE> 31
UnitedGlobalCom, Inc. Liberty's share of UnitedGlobalCom's net loss
was $38 million and $88 million for the quarter and six months ended June 30,
2000, respectively. On September 30, 1999 Liberty purchased 9.9 million class B
shares of UnitedGlobalCom for approximately $493 million in cash. Liberty's
ownership in UnitedGlobalCom is approximately 11% on an economic basis and 37%
on voting basis.
Telewest. Revenue increased by $109 million or 35% from $308 million
for the quarter ended June 30, 1999, to $417 million for the quarter ended June
30, 2000. Revenue increased $186 million or 30%, from $616 million for the six
months ended June 30, 1999, to $802 million for the six months ended June 30,
2000. The increase was primarily due to the acquisition of the Flextech plc in
April 2000 and the acquisition of the remaining 50% of Cable London plc during
the fourth quarter of 1999 and increased cable penetration due to the continued
success of Telewest's low-cost bundled television and telephony services.
Operating Cash Flow decreased by $10 million or 11% from $90 million for the
quarter ended June 30, 1999, to $80 million for the quarter ended June 30, 2000.
Operating Cash Flow decreased $1 million from $173 million for the six months
ended June 30, 1999, to $172 million for the six months ended June 30, 2000. The
decrease in the Operating Cash Flow margin resulted from increased costs during
the first six months of 2000 due to the launch of digital services which
commenced in the last quarter of 1999. Telewest's net loss increased by $51
million or 22% from $229 million for the quarter ended June 30, 1999, to $280
million for the quarter ended June 30, 2000. Telewest's net loss increased $62
million or 13% from $480 million for the six months ended June 30, 1999, to $542
million for the six months ended June 30, 2000. The increase in net loss was
primarily due to increased interest expense and increased depreciation and
amortization expense resulting from acquisitions. Telewest experiences
unrealized foreign currency transaction losses on its U.S. dollar denominated
debentures resulting from the translation of the debentures into UK pounds
sterling and the adjustment of a related foreign currency option contract to
market value. Liberty's share of Telewest's net losses was approximately $81
million and $72 million for the quarters ended June 30, 2000 and 1999,
respectively. Liberty's share of Telewest's net losses was approximately $168
million, $97 million and $38 million for the six month period ended June 30,
2000, the four month period ended June 30, 1999 and the two month period ended
February 28, 1999, respectively. Liberty's share of losses for the six month
period ended June 30, 2000, and the four month period ended June 30, 1999
included $43 million and $29 million, respectively, in amortization related to
purchase accounting adjustments associated with Liberty's investment in Telewest
in connection with the AT&T merger.
LIQUIDITY AND CAPITAL RESOURCES
Liberty's sources of funds include its available cash balances, net
cash from operating activities, dividend and interest receipts, proceeds from
asset sales and proceeds from financing activities. Liberty is a holding company
and as such is generally not entitled to the cash resources or cash generated by
operations of its subsidiaries and business affiliates. Liberty is primarily
dependent upon its financing activities to generate sufficient cash resources to
meet its cash requirements.
In connection with the AT&T merger and other related transactions,
Liberty received approximately $5.5 billion in cash. Also, upon consummation of
the AT&T merger, through a new tax sharing agreement between Liberty and AT&T,
Liberty became entitled to the benefit of all of the net operating loss
carryforwards available to the entities included in TCI's consolidated income
tax return as of the date of the AT&T merger. In addition, under the tax sharing
agreement, Liberty will receive a cash payment from AT&T in periods when it
generates taxable losses and those taxable losses are utilized by AT&T to reduce
the consolidated income tax liability. Additionally, certain warrants held by
TCI were transferred to Liberty in exchange for $176 million in cash.
I-30
<PAGE> 32
At June 30, 2000, Liberty and its consolidated subsidiaries had bank
credit facilities which provided for borrowings of up to $1.2 billion.
Borrowings under these facilities of $924 million were outstanding at June 30,
2000. Certain assets of Liberty's consolidated subsidiaries serve as collateral
for borrowings under these bank credit facilities. Also, these bank credit
facilities contain provisions which limit additional indebtedness, sale of
assets, liens, guarantees, and distributions by the borrowers.
On January 7, 2000, a trust, which holds Liberty's investment in
Sprint, entered into agreements to loan 18 million shares of Sprint PCS Group
stock to a third party, as Agent. The obligation to return those shares is
secured by cash collateral equal to 100% of the market value of that stock.
During the period of the loan, which is terminable by either party at any time,
the cash collateral is to be marked-to-market daily. The trust, for the benefit
of Liberty, has the use of 80% of the cash collateral plus any interest earned
thereon during the term of the loan, and is required to pay a rebate fee equal
to the Federal funds rate less 30 basis points to the borrower of the loaned
shares. The cash collateral of $423 million at June 30, 2000 included $205
million of restricted cash. At June 30, 2000, Liberty had utilized $603 million
of the cash collateral under the securities lending agreement.
On February 2, 2000, Liberty received net cash proceeds of $983 million
from the issuance of its 8-1/4% Senior Debentures due 2030.
On February 10, 2000, Liberty received net cash proceeds of $735
million from the issuance of its 3-3/4% Senior Exchangeable Debentures due 2030.
On March 8, 2000, Liberty received net cash proceeds of $59 million, including
accrued interest from February 10, 2000, from the issuance of an additional $60
million principal amount of its 3-3/4% Senior Exchangeable Debentures due 2030.
There are restrictions on incurrence of debt of Liberty Media Group,
and therefore on Liberty, through an Inter-Group Agreement with AT&T. Liberty
Media Group may not incur any debt that would cause the total indebtedness of
Liberty Media Group at any time to be in excess of 25% ($16 billion at June 30,
2000) of the total market capitalization of the Liberty Media Group tracking
stock, if the excess would adversely affect the credit rating of AT&T.
Various partnerships and other affiliates of Liberty accounted for
under the equity method finance a substantial portion of their acquisitions and
capital expenditures through borrowings under their own credit facilities and
net cash provided by their operating activities.
On April 10, 2000, the Company purchased 50,000 shares of ICG
Communications, Inc. ("ICG") Series A-1 preferred stock and a warrant to
purchase 6.7 million shares of ICG common stock. In exchange, Liberty paid ICG
$485 million, net of a transaction fee.
Liberty holds shares of Time Warner Series LMCN-V common stock, which
are convertible into 114 million shares of Time Warner common stock. Holders of
Time Warner Series LMCN-V common stock are entitled to receive dividends ratably
with Time Warner common stock. Liberty has received approximately $5 million in
cash dividends quarterly from Time Warner. On January 10, 2000, Time Warner
announced its proposed merger with America Online, Inc., pursuant to which each
share of Time Warner Series LMCN-V common stock would be converted into 1.5
shares of an identical series of stock of the combined AOL Time Warner. It is
anticipated that AOL Time Warner will pay dividends on its common stock and
consequently that Liberty will receive dividends on the AOL Time Warner Series
LMCN-V common stock it holds. However, there can be no assurance that such
dividends will continue to be paid.
I-31
<PAGE> 33
Liberty receives approximately $8 million in cash dividends quarterly
on the Fox Kids Worldwide preferred stock. This preferred stock pays quarterly
dividends at the annual rate of 9% of the liquidation value of $1,000 per share.
If Fox Kids Worldwide does not declare or pay a quarterly dividend, that
dividend will be added to the liquidation value and the dividend rate will
increase to 11.5% per annum until all accrued and unpaid dividends are paid.
News Corp. has undertaken to fund all amounts needed by Fox Kids Worldwide to
pay any amounts it is required to pay under the certificate of designations for
the Fox Kids Worldwide preferred stock, including payment of the liquidation
value of that stock upon any optional or mandatory redemption of that stock.
Liberty owns approximately 81.7 million ADRs representing preferred
limited voting shares of News Corp. News Corp. has historically paid cash
dividends on its common stock and it is anticipated that it will continue to do
so. Holders of the ADRs are entitled to receive dividends ratably with News
Corp. common stock, and, consequently, Liberty receives cash dividends on the
ADRs that it holds. However, there can be no assurance that such dividends will
continue to be paid.
On January 5, 2000, Motorola completed the acquisition of General
Instrument through a merger of General Instrument with a wholly owned subsidiary
of Motorola. In the merger, each outstanding share of General Instrument common
stock was converted into the right to receive 1.725 shares of Motorola common
stock. In connection with the merger Liberty received 54 million shares and
warrants to purchase 37 million shares of Motorola common stock in exchange for
its holdings in General Instrument. Motorola has historically paid cash
dividends on its common stock and it is anticipated that it will continue to do
so. Consequently, Liberty expects to receive cash dividends on its shares of
Motorola common stock. However, there can be no assurance that such dividends
will continue to be paid.
Pursuant to a proposed final judgment agreed to by TCI, AT&T and the
United States Department of Justice on December 30, 1998, Liberty transferred
all of its beneficially owned securities of Sprint to a trust prior to the AT&T
merger. The final judgment, which was entered by the United States District
Court for the District of Columbia on August 23, 1999, requires the trustee, on
or before May 23, 2002, to dispose of a portion of the Sprint securities held by
the trust sufficient to cause Liberty to own beneficially no more than 10% of
the outstanding Sprint PCS Group stock that would be outstanding on a fully
diluted basis on such date. On or before May 23, 2004, the trustee must divest
the remainder of the Sprint securities held by the trust. The final judgment
requires the trustee to vote the Sprint securities beneficially owned by Liberty
in the same proportion as other holders of Sprint PCS Group stock so long as
such securities are held by the trust. The final judgment also prohibits the
acquisition by Liberty of additional Sprint securities, with certain exceptions,
without the prior written consent of the Department of Justice.
As of June 30, 2000, the unrealized appreciation, net of taxes, of the
fair value of Liberty's shares of Time Warner Series LMCN-V common stock was
$443 million, based upon the market value of the Time Warner common stock into
which the Time Warner Series LMCN-V common stock is convertible. As of June 30,
2000, the unrealized appreciation, net of taxes, of the fair value of the Sprint
PCS Group stock held by Liberty was $4.6 billion based upon the market value of
such shares.
Liberty has guaranteed notes payable and other obligations of certain
affiliates. At June 30, 2000, the U.S. dollar equivalent of the amounts borrowed
pursuant to these guaranteed obligations aggregated approximately $774 million.
I-32
<PAGE> 34
Liberty intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of June 30, 2000, Starz Encore
Group's future minimum obligation related to certain film licensing agreements
was $1.2 billion. The amount of the total obligation is not currently estimable
because such amount is dependent upon the number of qualifying films released
theatrically by certain motion picture studios as well as the domestic
theatrical exhibition receipts upon the release of such qualifying films.
Continued development may require additional financing and it cannot be
predicted whether Starz Encore Group will obtain such financing. If additional
financing cannot be obtained by Starz Encore Group, Starz Encore Group or
Liberty could attempt to sell assets but there can be no assurance that asset
sales, if any, can be consummated at a price and on terms acceptable to Liberty.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash flows used in operating activities for the six months ended June
30, 2000 and the two months ended February 28, 1999 were $16 million and $107
million, respectively. Cash flows provided by operating activities for the four
month period ended June 30, 1999 were $171 million. Cash used during the six
months ended June 30, 2000 and the two months ended February 28, 1999 included
payments related to stock appreciation rights of $283 million and $126 million,
respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows used in investing activities were $2,286 million, $3,874
million and $79 million for the six months ended June 30, 2000, the four months
ended June 30, 1999 and the two months ended February 28, 1999, respectively.
Liberty is a holding company and as such it uses investing cash flows to make
contributions and investments in entities in which Liberty holds a 50% or less
ownership interest. Cash flows from investing activities were used for
investments in and loans to affiliates amounting to $2,336 million, $434 million
and $51 million during the six months ended June 30, 2000, the four months ended
June 30, 1999 and the two months ended February 28, 1999, respectively.
Investing cash flows were primarily used in the purchase of marketable
securities during the four month period ended June 30, 1999. Liberty made
purchases of marketable securities of $6,172 million during the four month
period ended June 30, 1999. Additionally, Liberty invested $546 million in
acquisitions during the six month period ended June 30, 2000.
CASH FLOWS FROM FINANCING ACTIVITIES
Liberty is primarily dependent on financing activities to generate
sufficient cash resources to meet its cash requirements. Financing cash flows
consist primarily of borrowings and repayments of debt. Liberty had borrowings
of $3 billion, $495 million and $155 million and repayments of $1,123 million,
$463 million and $145 million during the six months ended June 30, 2000, the
four months ended June 30, 1999 and the two months ended February 28, 1999,
respectively.
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<PAGE> 35
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Liberty is exposed to market risk in the normal course of its business
operations due to its investments in different foreign countries and ongoing
investing and financial activities. Market risk refers to the risk of loss
arising from adverse changes in foreign currency exchange rates, interest rates
and stock prices. The risk of loss can be assessed from the perspective of
adverse changes in fair values, cash flows and future earnings. Liberty has
established policies, procedures and internal processes governing its management
of market risks and the use of financial instruments to manage its exposure to
such risks.
Contributions to Liberty's foreign affiliates are denominated in
foreign currency. Liberty therefore is exposed to changes in foreign currency
exchange rates. Currently, Liberty does not hedge any foreign currency exchange
risk because of the long-term nature of its interests in foreign affiliates.
Liberty continually evaluates its foreign currency exposure (primarily the
Argentine Peso, British Pound Sterling, Japanese Yen and French Franc) based on
current market conditions and the business environment.
Liberty is exposed to changes in interest rates primarily as a result
of its borrowing and investment activities, which include fixed and floating
rate investments and borrowings used to maintain liquidity and fund its business
operations. The nature and amount of Liberty's long-term and short-term debt are
expected to vary as a result of future requirements, market conditions and other
factors. As of June 30, 2000, the majority of Liberty's debt was composed of
fixed rate debt resulting from the 1999 and 2000 issuances of notes and
debentures for net proceeds of approximately $3.9 billion. The proceeds were
used to repay floating rate debt, which reduced Liberty's exposure to interest
rate risk associated with rising variable interest rates. Had market interest
rates been 1% higher throughout the six months ended June 30, 2000 and 1999,
Liberty would have recorded approximately $7 million and $9 million of
additional interest expense, respectively. At June 30, 2000, the aggregate fair
value of Liberty's notes and debentures was $4.4 billion.
Liberty is exposed to changes in stock prices primarily as a result of
its significant holdings in publicly traded securities. Liberty continually
monitors changes in stock markets, in general, and changes in the stock prices
of its significant holdings, specifically. Changes in stock prices can be
expected to vary as a result of general market conditions, technological
changes, specific industry changes and other factors. Equity collars and equity
swaps have been used to hedge certain investment positions subject to
fluctuations in stock prices.
In order to illustrate the effect of changes in stock prices on Liberty
we provide the following sensitivity analysis. Had the stock price of our
investments accounted for as available-for-sale securities been 10% lower at
June 30, 2000, and December 31, 1999, the value of such securities would have
been lower by $2.6 billion and $2.4 billion, respectively. Our unrealized gains,
net of taxes would have also been lower by $1.6 billion and $1.5 billion,
respectively. Had the stock price of our publicly traded investments accounted
for using the equity method been 10% lower at June 30, 2000 and 1999, there
would have been no impact on the carrying value of such investments. Had the
stock price of the Sprint PCS Group stock underlying Liberty's senior
exchangeable debentures been 10% higher at June 30, 2000, Liberty's total debt
and correspondingly, Liberty's interest expense would have been higher by $198
million. Liberty's cash collateral account under the Securities lending
agreement would be reduced by $103 million if the underlying shares of Sprint
PCS decreased in value by 10%.
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<PAGE> 36
Liberty measures the market risk of its derivative financial
instruments through comparison of the blended rates achieved by those derivative
financial instruments to the historical trends in the underlying market risk
hedged. With regard to interest rate swaps, Liberty monitors the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. Liberty believes
that any losses incurred with regard to interest rate swaps would be offset by
the effects of interest rate movements on the underlying hedged facilities. With
regard to equity collars and hedges, Liberty monitors historical market trends
relative to values currently present in the market. Liberty believes that any
unrealized losses incurred with regard to equity collars and swaps would be
offset by the effects of fair value changes on the underlying hedged assets.
These measures allow Liberty's management to measure the success of its use of
derivative instruments and to determine when to enter into or exit from
derivative instruments.
I-35
<PAGE> 37
LIBERTY MEDIA CORPORATION
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit -
(27) Liberty Media Corporation Financial Data Schedule
(b) Reports on Form 8-K filed during the quarter ended
June 30, 2000:
<TABLE>
<CAPTION>
Date of Items
Report Reported Financial Statements Filed
------- -------- --------------------------
<S> <C> <C> <C>
None.
</TABLE>
II-1
<PAGE> 38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY MEDIA CORPORATION
Date: August 11, 2000 By: /s/ Charles Y. Tanabe
-----------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel
Date: August 11, 2000 By: /s/ Kathryn Scherff
-----------------------------
Kathryn Scherff
Vice President and Controller
(Principal Financial Officer
and Principal Accounting
Officer)
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<PAGE> 39
EXHIBIT INDEX
The following exhibit is filed herewith (according to the number assigned to it
in Item 601 of Regulation S-K) as noted:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
(27) Liberty Media Corporation Financial Data Schedule
</TABLE>
II-3
