SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): JUNE 7, 2004
LIBERTY MEDIA CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE
(State or Other Jurisdiction of Incorporation)
0-20421 84-1288730
(Commission File Number) (I.R.S. Employer Identification No.)
12300 LIBERTY BLVD.
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (720) 875-5400
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
On June 7, 2004, Liberty Media Corporation ("Liberty") completed the
spin off (the "Spin Off") of its wholly-owned subsidiary, Liberty Media
International, Inc. ("Liberty Media International"), to its
shareholders. Substantially all of the assets and businesses of Liberty
Media International were attributed to Liberty's International Group
segment. In connection with the Spin Off, holders of record of Liberty
common stock on June 1, 2004 (the "Record Date") received 0.05 of a
share of Liberty Media International Series A common stock for each
share of Liberty Series A common stock owned at 5:00 pm New York City
time on the Record Date and 0.05 of a share of Liberty Media
International Series B common stock for each share of Liberty Series B
common stock owned at 5:00 pm New York City time on the Record Date. The
Spin Off is intended to qualify as a tax-free spin off. For accounting
purposes, the Spin Off is deemed to have occurred on June 1, 2004, and
no gain or loss was recognized by Liberty in connection with the Spin
Off.
Liberty's financial statements as of December 31, 2003 and 2002 and for
the three years then ended (the "2003 Financial Statements"), included
in its Annual Report on Form 10-K, and its financial statements as of
March 31, 2004 and for the three months then ended (the "2004 Financial
Statements") included in its Quarterly Report on Form 10-Q may be
incorporated by reference into certain registration statements filed by
Liberty in the future. Accordingly, Liberty is revising its 2003
Financial Statements and 2004 Financial Statements to reflect Liberty
Media International as a discontinued operation. The revised financial
statements are included herein.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(c) Exhibit
23 Consent of KPMG LLP
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
Date: July 14, 2004
LIBERTY MEDIA CORPORATION
By: /s/ Christopher W. Shean
------------------------------
Name: Christopher W. Shean
Title: Senior Vice President
and Controller
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
March 31, December 31,
2004 2003
------------ ------------
amounts in millions
ASSETS
Current assets:
Cash and cash equivalents $ 1,834 3,050
Short-term investments 71 265
Trade and other receivables, net 1,024 1,085
Inventory, net 606 588
Prepaid expenses and program rights 650 531
Derivative instruments (note 7) 517 543
Other current assets 143 104
------------ ------------
Total current assets 4,845 6,166
------------ ------------
Investments in available-for-sale securities and other cost
investments (note 5) 20,905 19,499
Long-term derivative instruments (note 7) 3,034 3,247
Investments in affiliates, accounted for using the equity
method, and related receivables 3,629 3,614
Property and equipment, at cost 2,020 1,948
Accumulated depreciation (607) (538)
------------ ------------
1,413 1,410
------------ ------------
Intangible assets not subject to amortization:
Goodwill (note 6) 8,968 8,911
Trademarks 2,385 2,385
------------ ------------
11,353 11,296
------------ ------------
Intangible assets subject to amortization 5,713 5,666
Accumulated amortization (853) (732)
------------ ------------
4,860 4,934
------------ ------------
Other assets, at cost, net of accumulated amortization 467 532
Assets of discontinued operations (note 4) 10,745 3,551
------------ ------------
Total assets $ 61,251 54,249
============ ============
(continued)
1
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, continued
(unaudited)
March 31, December 31,
2004 2003
------------ ------------
amounts in millions
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 395 410
Accrued liabilities 968 1,073
Accrued stock compensation 180 190
Program rights payable 229 177
Derivative instruments (note 7) 1,013 854
Current portion of debt 96 104
------------ ------------
Total current liabilities 2,881 2,808
------------ ------------
Long-term debt (note 8) 9,460 9,441
Long-term derivative instruments (note 7) 1,626 1,756
Deferred income tax liabilities 10,940 10,686
Other liabilities 296 290
Liabilities of discontinued operations (note 4) 5,442 133
------------ ------------
Total liabilities 30,645 25,114
------------ ------------
Minority interests in equity of subsidiaries 239 293
Minority interests of discontinued operations (note 4) 1,103 --
Stockholders' equity (note 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
2,788,565,123 shares at March 31, 2004 and
2,669,835,166 shares at December 31, 2003 28 27
Series B common stock, $.01 par value. Authorized
400,000,000 shares; issued 131,062,825 shares at
March 31, 2004 and 217,100,515 shares at
December 31, 2003 1 2
Additional paid-in-capital 39,279 39,001
Accumulated other comprehensive earnings, net of taxes
("AOCE") 3,499 3,247
AOCE of discontinued operations (note 4) (27) (46)
Unearned compensation (90) (98)
Accumulated deficit (13,301) (13,291)
------------ ------------
29,389 28,842
Series B common stock held in treasury, at cost
(10,000,000 shares in 2004) (125) --
------------ ------------
Total stockholders' equity 29,264 28,842
------------ ------------
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity $ 61,251 54,249
============ ============
See accompanying notes to condensed consolidated financial statements.
2
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
Three months ended
March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions,
except per share amounts
Revenue:
Net sales from electronic retailing $ 1,283 --
Communications and programming services 512 480
------------ ------------
1,795 480
------------ ------------
Operating costs and expenses:
Cost of sales-electronic retailing services 811 --
Operating 418 247
Selling, general and administrative ("SG&A") 211 120
Stock compensation - SG&A (note 10) 1 10
Depreciation and amortization 185 95
------------ ------------
1,626 472
------------ ------------
Operating income 169 8
Other income (expense):
Interest expense (151) (99)
Dividend and interest income 45 27
Share of earnings of affiliates, net 7 34
Gains on dispositions of assets, net 218 66
Realized and unrealized gains (losses) on financial
instruments, net (note 7) (209) 183
Other, net 61 (26)
------------ ------------
(29) 185
------------ ------------
Earnings from continuing operations before income
taxes and minority interests 140 193
Income tax expense (66) (80)
Minority interests in losses of subsidiaries -- 12
------------ ------------
Earnings from continuing operations 74 125
Earnings (loss) from discontinued operations, net of taxes
(note 4) (84) 7
------------ ------------
Net earnings (loss) $ (10) 132
============ ============
Earnings (loss) per common share (note 2):
Basic and diluted earnings from continuing operations $ .03 .05
Discontinued operations (.03) --
------------ ------------
Basic and diluted earnings (loss) $ -- .05
============ ============
Weighted average common shares outstanding 2,903 2,689
============ ============
See accompanying notes to condensed consolidated financial statements.
3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(unaudited)
Three months ended
March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions
Net earnings (loss) $ (10) 132
------------ ------------
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments (19) --
Unrealized gains (losses) on available-for-sale securities 376 (290)
Recognition of previously unrealized losses (gains) on
available-for-sale securities, net (105) 15
Other comprehensive earnings (loss) from discontinued
operations 19 (2)
------------ ------------
Other comprehensive earnings (loss) 271 (277)
------------ ------------
Comprehensive earnings (loss) $ 261 (145)
============ ============
See accompanying notes to condensed consolidated financial statements.
4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity
(unaudited)
Three months ended March 31, 2004
Common stock Additional
Preferred --------------------------- paid-in
stock Series A Series B capital AOCE
----------- ------------ ------------ ------------ ------------
amounts in millions
Balance at January 1, 2004 $ -- 27 2 39,001 3,247
Net loss -- -- -- -- --
Other comprehensive
earnings -- -- -- -- 252
Issuance of Series A common
stock in exchange for
Series B common stock
(note 9) -- 1 (1) 125 --
Issuance of Series A common
stock for acquisition -- -- -- 152 --
Amortization of deferred
compensation -- -- -- -- --
Other -- -- -- 1 --
----------- ------------ ------------ ------------ ------------
Balance at March 31, 2004 $ -- 28 1 39,279 3,499
=========== ============ ============ ============ ============
AOCE
from Total
discontinued Unearned Accumulated Treasury stockholders'
operations compensation deficit stock equity
------------ ------------ ------------ ------------ -------------
amounts in millions
Balance at January 1, 2004 (46) (98) (13,291) -- 28,842
Net loss -- -- (10) -- (10)
Other comprehensive
earnings 19 -- -- -- 271
Issuance of Series A common
stock in exchange for
Series B common stock
(note 9) -- -- -- (125) --
Issuance of Series A common
stock for acquisition -- -- -- -- 152
Amortization of deferred
compensation -- 8 -- -- 8
Other -- -- -- -- 1
------------ ------------ ------------ ------------ --------------
Balance at March 31, 2004 (27) (90) (13,301) (125) 29,264
============ ============ ============ ============ ==============
See accompanying notes to condensed consolidated financial statements.
5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three months ended
March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions
Cash flows from operating activities:
Earnings from continuing operations $ 74 125
Adjustments to reconcile earnings from continuing
operations to net cash provided (used) by operating
activities:
Depreciation and amortization 185 95
Stock compensation 1 10
Payments of stock compensation (1) (53)
Share of earnings of affiliates, net (7) (34)
Gains on disposition of assets, net (218) (66)
Realized and unrealized losses (gains) on financial
instruments, net 209 (183)
Minority interests in losses of subsidiaries -- (12)
Deferred income tax expense 16 73
Other noncash charges (credits), net (1) 39
Changes in operating assets and liabilities:
Receivables 72 (60)
Inventory (18) --
Prepaid expenses and other current assets (113) (47)
Payables and other current liabilities (35) (72)
------------ ------------
Net cash provided (used) by operating activities 164 (185)
------------ ------------
Cash flows from investing activities:
Investments in and loans to equity affiliates (14) (6)
Investments in and loans to cost investees (907) --
Cash paid for acquisitions (127) --
Net sales (purchases) of short term investments (103) 169
Net proceeds from settlement of financial instruments 44 224
Premium proceeds from origination of financial
instruments 17 24
Capital expended for property and equipment (36) (23)
Cash proceeds from dispositions 468 90
Other investing activities, net (18) 1
------------ ------------
Net cash provided (used) by investing activities (676) 479
------------ ------------
Cash flows from financing activities:
Borrowings of debt -- 1,186
Proceeds attributed to call option obligations upon
issuance of senior exchangeable debentures -- 348
Repayments of debt (1) (103)
Proceeds from issuance of stock by subsidiaries -- --
Proceeds from issuance of Liberty Series A common stock -- 141
Purchases of Liberty common stock -- (170)
Other financing activities, net (20) (24)
------------ ------------
Net cash provided (used) by financing activities (21) 1,378
------------ ------------
Net cash used by discontinued operations (683) (385)
------------ ------------
Net increase (decreased) in cash and cash
equivalents (1,216) 1,287
Cash and cash equivalents at beginning of period 3,050 2,164
------------ ------------
Cash and cash equivalents at end of period $ 1,834 3,451
============ ============
Cash paid for interest $ 189 152
============ ============
Cash paid for income taxes $ 18 1
============ ============
See accompanying notes to condensed consolidated financial statements.
6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
March 31, 2004
(unaudited)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Liberty Media Corporation and its controlled subsidiaries
(collectively, "Liberty" or the "Company", unless the context otherwise
requires). All significant intercompany accounts and transactions have
been eliminated in consolidation.
Liberty is a holding company which, through its majority and minority
ownership of interests in subsidiaries and other companies, is primarily
engaged in (i) electronic retailing and (ii) the production, acquisition
and distribution through all available formats and media of branded
entertainment, educational and informational programming and software.
In addition, companies in which Liberty owns interests are engaged in,
among other things, (i) interactive commerce via the Internet,
television and telephone, (ii) domestic cable and satellite broadband
services, and (iii) wireless domestic telephony and other technology
ventures. Prior to June 7, 2004, Liberty was also engaged in
international programming and broadband distribution of video, voice and
data. See note 4. Liberty, through its affiliated companies, operates in
the United States, Europe and Asia.
The accompanying interim condensed 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 condensed 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, 2003.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Liberty considers the fair value of its derivative instruments and its
assessment of nontemporary declines in fair value of its investments to
be its most significant estimates.
Liberty holds a significant number of investments that are accounted for
using the equity method. Liberty does not control the decision making
process or business management practices of these affiliates.
Accordingly, Liberty relies on management of these affiliates and their
independent accountants to provide it with accurate financial
information prepared in accordance with GAAP that Liberty uses in the
application of the equity method. The Company is not aware, however, of
any errors in or possible misstatements of the financial information
provided by its equity affiliates that would have a material effect on
Liberty's condensed consolidated financial statements.
Certain prior period amounts have been reclassified for comparability
with the 2004 presentation.
(2) EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) by the weighted average number of common shares
outstanding for the period. Diluted
7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
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 periodspresented. Excluded from diluted earnings
per share for the three months ended March 31, 2004, are 84 million
potential common shares because their inclusion would be anti-dilutive.
(3) ACQUISITIONS
ACQUISITION OF CONTROLLING INTEREST IN QVC, INC. ("QVC")
On September 17, 2003, Liberty completed its acquisition of Comcast
Corporation's ("Comcast") approximate 56.5% ownership interest in QVC
for an aggregate purchase price of approximately $7.9 billion. QVC
markets and sells a wide variety of consumer products in the U.S. and
several foreign countries primarily by means of televised shopping
programs on the QVC networks and via the Internet through its domestic
and international websites. Prior to the closing, Liberty owned
approximately 41.7% of QVC. Subsequent to the closing, Liberty owned
approximately 98% of QVC's outstanding shares, and the remaining shares
of QVC were held by members of QVC management.
Liberty's purchase price for QVC was comprised of 217.7 million shares
of Liberty's Series A common stock valued, for accounting purposes, at
$2,555 million, Floating Rate Senior Notes due 2006 in an aggregate
principal amount of $4,000 million (the "Floating Rate Notes") and
approximately $1,358 million in cash (including acquisition costs). The
foregoing value of the Series A common stock issued was based on the
average closing price for such stock for the five days surrounding July
3, 2003, which was the date that Liberty announced that it had reached
an agreement with Comcast to acquire Comcast's interest in QVC.
Substantially all of the cash component of the purchase price was funded
with the proceeds from the Company's issuance of its 3.50% Senior Notes
due 2006 in the aggregate principal amount of $1.35 billion.
Subsequent to the closing, QVC is a consolidated subsidiary of Liberty.
For financial reporting purposes, the acquisition is deemed to have
occurred on September 1, 2003, and since that date QVC's results of
operations have been consolidated with Liberty's. Prior to its
acquisition of Comcast's interest, Liberty accounted for its investment
in QVC using the equity method of accounting. Liberty has recorded the
acquisition of QVC as a step acquisition, and accordingly, QVC's assets
and liabilities have been recorded at amounts equal to (1) 56.5% of
estimated fair value at the date of acquisition plus (2) 43.5% of
historical cost. The $2,048 million excess of the purchase price over
the estimated fair value of 56.5% of QVC's assets and liabilities
combined with Liberty's historical equity method goodwill of $1,848
million has been recorded as goodwill in the accompanying condensed
consolidated balance sheet. The excess of the purchase price for
Comcast's interest in QVC over the estimated fair value of QVC's assets
and liabilities is attributable to the following: (i) QVC's position as
a market leader in its industry, (ii) QVC's ability to generate
significant cash from operations and Liberty's ability to obtain access
to such cash, and (iii) QVC's perceived significant international growth
opportunities.
8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the three months ended March 31, 2003 was
prepared assuming the acquisition of QVC occurred on January 1, 2003.
These pro forma amounts are not necessarily indicative of operating
results that would have occurred if the QVC acquisition had occurred on
January 1, 2003 (amounts in millions, except per share amounts).
Revenue $ 1,542
Earnings from continuing operations $ 136
Net earnings $ 143
Earnings per common share $ .05
(4) SPIN OFF OF INTERNATIONAL GROUP
On June 7, 2004 (the "Spin Off Date"), Liberty completed the spin off
(the "Spin Off") of its wholly-owned subsidiary, Liberty Media
International, Inc. ("Liberty Media International"), to its
shareholders. Substantially all of the assets and businesses of Liberty
Media International were attributed to Liberty's International Group
segment. In connection with the Spin Off, holders of Liberty common
stock on June 1, 2004 (the "Record Date") received 0.05 of a share of
Liberty Media International Series A common stock for each share of
Liberty Series A common stock owned at 5:00 pm New York City time on the
Record Date and 0.05 of a share of Liberty Media International Series B
common stock for each share of Liberty Series B common stock owned at
5:00 pm New York City time on the Record Date. The Spin Off is intended
to qualify as a tax-free spin off. For accounting purposes, the Spin Off
is deemed to have occurred on June 1, 2004, and no gain or loss was
recognized by Liberty in connection with the Spin Off.
The condensed consolidated financial statements and accompanying notes
of Liberty have been revised to reflect Liberty Media International as
a discontinued operation. Accordingly, the assets and liabilities,
revenue, costs and expenses, and cash flows of Liberty Media
International have been excluded from the respective captions in the
accompanying condensed consolidated balance sheets, condensed
consolidated statements of operations, condensed consolidated statements
of comprehensive earnings (loss) and condensed consolidated statements
of cash flows and have been
9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
reported separately in such condensed consolidated financial statements.
Summarized combined financial information for Liberty Media
International, including the accounts of UnitedGlobalCom, Inc., which
became a consolidated subsidiary effective January 1, 2004, is as
follows:
COMBINED BALANCE SHEETS
March 31, December 31,
2004 2003
------------ ------------
amounts in millions
Cash $ 1,287 13
Current assets 339 18
Equity investments 1,971 1,741
Cost investments 687 450
Property and equipment, net 3,245 98
Goodwill and franchise costs 2,607 689
Deferred tax assets -- 458
Other assets 609 84
------------ ------------
Total assets $ 10,745 3,551
============ ============
Current liabilities $ 1,190 83
Long term debt 3,637 42
Deferred income tax liabilities 339 --
Other liabilities 307 8
Minority interests 1,103 --
Equity 4,169 3,418
------------ ------------
Total liabilities and equity $ 10,745 3,551
============ ============
COMBINED STATEMENTS OF OPERATIONS
Three months ended March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions
Revenue $ 576 25
Operating, selling, general and administrative expenses (439) (19)
Depreciation and amortization (221) (4)
------------ ------------
Operating income (loss) (84) 2
Other income (expense) (59) 13
Minority interests 69 --
Income tax expense (10) (8)
------------ ------------
Net earnings (loss) $ (84) 7
============ ============
In addition to the foregoing discontinued operations, Liberty also
contributed certain monetary assets to Liberty Media International in
connection with the Spin Off and agreed to make loans to Liberty Media
International pursuant to a short-term credit facility. These monetary
assets consisted of $50 million in cash, 5 million American Depository
Shares for preferred, limited voting ordinary shares of The News
Corporation Limited ("News Corp.") and related derivatives, and a 99.9%
economic interest in 345,000 shares of preferred stock of ABC Family
Worldwide, Inc. The short-term credit facility provides for loans
through December 31, 2004 in the aggregate principal amount of $383
million. The loans will bear interest at 6% per annum, compounded
semi-annually. Principal and accrued interest are due and payable on
March 31, 2005.
10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(5) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments
are summarized as follows:
March 31, December 31,
2004 2003
------------ ------------
amounts in millions
News Corp. (1) $ 8,410 7,633
Time Warner Inc. 2,886 3,080
InterActiveCorp 4,379 4,697
Sprint Corporation 1,789 1,134
Motorola, Inc. (2) 1,343 1,068
Viacom, Inc. 595 674
Other available-for-sale equity securities 393 382
Other available-for-sale debt securities (3) 1,020 918
Other cost investments and related receivables 161 178
------------ ------------
20,976 19,764
Less short-term investments (71) (265)
------------ ------------
$ 20,905 19,499
============ ============
----------
(1) Certain of Liberty's News Corp. ADSs were contributed to Liberty
Media International on the Spin Off Date. See note 4.
(2) Includes $669 million and $533 million of shares pledged as
collateral for share borrowing arrangements at March 31, 2004
and December 31, 2003, respectively.
(3) At March 31, 2004, other available-for-sale debt securities
include $599 million of investments in certain third-party
marketable debt securities held by Liberty parent and $22
million of such securities held by Liberty subsidiaries. At
December 31, 2003, such investments aggregated $493 million and
$26 million, respectively.
Management estimates that the aggregate fair market value of all of its
other cost investments approximated $470 million and $405 million at
March 31, 2004 and December 31, 2003, respectively. Management
calculates market values of its other cost investments using a variety
of approaches including multiple of cash flow, discounted cash flow
model, per subscriber value, or a value of comparable public or private
businesses. No independent appraisals were conducted for those cost
investments.
UNREALIZED HOLDING GAINS AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities that are included in accumulated other
comprehensive earnings are summarized below.
March 31, 2004 December 31, 2003
----------------------------- -------------------------
Equity Debt Equity Debt
securities securities securities securities
------------ ------------ ------------ ------------
amounts in millions
Gross unrealized holding gains $ 6,304 2 5,779 1
Gross unrealized holding losses $ (77) -- -- --
11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
(6) INTANGIBLE ASSETS
GOODWILL
Changes in the carrying amount of goodwill for the three months ended
March 31, 2004 are as follows:
Starz
Encore
QVC Group LLC Other Total
--- --------- ----- -----
amounts in millions
Balance at January 1, 2004 $ 3,889 1,383 3,639 8,911
Acquisitions 51 -- 17 68
Foreign currency translation (1) -- -- (1)
Other -- -- (10) (10)
------------ ------------ ------------ ------------
Balance at March 31, 2004 $ 3,939 1,383 3,646 8,968
============ ============ ============ ============
AMORTIZABLE INTANGIBLE ASSETS
Amortization of intangible assets with finite useful lives was $124
million and $50 million for the three months ended March 31, 2004 and
2003, respectively. Based on its current amortizable intangible assets,
Liberty expects that amortization expense will be as follows for the
next five years (amounts in millions):
Remainder of 2004 $ 342
2005 $ 462
2006 $ 419
2007 $ 389
2008 $ 380
(7) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are summarized as follows:
Type of March 31, December 31,
derivative 2004 2003
----------------------------------- ------------ ------------
amounts in millions
ASSETS
Equity collars $ 3,139 3,358
Put spread collars 289 331
Other 123 101
------------ ------------
Subtotal 3,551 3,790
Less current portion (517) (543)
------------ ------------
$ 3,034 3,247
============ ============
LIABILITIES
Exchangeable debenture call option obligations $ 926 990
Put options 823 772
Equity collars 194 293
Borrowed shares 669 533
Other 27 22
------------ ------------
Subtotal 2,639 2,610
Less current portion (1,013) (854)
------------ ------------
$ 1,626 1,756
============ ============
12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS
Realized and unrealized gains (losses) on financial instruments during
the three months ended March 31, 2004 and 2003 are comprised of the
following:
Three months ended
March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions
Change in fair value of exchangeable debenture
call option features $ 64 89
Change in fair value of derivatives related to
available-for-sale securities (298) 90
Change in fair value of other derivatives 25 4
------------ ------------
Total realized and unrealized gains (losses), net $ (209) 183
============ ============
(8) LONG-TERM DEBT
Debt is summarized as follows:
March 31, December 31,
2004 2003
------------ ------------
amounts in millions
Parent company debt:
Senior notes $ 5,628 5,627
Senior debentures 1,487 1,487
Senior exchangeable debentures 2,247 2,227
------------ ------------
9,362 9,341
------------ ------------
Subsidiary debt 194 204
------------ ------------
Total debt 9,556 9,545
Less current maturities (96) (104)
------------ ------------
Total long-term debt $ 9,460 9,441
============ ============
SUBSIDIARY DEBT
At March 31, 2004, Starz Encore had no amounts outstanding and $325
million in unused availability under its bank credit facility. The bank
credit facility contains restrictive covenants which require, among
other things, the maintenance of certain financial ratios, and include
limitations on indebtedness, liens, encumbrances, acquisitions,
dispositions, guarantees and dividends. Additionally, the bank credit
facility requires the payment of fees of .2% per annum on the average
unborrowed portion of the total commitment. Such fees were not
significant for the three months ended March 31, 2004 and 2003. Starz
Encore's ability to borrow the unused capacity noted above is dependent
on its continuing compliance with these covenants at the time of, and
after giving effect to, a requested borrowing.
At March 31, 2004, the subsidiary of Liberty that operates the DMX Music
service was not in compliance with three covenants contained in its bank
loan agreement. The subsidiary and the participating banks have entered
into a forbearance agreement whereby the banks have agreed to forbear
from exercising certain default-related remedies against the subsidiary.
The forbearance agreement originally expired on March 31, 2004, but has
been extended until June 15, 2004. The outstanding balance
13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
of the subsidiary's bank facility was $89 million at March 31, 2004, all
of which is included in current portion of debt.
Also included in other subsidiary debt is $80 million of capitalized
transponder lease obligations.
FAIR VALUE OF DEBT
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 securities at March 31, 2004 is as
follows (amounts in millions):
Fixed rate senior notes $ 3,414
Floating Rate Notes $ 2,503
Senior debentures $ 1,851
Senior exchangeable debentures, including call
option obligation $ 4,356
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at March 31, 2004.
A reconciliation of the carrying value of the Company's debt to the face
amount at maturity is as follows (amounts in millions):
Carrying value at March 31, 2004 $ 9,556
Add:
Unamortized issue discount on senior notes and debentures 23
Unamortized discount attributable to call option feature
of exchangeable debentures 2,391
----------
Face amount at maturity $ 11,970
==========
(9) STOCKHOLDERS' EQUITY
SHARES RESERVED FOR ISSUANCE
As of March 31, 2004, there were 55.8 million shares of Liberty Series A
common stock and 28.2 million shares of Liberty Series B common stock
reserved for issuance under exercise privileges of outstanding stock
options and warrants.
PURCHASES OF COMMON STOCK
During the three months ended March 31, 2004, the Company acquired
approximately 96.0 million shares of its Series B common stock from the
estate and family of the late founder of Liberty's former parent in
exchange for approximately 105.4 million shares of Liberty Series A
common stock. Ten million of the acquired Series B shares have been
accounted for as treasury stock in the accompanying condensed
consolidated balance sheet, and the remaining Series B shares have been
retired.
(10) STOCK BASED COMPENSATION
The Company has granted to certain of its employees options, stock
appreciation rights ("SARs") and options with tandem SARs to purchase
shares of Liberty Series A and Series B common stock. The Company
accounts for these grants pursuant to the
14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion
No. 25"). The Company's options and options with tandem SARs are
accounted for as variable plan awards, and compensation is recognized
based upon the percentage of the options that are vested and the
difference between the market price of the underlying common stock and
the exercise price of the options at the balance sheet date. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," ("Statement 123") to its options.
Compensation expense for options with tandem SARs is the same under APB
Opinion No. 25 and Statement 123.
Three months ended
March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions,
except per share amounts
Earnings from continuing operations $ 74 125
Add stock compensation as determined under the intrinsic
value method, net of taxes 2 --
Deduct stock compensation as determined under the fair
value method, net of taxes (13) (11)
------------ ------------
Pro forma earnings from continuing operations $ 63 114
============ ============
Basic and diluted earnings from continuing
operations per share:
As reported $ .03 .05
Pro forma $ .02 .04
(11) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Encore Group LLC ("Starz Encore"), a wholly-owned subsidiary of
Liberty, provides premium video programming distributed by cable
operators, direct-to-home satellite providers and other distributors
throughout the United States. Starz Encore has entered into agreements
with a number of motion picture producers which obligate Starz Encore to
pay fees for the rights to exhibit certain films that are released by
these producers. The unpaid balance under agreements for film rights
related to films that were available at March 31, 2004 is reflected as a
liability in the accompanying condensed consolidated balance sheet. The
balance due as of March 31, 2004 is payable as follows: $196 million in
2004 and $58 million in 2005.
Starz Encore has also contracted to pay fees for the rights to exhibit
films that have been released theatrically, but are not available for
exhibition by Starz Encore until some future date. These amounts have
not been accrued at March 31, 2004. Starz Encore's estimate of amounts
payable under these agreements is as follows: $408 million in 2004; $354
million in 2005; $146 million in 2006; $112 million in 2007; $107
million in 2008; and $233 million thereafter.
Starz Encore is also obligated to pay fees for films that are released
by certain producers through 2010 when these films meet certain criteria
described in the studio output agreements. The actual contractual amount
to be paid under these agreements is not
15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
known at this time. However, such amounts are expected to be
significant. Starz Encore's total film rights expense aggregated $127
million and $94 million for the three months ended March 31, 2004 and
2003, respectively.
In addition to the foregoing contractual film obligations, two motion
picture studios that have output contracts with Starz Encore through
2006 and 2010, respectively, have the right to extend their contracts
for an additional three years. If the first studio elects to extend its
contract, Starz Encore would be required to pay the studio $60 million
within five days of the studio's notice to extend. The studio is
required to exercise its option by December 31, 2004. Subsequent to
March 31, 2004, the studio exercised its option, and Starz Encore made
the $60 million payment. If the second studio elects to extend its
contract, Starz Encore would be required to pay the studio a total of
$190 million in four annual installments of $47.5 million. The studio is
required to exercise this option by December 31, 2007. If made, Starz
Encore's payments to the studios would be amortized ratably over the
term of the respective output agreement extension.
GUARANTEES
Liberty guarantees Starz Encore's obligations under certain of its
studio output agreements. At March 31, 2004, Liberty's guarantee for
obligations for films released by such date aggregated $857 million.
While the guarantee amount for films not yet released is not
determinable, such amount is expected to be significant. As noted above
Starz Encore has recognized the liability for a portion of its
obligations under the output agreements. As this represents a commitment
of Starz Encore, a consolidated subsidiary of Liberty, Liberty has not
recorded a separate liability for its guarantee of these obligations.
At March 31, 2004, Liberty has guaranteed Y 14.4 billion ($138 million)
of the bank debt of Jupiter Telecommunications, Co., Ltd. ("J-COM"), an
equity affiliate that provides broadband services in Japan. Liberty's
guarantees expire as the underlying debt matures. The debt maturity
dates range from 2004 to 2018. In addition, Liberty has agreed to fund
up to an additional Y 10 billion ($96 million at March 31, 2004) to
J-COM in the event J-COM's cash flow (as defined in its bank loan
agreement) does not meet certain targets. In the event J-COM meets
certain performance criteria, this commitment expires on September 30,
2004. In connection with the Spin Off, Liberty Media International has
agreed to indemnify Liberty for any amounts Liberty is required to fund
under these arrangements.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to
its sale, such as tax, environmental, litigation and employment matters.
Liberty generally indemnifies the purchaser in the event that a third
party asserts a claim against the purchaser that relates to a liability
retained by Liberty. These types of indemnification guarantees typically
extend for a number of years. Liberty is unable to estimate the maximum
potential liability for these types of indemnification guarantees as the
sale agreements typically do not specify a maximum amount and the
amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time.
Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to
these indemnification guarantees.
OPERATING LEASES
Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses certain equipment under lease
arrangements.
16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
LITIGATION
Liberty has contingent liabilities related to legal and tax 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 condensed consolidated financial
statements.
(12) OPERATING SEGMENTS
Liberty is a holding company, which through its ownership of interests
in subsidiaries and other companies, is primarily engaged in the
electronic retailing, media, communications and entertainment
industries. Each of these businesses is separately managed. Liberty
organized its businesses into four Groups based upon each businesses'
services or products: Interactive Group, International Group, Networks
Group and Corporate and Other. Liberty's chief operating decision maker
and management team review the combined results of operations of each of
these Groups (including consolidated subsidiaries and equity method
affiliates), as well as the results of operations of each individual
business in each Group. Substantially all of the businesses and assets
attributed to the International Group were contributed to Liberty Media
International and included in the Spin Off.
Liberty identifies its reportable segments as (A) those consolidated
subsidiaries that (1) represent 10% or more of its consolidated revenue,
earnings before income taxes or total assets or (2) are significant to
an evaluation of the performance of a Group; and (B) those equity method
affiliates (1) whose share of earnings represent 10% or more of
Liberty's pre-tax earnings or (2) are significant to an evaluation of
the performance of a Group. The segment presentation for prior periods
has been conformed to the current period segment presentation. Liberty
evaluates performance and makes decisions about allocating resources to
its Groups and operating segments based on financial measures such as
revenue, operating cash flow, gross margin, and revenue or sales per
customer equivalent. In addition, Liberty reviews non-financial measures
such as average prime time rating, prime time audience delivery,
subscriber growth and penetration, as appropriate.
Liberty defines operating cash flow as revenue less cost of sales,
operating expenses, and selling, general and administrative expenses
(excluding stock compensation). Liberty believes this is an important
indicator of the operational strength and performance of its businesses,
including the ability to service debt and fund capital expenditures. In
addition, this measure allows management to view operating results and
perform analytical comparisons and benchmarking between businesses and
identify strategies to improve performance. This measure of performance
excludes depreciation and amortization, stock compensation and
restructuring and impairment charges that are included in the
measurement of operating income pursuant to GAAP. Accordingly, operating
cash flow should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow provided by operating
activities and other measures of financial performance prepared in
accordance with GAAP. Liberty generally accounts for intersegment sales
and transfers as if the sales or transfers were to third parties, that
is, at current prices.
17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
For the three months ended March 31, 2004, Liberty has identified the
following consolidated subsidiaries and equity method affiliates as its
reportable segments:
INTERACTIVE GROUP
- QVC--consolidated subsidiary that markets and sells a wide variety
of consumer products in the U.S. and several foreign countries,
primarily by means of televised shopping programs on the QVC
networks and via the Internet through its domestic and
international websites.
- Ascent Media Group ("Ascent Media")--consolidated subsidiary that
provides sound, video and ancillary post-production and
distribution services to the motion picture and television
industries in the United States, Europe and Asia.
NETWORKS GROUP
- Starz Encore--consolidated subsidiary that provides premium
programming distributed by cable operators, direct-to-home
satellite providers and other distributors throughout the United
States.
- Discovery Communications, Inc. ("Discovery")--50% owned equity
method affiliate that provides original and purchased cable
television programming in the U.S. and over 150 other countries.
- Courtroom Television Network, LLC ("Court TV")--50% owned equity
method affiliate that operates a basic cable network that provides
informative and entertaining programming based on the American
legal system.
- Game Show Network, LLC ("GSN")--50% owned equity method affiliate
that operates a basic cable network dedicated to the world of
games, game playing and game shows.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each segment requires different technologies, distribution channels and
marketing strategies. The accounting policies of the segments that are
also consolidated subsidiaries are the same as those described in the
summary of significant policies.
The amounts presented in the table below represent 100% of each
business' revenue and operating cash flow. These amounts are combined on
an unconsolidated basis and are then adjusted to remove the effects of
the equity method investments to arrive at the consolidated balances for
each group. This presentation is designed to reflect the manner in which
management reviews the operating performance of individual businesses
within each group regardless of whether the investment is accounted for
as a consolidated subsidiary or an equity investment. It should be
noted, however, that this presentation is not in accordance with GAAP
since the results of equity method investments are required to be
reported on a net basis. Further, Liberty could not,
18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
among other things, cause any noncontrolled affiliate to distribute to
Liberty its proportionate share of the revenue or operating cash flow of
such affiliate.
PERFORMANCE MEASURES
Three months ended March 31,
----------------------------------------------------------
2004 2003
---------------------------- ---------------------------
Operating Operating
cash cash
Revenue Flow Revenue Flow
------------ ------------ ------------ ------------
amounts in millions
INTERACTIVE GROUP
QVC $ 1,283 270 1,062 211
Ascent Media 146 22 123 19
Other consolidated subsidiaries 74 11 71 3
------------ ------------ ------------ ------------
Combined Interactive Group 1,503 303 1,256 233
Eliminate equity method affiliates -- -- (1,062) (211)
------------ ------------ ------------ ------------
Consolidated Interactive Group 1,503 303 194 22
------------ ------------ ------------ ------------
NETWORKS GROUP
Starz Encore 232 69 229 107
Discovery 527 137 427 100
Court TV 52 9 46 14
GSN 21 2 18 1
Other consolidated subsidiaries 50 2 48 4
------------ ------------ ------------ ------------
Combined Networks Group 882 219 768 226
Eliminate equity method affiliates (600) (148) (491) (115)
------------ ------------ ------------ ------------
Consolidated Networks Group 282 71 277 111
------------ ------------ ------------ ------------
Corporate and Other 10 (19) 9 (20)
------------ ------------ ------------ ------------
Consolidated Liberty $ 1,795 355 480 113
============ ============ ============ ============
19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
BALANCE SHEET INFORMATION
March 31, 2004 December 31, 2003
---------------------------- ---------------------------
Investments Investments
Total in Total in
Assets Affiliates Assets Affiliates
------------ ------------ ------------ ------------
amounts in millions
INTERACTIVE GROUP
QVC $ 13,409 71 13,806 77
Ascent Media 803 4 741 4
Other consolidated subsidiaries 397 -- 415 --
------------ ------------ ------------ ------------
Consolidated Interactive Group 14,609 75 14,962 81
------------ ------------ ------------ ------------
NETWORKS GROUP
Starz Encore 2,781 50 2,745 50
Discovery 3,150 63 3,143 80
Court TV 236 -- 272 --
GSN 101 -- 101 --
Other consolidated subsidiaries 222 1 228 1
------------ ------------ ------------ ------------
Combined Networks Group 6,490 114 6,489 131
Eliminate equity method affiliates (3,487) (63) (3,516) (80)
------------ ------------ ------------ ------------
Consolidated Networks Group 3,003 51 2,973 51
------------ ------------ ------------ ------------
Corporate and Other 32,894 3,503 32,763 3,482
------------ ------------ ------------ ------------
Discontinued operations 10,745 -- 3,551 --
------------ ------------ ------------ ------------
Consolidated Liberty $ 61,251 3,629 54,249 3,614
============ ============ ============ ============
20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
The following table provides a reconciliation of consolidated segment operating
cash flow to earnings from continuing operations before income taxes and
minority interests:
Three months ended
March 31,
------------------------------
2004 2003
------------ ------------
amounts in millions
Consolidated segment operating cash flow $ 355 113
Stock compensation (1) (10)
Depreciation and amortization (185) (95)
Interest expense (151) (99)
Share of earnings of affiliates 7 34
Gains on dispositions of assets, net 218 66
Realized and unrealized gains (losses) on
financial instruments, net (209) 183
Other, net 106 1
------------ ------------
Earnings from continuing operations before
income taxes and minority interests $ 140 193
============ ============
21
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited the accompanying consolidated balance sheets of Liberty Media
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, comprehensive earnings (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Liberty Media
Corporation and subsidiaries as of December 31, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 2 to the consolidated financial statements, the Company
changed its method of accounting for intangible assets in 2002 and for
derivative financial instruments in 2001.
KPMG LLP
Denver, Colorado
March 12, 2004, except for
note 5, which is as of
June 7, 2004
1
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------ ------------
amounts in millions
Assets
Current assets:
Cash and cash equivalents $ 3,050 2,164
Short-term investments (note 7) 265 107
Trade and other receivables, net 1,085 348
Inventory, net 588 --
Prepaid expenses and program rights 531 354
Derivative instruments (note 8) 543 1,165
Deferred income tax assets (note 11) 34 286
Other current assets 70 55
------------ ------------
Total current assets 6,166 4,479
------------ ------------
Investments in available-for-sale securities and other cost
investments (note 7) 19,499 14,181
Long-term derivative instruments (note 8) 3,247 4,379
Investments in affiliates, accounted for using the equity method,
and related receivables (note 6) 3,614 6,244
Property and equipment, at cost 1,948 1,105
Accumulated depreciation (538) (279)
------------ ------------
1,410 826
------------ ------------
Intangible assets not subject to amortization (notes 2 and 4):
Goodwill 8,911 6,286
Trademarks 2,385 --
------------ ------------
11,296 6,286
------------ ------------
Intangible assets subject to amortization (note 4) 5,666 1,238
Accumulated amortization (732) (631)
------------ ------------
4,934 607
------------ ------------
Other assets, at cost, net of accumulated amortization 532 521
Assets of discontinued operations (note 5) 3,551 2,801
------------ ------------
Total assets $ 54,249 40,324
============ ============
(continued)
2
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
2003 2002
------------ ------------
amounts in millions
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 410 111
Accrued interest payable 152 125
Other accrued liabilities 921 295
Accrued stock compensation (note 14) 190 648
Program rights payable 177 128
Derivative instruments (note 8) 854 16
Current portion of debt (note 10) 104 633
------------ ------------
Total current liabilities 2,808 1,956
------------ ------------
Long-term debt (note 10) 9,441 4,302
Long-term derivative instruments (note 8) 1,756 1,465
Deferred income tax liabilities (note 11) 10,686 7,390
Other liabilities 290 186
Liabilities of discontinued operations (note 5) 133 92
------------ ------------
Total liabilities 25,114 15,391
------------ ------------
Minority interests in equity of subsidiaries 293 219
Obligation to redeem common stock (note 12) -- 32
Stockholders' equity (note 12):
Preferred stock, $.01 par value. Authorized 50,000,000
shares; no shares issued and outstanding -- --
Series A common stock $.01 par value. Authorized
4,000,000,000 shares; issued and outstanding 2,669,835,166
shares at December 31, 2003 and 2,476,953,566 shares at
December 31, 2002 27 25
Series B common stock $.01 par value. Authorized 400,000,000
shares; issued and outstanding 217,100,515 shares at
December 31, 2003 and 212,044,128 shares at December 31,
2002 2 2
Additional paid-in capital 39,001 36,498
Accumulated other comprehensive earnings, net of taxes
("AOCE") (note 16) 3,247 486
AOCE from discontinued operations (46) (260)
Unearned compensation (note 14) (98) --
Accumulated deficit (13,291) (12,069)
------------ ------------
Total stockholders' equity 28,842 24,682
------------ ------------
Commitments and contingencies (note 18)
Total liabilities and stockholders' equity $ 54,249 40,324
============ ============
See accompanying notes to consolidated financial statements.
3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
amounts in millions,
except per share amounts
Revenue:
Net sales from electronic retailing $ 1,973 -- --
Programming and other services 1,946 1,980 1,919
------------ ------------ ------------
3,919 1,980 1,919
------------ ------------ ------------
Operating costs and expenses:
Cost of sales--electronic retailing services 1,258 -- --
Operating 1,248 1,033 1,040
Selling, general and administrative ("SG&A") 600 541 535
Stock compensation--SG&A (note 14) (88) (46) 126
Depreciation 210 180 195
Amortization 284 191 731
Impairment of long-lived assets (note 2) 1,362 229 314
------------ ------------ ------------
4,874 2,128 2,941
------------ ------------ ------------
Operating loss (955) (148) (1,022)
Other income (expense):
Interest expense (537) (419) (503)
Dividend and interest income 164 183 205
Share of earnings (losses) of affiliates, net (note 6) 44 (92) (4,346)
Nontemporary declines in fair value of investments
(note 7) (22) (5,806) (4,099)
Realized and unrealized gains (losses) on derivative
instruments, net (note 8) (662) 2,139 361
Gains (losses) on dispositions, net (notes 6 and 7) 1,125 (537) (310)
Other, net (56) 5 --
------------ ------------ ------------
56 (4,527) (8,692)
------------ ------------ ------------
Loss from continuing operations before income
taxes and minority interest (899) (4,675) (9,714)
Income tax benefit (expense) (note 11) (346) 1,524 3,532
Minority interests in losses of subsidiaries 2 38 226
------------ ------------ ------------
Loss from continuing operations before cumulative
effect of accounting change (1,243) (3,113) (5,956)
Earnings (loss) from discontinued operations, net of taxes
(note 5) 21 (586) (792)
Cumulative effect of accounting change, net of taxes (note 2) -- (1,631) 545
------------ ------------ ------------
Net loss $ (1,222) (5,330) (6,203)
============ ============ ============
Loss per common share (note 2):
Basic and diluted loss from continuing operations $ (.45) (1.20) (2.30)
Discontinued operations .01 (.23) (.31)
Cumulative effect of accounting change, net of taxes -- (.63) .21
------------ ------------ ------------
Basic and diluted net loss $ (.44) (2.06) (2.40)
============ ============ ============
Number of common shares outstanding 2,748 2,590 2,588
============ ============ ============
See accompanying notes to consolidated financial statements.
4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
amounts in millions
Net loss $ (1,222) (5,330) (6,203)
------------ ------------ ------------
Other comprehensive earnings (loss), net of taxes (note 16):
Foreign currency translation adjustments 46 73 (245)
Unrealized holding gains (losses) arising during the
period 3,343 (4,158) (983)
Recognition of previously unrealized losses (gains)
on available-for-sale securities, net (628) 3,598 2,694
Other comprehensive earnings (loss) from discontinued
operations (note 5) 214 (127) (142)
Cumulative effect of accounting change (note 2) -- -- (87)
------------ ------------ ------------
Other comprehensive earnings (loss) 2,975 (614) 1,237
------------ ------------ ------------
Comprehensive earnings (loss) $ 1,753 (5,944) (4,966)
============ ============ ============
See accompanying notes to consolidated financial statements.
5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2002 and 2001
Common stock Additional
Preferred -------------------------- paid-in
stock series A series B capital AOCE
----------- ------------ ------------ ------------ ------------
amounts in millions
Balance at January 1, 2001 $ -- -- -- 35,042 (406)
Net loss -- -- -- -- --
Other comprehensive earnings -- -- -- -- 1,379
Issuance of common stock upon consummation of
Split Off Transaction (note 9) -- 24 2 (26) --
Contribution from AT&T upon consummation of Split
Off Transaction (note 9) -- -- -- 803 --
Accrual of amounts due to AT&T for taxes on
deferred intercompany gains (note 9) -- -- -- (115) --
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes -- -- -- (8) --
Utilization of net operating losses of Liberty by
AT&T prior to Split Off Transaction (note 9) -- -- -- (2) --
Stock option exercises and issuance of restricted
stock prior to Split Off Transaction -- -- -- 302 --
----------- ------------ ------------ ------------ ------------
Balance at December 31, 2001 -- 24 2 35,996 973
Net loss -- -- -- -- --
Other comprehensive loss -- -- -- -- (487)
Issuance of common stock for acquisitions -- -- -- 195 --
Issuance of common stock pursuant to rights
offering -- 1 -- 617 --
Purchases of Liberty Series A common stock -- -- -- (281) --
Liberty Series A common stock put options, net of
cash received (note 12) -- -- -- (29) --
----------- ------------ ------------ ------------ ------------
Balance at December 31, 2002 -- 25 2 36,498 486
Net loss -- -- -- -- --
Other comprehensive earnings -- -- -- -- 2,761
Issuance of Series A common stock for acquisitions -- 2 -- 2,654 --
Issuance of Series A common stock for cash -- -- -- 141 --
Purchases of Liberty Series A common stock -- -- -- (437) --
Issuance of restricted stock -- -- -- 102 --
Amortization of deferred compensation -- -- -- -- --
Liberty Series A common stock put options, net of
cash received (note 12) -- -- -- 37 --
Gain in connection with the issuance of stock of
a subsidiary -- -- -- 6 --
----------- ------------ ------------ ------------ ------------
Balance at December 31, 2003 $ -- 27 2 39,001 3,247
=========== ============ ============ ============ ============
AOCE
from Total
discontinued Unearned Accumulated stockholders'
operations compensation deficit equity
------------ ------------ ------------ -------------
amounts in millions
Balance at January 1, 2001 9 -- (536) 34,109
Net loss -- -- (6,203) (6,203)
Other comprehensive earnings (142) -- -- 1,237
Issuance of common stock upon consummation of
Split Off Transaction (note 9) -- -- -- --
Contribution from AT&T upon consummation of Split
Off Transaction (note 9) -- -- -- 803
Accrual of amounts due to AT&T for taxes on
deferred intercompany gains (note 9) -- -- -- (115)
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes -- -- -- (8)
Utilization of net operating losses of Liberty by
AT&T prior to Split Off Transaction (note 9) -- -- -- (2)
Stock option exercises and issuance of restricted
stock prior to Split Off Transaction -- -- -- 302
------------ ------------ ------------ -------------
Balance at December 31, 2001 (133) -- (6,739) 30,123
Net loss -- -- (5,330) (5,330)
Other comprehensive loss (127) -- -- (614)
Issuance of common stock for acquisitions -- -- -- 195
Issuance of common stock pursuant to rights
offering -- -- -- 618
Purchases of Liberty Series A common stock -- -- -- (281)
Liberty Series A common stock put options, net of
cash received (note 12) -- -- -- (29)
------------ ------------ ------------ -------------
Balance at December 31, 2002 (260) -- (12,069) 24,682
Net loss -- -- (1,222) (1,222)
Other comprehensive earnings 214 -- -- 2,975
Issuance of Series A common stock for acquisitions -- -- -- 2,656
Issuance of Series A common stock for cash -- -- -- 141
Purchases of Liberty Series A common stock -- -- -- (437)
Issuance of restricted stock -- (102) -- --
Amortization of deferred compensation -- 4 -- 4
Liberty Series A common stock put options, net of
cash received (note 12) -- -- -- 37
Gain in connection with the issuance of stock of
a subsidiary -- -- -- 6
------------ ------------ ------------ -------------
Balance at December 31, 2003 (46) (98) (13,291) 28,842
============ ============ ============ =============
See accompanying notes to consolidated financial statements.
6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2002 and 2001
2003 2002 2001
------------ ------------ ------------
amounts in millions
(see note 3)
Cash flows from operating activities:
Net loss $ (1,222) (5,330) (6,203)
Earnings from discontinued operations (21) 586 792
------------ ------------ ------------
Net loss from continuing operations (1,243) (4,744) (5,411)
Adjustments to reconcile net loss from continuing operations to
net cash provided (used) by operating activities:
Cumulative effect of accounting change, net of taxes -- 1,631 (545)
Depreciation and amortization 494 371 926
Impairment of long-lived assets 1,362 229 314
Stock compensation (88) (46) 126
Payments of stock compensation (360) (117) (238)
Share of losses (earnings) of affiliates, net (44) 92 4,346
Nontemporary decline in fair value of investments 22 5,806 4,099
Realized and unrealized losses (gains) on derivative
instruments, net 662 (2,139) (361)
Losses (gains) on disposition of assets, net (1,125) 537 310
Minority interests in losses of subsidiaries (2) (38) (226)
Deferred income tax expense (benefit) 270 (1,529) (3,230)
Intergroup tax allocation -- -- (222)
Payments from (to) AT&T pursuant to tax sharing agreement -- (26) 166
Other noncash charges 139 39 86
Changes in operating assets and liabilities, net of the effect
of acquisitions and dispositions:
Receivables (183) (29) 30
Inventory (14) -- --
Prepaid expenses and other current assets (149) (83) (148)
Payables and other current liabilities 186 37 (15)
------------ ------------ ------------
Net cash provided (used) by operating activities (73) (9) 7
------------ ------------ ------------
Cash flows from investing activities:
Cash proceeds from dispositions 2,449 1,040 471
Premium proceeds from origination of derivative instruments 763 521 383
Proceeds from settlement of derivative instruments 1,172 410 366
Investments in and loans to equity affiliates (48) (67) (1,008)
Investments in and loans to cost investees (2,509) (228) (230)
Cash paid for acquisitions, net of cash acquired (711) (44) (113)
Capital expended for property and equipment (155) (164) (343)
Net sales of short term investments 162 148 346
Other investing activities, net (24) 17 (8)
------------ ------------ ------------
Net cash provided (used) by investing activities 1,099 1,633 (136)
------------ ------------ ------------
Cash flows from financing activities:
Borrowings of debt 3,751 189 1,356
Proceeds attributed to call option obligations upon issuance of
senior exchangeable debentures 406 -- 1,028
Repayments of debt (3,485) (809) (1,002)
Purchases of Liberty Series A common stock (437) (281) --
Proceeds from issuance of common stock 141 618 --
Payment from AT&T related to Split Off Transaction -- -- 803
Cash transfers to related parties -- -- (157)
Other financing activities, net (42) (2) (20)
------------ ------------ ------------
Net cash provided (used) by financing activities 334 (285) 2,008
------------ ------------ ------------
Net cash used by discontinued operations (474) (1,247) (1,095)
------------ ------------ ------------
Net increase in cash and cash equivalents 886 92 784
Cash and cash equivalents at beginning of year 2,164 2,072 1,288
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,050 2,164 2,072
============ ============ ============
See accompanying notes to consolidated financial statements.
7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of Liberty Media Corporation and its controlled subsidiaries ("Liberty"
or the "Company," unless the context otherwise requires). All
significant intercompany accounts and transactions have been eliminated
in consolidation.
Liberty is a holding company which, through its majority and minority
ownership of interests in subsidiaries and other companies, is primarily
engaged in (i) electronic retailing, and (ii) the production,
acquisition and distribution through all available formats and media of
branded entertainment, educational and informational programming and
software. In addition, companies in which Liberty owns interests are
engaged in, among other things, (i) interactive commerce via the
Internet, television and telephone, (ii) domestic cable and satellite
broadband distribution services, and (iii) wireless domestic telephony
and other technology ventures. Prior to June 7, 2004, Liberty was also
engaged in international cable television distribution, telephony and
programming. See note 5. Liberty, through its affiliated companies,
operates in the United States, Europe and Asia.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible
into cash and have maturities of three months or less at the time of
acquisition.
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts.
Such allowance aggregated $95 million and $32 million at December 31,
2003 and 2002, respectively. A summary of activity in the allowance for
doubtful accounts is as follows:
Additions
Balance -------------------------------- Balance
beginning Charged Deductions- end of
of year to expense Acquisitions write-offs year
--------------- --------------- -------------- --------------- --------------
amounts in millions
2003 $ 32 23 62 (22) 95
=============== =============== =============== =============== =============
2002 $ 21 20 1 (10) 32
=============== =============== =============== =============== =============
2001 $ 12 12 -- (3) 21
=============== =============== =============== =============== =============
INVENTORY
Inventory, consisting primarily of products held for sale, is stated at
the lower of cost or market. Cost is determined by the average cost
method, which approximates the first-in, first-out method.
PROGRAM RIGHTS
Prepaid program rights are amortized on a film-by-film basis over the
anticipated number of exhibitions. Committed program rights and program
rights payable are recorded at the estimated cost of the programs when
the film is available for airing less prepayments. These amounts are
amortized on a film-by-film basis over the anticipated number of
exhibitions.
INVESTMENTS
All marketable equity and debt securities held by the Company are
classified as available-for-sale and are carried at fair value ("AFS
Securities"). Unrealized holding gains and losses on AFS Securities are
carried net of taxes as a component of accumulated other comprehensive
earnings in stockholders' equity. Realized gains and losses are
determined on an average cost basis. Other investments in which the
Company's ownership interest is less than 20% and are not considered
marketable securities are carried at cost.
8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
For those investments in affiliates in which the Company has the ability
to exercise significant influence, the equity method of accounting is
used. Under this method, the investment, originally recorded at cost, is
adjusted to recognize the Company's share of net earnings or losses of
the affiliates as they occur rather then as dividends or other
distributions are received, limited to the extent of the Company's
investment in, advances to and commitments for the investee. If the
Company's investment in the common stock of an affiliate is reduced to
zero as a result of recording its share of the affiliate's net losses,
and the Company holds investments in other more senior securities of the
affiliate, the Company would continue to record losses from the
affiliate to the extent of these additional investments. The amount of
additional losses recorded would be determined based on changes in the
hypothetical amount of proceeds that would be received by the Company if
the affiliate were to experience a liquidation of its assets at their
current book values. Prior to the Company's January 1, 2002 adoption of
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS ("Statement 142"), the Company's share of net earnings
or losses of affiliates included the amortization of the difference
between the Company's investment and its share of the net assets of the
investee. Upon adoption of Statement 142, the portion of excess costs on
equity method investments that represents goodwill ("equity method
goodwill") is no longer amortized, but continues to be considered for
impairment under Accounting Principles Board Opinion No. 18. The
Company's share of net earnings or loss of affiliates also includes any
other-than-temporary declines in fair value recognized during the
period.
Changes in the Company's proportionate share of the underlying equity of
a subsidiary or equity method investee, which result from the issuance
of additional equity securities by such subsidiary or equity investee,
are recognized as increases or decreases in stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The primary factors the Company considers in its
determination are the length of time that the fair value of the
investment is below the Company's carrying value; and the financial
condition, operating performance and near term prospects of the
investee. In addition, the Company considers the reason for the decline
in fair value, be it general market conditions, industry specific or
investee specific; analysts' ratings and estimates of 12 month share
price targets for the investee; changes in stock price or valuation
subsequent to the balance sheet date; and the Company's intent and
ability to hold the investment for a period of time sufficient to allow
for a recovery in fair value. If the decline in fair value is deemed to
be nontemporary, the cost basis of the security is written down to fair
value. In situations where the fair value of an investment is not
evident due to a lack of a public market price or other factors, the
Company uses its best estimates and assumptions to arrive at the
estimated fair value of such investment. The Company's assessment of the
foregoing factors involves a high degree of judgment and accordingly,
actual results may differ materially from the Company's estimates and
judgments. Writedowns for cost investments and AFS Securities are
included in the consolidated statements of operations as nontemporary
declines in fair values of investments. Writedowns for equity method
investments are included in share of earnings (losses) of affiliates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses various derivative instruments including equity
collars, narrow-band collars, put spread collars, written put and call
options, bond swaps, interest rate swaps and foreign exchange contracts
to manage fair value and cash flow risk associated with many of its
investments, some of its variable rate debt and transactions denominated
in foreign currencies. Liberty's derivative instruments are executed
with counterparties who are well known major financial institutions.
While Liberty believes these derivative instruments effectively manage
the risks highlighted above, they are subject to counterparty credit
risk. Counterparty credit risk is the risk that the counterparty is
unable to perform under the terms of the derivative instrument
9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
upon settlement of the derivative instrument. To protect itself against
credit risk associated with these counterparties the Company generally:
- executes its derivative instruments with several different
counterparties, and
- executes equity derivative instrument agreements which contain a
provision that requires the counterparty to post the "in the money"
portion of the derivative instrument into a cash collateral account
for the Company's benefit, if the respective counterparty's credit
rating for its senior unsecured debt were to reach certain levels,
generally a rating that is below Standard & Poor's rating of A-
and/or Moody's rating of A3.
Due to the importance of these derivative instruments to its risk
management strategy, Liberty actively monitors the creditworthiness of
each of its counterparties. Based on its analysis, the Company currently
considers nonperformance by any of its counterparties to be unlikely.
Effective January 1, 2001, Liberty adopted Statement of Financial
Accounting Standards No. 133 "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND
HEDGING ACTIVITIES" ("Statement 133"). All derivatives, whether
designated in hedging relationships or not, are 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. 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.
During 2001 and 2002, the only derivative instruments designated as
hedges were the Company's equity collars, which were designated as fair
value hedges. Effective December 31, 2002, the Company elected to
dedesignate its equity collars as fair value hedges. Such election had
no effect on the Company's financial position at December 31, 2002 or
its results of operations for the year ended December 31, 2002.
Subsequent to December 31, 2002, changes in the fair value of the
Company's AFS Securities that previously had been reported in earnings
due to the designation of equity collars as fair value hedges are
reported as a component of other comprehensive earnings (loss) on the
Company's consolidated balance sheet. Changes in the fair value of the
equity collars continue to be reported in earnings.
The fair value of derivative instruments is estimated using third party
estimates or the Black-Scholes model. The Black-Scholes model
incorporates a number of variables in determining such fair values,
including expected volatility of the underlying security and an
appropriate discount rate. The Company obtains volatility rates from
independent sources based on the expected volatility of the underlying
security over the term of the derivative instrument. The volatility
assumption is evaluated annually to determine if it should be adjusted,
or more often if there are indications that it should be adjusted. A
discount rate is obtained at the inception of the derivative instrument
and updated each reporting period based on the Company's estimate of the
discount rate at which it could currently settle the derivative
instrument. Considerable management judgment is required in estimating
the Black-Scholes variables. Actual results upon settlement or unwinding
of derivative instruments may differ materially from these estimates.
The adoption of Statement 133 on January 1, 2001, resulted in a
cumulative increase in net earnings of $545 million, or $0.21 per common
share (after tax expense of $356 million), and an increase in other
comprehensive loss of $87 million. The increase in net earnings was
mostly attributable to separately recording the fair value of the
embedded call option obligations associated with the Company's senior
exchangeable debentures. The increase in other comprehensive loss
relates primarily to changes in the fair value of the Company's warrants
and options to purchase certain AFS Securities.
The Company assesses the effectiveness of equity collars by comparing
changes in the intrinsic value of the equity collar to changes in the
fair value of the underlying security. For derivatives designated as
fair value hedges, changes in the time value of the derivatives, which
are excluded
10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements, continued
from the assessment of hedge effectiveness, are recognized currently in
earnings as a component of realized and unrealized gains (losses) on
derivative instruments. Hedge ineffectiveness, determined in accordance
with Statement 133, had no impact on earnings for the years ended
December 31, 2002 and 2001.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, is stated at
cost. Depreciation is computed using the straight-line method using
estimated useful lives of 3 to 20 years for support equipment and 10 to
40 years for buildings and improvements.
INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted Statement 142. Statement
142 requires that goodwill and other intangible assets with indefinite
useful lives (collectively, "indefinite lived intangible assets") no
longer be amortized, but instead be tested for impairment at least
annually in accordance with the provisions of Statement 142. Equity
method goodwill is also no longer amortized, but continues to be
considered for impairment under Accounting Principles Board Opinion No.
18. Statement 142 also requires that intangible assets with estimable
useful lives be amortized over their respective estimated useful lives
to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 144,
ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
("Statement 144").
Statement 142 required the Company to perform an assessment of whether
there was an indication that goodwill was impaired as of the date of
adoption. To accomplish this, the Company identified its reporting units
and determined the carrying value of each reporting unit by assigning
the assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of the date of adoption.
Statement 142 requires the Company to consider equity method affiliates
as separate reporting units. As a result, a portion of the Company's
enterprise-level goodwill balance was allocated to various reporting
units which included a single equity method investment as its only
asset. For example, goodwill was allocated to a separate reporting unit
which included only the Company's investment in Discovery
Communications, Inc. This allocation is performed for goodwill
impairment testing purposes only and does not change the reported
carrying value of the investment. However, to the extent that all or a
portion of an equity method investment which is part of a reporting unit
containing allocated goodwill is disposed of in the future, the
allocated portion of goodwill will be relieved and included in the
calculation of the gain or loss on disposal.
The Company determined the fair value of its reporting units using
independent appraisals, public trading prices and other means. The
Company then compared the fair value of each reporting unit to the
reporting unit's carrying amount. To the extent a reporting unit's
carrying amount exceeded its fair value, the Company performed the
second step of the transitional impairment test. In the second step, the
Company compared the implied fair value of the reporting unit's
goodwill, determined by allocating the reporting unit's fair value to
all of its assets (recognized and unrecognized) and liabilities in a
manner similar to a purchase price allocation, to its carrying amount,
both of which were measured as of the date of adoption.
In situations where the implied fair value of a reporting unit's
goodwill was less than its carrying value, Liberty recorded a transition
impairment charge. In total, the Company recognized a $1,631 million
transitional impairment loss, net of taxes of $24 million, as the
cumulative effect of a change in accounting principle in 2002. The
foregoing transitional impairment loss includes an adjustment of $61
million for the Company's proportionate share of transition adjustments
that its equity method affiliates recorded.
As noted above, indefinite lived intangible assets are no longer
amortized. Adjusted net loss and loss per common share, exclusive of
amortization expense related to goodwill, franchise costs and
11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
equity method goodwill, for periods prior to the adoption of Statement
142 are as follows (amounts in millions, except per share amounts):
Year ended
December 31,
2001
---------------
Net loss from continuing operations, as reported $ (5,411)
Adjustments:
Goodwill amortization 583
Equity method excess costs amortization 705
Income tax effect (293)
---------------
Net loss from continuing operations, as adjusted $ (4,416)
===============
Basic and diluted loss per common share from continuing
operations, as reported $ (2.09)
Adjustments:
Goodwill amortization .22
Equity method excess costs amortization .27
Income tax effect (.11)
---------------
Basic and diluted loss per common share from continuing
operations, as adjusted $ (1.71)
===============
Amortization of intangible assets with finite useful lives was $284
million and $191 million for the years ended December 31, 2003 and 2002,
respectively. Based on its current amortizable intangible assets,
Liberty expects that amortization expense will be as follows for the
next five years (amounts in millions):
2004 $ 488
2005 $ 468
2006 $ 424
2007 $ 395
2008 $ 362
Changes in the carrying amount of goodwill for the year ended December
31, 2003 are as follows:
Starz Ascent
Encore Media
QVC, Inc. Group LLC Group Other(3) Total
--------- ----------- -------- --------- ---------
amounts in millions
Balance at December 31, 2002 $ -- $ 1,540 327 4,419 6,286
2003 acquisitions (1) 3,896 -- 11 77 3,984
Impairment of goodwill (2) -- (157) -- (1,195) (1,352)
Other (7) -- -- -- (7)
-------- ----------- -------- --------- ---------
Balance at December 31, 2003 $ 3,889 1,383 338 3,301 8,911
======== =========== ======== ========= =========
----------
(1) During the year ended December 31, 2003 and excluding the
acquisition of QVC, Inc. ("QVC"), Liberty completed several small
acquisitions for aggregate consideration of $167 million. In
connection with these acquisitions, Liberty recorded additional
goodwill of $88 million, which represents the excess of the
purchase price over the estimated fair value of tangible and
identifiable intangible assets acquired.
(2) Starz Encore Group LLC ("Starz Encore") received an independent
third party valuation in connection with its annual year-end
evaluation of the recoverability of its goodwill. The result of
this valuation, which was based on a discounted cash flow analysis
of projections prepared by the management of Starz Encore,
indicated that the fair value of this reporting unit was
12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
less than its carrying value. This reporting unit fair value was
then used to calculate an implied value of the goodwill (including
$1,195 million of allocated enterprise-level goodwill) related to
Starz Encore. The $1,352 million excess of the carrying amount of
the goodwill over its implied value has been recorded as an
impairment charge in the fourth quarter of 2003. The reduction in
the value of Starz Encore reflected in the third party valuation
is believed to be attributable to a number of factors. Those
factors include the reliance placed in that valuation on
projections by management reflecting a lower rate of revenue
growth compared to earlier projections based, among other things,
on the possibility that revenue growth may be negatively affected
by (1) a reduction in the rate of growth in total digital video
subscribers and in the subscription video on demand business as
a result of cable operators' increased focus on the marketing
and sale of other services, such as high speed internet access
and telephony, and the uncertainty as to the success of
marketing efforts by distributors of Starz Encore's services and
(2) lower per subscriber rates under the new affiliation
agreement with Comcast, as compared to the payments required
under the 1997 AT&T Broadband Affiliation Agreement (including
the programming pass through provision).
(3) As noted above, the Company's enterprise-level goodwill is
allocable to reporting units, whether they are consolidated
subsidiaries or equity method investments. The following table
summarizes these allocations at December 31, 2003 (amounts in
millions).
Allocable
Entity goodwill
------ --------
Discovery Communications, Inc. $ 1,789
QVC 1,231
Courtroom Television Network, LLC 125
Game Show Network, LLC 17
Other 139
-------------
$ 3,301
=============
In August 2002, Liberty purchased 38% of the common equity and 85% of
the voting power of OpenTV Corp. ("OpenTV"), which when combined with
Liberty's previous ownership interest in OpenTV, brought Liberty's total
ownership to 41% of the equity and 86% of the voting power of OpenTV.
During the period between the execution of the purchase agreement in May
2002 and the consummation of the acquisition in August 2002, OpenTV
disclosed that it was lowering its revenue and cash flow projections for
2002 and extending the time before it would be cash flow positive. As a
result, OpenTV wrote off all of its separately recorded goodwill. In
light of the announcement by OpenTV and the adverse impact on its stock
price, as well as other negative factors arising in its industry sector,
Liberty determined that the goodwill initially recorded in purchase
accounting ($92 million) was not recoverable. This assessment is
supported by an appraisal performed by an independent third party.
Accordingly, Liberty recorded an impairment charge for the entire amount
of the goodwill during the third quarter of 2002.
In addition to the goodwill impairment related to OpenTV, the Company
recorded 2002 impairments of $84 million related to Ascent Media and $53
million related to other consolidated subsidiaries.
IMPAIRMENT OF LONG-LIVED ASSETS
Statement 144 requires that the Company periodically review the carrying
amounts of its property and equipment and its intangible assets (other
than goodwill) to determine whether current events or circumstances
indicate that such carrying amounts may not be recoverable. If the
carrying amount of the asset is greater than the expected undiscounted
cash flows to be generated by such asset, an impairment adjustment is to
be recognized. Such adjustment is measured by the amount that the
carrying value of such assets exceeds their fair value. The Company
generally measures fair value by considering sale prices for similar
assets or by discounting estimated future cash flows using an
appropriate discount rate. Considerable management judgment is necessary
to estimate the fair value of assets. Accordingly, actual
13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
results could vary significantly from such estimates. Assets to be
disposed of are carried at the lower of their financial statement
carrying amount or fair value less costs to sell.
As a result of the weakness in the economy in 2001 certain subsidiaries
of the Company did not meet their 2001 operating objectives and reduced
their 2002 expectations. Accordingly, the subsidiaries assessed the
recoverability of their property and equipment and intangible assets and
determined that impairment adjustments were necessary. In addition, in
the fourth quarter of 2001, a subsidiary made the decision to
consolidate its operations and close certain facilities. In connection
with these initiatives, the subsidiary recorded a restructuring charge
related to lease cancellation fees and an additional impairment charge
related to its property and equipment. All of the foregoing charges are
included in impairment of long-lived assets in the Company's statement
of operations.
MINORITY INTERESTS
Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable
portion of the common equity of those subsidiaries. Further, the
minority interests' share of losses is not recognized if the minority
holders of common equity of subsidiaries have the right to cause the
Company to repurchase such holders' common equity.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the United States ("U.S.")
dollar. The functional currency of the Company's foreign operations
generally is the applicable local currency for each foreign subsidiary
and foreign equity method investee. Assets and liabilities of foreign
subsidiaries and foreign equity investees are translated at the spot
rate in effect at the applicable reporting date, and the consolidated
statements of operations and the Company's share of the results of
operations of its foreign equity affiliates are translated at the
average exchange rates in effect during the applicable period. The
resulting unrealized cumulative translation adjustment, net of
applicable income taxes, is recorded as a component of accumulated other
comprehensive earnings in stockholders' equity.
Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such
transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in the accompanying
consolidated statements of operations and comprehensive loss as
unrealized (based on the applicable period-end exchange rate) or
realized upon settlement of the transactions.
REVENUE RECOGNITION
Revenue is recognized as follows:
- Revenue from electronic retail sales is recognized at the time of
shipment to customers. An allowance for returned merchandise is
provided as a percentage of sales based on historical experience.
The total reduction in sales due to returns for the four months
ended December 31, 2003 aggregated $340 million.
- Programming revenue is recognized in the period during which
programming is provided, pursuant to affiliation agreements.
- Advertising revenue is recognized, net of agency commissions, in
the period during which underlying advertisements are broadcast.
- Revenue from post-production services is recognized in the period
the services are rendered.
- Revenue from sales and licensing of software and related service
and maintenance is recognized pursuant to Statement of Position No.
97-2 "SOFTWARE REVENUE RECOGNITION." For multiple element contracts
with vendor specific objective evidence, the Company recognizes
revenue for each specific element when the earnings process is
complete. If vendor specific objective evidence does not exist,
revenue is deferred and recognized on a straight-line basis over
the term of the maintenance period.
- Distribution revenue is recognized in the period that services are
rendered.
14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
COST OF SALES-ELECTRONIC RETAILING
Cost of sales primarily includes actual product cost, provision for
obsolete inventory, buying allowances received from suppliers, shipping
and handling costs and warehouse costs.
ADVERTISING COSTS
Advertising costs generally are expensed as incurred. Advertising
expense aggregated $24 million, $42 million and $41 million for the
years ended December 31, 2003, 2002 and 2001, respectively. Co-operative
marketing costs are recognized as advertising expense to the extent an
identifiable benefit is received and fair value of the benefit can be
reasonably measured. Otherwise, such costs are recorded as a reduction
of revenue.
STOCK BASED COMPENSATION
As more fully described in note 13, the Company has granted to its
employees options, stock appreciation rights ("SARs") and options with
tandem SARs to purchase shares of Liberty Series A and Series B common
stock. The Company accounts for these grants pursuant to the recognition
and measurement provisions of Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion No. 25").
Under these provisions, options are accounted for as fixed plan awards
and no compensation expense is recognized because the exercise price is
equal to the market price of the underlying common stock on the date of
grant; whereas options with tandem SARs are accounted for as variable
plan awards unless there is a significant disincentive for employees to
exercise the SAR feature. Compensation for variable plan awards is
recognized based upon the percentage of the options that are vested and
the difference between the market price of the underlying common stock
and the exercise price of the options at the balance sheet date. The
following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions
of Statement of Financial Accounting Standards No. 123, "ACCOUNTING FOR
STOCK-BASED COMPENSATION," ("Statement 123") to its options.
Compensation expense for options with tandem SARs is the same under APB
Opinion No. 25 and Statement 123.
Years Ended December 31,
---------------------------------------------
2003 2002 2001
----------- ----------- -----------
amounts in millions,
except per share amounts
Net loss $ (1,222) (5,330) (6,203)
Add stock compensation as determined under the
intrinsic value method, net of taxes 5 -- --
Deduct stock compensation as determined under the
fair value method, net of taxes (55) (78) (127)
----------- ----------- -----------
Pro forma net loss $ (1,272) (5,408) (6,330)
=========== =========== ===========
Basic and diluted net loss per share:
As reported $ (.44) (2.06) (2.40)
Pro forma $ (.46) (2.09) (2.45)
Agreements that require Liberty to reacquire interests in subsidiaries
held by officers and employees in the future are marked-to-market at the
end of each reporting period with corresponding adjustments being
recorded to stock compensation expense.
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share is computed by dividing net
earnings (loss) by the number of common shares outstanding. The number
of outstanding common shares for periods prior to the Company's August
2001 split off from AT&T Corp. is based upon the number of shares of
Series A and Series B Liberty common stock issued upon consummation of
the Split Off Transaction. 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 years ended
December 31, 2003,
15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
2002 and 2001, are 84 million, 78 million and 76 million potential
common shares because their inclusion would be anti-dilutive.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparability
with the 2003 presentation.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America ("GAAP")
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Liberty considers the fair value of its derivative instruments and its
assessment of nontemporary declines in value of its investments to be
its most significant estimates.
Liberty holds a significant number of investments that are accounted for
using the equity method. Liberty does not control the decision making
process or business management practices of these affiliates.
Accordingly, Liberty relies on management of these affiliates and their
independent accountants to provide it with accurate financial
information prepared in accordance with GAAP that Liberty uses in the
application of the equity method. The Company is not aware, however, of
any errors in or possible misstatements of the financial information
provided by its equity affiliates that would have a material effect on
Liberty's consolidated financial statements.
(3) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
--------------------------------------------
2003 2002 2001
------------ ----------- -----------
amounts in millions
Cash paid for acquisitions:
Fair value of assets acquired $ 9,996 424 264
Net liabilities assumed (968) (57) (136)
Long term debt issued (4,000) -- --
Deferred tax liability (1,612) (14) (7)
Minority interest (49) (114) (8)
Common stock issued (2,656) (195) --
------------ ----------- -----------
Cash paid for acquisitions, net of cash acquired $ 711 44 113
============ =========== ===========
Cash paid for interest $ 432 407 445
============ =========== ===========
Cash paid for income taxes $ 57 -- 7
============ =========== ===========
(4) ACQUISITION OF CONTROLLING INTEREST IN QVC, INC.
On September 17, 2003, Liberty completed its acquisition of Comcast
Corporation's ("Comcast") approximate 56.5% ownership interest in QVC
for an aggregate purchase price of approximately $7.9 billion. QVC
markets and sells a wide variety of consumer products in the U.S. and
several foreign countries primarily by means of televised shopping
programs on the QVC networks and via the Internet through its domestic
and international websites. Prior to the closing, Liberty owned
approximately 41.7% of QVC. Subsequent to the closing, Liberty owned
approximately 98% of QVC's outstanding shares, and the remaining shares
of QVC are held by members of the QVC management team.
Liberty's purchase price for QVC was comprised of 217.7 million shares
of Liberty's Series A common stock valued, for accounting purposes, at
$2,555 million, Floating Rate Senior Notes due 2006 in an aggregate
principal amount of $4,000 million (the "Floating Rate Notes") and
approximately $1,358 million in cash (including acquisition costs). The
foregoing value of the Series A common stock issued was based on the
average closing price for such stock for the five days surrounding July
3, 2003, which was the date that Liberty announced that it had reached
an agreement with Comcast to acquire Comcast's interest in QVC.
Substantially all of the cash
16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
component of the purchase price was funded with the proceeds from the
Company's issuance of its 3.50% Senior Notes due 2006 in the aggregate
principal amount of $1.35 billion.
Subsequent to the closing, QVC is a consolidated subsidiary of Liberty.
For financial reporting purposes, the acquisition is deemed to have
occurred on September 1, 2003, and since that date QVC's results of
operations have been consolidated with Liberty's. Prior to its
acquisition of Comcast's interest, Liberty accounted for its investment
in QVC using the equity method of accounting. Liberty has recorded the
acquisition of QVC as a step acquisition, and accordingly, QVC's assets
and liabilities have been recorded at amounts equal to (1) 56.5% of
estimated fair value at the date of acquisition plus (2) 43.5% of
historical cost. The $2,048 million excess of the purchase price over
the estimated fair value of 56.5% of QVC's assets and liabilities
combined with Liberty's historical equity method goodwill of $1,848
million has been recorded as goodwill in the accompanying condensed
consolidated balance sheet. The excess of the purchase price for
Comcast's interest in QVC over the estimated fair value of QVC's assets
and liabilities is attributable to the following: (i) QVC's position as
a market leader in its industry, (ii) QVC's ability to generate
significant cash from operations and Liberty's ability to obtain access
to such cash, and (iii) QVC's perceived significant international growth
opportunities.
Liberty's total investment in QVC of $10,717 million is comprised of
$2,804 million attributable to its historical equity method investment
and $7,913 million representing the purchase price for Comcast's
interest. This total investment has been allocated based on a third
party appraisal to QVC's assets and liabilities as follows (amounts in
millions):
Current assets, including cash and cash equivalents of $632 million $ 1,764
Property and equipment 631
Intangible assets subject to amortization:
Customer relationships (1) 2,336
Cable and satellite television distribution rights (1) 2,022
Intangible assets not subject to amortization:
Trademarks 2,385
Goodwill 3,896
Other assets 269
Liabilities (888)
Minority interest (101)
Deferred income taxes (1,597)
------------
$ 10,717
============
----------
(1) Customer relationships are being amortized over 10-14
years. Cable and satellite television distribution
rights are being amortized primarily over 14 years.
The following unaudited pro forma information for Liberty and its
consolidated subsidiaries for the years ended December 31, 2003 and 2002
was prepared assuming the acquisition of QVC occurred on January 1,
2002. These pro forma amounts are not necessarily indicative of
operating results that would have occurred if the QVC acquisition had
occurred on January 1, 2002.
Years ended
December 31,
-------------------------------
2003 2002
----------- -----------
amounts in millions,
except per share amounts
Revenue $ 6,834 6,361
Loss from continuing operations $ (1,196) (3,084)
Loss before cumulative effect of accounting change $ (1,175) (3,682)
Net loss $ (1,175) (5,313)
Loss per common share $ (.41) (1.89)
17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(5) SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC.
On June 7, 2004 (the "Spin Off Date"), Liberty completed the spin off
(the "Spin Off") of its wholly-owned subsidiary, Liberty Media
International, Inc. ("Liberty Media International"), to its
shareholders. Substantially all of the assets and businesses of Liberty
Media International were attributed to Liberty's International Group
segment. In connection with the Spin Off, holders of Liberty common
stock on June 1, 2004 (the "Record Date") received 0.05 of a share of
Liberty Media International Series A common stock for each share of
Liberty Series A common stock owned at 5:00 pm, New York City time on
the Record Date and 0.05 of a share of Liberty Media International
Series B common stock for each share of Liberty Series B common stock
owned at 5:00 pm, New York City time on the Record Date. The Spin Off is
intended to qualify as a tax-free spin off. For accounting purposes, the
Spin Off is deemed to have occurred on June 1, 2004, and no gain or loss
was recognized by Liberty in connection with the Spin Off.
The consolidated financial statements and accompanying notes of Liberty
have been revised to reflect Liberty Media International as a
discontinued operation. Accordingly, the assets and liabilities,
revenue, costs and expenses, and cash flows of Liberty Media
International have been excluded from the respective captions in the
accompanying consolidated balance sheets, consolidated statements of
operations, consolidated statements of comprehensive earnings (loss) and
consolidated statements of cash flows and have been reported separately
in such consolidated financial statements. Summarized combined financial
information for Liberty Media International is as follows:
COMBINED BALANCE SHEETS
December 31,
---------------------------
2003 2002
------------ ------------
amounts in millions
Cash $ 13 6
Current assets 18 15
Equity investments 1,741 1,145
Cost investments 450 188
Property and equipment, net 98 89
Goodwill and franchise costs 689 689
Deferred tax assets 458 639
Other assets 84 30
------------ ------------
Total assets $ 3,551 2,801
============ ============
Current liabilities $ 83 71
Long term debt 42 14
Other liabilities 8 7
Equity 3,418 2,709
------------ ------------
Total liabilities and equity $ 3,551 2,801
============ ============
COMBINED STATEMENTS OF OPERATIONS
Years ended December 31,
----------------------------------------------
2003 2002 2001
------------ ----------- ------------
amounts in millions
Revenue $ 109 104 140
Operating, selling, general and administrative expenses (94) (81) (113)
Depreciation and amortization (16) (13) (58)
Impairment of long-lived assets -- (46) (74)
------------ ------------ ------------
Operating loss (1) (36) (105)
Other income (expense) 50 (490) (1,063)
Income tax benefit (expense) (28) 178 376
------------ ----------- ------------
Earnings (loss) before cumulative effect of
accounting change 21 (348) (792)
Cumulative effect of accounting change -- (238) --
------------ ----------- ------------
Net earnings (loss) $ 21 (586) (792)
============ =========== ============
18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In addition to the foregoing discontinued operations, Liberty invested
approximately $670 million in cash in Liberty Media International during
the period from January 1, 2004 through the Spin Off Date. Liberty also
contributed certain monetary assets to Liberty Media International in
connection with the Spin Off and agreed to make loans to Liberty Media
International pursuant to a short-term credit facility. These monetary
assets consisted of $50 million in cash, 5 million American Depository
Shares for preferred, limited voting ordinary shares of The News
Corporation Limited ("News Corp.") and related derivatives, and a 99.9%
economic interest in 345,000 shares of preferred stock of ABC Family
Worldwide, Inc. The short-term credit facility provides for loans
through December 31, 2004 in the aggregate principal amount of $383
million. The loans will bear interest at 6% per annum, compounded
semi-annually. Principal and accrued interest are due and payable on
March 31, 2005.
(6) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Liberty has various investments accounted for using the equity method.
The following table includes Liberty's carrying amount and percentage
ownership of the more significant investments in affiliates at December
31, 2003 and the carrying amount at December 31, 2002:
December 31, December 31,
2003 2002
-------------------------- ------------
Percentage Carrying Carrying
Ownership Amount Amount
---------- ----------- ------------
dollar amounts in millions
Discovery Communications, Inc. ("Discovery") 50% $ 2,864 2,817
QVC * -- 2,712
Other various 750 715
----------- ------------
$ 3,614 6,244
=========== ============
----------
* A consolidated subsidiary since September 2003.
The following table reflects Liberty's share of earnings (losses) of
affiliates including excess basis amortization in 2001 and nontemporary
declines in value:
Years ended December 31,
---------------------------------------------
2003 2002 2001
----------- ----------- ------------
amounts in millions
Discovery $ 38 (32) (293)
QVC 107 154 36
Telewest Communications plc ("Telewest") -- (92) (2,538)
Cablevision S.A. ("Cablevision") -- -- (476)
ASTROLINK International LLC ("Astrolink") -- (1) (417)
Other (101) (121) (658)
----------- ----------- ------------
$ 44 (92) (4,346)
=========== =========== ============
TELEWEST
Telewest operates cable television and telephone systems in the United
Kingdom, and develops and sells a variety of television programming also
in the U.K.
Telewest has disclosed that it has reached an agreement in principle,
subject to certain conditions, relating to a restructuring of a
significant portion of its notes and debentures. The agreement provides
for the cancellation of all outstanding notes and debentures issued by
Telewest and one of its subsidiaries, as well as certain other unsecured
foreign exchange contracts, in exchange for new ordinary shares
representing 98.5% of the issued share capital of a new holding company
immediately after the restructuring. Existing shareholders will receive
a 1.5% interest in the new holding company under the proposed
restructuring. As a result of
19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Telewest's proposed restructuring, which Liberty expects will reduce its
ownership in Telewest to below 10%, Liberty determined that beginning in
2003 it no longer has the ability to exercise significant influence over
the operations of Telewest. In addition, Liberty has removed its
representatives from the Telewest board of directors. Accordingly,
effective January 1, 2003, Liberty no longer accounts for its investment
in Telewest using the equity method.
At December 31, 2003, Liberty's accumulated other comprehensive earnings
includes $287 million (before related deferred taxes) of unrealized
foreign currency losses related to its investment in the equity of
Telewest. These unrealized foreign currency losses will only be
recognized by Liberty upon the sale of its Telewest investment.
During the year ended December 31, 2001, Liberty determined that its
investment in Telewest experienced a nontemporary decline in value. As a
result, the carrying value of Telewest was adjusted to its estimated
fair value, and the Company recognized a charge of $1,801 million. Such
charge is included in share of losses of affiliates.
CABLEVISION
Cablevision provides cable television and high speed data services in
Argentina. At December 31, 2003, the Company has a 39% economic
ownership in Cablevision. As a result of deteriorating economic
conditions and the devaluation of the Argentine peso, Cablevision
recorded foreign currency translation losses of $393 million in the
fourth quarter of 2001. At December 31, 2001, the Company determined
that its investment in Cablevision had experienced a nontemporary
decline in value, and accordingly, recorded an impairment charge of $195
million. Such charge is included in share of losses of affiliates. The
Company's share of losses in 2001, when combined with foreign currency
translation losses recorded in other comprehensive loss at December 31,
2001, reduced the carrying value of its investment in Cablevision to
zero as of December 31, 2001. Included in accumulated other
comprehensive earnings at December 31, 2003 is $201 million (before
related deferred taxes) of unrealized foreign currency translation
losses related to the Company's investment in Cablevision. These
unrealized foreign currency losses will only be recognized by Liberty
upon the sale of its Cablevision investment.
ASTROLINK
Astrolink originally intended to build a global telecom network using
Ka-band geostationary satellites to provide broadband data
communications services. Astrolink's original business plan required
significant additional financing over the next several years. During the
fourth quarter of 2001, two of the members of Astrolink informed
Astrolink that they did not intend to provide any of Astrolink's
required financing. Based on an assessment of Astrolink's remaining
sources of liquidity and Astrolink's inability to obtain financing for
its business plan, the Company concluded that the carrying value of its
investment in Astrolink should be reduced to reflect a fair value that
assumed the liquidation of Astrolink. Accordingly, the Company wrote-off
all of its remaining investment in Astrolink during the fourth quarter
of 2001. Including such fourth quarter amount, the Company recorded
losses and charges relating to its investment in Astrolink aggregating
$417 million during the year ended December 31, 2001. As Liberty had no
obligation to make additional contributions to Astrolink, its share of
losses in 2002 was limited to amounts advanced to Astrolink by Liberty.
Liberty sold its interest in Astrolink in the fourth quarter of 2003 for
cash proceeds of $5 million.
OTHER
In April 2002, Liberty sold its 40% interest in Telemundo Communications
Group for cash proceeds of $679 million, and recognized a gain of $344
million (before related tax expense of $134 million) based upon the
difference between the cash proceeds and Liberty's basis in Telemundo,
including allocated goodwill of $25 million.
During the years ended December 31, 2003, 2002 and 2001, Liberty
recorded nontemporary declines in fair value aggregating $71 million,
$76 million and $2,396 million, respectively,
20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
related to certain of its other equity method investments. Such amounts
are included in share of losses of affiliates.
(7) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities, which are recorded at
their respective fair market values, and other cost investments are
summarized as follows:
December 31,
---------------------------
2003 2002
------------ ------------
amounts in millions
News Corp. $ 7,633 5,254
InterActiveCorp ("IAC") 4,697 2,057
Time Warner Inc. ("Time Warner") 3,080 2,243
Sprint Corporation ("Sprint PCS") 1,134 968
Motorola (1) 1,068 660
Viacom, Inc. ("Viacom") 674 619
Vivendi Universal ("Vivendi") -- 604
Other AFS equity securities 382 551
Other AFS debt securities (2) 918 1,197
Other cost investments and related receivables 178 135
------------ ------------
19,764 14,288
Less short-term investments (265) (107)
------------ ------------
$ 19,499 14,181
============ ============
----------
(1) Includes $533 million of shares pledged as collateral for share
borrowing arrangements at December 31, 2003.
(2) At December 31, 2003, other available-for-sale securities include
$493 million of investments in certain third-party marketable debt
securities held by Liberty parent and $26 million of such
securities held by Liberty subsidiaries. At December 31, 2002, such
investments aggregated $622 million and $49 million, respectively.
NEWS CORP.
During the year ended December 31, 2003, Liberty increased its economic
and voting interest in News Corp. Effective October 14, 2003, pursuant
to a put/call arrangement with News Corp., Liberty acquired $500 million
of American Depository Shares ("ADSs") for News Corp. preferred limited
voting shares at $21.50 per ADR. In addition during 2003, Liberty sold
certain of its News Corp. non-voting ADSs in the open market and
purchased voting New Corp. ADSs in the open market. Liberty recognized a
gain of $236 million (before related tax expense of $92 million) on the
sale of its non-voting ADSs. Subsequent to December 31, 2003, Liberty
purchased additional voting ADSs and sold additional non-voting ADSs in
the open market. Subsequent to these transactions, Liberty owns 210.8
million non-voting News Corp. ADSs and 48 million voting ADSs. On a net
basis, Liberty effectively exchanged 21.2 million non-voting ADSs and
$693 million in cash for the 48 million voting ADSs, taking into account
proceeds from sales of, and unwinding of collars on, non-voting News
Corp. ADSs.
In May 2001, Liberty consummated a transaction with News Corp. whereby
Liberty exchanged 70.7 million shares of Gemstar-TV Guide International,
Inc. ("Gemstar") for 121.5 million News Corp. ADSs. Included in losses
on dispositions in the accompanying consolidated statement of operations
for the year ended December 31, 2001 is a loss of $764 million
recognized in connection with this transaction based on the difference
between the fair value of the securities received by Liberty and the
carrying value of the Gemstar shares. In December 2001, Liberty
exchanged its remaining Gemstar shares for 28.8 million additional News
Corp. ADSs and recorded an additional loss of $201 million. Liberty
accounts for its investment in News Corp. as an available-for-sale
security.
21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Certain of Liberty's News Corp. ADSs were contributed to Liberty Media
International on the Spin Off Date. See note 5.
VIVENDI AND INTERACTIVECORP
Prior to May 7, 2002, Liberty held 74.4 million shares of IAC's common
stock and shares and other equity interests in certain subsidiaries of
IAC that were exchangeable for an aggregate of 79.0 million shares of
IAC common stock. On an "as-converted basis," Liberty owned an
approximate 20% voting interest in IAC and applied the equity method of
accounting for its investment. IAC owned and operated businesses in
television production, electronic retailing, ticketing operations and
Internet services.
On May 7, 2002, Liberty, IAC, and Vivendi consummated the following
transactions. Liberty exchanged 7.1 million shares of USANi LLC (a
subsidiary of IAC) for a like number of shares of IAC common stock.
Vivendi then acquired from Liberty 25 million shares of IAC common
stock, approximately 38.7 million shares of USANi LLC, and Liberty's
approximate 30% interest in multiThematiques S.A., together with certain
liabilities with respect thereto, in exchange for 37.4 million Vivendi
ordinary shares, which at the date of the transaction had an aggregate
fair value of $1,013 million. Liberty recognized a loss of $817 million
based on the difference between the fair value of the Vivendi shares
received and the carrying value of the assets relinquished, including
goodwill of $514 million which was allocated to the reporting unit
holding the IAC interests. Following this exchange, IAC contributed
substantially all of its entertainment assets to Vivendi Universal
Entertainment ("VUE"), a partnership controlled by Vivendi, in exchange
for, among other consideration, common and preferred interests in VUE.
After this contribution, Liberty exchanged its remaining equity
interests in subsidiaries of IAC for 33.2 million shares of common stock
of IAC.
During the year ended December 31, 2003 and pursuant to contractual
pre-emptive rights, Liberty acquired an aggregate 48.7 million shares of
IAC for cash consideration of $1,166 million. At December 31, 2003,
Liberty owns approximately 20% of IAC common stock representing an
approximate 47% voting interest. However, due to certain governance
arrangements which limit its ability to exert significant influence over
IAC, Liberty accounts for such investment as an available-for-sale
security. Liberty also owned approximately 3% of Vivendi and accounted
for such investment as an available-for-sale security. During the fourth
quarter of 2003, Liberty sold all of its shares of Vivendi common stock
in the open market for aggregate cash proceeds of $838 million and
recognized a $262 million gain (before tax expense of $102 million).
TIME WARNER
On January 11, 2001, America Online, Inc. completed its merger with Time
Warner to form AOL Time Warner (now known as Time Warner Inc.). 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. 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.
VIACOM
On January 23, 2001, BET Holdings II, Inc. ("BET") was acquired by
Viacom in exchange for shares of Class B common stock of Viacom. As a
result of the merger, Liberty received 15.2 million shares of Viacom's
Class B common stock (less than 1% of Viacom's common equity) in
exchange for its 35% ownership interest in BET, which investment had
been accounted for using the equity method. Liberty accounts for its
investment in Viacom as an available-for-sale security. Liberty
recognized a gain of $559 million (before deferred tax expense of $221
million) in 2001 based upon the difference between the carrying value of
Liberty's interest in BET and the value of the Viacom securities
received.
22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS
During the years ended December 31, 2003, 2002 and 2001, Liberty
determined that certain of its AFS Securities and cost investments
experienced nontemporary declines in value. The primary factors
considered by Liberty in determining the timing of the recognition for
the majority of these impairments was the length of time the investments
traded below Liberty's cost bases and the lack of near-term prospects
for recovery in the stock prices. As a result, the carrying amounts of
such investments were adjusted to their respective fair values based
primarily on quoted market prices at the balance sheet date. These
adjustments are reflected as nontemporary declines in fair value of
investments in the consolidated statements of operations.
The following table identifies the realized losses attributable to each
of the individual investments as follows:
Years ended December 31,
----------------------------------------
2003 2002 2001
------------ ------------ ------------
Investment amounts in millions
----------
Time Warner $ -- 2,567 2,052
News Corp. -- 1,393 915
Sprint PCS -- 1,077 --
Vivendi -- 409 --
Others 22 360 1,132
------------ ------------ ------------
$ 22 5,806 4,099
============ ============ ============
UNREALIZED HOLDINGS GAINS AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities that are included in accumulated other
comprehensive earnings are summarized below.
December 31, 2003 December 31, 2002
-------------------------- ---------------------------
Equity Debt Equity Debt
securities securities securities securities
------------ ------------ ------------ ------------
amounts in millions
Gross unrealized holding gains $ 5,779 1 1,401 5
Gross unrealized holding losses $ -- -- (87) --
Management estimates that the fair market value of all of its other cost
investments approximated $405 million and $259 million at December 31,
2003 and 2002, respectively. Management calculates market values of its
other cost investments using a variety of approaches including multiple
of cash flow, per subscriber value, or a value of comparable public or
private businesses. No independent appraisals were conducted for those
cost investment assets.
23
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(8) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are summarized as follows:
December 31,
Type of ---------------------------
derivative 2003 2002
----------------------------------- ------------ ------------
amounts in millions
ASSETS
Equity collars (1) $ 3,358 5,014
Put spread collars 331 478
Other 101 52
------------ ------------
Total 3,790 5,544
Less current portion (543) (1,165)
------------ ------------
$ 3,247 4,379
============ ============
LIABILITIES
Exchangeable debenture call option obligations $ 990 536
Put options 772 929
Equity collars 293 --
Borrowed shares 533 --
Other 22 16
------------ ------------
Total 2,610 1,481
Less current portion (854) (16)
------------ ------------
$ 1,756 1,465
============ ============
----------
(1) Includes narrow-band collars.
EQUITY COLLARS, NARROW-BAND COLLARS, PUT SPREAD COLLARS AND PUT OPTIONS
The Company has entered into equity collars, narrow-band collars, put
spread collars, written put options and other financial instruments to
manage market risk associated with its investments in certain marketable
securities. These instruments are recorded at fair value based on option
pricing models. Equity collars provide the Company with a put option
that gives the Company the right to require the counterparty to purchase
a specified number of shares of the underlying security at a specified
price (the "Company Put Price") at a specified date in the future.
Equity collars also provide the counterparty with a call option that
gives the counterparty the right to purchase the same securities at a
specified price at a specified date in the future. The put option and
the call option generally are equally priced at the time of origination
resulting in no cash receipts or payments. Narrow-band collars are
equity collars in which the put and call prices are set so that the call
option has a relatively higher fair value than the put option at the
time of origination. In these cases the Company receives cash equal to
the difference between such fair values.
Put spread collars provide the Company and the counterparty with put and
call options similar to equity collars. In addition, put spread collars
provide the counterparty with a put option that gives it the right to
require the Company to purchase the underlying securities at a price
that is lower than the Company Put Price. The inclusion of the secondary
put option allows the Company to secure a higher call option price while
maintaining net zero cost to enter into the collar. However, the
inclusion of the secondary put exposes the Company to market risk if the
underlying security trades below the put spread price.
EXCHANGEABLE DEBENTURE CALL OPTION OBLIGATIONS
Liberty has issued senior exchangeable debentures which are exchangeable
for the value of a specified number of shares of Sprint PCS Group common
stock, Motorola common stock, Viacom Class B common stock or Time Warner
common stock, as applicable. (See note 9 for a more complete description
of the exchangeable debentures.)
Prior to the adoption of Statement 133, the exchangeable debenture call
option feature and the long-term debt were reported together in the
Company's consolidated balance sheet. Under Statement 133, the call
option feature of the exchangeable debentures is reported separately in
24
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
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 derivative instruments in
Liberty's consolidated statements of operations.
REALIZED AND UNREALIZED GAINS ON DERIVATIVE INSTRUMENTS
Realized and unrealized gains (losses) on derivative instruments during
the years ended December 31, 2003, 2002 and 2001 are comprised of the
following:
Years ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
amounts in millions
Change in fair value of exchangeable debenture call
option feature $ (158) 784 167
Change in fair value of hedged AFS Securities -- (2,378) (1,531)
Change in fair value of AFS derivatives (535) 3,671 1,712
Change in fair value of other derivatives (1) 31 62 13
------------ ------------ ------------
Total realized and unrealized gains (losses), net $ (662) 2,139 361
============ ============ ============
----------
(1) Comprised primarily of forward foreign exchange contracts and
interest rate swap agreements.
(9) AT&T OWNERSHIP OF LIBERTY
On March 9, 1999, AT&T Corp. ("AT&T") acquired Tele-Communications, Inc.
("TCI"), the former parent company of Liberty, in a merger transaction
(the "AT&T Merger").
From March 9, 1999 through August 9, 2001, AT&T owned 100% of the
outstanding common stock of Liberty. During such time, the AT&T Class A
Liberty Media Group common stock and the AT&T Class B Liberty Media
Group common stock 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, which was comprised of the businesses and
assets of Liberty and its subsidiaries.
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 Liberty Media Group tracking stock was
redeemed for one share of Liberty common stock (the "Split Off
Transaction"). Subsequent to the Split Off Transaction which was
accounted for at historical cost, Liberty is no longer a subsidiary of
AT&T.
In connection with the Split Off Transaction, Liberty was also
deconsolidated from AT&T for federal income tax purposes. Pursuant to an
agreement entered into at the time of the AT&T Merger, 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 had not been used as an offset to Liberty's obligations under a tax
sharing agreement and that had been, or was reasonably expected to be,
utilized by AT&T. The $803 million payment was received by Liberty prior
to the Split Off Transaction and has been reflected as an increase to
additional paid-in-capital in the accompanying consolidated statement of
stockholders' equity. In addition, certain deferred intercompany gains
were includible in AT&T's taxable income as a result of the Split Off
Transaction, and AT&T was entitled to reimbursement from Liberty for the
resulting tax liability of approximately $115 million. Such tax
liability has been reflected as a reduction in additional
paid-in-capital in the accompanying consolidated statement of
stockholders' equity.
25
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(10) LONG-TERM DEBT
Debt is summarized as follows:
Weighted
average
interest December 31,
rate ---------------------------
2003 2003 2002
------------ ------------ ------------
amounts in millions
Parent company debt:
Senior notes 4.29% $ 5,627 983
Senior debentures 8.33% 1,487 1,486
Senior exchangeable debentures 1.84% 2,227 865
Bank debt -- 325
------------ ------------
9,341 3,659
Debt of subsidiaries:
Bank credit facilities Various 89 1,206
Other debt, at varying rates 115 70
------------ ------------
204 1,276
------------ ------------
Total debt 9,545 4,935
Less current maturities (104) (633)
------------ ------------
Total long-term debt $ 9,441 4,302
============ ============
SENIOR NOTES AND DEBENTURES
In September 2003, Liberty issued $1,350 million principal amount of
3.5% senior notes due 2006 for net cash proceeds of $1,347 million.
Liberty used the proceeds from this offering to partially finance its
purchase of Comcast's interest in QVC. See note 4.
Also as part of the consideration for QVC, Liberty issued $4,000 million
of Floating Rate Notes due 2006 to Comcast. The Floating Rate Notes
accrue interest at LIBOR plus a margin. The margin on the $2,500 million
principal amount of Floating Rate Notes sold by Comcast on September 24,
2003 is fixed at 1.5%. On September 24, 2003 and December 12, 2003,
Liberty repurchased from subsidiaries of Comcast $500 million and $1,000
million, respectively, principal amount of the Floating Rate Notes at a
purchase price equal to 100% of the principal amount plus accrued
interest.
During the second quarter of 2003, Liberty issued $1,000 million
principal amount of senior notes due 2013 with an interest rate of 5.70%
for cash proceeds of $990 million net of offering discount and
underwriting fees.
In prior years, Liberty issued $750 million of 7-7/8% Senior Notes due
2009, $237.8 million of 7-3/4% Senior Notes due 2009, $500 million of
8-1/2% Senior Debentures due 2029, and $1 billion of 8-1/4% Senior
Debentures due 2030. Interest on these obligations is payable
semi-annually.
The senior notes and senior debentures are stated net of an aggregate
unamortized discount of $24 million and $19 million at December 31, 2003
and 2002, respectively, which is being amortized to interest expense in
the accompanying consolidated statements of operations.
SENIOR EXCHANGEABLE DEBENTURES
In November 1999, Liberty issued $869 million of 4% Senior Exchangeable
Debentures due 2029. Each $1,000 debenture is exchangeable at the
holder's option for the value of 22.9486 shares of Sprint PCS Group
stock. After the date Liberty's ownership level of Sprint PCS Group
common stock falls below 10%, 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. Liberty's
ownership in Sprint PCS was approximately 17% at December 31, 2003.
Liberty, at its option, may redeem the debentures, in whole or in part,
for cash.
26
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In February and March 2000, Liberty issued an aggregate of $810 million
of 3-3/4% Senior Exchangeable Debentures due 2030. 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 date Liberty's ownership level of
Sprint PCS Group stock falls below 10%, 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.
Liberty, at its option, may redeem the debentures, in whole or in part,
for cash.
In January 2001, Liberty issued $600 million of 3-1/2% Senior
Exchangeable Debentures due 2031. 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, in whole or in
part, for cash.
In March 2001, Liberty issued $817.7 million of 3-1/4% Senior
Exchangeable Debentures due 2031. 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, in whole or
in part, for cash.
In March and April 2003, Liberty issued an aggregate principal amount of
$1,750 million of 0.75% Senior Exchangeable Debentures due 2023 and
received net cash proceeds of $1,715 million after expenses. Each $1,000
debenture is exchangeable at the holder's option for the value of
57.4079 shares of Time Warner common stock. Liberty may, at its
election, pay the exchange value in cash, Time Warner common stock,
shares of Liberty Series A common stock or a combination thereof. On or
after April 5, 2008, Liberty, at its option, may redeem the debentures,
in whole or in part, for shares of Time Warner common stock, cash or any
combination thereof. On March 30, 2008, March 30, 2013 or March 30,
2018, each holder may cause Liberty to purchase its exchangeable
debentures, and Liberty, at its election, may pay the purchase price in
shares of Time Warner common stock, cash, Liberty Series A common stock,
or any combination thereof.
Interest on the Company's exchangeable debentures is payable
semi-annually based on the date of issuance. At maturity, all of the
Company's exchangeable debentures are payable in cash.
In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported at fair value and separately from
the long-term debt in the consolidated balance sheet. 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 $1,750
million of exchangeable debentures issued during the year ended December
31, 2003, aggregated $406 million on the date of issuance. Accordingly,
the long-term debt portion was recorded at $1,344 million. The long-term
debt is accreted to its face amount over the expected term of the
debenture using the effective interest method. Accretion related to all
of the Company's exchangeable debentures aggregated $61 million, $7
million and $6 million during the years ended December 31, 2003, 2002
and 2001, respectively, and is included in interest expense in the
accompanying consolidated statements of operations.
SUBSIDIARY BANK CREDIT FACILITIES
At December 31, 2003, Starz Encore had no amounts outstanding and $325
million available pursuant to its bank credit facility. The bank credit
facility contains restrictive covenants which require, among other
things, the maintenance of certain financial ratios, and include
limitations on indebtedness, liens, encumbrances, acquisitions,
dispositions, guarantees and dividends. Additionally, the bank credit
facility requires the payment of fees of .2% per annum on the
27
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
average unborrowed portion of the total commitment. Such fees were not
significant in 2003, 2002 and 2001. Starz Encore's ability to borrow the
unused capacity noted above is dependent on its continuing compliance
with its covenants at the time of, and after giving effect to, a
requested borrowing.
At December 31, 2003, the subsidiary of Liberty that operates the DMX
Music service was not in compliance with three covenants contained in
its bank loan agreement. The subsidiary and the participating banks have
entered into a forbearance agreement whereby the banks have agreed to
forbear from exercising certain default-related remedies against the
subsidiary through March 31, 2004. The subsidiary will not be able to
repay its debt when the forbearance agreement expires and is currently
considering its financing options. The outstanding balance of the
subsidiary's bank facility was $89 million at December 31, 2003, all of
which is included in current portion of debt. All other consolidated
borrowers were in compliance with their debt covenants at December 31,
2003.
FIVE YEAR MATURITIES
The U.S. dollar equivalent of the annual maturities of Liberty's debt
for each of the next five years is as follows (amounts in millions):
2004 $ 104
2005 $ 24
2006 $ 3,660
2007 $ 11
2008 $ 1,759
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to
Liberty for debt of the same remaining maturities. The fair value of
Liberty's publicly traded debt at December 31, 2003 is as follows
(amounts in millions):
Fixed rate senior notes $ 2,198
Floating Rate Notes $ 2,500
Senior debentures $ 1,805
Senior exchangeable debentures, including call option
liability $ 4,368
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at December 31, 2003.
A reconciliation of the carrying value of the Company's debt to the face
amount at maturity is as follows (amounts in millions):
Carrying value at December 31, 2003 $ 9,545
Add:
Unamortized issue discount on senior notes and debentures 24
Unamortized discount attributable to call option feature
of exchangeable debentures 2,411
----------
Face amount at maturity $ 11,980
==========
(11) INCOME TAXES
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing
Agreement"). Liberty calculated its respective tax liability on a
separate return basis. The income tax provision for Liberty was
calculated based on the increase
28
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
or decrease in the tax liability of the AT&T consolidated group
resulting from the inclusion of those items in the consolidated tax
return of AT&T which were attributable to Liberty.
Under the AT&T Tax Sharing Agreement, Liberty received a cash payment
from AT&T in periods when Liberty generated taxable losses and such
taxable losses were utilized by AT&T to reduce the consolidated income
tax liability. This utilization of taxable losses was accounted for by
Liberty as a current federal intercompany income tax benefit. To the
extent such losses were not utilized by AT&T, such amounts were
available to reduce federal taxable income generated by Liberty in
future periods, similar to a net operating loss carryforward, and were
accounted for as a deferred federal income tax benefit. During the
period from March 10, 1999 to December 31, 2002, Liberty received cash
payments from AT&T aggregating $555 million as payment for Liberty's
taxable losses that AT&T utilized to reduce its income tax liability. In
the event AT&T generates ordinary losses in 2003 or capital losses in
2003 or 2004 and is able to carry back such losses to offset taxable
income previously offset by Liberty's losses, Liberty may be required to
refund as much as $333 million of these cash payments.
Income tax benefit (expense) consists of:
Years ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
amounts in millions
Current:
Federal $ (5) (3) 298
State and local (30) (1) (2)
Foreign (41) (1) 6
------------ ------------ ------------
(76) (5) 302
------------ ------------ ------------
Deferred:
Federal (222) 1,297 2,747
State and local (47) 231 483
Foreign (1) 1 --
------------ ------------ ------------
(270) 1,529 3,230
------------ ------------ ------------
Income tax benefit (expense) $ (346) 1,524 3,532
============ ============ ============
29
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Income tax benefit (expense) differs from the amounts computed by
applying the U.S. federal income tax rate of 35% as a result of the
following:
Years ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
amounts in millions
Computed expected tax benefit $ 315 1,636 3,400
Impairment charges and amortization of
goodwill not deductible for income
tax purposes (477) (74) (250)
Disposition of nondeductible goodwill in
sales transactions -- (185) --
State and local income taxes, net of
federal income taxes (47) 154 312
Foreign taxes (38) (11) 15
Change in valuation allowance affecting
tax expense (65) (13) (70)
Adjustments to dividend received deduction (21) 16 17
Effect of change in estimated state tax
rate -- -- 78
Other, net (13) 1 30
------------ ------------ ------------
Income tax benefit (expense) $ (346) 1,524 3,532
============ ============ ============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below:
December 31,
---------------------------
2003 2002
------------ ------------
amounts in millions
Deferred tax assets:
Net operating and capital loss carryforwards $ 823 629
Accrued stock compensation 95 259
Other future deductible amounts 134 7
------------ ------------
Deferred tax assets 1,052 895
Valuation allowance (386) (363)
------------ ------------
Net deferred tax assets 666 532
------------ ------------
Deferred tax liabilities:
Investments 7,734 6,721
Intangible assets 2,645 87
Discount on exchangeable debentures 849 803
Other 146 25
------------ ------------
Deferred tax liabilities 11,374 7,636
------------ ------------
Net deferred tax liabilities $ 10,708 7,104
============ ============
The Company's valuation allowance increased $23 million in 2003,
including a $65 million charge to tax expense partially offset by a $42
million reversal of valuation allowance recorded in connection with
acquisitions.
At December 31, 2003, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $2,284
million which, if not utilized to reduce taxable income in future
periods, will expire as follows: 2004: $1 million; 2005: $15 million;
2006: $51 million; 2007: $78 million; 2008: $12 million; 2009: $64
million; 2010: $5 million; and beyond
30
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
2010: $2,058 million. Of the foregoing net operating and capital loss
carryforward amount, approximately $1,281 million is subject to certain
limitations and may not be currently utilized. The remaining $1,003
million is currently available to be utilized to offset future taxable
income of Liberty's consolidated tax group.
AT&T, as the successor to TCI, is the subject of an Internal Revenue
Service ("IRS") audit for the 1993-1999 tax years. The IRS notified AT&T
and Liberty that it was proposing income adjustments and assessing
certain penalties in connection with TCI's 1994 tax return. The IRS,
AT&T and Liberty have reached an agreement whereby AT&T will recognize
additional income of $94 million with respect to this matter, and no
penalties will be assessed. Pursuant to the tax sharing agreement
between Liberty and AT&T, Liberty may be obligated to reimburse AT&T for
any tax that AT&T is ultimately assessed as a result of this agreement.
Liberty is currently unable to estimate any such tax liability and
resulting reimbursement, but believes that any such reimbursement will
not be material to its financial position.
(12) 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 December 31, 2003, no shares of preferred stock were
issued.
COMMON STOCK
The Series A common stock has one vote per share, and the Series B
common stock has ten votes per share. Each share of the Series B common
stock is exchangeable at the option of the holder for one share of
Series A common stock.
As of December 31, 2003, there were 56 million shares of Liberty Series
A common stock and 28 million shares of Liberty Series B common stock
reserved for issuance under exercise privileges of outstanding stock
options and warrants.
PURCHASES OF COMMON STOCK
During the years ended December 31, 2003 and 2002, the Company purchased
42.3 million and 25.7 million shares of its common stock for aggregate
cash consideration of $437 million and $281 million, respectively. These
purchases have been accounted for as retirements of common stock and
have been reflected as a reduction of stockholders' equity in the
accompanying consolidated balance sheet.
During 2002, Liberty sold put options on 7.0 million shares of its
Series A common stock, 4.0 million of which were outstanding at December
31, 2002. Liberty sold another 9.3 million put options in the first
quarter of 2003. All of these options expired unexercised prior to
December 31, 2003. The Company accounted for these put options pursuant
to EITF 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED
TO, AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK" and recorded a
net increase to additional paid-in-capital of $37 million during the
year ended December 31, 2003.
(13) TRANSACTIONS WITH OFFICERS AND DIRECTORS
CHAIRMAN'S EMPLOYMENT AGREEMENT
In connection with the AT&T Merger, an employment agreement between the
Company's Chairman and TCI was assigned to the Company.
The Chairman's employment agreement provides for, among other things,
deferral of a portion (not in excess of 40%) of the monthly compensation
payable to him for all employment years commencing on or after January
1, 1993. The deferred amounts will be payable in monthly installments
over a 20-year period commencing on the termination of the Chairman's
31
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
employment, together with interest thereon at the rate of 8% per annum
compounded annually from the date of deferral to the date of payment.
The aggregate liability under this arrangement at December 31, 2003 is
$1.6 million, and is included in other liabilities in the accompanying
consolidated balance sheet.
The Chairman's employment agreement also provides that in the event of
termination of his employment with Liberty, he will be entitled to
receive 240 consecutive monthly payments equal to $15,000 increased at
the rate of 12% per annum compounded annually from January 1, 1988 to
the date payment commences ($82,103 per month as of December 31, 2003).
Such payments would commence on the first day of the month succeeding
the termination of employment. In the event of the Chairman's death, his
beneficiaries would be entitled to receive the foregoing monthly
payments. The aggregate liability under this arrangement at December 31,
2003 is $19.7 million, and is included in other liabilities in the
accompanying consolidated balance sheet.
The Company's Chairman deferred a portion of his monthly compensation
under his previous employment agreement with TCI. The Company assumed
the obligation to pay that deferred compensation in connection with the
AT&T Merger. The deferred obligation (together with interest at the rate
of 13% per annum compounded annually), which aggregated $10.9 million at
December 31, 2003 and is included in other liabilities, is payable on a
monthly basis, following the occurrence of specified events, under the
terms of the previous employment agreement. The rate at which interest
accrues on the deferred obligation was established in 1983 pursuant to
the previous employment agreement.
OTHER
Effective November 28, 2003, Liberty acquired all the outstanding stock
of TP Investment, Inc. ("TPI"), a corporation wholly owned by TP-JCM,
LLC, a limited liability company in which the sole member is the
Company's Chairman. In exchange for the stock of TPI, TP-JCM received
5,281,739 shares of the Company's Series B common stock, valued in the
agreement at $11.50 per share. As prescribed by the Agreement and Plan
of Merger pursuant to which the acquisition was effected, that per share
value equals 110% of the average of the closing sale prices of the
Company's Series A Common Stock for the ten trading days ended November
28, 2003. TPI owns 10,602 shares of Series B Preferred Stock of Liberty
TP Management, Inc. ("Liberty TP Management"), a subsidiary of the
Company. Those shares of Series B Preferred Stock represent 12% of the
voting power of Liberty TP Management. TPI also owns a 5% membership
interest (representing a 50% voting interest) in Liberty TP LLC, a
limited liability company which owns approximately 20.6% of the common
equity and 27.2% of the voting power of Liberty TP Management. As a
result of the acquisition, the Company beneficially owns all the equity
and voting interests in Liberty TP Management. Liberty TP Management
owns our interest in True Position and certain equity interests in
Sprint PCS Group, IDT Investments, Inc. and priceline.com.
In connection with the acquisition of TPI, the Company entered into a
registration rights agreement. That agreement provides for the
registration by the Company under applicable federal and state
securities laws, at the holder's request, of the sale of shares of the
Company's Series A Common Stock issuable upon conversion of shares of
the Series B Common Stock that were issued to TP-JCM.
The shares of Series B Common Stock issued to TP-JCM are subject to the
Company's rights to purchase such shares pursuant to a call agreement
entered into in February 1998 by the chairman and his spouse. Pursuant
to the call agreement, Liberty has the right to acquire all of the
Series B Liberty common stock held by the Chairman and his spouse in
certain circumstances. The price of acquiring such shares is generally
limited to the market price of the Series A Liberty common stock, plus a
10% premium.
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 the Chairman
32
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
and Chief Executive Officer of On Command, who at the time was also a
director of Liberty, for aggregate cash consideration of $25.2 million.
Such purchase price represents a per share price of $11.22. The closing
market price for On Command common stock on the day the transaction was
signed was $7.77. The Company has included the difference between the
aggregate market value of the shares purchased and the cash
consideration paid in selling, general and administrative expenses in
the accompanying consolidated statement of operations.
In August 2000, On Command sold shares of its Series A Convertible
Participating Preferred Stock (the "Preferred Shares") to a former
director of Liberty, who was also the Chairman and Chief Executive
Officer of On Command, for a $21 million note. The Preferred Shares are
convertible into 236,250 shares of Liberty Series A common stock. The
note is secured by the Preferred Shares or the proceeds from the sale of
such shares and the former director's personal obligations under such
loan are limited. The note, which matures on August 1, 2005, may not be
prepaid and interest on the note accrues at a rate of 7% per annum. This
arrangement has been treated as a fixed plan option for accounting
purposes.
(14) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
LIBERTY
Effective with the Split Off Transaction, Liberty assumed from AT&T the
Amended and Restated AT&T Corp. Liberty Media Group 2000 Incentive Plan
and renamed it the Liberty Media Corporation 2000 Incentive Plan (the
"Liberty Incentive Plan"). Grants by TCI to current and former Liberty
employees of options and options with tandem SARs with respect to shares
of Liberty Media Group stock prior to 1999 were assumed by Liberty under
the Liberty Incentive Plan. Grants of free standing SARs made under the
Plan in 2000 and in 2001 prior to the Split Off Transaction were
converted into options upon assumption by Liberty.
The Liberty Incentive Plan provides for awards to be made in respect of
a maximum of 160 million shares of common stock of Liberty. Awards may
be made as grants of stock options, SARs, restricted shares, stock
units, cash or any combination of the foregoing.
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 which were converted into shares of
Liberty common stock upon completion of the Split Off Transaction. Such
restricted shares vested according to a schedule that corresponded to
the vesting schedule applicable to the previously unvested options. As
of December 31, 2003, all of the restricted shares were vested.
In addition, each executive officer was granted free-standing SARs equal
to the total number of Restructured Options exercised. The free-standing
SARs were tied to the value of AT&T Liberty Media Group tracking stock
and will vest as to 30% in year one and 17.5% in years two through five.
The free-standing SARs were granted with an exercise price of $14.70
($15.35 in the case of Liberty Series B options) and had a fair value of
$9.56 on the date of the grant. Upon completion of the Split Off
Transaction, the free-standing SARs automatically converted to options
to purchase Liberty Series A common stock (and in some cases Liberty
Series B 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.
33
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
In addition to the SARs issued in the aforementioned option
restructuring, during 2001 and pursuant to the Liberty Incentive Plan,
Liberty awarded 2,104,000 options to purchase Liberty Series A common
stock to certain officers and key employees of the Company. Such options
have a 10-year term, exercise prices ranging from $12.40 to $16.35, vest
as to 25% in each of years 2 through 5 after the date of grant, and had
a weighted-average grant date fair value of $9.40.
During the first quarter of 2002, the Company reduced the exercise price
of 2.3 million stock options previously granted to three executive
officers from a weighted average exercise price of $21.66 to $14.70,
which new exercise price exceeded the closing market price of Liberty
Series A common stock on the date of repricing. As a result of such
repricing, these options are now accounted for as variable plan awards.
Options held by Liberty's Chairman, Chief Executive Officer and Chief
Operating Officer were not included in the foregoing repricing.
In connection with the Company's Rights Offering, which expired on
December 2, 2002, and pursuant to the Liberty Incentive Plan
antidilution provisions, the number of shares and the applicable
exercise prices of all Liberty options granted pursuant to the Liberty
Incentive Plan were adjusted as of October 31, 2002, the record date for
the Rights Offering. As a result of the foregoing modifications, all of
the Company's outstanding options are now accounted for as variable plan
awards.
During the year ended December 31, 2003, Liberty awarded 6,167,000 free
standing SARs to its officers and employees. Such SARs have a 10-year
term, exercise prices ranging from $11.09 to $14.33, vest as to 20% on
each of the first five anniversaries of the respective grant date, and
had a weighted average grant date fair value of $5.57 per share.
On December 17, 2002, shareholders of the Company approved the Liberty
Media Corporation 2002 Nonemployee Director Incentive Plan (the "NDIP").
Under the NDIP, the Liberty Board of Directors (the "Liberty Board") has
the full power and authority to grant eligible nonemployee directors
stock options, SARs, stock options with tandem SARs, and restricted
stock. Effective September 9, 2003, the Liberty Board granted each
nonemployee director of Liberty 11,000 free standing SARs at an exercise
price of $11.85. These options expire 10 years from the date of grant,
vest on the first anniversary of the grant date and had a grant date
fair value of $5.93 per share.
The estimated fair values of the options noted above are based on the
Black-Scholes model and are stated in current annualized dollars on a
present value basis. The key assumptions used in the model for purposes
of these calculations generally include the following: (a) a discount
rate equal to the 10-year Treasury rate on the date of grant; (b) a 32%
volatility factor; (c) the 10-year option term; (d) the closing price of
the respective common stock on the date of grant; and (e) an expected
dividend rate of zero.
34
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table presents the number and weighted average exercise
price ("WAEP") of certain options, SARs and options with tandem SARs to
purchase Liberty Series A and Series B common stock granted to certain
officers, employees and directors of the Company.
Liberty Liberty
Series A Series B
common common
stock WAEP stock WAEP
------------ ------------ ------------ ------------
numbers of options in thousands
Outstanding at January 1, 2001 77,516 $ 7.20 --
Granted 21,625 $ 14.72 27,462 $ 15.35
Exercised (50,315) $ 7.62 --
Canceled (1,167) $ 16.88 --
------------ ------------
Outstanding at December 31, 2001 47,659 $ 11.69 27,462 $ 15.35
Granted 525 $ 12.38 --
Exercised (488) $ 3.51 --
Canceled (995) $ 25.70 --
Options issued in mergers 744 $ 34.55 --
Adjustments pursuant to antidilution
provisions 1,216 703
------------ ------------
Outstanding at December 31, 2002 48,661 $ 9.60 28,165 $ 14.96
Granted 6,233 $ 11.88 --
Exercised (323) $ 4.68 --
Canceled (619) $ 17.22 --
Options issued in mergers 1,142 $ 78.53 --
------------ ------------
Outstanding at December 31, 2003 55,094 $ 11.23 28,165 $ 14.96
============ ============
Exercisable at December 31, 2001 23,494 $ 4.66 --
============ ============
Exercisable at December 31, 2002 30,402 $ 6.78 8,450 $ 14.96
============ ============
Exercisable at December 31, 2003 34,529 $ 9.12 13,378 $ 14.96
============ ============
Vesting period 5 yrs 5 yrs
The following table provides additional information about the Company's
outstanding options to purchase Liberty Series A common stock at
December 31, 2003.
No. of Weighted No. of
outstanding Range of WAEP of average exercisable WAEP of
options exercise outstanding remaining options exercisable
(000's) prices options life (000's) options
--------------- --------------- ------------- ------------- -------------- ------------
17,356 $ 1.06-$ 4.07 $ 1.97 2.0 years 17,356 $ 1.97
1,007 $ 6.14-$ 9.70 $ 6.91 3.3 years 1,007 $ 6.91
34,776 $10.53-$ 14.37 $ 13.56 7.3 years 14,822 $ 13.61
470 $15.69-$ 15.95 $ 15.89 6.1 years 347 $ 15.88
1,485 $21.88-$305.25 $ 66.27 6.3 years 997 $ 66.73
--------------- --------------
55,094 34,529
=============== ==============
In connection with the Spin Off, Liberty's incentive plan committee has
the authority to make equitable adjustments to outstanding Liberty
options. Accordingly, Liberty anticipates that certain adjustments will
be made to the options and exercise prices disclosed in the foregoing
table.
JUNIOR STOCK PLANS
In July 2001, Liberty LWR, Inc. ("LWR"), a wholly-owned subsidiary of
Liberty, formed Liberty Livewire Holdings, Inc. ("Livewire Holdings") as
a wholly owned subsidiary. LWR then sold to certain officers and a
director of Liberty an aggregate 19.872% common stock interest in
Livewire
35
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Holdings with an aggregate value of $600. Liberty, LWR and these
individuals entered into a stockholders agreement pursuant to which the
individuals could require Liberty to purchase, after five years, all or
part of their common stock interest in Livewire Holdings, in exchange
for Liberty common stock, at its then-fair market value. In addition,
Liberty had the right to purchase, in exchange for its common stock,
their common stock interests in Livewire Holdings for fair market value
at any time. Effective May 9, 2003, all of the assets of Livewire
Holdings were distributed to LWR as the holder of all of the preferred
stock interest in Livewire Holdings, and Livewire Holdings was
dissolved.
In September 2000, certain officers of Liberty purchased a 6% common
stock interest in a subsidiary for $1.3 million. Such subsidiary owns an
indirect interest in an entity that holds certain of Liberty's
investments in satellite and technology related assets. Liberty and the
officers entered into a shareholders agreement in which the officers
could require Liberty to purchase, after five years, all or part of
their common stock interest in exchange for Series A Liberty common
stock at the then fair market value. The shareholders agreement also
provides that upon termination of employment, Liberty will repurchase
the officers' interest for the original purchase price plus 6%. In
addition, Liberty has the right to purchase, in exchange for Series A
Liberty common stock, the common stock interests held by the officers at
fair market value at any time. During 2001, two of the officers resigned
their positions with the Company, and the Company purchased their
respective interests in the subsidiary pursuant to the terms of the
agreement. No compensation related to this stock plan was recognized by
Liberty in 2003, 2002 or 2001.
QVC
QVC has a qualified and nonqualified combination stock option/stock
appreciation rights plan (collectively, the "Tandem Plan") for
employees, officers, directors and other persons designated by the Stock
Option Committee of QVC's board of directors. Under the Tandem Plan, the
option price is generally equal to the fair market value, as determined
by an independent appraisal, of a share of the underlying common stock
of QVC at the date of the grant. The fair value of a share of QVC common
stock as of the latest valuation date is $2,270. If the eligible
participant elects the SAR feature of the Tandem Plan, the participant
receives 75% of the excess of the fair market value of a share of QVC
common stock over the exercise price of the option to which it is
attached at the exercise date. The holders of a majority of the
outstanding options have stated an intention not to exercise the SAR
feature of the Tandem Plan. Because the exercise of the option component
is more likely than the exercise of the SAR feature, compensation
expense is measured based on the stock option component. As a result,
QVC is applying fixed plan accounting in accordance with APB Opinion No.
25. Under the Tandem Plan, option/SAR terms are ten years from the date
of grant, with options/SARs generally becoming exercisable over four
years from the date of grant. At December 31, 2003, there were a total
of 142,671 options outstanding, 41,632 of which were vested at a
weighted average exercise price of $957.44 and 101,039 of which were
unvested at a weighted average exercise price of $1,523.21.
In the fourth quarter of 2003, Liberty granted to certain officers and
employees of QVC a total of 10,098,978 restricted shares of Liberty
Series A common stock. Such shares vest as to 33% on each of January 1,
2005, 2006 and 2007. These shares had a grant date fair value of $10.08
per share.
STARZ ENCORE
Starz Encore has granted Phantom Stock Appreciation Rights ("PSARS") to
certain of its officers and employees, including its chief executive
officer, under this plan. PSARS granted under the plan generally vest
over a five year period. Substantially all of these PSARs are fully
vested as of December 31, 2003. Compensation under the PSARS is computed
based upon the percentage of PSARS that are vested and a formula derived
from the appraised fair value of the net assets of Starz Encore. All
amounts earned under the plan are payable in cash, Liberty common stock
or a combination thereof. At December 31, 2003 the amount accrued
pursuant to this plan was $94 million.
36
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Effective December 27, 2002, the chief executive officer of Starz Encore
elected to exercise 54% of his outstanding PSARS. In July 2003, Starz
Encore satisfied the amount due the officer with a cash payment of $287
million.
OTHER
Certain of the Company's subsidiaries have stock based compensation
plans under which employees and non-employees are granted options or
similar stock based awards. Awards made under these plans vest and
become exercisable over various terms. The awards and compensation
recorded, if any, under these plans is not significant to Liberty.
(15) EMPLOYEE BENEFIT PLANS
Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Plan"), which provides its employees and the employees
of certain of its subsidiaries an opportunity for ownership in the
Company and creates a retirement fund. The Liberty 401(k) Plan provides
for employees to make contributions to a trust for investment in Liberty
common stock, as well as several mutual funds. The Company and its
subsidiaries make matching contributions to the Liberty 401(k) Plan
based on a percentage of the amount contributed by employees. In
addition, certain of the Company's subsidiaries have their own employee
benefit plans. Employer cash contributions to all plans aggregated $16
million, $10 million and $10 million for the years ended December 31,
2003, 2002 and 2001, respectively.
(16) OTHER COMPREHENSIVE EARNINGS (LOSS)
Accumulated other comprehensive earnings (loss) included in Liberty's
consolidated balance sheets and consolidated statements of stockholders'
equity reflect the aggregate of foreign currency translation adjustments
and unrealized holding gains and losses on AFS Securities. The change in
the components of accumulated other comprehensive earnings (loss), net
of taxes, is summarized as follows:
Accumulated
Foreign Unrealized other
currency holding comprehensive
translation gains (losses) earnings (loss),
adjustments on securities net of taxes
------------ -------------- ----------------
amounts in millions
Balance at January 1, 2001 $ (151) (255) (406)
Other comprehensive earnings (loss) (245) 1,624 1,379
------------ -------------- ----------------
Balance at December 31, 2001 (396) 1,369 973
Other comprehensive loss 73 (560) (487)
------------ -------------- ----------------
Balance at December 31, 2002 (323) 809 486
Other comprehensive earnings 46 2,715 2,761
Other activity 1 (1) --
------------ -------------- ----------------
Balance at December 31, 2003 $ (276) 3,523 3,247
============ ============== ================
37
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The components of other comprehensive earnings (loss) are reflected in
Liberty's consolidated statements of comprehensive earnings (loss) net
of taxes. The following table summarizes the tax effects related to each
component of other comprehensive earnings/loss.
Tax
Before-tax (expense) Net-of-tax
amount benefit amount
------------ ------------ ------------
amounts in millions
YEAR ENDED DECEMBER 31, 2003:
Foreign currency translation adjustments $ 75 (29) 46
Unrealized holding gains on securities arising during period 5,480 (2,137) 3,343
Reclassification adjustment for gains realized in net loss (1,030) 402 (628)
------------ ------------ ------------
Other comprehensive earnings $ 4,525 (1,764) 2,761
============ ============ ============
YEAR ENDED DECEMBER 31, 2002:
Foreign currency translation adjustments $ 120 (47) 73
Unrealized holding losses on securities arising during period (6,816) 2,658 (4,158)
Reclassification adjustment for losses realized in net loss 5,898 (2,300) 3,598
------------ ------------ ------------
Other comprehensive loss $ (798) 311 (487)
============ ============ ============
YEAR ENDED DECEMBER 31, 2001:
Foreign currency translation adjustments $ (402) 157 (245)
Unrealized holding losses on securities arising during period (1,611) 628 (983)
Reclassification adjustment for losses realized in net loss 4,416 (1,722) 2,694
Cumulative effect of accounting change (143) 56 (87)
------------ ------------ ------------
Other comprehensive earnings $ 2,260 (881) 1,379
============ ============ ============
(17) TRANSACTIONS WITH AT&T AND OTHER RELATED PARTIES
Subsidiaries of Liberty provide services to various equity affiliates of
Liberty, including Discovery Communications. Total revenue recognized by
Liberty subsidiaries for such services aggregated $14 million for the
year ended December 31, 2003.
Certain subsidiaries of Liberty produce and/or distribute programming
and other services to cable distribution operators (including AT&T) and
others pursuant to long term affiliation agreements. Charges to AT&T
were based upon customary rates charged to others. Amounts included in
revenue for services provided to AT&T prior to the Split Off Transaction
were $210 million for the seven months ended July 31, 2001.
Prior to the Split Off Transaction, AT&T allocated certain corporate
general and administrative costs to Liberty pursuant to an intergroup
agreement. Management believes such allocation methods were reasonable
and materially approximated the amount that Liberty would have incurred
on a stand-alone basis. In addition, there were 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 during the seven
months ended July 31, 2001 (the period immediately prior to the Split
Off Transaction) and are included in operating and SG&A expenses in the
accompanying consolidated statement of operations.
(18) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Encore, a wholly-owned subsidiary of Liberty, provides premium
video programming distributed by cable operators, direct-to-home
satellite providers and other distributors throughout the United States.
Starz Encore has entered into agreements with a number of motion picture
producers which obligate Starz Encore to pay fees for the rights to
exhibit certain films that are released by these producers. The unpaid
balance under agreements for film rights related to films that were
available to Starz Encore at December 31, 2003 is reflected as a
liability
38
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
in the accompanying consolidated balance sheet. The balance due as of
December 31, 2003 is payable as follows: $177 million in 2004 and $48
million in 2005.
Starz Encore has also contracted to pay fees for the rights to exhibit
films that have been released theatrically, but are not available for
exhibition by Starz Encore until some future date. These amounts have
not been accrued at December 31, 2003. Starz Encore's estimate of
amounts payable under these agreements is as follows: $558 million in
2004; $231 million in 2005; $140 million in 2006; $112 million in 2007;
$108 million in 2008; and $233 million thereafter.
Starz Encore is also obligated to pay fees for films that are released
by certain producers through 2010 when these films meet certain criteria
described in the studio output agreements. The actual contractual amount
to be paid under these agreements is not known at this time. However,
such amounts are expected to be significant. Starz Encore's total film
rights expense aggregated $398 million, $358 million and $354 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
In addition to the foregoing contractual film obligations, two motion
picture studios that have output contracts with Starz Encore through
2006 and 2010, respectively, have the right to extend their contracts
for an additional three years. If the first studio elects to extend its
contract, Starz Encore has agreed to pay the studio $60 million within
five days of the studio's notice to extend. The studio is required to
exercise its option by December 31, 2004. If the second studio elects to
extend its contract, Starz Encore has agreed to pay the studio a total
of $190 million in four annual installments. The studio is required to
exercise this option by December 31, 2007. If made, Starz Encore's
payments to the studios would be amortized ratably over the term of the
respective output agreement extension.
GUARANTEES
Liberty guarantees Starz Encore's obligations under certain of its
studio output agreements. At December 31, 2003, Liberty's guarantee for
obligations for films released by such date aggregated $799 million.
While the guarantee amount for films not yet released is not
determinable, such amount is expected to be significant. As noted above
Starz Encore has recognized the liability for a portion of its
obligations under the output agreements. As this represents a commitment
of Starz Encore, a consolidated subsidiary of Liberty, Liberty has not
recorded a separate liability for its guarantee of these obligations.
At December 31, 2003, Liberty has guaranteed Y 14.4 billion ($134
million) of the bank debt of J-COM, an equity affiliate that provides
broadband services in Japan. Liberty's guarantees expire as the
underlying debt matures and is repaid. The debt maturity dates range
from 2004 to 2018. In addition, Liberty has agreed to fund up to an
additional Y 10 billion ($93 million at December 31, 2003) to J-COM in
the event J-COM's cash flow (as defined in its bank loan agreement) does
not meet certain targets. In the event J-COM meets certain performance
criteria, this commitment expires on September 30, 2004. In connection
with the Spin Off, Liberty Media International has agreed to indemnify
Liberty for any amounts Liberty is required to fund under these
arrangements.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to
its sale, such as tax, environmental, litigation and employment matters.
Liberty generally indemnifies the purchaser in the event that a third
party asserts a claim against the purchaser that relates to a liability
retained by Liberty. These types of indemnification guarantees typically
extend for a number of years. Liberty is unable to estimate the maximum
potential liability for these types of indemnification guarantees as the
sale agreements typically do not specify a maximum amount and the
amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time.
Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to these
indemnification guarantees.
39
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
OPERATING LEASES
Liberty leases business offices, has entered into pole rental and
transponder lease agreements and uses certain equipment under lease
arrangements. Rental expense under such arrangements amounted to $71
million, $65 million and $71 million for the years ended December 31,
2003, 2002 and 2001, respectively.
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 2003 follows (amounts in millions):
Years ending December 31:
2004 $ 81
2005 $ 66
2006 $ 54
2007 $ 43
2008 $ 34
Thereafter $ 120
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties;
thus, it is anticipated that future minimum lease commitments will not
be less than the amount shown for 2003.
LITIGATION
Liberty has contingent liabilities related to legal and tax 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.
(19) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS
Liberty is a holding company, which through its ownership of interests
in subsidiaries and other companies, is primarily engaged in the
electronic retailing, media, communications and entertainment
industries. Each of these businesses is separately managed. Liberty
organized its businesses into four Groups based upon each businesses'
services or products: Interactive Group, International Group, Networks
Group and Corporate and Other. Liberty's chief operating decision maker
and management team review the combined results of operations of each of
these Groups (including consolidated subsidiaries and equity method
affiliates), as well as the results of operations of each individual
business in each Group. Substantially all of the businesses and assets
attributed to the International Group were contributed to Liberty Media
International and included in the Spin Off.
Liberty identifies its reportable segments as (A) those consolidated
subsidiaries that (1) represent 10% or more of its consolidated revenue,
earnings before income taxes or total assets or (2) are significant to
an evaluation of the performance of a Group; and (B) those equity method
affiliates (1) whose share of earnings represent 10% or more of
Liberty's pre-tax earnings or (2) are significant to an evaluation of
the performance of a Group. The segment presentation for prior periods
has been conformed to the current period segment presentation. Liberty
evaluates performance and makes decisions about allocating resources to
its Groups and operating segments based on financial measures such as
revenue, operating cash flow, gross margin, and revenue or sales per
customer equivalent. In addition, Liberty reviews non-financial measures
such as average prime time rating, prime time audience delivery,
subscriber growth and penetration, as appropriate.
Liberty defines operating cash flow as revenue less cost of sales,
operating expenses, and selling, general and administrative expenses
(excluding stock compensation). Liberty believes this is an
40
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
important indicator of the operational strength and performance of its
businesses, including the ability to service debt and fund capital
expenditures. In addition, this measure allows management to view
operating results and perform analytical comparisons and benchmarking
between businesses and identify strategies to improve performance. This
measure of performance excludes depreciation and amortization, stock
compensation and restructuring and impairment charges that are included
in the measurement of operating income pursuant to GAAP. Accordingly,
operating cash flow should be considered in addition to, but not as a
substitute for, operating income, net income, cash flow provided by
operating activities and other measures of financial performance
prepared in accordance with GAAP. Liberty generally accounts for
intersegment sales and transfers as if the sales or transfers were to
third parties, that is, at current prices.
For the year ended December 31, 2003, Liberty has identified the
following consolidated subsidiaries and equity method affiliates as its
reportable segments:
INTERACTIVE GROUP
- QVC--consolidated subsidiary that markets and sells a wide variety
of consumer products in the US and several foreign countries,
primarily by means of televised shopping programs on the QVC
networks and via the Internet through its domestic and
international websites.
- Ascent Media Group ("Ascent Media")--consolidated subsidiary that
provides sound, video and ancillary post-production and
distribution services to the motion picture and television
industries in the United States, Europe and Asia.
NETWORKS GROUP
- Starz Encore--consolidated subsidiary that provides premium
programming distributed by cable operators, direct-to-home
satellite providers and other distributors throughout the United
States.
- Discovery--50% owned equity method affiliate that provides original
and purchased cable television programming in the U.S. and over 150
other countries.
- Courtroom Television Network, LLC ("Court TV")--50% owned equity
method affiliate that operates a basic cable network that provides
informative and entertaining programming based on the American
legal system.
- Game Show Network, LLC ("GSN")--50% owned equity method affiliate
that operates a basic cable network dedicated to the world of
games, game playing and game shows.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because
each segment requires different technologies, distribution channels and
marketing strategies. The accounting policies of the segments that are
also consolidated subsidiaries are the same as those described in the
summary of significant policies.
The amounts presented below represent 100% of each business' revenue,
operating cash flow and operating income. These amounts are combined on
an unconsolidated basis and are then adjusted to remove the effects of
the equity method investments to arrive at the consolidated balances for
each group. This presentation is designed to reflect the manner in which
management reviews the operating performance of individual businesses
within each group regardless of whether the investment is accounted for
as a consolidated subsidiary or an equity investment. It should be
noted, however, that this presentation is not in accordance with GAAP
since the results of equity method investments are required to be
reported on a net basis.
41
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
Further, we could not, among other things, cause any noncontrolled
affiliate to distribute to us our proportionate share of the revenue or
operating cash flow of such affiliate.
PERFORMANCE MEASURES
Years ended December 31,
---------------------------------------------------------------------------------------
2003 2002 2001
--------------------------- --------------------------- ---------------------------
Operating Operating Operating
cash cash cash
Revenue flow Revenue flow Revenue flow
------------ ------------ ------------ ------------ ------------ ------------
amounts in millions
INTERACTIVE GROUP
QVC $ 4,889 1,013 4,362 861 3,894 722
Ascent Media 508 75 538 87 593 89
Other consolidated subsidiaries 317 (13) 256 (26) 239 (13)
Equity method affiliates 88 (20) 138 (91) -- --
------------ ------------ ------------ ------------ ------------ ------------
Combined Interactive Group 5,802 1,055 5,294 831 4,726 798
Eliminate equity method affiliates (3,004) (561) (4,500) (770) (3,894) (722)
------------ ------------ ------------ ------------ ------------ ------------
Consolidated Interactive Group 2,798 494 794 61 832 76
------------ ------------ ------------ ------------ ------------ ------------
NETWORKS GROUP
Starz Encore 906 368 945 371 863 313
Discovery 1,995 508 1,717 379 1,517 286
Court TV 193 44 148 (1) 118 (3)
GSN 76 1 53 (11) 37 (17)
Other consolidated subsidiaries 208 13 200 3 167 14
------------ ------------ ------------ ------------ ------------ ------------
Combined Networks Group 3,378 934 3,063 741 2,702 593
Eliminate equity method affiliates (2,264) (553) (1,918) (367) (1,672) (266)
------------ ------------ ------------ ------------ ------------ ------------
Consolidated Networks Group 1,114 381 1,145 374 1,030 327
------------ ------------ ------------ ------------ ------------ ------------
Corporate and Other 7 (62) 41 (29) 57 (59)
------------ ------------ ------------ ------------ ------------ ------------
Consolidated Liberty $ 3,919 813 1,980 406 1,919 344
============ ============ ============ ============ ============ ============
42
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
BALANCE SHEET INFORMATION
December 31,
-------------------------------------------------------
2003 2002
-------------------------- ---------------------------
Investments Investments
Total in Total in
Assets affiliates Assets affiliates
------------ ------------ ------------ ------------
amounts in millions
INTERACTIVE GROUP
QVC $ 13,806 77 2,886 --
Ascent Media 741 4 778 4
Other consolidated subsidiaries 592 -- 704 --
Equity method affiliates 548 -- 176 --
------------ ------------ ------------ ------------
Combined Interactive Group 15,687 81 4,544 4
Eliminate equity method affiliates (548) -- (3,062) --
------------ ------------ ------------ ------------
Consolidated Interactive Group 15,139 81 1,482 4
------------ ------------ ------------ ------------
NETWORKS GROUP
Starz Encore 2,745 50 3,090 141
Discovery 3,143 80 3,068 65
Court TV 272 -- 248 --
GSN 101 -- 95 --
Other consolidated subsidiaries 228 1 236 3
------------ ------------ ------------ ------------
Combined Networks Group 6,489 131 6,737 209
Eliminate equity method affiliates (3,516) (80) (3,411) (65)
------------ ------------ ------------ ------------
Consolidated Networks Group 2,973 51 3,326 144
------------ ------------ ------------ ------------
Corporate and Other 32,586 3,482 32,715 6,096
------------ ------------ ------------ ------------
Discontinued operations 3,551 -- 2,801 --
------------ ------------ ------------ ------------
Consolidated Liberty $ 54,249 3,614 40,324 6,244
============ ============ ============ ============
43
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
The following table provides a reconciliation of segment operating cash
flow to loss from continuing operations before income taxes and minority
interest:
Years ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
amounts in millions
Consolidated segment operating cash flow $ 813 406 344
Stock compensation 88 46 (126)
Depreciation and amortization (494) (371) (926)
Impairment of long-lived assets (1,362) (229) (314)
Interest expense (537) (419) (503)
Share of earnings (losses) of affiliates 44 (92) (4,346)
Nontemporary declines in fair value of investments (22) (5,806) (4,099)
Realized and unrealized gains (losses) on derivative
instruments, net (662) 2,139 361
Gains (losses) on dispositions, net 1,125 (537) (310)
Other, net 108 188 205
------------ ------------ ------------
Loss from continuing operations before income taxes
and minority interest $ (899) (4,675) (9,714)
============ ============ ============
REVENUE BY GEOGRAPHIC AREA
Years ended December 31,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
amounts in millions
United States $ 3,265 1,791 1,754
Foreign countries 654 189 165
------------ ------------ ------------
Consolidated Liberty $ 3,919 1,980 1,919
============ ============ ============
LONG-LIVED ASSETS BY GEOGRAPHIC AREA
December 31,
---------------------------
2003 2002
------------ ------------
amounts in millions
United States $ 14,856 4,898
Foreign countries 1,383 223
------------ ------------
Consolidated Liberty $ 16,239 5,121
============ ============
44
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements, continued
(20) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
amounts in millions,
except per share amounts
2003:
Revenue $ 480 473 877 2,089
============ ============ ============ ============
Operating income (loss) $ 8 (45) 145 (1,063)
============ ============ ============ ============
Net earnings (loss) $ 132 (464) 41 (931)
============ ============ ============ ============
Basic and diluted net earnings (loss) per common share
$ .05 (.17) .02 (.32)
============ ============ ============ ============
2002:
Revenue $ 486 484 499 511
============ ============ ============ ============
Operating income (loss) $ 49 8 (45) (160)
============ ============ ============ ============
Earnings (loss) before cumulative effect of accounting
change $ 68 (3,097) 22 (692)
============ ============ ============ ============
Net earnings (loss) $ (1,563) (3,097) 22 (692)
============ ============ ============ ============
Basic and diluted earnings (loss) before cumulative effect
of accounting change per common share $ .03 (1.20) .01 (.26)
============ ============ ============ ============
Basic and diluted net earnings (loss) per common share
$ (.60) (1.20) .01 (.26)
============ ============ ============ ============
45