Filed Pursuant to Rule 424(b)(3)
File No. 333-77066
LIBERTY DIGITAL, INC.
NOTICE TO STOCKHOLDERS
---------------------
LIBERTY MEDIA CORPORATION
PROSPECTUS
We are sending you this notice/prospectus to describe the merger between
Liberty Digital, Inc. ("Liberty Digital"), a subsidiary of Liberty Media
Corporation ("Liberty Media"), and LDIG Merger Sub, Inc. ("Merger Sub"), a newly
formed subsidiary of Liberty Media. Unless indicated otherwise, as used in this
notice/prospectus, "we," "us" and "our" refer to Liberty Media. Liberty Digital
has not reviewed or approved this notice/prospectus.
If we complete this merger, Merger Sub will be merged with and into Liberty
Digital and, unless you seek to exercise your appraisal rights, your shares of
Liberty Digital Series A common stock will be converted into shares of Liberty
Media Series A common stock. For each of your shares of Liberty Digital Series A
common stock, you will receive 0.25 shares of Liberty Media Series A common
stock. We will not issue fractional shares of Liberty Media common stock in the
merger. Instead, we will round the total number of shares of Liberty Media
Series A common stock you are entitled to receive down to the nearest whole
number of shares, and you will receive a cash payment for any fraction of a
share to which you would otherwise be entitled.
The board of directors of Liberty Media has voted to effect a merger of
Merger Sub with and into Liberty Digital, with Liberty Digital as the surviving
corporation, for the purpose of acquiring the minority interest in Liberty
Digital held by the public. As of February 11, 2002, Liberty Media beneficially
owned more than 90% of the common stock of Liberty Digital. Prior to the
effective time of the merger, Liberty Media will cause more than 90% of the
outstanding Liberty Digital common stock to be owned directly of record by
Merger Sub. Because the board of directors of each of Liberty Media and Merger
Sub, and the stockholders of Merger Sub, will have approved the merger, prior to
the effective time of the merger, no further action by Liberty Digital
stockholders is necessary to complete the merger as described in this
notice/prospectus. WE ARE NOT ASKING YOU FOR A PROXY TO VOTE YOUR SHARES, AND
YOU ARE REQUESTED NOT TO SEND US A PROXY TO VOTE YOUR SHARES. We expect that the
merger will be completed on the 20th business day following the mailing of this
notice/prospectus.
This notice/prospectus is also Liberty Media's prospectus for the shares of
Liberty Media Series A common stock that will be issued to Liberty Digital
stockholders in the merger. Liberty Digital Series A common stock trades on the
Nasdaq National Market under the symbol "LDIG", and Liberty Media Series A
common stock trades on the New York Stock Exchange under the symbol "L". On
February 11, 2002, the last reported sale price for Liberty Digital Series A
common stock was $3.25, and the last reported sale price for Liberty Media
Series A common stock was $13.62.
PLEASE CAREFULLY CONSIDER ALL OF THE INFORMATION IN THIS NOTICE/PROSPECTUS
REGARDING LIBERTY DIGITAL, LIBERTY MEDIA AND THE MERGER, INCLUDING IN PARTICULAR
THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" ON PAGE 12.
As soon as practicable after completion of the merger, you will be provided
with appropriate documentation for exchanging your shares of Liberty Digital
Series A common stock for shares of Liberty Media Series A common stock. PLEASE
DO NOT SEND ANY CERTIFICATES REPRESENTING SHARES OF LIBERTY DIGITAL SERIES A
COMMON STOCK AT THIS TIME.
NEITHER THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE SHARES OF LIBERTY MEDIA
SERIES A COMMON STOCK TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS
NOTICE/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This notice/prospectus is dated February 11, 2002, and is first being
mailed to Liberty Digital stockholders on or about February 12, 2002.
REFERENCE TO ADDITIONAL INFORMATION
This notice/prospectus "incorporates by reference" important business and
financial information about Liberty Media and Liberty Digital from documents
that are not included in or delivered with this notice/prospectus. You may
obtain documents incorporated by reference in this notice/prospectus without
charge by requesting them in writing or by telephone from Liberty Media at the
following address:
Corporate Secretary
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone: (720) 875-5400
TO OBTAIN TIMELY DELIVERY OF REQUESTED DOCUMENTS PRIOR TO THE TIME BY WHICH
YOU MUST EXERCISE YOUR APPRAISAL RIGHTS TO AVOID WAIVING THEM, YOU MUST REQUEST
THE INCORPORATED INFORMATION NO LATER THAN FEBRUARY 25, 2002. For a more
detailed description of the information incorporated by reference into this
notice/prospectus and how you may obtain it, see "Summary of the Merger -- Where
You Can Find More Information" on page 10.
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE MERGER...................... ii
SUMMARY OF THE MERGER....................................... 1
SELECTED SUMMARY FINANCIAL INFORMATION...................... 5
WHERE YOU CAN FIND MORE INFORMATION......................... 10
RISK FACTORS................................................ 12
Risks Related to the Merger............................... 12
Risks Related to the Business of Liberty Media............ 12
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 16
THE COMPANIES INVOLVED IN THE MERGER........................ 17
Liberty Media Corporation................................. 17
Liberty Digital, Inc...................................... 17
CERTAIN RELATED PARTY TRANSACTIONS.......................... 25
THE MERGER.................................................. 30
General................................................... 30
Background of the Merger.................................. 30
Reasons for and Purpose of the Merger..................... 31
Conflict of Interest of Liberty Media..................... 31
Interests of Directors and Officers....................... 31
Structure of the Merger; Merger Consideration............. 33
Treatment of Liberty Digital Stock Options and Stock 34
Appreciation Rights....................................
Accounting Treatment...................................... 34
Material U.S. Federal Income Tax Consequences............. 34
Regulatory Matters........................................ 36
Restrictions on Sales of Shares by Affiliates of Liberty 36
Media..................................................
Listing on the New York Stock Exchange.................... 36
Appraisal Rights.......................................... 36
Delisting and Deregistration of Liberty Digital Common 39
Stock After the Merger.................................
COMPARISON OF STOCKHOLDER RIGHTS............................ 40
EXPERTS..................................................... 42
LEGAL MATTERS............................................... 42
ANNEX A -- Section 262 of the Delaware General Corporation A-1
Law ("Appraisal Rights")..................................
i
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHAT IS THE TRANSACTION?
A: The transaction is a merger of Merger Sub, a newly formed subsidiary of
Liberty Media, with and into Liberty Digital, also a subsidiary of Liberty
Media. Liberty Digital will be the surviving corporation in the merger. As a
result, stockholders of Liberty Digital who do not properly exercise
appraisal rights will have their shares of Liberty Digital Series A common
stock converted into shares of Liberty Media Series A common stock.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Following the consummation of the merger, you will receive 0.25 of a share of
Liberty Media Series A common stock in exchange for each share of Liberty
Digital Series A common stock that you hold on the effective date of the
merger. We will not issue fractional shares of Liberty Media Series A common
stock in the merger. You will receive cash based on the market price of the
Liberty Media Series A common stock instead of any fractional shares.
For a more complete description of how fractional shares will be treated in
the merger, see the section entitled "The Merger -- Structure of the Merger;
Merger Consideration" on page 33.
Q: WILL THE EXCHANGE RATIO AND THE VALUE OF THE SHARES I RECEIVE CHANGE BETWEEN
NOW AND THE TIME THE MERGER IS CONSUMMATED?
A: The exchange ratio (which affects the number of shares you will receive) will
not change. The market value of the shares you receive may fluctuate between
the date of this notice/ prospectus and the completion of the merger, based
upon changes in the market price for Liberty Media Series A common stock.
Q: WILL I RECOGNIZE A TAXABLE GAIN OR LOSS FOR U.S. FEDERAL INCOME TAX PURPOSES
IN THE MERGER?
A: No gain or loss for United States federal income tax purposes will generally
be recognized by you as a Liberty Digital stockholder upon receipt of shares
of Liberty Media Series A common stock in the merger in exchange for shares
of Liberty Digital Series A common stock, except for cash you may receive in
lieu of fractional shares of Liberty Media Series A common stock. For a more
complete description of the tax consequences of the merger, see the section
entitled "The Merger -- Material U.S. Federal Income Tax Consequences" on
page 34.
Q: WHY IS THERE NO STOCKHOLDER VOTE?
A: Liberty Media beneficially owns (and prior to the effective date of the
merger will cause Merger Sub to own directly of record) more than 90% of the
outstanding common stock of Liberty Digital. The board of directors of each
of Liberty Media and Merger Sub has voted to merge Merger Sub with and into
Liberty Digital. Prior to the effective time of the merger, the only
stockholders of Merger Sub will be two subsidiary corporations of Liberty
Media, and they will have also approved the merger. This vote meets the
requirements for a merger under Delaware law, Liberty Digital's certificate
of incorporation and Liberty Digital's bylaws, so no Liberty Digital
stockholder vote or board of directors vote is necessary.
Q: AM I ENTITLED TO APPRAISAL RIGHTS?
A: Yes. Under Delaware law, which governs the merger, you have the right to seek
appraisal of your Liberty Digital Series A common stock. In order to exercise
appraisal rights, you must, within twenty days after the date of mailing this
notice/prospectus, demand in writing from Liberty Digital appraisal of your
shares of Liberty Digital Series A common stock. Your right to seek appraisal
requires strict compliance with the procedures contained in Section 262 of
the Delaware corporate statute. Failure to follow any of these procedures may
result in the termination or waiver of your appraisal right. See "The
Merger -- Appraisal Rights" on page 36.
Q: WHAT DO I NEED TO DO NOW?
A: Nothing, unless you intend to seek appraisal of your shares of Liberty
Digital Series A common stock. Otherwise, after the merger is completed, you
will receive written instructions and a letter of transmittal for exchanging
your shares of Liberty Digital Series A common stock for shares of Liberty
Media Series A
ii
common stock and receiving your cash payment in place of any fraction of a
share of Liberty Media Series A common stock.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. As soon as practicable after the merger is completed, Liberty Digital
stockholders will be sent written instructions for exchanging their share
certificates, together with a letter of transmittal for such certificates.
Q: WILL I HAVE TO PAY ANY FEES OR COMMISSIONS?
A: If you are the record owner of your shares, you will not have to pay
brokerage fees or incur similar expenses. If you own your shares through a
broker or other nominee, your broker may charge you a fee. You should consult
your broker or nominee to determine whether any charges will apply.
Q: WHOM SHOULD I CALL WITH QUESTIONS?
A: You should call our information agent, D.F. King & Co., at (800) 556-0790
with any questions about the merger.
You may also obtain additional information about Liberty Media and Liberty
Digital from documents filed with the Securities and Exchange Commission by
following the instructions in the section entitled "Summary of the
Merger -- Where You Can Find More Information" on page 10.
iii
SUMMARY OF THE MERGER
This summary highlights selected information from this notice/prospectus
and may not contain all the information that is important to you. To better
understand the merger, you should read this entire document carefully, including
the documents to which we refer you. In addition, we incorporate by reference in
this notice/prospectus important business and financial information about
Liberty Media and Liberty Digital. You may obtain the information incorporated
by reference into this notice/prospectus without charge by following the
instructions in the section entitled "--Where You Can Find More Information" on
page 10.
THE COMPANIES (SEE PAGE 17)
LIBERTY DIGITAL, INC.
1100 GLENDON AVENUE, SUITE 2000
LOS ANGELES, CALIFORNIA 90024
TEL: (310) 209-3600
Liberty Digital is a new media company focused on the development of
interactive television content with interests in interactive television
technology, Internet e-commerce and content businesses. Liberty Digital jointly
owns and operates Game Show Network, the premier programming service exclusively
dedicated to games, game playing and game shows, with partner Sony Pictures
Entertainment. Liberty Digital also owns a majority interest in DMX/AEI Music, a
leader in the delivery of multiple channels of professionally programmed,
commercial-free music to homes and businesses worldwide.
LIBERTY MEDIA CORPORATION
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
TEL: (720) 875-5400
Liberty Media owns interests in a broad range of video programming,
communications and Internet businesses in the United States, Europe, South
America and Asia with widely recognized brands such as Encore, STARZ!,
Discovery, Fox, USA, QVC, AOL, CNN, TBS, Motorola and Sprint PCS.
THE MERGER (SEE PAGE 30)
The merger will be effective on the filing of a certificate of ownership
and merger in Delaware, which is expected to occur on the 20th business day
following the mailing of this notice/prospectus. However, Liberty Media may
elect not to proceed with the merger at any time prior to filing the certificate
of ownership and merger if it determines that the merger is no longer in its
best interests. Unless you exercise your appraisal rights, each share of Liberty
Digital Series A common stock you own will be converted into 0.25 shares of
Liberty Media Series A common stock. Liberty Media will not issue fractional
shares. Instead, you will receive an amount in cash equal to your proportionate
interest in the net proceeds from the sale in the open market by Liberty Media's
exchange agent of the aggregate fractional shares of Liberty Media Series A
common stock that would have been issued in the merger. In connection with the
merger, a total of approximately 6.1 million shares of Liberty Media Series A
common stock will be issued or issuable in exchange for outstanding shares of
Liberty Digital Series A common stock and upon exercise of options to acquire
shares of Liberty Digital Series A common stock outstanding at the time of the
merger.
You will receive detailed instructions regarding the surrender of your
stock certificates from Liberty Media's transfer agent, EquiServe Trust Company,
N.A., promptly following the effective date of the merger. You will receive
certificates for Liberty Media Series A common stock as soon as practicable
after the transfer agent receives your Liberty Digital stock certificates and
other required documents. Please do not send any stock certificates to Liberty
Digital or Liberty Media or the exchange agent until you receive these
instructions.
FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 34)
Liberty Media has received an opinion of counsel to the effect that the
merger will qualify as a reorganization under the Internal Revenue Code, and
that no gain or loss will generally be recognized by you as a Liberty Digital
stockholder for U.S. federal income tax purposes upon receipt of shares of
Liberty Media Series A common stock in the merger in exchange for Liberty
Digital Series A common stock. In general, Liberty Digital stockholders will
recognize gain or loss from cash received in the merger in lieu of fractional
shares of Liberty Media Series A
1
common stock. You should consult your own tax advisor for a full understanding
of the merger's tax consequences to you. Please read the section entitled "The
Merger -- Material U.S. Federal Income Tax Consequences" for further discussion
of the tax consequences of the merger.
NO LIBERTY DIGITAL STOCKHOLDER APPROVAL REQUIRED (SEE PAGE 30)
We are not asking you to vote on the merger. The board of directors of
Liberty Media has voted to acquire the minority interest in Liberty Digital held
by the public. Liberty Media intends to acquire this minority interest by
merging its subsidiary, Merger Sub, with and into Liberty Digital. Prior to the
effective time of the merger, Liberty Media will cause Merger Sub to own
directly of record more than 90% of the outstanding common stock of Liberty
Digital. Because Merger Sub will own at least 90% of the common stock
outstanding of Liberty Digital at the time of the merger, the resolution of the
board of directors of each of Merger Sub and Liberty Media, and the consent of
the stockholders of Merger Sub, will be sufficient to authorize the merger under
Delaware law, Liberty Digital's certificate of incorporation and Liberty
Digital's bylaws.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS OF LIBERTY DIGITAL (SEE PAGE 36)
Delaware law permits you to have the "fair value" of your shares of Liberty
Digital Series A common stock determined by a court and paid to you in cash
rather than accepting the consideration you would otherwise receive in the
merger. This value may be more or less than the market value of the 0.25 shares
of Liberty Media Series A common stock issuable for each share of Liberty
Digital Series A common stock in the merger. See "The Merger -- Appraisal
Rights" on page 36.
If you wish to exercise appraisal rights and obtain appraisal of the fair
value of your shares, you must demand in writing from Liberty Digital appraisal
of your shares of Liberty Digital Series A common stock within twenty days after
the date of mailing this notice/prospectus. The relevant provisions of Delaware
law concerning the exercise of appraisal rights are technical in nature and
complex. You may wish to consult promptly with legal counsel because the failure
to comply strictly with these provisions may result in waiver or forfeiture of
your appraisal rights.
EFFECT OF THE MERGER ON LIBERTY DIGITAL STOCK OPTIONS AND STOCK APPRECIATION
RIGHTS (SEE PAGE 34)
Liberty Media will assume outstanding stock options and stock appreciation
rights issued under the Liberty Digital Amended and Restated 1997 Stock
Incentive Plan and other stock options and stock appreciation rights not issued
under that plan, in each case with respect to Liberty Digital Series A common
stock on the effective date of the merger. Assumed stock options and stock
appreciation rights will be exercisable with respect to the number of shares of
Liberty Media Series A common stock determined by multiplying the number of
underlying shares of Liberty Digital Series A common stock on the effective date
of the merger by the 0.25 exchange ratio, rounded up to the nearest whole share.
The exercise price per share of Liberty Media Series A common stock issuable
under each assumed option will be calculated by dividing the exercise price of
such option before the merger by the exchange ratio, rounded to the nearest
whole cent.
REASONS FOR AND PURPOSE OF THE MERGER (SEE PAGE 31)
The purpose of the merger is to acquire the publicly held minority interest
in Liberty Digital. In deciding to undertake the merger, which will result in
Liberty Digital ceasing to be a public majority-owned subsidiary, Liberty Media
considered the following factors, among others:
- Liberty Digital's lack of internal capital resources to develop its
business;
- recent capital market trends, which have adversely affected the ability
of small companies and companies with more speculative credit risk to
access capital;
- the latest trends in Liberty Digital's markets, primarily the slower than
anticipated development of interactive television and the slow-down in
growth of new media industries;
- the trading price volatility of the Liberty Digital common stock caused,
in part, by its limited public float;
2
- Liberty Digital's outstanding debt and greater cost of borrowing as
compared to Liberty Media's;
- Liberty Digital's anticipated capital requirements, including, among
others, payment of a $100 million note to Sony Pictures Entertainment,
Inc. due in February 2002;
- the impact on Liberty Media's own common stock of the issuance of Liberty
Media shares to Liberty Digital's stockholders; and
- the costs associated with operating Liberty Digital as a separate public
company, including elimination of duplicate corporate functions and
elimination of fees associated with SEC reporting and related legal and
accounting fees, which Liberty Media anticipates could result in savings
of approximately $9 million per year.
CONDITIONS TO THE MERGER (SEE PAGE 34)
Although Liberty Media is under no obligation to complete the merger, it is
expected that the merger will be effected on the 20th business day following the
mailing of this notice/prospectus. In addition, the following conditions must be
satisfied before the merger can be completed:
- Merger Sub must own directly of record at least 90% of the common stock
outstanding of Liberty Digital;
- no unfavorable change in the tax consequences relating to the merger
shall have occurred between the date of this notice/ prospectus and the
effective date of the merger;
- the registration statement of which this notice/prospectus forms a part
shall have remained effective; and
- the shares of Liberty Media Series A common stock that will be issued in
the merger must be authorized for listing on the New York Stock Exchange,
subject only to official notice of issuance.
CONFLICT OF INTEREST OF LIBERTY MEDIA (SEE PAGE 31)
In setting the exchange ratio, Liberty Media's financial interest was
adverse to the interest of the public stockholders of Liberty Digital. Liberty
Media determined the exchange ratio without negotiating with Liberty Digital and
makes no representation or warranty in this notice/prospectus as to the fairness
or adequacy of the consideration to be paid in the merger. Under Delaware law,
which governs the merger, you have the right to seek appraisal of the "fair
value" of your Liberty Digital shares and receive cash instead of the
consideration you would otherwise receive in the merger. See "The
Merger -- Appraisal Rights" on page 36 for a description of the appraisal
process.
INTERESTS OF DIRECTORS AND OFFICERS (SEE PAGE 31)
You should be aware that some officers and directors of Liberty Digital
have interests in the merger that are different from, or in addition to, yours.
These interests include:
- severance payments in connection with the merger;
- ownership of Liberty Media common stock and options to acquire Liberty
Media common stock;
- indemnification arrangements between Liberty Digital and its directors
and officers; and
- in some cases, accelerated vesting of stock options and stock
appreciation rights with respect to Liberty Digital Series A common
stock.
In addition, some of the officers and directors of Liberty Media and/or Merger
Sub are also officers and directors of Liberty Digital and have interests that
are in addition to, or different from, your interests.
ACCOUNTING TREATMENT (SEE PAGE 34)
The merger, if completed, will be accounted for as a "purchase" of a
minority interest, as such term is used under generally accepted accounting
principles, for accounting and financial reporting purposes.
FEDERAL AND STATE REGULATORY REQUIREMENTS (SEE PAGE 36)
Except for filing a certificate of ownership and merger in Delaware and
compliance with federal and state securities laws, Liberty Media is
3
not aware of any material United States federal or state or foreign governmental
regulatory requirement necessary to be complied with, or approval that must be
obtained, in connection with the merger.
RESTRICTIONS ON THE ABILITY TO SELL LIBERTY MEDIA SERIES A COMMON STOCK (SEE
PAGE 36)
All shares of Liberty Media Series A common stock received by you in
connection with the merger will be freely transferable unless you are considered
an "affiliate" of Liberty Media under the Securities Act of 1933. If you are an
affiliate of Liberty Media, then prior to the first anniversary of the merger,
you may transfer your shares only pursuant to an effective registration
statement or an exemption under the Securities Act.
DIFFERENCES BETWEEN YOUR RIGHTS AS A LIBERTY DIGITAL STOCKHOLDER AND AS A
LIBERTY MEDIA STOCKHOLDER (SEE PAGE 40)
There are differences between the rights you have as a holder of Liberty
Digital Series A common stock and the rights you will have as a holder of
Liberty Media Series A common stock. For a description of these differences, see
the section entitled "Comparison of Stockholder Rights" on page 40.
4
SELECTED SUMMARY FINANCIAL INFORMATION
LIBERTY MEDIA
The following table provides you with selected historical consolidated
financial data of Liberty Media. From August 1994 to March 1999 Liberty Media
was a wholly owned subsidiary of Tele-Communications, Inc. ("TCI"). On March 9,
1999, AT&T Corp. ("AT&T") acquired TCI in a merger transaction and changed TCI's
name to AT&T Broadband. For financial reporting purposes, the merger of AT&T and
TCI is deemed to have occurred on March 1, 1999. In connection with that merger,
the assets and liabilities of Liberty Media were adjusted to their respective
fair values pursuant to the purchase method of accounting. For periods prior to
March 1, 1999, the assets and liabilities of Liberty Media and the related
consolidated results of operations are referred to below as "Old Liberty," and
for periods subsequent to February 28, 1999, the assets and liabilities of
Liberty Media and the related consolidated results of operations are referred to
as "New Liberty." Also, in connection with that merger, TCI effected an internal
restructuring as a result of which certain net assets and approximately $5.5
billion in cash were contributed to Liberty Media. On August 10, 2001, AT&T
effected a split-off of Liberty Media and as a result of that transaction,
Liberty Media is no longer a subsidiary of AT&T. We derived the historical
consolidated financial data from our consolidated financial statements. It is
important that when you read this information, you read along with it the
consolidated financial statements and accompanying notes of Liberty Media
incorporated by reference into this notice/prospectus. For a list of documents
incorporated by reference into this notice/prospectus, see "--Where You Can Find
More Information" on page 10.
NEW LIBERTY OLD LIBERTY
----------------------------------------------------------- ----------------------------------------
NINE MONTHS NINE MONTHS TEN MONTHS TWO MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED DECEMBER 31,
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, FEBRUARY 28, -------------------------
2001 2000 2000 1999 1999 1998 1997 1996
------------- ------------- ------------ ------------ ------------ ------- ------ ------
(UNAUDITED) (UNAUDITED)
(IN MILLIONS) (IN MILLIONS)
OPERATING DATA
Revenue............... $ 1,538 $ 1,053 $ 1,526 $ 729 $ 235 $ 1,359 $1,225 $2,208
Operating income
(loss).............. (453) 131 436 (2,214) (158) (431) (260) (66)
Interest expense...... (396) (276) (399) (134) (25) (104) (40) (53)
Share of losses of
affiliates, net..... (3,227) (2,594) (3,485) (904) (66) (1,002) (785) (332)
Gain (loss) on
dispositions, net... (67) 7,447 7,340 4 14 2,449 406 1,558
Net earnings (loss)... (2,492) 2,962 1,485 (2,021) (70) 622 (470) 741
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents......... $ 2,864 $ 1,223 $ 1,295 $ 1,714 $ 31 $ 228 $ 100 $ 434
Short-term
investments......... 298 461 500 378 125 159 248 59
Investments in
affiliates.......... 12,129 20,679 20,464 15,922 3,971 3,079 2,359 1,519
Investments in
available-for-sale
securities and
others.............. 22,224 26,063 19,035 28,593 11,974 10,539 3,971 2,257
Total assets.......... 50,844 61,848 54,268 58,658 16,886 15,783 7,735 6,722
Debt, including
current portion..... 6,579 5,869 6,363 3,277 2,087 2,096 785 555
Call option
obligations......... 1,237 -- -- -- -- -- -- --
Stockholders'
equity.............. 31,174 39,266 34,290 38,435 9,449 9,230 4,721 4,519
LIBERTY DIGITAL
The following table provides you with selected historical consolidated
financial data of Liberty Digital, formerly TCI Music, Inc., and its
predecessor, DMX, Inc. ("DMX"). Liberty Digital was incorporated as a wholly
owned subsidiary of TCI in January 1997 for the purpose of acquiring DMX.
Liberty Digital acquired DMX in July 1997 and became a publicly held,
majority-owned subsidiary of TCI. In March 1999, TCI transferred its interest in
Liberty Digital to Liberty Media. The financial data in the following table is
derived from the consolidated financial statements of Liberty Digital. It is
important that you read this information along with the consolidated financial
statements and accompanying notes of Liberty Digital incorporated by reference
into this notice/prospectus.
5
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
LIBERTY DIGITAL TCI MUSIC
----------------------------------------------------------- ------------
NINE MONTHS NINE MONTHS TEN MONTHS TWO MONTHS
ENDED ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, FEBRUARY 28,
2001 2000 2000 1999 1999
------------- ------------- ------------ ------------ ------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED) (UNAUDITED)
INCOME STATEMENT DATA
Revenue........................ $ 114,774 $ 70,879 $ 100,727 $ 68,581 $14,220
Cost of equipment and
installation.................. 28,955 15,200 22,628 13,216 2,643
Operating, selling, general and
administrative expenses....... 67,089 47,785 62,650 43,329 7,801
Stock compensation............. 3,804 (224,534) (402,475) 692,936 85
Depreciation and
amortization.................. 48,109 41,939 53,533 40,660 2,502
Inventory writedown............ -- -- -- -- --
Loss on disposition of DMX
Europe N.V. .................. -- -- -- -- --
--------- --------- --------- --------- -------
Operating income (loss)........ (33,183) 190,489 364,391 (721,560) 1,189
Interest expense, net.......... (23,543) (11,790) (15,887) (5,727) (1,036)
Share of earnings (losses) of
affiliates.................... (10,435) (16,789) (21,520) (11,620) (6)
Gain (loss) from investments/
financial instruments......... 28,771 (9,351) 277 1,152 --
Impairment of investments(1)... (142,422) (2,204) (174,641) -- --
Minority interest in net losses
of subsidiaries............... 6,146 -- -- -- --
Other income (expense), net.... (1,272) 1,735 1,770 -- (2)
--------- --------- --------- --------- -------
Earnings (loss) from continuing
operations before income
taxes......................... (175,938) 152,090 154,390 (737,755) 145
Income tax (expense) benefit... 60,608 (67,526) (101,134) 282,467 (1,049)
--------- --------- --------- --------- -------
Income (loss) from continuing
operations before
extraordinary items........... $(115,330) $ 84,564 $ 53,256 $(455,288) $ (904)
========= ========= ========= ========= =======
Basic net income (loss)
attributable to common
stockholders.................. $(125,381) $ 137,150 $ 164,368 $(679,025) $(4,596)
Basic net income (loss)
attributable to common
stockholders per common
share......................... $ (0.61) $ 0.68 $ 0.82 $ (3.54) $ (0.06)
Weighted average number of
common shares -- basic........ 204,743 201,116 201,585 191,932 81,377
Diluted net income (loss)
attributable to common
stockholders.................. $(125,381) $ 144,286 $ 173,622 $(679,025) $(4,596)
Diluted income (loss)
attributable to common
stockholders per common
share......................... $ (0.61) $ 0.61 $ 0.74 $ (3.54) $ (0.06)
Weighted average number of
common shares -- diluted...... 204,743 238,100 234,905 191,932 81,377
TCI MUSIC DMX
--------------------------- ---------------------------
SIX MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
1998 1997 1997 1996
------------ ------------ ----------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
INCOME STATEMENT DATA
Revenue........................ $ 66,495 $23,415 $ 18,476 $ 19,265
Cost of equipment and
installation.................. 8,116 1,304 1,882 1,939
Operating, selling, general and
administrative expenses....... 38,359 12,905 27,300 29,909
Stock compensation............. 502 294 137 550
Depreciation and
amortization.................. 14,192 6,078 1,789 1,884
Inventory writedown............ 1,102 -- -- --
Loss on disposition of DMX
Europe N.V. .................. -- -- 1,738 7,153
-------- ------- -------- --------
Operating income (loss)........ 4,224 2,834 (14,370) (22,170)
Interest expense, net.......... (5,698) (289) (422) (300)
Share of earnings (losses) of
affiliates.................... 151 120 203 (11,657)
Gain (loss) from investments/
financial instruments......... -- -- -- --
Impairment of investments(1)... -- -- -- --
Minority interest in net losses
of subsidiaries............... -- --
Other income (expense), net.... -- (222) (119) 272
-------- ------- -------- --------
Earnings (loss) from continuing
operations before income
taxes......................... (1,323) 2,443 (14,708) (33,855)
Income tax (expense) benefit... (3,059) (2,625) -- --
-------- ------- -------- --------
Income (loss) from continuing
operations before
extraordinary items........... $ (4,382) $ (182) $(14,708) $(33,855)
======== ======= ======== ========
Basic net income (loss)
attributable to common
stockholders.................. $(30,467) $ (589) $(14,708) $(33,855)
Basic net income (loss)
attributable to common
stockholders per common
share......................... $ (0.38) $ (0.01) $ (0.25) $ (0.68)
Weighted average number of
common shares -- basic........ 81,046 77,423 59,587 49,676
Diluted net income (loss)
attributable to common
stockholders.................. $(30,467) $ (589) $(14,708) $(33,855)
Diluted income (loss)
attributable to common
stockholders per common
share......................... $ (0.38) $ (0.01) $ (0.25) $ (0.68)
Weighted average number of
common shares -- diluted...... 81,046 77,423 59,587 49,676
---------------
(1) Liberty Digital has recorded impairment charges to reduce the value of
certain of its investments to fair value. At September 30, 2001, $35 million
of the total $142.4 million charge was attributable to Liberty Digital's
interest in the MTVi Group, L.P. ("MTVi"), $15 million to Order Trust, Inc.,
$46.8 million to ACTV, Inc. and the remainder to other equity investments
and marketable securities. At December 31, 2000, $86 million of the total
$174.6 million charge was attributable to Liberty Digital's interest in MTVi
and the remainder was for other equity investments and marketable
securities.
6
LIBERTY DIGITAL, INC. AND SUBSIDIARIES
(A SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
LIBERTY DIGITAL TCI MUSIC DMX
------------------------------------- ------------------- ------------------------
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, JUNE 30, SEPTEMBER 30,
------------- --------------------- ------------------- -------- -------------
2001 2000 1999 1998 1997 1997 1996
------------- -------- ---------- -------- -------- -------- -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
BALANCE SHEET DATA
Current assets.......... $ 76,765 $ 45,895 $ 20,326 $ 20,642 $ 16,757 $ 6,186 $ 7,719
Net assets of
discontinued
operations............ -- -- -- 65,451 70,756 -- --
Investments in
affiliates, accounted
for under the equity
method................ 237,222 15,395 34,345 378 577 558 504
Investment in available
for sale securities... 162,320 177,202 930,048 -- -- -- --
Investments recorded at
cost.................. 33,368 159,058 217,457 -- -- -- --
Property and equipment,
net................... 39,956 22,909 18,419 12,686 4,227 4,132 5,894
Intangibles and other
assets, net........... 556,064 508,602 513,267 102,708 91,903 110 4,635
---------- -------- ---------- -------- -------- -------- -------
Total assets............ $1,105,695 $929,061 $1,733,862 $201,865 $184,220 $ 10,986 $18,752
========== ======== ========== ======== ======== ======== =======
Current liabilities..... $ 201,306 $179,074 $ 577,609 $ 13,604 $ 13,141 $ 14,705 $16,932
Notes payable and
accrued
interest -- related
party................. 205,474 192,875 -- 226 3,793 3,887 --
Debt.................... 172,595 2,428 97,813 96,244 53,236 23 1,401
Accrued stock
compensation,
long-term............. 6,291 8,615 101,846 -- -- -- --
Deferred income taxes... 3,186 57,402 375,818 380 2,811 -- --
Other liabilities....... 1,132 16,469 18,212 12,187 11,413 8,673 1,773
---------- -------- ---------- -------- -------- -------- -------
Total liabilities....... 589,984 456,863 1,171,298 122,641 84,394 27,288 20,106
Redeemable convertible
preferred stock....... 166,967 160,224 153,308 34,322 35,588 -- --
Stockholders' equity
(deficit)............. 348,744 311,974 409,256 44,902 64,238 (16,302) (1,354)
---------- -------- ---------- -------- -------- -------- -------
Total liabilities and
stockholders' equity
(deficit)............. $1,105,695 $929,061 $1,733,862 $201,865 $184,220 $ 10,986 $18,752
========== ======== ========== ======== ======== ======== =======
UNAUDITED COMPARATIVE PER SHARE DATA
The table below provides you with Liberty Media's and Liberty Digital's
historical per share information as of and for the nine months ended September
30, 2001 and for the year ended December 31, 2000 (assuming that Liberty Media's
split off from AT&T had occurred on January 1, 2000 and that each share of
Liberty Media common stock issued in connection with the split off was
outstanding on that date). For more information on Liberty Media's split off
from AT&T, see "Where You Can Find More Information," on page 10 of this
notice/prospectus. In addition, we provide Liberty Media pro forma information
as of and for the nine months ended September 30, 2001 and for the year ended
December 31, 2000 (assuming that Liberty Media's split off from AT&T had
occurred on January 1, 2000, that each share of Liberty Media common stock
issued in connection with the split off was outstanding on that date and that
the merger of Liberty Digital and Merger Sub had been completed
7
on January 1, 2000). The column labeled "Liberty Digital Pro Forma Equivalent"
presents the per share data set forth in the column labeled "Liberty Media Pro
Forma" multiplied by 0.25. It is important that when you read this information,
you read along with it the consolidated financial statements and accompanying
notes of Liberty Media incorporated by reference into this notice/prospectus. It
is also important that when you read this information, you read along with it
the consolidated financial statements and accompanying notes of Liberty Digital
incorporated by reference into this notice/prospectus.
LIBERTY LIBERTY DIGITAL LIBERTY MEDIA LIBERTY DIGITAL PRO
MEDIA(1) HISTORICAL PRO FORMA FORMA EQUIVALENT(4)
------------- --------------- ------------- -------------------
Book value per common share as of
September 30, 2001................ $12.04 $ 1.70 $12.04(2) $ 3.01
Basic earnings (loss) attributable
to common shareholders per common
share:
Nine months ended September 30,
2001........................... (0.96) (0.61) (0.96)(3) (0.24)
Year ended December 31, 2000...... 0.57 0.82 0.58(3) 0.15
Diluted earnings (loss) attributable
to common shareholders per common
share:
Nine months ended September 30,
2001........................... (0.96) (0.61) (0.96)(3) (0.24)
Year ended December 31, 2000...... 0.57 0.74 0.58(3) 0.15
---------------
(1) Until August 10, 2001, Liberty Media was a wholly-owned subsidiary of AT&T.
The per share amounts in the table are based upon the number of shares of
Liberty Media Series A and Series B common stock issued in Liberty Media's
split off from AT&T.
(2) The pro forma book value per common share is based upon 2,383 million shares
of Liberty Media Series A common stock and 212 million shares of Liberty
Media Series B common stock. Such amounts represent the number of shares
that would have been outstanding if the merger of Liberty Digital and Merger
Sub had been completed on September 30, 2001.
(3) The pro forma net loss per share is based upon 2,595 million weighted
average shares outstanding for the nine months ended September 30, 2001 and
the year ended December 31, 2000. Such amount represents the number of
weighted average shares that would have been outstanding if the split off
from AT&T and the merger of Liberty Digital and Merger Sub had been
completed on January 1, 2000.
(4) The Liberty Digital pro forma equivalents have been determined by
multiplying the Liberty Media pro forma amounts by the exchange ratio of
0.25 of a share of Liberty Media Series A common stock for each share of
Liberty Digital Series A common stock outstanding.
COMPARATIVE PER SHARE MARKET PRICE AND DIVIDEND INFORMATION
Shares of Liberty Digital Series A common stock are traded on the Nasdaq
National Market. Shares of Liberty Media Series A common stock are listed on the
New York Stock Exchange. Public trading of Liberty Media Series A common stock
commenced on August 10, 2001, the date of Liberty Media's split off from AT&T,
under the symbol "LMC.A". On January 2, 2002, the trading symbol for the Liberty
Media Series A common stock on the New York Stock Exchange was changed to "L."
Public trading of Liberty Digital Series A common stock commenced on September
10, 1999 on the Nasdaq National Market under the symbol "LDIG." Prior to that
date, Liberty Digital Series A common stock was quoted on the Nasdaq SmallCap
Market under the symbol "TUNE." No trading market exists for Liberty Digital
Series B common stock.
8
The following table sets forth, for the fiscal quarters indicated, the high
and low sale prices for a share of:
- Liberty Digital Series A common stock, as reported on the Nasdaq National
Market; and
- Liberty Media Series A common stock, as reported on the New York Stock
Exchange Composite Transaction Tape (assuming that Liberty Media's split
from AT&T had occurred on January 1, 2000 and that each share of AT&T's
Class A Liberty Media Group common stock outstanding was exchanged for
one share of Liberty Media Series A common stock on such date).
LIBERTY DIGITAL LIBERTY MEDIA
SERIES A COMMON STOCK SERIES A COMMON STOCK
---------------------- ----------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
Year Ended December 31, 2000
First Quarter............................. $71.13 $35.50 $30.72 $24.44
Second Quarter............................ 39.94 18.00 29.94 19.19
Third Quarter............................. 37.00 16.63 26.56 17.44
Fourth Quarter............................ 20.50 3.84 19.25 10.75
Year Ended December 31, 2001
First Quarter............................. $10.38 $ 3.63 $17.25 $11.88
Second Quarter............................ 6.90 3.50 18.04 11.50
Third Quarter............................. 6.30 2.98 17.85 9.75
Fourth Quarter............................ 4.00 2.60 14.46 11.17
Liberty Media's fiscal year ends on December 31 of each year, and Liberty
Digital's fiscal year ends on December 31 of each year. Cash dividends have
never been paid with respect to Liberty Media Series A common stock. It is the
current intention of Liberty Media to retain future earnings to finance
operations and expand its business. Liberty Media does not anticipate paying any
dividends on its common stock in the foreseeable future.
The following table sets forth the closing prices per share of Liberty
Digital Series A common stock as reported on the Nasdaq National Market, and the
closing prices per share of Liberty Media Series A common stock as reported on
the New York Stock Exchange Composite Transaction Tape, on:
- October 12, 2001, the last full trading day prior to the public
announcement of the merger; and
- February 11, 2002, the last full trading day for which closing prices
were available prior to the printing of this notice/prospectus.
The table also presents, under the heading "Equivalent Per Share Price," an
amount equal to the closing price of a share of Liberty Media Series A common
stock on the applicable date multiplied by 0.25, which is the number of shares
of Liberty Media Series A common stock to be issued in the merger for each share
of Liberty Digital Series A common stock. These equivalent per share prices
reflect the market value of the Liberty Media Series A common stock you would
have received for each of your shares of Liberty Digital Series A common stock
if the merger had been completed on the specified dates. Because the market
price of Liberty Media Series A common stock may increase or decrease before the
merger is completed, we urge you to obtain current market quotations.
SERIES A
LIBERTY DIGITAL LIBERTY MEDIA EQUIVALENT PER
DATES COMMON STOCK COMMON STOCK SHARE PRICE
----- --------------- ------------- --------------
October 12, 2001.................................... $2.82 $12.37 $3.09
February 11, 2002................................... 3.25 13.62 3.41
9
WHERE YOU CAN FIND MORE INFORMATION
Liberty Media and Liberty Digital each file annual, quarterly and special
reports, proxy statements and other information with the SEC. You may read and
copy any reports, statements or other information Liberty Media and Liberty
Digital file at the SEC's public reference room at the following location:
Public Reference Room
450 Fifth Street, N.W.
Room 1024
Washington, D.C. 20549
Additional public reference rooms are located in Chicago, Illinois and New
York, New York. Please call the SEC at 1-800-SEC-0330 for further information on
the public reference rooms. The SEC maintains an internet site that contains
reports, proxy statements and other information regarding Liberty Media and
Liberty Digital. The address of the SEC website is www.sec.gov. Liberty Media's
and Liberty Digital's SEC filings are also available to the public from
commercial document retrieval services.
Liberty Media filed a registration statement on Form S-4 to register with
the SEC its Series A common stock to be issued to Liberty Digital stockholders
in the merger. This notice/prospectus is a part of that registration statement.
As allowed by SEC rules, this notice/prospectus does not contain all the
information you can find in the registration statement or the exhibits to the
registration statement.
SEC rules allow Liberty Media and Liberty Digital to "incorporate by
reference" information into this notice/prospectus, which means that we can
disclose important information to you by referring you to another document filed
separately with the SEC. The information incorporated by reference is deemed to
be a part of this notice/prospectus, except for any information superseded or
modified by information contained directly in this notice/prospectus or in any
subsequently filed document which also is, or is deemed to be, incorporated by
reference herein. This notice/prospectus incorporates by reference the documents
set forth below that have previously been filed with the SEC. These documents
contain important information about each company and its financial condition.
LIBERTY MEDIA
The following documents filed by Liberty Media (File No. 000-20421) are
hereby incorporated by reference into this notice/prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2000, filed on
March 28, 2001, as amended by the Annual Report on Form 10-K/A for the
year ended December 31, 2000, filed on June 12, 2001.
- Quarterly Report on Form 10-Q for the three months ended March 31, 2000,
filed on May 14, 2001, as amended by the Quarterly Report on Form 10-Q/A
for the three month period ending March 31, 2001, filed on June 20, 2001.
- Quarterly Report on Form 10-Q for the six months ended June 30, 2001,
filed on August 14, 2001.
- Quarterly Report on Form 10-Q for the nine months ended September 30,
2001, filed on November 13, 2001.
- Current Reports on Form 8-K filed on March 7, 2001, June 26, 2001, August
14, 2001, October 12, 2001, November 13, 2001, December 3, 2001, December
5, 2001, December 27, 2001 and January 9, 2002.
On May 7, 2001, certain subsidiaries and assets of AT&T which had previously
been attributed to AT&T's Liberty Media Group but which had not been previously
held by Liberty Media were contributed to Liberty Media in anticipation of the
split off from AT&T. Those subsidiaries and assets, which constitute only a
portion of Liberty Media's overall assets, are being accounted for in a manner
similar to a pooling of interests and, therefore, the financial statements of
Liberty Media for periods prior to the contributions have been restated to
include the financial position and results of operations of the contributed
assets from
10
the dates of their acquisition by AT&T. Accordingly, the following information
is incorporated by reference from the Registration Statement on Form S-1 of
Liberty Media, Registration No. 333-55998, declared effective on June 14, 2001,
with respect to the split off: (1) the information under the captions titled
"Capitalization," "Selected Financial Information" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and (2) the
following financial statements and notes thereto of Liberty Media and
subsidiaries, which have been restated to give effect to the aforementioned
contribution: (x) the balance sheets of Liberty Media as of March 31, 2001 and
December 31, 2000, and the related consolidated statements of operations and
comprehensive earnings, stockholder's equity, and cash flows for the three
months ended March 31, 2001 and 2000; and (y) the balance sheets of Liberty
Media as of December 31, 2000 and 1999 and the related consolidated statements
of operations and comprehensive earnings, stockholders' equity, and cash flows
for the year ended December 31, 2000, and the period from March 1, 1999 to
December 31, 1999 (Successor periods) and from January 1, 1999 to February 28,
1999 and for the year ended December 31, 1998 (Predecessor periods).
LIBERTY DIGITAL
The following documents filed by Liberty Digital (File No. 000-22815) are
hereby incorporated by reference into this notice/prospectus:
- Annual Report on Form 10-K for the year ended December 31, 2000, filed on
April 2, 2001, as amended by the Annual Report on Form 10-K/A for the
year ended December 31, 2000, filed on April 30, 2001.
- Quarterly Report on Form 10-Q for the three months ended March 31, 2000,
filed on May 15, 2001.
- Quarterly Report on Form 10-Q for the six months ended June 30, 2001,
filed on August 14, 2001.
- Quarterly Report on Form 10-Q for the nine months ended September 30,
2001, filed November 14, 2001.
- Current Reports on Form 8-K filed on March 9, 2001, March 16, 2001 and
February 7, 2002.
All documents filed by Liberty Media and Liberty Digital pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934
subsequent to the date of this notice/prospectus and prior to the effective date
of the merger are incorporated by reference into and are deemed to be a part of
this notice/prospectus from the date of filing of those documents.
You may request a copy of any and all of the documents incorporated by
reference in this notice/prospectus at no cost, by writing or telephoning the
office of:
Corporate Secretary
Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Telephone: 720-875-5400
You should rely only on the information contained or incorporated by
reference in this section of the notice/prospectus. We have not authorized
anyone to provide you with information that is different from what is contained
in this notice/prospectus. This notice/prospectus is dated February 11, 2002.
You should not assume that the information contained in this notice/prospectus
is accurate as of any date other than that date, and neither the mailing of this
notice/prospectus to stockholders nor the issuance of Liberty Media Series A
common stock in the merger shall create any implication to the contrary.
11
RISK FACTORS
If you hold your shares of Liberty Digital Series A common stock on the
date of the merger and do not properly exercise your appraisal rights, you will
receive shares of Liberty Media Series A common stock and will become a
stockholder of Liberty Media. In addition to the other information we include in
or incorporate by reference into this notice/prospectus, you should consider the
following risk factors in deciding whether to exercise your appraisal rights.
RISKS RELATED TO THE MERGER
THERE WAS NO FORMAL VALUATION DETERMINING THE FAIRNESS OF THE MERGER
CONSIDERATION.
The merger consideration was not determined by arms' length negotiation,
and there was no formal valuation of Liberty Media or Liberty Digital by an
independent third party. Neither Liberty Media nor Liberty Digital has obtained
a fairness opinion by an investment banking firm or other qualified appraiser.
Because the merger is being effected pursuant to Delaware's "short-form" merger
statute, the board of directors of Liberty Digital is not required to and has
not considered or made any determination as to whether the terms of the merger
are fair to, or in the best interests of, the holders of Liberty Digital Series
A common stock other than Liberty Media and its subsidiaries.
THE VALUE OF THE LIBERTY MEDIA SERIES A COMMON STOCK YOU WILL RECEIVE IN THE
MERGER MAY FLUCTUATE.
The number of shares of Liberty Media Series A common stock you will
receive in the merger will not be adjusted based on changes in the market price
of Liberty Media Series A common stock. Accordingly, because the market price of
Liberty Media Series A common stock may fluctuate, the value of the
consideration you receive when we complete the merger will depend on the market
price of Liberty Media Series A common stock at that time. We cannot assure you
as to the market value of the merger consideration you will receive when the
merger is completed.
THE PRICE OF LIBERTY MEDIA SERIES A COMMON STOCK MAY BE AFFECTED BY FACTORS
DIFFERENT FROM THOSE AFFECTING THE PRICE OF THE LIBERTY DIGITAL SERIES A
COMMON STOCK.
When we complete the merger, you will become a holder of Liberty Media
Series A common stock. The businesses of Liberty Media are much broader than the
businesses of Liberty Digital, and the results of operations of Liberty Media,
as well as the market price of Liberty Media Series A common stock, may be
affected by factors different from those affecting Liberty Digital's results of
operations and the market price of the Liberty Digital Series A common stock. As
a result, factors that had little or no effect on the price of the Liberty
Digital Series A common stock may adversely affect the price of Liberty Media
Series A common stock.
RISKS RELATED TO THE BUSINESS OF LIBERTY MEDIA
WE DEPEND ON A LIMITED NUMBER OF POTENTIAL CUSTOMERS FOR CARRIAGE OF OUR
PROGRAMMING SERVICES.
The cable television and direct-to-home satellite industries are currently
undergoing a period of consolidation. As a result, the number of potential
buyers of our programming services and those of our business affiliates is
decreasing. AT&T's cable television subsidiaries and affiliates, which as a
group comprise one of the two largest operators of cable television systems in
the United States, are collectively the largest single customer of our
programming companies. With respect to some of our programming services and
those of our business affiliates, this is the case by a significant margin. The
existing agreements between AT&T's cable television subsidiaries and affiliates
and the program suppliers owned or affiliated with us were entered into prior to
the TCI merger. There can be no assurance that our owned and affiliated program
suppliers will be able to negotiate renewal agreements with AT&T's cable
television subsidiaries and affiliates. Although AT&T has agreed to extend any
existing affiliation agreement of ours and our affiliates that expires on or
before March 9, 2004 to a date not before March 9, 2009, that agreement is
conditioned on mutual most favored nation terms being offered and the
arrangements being consistent with industry practice.
12
THE LIQUIDITY AND VALUE OF OUR INTERESTS IN OUR BUSINESS AFFILIATES MAY BE
ADVERSELY AFFECTED BY STOCKHOLDERS AGREEMENTS AND SIMILAR AGREEMENTS TO WHICH
WE ARE A PARTY.
A significant portion of the equity securities we own is held pursuant to
stockholder agreements, partnership agreements and other instruments and
agreements that contain provisions that affect the liquidity, and therefore the
realizable value, of those securities. Most of these agreements subject the
transfer of the stock, partnership or other interests constituting the equity
security to consent rights or rights of first refusal of the other stockholders
or partners. In certain cases, a change in control of our company or of the
subsidiary holding our equity interest will give rise to rights or remedies
exercisable by other stockholders or partners, such as a right to initiate or
require the initiation of buy/sell procedures. Some of our subsidiaries and
business affiliates are parties to loan agreements that restrict changes in
ownership of the borrower without the consent of the lenders. All of these
provisions will restrict our ability to sell those equity securities and may
adversely affect the price at which those securities may be sold. For example,
in the event buy/sell procedures are initiated at a time when we are not in a
financial position to buy the initiating party's interest, we could be forced to
sell our interest at a price based upon the value established by the initiating
party, and that price might be significantly less than what we might otherwise
obtain.
WE DO NOT HAVE THE RIGHT TO MANAGE OUR BUSINESS AFFILIATES, WHICH MEANS WE
CANNOT CAUSE THOSE AFFILIATES TO OPERATE IN A MANNER THAT IS FAVORABLE TO US.
We do not have the right to manage the businesses or affairs of any of our
business affiliates in which we have less than a majority voting interest.
Rather, our rights may take the form of representation on the board of directors
or a partners' or similar committee that supervises management or possession of
veto rights over significant or extraordinary actions. The scope of our veto
rights varies from agreement to agreement. Although our board representation and
veto rights may enable us to exercise influence over the management or policies
of an affiliate and enable us to prevent the sale of assets by a business
affiliate in which we own less than a majority voting interest or prevent it
from paying dividends or making distributions to its stockholders or partners,
they do not enable us to cause these actions to be taken.
OUR BUSINESS IS SUBJECT TO RISKS OF ADVERSE GOVERNMENT REGULATION.
Programming services, cable television systems, satellite carriers,
television stations and internet companies are subject to varying degrees of
regulation in the United States by the Federal Communications Commission and
other entities. Such regulation and legislation are subject to the political
process and have been in constant flux over the past decade. In addition,
substantially every foreign country in which we have, or may in the future make,
an investment regulates, in varying degrees, the distribution and content of
programming services and foreign investment in programming companies and
wireline and wireless cable communications, satellite, telephony and Internet
services. Regulation can take the form of price controls, service requirements
and programming and other content restrictions, among others. Further material
changes in the law and regulatory requirements must be anticipated, and there
can be no assurance that our business will not be adversely affected by future
legislation, new regulation, deregulation or court decisions.
WE MAY MAKE SIGNIFICANT CAPITAL CONTRIBUTIONS AND LOANS TO OUR SUBSIDIARIES
AND BUSINESS AFFILIATES TO COVER OPERATING LOSSES AND FUND DEVELOPMENT AND
GROWTH, WHICH COULD LIMIT THE AMOUNT OF CASH AVAILABLE TO PAY OUR OWN
FINANCIAL OBLIGATIONS OR TO MAKE ACQUISITIONS OR INVESTMENTS.
The development of video programming, communications, technology and
Internet businesses involves substantial costs and capital expenditures. As a
result, many of our business affiliates have incurred operating and net losses
to date and are expected to continue to incur significant losses for the
foreseeable future. Our results of operations include our, and our consolidated
subsidiaries', share of the net losses of our respective affiliates. Our share
of net losses of affiliates amounted to $3,227 million for the first nine months
of 2001, $3,485 million for calendar year 2000 and $970 million for calendar
year 1999.
13
We may make significant capital contributions and loans to our existing and
future subsidiaries and business affiliates to help cover their operating losses
and fund the development and growth of their respective businesses and assets.
We have assisted, and may in the future assist, our subsidiaries and business
affiliates in their financing activities by guaranteeing bank and other
financial obligations. At September 30, 2001, we had guaranteed various loans,
notes payable, letters of credit and other obligations of certain of our
subsidiaries and business affiliates totaling approximately $2,242 million.
To the extent we make loans and capital contributions to our subsidiaries
and business affiliates or we are required to expend cash due to a default by a
subsidiary or business affiliate of any obligation we guarantee, there will be
that much less cash available to us with which to pay our own financial
obligations or make acquisitions or investments.
IF WE FAIL TO MEET REQUIRED CAPITAL CALLS TO A SUBSIDIARY OR BUSINESS
AFFILIATE, WE COULD BE FORCED TO SELL OUR INTEREST IN THAT COMPANY, OUR
INTEREST IN THAT COMPANY COULD BE DILUTED OR WE COULD FORFEIT IMPORTANT
RIGHTS.
We have entered into stockholder and partnership agreements that provide
for possible capital calls on stockholders and partners. Our failure to meet a
capital call, or other commitment to provide capital or loans to a particular
company, may have adverse consequences to us. These consequences may include,
among others, the dilution of our equity interest in that company, the
forfeiture of our right to vote or exercise other rights, the right of the other
stockholders or partners to force us to sell our interest at less than fair
value, the forced dissolution of the company to which we have made the
commitment or, in some instances, a breach of contract action for damages
against us. Our ability to meet capital calls or other capital or loan
commitments is subject to our ability to access cash.
BECAUSE WE ARE A HOLDING COMPANY, WE MAY BE UNABLE IN THE FUTURE TO OBTAIN
CASH IN AMOUNTS SUFFICIENT TO MEET OUR FINANCIAL OBLIGATIONS.
Our ability to meet our financial obligations depends upon our ability to
access cash. We are a holding company, and our sources of cash include our
available cash balances, net cash from the operating activities of our wholly
owned subsidiaries, dividends and interest from our investments and proceeds
from the monetization and/or sale of assets. The ability of our operating
subsidiaries to pay dividends or to make other payments or advances to us
depends on their individual operating results and any statutory, regulatory or
contractual restrictions to which they may be or may become subject. We
generally do not receive cash, in the form of dividends, loans, advances or
otherwise, from our business affiliates. In this regard, we do not have
sufficient voting control over most of our business affiliates to cause those
companies to pay dividends or make other payments or advances to their partners
or stockholders (including us).
OUR SUBSIDIARIES AND BUSINESS AFFILIATES OPERATING INTERNATIONALLY ARE SUBJECT
TO ADDITIONAL RISKS.
We have made significant investments in businesses outside the United
States and we may continue to do so in the future. Some countries where we have
or may in the future acquire interests in a cable television operator do not
issue exclusive licenses or franchises to provide multi-channel television
services within a geographic area, and in those instances we may be adversely
affected by an overbuild by one or more competing cable operators. In certain
countries where multi-channel television is less developed, there is minimal
regulation of cable television and other forms of video distribution, and,
therefore, the protections of the distributor's investment available in the
United States and other countries (such as rights to renewal of licenses,
franchises and pole attachment) may not be available in these countries. In
addition, our international operations are subject to the following inherent
risks:
- fluctuations in currency exchange rates;
- longer payment cycles by our customers in foreign countries that may
increase the uncertainty associated with recoverable accounts;
14
- difficulties in staffing and managing international operations; and
- political unrest that may result in disruptions of services that are
critical to our businesses.
WE ARE SUBJECT TO THE RISK OF POSSIBLY BECOMING AN INVESTMENT COMPANY.
Because we are a holding company and a significant portion of our assets
consists of investments in companies in which we own less than a 50% interest,
we run the risk of inadvertently becoming an investment company that is required
to register under the Investment Company Act of 1940. Registered investment
companies are subject to extensive, restrictive and potentially adverse
regulation relating to, among other things, operating methods, management,
capital structure, dividends and transactions with affiliates. Registered
investment companies are not permitted to operate their business in the manner
we operate our business, nor are registered investment companies permitted to
have many of the relationships that we have with our affiliated companies.
To avoid regulation under the Investment Company Act, we monitor the value
of our investments and structure transactions with an eye toward the Investment
Company Act. As a result, we may structure transactions in a less advantageous
manner than if we did not have Investment Company Act concerns, or we may avoid
otherwise economically desirable transactions due to those concerns. In
addition, events beyond our control, including significant appreciation or
depreciation in the market value of certain of our publicly traded holdings,
could result in our inadvertently becoming an investment company. If we were to
inadvertently become an investment company, we would have one year to divest a
sufficient amount of investment securities and/or acquire other assets
sufficient to cause us to no longer be an investment company.
If it were established that we are an unregistered investment company in
violation of the Investment Company Act, there would be risks, among other
material adverse consequences, that we could become subject to monetary
penalties or injunctive relief, or both, in an action brought by the SEC, and
that we would be unable to enforce contracts with third parties or that third
parties could seek to obtain rescission of transactions with us undertaken
during the period it was established that we were an unregistered investment
company.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO MAY BE
BENEFICIAL TO OUR STOCKHOLDERS.
Certain provisions of our restated certificate of incorporation and bylaws
may discourage, delay or prevent a change in control of our company that a
stockholder may consider favorable. These provisions include the following:
-- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
-- classifying our board of directors with staggered three-year terms,
which may lengthen the time required to gain control of our board of
directors;
-- limiting who may call special meetings of stockholders;
-- prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of the stockholders;
-- establishing advance notice requirements for nominations of candidates
for election to the board of directors or for proposing matters that can
be acted upon by stockholders at stockholder meetings; and
-- supermajority voting requirements for the approval of certain actions by
stockholders which have not been approved by at least 75% of our board
of directors.
Section 203 of the Delaware General Corporation Law may also discourage,
delay or prevent a change in control of our company.
15
OUR STOCK PRICE MAY DECLINE SIGNIFICANTLY BECAUSE OF STOCK MARKET FLUCTUATIONS
THAT AFFECT THE PRICES OF THE COMPANIES IN WHICH WE INVEST.
The stock market has recently experienced significant price and volume
fluctuations that have affected the market prices of common stock of Internet,
telecommunications and technology companies. We have investments in many
companies in these business sectors. If market fluctuations cause the stock
price of these companies to decline, our stock price may decline.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This notice/prospectus contains forward looking statements concerning
future events that are subject to risks, uncertainties and assumptions. Certain
statements made in this notice/prospectus under the captions entitled "Summary
of the Merger" and "Risk Factors" and elsewhere in this notice/prospectus are
forward-looking statements. These forward-looking statements are based upon our
current expectations and projections about future events. When used in this
notice/prospectus, the words "believe," "anticipate," "intend," "estimate,"
"expect" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such words.
These forward-looking statements are subject to risks, uncertainties and
assumptions about us and our subsidiaries and business affiliates, including,
among other things, the following:
- general economic and business conditions and industry trends;
- the continued strength of the industries in which we are involved;
- uncertainties inherent in our proposed business strategies;
- our future financial performance, including availability, terms and
deployment of capital;
- availability of qualified personnel;
- changes in, or our failure or inability to comply with, government
regulations and adverse outcomes from regulatory proceedings;
- changes in the nature of key strategic relationships with partners and
business affiliates;
- rapid technological changes;
- our inability to obtain regulatory or other necessary approvals of any
strategic transactions; and
- social, political and economic situations in foreign countries where we
do business.
You are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this notice/prospectus. In light
of these risks, uncertainties and other assumptions, the forward-looking events
discussed in this notice/prospectus might not occur.
16
THE COMPANIES INVOLVED IN THE MERGER
LIBERTY MEDIA CORPORATION
Liberty Media owns interests in a broad range of video programming,
communications and Internet businesses in the United States, Europe, South
America and Asia. These interests include widely recognized brands such as
Encore, STARZ!, Discovery, Fox, USA, QVC, AOL, CNN, TBS, Motorola and Sprint
PCS. For more detailed information on the business of Liberty Media, see the
section entitled "Where You Can Find More Information," on page 10 of this
notice/prospectus.
LIBERTY DIGITAL, INC.
Liberty Digital is currently a majority-owned subsidiary of Liberty Media.
Liberty Digital is a new media company focused on Interactive Media and Music
business segments. In addition to the following discussion, for more detailed
information on the business of Liberty Digital, see the section entitled "Where
You Can Find More Information," on page 10 of this notice/prospectus.
BACKGROUND
Liberty Digital was incorporated in Delaware in January 1997 as a wholly
owned subsidiary of TCI for the purpose of acquiring DMX, now Maxide
Acquisition, Inc. ("DMX/AEI Music"). Liberty Digital acquired DMX in July 1997.
In that transaction, Liberty Digital became a publicly held, majority-owned
subsidiary of TCI. In March 1999, TCI transferred its majority interest in
Liberty Digital to Liberty Media Corporation, which at that time was a wholly
owned subsidiary of TCI. AT&T acquired TCI in March 1999 in a merger. In
connection with AT&T's acquisition of TCI, Liberty Media became an indirect,
wholly owned subsidiary of AT&T. Liberty Media split off from AT&T and became an
independent publicly held company, effective as of August 10, 2001.
INTERACTIVE MEDIA SEGMENT
Liberty Digital's Interactive Media segment develops interactive television
and new media business and strategically invests in Internet and new media
companies. This segment is in the developmental stage and has not yet generated
revenue. Liberty Digital's development goals for this segment are discussed
below. Liberty Media believes that achievement of these goals has been delayed
primarily as a result of the following factors:
- Delayed development, deployment and market acceptance of interactive
television. Interactive television requires two-way communications
capability in multiple system operator ("MSO") cable plants and in an
installed base of interactive set-top boxes. This technology has not yet
been fully implemented by MSOs or embraced by subscribers.
- Liberty Digital's inability to generate sufficient cash flow. The
Interactive Media segment has been in a development stage and has not yet
generated significant cash flow. Liberty Digital has relied heavily on
Liberty Media and a bank line of credit to fund its operations. Liberty
Digital does not currently have the capital resources to pay a $100
million note due in February 2002 to Sony Pictures Entertainment Inc.
("SPE") which was issued in connection with Liberty Digital's acquisition
of 50% ownership in the Game Show Network ("GSN"), discussed further
below. Liberty Media is a co-obligor under that note and has a contingent
call right with respect to a portion of Liberty Digital's interest in GSN
if Liberty Digital fails to pay the note when due and the note is paid by
Liberty Media.
- Inability of Liberty Digital, and of other companies of similar size, to
access capital markets. Liberty Digital requires a significant amount of
additional capital to develop its interactive television business and to
invest in content-related and other complementary businesses. Recent
trends in capital markets have adversely affected the ability of
companies of similar size to Liberty Digital to raise capital.
17
Interactive Television
Development Goals. Liberty Digital's goal has been to create a suite of
category-specific interactive television channels, such as "travel" and "home,"
referred to as vertical categories, and to further develop interactive channels
for use with web appliances, cellular telephones and palmtop computers, as
technology permits.
In this developmental phase, Liberty Digital's strategies for building an
interactive television business have been as follows:
- Develop compelling interactive channels. Liberty Digital's goal has been
to develop a suite of vertical interactive television channels that
combine traditional basic-cable network economics with interactive
enhancements, which will provide shopping, transactional services,
entertainment and information to viewers.
- Develop and leverage strategic relationships. Liberty Digital has sought
to identify, form alliances with, and if appropriate, acquire equity
positions in interactive television technology and e-commerce and content
companies it believes are well managed and will be capable of offering
services or technologies that will complement an interactive television
business.
- Expand distribution platform. Liberty Digital's strategy has been to
leverage a large distribution platform capable of wide-scale deployment
of interactive channels as a cornerstone in entering into new
relationships with other system operators, including cable, satellite,
wireless and DSL operators.
Access Agreement with AT&T. Successful implementation of Liberty Digital's
distribution strategy depends in part on the resolution of discussions with AT&T
concerning Liberty Digital's access agreement with AT&T. The access agreement
establishes a framework to negotiate definitive agreements for carriage of
interactive television channels over six megahertz of bandwidth on AT&T's cable
television systems, which we estimate could support between 12 and 15
interactive channels.
The access agreement allows AT&T to elect either of two possible
distribution arrangements. One arrangement would provide Liberty Digital with
access to six megahertz of bandwidth on AT&T's cable systems for the
distribution of interactive video services for an initial five-year term, and
would be renewable for an additional four-year term. The second arrangement
would enable AT&T to elect to enter into separate joint ventures with Liberty
Digital as to specific interactive channels on mutually agreeable terms. AT&T
and Liberty Digital would own each joint venture equally and share revenues and
expenses pro rata based on their ownership interests. Under this second
arrangement, neither AT&T nor Liberty Digital would be able to provide
interactive video services for such specific channel categories outside of the
joint ventures. AT&T would have the option to purchase Liberty Digital's joint
venture interest at fair market value three years after formation of the
venture. Because interactive television has not yet been widely deployed or
accepted in any market, newly created interactive channels are likely to incur
losses in their development stages. As a result, the value of any such joint
venture may not be fully realized until after three years. If AT&T were to
purchase Liberty Digital's joint venture interest after three years, then
Liberty Digital would not realize any increased value in the venture after such
purchase.
Liberty Digital has sought to negotiate a definitive distribution agreement
with AT&T under both arrangements. However, AT&T has been reluctant to engage in
substantive negotiations concerning a definitive distribution agreement under
either arrangement until such time as the technologies necessary to support the
interactive channels contemplated by the access agreement are more fully
deployed. It is possible that Liberty Digital and AT&T may not be able to agree
on terms for a definitive carriage agreement under the access agreement.
The access agreement does not restrict AT&T's ability to transfer or
decrease the size of any of its cable systems. In the event AT&T transfers or
reduces the number of cable systems it operates, the success of Liberty
Digital's interactive television business will be significantly limited if other
MSOs do not distribute its programming. Liberty Digital has not entered into
definitive distribution agreements with any MSO. The terms of distribution with
MSOs other than AT&T may not be as favorable to Liberty Digital as the terms
anticipated under the access agreement.
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Game Show Network. Liberty Digital currently owns 50% of GSN, a
programming service focused exclusively on game playing and game shows. GSN
offers 24-hour cable network programming consisting of original game shows and
interactive television games, as well as syndicated game shows from a library of
over 55,000 game show episodes spanning five decades. According to Nielsen Media
Research, GSN had approximately 40,859,000 subscribers in December 2001,
representing an increase of 624,000 from November 2001 and 10, 163,000 from
November 2000.
SPE owns the other 50% of GSN. Liberty Digital purchased its interest in
GSN from SPE and paid a portion of the purchase price with a $100 million note
payable to SPE, due in February 2002. Liberty Media is a co-obligor on the note
and has a contingent call right with respect to a portion of Liberty Digital's
ownership interest in GSN if Liberty Digital fails to pay the SPE note when due
and the note is paid by Liberty Media. Liberty Digital does not currently have
the capital resources to pay this note.
Investments
Liberty Digital has invested in companies it believes will assist in
implementing Liberty Digital's business strategy and operating plan. Liberty
Digital has specifically targeted companies that are establishing infrastructure
to provide or facilitate interactive television or e-commerce, or that intend to
provide e-commerce or content applications suitable for use in interactive
television.
The following table sets forth the companies in which Liberty Digital held
direct equity interests at December 31, 2001 and its approximate percentage
ownership interest in each. The percentage ownership does not give effect to the
conversion, exercise or exchange of convertible securities, options or warrants
owned by Liberty Digital or third parties. Liberty Digital's interests in these
companies generally consist of common stock or securities convertible into or
exchangeable for common stock. In some cases Liberty Digital's interests are
subject to transfer restrictions, rights of first refusal, buy-sell rights,
repurchase rights and other restrictions.
EQUITY
INVESTMENT INTEREST DESCRIPTION
---------- -------- -----------
ACTV, Inc................................ 14.3% Producer of tools for the creation of
programming that allows viewer
participation for both television and
Internet platforms
Alloy Online, Inc........................ 12.7% Teen e-commerce and cataloger
CacheFlow, Inc........................... * Developer of Internet caching appliances
to accelerate and optimize information
flow
CarsDirect.com, Inc...................... * Internet provider for research, price,
design, order and delivery of new
vehicles at home
Food.com, Inc............................ 2.9% Provider of online purchase service for
delivered and take-out dining
iBEAM Broadcasting Corporation(1)........ 2.8% Provider of satellite delivery of
streaming media to Internet service
providers
Katalyst Venture Partners I.............. 6.3% B2B e-commerce investor
KPCB Java Fund, L.P...................... 4.0% Venture fund invested in entities that
develop applications using Java software
Lightspan, Inc........................... 8.8% Provider of curriculum based educational
software and Internet services to schools
and homes
The MTVi Group, L.P.(2).................. 9.7% Provider of music-related and
music-themed services online
Open TV, Inc............................. 3.4% Worldwide distributor of software that
enables interactive television
priceline.com Incorporated(1)............ 1.9% Provider of online e-commerce for
products and services through a "reverse
auction" pricing system
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EQUITY
INVESTMENT INTEREST DESCRIPTION
---------- -------- -----------
SONICblue, Inc........................... * Manufacturer of MP3 players and provider
of personal television product enabling
consumers to control their television
viewing
RespondTV, Inc........................... 4.1% Provider of infrastructure services for
delivery of real time enhanced TV ads
---------------
* less than 1%
(1) During the third quarter of 2000, Liberty Digital monetized priceline.com
Incorporated and iBeam Broadcasting Corporation investments generating
proceeds of approximately $125 million and $65 million, respectively. (Refer
to note 11 of the consolidated financial statements of Liberty Digital for
the year ended December 31, 2000, which are incorporated by reference into
this notice/prospectus.)
(2) On February 7, 2002, Liberty Digital sold its interest in the MTVi Group,
L.P. for $15 million to a subsidiary of Viacom International, Inc.
During 2000 and 2001, Liberty Digital sold and/or monetized certain of its
investments to obtain funds for other strategic investments as appropriate, to
enhance its liquidity and maximize return on capital. The ability to continue to
sell and/or monetize investments that Liberty Digital may no longer consider
strategic, as well as the timing and amount of proceeds, may be adversely
affected by market and other conditions largely beyond the control of Liberty
Digital. If it is unable to sell or monetize all or any portion of its
investments at favorable prices, or at all, Liberty Digital's business and
results of operations could be adversely affected.
Liberty Digital holds certain investments subject to shareholder
agreements, partnership agreements, and other instruments and agreements
containing provisions that affect the liquidity, and therefore the realizable
value, of those securities. Liberty Digital does not have the right to manage
the businesses or affairs of the entities in which it holds less than a majority
voting interest.
Competition
Liberty Digital faces competition from a number of companies in the new and
rapidly evolving digital interactive television market, including commerce and
content companies in both television and Internet industries. Many of these
companies have significantly greater financial, marketing and operating
resources than Liberty Digital and may be in a better position to compete in the
industry. Potential competitors include, but are not limited to, the following:
- Existing television channels. Channels such as The Home Shopping Network,
QVC, and Home & Garden TV, could incorporate interactive services into
their video programming and thus become direct competitors.
- MSOs, including AT&T Broadband.
- Technology and Internet companies such as Microsoft and AOL Time Warner.
- Major studios and entertainment companies.
- Web-based commerce companies. Companies such as Expedia.com, Inc. and
Amazon.com, Inc., may develop television compatible interfaces to market
their products.
- Other interactive businesses. Liberty Digital may compete with developing
businesses such as video-on-demand, information services, e-mail and
telephony services, for carriage of its programming over cable systems
and other distribution media.
- Other sources of entertainment. Liberty Digital may compete for
consumers' time and discretionary income with other sources of
entertainment, such as radio, television, in-home video and audio
systems, filmed entertainment, and entertainment delivered over the
Internet.
Liberty Digital's ability to compete may be restricted under the access
agreement with AT&T in certain circumstances. If AT&T elects an arrangement to
form separate joint ventures with Liberty Digital for each interactive channel
developed, then under the access agreement neither AT&T nor Liberty Digital may
provide interactive video services in the specified categories of channels which
are the subject of such joint venture, other than through the joint venture.
20
MUSIC SEGMENT
Prior to June 1, 2001 Liberty Digital's Music segment, formerly referred to
as its Audio segment, consisted of revenues derived from AT&T Broadband and from
the operations of DMX. On May 18, 2001, Liberty Digital completed a transaction
in which DMX was combined with AEI Music Network Inc. ("AEI"). Liberty Digital
owns a 56% interest in the resulting company, Maxide Acquisition, Inc. ("DMX/AEI
Music"), a leader in the delivery of professionally programmed commercial-free
music to homes and businesses around the world via the Internet, satellite and
broadband networks.
DMX/AEI Music is primarily engaged in programming and distributing
background and foreground music and imaging through digital, tape and satellite
distribution to homes and businesses worldwide. DMX/AEI Music leases tuner boxes
for receipt of the music service and also designs, installs and sells sound
systems and related equipment to businesses worldwide. Prior to the combination
with AEI, the DMX service was primarily distributed in the United States, and
also distributed in Canada, Mexico, Latin America, the Caribbean and Sub-Sahara
Africa through distribution agreements with certain DMX affiliates. AEI provides
music service throughout Europe, Canada, Latin America and Australia through
direct operations as well as distribution agreements with AEI affiliates.
AT&T Broadband Annual Payments
Liberty Digital is a party to an amended contribution agreement with AT&T
Broadband, pursuant to which Liberty Digital receives monthly payments relating
to sales of analog DMX services by certain AT&T Broadband affiliates. These
payments, which are adjusted annually for inflation, totaled approximately $20.9
million in 2001 before payment of approximately $1.1 million in related
operating expenses by Liberty Digital. These payments are payable through June
2017.
DMX/AEI Music Service
Music Programming. The DMX/AEI Music service develops programming content
in distinct music genres, such as Classical, Jazz, Rock, Oldies and Latin. The
DMX/AEI Music service is distributed via cable, Ku-Band direct broadcast
satellite ("DBS") and on-premise methods. The DMX/AEI Music service currently
offers 10 to 45 genres via cable, 100 genres via DBS and over 600 titles or 130
styles in its library catalogue for on-premise distribution. The DMX/AEI Music
service is primarily programmed by a full-time, in-house programming staff
supplemented by outside contractors and consultants. Approximately 90% of the
DMX/AEI Music formats are updated daily, while the other 10% is updated at least
once a week.
Distribution Methods. Liberty Digital distributes the DMX/AEI Music
service through satellite transmission to cable operators and directly to
residential and commercial subscribers with satellite dishes. It subleases
transponder capacity from seven satellite providers, with the principal sublease
from the National Digital Television Center, an AT&T subsidiary. The term of
Liberty Digital's transponder subleases extends to the earlier of the life of
the satellite or November 2017. A satellite failure could have a material
adverse effect on Liberty Digital's financial condition and results of
operations. Satellite failure could result in disruptions in service and damage
to relationships with customers. There is a limited number of satellites with
orbital positions suitable for transmission of Liberty Digital's signals and a
limited number of available transponders on those satellites. If signals become
unavailable due to satellite failure or if third parties are unable to provide
transponder services, Liberty Digital would have to seek alternative satellite
or transponder facilities. However, alternative facilities may not be available
on a timely or cost-effective basis, may be available only on a satellite that
is not positioned as favorably as current satellites and may therefore require
Liberty Digital to expend money to re-point subscribers' satellite dishes or may
require a change in the frequency currently used to transmit and receive the
signal. If Liberty Digital is required to enter into new transponder lease
agreements, there can be no assurance that it will be able to do so on terms as
favorable as those in current agreements.
Distribution by Cable Operators. The DMX/AEI Music Service is primarily
distributed by cable operators to their subscribers by digital compression
technology. The technology is distributed through AT&T Broadband's Headend in
the Sky. The DMX/AEI Music service is currently included in digital
21
packages distributed by AT&T Broadband and certain other MSOs. Liberty Digital's
affiliation agreements with cable operators for digital distribution generally
provide for the cable operator to pay a fee for each subscriber that purchases a
digital cable package of video and music services that includes the DMX/AEI
Music service.
The DMX/AEI Music service is also distributed by cable operators through
analog technology that delivers the service over the existing cable network to a
separate tuner at the subscriber's home or business. The DMX/AEI Music service
delivered via analog technology is generally offered as a premium service at a
separate fee to subscribers. Under its affiliation agreements with cable
operators, Liberty Digital is paid a per subscriber license fee for each
subscriber receiving the DMX/AEI Music service.
The annual payments to Liberty Digital by AT&T Broadband under the amended
contribution agreement are not subject to either of these fee arrangements.
Distribution by Satellite. The DMX/AEI Music service is also transmitted
to small satellite dishes from the Ku-Band satellite directly to residential and
commercial subscribers. Customers use proprietary DMX/AEI Music satellite
receivers to receive the signal and play it back through their music sound
system. Customers can select from over 100 available formats at any time via the
receiver.
On-Premise Distribution. The DMX/AEI Music service is also distributed as
an on-premise business music service via compact disc, tape and Internet where
cable and DBS are not available. The DMX/AEI Music compact disc and tape
services are distributed on an established schedule with the customer, typically
on a quarterly basis. Through the distribution and rotation of library compact
discs and cassette tapes, an on-premise distribution customer receives
essentially the same programming that is available by satellite.
Other Services
Liberty Digital also derives revenues from leasing tuner boxes for the
DMX/AEI Music service and from sales and installation of sound system-related
products to commercial customers through its 26 local sales offices. Liberty
Digital also offers in-store audio marketing systems and on-hold custom music
messaging. In-store audio marketing allows retailers to interrupt the music
service with the insertion of promotional advertisements. On-hold custom music
messaging provides music while holding on the telephone.
Music Licensing
Liberty Digital has entered into a number of license agreements for
distribution of copyrighted music. Under these agreements, Liberty Digital pays
royalties for all music played on its services in the United States through
residential, commercial or Internet distribution. Liberty Digital has also
obtained the applicable licenses for distribution of commercial and residential
music services outside the United States through various licensing agencies
located in the foreign territories where its services are distributed.
Certain license agreements with major music licensing organizations are
being negotiated on an industry-wide basis and may require retroactive rate
increases. Liberty Digital has continued to pay the rates as provided in its
prior license agreements with these organizations. Liberty Digital has accrued
estimated royalties applicable to the agreements under negotiation. If the
actual license fees under those agreements are ultimately in excess of current
accruals, Liberty Digital's results of operations could be materially adversely
affected.
Marketing
Commercial Marketing. Liberty Digital distributes its programming services
to the commercial marketplace through its regional direct sales offices,
franchisees and cable operators. Each local sales office sells the DMX/AEI Music
service and designs and sells sound systems, on-hold music and in-store audio
marketing systems to both local and regional chain accounts located in its
territory.
Liberty Digital grants rights to franchisees and cable operators to market
the DMX/AEI Music service to commercial subscribers within exclusive franchise
territories in exchange for a monthly per subscriber fee. Franchisees market the
DMX/AEI Music service via DBS, cassette tape or compact disc,
22
while cable operators have the right to market the DMX/AEI Music service
received via DBS and delivered to businesses via their cable systems, or through
on-premise distribution.
Residential Marketing. Affiliation agreements between Liberty Digital and
cable operators allow cable operators to distribute the DMX/AEI Music service to
residential subscribers within their franchise territories in exchange for a
monthly per subscriber license fee. Liberty Digital contributes marketing
materials and/or cooperative marketing funds to joint marketing efforts by cable
operators. Commercial rights are granted under a separate contract.
International Business
Liberty Digital has historically focused on domestic growth. However, as a
result of the combination of DMX and AEI, Liberty Digital now has operations in
the United Kingdom, Germany, Holland, Belgium, France, Hungary, Poland, the
Czech Republic and Australia, in addition to those DMX had in Canada, Latin
America, the Caribbean and Sub-Sahara Africa. Liberty Digital provides the
DMX/AEI Music service and related business communication services throughout
Europe, Canada, Latin America and Australia through direct operations and a
sales and marketing staff of more than thirty employees, as well as through
distribution agreements for the DMX/AEI Music service with AEI affiliates in
Austria, Switzerland, Italy, Spain, Portugal, Sweden, Finland, Norway, Denmark,
Greece, Lithuania and Russia.
Competition
Liberty Digital competes with other providers of residential cable
television and direct broadcast satellite programming (including competitors who
provide digital music programming similar to the DMX/AEI Music service) for
third party cable and DBS affiliations. Liberty Digital's principal competitors
for these affiliations are Music Choice and Muzak Limited Partnership.
Muzak is also Liberty Digital's primary competitor for in-store audio
marketing systems and on-hold music. Liberty Digital competes with local market
sound contractors for design, installation and sales of sound systems and
related products to businesses. Some of Liberty Digital's competitors may have
substantially greater financial, technical, personnel and other resources than
Liberty Digital.
Liberty Digital may compete for consumers' time and discretionary income
with other sources of entertainment, such as radio, television, in-home video
and audio systems, filmed entertainment, and entertainment delivered over the
Internet.
There are numerous methods by which existing and future competitors can
deliver music programming, including various forms of direct broadcast satellite
services, wireless cable, fiber optic cable, digital compression over existing
telephone lines, interactive television broadcast channels, digital audio radio
service and the Internet. Competitors may use different forms of delivery for
the services offered by Liberty Digital, and customers may prefer these
alternative delivery methods. Liberty Digital may not have the financial or
technological resources to adapt to changes in available technology and clients'
preferences.
REGULATION AFFECTING LIBERTY DIGITAL'S INTERACTIVE MEDIA AND MUSIC SEGMENTS
Any laws or regulations that adversely affect satellite or transmission
services, copyright agreements or that would have an adverse effect on the
growth of the cable television and satellite industry may also have an adverse
effect on Liberty Digital. Such regulations are subject to the political process
and have been in constant flux over the past decade. Material changes in the law
and regulatory requirements must be anticipated and there can be no assurance
that Liberty Digital's business and the development of interactive television
will not be affected adversely by future legislation, new regulation,
deregulation or court decisions. Recent developments in regulations that may
affect Liberty Digital are summarized below. For a more detailed description of
the government regulation affecting Liberty Digital, see the section entitled
"Where You Can Find More Information," on page 10 of this notice/prospectus.
Channel Occupancy Rules. Channel occupancy limits established by the FCC
under the Cable Television Consumer Protection and Competition Act of 1992, also
known as the Cable Act, prescribed, among other things, limits on the number of
channels on a cable system that are allowed to carry programming in which the
owner of such cable system holds an attributable interest. On March 2, 2001,
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the United States Court of Appeals for the District of Columbia Circuit found
that the FCC had failed to justify adequately its channel occupancy limits and
reversed and remanded the rule to the FCC for further consideration. The FCC has
issued a further notice of proposed rulemaking regarding the channel occupancy
rules. These or other rules, if readopted by the FCC upon remand with record
support, may limit carriage of the programming companies in which Liberty
Digital has interests on certain systems of affiliated cable operators.
Carriage Requirements. The Cable Act grants television broadcasters "must
carry" rights on local cable systems. "Must carry" rights afford less popular
broadcast stations guaranteed access to local cable systems, which can reduce
the channel capacity available for other programming services, like the GSN or
DMX/AEI services and the interactive channels Liberty Digital plans to develop
in the future. On January 18, 2001, the FCC adopted rules relating to the cable
carriage of digital television signals. Among other things, the rules clarify
that a digital-only television station can assert a right to analog or digital
carriage on a cable system. The FCC initiated a further proceeding to determine
whether television stations may assert rights to carriage of both analog and
digital signals during the transition to digital television.
Carriage Agreements. FCC regulations prohibit cable operators from
requiring a financial interest in a video program service as a condition of
carriage of such service, coercing exclusive rights in a video programming
service or favoring affiliated programmers so as to restrain unreasonably the
ability of an unaffiliated video programmer to compete. The FCC has issued a
notice of proposed rulemaking to determine whether to extend its prohibition on
exclusive contracts between cable operators and satellite programmers affiliated
with any cable operator (unless the FCC first determines the contract serves the
public interest). Absent such an extension, the prohibition will expire on
October 5, 2002.
Interactive Television. On January 18, 2001, the FCC released a Notice of
Inquiry regarding interactive television services over cable television. The FCC
sought comment on, among other things, an appropriate definition of interactive
television services, whether access to a high speed connection is necessary to
realize interactive television capabilities, and whether a nondiscrimination
rule is necessary and/or appropriate. The outcome of this proceeding and any
rules ultimately adopted by the FCC could affect the carriage of Liberty
Digital's contemplated interactive television services and the implementation of
its access agreement with AT&T.
LEGAL PROCEEDINGS
On October 24, 2001, a lawsuit titled Harold and Marilyn Finkelstein v.
Liberty Digital, Inc., et al, Case No. 01 CV 5964, was filed in Denver County
District Court, in the State of Colorado, challenging the proposed merger of
Liberty Digital described in this notice/prospectus. The plaintiffs seek to
maintain the lawsuit as a class action on behalf of all public shareholders of
Liberty Digital. The defendants in the litigation are Liberty Media, Liberty
Digital, John C. Malone and the directors of Liberty Digital. The plaintiffs
claim that the proposed transaction is in breach of various alleged fiduciary
duties of the defendants to the public shareholders of Liberty Digital. Among
their claims is a claim that the value of the consideration offered by Liberty
Media for the public shares of Liberty Digital is too low. The plaintiffs seek a
preliminary and permanent injunction precluding the merger from going forward,
as well as unspecified damages, attorneys fees and costs.
Discovery has not yet begun in this case. The parties have agreed that
following the filing of the registration statement of which this
notice/prospectus forms a part, the plaintiffs will determine whether to proceed
with their current complaint or to amend the complaint, and whether to seek a
preliminary injunction. The defendants deny all of the plaintiffs' claims and
intend to defend the litigation vigorously regardless of the course of action
pursued by the plaintiffs.
FROM TIME TO TIME LIBERTY DIGITAL IS A PARTY TO OTHER LEGAL ACTIONS ARISING
IN THE ORDINARY COURSE OF BUSINESS, INCLUDING CLAIMS BY FORMER EMPLOYEES. FOR
MORE DETAILED INFORMATION ABOUT LEGAL PROCEEDINGS INVOLVING LIBERTY DIGITAL, SEE
THE SECTION ENTITLED "WHERE YOU CAN FIND MORE INFORMATION," ON PAGE 10 OF THIS
NOTICE/PROSPECTUS.
24
CERTAIN RELATED PARTY TRANSACTIONS
The following is a description of certain material transactions between
Liberty Media and Liberty Digital, or their respective affiliates. Liberty Media
ceased to be an affiliate of AT&T in August 2001. Please see the general
descriptions of Liberty Media and Liberty Digital in the section entitled, "The
Companies Involved in the Merger," on page 17 of this notice/prospectus and in
the documents incorporated in this notice/prospectus by reference, as described
in the section entitled "Where You Can Find More Information," on page 10.
DMX AFFILIATION AGREEMENTS
A significant amount of Liberty Digital's Music segment revenues are
derived from AT&T Broadband and its affiliates. Such revenues result from
transactions under two agreements: an amended and restated contribution
agreement between Liberty Digital and AT&T Broadband and an affiliation
agreement between DMX and Satellite Services, Inc., an AT&T Broadband subsidiary
("SSI"), each dated as of July 1, 1997.
Pursuant to the amended and restated contribution agreement, Liberty
Digital receives monthly payments relating to sales of analog DMX services by
certain AT&T Broadband affiliates. These payments, which are adjusted annually
for inflation, totaled approximately $20.9 million in 2001 before payment of
approximately $1.1 million in related operating expenses by Liberty Digital.
These payments are payable through June 2017.
Pursuant to the affiliation agreement, SSI has the non-exclusive right to
distribute and subdistribute digital music services to commercial and
residential customers of systems managed by AT&T Broadband, or with which AT&T
Broadband has a specific relationship, for a 10-year term, in exchange for
licensing fees paid by SSI to Liberty Digital. Prior to July 2000, revenue from
the SSI affiliation agreement was $8.5 million annually. After July 2000,
revenue is based on the number of subscribers, and was approximately $7.2
million for the nine months ended September 30, 2001. In addition, Liberty
Digital receives subscriber revenue under the affiliation agreement from certain
AT&T Broadband affiliates, amounting to approximately $4.2 million for the nine
months ended September 30, 2001.
THE MTVI GROUP, L.P.
In July 1999, Liberty Digital and MTV Networks, a division of Viacom
International, Inc., formed the MTVi Group, L.P. ("MTVi"). In connection with
that transaction, and in consideration of certain agreements by AT&T Broadband
relating to the distribution of MTV Network's programming service on AT&T
Broadband cable systems, Liberty Digital agreed to pay AT&T Broadband an amount
equal to a portion of the appreciation in value of Liberty Digital's interest in
MTVi over a specified period, but in no event less than $15 million or more than
$30 million. In October 2001, AT&T Broadband assigned this payment right to
Liberty Media.
Pursuant to the agreement with AT&T Broadband described above, Liberty
Digital is obligated to make a payment to Liberty Media of $15 million. On
February 7, 2002, Liberty Digital sold its interest in MTVi for $15 million to a
subsidiary of Viacom. Liberty Digital used the proceeds of such sale to satisfy
its $15 million obligation to Liberty Media in cash.
CONTRIBUTION BY LIBERTY MEDIA OF INTERACTIVE MEDIA ASSETS
On September 9, 1999, pursuant to a contribution agreement, Liberty Media
contributed to Liberty Digital a group of investments it had made in companies
involved in interactive television technology businesses, e-commerce and content
and assigned to Liberty Digital an access agreement with AT&T, which now
comprise the assets of Liberty Digital's Interactive Media segment other than
Liberty Digital's interest in GSN. Liberty Media also contributed to Liberty
Digital a combination of cash and notes receivable equal to $150 million. In
exchange for these assets, Liberty Digital issued to Liberty Media 109,450,167
shares of Liberty Digital Series B common stock and 150,000 shares of Liberty
Digital
25
Series B convertible preferred stock. The Liberty Digital Series B convertible
preferred stock was subsequently exchanged for Liberty Digital Series C
convertible preferred stock and Liberty Digital Series D preferred stock in the
transaction described below under the heading "-- Exchange of Liberty Digital
Series B Convertible Preferred Stock."
TAX SHARING AGREEMENT
On September 9, 1999, in connection with the transaction described above
under the heading "-- Contribution by Liberty Media of Interactive Media
Assets," Liberty Digital entered into a tax liability allocation and
indemnification agreement with Liberty Media. Pursuant to that agreement,
Liberty Digital is obligated to make a cash payment to Liberty Media in each
year that Liberty Digital (taken together with its applicable subsidiaries) has
taxable income, determined as if Liberty Digital and its subsidiaries filed a
separate return. The amount of the payment is equal to the amount of Liberty
Digital's consolidated taxable income, as so determined, if positive, multiplied
by the highest applicable corporate tax rate. If (1) Liberty Digital and its
subsidiaries, when treated as a separate group, have a net operating loss or
deduction or are entitled to a tax credit for a particular year, and (2) Liberty
Media is able to use such loss, deduction, or credit to reduce its tax
liability, Liberty Digital will be entitled to a contractual credit against
current and future payments to Liberty Media under the agreement. If Liberty
Digital ceases to be a member of Liberty Media's affiliated group prior to the
time that Liberty Digital is able to use such credit, Liberty Digital will be
entitled to a payment from Liberty Media at the earlier of the time that (A)
Liberty Digital demonstrates to Liberty Media that Liberty Digital and its
subsidiaries could have used the losses, deductions, or tax credits giving rise
to such contractual credit to reduce their own separately computed tax liability
or (B) the aggregate voting power of Liberty Digital stock owned by Liberty
Media and members of its affiliated group falls below 20% of Liberty Digital's
outstanding voting power. Notwithstanding the foregoing, the tax sharing
agreement allocates to Liberty Media certain deductions arising from
compensation paid under the SAR Plan described below under the heading
"-- Certain Compensation Arrangements Between Liberty Digital and Liberty
Media."
The tax sharing agreement provides Liberty Digital the opportunity to
participate in the defense of any claims of the Internal Revenue Service that
might affect Liberty Digital's liability under the agreement.
During the nine months ended September 30, 2001, Liberty Media utilized tax
benefits of $1.0 million related to net operating losses incurred by Liberty
Digital in previous periods.
CERTAIN COMPENSATION ARRANGEMENTS BETWEEN LIBERTY DIGITAL AND LIBERTY MEDIA
Also in connection with Liberty Media's contribution transaction with
Liberty Digital described under the heading "-- Contribution by Liberty Media of
Interactive Media Assets," Liberty Media, Liberty Digital, Lee Masters,
President and CEO of Liberty Digital and another former Liberty Digital
executive agreed that Mr. Masters and the other former executive who were then
employed by Liberty Media, would become employed directly by Liberty Digital
rather than Liberty Media. Accordingly, Liberty Digital and these executives
entered into new employment contracts and Liberty Digital adopted the Liberty
Digital Deferred Compensation and Stock Appreciation Rights Plan (the "SAR
Plan"). Liberty Digital, Liberty Media and each of these executives entered into
a deferred compensation and stock appreciation rights agreement pursuant to the
SAR Plan (the "SAR Agreement"). In that connection, Liberty Media and Liberty
Digital further agreed that, notwithstanding the other allocations of tax
benefits under the tax sharing agreement described above, Liberty Media would be
entitled to any tax benefit inuring to Liberty Digital from deductions arising
from compensation paid under the SAR Plan. At September 30, 2001, Liberty
Digital had recorded $9.8 million of deferred tax benefits related to the SAR
Plan as a separate component of stockholders' equity. Such amounts have been
treated for financial statement purposes in a manner similar to a stockholder
dividend to Liberty Media.
The SAR agreement with the former Liberty Digital executive has been
terminated and the executive's rights under that agreement were cancelled. The
SAR Agreement with Mr. Masters allows
26
Liberty Digital to satisfy its payment obligations to Mr. Masters under that
agreement in either cash or Liberty Digital Series A common stock, at the
election of Liberty Digital. Liberty Media has no payment obligation to Mr.
Masters under the SAR Agreement. However, the SAR Agreement provides that
Liberty Media is entitled to direct Liberty Digital to satisfy payment
obligations to Mr. Masters under the SAR Agreement in cash rather than Liberty
Digital Series A common stock. If Liberty Media exercises such right, then it
must purchase from Liberty Digital the number of shares of Liberty Digital
Series B common stock equal to the number of shares of Liberty Digital Series A
common stock that otherwise would have been issued to Mr. Masters as payment
under the SAR Agreement, not to exceed 19,305,193 shares.
In January 2000, Mr. Masters exercised rights under the SAR Agreement with
respect to 3,046,188 shares of Liberty Digital Series A common stock. Due to the
adverse impact payment of this obligation would have on Liberty Digital, the
parties agreed that this obligation of Liberty Digital would be satisfied by
Liberty Media causing to be issued to Mr. Masters 5,779,982 shares of AT&T's
Class A Liberty Media Group common stock and making a cash payment to him in the
amount of $50 million. Payment of this liability by Liberty Media was made in
the first quarter of 2001 and recorded at that time as a capital contribution by
Liberty Media to Liberty Digital.
MONETIZATION OF CERTAIN INVESTMENTS
On September 29, 2000, Liberty Digital monetized two of its investments by
borrowing against them an aggregate of $188.5 million from Liberty Media. The
first loan, evidenced by a note due September 28, 2010, in the original
principal amount of $123.9 million, is secured by Liberty Digital's 99%
preferred interest in Priceline LLC, which owns 3,125,000 shares of
priceline.com, Incorporated ("Priceline"). The second loan, evidenced by a note
due September 28, 2008, in the original principal amount of $64.6 million, is
secured by Liberty Digital's 99% preferred interest in iBeam LLC, which owns
362,368 shares of iBeam Broadcasting Corporation ("iBeam) and by a put and call
option with respect to such preferred interest entered into with an affiliate of
Liberty Media (See "-- Liberty Digital iBeam Investment," below.) Both notes
bear interest at 9% per year compounded annually. The only obligors on the notes
are the subsidiaries of Liberty Digital that hold the respective preferred
interests in Priceline LLC and iBeam LLC, making the notes essentially
non-recourse to Liberty Digital. The accrued interest and principal on the notes
are payable at maturity, or upon any earlier sale or disposition of the
collateral under the notes. At September 30, 2001 and December 31, 2000, accrued
interest on these notes aggregated $17.0 million and $4.4 million, respectively.
LIBERTY DIGITAL IBEAM INVESTMENT
On September 29, 2000, Liberty Digital transferred a 1% managing common
interest in iBeam LLC to Liberty Satellite, LLC ("LSAT"), an affiliate of
Liberty Media, for $652,000. Liberty Digital retained a 99% preferred interest
in iBeam LLC. Liberty Digital also entered into a put and call option
transaction with LSAT with respect to Liberty Digital's 99% interest in iBeam
LLC. LSAT granted Liberty Digital the right to put Liberty Digital's 99%
interest in iBeam LLC to LSAT for a purchase price of $26 million, the value of
the iBeam shares at September 29, 2000, plus 9% per year compounded annually.
LSAT has the right to call Liberty Digital's 99% preferred interest in iBeam LLC
at a price equal to the initial liquidation value of such preferred interest,
which is approximately $64.6 million plus 9% per year compounded annually. Both
the put and call options are exercisable in September 2008. Liberty Digital's
99% preferred interest in iBeam LLC and its rights under the put and call option
were contemporaneously pledged to Liberty Media as security for Liberty Media's
$64.6 million loan to the Liberty Digital subsidiary that holds such preferred
interest and option. See "-- Monetization of Certain Investments," above.
Liberty Digital recorded the put and call option as additional paid-in
capital in the amount of $7.4 million. At December 31, 2000, Liberty Digital had
marked to market the value of the iBeam LLC investment and related put and call
option and recorded a gain of $19.4 million as other income. At September 30,
2001, Liberty Digital wrote down its iBeam investment in the amount of $2.9
million and
27
recorded the call and put option at fair market value, reflecting an aggregate
gain on the investment of $23.3 million since inception.
EXCHANGE OF LIBERTY DIGITAL SERIES B CONVERTIBLE PREFERRED STOCK
On September 29, 2000, Liberty Media exchanged 150,000 shares of Liberty
Digital Series B convertible preferred stock, including any rights to accrued
dividends on such shares, for 150,000 shares of Liberty Digital Series C
convertible preferred stock and 8,106 shares of Liberty Digital Series D
preferred stock. As a result of such exchange, no shares of Liberty Digital
Series B convertible preferred stock are outstanding. The terms of the Liberty
Digital Series C convertible preferred stock are substantially the same as the
Liberty Digital Series B convertible preferred stock, except that dividends on
the Liberty Digital Series B convertible preferred stock were payable only in
cash, while dividends on the Liberty Digital Series C convertible preferred
stock are payable in cash or shares of Liberty Digital Series D preferred stock.
Liberty Digital Series C convertible preferred stock is convertible into
Liberty Digital Series B common stock at an initial conversion price of $5.825
per share. The annual dividend rate of Series C convertible preferred stock is
generally 5%, but 7% in the event of a default. The Series C convertible
preferred stock is redeemable at the option of Liberty Digital after June 30,
2006. On or after such date, a holder of shares of Series C convertible
preferred stock may require Liberty Digital to redeem such shares.
Liberty Digital Series D preferred stock is not convertible into common
stock and bears annual dividends at the rate of 12% of its liquidation value,
payable quarterly in cash or additional shares of Liberty Digital Series D
preferred stock. The Series D preferred stock is redeemable at the option of
Liberty Digital after June 30, 2006. On or after such date, a holder of shares
of Series D preferred stock may require Liberty Digital to redeem such shares.
At December 31, 2001, a total of 19,351 shares of Liberty Digital Series D
preferred stock, including the 8,106 shares initially issued as dividends on the
Liberty Digital Series B convertible preferred stock, had been issued as
dividends.
GAME SHOW NETWORK
On February 23, 2001, as part of the purchase price of Liberty Digital's
acquisition of a 50% interest in GSN, a subsidiary of Liberty Digital, LDIG
GameNet, Inc. ("GameNet") and Liberty Media delivered a note payable to SPE, due
February 22, 2002, in the original principal amount of $100 million. Interest on
the note to its maturity was prepaid by GameNet at an annual rate of 5.8%, by
delivering shares of Liberty Digital Series A common stock to SPE.
As consideration to Liberty Media for becoming an obligor on the $100
million note, Liberty Digital transferred to Liberty Media 888,517 shares of the
common stock of Internet Pictures Corporation, one of Liberty Digital's
portfolio investments. Liberty Media, Liberty Digital and GameNet entered an
agreement which provides, among other things, that to the extent Liberty Media
is required to pay any amount under the note, GameNet will be required to
transfer a portion of its interest in GSN to Liberty Media in consideration of
Liberty Media making such payment. The GSN interest to be transferred to Liberty
Media in such event would be equal to the greater of:
- the percentage equivalent of $100 million divided by the product of (A)
the sum of $275 million and the aggregate amount of cash capital
contributions made by GameNet to GSN after February 21, 2001 and (B) two;
or
- the percentage equivalent of $110 million divided by the fair market
value of GSN at such time, determined through negotiations between
Liberty Media and GameNet, or if they cannot agree, then by an investment
banking or valuation firm selected by Liberty Media.
GameNet and Liberty Media also entered into a security agreement securing
GameNet's obligations under the note by a security interest in the GSN interest
held by GameNet.
28
Liberty Digital also borrowed $12.5 million from Liberty Media, at an
annual interest rate of 10%, to finance a portion of the purchase price of its
50% ownership interest in GSN. This note was paid in full on June 14, 2001.
Total interest paid on this note was $404,000, and is reflected in Liberty
Digital's financial statements for the nine months ended September 30, 2001.
INTERCOMPANY SERVICES
Prior to the merger of TCI with AT&T, TCI provided services to Liberty
Digital for administration and operation of its businesses as requested by
Liberty Digital. These services included financial reporting, payroll
processing, employee benefit and workers' compensation administration, insurance
coverage and other services. This arrangement was assigned to Liberty Media
after the merger of TCI with AT&T and has been modified over time with respect
to the operations of Liberty Digital. There is no written agreement between the
companies related to the current service arrangement; services provided to
Liberty Digital under this arrangement are recorded as a current, non-interest
bearing liability of Liberty Digital, payable on demand by Liberty Media.
Aggregate allocations for such services were $0 and $225,000 during the year
ended December 31, 2000 and the nine months ending September 30, 2001,
respectively. At September 30, 2001, Liberty Digital's liability to Liberty
Media under this arrangement was $1.7 million.
Liberty Digital also leases office space, uplinking and satellite services
from the National Digital Television Center, a subsidiary of AT&T, at an annual
cost of approximately $4,178,000 for the year ended December 31, 2001.
PAYMENT OF LIBERTY DIGITAL LOAN BY LIBERTY MEDIA
On January 31, 2002, Liberty Digital repaid the outstanding balance of
approximately $54.1 million under a loan agreement between Liberty Digital and
several banks. Of that amount, approximately $53.9 million was the principal
amount owed and approximately $200,000 was interest owed. Liberty Digital
entered into the agreement on December 30, 1997. The agreement allowed Liberty
Digital to borrow up to $100 million with annual interest tied to London
Interbank Offered Rate ("LIBOR") plus an applicable margin based on an asset
coverage test and providing for an annual rate equal to LIBOR plus 2.50%.
Liberty Digital borrowed the funds used to make this repayment from Liberty
Media. This loan accrues interest at an annual rate of 9.0%.
29
THE MERGER
GENERAL
Liberty Media is furnishing this notice/prospectus to you in connection
with the intended merger of Merger Sub, a newly formed subsidiary of Liberty
Media, with and into Liberty Digital, also a subsidiary of Liberty Media.
Liberty Digital has not reviewed or approved this notice/prospectus. The purpose
of this notice/prospectus is to inform you of the merger. Your vote is not
required for the merger.
In the merger, each outstanding share of Liberty Digital Series A common
stock will be converted into 0.25 shares of Liberty Media Series A common stock.
If the number of shares of Liberty Media Series A common stock that you would
receive in the merger includes a fraction of a share of Liberty Media Series A
common stock, Liberty Media will instead pay you an equivalent cash amount, as
described below, rather than give you a fractional share of Liberty Media Series
A common stock.
At a meeting held on October 11, 2001, the board of directors of Liberty
Media resolved to acquire, by merger, the publicly held minority interest in
Liberty Digital. Liberty Media intends to acquire this minority interest by
merging Merger Sub with and into Liberty Digital, with Liberty Digital
continuing as the surviving entity after the merger. Merger Sub was formed as a
wholly owned indirect subsidiary of Liberty Media on February 1, 2002, for the
purpose of effecting the merger with Liberty Digital. The board of directors of
Merger Sub approved the merger on February 1, 2002. Prior to the effective time
of the merger the sole stockholders of Merger Sub will be Liberty DMX, Inc. and
LMC Music, Inc., both of which are wholly owned subsidiaries of Liberty Media.
The stockholders of Merger Sub will consent to the merger prior to the effective
time of the merger.
As of February 11, 2002, Liberty Media beneficially owned more than 90% of
the outstanding equity securities of Liberty Digital and more than 99% of the
voting power of Liberty Digital in the form of voting common stock and preferred
stock convertible into common stock. Prior to the effective time of the merger,
Liberty Media will cause the Liberty Digital convertible preferred stock
beneficially owned by it to be converted into shares of Liberty Digital common
stock, and will cause such shares to be held of record by Merger Sub, so that
Merger Sub will be the direct owner of more than 90% of the Liberty Digital
common stock outstanding. The board of directors of each of Liberty Media and
Merger Sub has resolved that the merger will be effective upon the filing of a
certificate of ownership and merger in Delaware, which is expected to occur on
the 20th business day following the mailing of this notice/prospectus. Because
Merger Sub will own directly of record at least 90% of the common stock of
Liberty Digital outstanding at the time of the merger, the resolution of the
Merger Sub board of directors and the consent of all its stockholders will be
sufficient to authorize the merger under Delaware law and the certificate of
incorporation and bylaws of Liberty Digital, and no vote of Liberty Digital's
stockholders will be required.
This notice/prospectus also constitutes a prospectus of Liberty Media,
which forms a part of the registration statement on Form S-4 filed by Liberty
Media with the SEC under the Securities Act in order to register the shares of
Liberty Media Series A common stock to be issued to Liberty Digital's
stockholders in the merger. The total number of shares of Liberty Media Series A
common stock to be issued in the merger, based on the number of shares of
Liberty Digital Series A common stock outstanding on February 11, 2002, is
approximately 5.3 million. Up to 800,000 additional shares of Liberty Media
Series A common stock included in such registration statement will be reserved
for issuance upon the exercise of options and stock appreciation rights for
Liberty Digital common stock outstanding on the effective date of the merger or
upon the conversion in the merger of any shares of Liberty Digital common stock
issued upon any exercise of such outstanding options or rights prior to the
effective date of the merger.
BACKGROUND OF THE MERGER
At a meeting held on October 11, 2001, the board of directors of Liberty
Media approved the acquisition of the minority interest in Liberty Digital by a
merger of Liberty Digital with a subsidiary of Liberty Media. On October 12,
2001, Liberty Media notified Liberty Digital of the proposed merger and
30
issued a press release describing the proposed merger. On February 1, 2002,
Liberty Media formed Merger Sub as a wholly owned, indirect subsidiary for the
purpose of effecting the merger with Liberty Digital. On February 1, 2002, the
board of directors of Merger Sub approved the merger of Merger Sub with and into
Liberty Digital on the same terms proposed by the board of directors of Liberty
Media. Prior to the effective time of the merger, the only stockholders of
Merger Sub will be two wholly owned subsidiaries of Liberty Media, and they will
approve the merger on the same terms approved by the board of directors of
Merger Sub.
REASONS FOR AND PURPOSE OF THE MERGER
The purpose of the merger is to acquire the publicly held minority interest
in Liberty Digital. In deciding to undertake the merger, which will result in
Liberty Digital ceasing to be a public majority-owned subsidiary, Liberty Media
considered the following factors, among others:
- Liberty Digital's lack of internal capital resources to develop its
business;
- recent capital market trends, which have adversely affected the ability
of small companies and companies with more speculative credit risk to
access capital;
- the latest trends in Liberty Digital's markets, primarily the slower than
anticipated development of interactive television and the slow-down in
growth of new media industries;
- the trading price volatility of the Liberty Digital common stock caused,
in part, by its limited public float;
- Liberty Digital's outstanding debt and greater cost of borrowing as
compared to Liberty Media's;
- Liberty Digital's anticipated capital requirements, including, among
others, payment of a $100 million note to SPE due in February 2002;
- the impact on Liberty Media's own common stock of the issuance of Liberty
Media shares to Liberty Digital's stockholders; and
- the costs associated with operating Liberty Digital as a separate public
company, including elimination of duplicative corporate functions and
elimination of fees associated with SEC reporting and related legal and
accounting fees, which Liberty Media anticipates could result in savings
of approximately $9 million per year.
CONFLICT OF INTEREST OF LIBERTY MEDIA
In setting the exchange ratio, Liberty Media's financial interest was
adverse to the interests of the public stockholders of Liberty Digital. Liberty
Media determined the exchange ratio without negotiating with Liberty Digital and
makes no representation or warranty in this notice/prospectus as to the fairness
or adequacy of the consideration to be paid in the merger. Under Delaware law,
which governs the merger, you have the right to seek appraisal of your Liberty
Digital shares as provided for under such law. Please see "The
Merger -- Appraisal Rights" on page 36 for a description of the appraisal
process.
INTERESTS OF DIRECTORS AND OFFICERS
Certain directors and officers of each of Liberty Media, Merger Sub and
Liberty Digital have one or more of the following interests that may be deemed
to be different from, or in addition to, the interests of Liberty Digital
stockholders generally. In the case of directors of Liberty Media and Merger
Sub, these interests presented actual or potential conflicts of interest in
determining the exchange ratio and the other terms of the merger:
- ownership of shares of Liberty Media common stock;
- ownership of options, warrants or other securities exercisable for or
convertible into shares of Liberty Media common stock;
31
- in some cases, severance payments in connection with the merger;
- in some cases, accelerated vesting of stock options and stock
appreciation rights with respect to Liberty Digital Series A common
stock; and
- indemnification arrangements between Liberty Digital and its directors
and officers.
Officers and directors of Liberty Media, Merger Sub and/or Liberty Digital
who own shares of Liberty Digital Series A common stock at the effective time of
the merger will receive shares of Liberty Media Series A common stock on the
same terms as the Liberty Digital public stockholders. Officers and directors of
Liberty Media, Merger Sub and/or Liberty Digital who own options or stock
appreciation rights with respect to shares of Liberty Digital Series A common
stock at the effective time of the merger will have such interests assumed by
Liberty Media on the same basis as any other outstanding stock options and stock
appreciation rights for Liberty Digital Series A common stock. Assumed stock
options and stock appreciation rights will be exercisable with respect to the
number of shares of Liberty Media Series A common stock determined by
multiplying the number of underlying shares of Liberty Digital Series A common
stock by the exchange ratio of 0.25.
The following directors and executive officers of Liberty Digital are
directors or officers of Liberty Media, Merger Sub and/or other affiliates of
Liberty Media, as set forth in the following table. Consequently, these
directors and officers receive or have received compensation not only from
Liberty Digital but also from Liberty Media and/or its other affiliates.
NAME AFFILIATED ENTITY POSITION(S) HELD
---- ----------------- ----------------
Robert R. Bennett......................... Liberty Media President, Chief
Executive Officer
and Director
Liberty Livewire Corporation Director
Liberty Satellite & Technology, Inc. Director
Merger Sub Director
Gary S. Howard............................ Liberty Media Executive Vice
President, Chief
Operating Officer,
Director
Liberty Livewire Corporation Director
Liberty Satellite & Technology, Inc. Chairman of the Board
On Command Corporation Chairman of the Board
Merger Sub Director
David B. Koff............................. Liberty Media Senior Vice President
Merger Sub Director
Elizabeth M. Markowski.................... Liberty Media Senior Vice President
J. David Wargo............................ On Command Corporation Director
Peter M. Kern............................. On Command Corporation Director
COMPENSATION ARRANGEMENTS WITH MANAGEMENT OF LIBERTY DIGITAL
Lee Masters. Liberty Digital's Chief Executive Officer, Lee Masters,
receives annual compensation under the terms of his employment agreement with
Liberty Digital and is the sole participant in the SAR Plan. Mr. Masters'
employment with Liberty Digital will terminate in connection with the proposed
merger. As a result, Mr. Masters will be entitled to payment of salary for the
remaining term of his employment agreement, and payment of deferred compensation
and stock appreciation rights under his SAR Agreement. Mr. Masters' rights under
his SAR Agreement are payable in cash or in shares of Liberty Digital Series A
common stock, and such rights will become fully vested in connection with his
termination of employment with Liberty Digital as a result of the merger. Mr.
Masters' rights under his
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SAR Agreement will be deemed exercised on the valuation date, which is the last
day of the fiscal quarter prior to the date Mr. Masters' employment with Liberty
Digital is terminated.
In July 1999, Mr. Masters was granted deferred compensation and stock
appreciation rights with respect to 15,230,942 shares of Liberty Digital Series
A common stock under the SAR Plan. His SAR Agreement provides for two types of
awards. The first award is in the form of deferred compensation payable only
upon termination of Mr. Masters' employment, and only if the price per share of
Liberty Digital Series A common stock on the valuation date is equal to, or
greater than, the sum of $2.46 plus 10% annual interest from January 1, 1999.
The aggregate amount of deferred compensation will be equal to 9.5% of the
appreciation in the Liberty Digital Series A common stock market price over
$2.46, provided that if the market price of the Liberty Digital Series A common
stock is greater than $19.125, such appreciation shall be capped at the
difference between $2.46 and $19.125 per share. The second award is in the form
of stock appreciation rights for any appreciation in the Liberty Digital Series
A common stock market price over $19.125 per share. The second award is
exercisable by Mr. Masters as vested over time and as to all or part of the
underlying shares of Liberty Digital Series A common stock. Both types of awards
vest as to 20% on December 15, 1999; 20% on December 15, 2000; 30% on December
15, 2001 and 30% on December 15, 2002. However, termination of Mr. Masters'
employment in connection with the merger will result in all of his rights under
the SAR Agreement becoming fully vested and exercisable.
On January 5, 2000, Mr. Masters exercised stock appreciation rights under
his SAR Agreement with respect to 3,046,188 shares of Liberty Digital Series A
common stock. The payment obligation upon exercise was satisfied during the
first quarter of 2001 by a cash payment by Liberty Media of $50 million and by
the issuance of 5,779,982 shares of AT&T's Class A Liberty Media Group common
stock.
Mark Rozells. In connection with the merger, Liberty Digital has entered
into a severance and release agreement with its Executive Vice President and
Chief Financial Officer, Mark D. Rozells. The agreement provides for Mr. Rozells
to continue to be employed by Liberty Digital until June 30, 2002 or the date of
the consummation of the merger. In addition, following termination of Mr.
Rozells' employment and upon receipt by Liberty Digital of an executed release
agreement, Liberty Digital will pay Mr. Rozells an amount equal to twelve
months' salary, payable at the election of Liberty Digital either in a lump sum
within ten business days after receipt of the executed release agreement or over
a twelve-month period. Liberty Digital is obligated to continue the severance
payments in the event of Mr. Rozells' death on or after the termination date.
STRUCTURE OF THE MERGER; MERGER CONSIDERATION
Merger Consideration. At the effective time of the merger, each holder of
shares of Liberty Digital Series A common stock who has not properly exercised
appraisal rights will be entitled to receive 0.25 of a share of Liberty Media
Series A common stock for each share of Liberty Digital Series A common stock
held immediately prior to the merger. The number of shares of Liberty Media
Series A common stock stockholders receive in the merger will be appropriately
adjusted for any stock splits, combinations and other similar events that occur
between the date of the resolution of the Liberty Media board of directors
authorizing the merger and the effective date of the merger. We will not issue
fractional shares of Liberty Media Series A common stock in the merger. Instead,
each Liberty Digital stockholder otherwise entitled to a fractional share will
receive cash, without interest, in lieu of such fraction of a share of Liberty
Media Series A common stock. Specifically, as soon as practicable after the
effective date of the merger, the exchange agent for the merger will determine
the aggregate number of fractional shares that would otherwise be issuable in
the merger. The exchange agent will then sell such shares at prevailing prices
on the New York Stock Exchange and pay to each Liberty Digital stockholder
otherwise entitled to a fractional share an amount equal to such stockholder's
proportionate interest in the net proceeds of those sales. Sales of shares of
Liberty Media Series A common stock by the exchange agent will be executed by
one or more member firms of the New York Stock Exchange and will be executed in
round lots to the extent practicable. All commissions, transfer taxes and other
out-of-pocket transaction costs, including the
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expenses and compensation of the exchange agent, will be deducted from the
proceeds distributable to those holders of Liberty Digital Series A common stock
otherwise entitled to a fractional share interest.
Effective Time of the Merger. The merger will become effective when a
certificate of ownership and merger is filed with the Delaware Secretary of
State or at a later time as may be specified in the certificate of ownership and
merger. The effective time of the merger will occur as soon as practicable after
the last of the conditions described under "-- Conditions to the Merger" below,
has been satisfied or waived by Liberty Media. We expect the merger to become
effective on the 20th business day following the mailing of this
notice/prospectus. However, because the merger is subject to certain conditions,
the merger may occur on any date thereafter, or not at all. LIBERTY MEDIA MAY
ALSO WITHDRAW THE MERGER IF IT SHOULD DETERMINE THAT THE MERGER IS NO LONGER IN
THE BEST INTERESTS OF LIBERTY MEDIA.
Conditions to the Merger. The following conditions must be satisfied
before the merger is completed:
- Merger Sub must own directly of record at least 90% of the common stock
of Liberty Digital outstanding at the time of filing the certificate of
ownership and merger in Delaware;
- Liberty Media's registration statement relating to the merger must be
effective and must not be subject to any stop order or proceedings
seeking a stop order;
- the shares of Liberty Media Series A common stock that will be issued in
the merger must be authorized for listing on the New York Stock Exchange,
subject only to official notice of issuance; and
- there shall not have been any unfavorable change in applicable tax laws
and regulations, or in the published interpretations thereof, that
prevents Liberty Media from being able to rely on the tax opinion
described below.
TREATMENT OF LIBERTY DIGITAL STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
Liberty Media will assume outstanding stock options and stock appreciation
rights issued under the 1997 Plan and other stock options and stock appreciation
rights not issued under the 1997 Plan, with respect to Liberty Digital Series A
common stock on the effective date of the merger. Assumed stock options and
stock appreciation rights will be exercisable with respect to the number of
shares of Liberty Media Series A common stock determined by multiplying the
number of underlying shares of Liberty Digital Series A common stock on the
effective date of the merger by the 0.25 exchange ratio, rounded up to the
nearest whole share. The exercise price per share of Liberty Media Series A
common stock issuable under each assumed stock option will be calculated by
dividing the exercise price of such option before the merger by the 0.25
exchange ratio, rounded down to the nearest whole cent.
ACCOUNTING TREATMENT
The merger will be accounted as a "purchase" of a minority interest, as
such term is used under generally accepted accounting principles, for accounting
and financial reporting purposes. Accordingly, the consideration paid for the
acquired Liberty Digital shares will be allocated to the assets and liabilities
of Liberty Digital based on their respective fair values.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material U.S. federal income tax
consequences of the merger that are applicable to holders of Liberty Digital
Series A common stock. It is not a complete analysis of all potential tax
effects relevant to the merger. This discussion assumes that you hold your
shares of Liberty Digital Series A common stock as capital assets within the
meaning of Section 1221 of the Internal Revenue Code.
This discussion does not address the tax consequences that may be relevant
to a particular Liberty Digital stockholder subject to special treatment under
U.S. federal income tax laws, such as dealers in securities, banks, insurance
companies, tax-exempt organizations, non-U.S. persons, stockholders who
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acquired their shares of Liberty Digital Series A common stock pursuant to the
exercise of options or otherwise as compensation, or stockholders who hold their
stock as part of a hedge, constructive sale, wash sale, straddle or conversion
transaction, nor does the discussion address any consequences arising under the
laws of any state, local or foreign jurisdiction. Moreover, the tax consequences
to holders of Liberty Digital options and warrants are not discussed. The
discussion is based on and subject to the Internal Revenue Code of 1986, as
amended, Treasury regulations thereunder, and administrative rulings and court
decisions as of the date hereof. All of the foregoing are subject to change,
which may be retroactive, and any such change could affect the continuing
validity of this discussion. We urge you to consult your own tax advisors
concerning the U.S. federal, state and local and foreign tax consequences of the
merger to you.
TAX OPINION
Liberty Media has received an opinion from Baker Botts L.L.P. that the
merger will qualify for U.S. federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code.
Opinions of counsel are not binding on the Internal Revenue Service or the
courts. Certain of the conclusions expressed by counsel in their opinion are
based upon their view that for U.S. federal income tax purposes, Merger Sub will
be disregarded, and the transaction will be treated as an acquisition of shares
of Liberty Digital Series A common stock by Liberty DMX, Inc., a subsidiary of
Liberty Media ("Liberty DMX") for shares of Liberty Media Series A common stock
that Liberty DMX received from Liberty Media. There is no assurance that the IRS
will not successfully challenge the conclusions expressed in such opinion. The
opinion is subject to the assumptions, limitations, and qualifications set forth
above, and to the further assumption that the shares of Liberty Digital Series A
common stock held by the Liberty Digital public stockholders, other than any
shares of Liberty Digital Series A common stock acquired by Liberty Digital in
connection with the merger out of its own funds, will be acquired by Liberty DMX
solely for shares of Liberty Media Series A common stock. Further, the opinion
is based upon factual representations made by Liberty Digital, Liberty DMX,
Liberty Media and certain of Liberty Media's subsidiaries. Any inaccuracy or
change in the assumptions or representations could adversely affect the
conclusions reached in the opinion and the tax discussion below.
TAX CONSEQUENCES TO LIBERTY DIGITAL STOCKHOLDERS
Assuming that the merger qualifies as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code, and subject to the
qualifications set forth above, it is the opinion of Baker Botts L.L.P. that:
- No gain or loss will be recognized by Liberty Digital as a result of the
merger;
- No gain or loss will be recognized by Liberty Digital stockholders as a
result of the merger with respect to shares of Liberty Digital Series A
common stock converted solely into Liberty Media Series A common stock;
- The aggregate tax basis of the Liberty Media Series A common stock
received by Liberty Digital stockholders in the merger will be the same
as the aggregate tax basis of the Liberty Digital Series A common stock
surrendered in exchange therefor, excluding any basis allocable to a
fractional share of Liberty Media Series A common stock for which cash is
received; and
- The holding period of the shares of Liberty Media Series A common stock
received by Liberty Digital stockholders in the merger will include the
period during which the shares of Liberty Digital Series A common stock
surrendered in exchange therefor were held, provided that such shares of
Liberty Digital Series A common stock were held as capital assets at the
effective time.
A holder of shares of Liberty Digital Series A common stock who receives
cash in the merger in lieu of a fractional share interest in Liberty Media
Series A common stock will recognize capital gain or loss on the sale of such
fractional interest by the exchange agent on such holder's behalf. Such gain or
loss will be measured by the difference between the amount of cash received and
the tax basis of the shares of
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Liberty Digital Series A common stock allocable to such fractional share
interest. In the case of an individual holder of shares of Liberty Digital
Series A common stock, any such capital gain will generally be subject to a
maximum U.S. federal income tax rate of 20% if the shareholder's holding period
in such shares was more than one year at the effective time.
THE FOREGOING IS A GENERAL DISCUSSION OF THE MATERIAL UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE MERGER AND IS INCLUDED FOR GENERAL INFORMATION
ONLY. THE FOREGOING DISCUSSION DOES NOT TAKE INTO ACCOUNT THE PARTICULAR FACTS
AND CIRCUMSTANCES OF YOUR STATUS AND ATTRIBUTES. AS A RESULT, THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES ADDRESSED IN THE FOREGOING DISCUSSION MAY NOT
APPLY TO YOU. IN VIEW OF THE INDIVIDUAL NATURE OF INCOME TAX CONSEQUENCES, YOU
ARE URGED TO CONSULT YOUR OWN TAX ADVISOR TO DETERMINE THE SPECIFIC TAX
CONSEQUENCES OF THE MERGER TO YOU, INCLUDING THE APPLICATION AND EFFECT OF
UNITED STATES FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS
OF CHANGES IN UNITED STATES FEDERAL AND OTHER TAX LAWS.
REGULATORY MATTERS
The merger is not subject to the requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules promulgated under
that Act by the Federal Trade Commission, which prevent some transactions from
being completed until required information and materials are furnished to the
Antitrust Division of the U.S. Department of Justice and the U.S. Federal Trade
Commission and the waiting periods end or expire. We are not aware of any
material regulatory requirements applicable to the merger under any U.S. state
or federal law or regulation, other than any requirements under applicable
federal and state securities laws and regulations and Delaware corporate law.
RESTRICTIONS ON SALES OF SHARES BY AFFILIATES OF LIBERTY MEDIA
The shares of Liberty Media Series A common stock that will be issued in
the merger will be registered under the Securities Act and will be freely
transferable under the Securities Act, except for shares of Liberty Media Series
A common stock issued to any person who is deemed to be an "affiliate" of
Liberty Media. Liberty Media's registration statement, of which this
notice/prospectus forms a part, does not cover the resale of shares of Liberty
Media Series A common stock to be received by affiliates of Liberty Media in the
merger.
Persons who may be deemed to be affiliates include individuals or entities
that control, are controlled by or are under common control with, Liberty Media
and may include some of the officers, directors, and principal stockholders of
such entities. Any person deemed to be an affiliate of Liberty Media at the time
of the merger may not sell shares of Liberty Media Series A common stock
acquired in the merger except pursuant to an effective registration statement
under the Securities Act covering the resale of those shares or an applicable
exemption under the Securities Act.
LISTING ON THE NEW YORK STOCK EXCHANGE
Liberty Media will use reasonable efforts to cause the shares of Liberty
Media Series A common stock that will be issued in the merger to be authorized
for listing on the New York Stock Exchange, subject to official notice of
issuance, before completing the merger. The merger will not be completed before
the authorization is obtained.
APPRAISAL RIGHTS
If the merger is consummated, a holder of record of Liberty Digital common
stock on the date of making a demand for appraisal, as described below, will be
entitled to have the fair value of those shares appraised by the Delaware Court
of Chancery under Section 262 of the Delaware corporation statute and to receive
payment for the "fair value" of those shares instead of the merger
consideration. In order to be eligible to receive this payment, however, a
stockholder must (1) continue to hold such stockholder's shares through the time
of the merger and (2) strictly comply with the procedures described in Section
262.
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THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT
COMPLIANCE WITH THE PROCEDURES SET FORTH IN SECTION 262. FAILURE TO FOLLOW ANY
OF THESE PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF APPRAISAL RIGHTS
UNDER SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF
SECTION 262.
The following summary is not a complete statement of Section 262 of the
Delaware corporation statute, and is qualified in its entirety by reference to
Section 262, which is incorporated in this notice/prospectus by reference,
together with any amendments to the laws that may be adopted after the date of
this notice/prospectus. A copy of Section 262 is attached as Annex A to this
notice/prospectus.
Notice Requirements. Under Section 262, where a merger is accomplished
pursuant to Section 253 of the Delaware General Corporation Law, either before
or within ten days after the effective date of the merger, Liberty Digital, as
the surviving corporation, is required to notify each stockholder of Liberty
Digital entitled to appraisal rights of the merger and that appraisal rights are
available to the stockholder. Such notice must also include a copy of Section
262 and, if given on or after the effective date of the merger, specify the
effective date of the merger. THIS NOTICE/PROSPECTUS CONSTITUTES YOUR NOTICE OF
APPRAISAL RIGHTS AS REQUIRED UNDER SECTION 262. IT WAS MAILED TO THE
STOCKHOLDERS OF LIBERTY DIGITAL ON FEBRUARY 12, 2002.
Demand for Appraisal. In order to exercise appraisal rights, a stockholder
must, within twenty days after the date of mailing of this notice/prospectus,
which serves as notice, demand in writing from the surviving corporation,
Liberty Digital, an appraisal of such stockholder's shares of Liberty Digital
common stock. Such demand will be sufficient if it reasonably informs Liberty
Digital of the identity of the stockholder and that the stockholder intends to
demand an appraisal of the fair value of such stockholder's shares of Liberty
Digital common stock. Failure to make such demand on or before the expiration of
such twenty day period will foreclose a stockholder's rights to appraisal. All
demands should be delivered to Liberty Digital and addressed as follows: Liberty
Digital, Inc., c/o Liberty Media Corporation, 12300 Liberty Boulevard,
Englewood, Colorado 80112, Attention: Corporate Secretary.
Only a record holder of shares of Liberty Digital common stock on the date
of making a written demand for appraisal who continuously holds those shares
through the time of the merger is entitled to seek appraisal. Demand for
appraisal must be executed by or for the holder of record, fully and correctly,
as that holder's name appears on the holder's stock certificates representing
shares of Liberty Digital common stock. If Liberty Digital common stock is owned
of record in a fiduciary capacity by a trustee, guardian or custodian, the
demand should be made in that capacity. If Liberty Digital common stock is owned
of record by more than one person, as in a joint tenancy or tenancy in common,
the demand should be made by or for all owners of record.
An authorized agent, including an agent for one or more joint owners, may
execute the demand for appraisal for a holder of record; that agent, however,
must identify the record owner or owners and expressly disclose in the demand
that the agent is acting as agent for the record owner or owners of the shares.
If a stockholder holds shares of Liberty Digital common stock through a broker
who in turn holds the shares through a central securities depository nominee
such as Cede & Co., a demand for appraisal of such shares must be made by or on
behalf of the depository nominee and must identify the depository nominee as
record holder.
A record holder such as a broker, fiduciary, depository or other nominee
who holds shares of Liberty Digital common stock as a nominee for more than one
beneficial owner, some of whom desire to demand appraisal, may exercise
appraisal rights on behalf of those beneficial owners with respect to the shares
of Liberty Digital common stock held for those beneficial owners. In that case,
the written demand for appraisal should state the number of shares of Liberty
Digital common stock covered by it. Unless a demand for appraisal specifies a
number of shares, the demand will be presumed to cover all shares of Liberty
Digital common stock held in the name of the record owner.
BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF
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APPRAISAL RIGHTS WITHIN TWENTY DAYS AFTER THE MAILING DATE OF THIS
NOTICE/PROSPECTUS, WHICH CONSTITUTES YOUR STATUTORY NOTICE.
Filing of Petition. Within 120 days after the effective date of the
merger, any stockholder who has complied with the applicable provisions of
Section 262 will be entitled, upon written request, to receive from Liberty
Digital a statement setting forth the aggregate number of shares of common stock
with respect to which demands for appraisal were received by Liberty Digital and
the number of holders of such shares. Liberty Digital must mail this statement
within ten days after it receives the written request or within ten days after
the expiration of the period for the delivery of demands as described above,
whichever is later.
Within 120 days after the effective date of the merger, the surviving
corporation or any stockholder who has complied with the requirements of Section
262 may file a petition in the Delaware Court of Chancery demanding a
determination of the fair value of the shares of Liberty Digital common stock
held by all stockholders seeking appraisal. A dissenting stockholder must serve
a copy of the petition on Liberty Digital. If no petition is filed within the
120-day period, the rights of all dissenting stockholders to appraisal will
cease.
Stockholders seeking to exercise appraisal rights should not assume that
the surviving corporation will file a petition with respect to the appraisal of
the fair value of their shares or that the surviving corporation will initiate
any negotiations with respect to the fair value of those shares. The surviving
corporation is under no obligation to, and has no present intention to, take any
action in this regard. Accordingly, stockholders who wish to seek appraisal of
their shares should initiate all necessary action with respect to the perfection
of their appraisal rights within the time periods and in the manner prescribed
in Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE
STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
Hearing in Chancery Court. If a petition for an appraisal is filed in a
timely manner, at the hearing on the petition, the Delaware Court of Chancery
will determine which stockholders are entitled to appraisal rights and will
appraise the shares of Liberty Digital common stock owned by those stockholders.
The Delaware Court may require the stockholders who have demanded an appraisal
for their shares and who hold stock represented by certificates to submit their
stock certificates to the Register in Chancery for notation on such certificates
of the pendency of the appraisal proceedings; and if any stockholder fails to
comply with such direction, the Delaware Court may dismiss the proceedings as to
such stockholder. The court will determine the fair value of those shares,
taking into account all relevant circumstances, exclusive of any element of
value arising from the accomplishment or expectation of the merger, together
with a fair rate of interest, to be paid, if any, upon the fair value. The Court
of Chancery may determine the cost of the appraisal proceeding and assess it
against the parties as the court deems equitable.
Neither Liberty Media nor Liberty Digital makes any representation as to
the outcome of the appraisal of fair value as determined by the court and
stockholders should recognize that such an appraisal could result in a
determination of a value that is higher or lower than, or the same as, the
merger consideration. Liberty Media does not anticipate offering more than the
merger consideration to any stockholder exercising appraisal rights and reserves
the right to assert, in any appraisal proceeding, that, for purposes of Section
262, the "fair value" of a share of Liberty Digital Series A common stock is
less than the merger consideration.
Expenses. Each dissenting stockholder is responsible for his or her
attorneys' and expert witness expenses, although upon application of a
dissenting stockholder, the court may order that all or a portion of the
expenses incurred by any dissenting stockholder in connection with the appraisal
proceeding (including, without limitation, reasonable attorney's fees and the
fees and expenses of experts) be charged pro rata against the value of all
shares of Liberty Digital common stock entitled to appraisal. In the absence of
a court determination or assessment, each party bears its own expenses.
No Right to Vote or Receive Dividends. Any stockholder who has demanded
appraisal in compliance with Section 262 will not, after the merger, be entitled
to vote such stock for any purpose or receive
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payment of dividends or other distributions, if any, on Liberty Digital common
stock, except for dividends or distributions, if any, payable to stockholders of
record at a date prior to the merger.
Withdrawal. A stockholder may withdraw a demand for appraisal and accept
Liberty Media Series A common stock at any time within 60 days after the
effective date of the merger, or thereafter may withdraw a demand for appraisal
with the written approval of Liberty Digital. Notwithstanding the foregoing, if
an appraisal proceeding is properly instituted, it may not be dismissed as to
any stockholder without the approval of the Delaware Court of Chancery, and any
such approval may be conditioned on the Court of Chancery's deeming the terms to
be just. If, after the merger, a holder of Liberty Digital Series A common stock
who had demanded appraisal for his shares fails to perfect or loses his right to
appraisal, those shares will be treated as if they were converted into Liberty
Media Series A common stock at the time of the merger.
BECAUSE A STOCKHOLDER THAT FAILS TO COMPLY ENTIRELY WITH THE STRICT
REQUIREMENTS OF THE DELAWARE GENERAL CORPORATION LAW MAY LOSE SUCH STOCKHOLDER'S
RIGHT TO AN APPRAISAL, ANY LIBERTY DIGITAL STOCKHOLDER WHO IS CONSIDERING
EXERCISING APPRAISAL RIGHTS SHOULD PROMPTLY CONSULT A LEGAL ADVISOR.
DELISTING AND DEREGISTRATION OF LIBERTY DIGITAL COMMON STOCK AFTER THE MERGER
If the merger is completed, Liberty Digital Series A common stock will be
delisted from the Nasdaq National Market and deregistered under the Securities
Exchange Act.
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COMPARISON OF STOCKHOLDER RIGHTS
As a stockholder of Liberty Digital, your rights are governed by Liberty
Digital's certificate of incorporation and bylaws. After completion of the
merger, you will become a stockholder of Liberty Media. As a Liberty Media
stockholder, your rights will be governed by Liberty Media's certificate of
incorporation and bylaws. Liberty Digital and Liberty Media are each
incorporated under the laws of the State of Delaware and accordingly, your
rights as a stockholder will continue to be governed by the Delaware General
Corporation Law after completion of the merger.
This section of the notice/prospectus describes certain differences between
the rights of holders of Liberty Digital common stock and Liberty Media common
stock. This description is only a summary and may not contain all of the
information that is important to you. You should carefully read this entire
document and the other documents we refer to for a more complete understanding
of the differences between being a stockholder of Liberty Digital and being a
stockholder of Liberty Media.
COMMON STOCK
Liberty Digital and Liberty Media each has Series A common stock and Series
B common stock issued and outstanding. Liberty Digital has authorized
1,750,000,000 shares of common stock, and Liberty Media has authorized
4,400,000,000 shares of common stock. As of February 11, 2002, there were
approximately 205.2 million shares of Liberty Digital common stock outstanding,
of which approximately 33.2 million were Series A common stock, and
approximately 172 million were Series B common stock. All of the Series B common
stock is owned by a subsidiary of Liberty Media. As of February 11, 2002, there
was an aggregate of approximately 3.0 million shares of Liberty Digital Series A
common stock reserved for issuance upon exercise of stock options. As of
February 11, 2002, there were approximately 2,590 million shares of Liberty
Media common stock outstanding, of which approximately 2,378 million were Series
A common stock, and approximately 212 million were Series B common stock. As of
February 11, 2002, there was an aggregate of approximately 75 million shares of
Liberty Media Series A common stock reserved for issuance upon exercise of
options.
SERIES B CONVERSION
Each share of Series B common stock of each of Liberty Digital and Liberty
Media is convertible, at the option of the holder, into one share of Series A
common stock of Liberty Digital or Liberty Media, as applicable. The Series A
common stock of each of Liberty Digital and Liberty Media is not convertible.
PREFERRED STOCK
Liberty Digital has authorized 5,000,000 shares of preferred stock, of
which 169,315 shares were outstanding as of February 11, 2002. Of the preferred
shares outstanding, 150,000 are designated as Series C convertible preferred
stock and 19,315 shares are designated as Series D preferred stock. Liberty
Media has authorized 50,000,000 shares of preferred stock, none of which were
outstanding as of February 11, 2002.
VOTING RIGHTS
With respect to each of Liberty Digital and Liberty Media, the holders of
Series A common stock are entitled to one vote for each share held, and the
holders of Series B common stock are entitled to ten votes for each share held,
on all matters voted on by stockholders, including elections of directors.
Neither Liberty Digital nor Liberty Media provides for cumulative voting in the
election of directors in its respective charter.
LIQUIDATION AND DISSOLUTION
In the event of liquidation, dissolution or winding up of Liberty Digital
or Liberty Media, the holders of Series A common stock and Series B common stock
of each of Liberty Digital and Liberty Media will share equally, on a share for
share basis, in the assets remaining for distribution to the common stockholders
of the applicable corporation, after payment or provisions for payment of such
corporation's
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debts and liabilities and subject to prior payment in full of any preferential
amounts to which the holders of such corporation's preferred stock may be
entitled.
CLASSIFIED BOARD OF DIRECTORS
Delaware law provides that a corporation's board of directors may be
divided into various classes with staggered terms of office. The boards of
directors of each of Liberty Digital and Liberty Media are divided into three
classes, as nearly equal in size as possible, with one class elected annually.
The holders of a series of preferred stock of each of Liberty Digital and
Liberty Media may be entitled to elect additional directors, if the certificate
of designations, with respect to such series so provides. Currently, neither of
the two outstanding series of preferred stock of Liberty Digital provides for
directors to be elected by the holders of such series of preferred stock.
Directors of each of Liberty Digital and Liberty Media are elected for a term of
three years, subject to the election and qualification of the director's
successor and to the director's earlier death, resignation or removal.
NUMBER OF DIRECTORS
Liberty Digital's board of directors currently consists of seven directors.
The number of directors on Liberty Digital's board is determined by resolution
of the board, but cannot be less than three. Liberty Media's board of directors
currently consists of seven directors. The number of directors on Liberty
Media's board is determined by resolution of the board, but cannot be less than
three.
STOCKHOLDER ACTION BY WRITTEN CONSENT; SPECIAL MEETINGS
The certificate of incorporation of Liberty Media provides that, except as
otherwise provided in the terms of any series of preferred stock, any action
required to be taken or which may be taken at any annual meeting or special
meeting of stockholders may not be taken without a meeting and may not be
effected by any consent in writing by such holders. The certificate of
incorporation of Liberty Digital does not prohibit stockholder action by written
consent.
Except as otherwise required by law and subject to the rights of the
holders of any series of preferred stock, special meetings of stockholders of
each of Liberty Media and Liberty Digital for any purpose or purposes may be
called only by the Secretary (1) upon written request of holders of not less
than 66 2/3% of the total voting power of outstanding capital stock or (2) at
the request of at least 75% of the members of the board then in office. No
business other than that stated in the notice of special meeting shall be
transacted at any special meeting.
ACTIONS REQUIRING SUPERMAJORITY VOTE
The certificate of incorporation of each of Liberty Digital and Liberty
Media provides that, subject to the rights of the holders of any series of
preferred stock, the affirmative vote of the holders of at least 66 2/3% of the
voting power of outstanding capital stock, voting together as a single class, is
required for the following corporate actions:
- to adopt, amend or repeal any provision of the certificate of
incorporation or the addition or insertion of other provisions in the
certificate;
- to adopt, amend or repeal any provision of the bylaws;
- the merger or consolidation with any other corporation, unless (1) the
General Corporation Law of Delaware, as then in effect, does not require
stockholder consent or (2) at least 75% of the members of its board then
in office has approved;
- the sale, lease or exchange of all, or substantially all, of the assets
of the corporation; or
- the dissolution of the corporation.
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However, in the case of Liberty Media, the foregoing voting requirement
shall not apply to any of the foregoing corporate actions as to which either (1)
the General Corporation Law of Delaware, as then in effect, does not require the
consent of its stockholders or (2) at least 75% of the members of its board then
in office has approved. In the case of Liberty Digital, such voting requirement
does not apply only (1) with respect to amendment of the bylaws by the board
where the board of directors is otherwise authorized to effect such amendment or
(2) to a merger or consolidation as to which (a) the General Corporation Law of
Delaware, as then in effect, does not require the consent of its stockholders or
(b) at least 75% of the members of its board then in office has approved. The
result is that the board of directors of Liberty Media has broader authority to
approve certain corporate actions without stockholder approval as compared to
the board of directors of Liberty Digital.
EXPERTS
The consolidated balance sheets of Liberty Media Corporation and
subsidiaries ("New Liberty or Successor") as of December 31, 2000 and 1999, and
the related consolidated statements of operations and comprehensive earnings,
stockholder's equity, and cash flows for the year ended December 31, 2000 and
for the period from March 1, 1999 to December 31, 1999 (Successor periods) and
from January 1, 1999 to February 28, 1999 and for the year ended December 31,
1998 (Predecessor periods) have been incorporated by reference herein in
reliance upon the report, dated February 26, 2001, except as to notes 1 and 2,
which are as of May 7, 2001, of KPMG LLP, independent certified public
accountants, incorporated by reference herein, and upon the authority of said
firm as experts in accounting and auditing.
In addition the KPMG LLP report contains an explanatory paragraph that
states that effective March 9, 1999, AT&T Corp., the former parent company of
New Liberty, acquired Tele-Communications, Inc., the former parent company of
Old Liberty, in a business combination accounted for as a purchase. As a result
of the acquisition, the consolidated financial information for the periods after
the acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
The consolidated balance sheets of Liberty Digital, Inc. (formerly TCI
Music, Inc.) and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of operations and comprehensive earnings (loss),
stockholders' equity and cash flows for the year ended December 31, 2000, the
ten months ended December 31, 1999, the two months ended February 28, 1999 and
the year ended December 31, 1998, have been incorporated by reference herein in
reliance upon the report, dated February 13, 2001, of KPMG LLP, independent
certified public accountants, and upon the authority of said firm as experts in
accounting and auditing. Effective March 9, 1999, AT&T Corp. acquired Tele-
Communications, Inc., the former parent company of Liberty Digital, in a
business combination accounting for as a purchase. As a result of the
acquisition, the consolidated financial information for the periods, after the
acquisition is presented on a different cost basis than that for the periods
before the acquisition and, therefore, is not comparable.
LEGAL MATTERS
An opinion regarding the legality of the Liberty Media Series A common
stock to be issued in the merger is being provided by Baker Botts L.L.P.,
counsel to Liberty Media.
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ANNEX A
SECTION 262
OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
("APPRAISAL RIGHTS")
SECTION 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to section 251 (other than a merger effected pursuant to
section 251(g) of this title), section 252, section 254, section 257, section
258, section 263 or section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to section
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository
receipts in respect thereof) or depository receipts at the effective
date of the merger or consolidation will be either listed on a national
securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under section 253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the
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procedures of this section, including those set forth in subsections (d) and (e)
of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a
meeting of stockholders, the corporation, not less than 20 days prior to
the meeting, shall notify each of its stockholders who was such on the
record date for such meeting with respect to shares for which appraisal
rights are available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of the
constituent corporations, and shall include in such notice a copy of this
section. Each stockholder electing to demand the appraisal of such
stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of
such stockholder's shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such stockholder's
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must
do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or
resulting corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to section
228 or section 253 of this title, then, either a constituent corporation
before the effective date of the merger or consolidation, or the surviving
or resulting corporation within ten days thereafter, shall notify each of
the holders of any class or series of stock of such constituent corporation
who are entitled to appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section. Such notice may, and, if
given on or after the effective date of the merger or consolidation, shall,
also notify such stockholders of the effective date of the merger or
consolidation. Any stockholder entitled to appraisal rights may, within 20
days after the date of mailing of such notice, demand in writing from the
surviving or resulting corporation the appraisal of such holder's shares.
Such demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of such holder's shares. If such notice did not notify
stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders
of any class or series of stock of such constituent corporation that are
entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send
such a second notice to all such holders on or within 10 days after such
effective date; provided, however, that if such second notice is sent more
than 20 days following the sending of the first notice, such second notice
need only be sent to each stockholder who is entitled to appraisal rights
and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud, be
prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall be
not more than 10 days prior to the date the notice is given, provided, that
if the notice is given on or after the effective date of the merger or
consolidation, the record date shall be such effective date. If no record
date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the
day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
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(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the resulting corporation would have had to pay to borrow money
during the pendency of the proceeding. Upon application by the surviving or
resulting corporation or by any stockholder entitled to participate in the
appraisal proceeding, the Court may, in its discretion, permit discovery or
other pretrial proceedings and may proceed to trial upon the appraisal prior to
the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that he is not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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