10-Q 1 a2063226z10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 F O R M 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, 2001 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) 12300 Liberty Boulevard Englewood, Colorado 80112 ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (720) 875-5400 9197 SOUTH PEORIA STREET, ENGLEWOOD, COLORADO --------------------------------------------- Registrant's former address Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of outstanding shares of Liberty Media Corporation's common stock as of October 31, 2001 was: Series A common stock 2,377,917,544 shares; and Series B common stock 212,045,288 shares. LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
September 30, December 31, 2001 2000* ------------- ------------ amounts in millions Assets Current assets: Cash and cash equivalents $ 2,864 1,295 Short-term investments 298 500 Trade and other receivables, net 406 307 Prepaid expenses and program rights 708 537 Deferred income tax assets 307 242 Other current assets 323 73 ------- ------- Total current assets 4,906 2,954 ------- ------- Investments in affiliates, accounted for using the equity method, and related receivables (note 5) 12,129 20,464 Investments in available-for-sale securities and others (note 6) 22,224 19,035 Property and equipment, at cost 1,252 976 Less accumulated depreciation 254 131 ------- ------- 998 845 ------- ------- Intangible assets: Excess cost over acquired net assets 11,302 11,146 Franchise costs 190 190 ------- ------- 11,492 11,336 Less accumulated amortization 1,519 1,048 ------- ------- 9,973 10,288 ------- ------- Other assets, at cost, net of accumulated amortization 614 682 ------- ------- Total assets $50,844 54,268 ======= =======
(continued) I-1 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (unaudited)
September 30, December 31, 2001 2000* ------------- ------------ amounts in millions Liabilities and Stockholders' Equity Current liabilities: Accounts payable and accrued liabilities $ 619 654 Accrued stock compensation 746 1,216 Program rights payable 225 179 Current portion of debt 1,787 1,094 -------- -------- Total current liabilities 3,377 3,143 -------- -------- Long-term debt (note 8) 4,792 5,269 Call option obligations (note 8) 1,237 -- Deferred income tax liabilities 9,514 11,337 Other liabilities 510 62 -------- -------- Total liabilities 19,430 19,811 -------- -------- Minority interests in equity of subsidiaries 240 348 Stockholders' equity (notes 1 and 9): Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued -- -- Series A common stock $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 2,377,917,544 shares at September 30, 2001 24 -- Series B common stock $.01 par value. Authorized 400,000,000 shares; issued and outstanding 212,045,288 shares at September 30, 2001 2 -- Additional paid-in-capital 35,993 35,042 Accumulated other comprehensive loss, net of taxes (1,817) (397) Accumulated deficit (3,028) (536) -------- -------- Total stockholders' equity 31,174 34,109 -------- -------- Commitments and contingencies (note 11) Total liabilities and stockholders' equity $ 50,844 54,268 ======== ========
-------------- * as restated, see note 1 See accompanying notes to consolidated financial statements. I-2 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2001 2000* 2001 2000* ------- ------- ------- ------- amounts in millions, except per share amounts Revenue: Unaffiliated parties $ 492 363 1,328 869 Related parties (note 10) 29 73 210 184 ------- ------- ------- ------- 521 436 1,538 1,053 ------- ------- ------- ------- Operating costs and expenses: Operating, selling, general and administrative 406 325 1,207 779 Charges from related parties (note 10) 3 11 20 26 Stock compensation (78) (248) 37 (487) Depreciation and amortization 241 201 727 604 ------- ------- ------- ------- 572 289 1,991 922 ------- ------- ------- ------- Operating income (loss) (51) 147 (453) 131 Other income (expense): Interest expense (127) (101) (396) (276) Dividend and interest income 84 54 204 218 Share of losses of affiliates, net (note 5) (680) (1,800) (3,227) (2,594) Gains (losses) on dispositions, net (notes 5 and 6) (9) 4,395 (67) 7,447 Other-than-temporary decline in fair value of investments (note 6) (61) (40) (665) (40) Realized and unrealized gains (losses) on financial instruments, net (notes 2, 6 and 8) 551 240 (66) 76 Other, net 5 (5) 10 2 ------- ------- ------- ------- (237) 2,743 (4,207) 4,833 ------- ------- ------- ------- Earnings (loss) before income taxes and minority interest (288) 2,890 (4,660) 4,964 Income tax benefit (expense) 52 (1,151) 1,511 (2,047) Minority interests in losses of subsidiaries 21 17 112 45 ------- ------- ------- ------- Earnings (loss) before cumulative effect of accounting change (215) 1,756 (3,037) 2,962 Cumulative effect of accounting change, net of taxes (notes 2 and 8) -- -- 545 -- ------- ------- ------- ------- Net earnings (loss) $ (215) 1,756 (2,492) 2,962 ======= ======= ======= ======= Pro forma earnings (loss) per common share (note 3) Pro forma basic and diluted earnings (loss) per common share $ (.08) .68 (.96) 1.14 ======= ======= ======= ======= Pro forma number of common shares outstanding 2,588 2,588 2,588 2,588 ======= ======= ======= =======
-------------- * as restated, see note 1 See accompanying notes to consolidated financial statements. I-3 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Loss (unaudited)
Three months ended Nine months ended September 30, September 30, --------------------- --------------------- 2001 2000* 2001 2000* ------- ------- ------- ------- amounts in millions Net earnings (loss) $ (215) 1,756 (2,492) 2,962 ------- ------- ------- ------- Other comprehensive loss, net of taxes: Foreign currency translation adjustments 54 (75) (97) (193) Recognition of previously unrealized losses (gains) on available-for-sale securities, net 11 (1,510) 116 (1,477) Unrealized losses on available-for-sale securities (3,408) (348) (1,352) (1,825) Cumulative effect of accounting change (notes 2 and 8) -- -- (87) -- ------- ------- ------- ------- Other comprehensive loss (3,343) (1,933) (1,420) (3,495) ------- ------- ------- ------- Comprehensive loss $(3,558) (177) (3,912) (533) ======= ======= ======= =======
-------------- * as restated, see note 1 See accompanying notes to consolidated financial statements. I-4 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statement of Stockholders' Equity (unaudited) Nine months ended September 30, 2001
Accumulated other Common stock Additional comprehensive Total Preferred --------------------- paid-in loss, net Accumulated stockholders' stock Series A Series B capital of taxes deficit equity --------- -------- -------- ---------- ------------ ----------- ------------- amounts in millions Balance at January 1, 2001 * $ -- -- -- 35,042 (397) (536) 34,109 Net loss -- -- -- -- -- (2,492) (2,492) Issuance of common stock upon consummation of Split Off Transaction (note 1) -- 24 2 (26) -- -- -- Contribution from AT&T upon consummation of Split Off Transaction (note 1) -- -- -- 803 -- -- 803 Accrual of amounts due to AT&T for taxes on deferred intercompany gains (note 1) -- -- -- (115) -- -- (115) Issuances of common stock by subsidiaries and affiliates -- -- -- (9) -- -- (9) Utilization of net operating losses of Liberty by AT&T -- -- -- (3) -- -- (3) Stock option exercises and issuance of restricted stock prior to Split Off Transaction (note 9) -- -- -- 301 -- -- 301 Other comprehensive loss -- -- -- -- (1,420) -- (1,420) ----- ------- ------- ------- ------- ------- ------- Balance at September 30, 2001 $ -- 24 2 35,993 (1,817) (3,028) 31,174 ===== ======= ======= ======= ======= ======= =======
-------------- * as restated, see note 1 See accompanying notes to consolidated financial statements. I-5 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, --------------------- 2001 2000* ------- ------- amounts in millions (see note 4) Cash flows from operating activities: Net earnings (loss) $(2,492) 2,962 Adjustments to reconcile net earnings (loss) to net cash used by operating activities: Cumulative effect of accounting change, net of taxes (545) -- Depreciation and amortization 727 604 Stock compensation 37 (487) Payments of stock compensation (241) (292) Share of losses of affiliates, net 3,227 2,594 Noncash interest 21 (143) Losses (gains) on disposition of assets, net 67 (7,447) Other-than-temporary decline in fair value of investments 665 40 Realized and unrealized losses on financial instruments 66 77 Minority interests in losses of subsidiaries (112) (45) Deferred income tax expense (benefit) (1,322) 2,092 Intergroup tax allocation (222) (44) Cash payment from AT&T pursuant to tax sharing agreement 166 138 Changes in operating assets and liabilities, net of the effect of acquisitions and dispositions: Change in receivables (22) (132) Change in prepaid expenses and program rights (168) (109) Change in payables and accruals 143 39 ------- ------- Net cash used by operating activities (5) (153) ------- ------- Cash flows from investing activities: Cash paid for acquisitions (111) (669) Capital expended for property and equipment (255) (130) Investments in and loans to affiliates and others (2,141) (2,496) Purchases of marketable securities (43) (832) Sales and maturities of marketable securities 525 1,720 Cash proceeds from dispositions 441 364 Other investing activities, net (6) 4 ------- ------- Net cash used by investing activities (1,590) (2,039) ------- ------- Cash flows from financing activities: Borrowings of debt 3,065 3,620 Proceeds related to call option obligations due to issuance of senior exchangeable debentures 1,028 -- Cash payments for debt issue costs (29) (28) Repayments of debt (1,973) (1,768) Proceeds from settlement of financial instruments 527 -- Contributions from (distributions to) minority interest holders, net (21) 33 Cash payment from AT&T upon consummation of Split Off Transaction 803 -- Cash transfers to related parties, net (236) (156) ------- ------- Net cash provided by financing activities 3,164 1,701 ------- ------- Net increase (decrease) in cash and cash equivalents 1,569 (491) Cash and cash equivalents at beginning of period 1,295 1,714 ------- ------- Cash and cash equivalents at end of period $ 2,864 1,223 ======= =======
-------------- * as restated, see note 1 See accompanying notes to consolidated financial statements. I-6 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 2001 (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. From March 9, 1999 through August 9, 2001, AT&T Corp. ("AT&T") owned 100% of the outstanding common stock of Liberty. During such time, the AT&T Class A Liberty Media Group common stock and the AT&T Class B Liberty Media Group common stock (together, the AT&T Liberty Media Group tracking stock) were tracking stocks of AT&T designed to reflect the economic performance of the businesses and assets of AT&T attributed to the Liberty Media Group. Liberty was included in the Liberty Media Group, and the businesses and assets of Liberty and its subsidiaries constituted all of the businesses and assets of the Liberty Media Group. Prior to March 9, 1999, Liberty was a wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), which was an independent publicly traded company prior to its acquisition by AT&T on March 9, 1999. On May 7, 2001, AT&T contributed to Liberty assets that were attributed to the Liberty Media Group but not previously owned by Liberty (the "Contributed Assets"). These assets include (i) preferred stock and common stock interests in a subsidiary of IDT Corporation, a multinational telecommunications services provider and (ii) an approximate 8% indirect common equity interest in Liberty Digital, Inc. ("Liberty Digital"). The contributions have been accounted for in a manner similar to a pooling of interests and, accordingly, the financial statements of Liberty for periods prior to the contributions have been restated to include the financial position and results of operations of the Contributed Assets. Effective August 10, 2001, AT&T effected the split-off of Liberty pursuant to which Liberty's common stock was recapitalized, and each outstanding share of AT&T Class A Liberty Media Group tracking stock was redeemed for one share of Liberty Series A common stock and each outstanding share of AT&T Class B Liberty Media Group tracking stock was redeemed for one share of Liberty Series B common stock (the "Split Off Transaction"). Subsequent to the Split Off Transaction, Liberty is no longer a subsidiary of AT&T and no shares of AT&T Liberty Media Group tracking stock remain outstanding. The Split Off Transaction has been accounted for at historical cost. In connection with the Split Off Transaction, Liberty has also been deconsolidated from AT&T for federal income tax purposes. As a result, AT&T was required to pay Liberty an amount equal to 35% of the amount of the net operating loss carryforward reflected in TCI's final federal income tax return that has not been used as an offset to Liberty's obligations under the AT&T Tax Sharing Agreement and that has been, or is reasonably expected to be, utilized by AT&T. The $803 million payment, which was reduced by Liberty's $138 million obligation under the 1995 TCI Tax Sharing Agreement, was received by Liberty prior to the Split Off Transaction. In addition, certain deferred intercompany gains will be includible in AT&T's taxable income as a result of the Split Off Transaction, and AT&T will be entitled to reimbursement from Liberty for the resulting tax liability of approximately $115 million. 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 I-7 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued transaction processing. Liberty also has significant interests in foreign affiliates which operate in cable television, programming and satellite distribution. 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 Annual Report on Form 10-K for the year ended December 31, 2000. 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 2001 presentation. (2) ACCOUNTING CHANGE Effective January 1, 2001, Liberty adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("Statement 133"), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings and are recognized in the statement of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings. Derivative gains and losses included in other comprehensive earnings are reclassified into earnings at the time the sale of the hedged item or transaction is recognized. The Company uses various derivative instruments including equity collars, put spread collars, interest rate swaps, and forward foreign exchange contracts to manage fair value risk associated with certain investments, interest rate risk on certain indebtedness, and foreign exchange rate risk. Derivative instruments are generally not used for speculative purposes. The derivative instruments may involve elements of credit and market risk in excess of amounts recognized in the financial statements. The Company monitors its positions and the credit quality of counter-parties, consisting primarily of major financial institutions, and does not anticipate nonperformance by any counter-party. The adoption of Statement 133 on January 1, 2001, resulted in a cumulative increase in net earnings of $545 million (after tax expense of $356 million) and an increase in other comprehensive loss of $87 million. The increase in net earnings was mostly attributable to separately recording the fair value of the embedded call option obligations associated with the Company's senior exchangeable debentures. The increase in other comprehensive loss relates primarily to changes in the fair value of the Company's warrants and options to purchase certain available-for-sale securities. For derivatives designated either as fair value or cash flow hedges, changes in the time value of the derivatives are excluded from the assessment of hedge effectiveness and are recognized in earnings. Hedge ineffectiveness, determined in accordance with Statement 133, had no impact I-8 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued on earnings for the nine months ended September 30, 2001. No fair value hedges or cash flow hedges were derecognized during the nine months ended September 30, 2001. For the nine months ended September 30, 2001, realized and unrealized gains on financial instruments included a $250 million unrealized gain related to call option obligations, a $599 million unrealized net loss for changes in the fair value of derivative instruments related to available-for-sale securities and other derivatives not designated as hedging instruments, a $114 million unrealized net gain for changes in the time value of options for fair value hedges, and a $169 million realized gain related to the settlement of an equity collar. (3) PRO FORMA EARNINGS (LOSS) PER COMMON SHARE Pro forma basic earnings (loss) per common share is computed by dividing net earnings (loss) by the pro forma number of common shares outstanding. The pro forma number of outstanding common shares for periods prior to the Split Off Transaction is based upon the number of shares of Series A and Series B Liberty common stock issued upon consummation of the Split Off Transaction. Pro forma diluted earnings (loss) per common share presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Excluded from diluted earnings per share for the nine months ended September 30, 2001, are 78 million potential common shares because their inclusion would be anti-dilutive. (4) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, ------------------- 2001 2000 ------ ------ amounts in millions Cash paid for acquisitions: Fair value of assets acquired $ 252 3,612 Net liabilities assumed (141) (1,120) Deferred tax asset (liability) recorded 7 (322) Minority interests in equity of acquired subsidiaries (7) (470) Contribution to equity for acquisitions -- (1,031) ------ ------ Cash paid for acquisitions $ 111 669 ====== ====== Cash paid for interest $ 378 262 ====== ======
(5) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD Liberty has various investments accounted for using the equity method. The following table includes Liberty's carrying amount of its more significant investments in affiliates:
September 30, December 31, 2001 2000 ------------- ------------ amounts in millions Gemstar-TV Guide International, Inc. ("Gemstar") $ -- 5,855 Discovery Communications, Inc. ("Discovery") 2,945 3,133 Telewest Communications plc ("Telewest") 525 2,712 USA Networks, Inc. ("USAI") and related investments 2,870 2,824 QVC Inc. ("QVC") 2,504 2,508 Other 3,285 3,432 ------- ------- $12,129 20,464 ======= =======
I-9 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The following table reflects Liberty's share of earnings (losses) of affiliates including excess basis amortization and other-than-temporary declines in value:
Nine months ended September 30, --------------------- 2001 2000 ------- ------- amounts in millions Gemstar $ (133) (71) Discovery (246) (219) Telewest (2,126) (262) USAI and related investments 48 (18) QVC (1) -- UnitedGlobalCom, Inc. ("UGC") (267) (132) Teligent, Inc. ("Teligent") (85) (1,106) Other (417) (786) ------- ------- $(3,227) (2,594) ======= =======
At September 30, 2001, the aggregate carrying amount of Liberty's investments in its affiliates exceeded Liberty's proportionate share of its affiliates' net assets by $8,101 million. Such excess is being amortized over estimated useful lives of up to 20 years. Amortization aggregating $681 million and $587 million for the nine months ended September 30, 2001 and 2000, respectively, is included in share of losses of affiliates. Certain of Liberty's affiliates are general partnerships and, as such, Liberty is liable as a matter of partnership law for all debts (other than non-recourse debts) of that partnership in the event liabilities of that partnership were to exceed its assets. GEMSTAR Gemstar is a global technology and media company focused on consumer entertainment. The common stock of Gemstar is publicly traded. On July 12, 2000, Gemstar acquired TV Guide, Inc. ("TV Guide"). TV Guide shareholders received .6573 shares of Gemstar common stock in exchange for each share of TV Guide. As a result of this transaction, 133 million shares of TV Guide held by Liberty were exchanged for 87.5 million shares or 21% of Gemstar common stock. Liberty recognized a $4,391 million gain (before deferred tax expense of $1,737 million) on such transaction during the third quarter of 2000 based on the difference between the carrying value of Liberty's interest in TV Guide and the fair value of the Gemstar securities received. On May 2, 2001, Liberty consummated a transaction ("Exchange Transaction") with The News Corporation Limited ("News Corp.") whereby Liberty exchanged 70.7 million shares of Gemstar for 121.5 million News Corp. American Depository Shares ("ADSs") representing preferred, limited voting, ordinary shares of News Corp. Liberty recorded a loss of $764 million in connection with the Exchange Transaction as the fair value of the securities received by Liberty was less than the carrying value of the Gemstar shares. As a result of the Exchange Transaction, Liberty's ownership interest in Gemstar was reduced from 21% to 4%, and accordingly, Liberty now accounts for its investment in Gemstar as an available-for-sale security. In addition to the Exchange Transaction, Liberty has agreed to exchange its remaining Gemstar shares for 28.8 million additional News Corp. ADSs. I-10 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued TELEWEST Telewest currently operates and constructs cable television and telephone systems in the UK. In April 2000, Telewest acquired Flextech p.l.c. ("Flextech") which develops and sells a variety of television programming in the UK. Prior to the acquisition, Liberty owned an approximate 37% equity interest in Flextech and a 22% equity interest in Telewest. As a result of the acquisition, Liberty recognized a $649 million gain (before deferred tax expense of $227 million) 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. During the nine months ended September 30, 2001, Liberty determined that its investment in Telewest experienced an other-than-temporary decline in value. As a result, the carrying value of Telewest was adjusted to its estimated fair value, and the Company recorded a charge of $1,801 million, including $398 million in the third quarter of 2001. Such charge is included in share of losses of affiliates. At September 30, 2001, Liberty indirectly owned 744 million or approximately 25% of the issued and outstanding Telewest ordinary shares. Telewest's ordinary shares reported a closing price of $.49 per share on September 30, 2001. Summarized unaudited results of operations for Telewest are as follows:
Nine months ended September 30, --------------------- 2001 2000 ------- ------- amounts in millions Revenue $ 1,336 1,200 Operating expenses (1,037) (939) ------- ------- Operating cash flow (as defined by Liberty) 299 261 Depreciation and amortization (698) (581) Interest expense (519) (444) Other, net 25 (51) ------- ------- Net loss $ (893) (815) ======= =======
USAI USAI owns and operates businesses in network and television production, electronic retailing, ticketing operations, and internet services. At September 30, 2001, Liberty held 74.4 million shares of USAI's common stock. In addition, at September 30, 2001, Liberty held shares and other equity interests in certain subsidiaries of USAI that are exchangeable for an aggregate 79.0 million shares of USAI common stock. The exchange of such shares and interests is subject to certain conditions including that Liberty's ownership of USAI's common stock issuable upon such exchange not being restricted by Federal Communications Commission ("FCC") regulations. On August 28, 2001, USAI gave Liberty notice that on August 21, 2001 USAI had sold its television broadcast stations and associated broadcast licenses and as a result of such sale FCC regulations no longer restricted Liberty's ownership of shares of USAI's common stock issuable upon such exchange and, accordingly, that USAI was exercising its right to require that Liberty exchange such stock and other interests of such subsidiaries for shares of USAI common stock. Liberty anticipates that this exchange will occur in the fourth quarter of 2002. If this exchange had been completed at September 30, 2001, Liberty would have owned 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 $17.98 per share on September 30, 2001. UGC UGC is a global broadband communications provider of video, voice and data services with operations in over 20 countries throughout the world. At September 30, 2001, Liberty owned an approximate 11% economic ownership interest representing an approximate 37% voting interest in UGC. Liberty owns 9.9 million shares of UGC Class B common stock and 1.2 million shares of UGC Class A common stock. The UGC Class B common stock is convertible, on a one-for-one basis, into UGC Class A common stock. UGC's Class A common stock reported a closing price of $2.32 per share on September 30, 2001. I-11 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued TELIGENT In January 2000, the Company acquired a 40% equity interest in Teligent, a full-service facilities based communications company. During the nine months ended September 30, 2000, the Company determined that its investment in Teligent experienced an other than temporary decline in value. As a result, the carrying amount of this investment was adjusted to its estimated fair value resulting in a charge of $839 million. This impairment charge is included in share of losses of affiliates. In April 2001, the Company exchanged its investment in Teligent for shares of IDT Investments, Inc., a subsidiary of IDT Corporation. As the fair value of the consideration received in the exchange approximated the carrying value of the Company's investment in Teligent, no gain or loss was recognized on the transaction. The Company accounts for its investment in IDT Investments, Inc. using the cost method. Summarized unaudited combined financial information for affiliates other than Telewest is as follows:
Nine months ended September 30, ----------------------- 2001 2000 -------- -------- amounts in millions Revenue $ 11,443 10,357 Operating expenses (10,502) (9,613) Depreciation and amortization (2,156) (1,765) -------- -------- Operating loss (1,215) (1,021) Interest expense (1,265) (1,098) Other, net 115 205 -------- -------- Net loss $ (2,365) (1,914) ======== ========
(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHERS Investments in available-for-sale securities and others are summarized as follows:
September 30, December 31, 2001 2000 ------------- ------------ amounts in millions Sprint Corporation $ 6,170 5,192 AOL Time Warner Inc. ("AOL Time Warner") 6,380 6,325 News Corp. 4,394 2,342 Motorola, Inc. ("Motorola") 1,816 1,982 Viacom, Inc. ("Viacom") 524 -- Other available-for-sale securities 2,331 2,989 Other investments, at cost, and related receivables 907 705 ------- ------- 22,522 19,535 Less short-term investments 298 500 ------- ------- $22,224 19,035 ======= =======
SPRINT PCS Liberty and certain of its consolidated subsidiaries collectively are the beneficial owners of approximately 197 million shares of Sprint PCS Group Stock and certain other instruments convertible into such securities (the "Sprint Securities"). The Sprint PCS Group Stock is a tracking stock intended to reflect the performance of Sprint Corporation's domestic wireless PCS operations. Liberty accounts for its investment in the Sprint Securities as an available-for-sale security. I-12 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued Pursuant to a final judgment (the "Final Judgment") agreed to by Liberty, AT&T and the United States Department of Justice (the "DOJ") on December 31, 1998, Liberty transferred all of its beneficially owned Sprint Securities to a trustee (the "Trustee") prior to the March 1999 merger of TCI, Liberty's former parent, and AT&T. The Final Judgment, which was entered by the United States District Court for the District of Columbia on August 23, 1999, requires the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities sufficient to cause Liberty to beneficially own no more than 10% of the outstanding Sprint PCS Group common stock - Series 1 on a fully diluted basis on such date. On or before May 23, 2004, the Trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty. As of September 30, 2001, Liberty beneficially owned approximately 20% of Sprint PCS Group common stock - Series 2. The Final Judgment requires that the Trustee vote the Sprint Securities beneficially owned by Liberty in the same proportion as other holders of Sprint's PCS Group Common Stock so long as such securities are held by the trust. The Final Judgment also prohibits the acquisition by Liberty of additional Sprint Securities, with certain exceptions, without the prior written consent of the DOJ. On October 18, 2001, Liberty published a legal notice in the national edition of the Wall Street Journal in which it notified interested persons of its having asked the DOJ to consent to the termination of the Final Judgment and of the DOJ having opened an investigation to review this request. AOL TIME WARNER On January 11, 2001, America Online, Inc. completed its merger with Time Warner Inc. ("Time Warner") to form AOL Time Warner. In connection with the merger, each share of Time Warner common stock held by Liberty was converted into 1.5 shares of an identical series of AOL Time Warner stock. Upon completion of this transaction, Liberty holds a total of 171 million shares in AOL Time Warner. Liberty recognized a $253 million gain (before deferred tax expense of $100 million) based upon the difference between the carrying value of Liberty's interest in Time Warner and the fair value of the AOL Time Warner securities received. NEWS CORP. At September 30, 2001, Liberty owned 203 million ADSs or approximately 16% of the outstanding equity of News Corp. MOTOROLA On January 5, 2000, Motorola acquired General Instrument Corporation ("General Instrument"). In connection with the acquisition, 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 $2,233 million gain (before deferred tax expense of $883 million) on such transaction during the first quarter of 2000 based on the difference between the carrying value of Liberty's interest in General Instrument and the fair value of the Motorola securities received. At September 30, 2001, Liberty owned 71 million Motorola shares and warrants to purchase an additional 18 million shares. VIACOM, INC. ("VIACOM") On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by Viacom in exchange for shares of Class B common stock of Viacom. As a result of the merger, Liberty received 15.2 million shares of Viacom's Class B common stock (less than 1% of Viacom's common equity) in exchange for its 35% ownership interest in BET, which investment had been accounted for using the equity method. Liberty accounts for its investment in Viacom as an available-for-sale security. Liberty recognized a gain of $570 million (before deferred tax expense of $225 million) in the first quarter of 2001 based upon the difference between the carrying value of Liberty's interest in BET and the value of the Viacom securities received. I-13 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued UNITED PAN-EUROPE COMMUNICATIONS N.V. ("UPC") In May 2001, the Company entered into a loan agreement with UPC and Belmarken Holding B.V. ("Belmarken"), a subsidiary of UPC, pursuant to which the Company loaned Belmarken $857 million, which represented a 30% discount to the face amount of the loan of $1,225 million (the "Belmarken Loan"). UPC is a consolidated subsidiary of UGC. The loan accrues interest at 6% per annum, and all principal and interest are due in May 2007. After May 29, 2002, the loan is exchangeable, at the option of the Company, into shares of ordinary common stock of UPC at a rate of $6.85 per share. At inception, Liberty recorded the conversion feature of the loan at its estimated fair value of $420 million, and the $437 million remaining balance as a loan receivable. Liberty accounts for the convertible feature of the Belmarken Loan as a derivative security under Statement 133, and records the convertible feature at fair value with periodic market adjustments recorded in the statement of operations as unrealized gains or losses. The discounted loan receivable is being accreted up to the $1,225 million face amount over its term. Such accretion, which includes the stated interest of 6%, is being recognized into interest income over the term of the loan. Pursuant to an amended agreement between the Company and UGC dated as of May 25, 2001, the Company has agreed to, among other matters, contribute the Belmarken Loan to UGC in exchange for Class C shares of UGC. Liberty had previously purchased exchangeable preferred stock and warrants of UPC in December 2000 for $203 million. DERIVATIVES The Company enters into equity collars, put spread collars and other financial instruments to manage market risk associated with its investments in certain marketable securities. These instruments are recorded at fair value based on option pricing models using the historical volatility of the underlying security. Equity collars generally have high correlation between changes in the fair value of the instrument and changes in the fair value of the underlying security, and therefore, qualify as fair value hedges. Conversely, put spread collars generally do not have high correlation, and therefore, do not qualify as fair value hedges. Investments in available-for-sale securities at September 30, 2001 and December 31, 2000 are summarized as follows:
September 30, 2001 ------------------------------------------------------------------- Put Equity Equity spread Debt securities collars collars securities Total ---------- ------- ------- ---------- ----- amounts in millions Cost basis $ 22,872 -- -- 1,052 23,924 Gross gains recognized in earnings 123 2,011 267 -- 2,401 Gross losses recognized in earnings (1,792) -- -- -- (1,792) Gross unrealized holding gains 2,387 -- -- 96 2,483 Gross unrealized holding losses (5,393) -- -- (8) (5,401) -------- -------- -------- -------- -------- Fair value $ 18,197 2,011 267 1,140 21,615 ======== ======== ======== ======== ========
December 31, 2000 ------------------------------------------------------------------- Put Equity Equity spread Debt securities collars collars securities Total ---------- ------- ------- ---------- ----- amounts in millions Cost basis $ 17,640 -- -- 1,533 19,173 Gross gains recognized in earnings -- -- 188 -- 188 Gross unrealized holding gains 1,003 1,080 -- 86 2,169 Gross unrealized holding losses (2,636) -- -- (64) (2,700) -------- -------- -------- -------- -------- Fair value $ 16,007 1,080 188 1,555 18,830 ======== ======== ======== ======== ========
I-14 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued During the nine months ended September 30, 2001, Liberty determined that certain of its other investments experienced other-than-temporary declines in value. As a result, the carrying amounts of such investments were adjusted to their respective fair values. These adjustments resulted in a total charge of $665 million, before deducting a deferred tax benefit of $263 million. Management estimates the fair market value of all of its investments in available-for-sale securities and others aggregated $22,489 million and $19,664 million at September 30, 2001 and December 31, 2000, respectively. Management calculates market values using a variety of approaches including multiple of cash flow, per subscriber value, a value of comparable public or private businesses or publicly quoted market prices. No independent appraisals were conducted for those assets. (7) ACQUISITIONS ASCENT ENTERTAINMENT GROUP, INC. ("ASCENT") On March 28, 2000, Liberty completed a cash tender offer for the outstanding common stock of Ascent at a price of $15.25 per share. Approximately 85% of the outstanding shares of common stock of Ascent were tendered in the offer and Liberty paid $385 million. On June 28, 2000, Liberty acquired the remaining 15% of Ascent for an additional $67 million. The total purchase price for the acquisition was $452 million. Such transaction was accounted for as a purchase and the $228 million excess of the purchase price over the fair value of the net assets acquired is being amortized over 5 years. LIBERTY LIVEWIRE CORPORATION ("LIBERTY LIVEWIRE") On April 10, 2000, Liberty acquired all of the outstanding common stock of Four Media Company ("Four Media") for total consideration of $462 million comprised of $123 million in cash, $194 million of assumed debt, 6.4 million shares of AT&T Class A Liberty Media Group tracking stock and a warrant to purchase approximately 700,000 shares of AT&T Class A Liberty Media Group tracking stock at an exercise price of $23 per share. Four Media provides technical and creative services to owners, producers and distributors of television programming, feature films and other entertainment products both domestically and internationally. On June 9, 2000, Liberty acquired a controlling interest in The Todd-AO Corporation ("Todd-AO") in exchange for approximately 5.4 million shares of AT&T Class A Liberty Media Group tracking stock valued at $106 million. Todd-AO provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe. Immediately following the closing of such transaction, Liberty contributed to Todd-AO 100% of the capital stock of Four Media, and Todd-AO changed its name to Liberty Livewire. On July 19, 2000, Liberty purchased all of the assets relating to the post production, content and sound editorial businesses of Soundelux Entertainment Group for $90 million in cash, and contributed such assets to Liberty Livewire. Immediately following this contribution, Liberty's ownership in Liberty Livewire increased to approximately 88% of the equity and approximately 99% of the voting power of Liberty Livewire. Each of the foregoing acquisitions was accounted for as a purchase. In connection therewith, Liberty recorded an aggregate increase to additional paid-in-capital of $251 million. The $452 million excess purchase price over the fair value of the net assets acquired is being amortized over 20 years. I-15 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued PRO FORMA INFORMATION The following unaudited pro forma information for the nine months ended September 30, 2000 was prepared assuming the 2000 acquisitions discussed above occurred on January 1, 2000. These pro forma amounts are not necessarily indicative of operating results that would have occurred if the acquisitions discussed above and the Split Off Transaction had occurred on January 1, 2000. (amounts in millions) Revenue $1,437 Net earnings $2,891 Pro forma basic and diluted earnings per common share $ 1.12
(8) LONG-TERM DEBT Debt is summarized as follows:
September 30, December 31, 2001 2000 ------------ ------------ amounts in millions Parent company debt: Senior notes $ 742 742 Senior debentures 1,486 1,486 Senior exchangeable debentures 858 1,679 Securities lending agreement 449 338 Bank credit facilities 675 475 Other debt 510 242 ------ ------ 4,720 4,962 ------ ------ Debt of subsidiaries: Bank credit facilities 1,353 1,129 Senior notes 195 179 Other debt 311 93 ------ ------ 1,859 1,401 ------ ------ Total debt 6,579 6,363 Less current maturities 1,787 1,094 ------ ------ Total long-term debt $4,792 5,269 ====== ======
SENIOR NOTES AND DEBENTURES On July 7, 1999, Liberty issued $750 million of 7-7/8% Senior Notes due 2009 and issued $500 million of 8-1/2% Senior Debentures due 2029 for aggregate cash proceeds of $741 million and $494 million, respectively. Interest on both issuances is payable on January 15 and July 15 of each year. On February 2, 2000, Liberty issued $1 billion of 8-1/4% Senior Debentures due 2030 for aggregate cash proceeds of $983 million. Interest on these debentures is payable on February 1 and August 1 of each year. The senior notes and debentures are stated net of an aggregate unamortized discount of $22 million at September 30, 2001 and December 31, 2000, which is being amortized to interest expense in the consolidated statements of operations. SENIOR EXCHANGEABLE DEBENTURES In November 1999, Liberty issued $869 million of 4% Senior Exchangeable Debentures due 2030. Interest is payable on May 15 and November 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 22.9486 shares of Sprint PCS Group Stock. I-16 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued After the later of December 31, 2001 and the date Liberty's ownership level of Sprint PCS Group Stock falls below a specified level, Liberty may, at its election, pay the exchange value in cash, Sprint PCS Group Stock or a combination thereof. Prior to such time, the exchange value must be paid in cash. In February and March 2000, Liberty issued an aggregate of $810 million of 3-3/4% Senior Exchangeable Debentures due 2030. Interest is payable on February 15 and August 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 16.7764 shares of Sprint PCS Group Stock. After the later of February 15, 2002 and the date Liberty's ownership level of Sprint PCS Group Stock falls below a specified level, Liberty may, at its election, pay the exchange value in cash, Sprint PCS Group Stock or a combination thereof. Prior to such time, the exchange value must be paid in cash. In January 2001, Liberty issued $600 million of 3-1/2% Senior Exchangeable Debentures due 2031. Interest is payable on January 15 and July 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 36.8189 shares of Motorola common stock. Such exchange value is payable, at Liberty's option, in cash, Motorola stock or a combination thereof. On or after January 15, 2006, Liberty, at its option, may redeem the debentures for cash. In March 2001, Liberty issued $817.7 million of 3-1/4% Senior Exchangeable Debentures due 2031. Interest is payable on March 15 and September 15 of each year. Each $1,000 debenture is exchangeable at the holder's option for the value of 18.5666 shares of Viacom Class B common stock. After January 23, 2003, such exchange value is payable at Liberty's option in cash, Viacom stock or a combination thereof. Prior to such date, the exchange value must be paid in cash. On or after March 15, 2006, Liberty, at its option, may redeem the debentures for cash. Prior to the adoption of Statement 133, the carrying amount of the senior exchangeable debentures was adjusted based on the fair value of the underlying security. Increases or decreases in the value of the underlying security above the principal amount of the senior exchangeable debentures were recorded as unrealized gains or losses on financial instruments in the consolidated statements of operations and comprehensive loss. If the value of the underlying security decreased below the principal amount of the senior exchangeable debentures there was no effect on the principal amount of the debentures. Upon adoption of Statement 133, the call option feature of the exchangeable debentures is reported separately in the consolidated balance sheet at fair value. Accordingly, at January 1, 2001, Liberty recorded a transition adjustment to reflect the call option obligations at fair value ($459 million) and to recognize in net earnings the difference between the fair value of the call option obligations at issuance and the fair value of the call option obligations at January 1, 2001. Such adjustment to net earnings aggregated $757 million (before tax expense of $299 million) and is included in cumulative effect of accounting change. Changes in the fair value of the call option obligations subsequent to January 1, 2001 are recognized as unrealized gains (losses) on financial instruments in Liberty's consolidated statements of operations. During the nine months ended September 30, 2001, Liberty recorded unrealized gains of $250 million related to the call option obligations. Under Statement 133, the reported amount of the long-term debt portion of the exchangeable debentures is calculated as the difference between the face amount of the debentures and the fair value of the call option feature on the date of issuance. The fair value of the call option obligations related to the $1,418 million of exchangeable debentures issued during the nine months ended September 30, 2001, aggregated $1,028 million on the date of issuance. Accordingly, the long-term debt portion was recorded at $390 million. The long-term debt is accreted to its face amount over the term of the debenture using the effective interest method. The transition adjustment noted above resulted in a decrease in the carrying value of the long-term debt portion of the senior exchangeable debentures of $1,216 million on January 1, 2001. I-17 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued SECURITIES LENDING AGREEMENT On January 7, 2000, a trust, which holds Liberty's investment in Sprint Corporation, 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 $449 million at September 30, 2001. 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. Interest earned on the cash collateral aggregated $25 million as of September 30, 2001, and Liberty had utilized $255 million of the cash collateral and interest income as of such date. Unutilized cash collateral of $194 million at September 30, 2001, which includes restricted cash of $69 million, is included in other assets in the consolidated balance sheets. BANK CREDIT FACILITIES At September 30, 2001, Liberty and its subsidiaries had $235 million in unused lines of credit under their respective 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. The borrowers were in compliance with their debt covenants at September 30, 2001. Additionally, the bank credit facilities require the payment of fees ranging from .15% to .375% per annum on the average unborrowed portions of the total commitments. Liberty estimates the fair value of its debt based on the quoted market prices for the same or similar issues or on the current rate offered to Liberty for debt of the same remaining maturities. The fair value of Liberty's publicly traded debt at September 30, 2001 is as follows (amounts in millions): Senior notes of parent company $ 754 Senior debentures of parent company 1,437 Senior exchangeable debentures of parent company, including call option liability 2,320 Senior notes of subsidiary 202
Liberty believes that the carrying amount of the remainder of its debt approximated its fair value at September 30, 2001. (9) STOCKHOLDERS' EQUITY PREFERRED STOCK Liberty's 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 Liberty's Board of Directors. As of September 30, 2001, no shares of preferred stock were issued. I-18 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued COMMON STOCK Prior to the Split Off Transaction, Liberty had 1,000 shares of each of Class A, Class B and Class C common stock outstanding. In connection with the Split Off Transaction, the Class A and Class B common stock were reclassified into Series A common stock and the Class C common stock was reclassified into Series B Stock. The Series A common stock has one vote per share, and the Series B common stock has ten votes per share. Each share of the Series B common stock is exchangeable at the option of the holder for one share of Series A common stock. As of September 30, 2001, there were 75.9 million shares of Liberty Series A common stock reserved for issuance under exercise privileges of outstanding stock options. STOCK ISSUANCES OF SUBSIDIARIES During the nine months ended September 30, 2001, certain equity affiliates and consolidated subsidiaries of Liberty issued shares of common stock in connection with certain acquisitions and the exercise of employee stock options. In connection with the increase in the issuers' equity, net of the dilution of Liberty's ownership interest, that resulted from such stock issuances, Liberty recorded a $9 million decrease to additional paid-in-capital. TRANSACTIONS WITH OFFICERS AND DIRECTORS Effective February 28, 2001 (the "Effective Date"), the Company restructured the options and options with tandem SARs to purchase AT&T common stock and AT&T Liberty Media Group tracking stock (collectively the "Restructured Options") held by certain executive officers of the Company. Pursuant to such restructuring, all Restructured Options became exercisable on the Effective Date, and each executive officer was given the choice to exercise all of his Restructured Options. Each executive officer who opted to exercise his Restructured Options received consideration equal to the excess of the closing price of the subject securities on the Effective Date over the exercise price. The exercising officers received (i) a combination of cash and AT&T Liberty Media Group tracking stock for Restructured Options that were vested prior to the Effective Date and (ii) cash for Restructured Options that were previously unvested. The executive officers used the cash proceeds from the previously unvested options to purchase restricted shares of AT&T Liberty Media Group tracking stock. Such restricted shares are subject to forfeiture upon termination of employment. The forfeiture obligation will lapse according to a schedule that corresponds to the vesting schedule applicable to the previously unvested options. In addition, each executive officer was granted free-standing SARs equal to the total number of Restructured Options exercised. The free-standing SARs were tied to the value of AT&T Liberty Media Group tracking stock and will vest as to 30% in year one and 17.5% in years two through five. Upon completion of the Split Off Transaction, the free-standing SARs automatically converted to options to purchase Liberty common stock. Prior to the Effective Date, the Restructured Options were accounted for using variable plan accounting pursuant to APB Opinion No. 25. Accordingly, the above-described transaction did not have a significant impact on Liberty's results of operations. During the first quarter of 2000, an executive officer of Liberty Digital, a subsidiary of Liberty, exercised certain of his stock options with tandem stock appreciation rights that had been granted by Liberty Digital. In order to satisfy Liberty Digital's obligations under the stock option agreement, LDIG and Liberty offered to issue, and the executive agreed to accept, a combination of cash and AT&T Liberty Media Group tracking stock in lieu of a cash payment. Accordingly, Liberty paid cash of $50 million and issued 5.8 million shares to the executive officer in the first quarter of 2001. During the second quarter of 2001, Liberty purchased 2,245,155 shares of common stock of On Command Corporation ("On Command"), a consolidated subsidiary of Liberty, from an executive officer and director of On Command, who is also a director of Liberty, for aggregate cash I-19 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued consideration of $25.2 million. Such purchase price represents a per share price of $11.22. The closing market price for On Command common stock on the day the transaction was signed was $7.77. The Company has included the difference between the aggregate market value of the shares purchased and the cash consideration paid in selling, general and administrative expenses in the accompanying consolidated statement of operations. (10) 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 $210 million and $184 million for the period from January 1, 2001 to August 9, 2001 (the period in 2001 that Liberty was a wholly-owned subsidiary of AT&T) and for the nine months ended September 30, 2000, respectively. Prior to the Split Off Transaction, AT&T allocated certain corporate general and administrative costs to Liberty pursuant to an intergroup agreement. Management believes such allocation methods were reasonable. In addition, there are arrangements between subsidiaries of Liberty and AT&T and its other subsidiaries for satellite transponder services, marketing support, programming, and hosting services. These expenses aggregated $20 million and $26 million for the seven months ended July 31, 2001 and for the nine months ended September 30, 2000, respectively. (11) COMMITMENTS AND CONTINGENCIES Starz Encore Group LLC ("Starz Encore Group"), a wholly owned subsidiary of Liberty, provides premium programming distributed by cable, direct-to-home satellite and other distribution media throughout the United States. Starz Encore Group is obligated to pay fees for the rights to exhibit certain films that are released by various producers through 2017 (the "Film Licensing Obligations"). Based on customer levels at September 30, 2001, these agreements require minimum payments aggregating approximately $1,203 million. 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, 2001, the Guaranteed Obligations aggregated approximately $1,039 million. Currently, Liberty is not certain of the likelihood of being required to perform under such guarantees. Liberty leases business offices, has entered into pole rental and transponder lease agreements and uses certain equipment under lease arrangements. STARZ ENCORE GROUP LLC V. AT&T BROADBAND LLC AND SATELLITE SERVICES, INC. Starz Encore Group entered into a 25-year affiliation agreement in 1997 with TCI. TCI cable systems subsequently acquired by AT&T in the TCI merger operate under the name AT&T Broadband. Starz Encore Group receives fixed monthly payments in exchange for unlimited access to all of the existing Encore and STARZ! services. The payment from AT&T Broadband can be adjusted if AT&T acquires or disposes of cable systems. The affiliation agreement further provides that to the extent Starz Encore Group's programming costs increase above or decrease below amounts specified in the agreement, then AT&T Broadband's payments under the affiliation agreement will be increased or decreased in an amount equal to a proportion of the excess or shortfall. Starz Encore Group requested payment from AT&T Broadband of its proportionate share of excess programming costs during the first quarter of 2001 (which amount, approximately $40 million, is expected to represent the bulk of AT&T Broadband's proportionate share of excess programming I-20 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued costs for the year 2001). Excess programming costs payable by AT&T Broadband could be significantly larger in future years. By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability of the excess programming costs pass through provisions of the affiliation agreement and questioned whether the affiliation agreement, as a whole, is "voidable." In addition, AT&T Broadband raised certain issues concerning interpretations of the contractual requirements associated with the treatment of acquisitions and dispositions. Starz Encore Group believes the position expressed by AT&T Broadband to be without merit. On July 10, 2001, Starz Encore Group initiated a lawsuit against AT&T Broadband and Satellite Services, Inc., a subsidiary of AT&T Broadband that is also a party to the affiliation agreement, in Arapahoe County District Court, Colorado for breach of contract. Starz Encore Group is seeking a judgment of specific performance of the contract, damages and costs. On October 19, 2001, Starz Encore Group entered into a standstill and tolling agreement whereby the parties agreed to move the court to stay the lawsuit until August 31, 2002 to permit the parties an opportunity to resolve their dispute. This agreement provides that either party may unilaterally petition the court to lift the stay after April 30, 2002 and proceed with the litigation. The court granted the stay on October 30, 2001. In conjunction with this agreement, AT&T Broadband and the Company entered into various agreements whereby Starz Encore Group will indirectly receive payment for AT&T Broadband's proportionate share of the programming costs pass through for 2001. Liberty has contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Liberty may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying consolidated financial statements. (12) 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 Liberty's pre-tax earnings or loss. Subsidiaries and affiliates not meeting this threshold are aggregated for segment reporting purposes. The segment presentation for prior periods has been conformed to correspond to the current period segment presentation. For the nine months ended September 30, 2001, Liberty had five operating segments: Starz Encore Group, Liberty Livewire, On Command, Telewest and Other. Starz Encore Group provides premium programming distributed by cable, direct-to-home satellite and other distribution media throughout the United States and is wholly owned and consolidated by Liberty. Liberty Livewire provides sound, video and ancillary post production and distribution services to the motion picture and television industries in the United States and Europe and is majority owned and consolidated by Liberty. On Command provides in-room, on-demand video entertainment and information services to the lodging industry and is majority owned and consolidated by Liberty. Telewest, an equity method affiliate, operates and constructs cable television and telephone systems in the UK. Other includes Liberty's non-consolidated investments, corporate and other consolidated businesses not representing separately reportable segments. The accounting policies of the segments that are also consolidated subsidiaries are the same as those described in Liberty's summary of significant accounting policies. Liberty evaluates performance based on the financial measures of revenue and operating cash flow (as defined by Liberty), appreciation in stock price and non-financial measures such as average prime time rating, prime time audience delivery, subscriber growth and penetration, as appropriate. Liberty believes operating cash flow is a widely used financial measure of companies similar to Liberty I-21 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued and its affiliates, which should be considered in addition to, but not as a substitute for, operating income, net income, cash 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, distribution channels and marketing strategies. Liberty utilizes the following financial information for purposes of allocating resources to a segment and assessing a segment's performance:
Starz Encore Liberty On Group Livewire Command Other Telewest(1) Eliminations Total ------- -------- ------- ----- ----------- ------------ ----- amounts in millions PERFORMANCE MEASURES: NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenue $ 639 445 184 270 1,336 (1,336) 1,538 Operating cash flow (deficit) 237 74 31 (31) 299 (299) 311 NINE MONTHS ENDED SEPTEMBER 30, 2000 Revenue 542 170 135 206 1,200 (1,200) 1,053 Operating cash flow 182 21 37 8 261 (261) 248 BALANCE SHEET INFORMATION: AS OF SEPTEMBER 30, 2001 Assets 2,869 1,257 461 46,257 10,795 (10,795) 50,844 Investments in affiliates 140 -- 25 11,964 1,128 (1,128) 12,129
------------------- (1) Represents an equity method affiliate. I-22 LIBERTY MEDIA CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements, continued The following table provides a reconciliation of segment operating cash flow to earnings (loss) before income taxes and minority interest:
Nine months ended September 30, -------------------- 2001 2000 ------- ------- amounts in millions Segment operating cash flow $ 311 248 Stock compensation (37) 487 Depreciation and amortization (727) (604) Interest expense (396) (123) Segment equity in losses of affiliates (3,227) (2,594) Gains (losses) on dispositions, net (67) 7,447 Other-than-temporary decline in fair value of investments (665) (40) Realized and unrealized losses on financial instruments, net (66) (77) Other, net 214 220 ------- ------- Earnings (loss) before income taxes and minority interest $(4,660) 4,964 ======= =======
I-23 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying consolidated financial statements and the notes thereto. Liberty's domestic subsidiaries generally operate or hold interests in businesses which provide programming services including production, acquisition and distribution, through all available formats and media, of branded entertainment, educational and informational programming and software. In addition, certain of Liberty's subsidiaries hold interests in technology and Internet businesses, as well as interests in businesses engaged in wireless telephony, electronic retailing, direct marketing and advertising sales relating to programming services, infomercials and transaction processing. Liberty also has significant interests in foreign affiliates, which operate in cable television, programming and satellite distribution. Liberty's most significant consolidated subsidiaries at September 30, 2001, 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 generally 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, 2001 were USA Networks, Inc., Discovery Communications, 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 AOL Time Warner Inc., Sprint Corporation, The News Corporation Limited, Viacom, Inc. and Motorola Inc. which are classified as available-for-sale securities and are carried at fair value. Realized gains and losses are determined on a specific-identification basis. Prior to the Split Off Transaction, AT&T owned all the outstanding shares of Class A Common Stock, Class B Common Stock and Class C Common Stock of Liberty. On August 9, 2001, Liberty increased its authorized capital stock, and the Liberty Class A and Class B Common Stock was reclassified as Series A Liberty Media Corporation common stock and the Class C Common Stock was reclassified as Series B Liberty Media Corporation common stock. Effective August 10, 2001, AT&T effected the split off of Liberty from AT&T by means of a redemption of AT&T Liberty Media Group tracking stock. In the Split Off Transaction, each share of Class A and Class B AT&T Liberty Media Group tracking stock was exchanged for one share of Series A common stock and Series B common stock, respectively. Upon completion of the Split Off Transaction, Liberty ceased to be a subsidiary of AT&T, and no shares of AT&T Liberty Media Group tracking stock remain outstanding. The Split Off Transaction has been accounted for at historical cost. 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. Due to the significance of their operations and to enhance the reader's understanding, separate financial data has been provided below for Starz Encore Group, Liberty Livewire and On Command for the periods in which they were consolidated. Included in the other category are Liberty's other consolidated subsidiaries and corporate expenses. Some of Liberty's significant other consolidated subsidiaries include Liberty Digital, Pramer S.C.A. and Liberty I-24 Cablevision of Puerto Rico. Liberty Digital is principally engaged in programming, distributing and marketing digital and analog music services to homes and businesses. Pramer is an owner and distributor of cable programming services in Argentina. Liberty Cablevision of Puerto Rico is a provider of cable television services in Puerto Rico. 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 Using the Equity Method." Other items of significance are discussed separately below.
Three months Three months ended ended September 30, % of September 30, % of 2001 revenue 2000 revenue ------------- ------- ------------- ----- dollar amounts in millions Starz Encore Group Revenue $ 217 100% $ 189 100% Operating, selling, general and administrative (126) (58) (124) (66) Stock compensation (2) (1) -- Depreciation and amortization (39) (18) (39) (20) ----- ----- ----- ----- Operating income $ 50 23% $ 26 14% ===== ===== ===== ===== Liberty Livewire Revenue $ 143 100% $ 101 100% Operating, selling, general and administrative (131) (92) (91) (90) Stock compensation 11 8 24 24 Depreciation and amortization (33) (23) (20) (20) ----- ----- ----- ----- Operating income (loss) $ (10) (7)% $ 14 14% ===== ===== ===== ===== On Command Revenue $ 58 100% $ 69 100% Operating, selling, general and administrative (45) (78) (51) (74) Depreciation and amortization (21) (36) (22) (32) ----- ----- ----- ----- Operating loss $ (8) (14)% $ (4) (6)% ===== ===== ===== ===== Other Revenue $ 103 (a) $ 77 (a) Operating, selling, general and administrative (107) (70) Stock compensation 69 224 Depreciation and amortization (148) (120) ----- ----- Operating income (loss) $ (83) $ 111 ===== =====
-------------- (a) Not meaningful. I-25
Nine months Nine months ended ended September 30, % of September 30, % of 2001 revenue 2000 revenue ------------- ------- ------------- ----- dollar amounts in millions Starz Encore Group Revenue $ 639 100% $ 542 100% Operating, selling, general and administrative (402) (63) (360) (66) Stock compensation (6) (1) (5) (1) Depreciation and amortization (116) (18) (118) (22) ----- ----- ----- ----- Operating income $ 115 18% $ 59 11% ===== ===== ===== ===== Liberty Livewire Revenue $ 445 100% $ 170 100% Operating, selling, general and administrative (371) (83) (149) (88) Stock compensation -- -- 24 14 Depreciation and amortization (97) (22) (34) (20) ----- ----- ----- ----- Operating loss $ (23) (5)% $ 11 6% ===== ===== ===== ===== On Command Revenue $ 184 100% $ 135 100% Operating, selling, general and administrative (153) (83) (98) (73) Depreciation and amortization (62) (34) (44) (32) ----- ----- ----- ----- Operating loss $ (31) (17)% $ (7) (5)% ===== ===== ===== ===== Other Revenue $ 270 (a) $ 206 (a) Operating, selling, general and administrative (301) (198) Stock compensation (31) 468 Depreciation and amortization (452) (408) ----- ----- Operating loss $(514) $ 68 ===== =====
-------------- (a) Not meaningful. Certain of the Company's consolidated subsidiaries and equity affiliates (the "Programming Affiliates") are dependent on the entertainment industry for entertainment, educational and informational programming. A prolonged downturn in the economy could have a negative impact on the revenue and operating income of the Programming Affiliates. Such an event could reduce the development of new television and motion picture programming, thereby adversely impacting the Programming Affiliates' supply of service offerings. In addition, a soft economy could reduce consumer disposable income and consumer demand for the products and services of the Programming Affiliates. CONSOLIDATED SUBSIDIARIES STARZ ENCORE GROUP. The majority of Starz Encore Group's revenue is derived from the delivery of movies to subscribers under affiliation agreements with cable operators and satellite direct-to-home distributors. In 1997, Starz Encore Group entered into a 25-year affiliation agreement with TCI. TCI cable systems were subsequently acquired by AT&T and 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 20%. After adjusting for the elimination of the former MediaOne contract, the net payment amount from the combined AT&T companies increased by approximately 10%. Starz Encore I-26 Group's other affiliation agreements generally provide for payments based on the number of subscribers that receive Starz Encore Group's services. By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability of the excess programming costs pass through provisions of the affiliation agreement and questioned whether the affiliation agreement, as a whole, is "voidable." In addition, AT&T Broadband raised certain issues concerning the interpretation of the contractual requirements associated with the treatment of acquisitions and dispositions. Starz Encore Group believes the position expressed by AT&T Broadband to be without merit. On July 10, 2001, Starz Encore Group initiated a lawsuit against AT&T Broadband and Satellite Services, Inc., a subsidiary of AT&T Broadband that is also a party to the affiliation agreement, for breach of contract and collection of damages and costs. On October 19, 2001, Starz Encore Group entered into a standstill and tolling agreement whereby the parties agreed to move the court to stay the lawsuit until August 31, 2002 to permit the parties an opportunity to resolve their dispute. This agreement provides that either party may unilaterally petition the court to lift the stay after April 30, 2002 and proceed with the litigation. The court granted the stay on October 30, 2001. In conjunction with this agreement, AT&T Broadband and Liberty entered into various agreements whereby Starz Encore Group will indirectly receive payment for AT&T Broadband's proportionate share of the programming costs pass through for 2001. Revenue increased 15% and 18% for the three and nine month periods ended September 30, 2001, respectively, as compared to the corresponding prior year periods. Such increases are primarily due to a 44% increase in subscription units from all forms of distribution. Encore and its Thematic Multiplex end-of-period units increased 60% as of September 30, 2001, and STARZ! end-of-period units increased 11% as of September 30, 2001, as compared to the same date in 2000. Operating, selling, general and administrative expenses increased 2% and 12% for the three and nine month periods ended September 30, 2001, respectively, as compared to the corresponding periods in 2000. Such increases are primarily due to increases in programming license fees, partially offset by decreases in affiliate marketing support and national branding expense. Liberty expects Starz Encore Group to generate an operating loss during 2001 due to continued stock compensation and depreciation and amortization expenses. It is expected that this operating loss will decrease compared to 2000 due to improved earnings before interest, taxes, depreciation and amortization. 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 tracking 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 tracking stock. Immediately following the closing of such transaction, Liberty contributed 100% of the capital stock of Four Media Company to Todd-AO in exchange for additional Todd-AO common stock. Following these transactions, Todd-AO changed its name to Liberty Livewire. On July 19, 2000, Liberty purchased all of the assets relating to the post-production, content and sound editorial businesses of Soundelux Entertainment Group and contributed such assets to Liberty Livewire for additional Liberty Livewire stock. Immediately following the contributions, Liberty owned approximately 88% of the equity and controlled approximately 99% of the voting power of Liberty Livewire. Liberty Livewire's operations for the nine months ended September 30, 2000 include Four Media for six months, Todd-AO for four months and Soundelux for two months. Increases in Liberty Livewire's revenue and expenses for the three months ended September 30, 2001 are due to the inclusion of Soundelux and other entities acquired by Liberty Livewire in 2001. Liberty Livewire is dependent on the television and movie production industries for a substantial portion of its revenue. ON COMMAND. On March 28, 2000, Liberty completed a cash tender offer for the outstanding common stock of Ascent. Approximately 85% of the outstanding shares of common stock of Ascent were tendered in the offer. On June 28, 2000, Liberty acquired the remaining 15% of Ascent. On Command is a majority-owned subsidiary of Ascent. On Command's principal business is providing pay-per-view entertainment and information services to the lodging industry. Upon completion of the tender offer, Liberty consolidated the operations of On Command. Liberty expects On Command to generate an operating loss in 2001. I-27 Revenue decreased 16% for the three months ended September 30, 2001, as compared to the corresponding period in 2000. Such decrease is due primarily to a reduction in total rooms served by On Command and an overall decrease in occupancy rates in the hotel industry. Operating, selling, general and administrative expenses decreased 12% for the three months ended September 30, 2001, as compared to the corresponding period in 2000. Such decrease is consistent with the decrease in revenue noted above. OTHER. Included in this information are the results of Liberty's other consolidated subsidiaries and corporate expenses. Revenue increased 34% and 31% for the three months and nine months ended September 30, 2001, respectively, as compared to the corresponding period in 2000. Such increases are due primarily to revenue growth at Liberty Digital. Operating, selling, general and administrative expenses increased 53% and 52% for the three month and nine month periods ended September 30, 2001, respectively, as compared to the same period in 2000. Included in expenses for 2001 is $11 million of expenses related to the Split Off Transaction. In addition, the increase in 2001 is due to (i) increases in expenses of Liberty Digital and (ii) start up expenses of True Position, Inc., which was acquired on January 14, 2000. 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 increased 26% and 43% for the three and nine months ended September 30, 2001, respectively, as compared to the corresponding prior year periods. Such increases are primarily due to increased borrowings during 2000 and the first quarter of 2001. Dividend and interest income for the nine months ended September 30, 2001 and 2000 was $204 million and $218 million, respectively. The decrease in dividend and interest income during the nine months ended September 30, 2001 is primarily attributed to the use of Liberty's cash balance in investing activities, combined with the elimination of Time Warner dividends subsequent to the merger of Time Warner and AOL. These decreases were partially offset by interest earned on the Belmarken Loan and other debt securities purchased in the second and third quarter of 2001. Aggregate gains (losses) from dispositions during the nine month periods ended September 30, 2001 and 2000 were $(67) million and $7,447 million, respectively. Included in gains from dispositions in 2001 are $570 million related to the merger of Viacom and BET, and $253 million related to the merger of AOL and Time Warner offset by losses of $764 million from the Company's exchange of Gemstar stock for News Corp. ADSs and $121 million from the sale of a portion of the Company's investment in Cendant Corporation. Included in the 2000 gains from dispositions is $4,391 million related to the acquisition of TV Guide by Gemstar, $2,233 million related to the acquisition of General Instruments by Motorola and $649 million related to the Telewest acquisition of Flextech. See notes 5 and 6 to the accompanying consolidated financial statements for a discussion of the foregoing transactions. During the nine months ended September 30, 2001, Liberty determined that certain of its other investments experienced other-than-temporary declines in value. As a result, the carrying amounts of such investments were adjusted to their respective fair values. These adjustments resulted in a total charge of $665 million, before deducting a deferred tax benefit of $263 million. For the nine months ended September 30, 2001, realized and unrealized gains on financial instruments included a $250 million unrealized gain related to call option obligations, a $599 million unrealized net loss for changes in the fair value of derivative instruments related to available-for-sale securities and other derivatives not designated as hedging instruments, a $114 million unrealized net gain for changes in the time value of options for fair value hedges, and a $169 million realized gain related to the settlement of an equity collar. I-28 Prior to the adoption of Statement 133, the carrying amount of the senior exchangeable debentures was adjusted based on the fair value of the underlying 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 were recorded as unrealized gains or losses on financial instruments in the consolidated statements of operations and comprehensive loss. INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD Liberty's share of losses of affiliates for the nine months ended September 30, 2001 and 2000 was $3,227 million and $2,594 million, respectively. A summary of Liberty's share of earnings (losses) of affiliates, including excess basis amortization and other-than-temporary declines in value, is presented below:
Nine months ended September 30, Percentage ------------------------ Ownership 2001 2000 --------- ------- ------- amounts in millions Gemstar N/A $ (133) (71) Discovery 50% (246) (219) Telewest 25% (2,126) (262) USAI and related investments 21% 48 (18) QVC 42% (1) -- UGC 11% (267) (132) Teligent N/A (85) (1,106) Other Various (417) (786) ------- ------- $(3,227) (2,594) ======= =======
At September 30, 2001, the aggregate carrying amount of Liberty's investments in its affiliates exceeded Liberty's proportionate share of its affiliates' net assets by $8,101 million. Such excess is being amortized over estimated useful lives of up to 20 years. Amortization aggregating $681 million and $587 million for the nine months ended September 30, 2001 and 2000, respectively, is included in share of losses of affiliates. Liberty expects to continue to record share of losses in its affiliates for the foreseeable future. GEMSTAR. On July 12, 2000, TV Guide and Gemstar completed a merger whereby Gemstar acquired TV Guide. As a result of this transaction, 133 million shares of TV Guide held by Liberty were exchanged for 87.5 million shares of Gemstar common stock. On May 2, 2001, Liberty entered into a transaction with News Corp. to exchange 70.7 million shares of Gemstar held by Liberty for 121.5 million News Corp. American Depository Shares representing preferred, limited voting, ordinary shares of News Corp. The Company recognized a loss of $764 million in connection with the Exchange Transaction as the fair value of the securities received by Liberty was less than the carrying value of the Gemstar shares on the date of the Exchange Transaction. As a result of the Exchange Transaction, Liberty's ownership interest in Gemstar was reduced from 21% to 4%, and accordingly, Liberty now accounts for its investment in Gemstar as an available-for-sale security. TELEWEST. Liberty's share of Telewest's net loss increased to $2,126 million for the nine months ended September 30, 2001 from $262 million for the nine months ended September 30, 2000, including excess basis amortization of $109 million and $69 million for 2001 and 2000, respectively. During the nine months ended September 30, 2001, Liberty determined that its investment in Telewest experienced an other-than-temporary decline in value. As a result, the carrying value of Telewest was adjusted to its estimated fair value, and the Company recorded a charge of $1,801 million, including $398 million in the third quarter of 2001. Such charge is included in share of losses of affiliates. Excluding the effects of the excess basis amortization and the other-than-temporary decline in value adjustment, Liberty's share of Telewest's net loss increased from $193 million to $216 million due to a $78 million increase in Telewest's net loss. Telewest's net loss increased due to increased interest expense and increased depreciation and amortization expense resulting from acquisitions partially offset by an increase in operating cash flow. I-29 TELIGENT. In January 2000, the Company acquired a 40% equity interest in Teligent, a full-service facilities based communications company. During the nine months ended September 30, 2000, the Company determined that its investment in Teligent experienced an other-than-temporary decline in value. As a result, the carrying amount of this investment was adjusted to its estimated fair value resulting in a charge of $839 million. This impairment charge is included in share of losses of affiliates. In April 2001, the Company exchanged its investment in Teligent for shares of IDT Investments, Inc., a subsidiary of IDT Corporation. As the fair value of the consideration received in the exchange approximated the carrying value of the Company's investment in Teligent, no gain or loss was recognized on the transaction. The Company accounts for its investment in IDT Investments, Inc. using the cost method. LIQUIDITY AND CAPITAL RESOURCES Although Liberty's sources of funds include its available cash balances, net cash from operating activities, dividend and interest receipts, and proceeds from asset sales, Liberty is primarily dependent upon its financing activities to generate sufficient cash resources to meet its future cash requirements and planned commitments. Liberty is generally not entitled to the cash resources or cash generated by operations of its subsidiaries and business affiliates. Prior to the Split Off Transaction, Liberty was 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 received a cash payment from AT&T in periods when Liberty generated taxable losses and those taxable losses were utilized by AT&T to reduce the consolidated income tax liability. In connection with the Split Off Transaction, Liberty has also been deconsolidated from AT&T for federal income tax purposes. As a result, AT&T was required to pay Liberty an amount equal to 35% of the amount of the net operating loss carryforward reflected in TCI's final federal income tax return that has not been used as an offset to Liberty's obligations under the tax sharing agreement and that has been, or is reasonably expected to be, utilized by AT&T. The $803 million payment, which was reduced by Liberty's $138 million obligation under the 1995 TCI Tax Sharing Agreement, was received by Liberty prior to the Split Off Transaction. In addition, certain deferred intercompany gains will be includible in AT&T's taxable income as a result of the Split Off Transaction, and AT&T will be entitled to reimbursement from Liberty for the resulting tax liability of approximately $115 million. While Liberty was a subsidiary of AT&T, there were restrictions on incurrence of debt of Liberty under an Inter-Group Agreement with AT&T. Liberty could not incur any debt that would cause the total indebtedness of Liberty at any time to be in excess of 25% of the total market capitalization of the AT&T Liberty Media Group tracking stock, if the excess would adversely affect the credit rating of AT&T. Such restrictions were eliminated upon consummation of the Split Off Transaction on August 10, 2001. In connection with the private letter ruling received by AT&T with respect to the tax consequences of the Split Off Transaction, Liberty represented to the Internal Revenue Service that, within one year following the Split Off Transaction, it will issue, subject to market and business conditions, at least $250 million to $500 million of Liberty common stock for cash or other assets, and, within two years following the Split Off Transaction, it will issue at least $500 million to $1 billion of Liberty common stock (including any common stock issued during the first year) for cash or other assets. In January 2001, Liberty received net cash proceeds of $588 million (after underwriter fees of $12 million) from the issuance of its 3-1/2% senior exchangeable debentures due 2031. These debentures are exchangeable, at the option of the holder, for the value of 36.8189 shares of Motorola stock. Liberty may pay such value in cash, with a number of shares of Motorola stock or a combination of cash and stock, as determined in the debentures. In March 2001, Liberty received net cash proceeds of $801 million (after underwriter fees of $17 million) from the issuance of its 3-1/4% senior exchangeable debentures due 2031. These debentures are exchangeable, at the option of the holder, for the value of 18.5666 shares of Viacom. Liberty may pay such value in cash, with a number of shares of Viacom stock or a combination of cash and stock, as determined in the debentures. I-30 At September 30, 2001, Liberty and its consolidated subsidiaries had bank credit facilities which provided for borrowings of up to $2,263 million. Borrowings under these facilities of $2,028 million were outstanding at September 30, 2001. 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. In January 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 $449 million at September 30, 2001. 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. Interest earned on the cash collateral aggregated $25 million as of September 30, 2001, and Liberty had utilized $255 million of the cash collateral and interest income as of such date. Unutilized cash collateral of $194 million at September 30, 2001, which includes restricted cash of $69 million, is included in other current assets in the consolidated balance sheets. At September 30, 2001, Liberty owned 203 million ADSs of News Corp. and 71 million shares of Motorola common stock. Liberty receives dividends on its ownership interests in these entities periodically. In addition, Liberty owns shares of Fox Kids Worldwide preferred stock which pays quarterly dividends at the annual rate of 9% of the liquidation value of $1,000 per share. There can be no assurance that such dividends will continue to be paid. Based on currently available information and expected future transactions, Liberty expects to receive approximately $230 million in dividend and interest income during the year ended December 31, 2001. Based on current debt levels and current interest rates, Liberty expects to make interest payments of approximately $460 million during the year ended December 31, 2001. 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. 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 trustee prior to the AT&T merger. The Final Judgment, which was entered by the United States District Court for the District of Columbia on August 23, 1999, requires the Trustee, on or before May 23, 2002, to dispose of a portion of the Sprint Securities held by the trust sufficient to cause Liberty to beneficially own no more than 10% of the outstanding Sprint PCS Group common stock-Series 1 on a fully diluted basis on such date. On or before May 23, 2004, the trustee must divest the remainder of the Sprint Securities beneficially owned by Liberty. On November 9, 2001, the Company, through a wholly owned subsidiary, acquired approximately $1,156 million face amount of U.S. dollar denominated outstanding notes issued by UPC and Euro 261 million face amount of EURO denominated outstanding notes issued by UPC for an aggregate purchase price of approximately $220 million (including accrued interest) pursuant to a tender offer commenced on October 9, 2001. The company used available cash on hand to purchase these notes. Liberty has guaranteed notes payable and other obligations of certain affiliates. At September 30, 2001, the U.S. dollar equivalent of these guaranteed obligations aggregated approximately $1,039 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, 2001, Starz Encore Group's future minimum obligation related to certain film licensing agreements was $1,203 million. 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 I-31 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 Starz Encore Group or Liberty. Liberty has signed definitive agreements to acquire six German regional cable television companies from Deutsche Telekom AG. In addition, Liberty has agreed to acquire a 100% ownership interest in Deutsche Telekom's Level 4 operator, DeTeKS, as well as Media Services GmbH, an IT service provider and operator of a neutral digital distribution platform in Germany. The aggregate purchase price is approximately euro 5.5 billion comprised of euro 3.0 billion in cash, euro 1.5 billion in Liberty Series A common stock and euro 1.0 billion in 10-year 7.125% Liberty notes payable. The transaction is subject to governmental approval and customary closing conditions. Although no assurance can be given that the contemplated transactions will be consummated, Liberty anticipates that such transactions could have a significant impact on its capital resources. Liberty has also agreed to a transaction with UnitedGlobalCom, Inc. pursuant to which Liberty will invest consideration equal to $1.4 billion, of which Liberty has advanced to a subsidiary of UGC approximately $857 million, and will contribute certain of its interests in various international broadband distribution and programming assets, including its interests in Cablevision S.A., Pramer S.C.A. and Torneos y Competencias S.A., in exchange for direct or indirect equity interests in UGC. Assuming the consummation of all of the contemplated transactions and the contribution of all of the assets proposed to be contributed, Liberty would hold a substantial direct or indirect equity interest in UGC and, upon the occurrence of certain events, a controlling voting interest in UGC. However, pursuant to certain voting and standstill arrangements that would be entered into at the time of the closing of this transaction, Liberty's ability to exercise control of UGC would be limited. The voting and standstill arrangements would terminate upon the tenth anniversary of the closing, subject to earlier termination upon the occurrence of specified events. This transaction is subject to various conditions, including receipt of governmental and other third party approvals. Although no assurance can be given that the contemplated transactions will be consummated, Liberty anticipates that such transactions could have a significant impact on its capital resources. CASH FLOWS FROM OPERATING ACTIVITIES Cash used in operating activities for the nine months ended September 30, 2001 and 2000 was $5 million and $153 million, respectively, including payments related to stock appreciation rights of $241 million and $292 million, respectively. CASH FLOWS FROM INVESTING ACTIVITIES Cash used in investing activities was $1,590 million and $2,039 million for the nine months ended September 30, 2001 and 2000, respectively. Liberty 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 $2,135 million and $2,496 million during the nine months ended September 30, 2001 and 2000, respectively. 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 $4,093 million and $3,620 million and repayments of $1,973 million and $1,768 million during the nine months ended September 30, 2001 and 2000, respectively. I-32 RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" which requires the use of the purchase method and eliminates the option of using the pooling-of-interests method of accounting for all business combinations. The provisions in this statement apply to all business combinations initiated after June 30, 2001, and all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Company does not believe that the adoption of this statement will have a material impact on the Company's financial position, results of operations or cash flows. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). In general, Statement 142 is effective for fiscal years beginning after December 15, 2001. Statement 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets, and requires that all intangible assets acquired, other than those acquired in a business combination, be initially recognized and measured based on fair value. In addition, the intangible asset should be amortized based upon its useful life. If the intangible asset is determined to have an indefinite useful life, it shall not be amortized, but shall be tested for impairment at least annually. Management has not determined the potential impact that this statement will have on the Company's financial position, results of operations or cash flows. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" which requires that the fair value of a liability for an asset retirement obligation by recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The statement also requires that the associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This statement is effective for financial statements issued for periods beginning after June 15, 2001. The Company does not believe the adoption of this statement will have a material impact on the company's financial position, results of operations or cash flows. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes prior statements that address the disposal of a segment of a business, and eliminates the exception to consolidation for subsidiaries for which control is likely to be temporary. This statement retains the prior statement's fundamental provisions for the recognition and measurement of impairment of long-lived assets to be held and used, as well as the measurement of long-lived assets to be disposed of by sale. The statement is effective for fiscal years beginning after December 15, 2001. The Company does not believe the adoption of this statement will have a material impact on the Company's financial position, results of operations or cash flow. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Liberty is exposed to market risk in the normal course of business 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. Investments in and advances to Liberty's foreign affiliates are denominated in foreign currencies. 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. However, due to the significant cash commitment the Company has with respect to the pending transaction with Deutsche Telekom, Liberty has entered into forward purchase contracts with respect to 3.0 billion Euros as of September 30, 2001. Liberty recorded $67 million in unrealized gains related to these contracts during the nine months ended September 30, 2001. If the price of the Euro had been 10% lower at September 30, 2001, Liberty would have recorded an unrealized loss on financial instruments of $273 million. Liberty continually evaluates its foreign currency exposure based on current market conditions and the business environment in each country in which it operates. I-33 Liberty is exposed to changes in interest rates primarily as a result of its borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of Liberty's long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. Liberty manages its exposure to interest rates primarily through the issuance of fixed rate debt that Liberty believes has a low stated interest rate and significant term to maturity. Liberty believes this best protects the Company from interest rate risk. As of September 30, 2001, 60% of Liberty's debt was composed of fixed rate debt with a weighted average stated interest rate of 6.0%. The Company's variable rate debt had a weighted average interest rate of 5.4% at September 30, 2001. Had market interest rates been 100 basis points higher (representing an approximate 19% increase over Liberty's variable rate debt effective cost of borrowing) throughout the nine months ended September 30, 2001, Liberty would have recorded approximately $18 million of additional interest expense. Had the price of the securities underlying the call option obligations associated with the Company's senior exchangeable debentures been 10% higher during the nine months ended September 30, 2001, Liberty would have recorded an additional unrealized loss on financial instruments of $158 million. 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. The Company uses equity collars, put spread collars and other financial instruments to hedge certain investment positions subject to fluctuations in stock prices. At September 30, 2001, the Company had available-for-sale ("AFS") equity securities with an aggregate fair value of $18,197 million (excluding the fair value of related equity and put spread collars). As of such date, the Company had entered into equity collars with an aggregate fair value of $2,011 million related to $4,215 million or 23% of the value of such AFS securities. In addition, the Company had entered into put spread collars related to $3,489 million or 19% of the value of such AFS securities. The Company's market risk related to its hedged AFS securities is generally the excess of (i) the aggregate carrying value of the AFS securities and related financial instruments over (ii) the put value of such financial instruments. At September 30, 2001, $10,493 million or 58% of the value of the Company's AFS securities were not hedged. Had the market price of the unhedged AFS securities been 10% lower at September 30, 2001, the value of such securities would have been $1,049 million lower. Had the stock price of Liberty's publicly traded investments accounted for using the equity method been 10% lower at September 30, 2001, there would have been no impact on the carrying value of such investments. Liberty's cash collateral account and debt balance under the securities lending agreement would be reduced by $45 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, 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 assets. These measures allow Liberty's management to measure the success of its use of derivative instruments and to determine when to enter into or exit from derivative instruments. I-34 LIBERTY MEDIA CORPORATION PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND ROBERT R. BENNETT. On September 4, 2001, we entered into agreements with Deutsche Telekom AG pursuant to which we would purchase its entire interest in six of nine regional cable television companies in Germany. On July 27, 2001, Klesch & Company Limited initiated a lawsuit against us, our chairman, John C. Malone, and our chief executive officer, Robert R. Bennett, in the United States District Court for the District of Colorado alleging, among other things, breach of fiduciary duty, fraud and breach of contract in connection with actions alleged to have been taken by us with respect to what then was a proposed transaction with Deutsche Telekom. Klesch is seeking damages in an unspecified amount. We believe all such claims to be without merit and, together with Messrs. Malone and Bennett, have filed an answer denying any liability to Klesch. We also have asserted counterclaims against Klesch seeking, among other things, a declaratory judgment to the effect that because Klesch has breached and repudiated an agreement that we entered into with Klesch in June 2001, we are relieved of any obligations that we might have to Klesch under that agreement. Those obligations would include, among other things, the obligation in certain events to pay to Klesch, as its sole compensation, fees equal to 3% of the value of specified assets acquired by us from Deutsche Telekom before the second anniversary of the date of that agreement, subject to an aggregate cap of Euro 165 million. Klesch has filed a reply denying all our counterclaims. STARZ ENCORE GROUP LLC V. AT&T BROADBAND LLC AND SATELLITE SERVICES, INC. Starz Encore Group entered into a 25-year affiliation agreement in 1997 with TCI. TCI cable systems subsequently acquired by AT&T in the TCI merger operate under the name AT&T Broadband. Starz Encore Group receives fixed monthly payments in exchange for unlimited access to all of the existing Encore and STARZ! services. The payment from AT&T Broadband can be adjusted if AT&T acquires or disposes of cable systems. The affiliation agreement further provides that to the extent Starz Encore Group's programming costs increase above or decrease below amounts specified in the agreement, then AT&T Broadband's payments under the affiliation agreement will be increased or decreased in an amount equal to a proportion of the excess or shortfall. Starz Encore Group has requested payment from AT&T Broadband of its proportionate share of excess programming costs during the first quarter of 2001 (which amount, approximately $40 million, is expected to represent the bulk of AT&T Broadband's proportionate share of excess programming costs for the year 2001). Excess programming costs payable by AT&T Broadband could be significantly larger in future years. By letter dated May 29, 2001, AT&T Broadband has disputed the enforceability of the excess programming costs pass through provisions of the affiliation agreement and questioned whether the affiliation agreement, as a whole, is "voidable." Starz Encore Group believes the position expressed by AT&T Broadband in that letter to be without merit. On July 10, 2001, Starz Encore Group initiated a lawsuit against AT&T Broadband and Satellite Services, Inc., a subsidiary of AT&T Broadband that is also a party to the affiliation agreement, in Arapahoe County District Court, Colorado for breach of contract. Starz Encore Group is seeking a judgment of specific performance of the contract, damages and costs. On October 19, 2001, Starz Encore Group entered into a standstill and tolling agreement whereby the parties agreed to move the court to stay the lawsuit until August 31, 2002 to permit the parties an opportunity to resolve their dispute. This agreement provides that either party may unilaterally petition the court to lift the stay after April 30, 2002 and proceed with the litigation. The court granted the stay on October 30, 2001. In conjunction with this agreement, AT&T Broadband and the Company entered into various agreements whereby Starz Encore Group will indirectly receive payment for AT&T Broadband's proportionate share of the programming costs pass through for 2001. II-1 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None. (b) Report on Form 8-K filed during the quarter ended September 30, 2001:
Date Item Financial Filed reported statements filed ----- -------- ---------------- August 14, 2001 Item 5 None.
II-2 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 13, 2001 By: /s/ Charles Y. Tanabe --------------------------------- Charles Y. Tanabe Senior Vice President and General Counsel Date: November 13, 2001 By: /s/ David J.A. Flowers --------------------------------- David J.A. Flowers Senior Vice President and Treasurer (Principal Financial Officer) Date: November 13, 2001 By: /s/ Christopher W. Shean --------------------------------- Christopher W. Shean Vice President and Controller (Principal Accounting Officer) II-3