<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 September 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>
September 30, December 31,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,223 1,714
Cash collateral under securities lending agreement (note 6) 208 --
Short-term investments 461 378
Trade and other receivables, net 330 116
Prepaid expenses and committed program rights 501 405
Deferred income tax assets 496 750
Other current assets 22 5
--------------- ---------------
Total current assets 3,241 3,368
--------------- ---------------
Investments in affiliates, accounted for under the equity method, and
related receivables (note 3) 20,416 15,922
Investments in available-for-sale securities and others
(notes 4, 5 and 6) 26,063 28,593
Property and equipment, at cost 828 162
Less accumulated depreciation 91 19
--------------- ---------------
737 143
--------------- ---------------
Intangible assets:
Excess cost over acquired net assets (note 5) 11,094 9,966
Franchise costs 190 273
--------------- ---------------
11,284 10,239
Less accumulated amortization 882 454
--------------- ---------------
10,402 9,785
--------------- ---------------
Other assets, at cost, net of accumulated amortization 719 839
--------------- ---------------
Total assets $ 61,578 58,650
=============== ===============
</TABLE>
(continued)
I-1
<PAGE> 3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
(subsidiary of AT&T Corp.)
Consolidated Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable and accrued liabilities $ 382 245
Accrued stock compensation 1,706 2,405
Program rights payable 179 166
Current portion of debt 237 554
--------------- ---------------
Total current liabilities 2,504 3,370
--------------- ---------------
Long-term debt (note 6) 5,632 2,723
Deferred income tax liabilities 14,220 14,103
Other liabilities 74 23
--------------- ---------------
Total liabilities 22,430 20,219
--------------- ---------------
Minority interests in equity of subsidiaries 260 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 34,263 33,838
Accumulated other comprehensive earnings, net of taxes 3,054 6,518
Retained earnings (accumulated deficit) 1,941 (1,975)
--------------- ---------------
39,258 38,381
Due to (from) related parties (370) 27
--------------- ---------------
Total stockholder's equity 38,888 38,408
--------------- ---------------
Commitments and contingencies (note 8)
Total liabilities and stockholder's equity $ 61,578 $ 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
September 30, September 30,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Revenue $ 436 214
Operating costs and expenses:
Operating, selling, general and
administrative 336 168
Stock compensation (248) (23)
Depreciation and amortization 201 164
--------------- ---------------
289 309
--------------- ---------------
Operating income (loss) 147 (95)
Other income (expense):
Interest expense (101) (41)
Adjustment to interest expense for contingent portion of
exchangeable debentures (note 6) 317 --
Dividend and interest income 59 65
Share of losses of affiliates, net (note 3) (375) (238)
Impairment of investments (40) --
Minority interests in losses of subsidiaries 20 6
Gains on dispositions, net (note 3) 4,395 12
Unrealized losses on financial instruments, net (77) --
Other, net (4) (2)
--------------- ---------------
4,194 (198)
--------------- ---------------
Earnings (loss) before income taxes 4,341 (293)
Income tax (expense) benefit (1,720) 80
--------------- ---------------
Net earnings (loss) $ 2,621 (213)
--------------- ---------------
Other comprehensive (loss) earnings, net of taxes:
Foreign currency translation adjustments (75) 131
Unrealized holding (losses) gains arising during the period,
net of reclassification adjustments (1,855) 313
--------------- ---------------
Other comprehensive (loss) earnings (1,930) 444
--------------- ---------------
Comprehensive earnings $ 691 231
=============== ===============
</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)
Nine months Seven months Two months
ended ended ended
September 30, September 30, February 28,
2000 1999 1999
--------------- --------------- ---------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 1,053 506 235
Operating costs and expenses:
Operating, selling, general and administrative 805 408 188
Stock compensation (487) 432 183
Depreciation and amortization 604 394 22
--------------- --------------- ---------------
922 1,234 393
--------------- --------------- ---------------
Operating income (loss) 131 (728) (158)
Other income (expense):
Interest expense (276) (87) (26)
Adjustment to interest expense for contingent portion
of exchangeable debentures (note 6) 153 -- --
Dividend and interest income 224 171 10
Share of losses of affiliates, net (note 3) (1,017) (597) (66)
Impairment of investments (40) -- --
Minority interests in losses of subsidiaries 44 18 4
Gains on dispositions, net (notes 3, 4 and 5) 7,447 10 14
Gains on issuance of equity by affiliates and
subsidiaries (note 3) -- -- 372
Unrealized losses on financial instruments, net (77) -- --
Other, net 3 (6) (9)
--------------- --------------- ---------------
6,461 (491) 299
--------------- --------------- ---------------
Earnings (loss) before income taxes 6,592 (1,219) 141
Income tax (expense) benefit (2,676) 405 (211)
--------------- --------------- ---------------
Net earnings (loss) $ 3,916 (814) (70)
--------------- --------------- ---------------
Other comprehensive (loss) earnings, net of taxes:
Foreign currency translation adjustments (193) 88 (15)
Unrealized holding (losses) gains arising during the
period, net of reclassification adjustments (3,271) 2,319 885
--------------- --------------- ---------------
Other comprehensive (loss) earnings (3,464) 2,407 870
--------------- --------------- ---------------
Comprehensive earnings $ 452 1,593 800
=============== =============== ===============
</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>
Common stock Additional
Preferred -------------------------------- paid-in
stock Class A Class B Class C capital
--------- --------- --------- --------- ---------------
amounts in millions
<S> <C> <C> <C> <C> <C>
Balance at January 1, 2000 $ -- -- -- -- 33,838
Net earnings -- -- -- -- --
Foreign currency translation adjustments -- -- -- -- --
Recognition of previously unrealized gains
on available-for-sale securities, net -- -- -- -- --
Unrealized losses on available-for-sale
securities -- -- -- -- --
Issuances of common stock by subsidiaries and
affiliates, net of taxes -- -- -- -- 326
Contribution to equity from related party for
acquisitions, net (note 5) -- -- -- -- 184
Utilization of net operating losses of
Liberty by AT&T -- -- -- -- (4)
Note receivable from related party -- -- -- -- --
Other transfers (to) from related parties, net -- -- -- -- (81)
--------- --------- --------- --------- ---------------
Balance at September 30, 2000 $ -- -- -- -- 34,263
========= ========= ========= ========= ===============
<CAPTION>
Accumulated
other Due to
comprehensive Retained (from) Total
earnings, earnings related stockholder's
net of taxes (deficit) parties equity
--------------- -------- -------- ---------------
amounts in millions
<S> <C> <C> <C> <C>
Balance at January 1, 2000 6,518 (1,975) 27 38,408
Net earnings -- 3,916 -- 3,916
Foreign currency translation adjustments (193) -- -- (193)
Recognition of previously unrealized gains
on available-for-sale securities, net (1,479) -- -- (1,479)
Unrealized losses on available-for-sale
securities (1,792) -- -- (1,792)
Issuances of common stock by subsidiaries and
affiliates, net of taxes -- -- -- 326
Contribution to equity from related party for
acquisitions, net (note 5) -- -- -- 184
Utilization of net operating losses of
Liberty by AT&T -- -- -- (4)
Note receivable from related party -- -- (485) (485)
Other transfers (to) from related parties, net -- -- 88 7
--------------- -------- -------- ---------------
Balance at September 30, 2000 3,054 1,941 (370) 38,888
</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)
Nine months Seven months Two months
ended ended ended
September 30, September 30, February 28,
2000 1999 1999
--------------- --------------- ---------------
amounts in millions
<S> <C> <C> <C>
Cash flows from operating activities: (note 2)
Net earnings (loss) $ 3,916 (814) (70)
Adjustments to reconcile net earnings (loss) to net cash used by
operating activities:
Depreciation and amortization 604 394 22
Stock compensation (487) 432 183
Payments of stock compensation (292) (42) (126)
Share of losses of affiliates, net 1,017 597 66
Deferred income tax expense (benefit) 2,721 (356) 212
Intergroup tax allocation (45) (49) (1)
Cash receipts from AT&T pursuant to tax sharing agreement 138 19 --
Minority interests in losses of subsidiaries (44) (18) (4)
Gains on disposition of assets, net (7,447) (10) (14)
Impairment of investments 40 -- --
Noncash interest (143) -- --
Gains on issuance of equity by affiliates and subsidiaries -- -- (372)
Other noncash charges -- 5 18
Changes in operating assets and liabilities, net of the effect
of acquisitions and dispositions:
Change in receivables (73) (3) 33
Change in prepaid expenses and committed program rights (110) (120) (23)
Change in payables and accruals 41 70 (31)
--------------- --------------- ---------------
Net cash (used) provided by operating activities (164) 105 (107)
--------------- --------------- ---------------
Cash flows from investing activities:
Cash paid for acquisitions (669) (3) --
Capital expended for property and equipment (130) (28) (15)
Investments in and loans to affiliates and others (2,496) (1,952) (51)
Purchases of marketable securities (832) (6,894) (3)
Sales and maturities of marketable securities 1,720 3,923 9
Cash proceeds from dispositions 364 90 43
Cash balances of deconsolidated subsidiaries -- -- (53)
Other, net 4 1 (9)
--------------- --------------- ---------------
Net cash used by investing activities (2,039) (4,863) (79)
--------------- --------------- ---------------
Cash flows from financing activities:
Borrowings of debt 3,620 2,216 155
Repayments of debt (1,768) (2,166) (145)
Cash transfers to related parties, net (145) (156) 31
Net proceeds from issuance of stock by subsidiaries 33 27 --
Repurchase of stock of subsidiary -- -- (45)
Other, net (28) 17 (7)
--------------- --------------- ---------------
Net cash provided (used) by financing activities 1,712 (62) (11)
--------------- --------------- ---------------
Net decrease in cash and cash equivalents (491) (4,820) (197)
Cash and cash equivalents at beginning of year 1,714 5,319 228
--------------- --------------- ---------------
Cash and cash equivalents at end of year $ 1,223 499 31
=============== =============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
I-6
<PAGE> 8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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 $262 million, $75 million and $32 million
for the nine months ended September 30, 2000, the seven months ended
September 30, 1999 and the two months ended February 28, 1999,
respectively. Cash paid for income taxes during the nine months ended
September 30, 2000, the seven months ended September 30, 1999 and the
two months ended February 28, 1999 was not significant.
<TABLE>
<CAPTION>
New Liberty Old Liberty
---------------------------------- ----------------
(note 1) (note 1)
Nine months Seven months Two months
ended ended ended
September 30, September 30, February 28,
2000 1999 1999
--------------- --------------- ---------------
amounts in millions
<S> <C> <C> <C>
Cash paid for acquisitions (note 5):
Fair value of assets acquired $ 2,224 5 --
Net liabilities assumed (1,120) (2) --
Deferred tax asset recorded 219 -- --
Minority interests in equity of
acquired subsidiaries (470) -- --
Contribution to equity for
acquisitions (184) -- --
--------------- --------------- ---------------
Cash paid for acquisitions $ 669 3 --
=============== =============== ===============
</TABLE>
On August 7, 2000, Liberty transferred its investment in ICG to a
related party in exchange for a note receivable from the related party
in the amount of $485 million (see note 7).
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>
September 30, December 31,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Gemstar-TV Guide International, Inc. ("Gemstar") $ 6,030 --
Discovery Communications, Inc. ("Discovery") 3,222 3,441
Telewest Communications plc ( "Telewest ") 2,869 1,996
USA Networks, Inc. ( "USAI ") and related
investments 2,847 2,699
QVC Inc. ( "QVC ") 2,515 2,515
UnitedGlobalCom, Inc. ("UnitedGlobalCom") 402 505
TV Guide -- 1,732
Various foreign equity investments (other than
Telewest) 1,648 2,190
Other 883 844
--------------- ---------------
$ 20,416 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 (losses) earnings of
affiliates:
<TABLE>
<CAPTION>
New Liberty Old Liberty
---------------------------------- ---------------
(note 1) (note 1)
Nine months Seven months Two months
ended ended ended
September 30, September 30, February 28,
2000 1999 1999
--------------- --------------- ---------------
amounts in millions
<S> <C> <C> <C>
Gemstar $ (71) -- --
Discovery (219) (154) (8)
Telewest (262) (154) (38)
USAI and related investments (18) (13) 10
QVC -- (17) 13
UnitedGlobalCom (132) -- --
TV Guide (25) (24) --
Various foreign investments (other
than Telewest) (219) (123) (27)
Other (71) (112) (16)
--------------- --------------- ---------------
$ (1,017) (597) (66)
=============== =============== ===============
</TABLE>
Summarized unaudited combined financial information for affiliates is
as follows:
<TABLE>
<CAPTION>
Nine months Seven months Two months
ended ended ended
September 30, September 30, February 28,
2000 1999 1999
--------------- --------------- ---------------
amounts in millions
<S> <C> <C> <C>
Revenue $ 11,459 6,947 2,341
Operating expenses (10,115) (5,901) (1,894)
Depreciation and amortization (2,277) (929) (353)
--------------- --------------- ---------------
Operating income (loss) (933) 117 94
Interest expense (1,463) (558) (281)
Other, net 246 (322) (127)
--------------- --------------- ---------------
Net loss $ (2,150) (763) (314)
=============== =============== ===============
</TABLE>
(continued)
I-10
<PAGE> 12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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).
On July 12, 2000, TV Guide and Gemstar completed a merger whereby
Gemstar acquired TV Guide. TV Guide shareholders received .6573 shares
of Gemstar common stock in exchange for each share of TV Guide. As a
result of this transaction, 133 million shares of TV Guide held by
Liberty were exchanged for 87.5 million shares of Gemstar common stock.
Following the merger, Liberty owns approximately 21.4% of Gemstar.
Liberty recognized a $4.4 billion gain (before deducting deferred
income taxes of $1.7 billion) on such transaction during the third
quarter of 2000 based on the difference between the carrying value of
Liberty's interest in TV Guide and the fair value of the Gemstar
securities received.
Gemstar is a leading global technology and media company focused on
consumer entertainment. The common stock of Gemstar is publicly traded.
At September 30, 2000, Liberty held 87.5 million shares of Gemstar
common stock. Gemstar's stock reported a closing price of $87-3/16 per
share on September 30, 2000.
Telewest currently operates and constructs cable television and
telephone systems in the UK. Flextech p.l.c. ("Flextech") develops and
sells a variety of television programming in the UK. In April 2000,
Telewest acquired Flextech. As a result, each share of Flextech was
exchanged for 3.78 new Telewest shares. Prior to the acquisition,
Liberty owned an approximate 37% equity interest in Flextech and a 22%
equity interest in Telewest. As a result of the acquisition, Liberty
owns an approximate 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
September 30, 2000 Liberty indirectly owned 724 million of the issued
and outstanding Telewest ordinary shares. Telewest's ordinary shares
reported a closing price of $1.95 per share on September 30, 2000.
(continued)
I-11
<PAGE> 13
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 September 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 million shares of USAI common stock. Liberty's
direct ownership of USAI is currently restricted by Federal
Communications Commission ("FCC") regulations. The exchange of the
shares of subsidiaries can be accomplished only if there is a change to
existing regulations or if Liberty obtains permission from the FCC. If
the exchange of subsidiary stock into USAI common stock was completed
at September 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 $21-15/16 per share on
September 30, 2000.
UnitedGlobalCom is a global broadband communications provider of video,
voice and data services with operations in over 20 countries throughout
the world. At September 30, 2000, Liberty owned an approximate 10.9%
economic ownership interest representing an approximate 36.8% voting
interest in UnitedGlobalCom. Liberty owns 10.5 million shares of
UnitedGlobalCom Class B common stock, which stock is convertible, on a
one-for-one basis, into UnitedGlobalCom Class A common stock.
UnitedGlobalCom's Class A common stock reported a closing price of
$30.00 per share on September 30, 2000.
The $15 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 principally over estimated useful lives
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>
September 30, December 31,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Sprint Corporation ("Sprint PCS") $ 7,580 10,186
Time Warner, Inc. ("Time Warner") 8,842 8,202
News Corp. 3,748 2,403
Motorola, Inc. ("Motorola") 2,146 3,430
Other available-for-sale securities 2,951 3,765
Other investments, at cost, and related receivables 1,257 985
--------------- ---------------
26,524 28,971
Less short-term investments 461 378
--------------- ---------------
$ 26,063 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
connection with the merger Liberty received 54 million shares and
warrants to purchase 37 million shares of Motorola common stock in
exchange for its holdings in General Instrument. Liberty recognized a
$2.2 billion gain (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.
(continued)
I-12
<PAGE> 14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The right to exercise warrants to purchase 18.4 million shares 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 for
each warrant that does not vest as a result of the purchase commitment
not being met.
Investments in available-for-sale securities are summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
amounts in millions
<S> <C> <C>
Equity securities:
Fair value $ 23,958 24,464
Gross unrealized holding gains 7,144 11,453
Gross unrealized holding losses (2,013) (646)
Debt securities:
Fair value 1,109 1,995
Gross unrealized holding gains -- --
Gross unrealized holding losses (9) (22)
</TABLE>
Management estimates the fair market value of all of its investments in
available-for-sale securities and others aggregated $26.8 billion and
$29.2 billion at September 30, 2000 and December 31, 1999,
respectively. Management calculates market values using a variety of
approaches including multiple of cash flow, per subscriber value, a
value of comparable public or private businesses or publicly quoted
market prices. No independent appraisals were conducted for those
assets.
(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 common stock and AT&T Class A
Liberty Media Group common 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 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.
(continued)
I-13
<PAGE> 15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
On March 16, 2000, Liberty purchased shares of preferred stock in TCI
Satellite Entertainment, Inc. in exchange for Liberty's economic
interest in approximately 5 million shares of Sprint PCS Group Stock,
valued at $300 million. During the third quarter of 2000, TCI Satellite
Entertainment, Inc. changed its name to Liberty Satellite & Technology,
Inc. ("LSAT"). Liberty received 150,000 shares of LSAT Series A 12%
Cumulative Preferred Stock and 150,000 shares of LSAT Series B 8%
Cumulative Convertible Voting Preferred Stock. The Series A preferred
stock does not have voting rights, while the Series B preferred stock
gives Liberty approximately 85% of the voting power of LSAT. In
connection with this transaction, Liberty realized a $211 million gain
(before related tax expense of $84 million) 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.
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 $252 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 common
stock and a warrant to purchase approximately 700,000 shares of AT&T
Class A Liberty Media Group common stock at an exercise price of $23
per share. The acquisition was accounted for as a purchase. In
connection with the AT&T Class A Liberty Media Group common stock
issued in this transaction, Liberty recorded a $145 million increase to
paid-in-capital and the $276 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 common stock. The
acquisition was accounted for as a purchase. In connection with the
AT&T Class A Liberty Media Group common stock issued in this
transaction, Liberty recorded a $108 million increase to
paid-in-capital and the $96 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.
(continued)
I-14
<PAGE> 16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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").
On July 19, 2000, Liberty purchased all of the assets relating to the
post production, content and sound editorial businesses of Soundelux
Entertainment Group ("Soundelux") for $90 million. Immediately
following such transaction, the assets of Soundelux were contributed to
Liberty Livewire in exchange for approximately 8.2 million additional
shares of Liberty Livewire Class B Common Stock. Following this
contribution, Liberty's ownership in Liberty Livewire increased to
approximately 88% of the equity and approximately 99% of the voting
power of Liberty Livewire outstanding immediately following the
contribution.
(6) Long-Term Debt
Debt is summarized as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Parent company debt:
Senior notes (a) $ 741 741
Senior debentures (a) 1,486 494
Senior exchangeable debentures (b) 1,679 1,022
Securities lending agreement (c) 595 --
Bank credit facilities 177 390
--------------- ---------------
4,678 2,647
Debt of subsidiaries:
Bank credit facilities 924 573
Senior notes 174 --
Other debt, at varying rates 93 57
--------------- ---------------
1,191 630
--------------- ---------------
Total debt 5,869 3,277
Less current maturities 237 554
--------------- ---------------
Total long-term debt $ 5,632 2,723
=============== ===============
</TABLE>
(a) On July 7, 1999, Liberty received net cash proceeds of
approximately $741 million and $494 million from the issuance
of 7-7/8% Senior Notes due 2009 (the "Senior Notes") and
8-1/2% Senior Debentures due 2029 (the "8-1/2% Senior
Debentures"), respectively. The Senior Notes, which are stated
net of an unamortized discount of $9 million, have an
aggregate principal amount of $750 million and the 8-1/2%
Senior Debentures, which are stated net of an unamortized
discount of $6 million, have an aggregate principal amount of
$500 million. Interest on the Senior Notes and the 8-1/2%
Senior Debentures is payable on January 15 and July 15 of each
year.
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 "8-1/4% Senior Debentures"). The
8-1/4% Senior Debentures, which are stated net of an
unamortized discount of $8 million, have an aggregate
principal amount of $1 billion. Interest on the 8-1/4% Senior
Debentures is payable on February 1 and August 1 of each year.
(continued)
I-15
<PAGE> 17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) On November 16, 1999, Liberty received net cash proceeds of
$854 million from the issuance of 4% Senior Exchangeable
Debentures due 2030 (the "4% Senior Exchangeable
Debentures"). The 4% Senior Exchangeable Debentures have an
aggregate principal amount of $869 million. Each debenture
has a $1,000 face amount and is exchangeable at the holder's
option for the value of 22.9486 shares of Sprint PCS Group
Stock. This exchange value will be paid only in cash until
the later of December 31, 2001 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 exchange value in
cash, Sprint PCS Group Stock or a combination thereof.
Interest on the 4% Senior Exchangeable Debentures is payable
on May 15 and November 15 of each year.
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 (the
"3-3/4% Senior Exchangeable Debentures"). 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. 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 exchange value 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 exchange value in cash, Sprint
PCS Group Stock or a combination thereof. Interest on the
3-3/4% Senior Exchangeable Debentures is payable on February
15 and August 15 of each year.
The carrying amount of the senior exchangeable debentures is
adjusted based on the fair value of the underlying Sprint PCS
Group Stock. Increases or decreases in the value of the
underlying Sprint PCS Group Stock above the principal amount
of the senior exchangeable debentures (the "Contingent
Portion") is recorded as an adjustment to interest expense in
the consolidated statements of operations and comprehensive
earnings. If the value of the underlying Sprint PCS Group
Stock decreases below the principal amount of the senior
exchangeable debentures there is no effect on the principal
amount of such debentures.
(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, which was $595 million at September 30, 2000. 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 unutilized cash
collateral of $208 million at September 30, 2000 included
$105 million of restricted cash. At September 30, 2000,
Liberty had utilized $387 million of the cash collateral
under the securities lending agreement.
(continued)
I-16
<PAGE> 18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
At September 30, 2000, Liberty had approximately $414 million in unused
lines of credit under its bank credit facilities. The bank credit
facilities generally contain restrictive covenants which require the
borrowers and certain of their subsidiaries to maintain certain
financial ratios, and include limitations on indebtedness, liens,
encumbrances, acquisitions, dispositions, guarantees and dividends.
Liberty was in compliance with its debt covenants at September 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
September 30, 2000 is as follows (amounts in millions):
<TABLE>
<S> <C>
Senior notes of parent company $ 738
Senior debentures of parent company 1,415
Senior exchangeable debentures of parent company 1,448
Senior notes of subsidiary 188
</TABLE>
Liberty believes that the carrying amount of the remainder of its debt
approximated its fair value at September 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
September 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 September 30, 2000, all of the issued and outstanding common
stock of Liberty was held by AT&T.
Stock Issuances of Subsidiaries and Equity Affiliates
During the nine months ended September 30, 2000, consolidated
subsidiaries and equity affiliates of Liberty issued shares of common
stock in connection with certain acquisitions and the exercise of
certain employee stock options. In connection with the increase in the
issuers' equity, net of the dilution of Liberty's ownership interest,
that resulted from such stock issuances, Liberty recorded increases to
additional paid-in-capital as follows (amounts in millions):
<TABLE>
<S> <C>
Stock issuances by consolidated subsidiaries $ 225
Stock issuances by equity affiliates (net of
deferred tax expense of $55 million) 101
--------
$ 326
========
</TABLE>
(continued)
I-17
<PAGE> 19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
In September 2000, certain officers of Liberty purchased a 6% common
stock interest in a subsidiary for $1.3 million. Such subsidiary owns
an indirect interest in an entity that holds certain of Liberty's
investments in satellite and technology related assets. Liberty and the
officers entered into a shareholders agreement in which the officers
could require a subsidiary of Liberty to purchase, after five years,
all or part of their common stock interest in exchange for AT&T Class A
Liberty Media Group common stock at the then fair market value. In
addition, Liberty has the right to repurchase the common stock
interests held by the officers at fair market value at any time.
Transactions with AT&T
Certain subsidiaries of Liberty produce and/or distribute programming
and other services to cable distribution operators (including AT&T) and
others. Charges to AT&T are based upon customary rates charged to
others. Amounts included in revenue for services provided to AT&T were
$184 million, $125 million and $43 million for the nine months ended
September 30, 2000, the seven months ending September 30, 1999 and the
two month period ending February 28, 1999, respectively.
AT&T allocates certain corporate general and administrative costs to
Liberty pursuant to an intergroup agreement. Management believes such
allocation methods are reasonable. In addition, there are arrangements
between subsidiaries of Liberty and AT&T and its other subsidiaries for
satellite transponder services, marketing support, programming, and
hosting services. These expenses aggregated $26 million, $21 million
and $3 million during the nine months ended September 30, 2000, the
seven months ended September 30, 1999 and the two months ended February
28, 1999, respectively, and are included in operating, selling, general
and administrative expenses in the accompanying consolidated statements
of operations and comprehensive earnings.
Due to (from) Related Parties
The components of "Due to (from) related parties" are as follows:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
--------------- ---------------
amounts in millions
<S> <C> <C>
Note receivable from related party $ (485) --
Intercompany account 115 27
--------------- ---------------
$ (370) 27
=============== ===============
</TABLE>
(continued)
I-18
<PAGE> 20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During the third quarter of 2000, Liberty transferred its interest in
ICG Communications, Inc. ("ICG") to a related party for $485 million
which was equal to Liberty's carrying value of ICG. No gain or loss was
recognized due to the related party nature of such transaction. In
exchange for its interest in ICG, Liberty received a note receivable
from the related party, which bears interest at 8.5% and is due and
payable in 2010. Interest on the note receivable will be received
semi-annually beginning during the first quarter of 2006.
The non-interest bearing intercompany account includes income tax
allocations that are to be settled at some future date. All other
amounts included in the intercompany account are 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 2013 (the "Film Licensing Obligations"). Based on customer
levels at September 30, 2000, these agreements require minimum payments
aggregating approximately $1.3 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 September 30, 2000, the Guaranteed Obligations
aggregated approximately $583 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 PCS Securities") of Sprint PCS 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 PCS Securities sufficient
to cause Liberty to beneficially own no more than 10% of the
outstanding Sprint PCS Group common stock-Series 1 on a fully diluted
basis on such date. On or before May 23, 2004, the Trustee must divest
the remainder of the Sprint PCS Securities beneficially owned by
Liberty.
The Final Judgment requires that the Trustee vote the Sprint PCS
Securities beneficially owned by Liberty in the same proportion as
other holders of Sprint's PCS Group Common Stock so long as such
securities are held by the trust. The Final Judgment also prohibits the
acquisition by Liberty of additional Sprint PCS 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.
(continued)
I-19
<PAGE> 21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 nine months ended September 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.
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.
(continued)
I-20
<PAGE> 22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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>
Nine months ended September 30, 2000
Segment revenue $ 542 170 135 206 1,053
Segment operating cash flow 182 21 37 8 248
As of September 30, 2000
Segment assets 2,620 958 321 57,679 61,578
Investments in affiliates -- -- -- 20,416 20,416
Seven months ended September 30, 1999
Segment revenue 372 -- -- 134 506
Segment operating cash flow (deficit) 93 -- -- 5 98
Two months ended February 28, 1999
Segment revenue $ 101 -- -- 134 235
Segment operating cash flow 41 -- -- 6 47
</TABLE>
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)
Nine months Seven months Two months
ended ended ended
September 30, September 30, February 28,
2000 1999 1999
--------------- --------------- ---------------
amounts in millions
<S> <C> <C> <C>
Segment operating cash flow $ 248 98 47
Stock compensation 487 (432) (183)
Depreciation and amortization (604) (394) (22)
Interest expense (276) (87) (26)
Segment equity in losses of
affiliates (1,017) (597) (66)
Gains on dispositions, net 7,447 10 14
Gain on issuance of equity by
affiliates and subsidiaries -- -- 372
Other, net 307 183 5
--------------- --------------- ---------------
Earnings (loss) before income taxes $ 6,592 (1,219) 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.
AT&T's Liberty Media Group common stock is a tracking stock designed to
reflect the economic performance of the businesses and assets of AT&T attributed
to the "Liberty Media Group." We are included in the Liberty Media Group, and
the businesses and assets of Liberty and its subsidiaries constitute
substantially all of the businesses and assets of the Liberty Media Group.
Liberty's domestic subsidiaries generally operate or hold interests in
businesses which provide programming services including production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software. In
addition, certain of Liberty's subsidiaries hold interests in technology and
Internet businesses, as well as interests in businesses engaged in wireless
telephony, electronic retailing, direct marketing and advertising sales relating
to programming services, infomercials and transaction processing. Liberty also
has significant interests in foreign affiliates, which operate in cable
television, programming and satellite distribution.
Liberty's most significant consolidated subsidiaries at September 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 September 30, 2000 were USA Networks, Inc.,
Discovery Communications, Inc., Gemstar-TV Guide International, Inc. (successor
to 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 PCS, The News Corporation
Limited and Motorola, Inc. The investments in Time Warner, Sprint PCS Group, the
majority of the News Corporation interest and Motorola 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
September 30, total September 30, total
2000 revenue 1999 revenue
--------------- --------------- --------------- ---------------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Starz Encore Group
Revenue $ 189 100% $ 161 100%
Operating, selling, general and
administrative 124 66 121 75
Stock compensation -- -- 4 3
Depreciation and amortization 39 20 44 27
--------------- --------------- --------------- ---------------
Operating income (loss) $ 26 14% $ (8) (5)%
=============== =============== =============== ===============
Liberty Livewire
Revenue $ 101 100% $ -- --
Operating, selling, general and
administrative 91 90 -- --
Stock compensation (24) (24) -- --
Depreciation and amortization 20 20 -- --
--------------- --------------- --------------- ---------------
Operating income $ 14 14% $ -- --
=============== =============== =============== ===============
On Command
Revenue $ 69 100% $ -- --
Operating, selling, general and
administrative 51 74 -- --
Depreciation and amortization 22 32 -- --
--------------- --------------- --------------- ---------------
Operating loss $ (4) (6)% $ -- --
=============== =============== =============== ===============
Other
Revenue $ 77 (a) $ 53 (a)
Operating, selling, general and
administrative 70 47
Stock compensation (224) (27)
Depreciation and amortization 120 120
--------------- ---------------
Operating income (loss) $ 111 $ (87)
=============== ===============
</TABLE>
---------
(a) Not meaningful.
Due to the consummation of the AT&T merger, Liberty's statements of
operations include information reflecting the nine month period ended September
30, 2000, the seven month period ended September 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
------------------------------------------------------------- ---------------------------
Nine months Seven months Two months
ended % of ended % of ended % of
September 30, total September 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 $ 542 100% $ 372 100% $ 101 100%
Operating, selling, general and
administrative 360 66 279 75 60 59
Stock compensation 5 1 4 1 3 3
Depreciation and amortization 118 22 104 28 1 1
-------------- ---------- -------------- ---------- -------------- ----------
Operating income (loss) $ 59 11% $ (15) (4)% $ 37 37%
============== ========== ============== ========== ============== ==========
Liberty Livewire
Revenue $ 170 100% $ -- -- $ -- --
Operating, selling, general and
administrative 149 88 -- -- -- --
Stock compensation (24) (14) -- -- -- --
Depreciation and amortization 34 20 -- -- -- --
-------------- ---------- -------------- ---------- -------------- ----------
Operating income $ 11 6% $ -- -- $ -- --
============== ========== ============== ========== ============== ==========
On Command
Revenue $ 135 100% $ -- -- $ -- --
Operating, selling, general and
administrative 98 73 -- -- -- --
Depreciation and amortization 44 32 -- -- -- --
-------------- ---------- -------------- ---------- -------------- ----------
Operating loss $ (7) (5)% $ -- -- $ -- --
============== ========== ============== ========== ============== ==========
Other
Revenue $ 206 (a) $ 134 (a) $ 134 (a)
Operating, selling, general and
administrative 198 129 128
Stock compensation (468) 428 180
Depreciation and amortization 408 290 21
-------------- -------------- --------------
Operating income (loss) $ 68 $ (713) $ (195)
============== ============== ==============
</TABLE>
---------
(a) Not meaningful.
I-24
<PAGE> 26
In order to provide a meaningful basis for comparing the nine months
ended September 30, 2000 and 1999 for purposes of the following table and
discussion, the operating results of Combined Liberty for the seven months ended
September 30, 1999 have been combined with the operating results of Combined
Liberty for the two months ended February 28, 1999, and the resulting nine month
operating results are compared to the operating results for the nine months
ended September 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
------------------------------------------------------------------------
Nine months Nine months
ended % of ended % of
September 30, total September 30, total
2000 revenue 1999 revenue
--------------- --------------- --------------- ---------------
(dollar amounts in millions)
<S> <C> <C> <C> <C>
Starz Encore Group
Revenue $ 542 100% $ 473 100%
Operating, selling, general and
administrative 360 66 339 72
Stock compensation 5 1 7 1
Depreciation and amortization 118 22 105 22
--------------- --------------- --------------- ---------------
Operating income $ 59 11% $ 22 5%
=============== =============== =============== ===============
Liberty Livewire
Revenue $ 170 100% $ -- --
Operating, selling, general and
administrative 149 88 -- --
Stock compensation (24) (14) -- --
Depreciation and amortization 34 20 -- --
--------------- --------------- --------------- ---------------
Operating income $ 11 6% $ -- --
=============== =============== =============== ===============
On Command
Revenue $ 135 100% $ -- --
Operating, selling, general and
administrative 98 73 -- --
Depreciation and amortization 44 32 -- --
--------------- --------------- --------------- ---------------
Operating loss $ (7) (5)% $ -- --
=============== =============== =============== ===============
Other
Revenue $ 206 (a) $ 268 (a)
Operating, selling, general and
administrative 198 257
Stock compensation (468) 608
Depreciation and amortization 408 311
--------------- ---------------
Operating income (loss) $ 68 $ (908)
=============== ===============
</TABLE>
---------
(a) Not meaningful.
I-25
<PAGE> 27
QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO QUARTER
AND NINE MONTHS ENDED SEPTEMBER 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 can be adjusted, in certain instances, if AT&T
acquires or disposes of cable systems or if Starz Encore Group's programming
costs increase above certain specified levels. As a result of AT&T's acquisition
of MediaOne Group, Inc. on June 15, 2000, the contracted payment amount
increased by approximately 25%. After adjusting for the elimination of the
former MediaOne contract, the net payment amount from the combined AT&T
companies increased by approximately 10%. Starz Encore Group's other affiliation
agreements generally provide for payments based on the number of subscribers
that receive Starz Encore Group's services.
Revenue increased to $189 million for the quarter ended September 30,
2000, from $161 million for the corresponding quarter of 1999. Revenue increased
to $542 million for the nine months ended September 30, 2000 from $473 million
for the corresponding period of 1999. The increases in revenue are primarily due
to increases in subscription units from all forms of distribution. These
increases are due to subscription unit increases of 51% for Encore and its
Thematic Multiplex, and 14% for STARZ! as compared to the same period in 1999.
Operating expenses increased by 2% and 6% for the quarter and nine
months ended September 30, 2000, respectively, as compared to the corresponding
periods in 1999. The increase in operating expense during the quarter ended
September 30, 2000 is primarily due to an increase in programming expense offset
by reduced affiliate marketing support and national branding expense. The
increase in operating expense for the nine months ended September 30, 2000 is
primarily due to an increase in programming expenses and an increase in spending
on affiliate marketing efforts related to higher revenue and subscription units,
offset by a decrease in national branding efforts.
Depreciation and amortization decreased from $44 million for the
quarter ended September 30, 1999 to $39 million for the quarter ended September
30, 2000 due to fully amortized other assets. Depreciation and amortization
increased from $105 million for the nine months ended September 30, 1999 to $118
million for the corresponding period in 2000. The fluctuations in depreciation
and amortization during the nine months ended September 30, 2000 are a direct
result of the effects of purchase accounting adjustments related to the AT&T
merger.
I-26
<PAGE> 28
Liberty Livewire. On April 10, 2000, Liberty acquired all of the
outstanding common stock of Four Media Company in exchange for AT&T Class A
Liberty Media Group common stock and cash. On June 9, 2000 Liberty acquired a
controlling interest in The Todd-AO Corporation in exchange for AT&T Class A
Liberty Media Group common stock. Immediately following the closing of such
transaction, Liberty contributed 100% of the capital stock of Four Media Company
to Todd-AO in exchange for additional Todd-AO common stock. Following these
transactions, Todd-AO changed its name to Liberty Livewire. On July 19, 2000,
Liberty purchased all of the assets relating to the post production, content and
sound editorial businesses of Soundelux Entertainment Group. Immediately
following such transaction, the assets of Soundelux were contributed to Liberty
Livewire for additional Liberty Livewire stock. Following these transactions,
Liberty owns approximately 88% of the equity and controls approximately 99% of
the voting power of Liberty Livewire, and as a result, began to consolidate the
operations of Liberty Livewire during the quarter ended June 30, 2000.
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 June 28, 2000, Liberty completed its
acquisition of 100% of Ascent. On Command is a majority owned subsidiary of
Ascent. On Command's principal business is providing pay-per-view entertainment
and information services. Upon completion of the tender offer, Liberty
consolidated the operations of On Command.
Other. Included in this information are the results of Liberty's other
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 45% to $77 million for the quarter ended September
30, 2000 as compared to $53 million for the corresponding period in 1999 due to
revenue growth at Pramer S.C.A., as well as revenue from Ascent Network
Services, Inc. which was acquired during March 2000, as part of the Ascent
transaction. Revenue decreased 23% to $206 million for the nine months ended
September 30, 2000 as compared to $268 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 49%
to $70 million for the quarter ended September 30, 2000 compared to $47 million
for the same period in 1999. Operating, selling, general and administrative
expenses decreased 23% to $198 million for the nine months ended September 30,
2000 as compared to $257 million for the corresponding period of 1999. The
increase in expenses for the quarter ended September 30, 2000 is due to start up
losses of True Position, Inc. which was acquired on January 14, 2000 as well as
expenses related to Ascent Network Services. The decrease in expenses for the
nine months ended September 30, 2000 is primarily due to the deconsolidation of
TV Guide on March 1, 1999, offset by increases associated with True Position and
Ascent Network Services.
Depreciation and amortization for the quarter ended September 30, 2000
remained consistent with the corresponding period in 1999. Depreciation and
amortization increased $97 million to $408 million for the nine months ended
September 30, 2000 from $311 million for the corresponding period in 1999. The
increase for the nine months ended September 30, 2000 was a result of the
effects of purchase accounting adjustments related to the AT&T merger and other
acquisitions.
I-27
<PAGE> 29
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
September 30, 2000 and September 30, 1999 was $101 million and $41 million,
respectively. Interest expense was $276 million, $87 million and $26 million for
the nine month period ending September 30, 2000, the seven month period ending
September 30, 1999 and the two month period ending February 28, 1999,
respectively. The increases in interest expense during the quarter and the nine
months ended September 30, 2000 were due to increased borrowings during 1999 and
the first quarter of 2000.
The carrying amount of the senior exchangeable debentures is adjusted
based on the fair value of the underlying Sprint PCS Group Stock. Increases or
decreases in the value of the underlying Sprint PCS Group Stock above the
principal amount of the senior exchangeable debentures (the "Contingent
Portion") is recorded as an adjustment to interest expense in the consolidated
statements of operations and comprehensive earnings. If the value of the
underlying Sprint PCS Group Stock decreases below the principal amount of the
senior exchangeable debentures there is no effect on the principal amount of
such debentures.
Dividend and interest income for the quarters ended September 30, 2000
and 1999 was $59 million and $65 million, respectively. Dividend and interest
income was $224 million, $171 million and $10 million for the nine month period
ending September 30, 2000, the seven month period ended September 30, 1999 and
the two month period ending February 28, 1999, respectively. The increase in
dividend and interest income during the nine months ended September 30, 2000
primarily represents dividends and interest income from the investment of the
$5.5 billion received in connection with the AT&T merger. The decrease in
dividend and interest income during the quarter ended September 30, 2000 is
primarily attributed to the use of Liberty's cash balance in investing
activities.
I-28
<PAGE> 30
Aggregate gains from dispositions during the nine month period ended
September 30, 2000, the seven month period ended September 30, 1999 and the two
month period ended February 28, 1999 were approximately $7.4 billion, $10
million and $14 million, respectively. Liberty recognized a gain of $2.2 billion
(before deducting deferred income tax expense of $883 million) during the nine
months ended September 30, 2000, in connection with the acquisition of General
Instrument by Motorola (see note 4 of the accompanying consolidated financial
statements). The gain was calculated 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 also recognized a $211 million gain
(before deducting deferred income taxes of $84 million) during the nine months
ended September 30, 2000, in connection with the Liberty Satellite & Technology,
Inc. ("LSAT") 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
LSAT preferred stock. Liberty recognized a gain of $649 million (before
deducting deferred income tax expense of $227 million) during the nine months
ended September 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's interest in Flextech plc and the fair value of the Telewest shares
received. Liberty recognized a gain of $4.4 billion (before deducting deferred
income tax expense of $1.7 billion) during the nine months ended September 30,
2000 in connection with the acquisition of TV Guide by Gemstar (see note 3 of
the accompanying consolidated financial statements). The gain was calculated
based on the difference between the carrying value of Liberty's interest in TV
Guide and the fair value of the Gemstar securities received.
Liberty recognized a gain on issuance of equity by affiliates and
subsidiaries 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
September 30, 2000 and 1999 was $375 million and $238 million, respectively.
Liberty's share of losses of affiliates was $1,017 million, $597 million and $66
million during the nine month period ending September 30, 2000, the seven month
period ended September 30, 1999 and the two month period ending February 28,
1999, respectively.
Gemstar. Liberty's share of Gemstar's net loss was $71 million for the
quarter and the nine months ended September 30, 2000. On July 12, 2000, TV Guide
and Gemstar completed a merger whereby Gemstar acquired TV Guide. As a result of
this transaction, 133 million shares of TV Guide held by Liberty were exchanged
for 87.5 million shares of Gemstar common stock. Following the merger, Liberty
owns approximately 21.4% of Gemstar.
I-29
<PAGE> 31
Discovery. Discovery's revenue increased $74 million or 24% from $304
million for the quarter ended September 30, 1999, to $378 million for the
quarter ended September 30, 2000. Discovery's revenue increased $249 million or
27% from $935 million for the nine months ended September 30, 1999, to $1,184
million for the nine months ended September 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 $19 million from
breakeven for the quarter ended September 30, 1999, to $19 million for the
quarter ended September 30, 2000. Operating Cash Flow increased by $16 million
or 19% from $86 million for the nine months ended September 30, 1999, to $102
million for the nine months ended September 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 the launch of other developing networks.
Discovery's net loss increased $28 million or 45% from $62 million for the
quarter ended September 30, 1999, to $90 million for the quarter ended September
30, 2000. Discovery's net loss increased $91 million or 85% from $107 million
for the nine months ended September 30, 1999, to $198 million for the nine
months ended September 30, 2000. The increase in the net loss is due to
increased interest expense and launch amortization due to Discovery's efforts to
increase launch support related to developing networks. Liberty's share of
Discovery's net loss was approximately $91 million and $78 million for the
quarters ended September 30, 2000 and 1999, respectively. Liberty's share of
Discovery's net loss was approximately $219 million, $154 million and $8 million
for the nine month period ended September 30, 2000, the seven month period ended
September 30, 1999 and the two month period ended February 28, 1999,
respectively. Liberty's share of losses for the nine month period ended
September 30, 2000, and the seven months ended September 30, 1999 included $140
million and $109 million, respectively, in amortization related to purchase
accounting adjustments associated with Liberty's investment in Discovery in
connection with the AT&T merger.
Telewest. Revenue increased by $84 million or 27% from $314 million for
the quarter ended September 30, 1999, to $398 million for the quarter ended
September 30, 2000. Revenue increased $267 million or 29%, from $933 million for
the nine months ended September 30, 1999, to $1,200 million for the nine months
ended September 30, 2000. The increase was primarily due to the acquisition of
Flextech in April 2000 and the acquisition of the remaining 50% of Cable London
plc during the fourth quarter of 1999. Operating Cash Flow decreased by $6
million or 6% from $95 million for the quarter ended September 30, 1999, to $89
million for the quarter ended September 30, 2000. Operating Cash Flow increased
$19 million from $242 million for the nine months ended September 30, 1999, to
$261 million for the nine months ended September 30, 2000. The decrease in the
Operating Cash Flow margin resulted from increased costs during the first nine
months of 2000 due to the launch of digital services which commenced in the last
quarter of 1999. Telewest's net loss increased by $107 million or 64% from $166
million for the quarter ended September 30, 1999, to $273 million for the
quarter ended September 30, 2000. Telewest's net loss increased $179 million or
28% from $636 million for the nine months ended September 30, 1999, to $815
million for the nine months ended September 30, 2000. The increase in net loss
was primarily due to increased interest expense and increased depreciation and
amortization expense resulting from acquisitions. Liberty's share of Telewest's
net losses was approximately $94 million and $57 million for the quarters ended
September 30, 2000 and 1999, respectively. Liberty's share of Telewest's net
losses was approximately $262 million, $154 million and $38 million for the nine
month period ended September 30, 2000, the seven month period ended September
30, 1999 and the two month period ended February 28, 1999, respectively.
Liberty's share of losses for the nine month period ended September 30, 2000,
and the seven month period ended September 30, 1999 included $70 million and $51
million, respectively, in amortization related to purchase accounting
adjustments associated with Liberty's investment in Telewest in connection with
the AT&T merger.
I-30
<PAGE> 32
USA Networks. USA Network's revenue increased $405 million or 51% from
$793 million for the quarter ended September 30, 1999, to $1,198 million for the
quarter ended September 30, 2000. Revenue increased $1 billion or 43% from $2.3
billion for the nine months ended September 30, 1999, to $3.3 billion for the
nine months ended September 30, 2000. The increase was due to increased
advertising and affiliate 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 $32 million or 25% from $129 million for the quarter ended
September 30, 1999, to $161 million for the quarter ended September 30, 2000.
Operating Cash Flow increased $123 million or 31% from $401 million for the nine
months ended September 30, 1999, to $524 million for the nine months ended
September 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 $10 million or 125% from $8 million
for the quarter ended September 30, 1999, to $18 million for the quarter ended
September 30, 2000. USA's net loss increased $56 million from $10 million for
the nine months ended September 30, 1999, to $66 million for the nine months
ended September 30, 2000. 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 $2 million and $4 million for
the quarters ended September 30, 2000 and 1999, respectively. Liberty's share of
USA Networks, Inc.'s net (loss) earnings was approximately $(18) million, $(13)
million and $10 million for the nine month period ended September 30, 2000, the
seven month period ended September 30, 1999 and the two month period ended
February 28, 1999, respectively. Liberty's share of losses for the nine month
period ended September 30, 2000, and the seven months ended September 30, 1999
included $48 million and $37 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 $69 million or 9% from $751 million for the
quarter ended September 30, 1999, to $820 million for the quarter ended
September 30, 2000. Revenue increased by $235 million or 11% from $2,177 million
for the nine months ended September 30, 1999, to $2,412 million for the nine
months ended September 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 $14 million or 11% from $125 million for the quarter ended
September 30, 1999, to $139 million for the quarter ended September 30, 2000.
Operating Cash Flow increased by $41 million or 11% from $377 million for the
nine months ended September 30, 1999 to $418 million for the nine months ended
September 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, Germany and Japan. Net earnings
increased by $10 million or 21% from $47 million for the quarter ended September
30, 1999, to $57 million for the quarter ended September 30, 2000. Net earnings
increased by $34 million or 24% to $176 million for the nine months ended
September 30, 2000, as compared to $142 million for the nine months ended
September 30, 1999. The increase in net earnings was due to the increase in
Operating Cash Flow offset by increased income tax expense. Liberty's share of
QVC's net earnings (losses) was approximately $5 million and $(8) million for
the quarters ended September 30, 2000 and 1999, respectively. Liberty's share of
QVC's net earnings (losses) was less than $1 million, $(17) million and $13
million for the nine month period ended September 30, 2000, the seven month
period ended September 30, 1999 and the two month period ended February 28,
1999, respectively. Liberty's share of losses for the nine month period ended
September 30, 2000, and the seven month period ended September 30, 1999 included
$83 million and $64 million, respectively, in amortization related to purchase
accounting adjustments associated with Liberty's investment in QVC in connection
with the AT&T merger.
I-31
<PAGE> 33
UnitedGlobalCom. Liberty's share of UnitedGlobalCom's net loss was $44
million and $132 million for the quarter and nine months ended September 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.
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 future cash requirements and planned commitments.
Upon consummation of the AT&T merger, through a new tax sharing
agreement between Liberty and AT&T, Liberty became entitled to the benefit of
all of the net operating loss carryforwards available to 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.
Liberty holds shares of Time Warner Series LMCN-V common stock, which
are convertible into 114 million shares of Time Warner common stock. Liberty
owns approximately 81.7 million ADRs representing preferred limited voting
shares of News Corp. Liberty owns 62.6 million shares of Motorola common stock.
Liberty receives dividends on its ownership interests in these entities
periodically. On January 10, 2000, Time Warner announced its proposed merger
with America Online, Inc., pursuant to which each share of the Time Warner
common stock held by Liberty will be converted into 1.5 shares of an identical
series of stock of the combined AOL Time Warner. The combined AOL Time Warner
does not currently intend to pay dividends on its common stock. Liberty
anticipates that it will continue to receive dividends on its ownership
interests in News Corp. and Motorola. However, there can be no assurance that
such dividends will continue to be paid.
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.
At September 30, 2000, Liberty and its consolidated subsidiaries had
bank credit facilities which provided for borrowings of up to $1.5 billion.
Borrowings under these facilities of $1.1 billion were outstanding at September
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.
I-32
<PAGE> 34
On January 7, 2000, a trust, which holds Liberty's investment in
Sprint, entered into agreements to loan 18 million shares of Sprint PCS Group
stock to a third party, as Agent. The obligation to return those shares is
secured by cash collateral equal to 100% of the market value of that stock,
which was $595 million at September 30, 2000. 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 unutilized cash
collateral of $208 million at September 30, 2000 included $105 million of
restricted cash. At September 30, 2000, Liberty had utilized $387 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. The 8-1/4% Senior
Debentures have an aggregate principal amount of $1 billion. Interest on the
8-1/4% Senior Debentures is payable on February 1 and August 1 of each year.
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.
Interest on the 3-3/4% Senior Exchangeable Debentures is payable on February 15
and August 15 of each year.
There are restrictions on incurrence of debt of Liberty through an
Inter-Group Agreement with AT&T. Liberty may not incur any debt that would cause
the total indebtedness of Liberty at any time to be in excess of 25% ($12
billion at September 30, 2000) of the total market capitalization of the AT&T
Liberty Media Group Common 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.
During September, 1999, Liberty Media Group announced the approval to
repurchase from time to time up to 135 million shares of AT&T Class A or Class B
Liberty Media Group common stock. During the nine months ended September 30,
2000, Liberty made distributions to Liberty Media Group totaling approximately
$112 million to repurchase approximately 5 million shares under this repurchase
plan. The distributions were accounted for as a reduction to additional
paid-in-capital.
Pursuant to a proposed final judgment agreed to by TCI, AT&T and the
United States Department of Justice on December 30, 1998, Liberty transferred
all of its beneficially owned securities of Sprint PCS to a 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 PCS securities
held by the trust sufficient to cause Liberty to own beneficially no more than
10% of the outstanding Sprint PCS Group common stock Series 1 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 PCS securities held by the
trust. The final judgment requires the trustee to vote the Sprint PCS securities
beneficially owned by Liberty in the same proportion as other holders of Sprint
PCS Group common stock so long as such securities are held by the trust. The
final judgment also prohibits the acquisition by Liberty of additional Sprint
PCS securities, with certain exceptions, without the prior written consent of
the Department of Justice.
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<PAGE> 35
Liberty has guaranteed notes payable and other obligations of certain
affiliates. At September 30, 2000, the U.S. dollar equivalent of the amounts
borrowed pursuant to these guaranteed obligations aggregated approximately $583
million.
Liberty intends to continue to develop its entertainment and
information programming services and has made certain financial commitments
related to the acquisition of programming. As of September 30, 2000, Starz
Encore Group's future minimum obligation related to certain film licensing
agreements was $1.3 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 used in operating activities for the nine months ended September
30, 2000 and the two months ended February 28, 1999 were $164 million and $107
million, respectively. Cash provided by operating activities for the seven month
period ended September 30, 1999 were $105 million. Cash used during the nine
months ended September 30, 2000 and the two months ended February 28, 1999
included payments related to stock appreciation rights of $292 million and $126
million, respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash used in investing activities were $2 billion, $4.9 billion and $79
million for the nine months ended September 30, 2000, the seven months ended
September 30, 1999 and the two months ended February 28, 1999, respectively.
Liberty is a holding company and as such it uses cash to make contributions and
investments in entities in which Liberty holds a 50% or less ownership interest.
Cash flows from investing activities included cash used for investments in and
loans to affiliates amounting to $2.5 billion, $2 billion and $51 million during
the nine months ended September 30, 2000, the seven months ended September 30,
1999 and the two months ended February 28, 1999, respectively. Liberty made
purchases of marketable securities of $6.9 billion during the seven month period
ended September 30, 1999. Additionally, Liberty invested $669 million in
acquisitions of consolidated businesses during the nine month period ended
September 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 $3.6 billion, $2.2 billion and $155 million and repayments of $1.8 billion,
$2.2 billion and $145 million during the nine months ended September 30, 2000,
the seven months ended September 30, 1999 and the two months ended February 28,
1999, respectively.
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<PAGE> 36
ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"), which is effective for all fiscal
years beginning after June 15, 2000. Statement 133 establishes accounting and
reporting standards for derivative instruments and hedging activities by
requiring that all derivative instruments be reported as assets or liabilities
and measured at their fair values. Under Statement 133, changes in the fair
values of derivative instruments are recognized immediately in earnings unless
those instruments qualify as hedges of the:
o fair values of existing assets, liabilities, or firm commitments,
o variability of cash flows of forecasted transactions, or
o foreign currency exposures of net investments in foreign
operations.
Although our management has not completed its assessment of the impact of
Statement 133 on Liberty's consolidated results of operations and financial
position, management does not expect that the impact of Statement 133 will be
significant, however, no assurances can be given that it will not be
significant.
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. Liberty does not hedge the majority of its foreign currency
exchange risk because of the long-term nature of its interests in foreign
affiliates. During the nine months ended September 30, 2000, Liberty hedged 230
million Euros related to certain foreign currency denominated transactions. Had
the price of the Euro been 10% lower at September 30, 2000, Liberty would have
recorded an additional unrealized loss on financial instruments, net of taxes,
of $18 million. 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 September 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 nine months ended September 30, 2000 and
1999, Liberty would have recorded approximately $9 million and $11 million of
additional interest expense, respectively. At September 30, 2000, the aggregate
fair value of Liberty's notes and debentures was $3.8 billion.
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<PAGE> 37
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
September 30, 2000, and December 31, 1999, the value of such securities would
have been lower by $2.4 billion for both periods. Our unrealized gains, net of
taxes would have also been lower by $1.4 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 September 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 September 30, 2000, Liberty's total debt and correspondingly,
Liberty's interest expense would have been unchanged as the stock price of the
Sprint PCS Group stock would have been below the respective initial exchange
prices. Liberty's cash collateral account under the Securities lending agreement
would be reduced by $61 million if the underlying shares of the Sprint PCS Group
decreased in value by 10%.
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.
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<PAGE> 38
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
September 30, 2000:
None.
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<PAGE> 39
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: November 14, 2000 By: /s/ Charles Y. Tanabe
------------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel
Date: November 14, 2000 By: /s/ Gary S. Howard
------------------------------
Gary S. Howard
Executive Vice President
and Chief Operating
Officer (Principal
Financial Officer
and Principal Accounting
Officer)
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<PAGE> 40
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
