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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-51990
LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 84-1288730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-5400
LIBERTY MEDIA HOLDING CORPORATION
(Former name)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act.
Large accelerated filer /X/ Accelerated filer / / Non-accelerated filer / /
Indicate by check mark whether the Registrant is a shell company as defined
in Rule 12b-2 of the Exchange Act. Yes / / No /X/
The number of outstanding shares of Liberty Media Corporation's common stock
as of July 31, 2006 was:
Liberty Capital Series A common stock 134,430,818 shares;
Liberty Capital Series B common stock 6,038,428 shares;
Liberty Interactive Series A common stock 642,915,105 shares; and
Liberty Interactive Series B common stock 30,188,821 shares.
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--------------------------------------------------------------------------------
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
AMOUNTS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,651 1,946
Trade and other receivables, net.......................... 1,030 1,106
Inventory, net............................................ 737 719
Program rights............................................ 550 599
Derivative instruments (note 10).......................... 198 661
Other current assets...................................... 141 129
-------- -------
Total current assets.................................... 5,307 5,160
-------- -------
Investments in available-for-sale securities and other cost
investments, including $1,476 million and $1,581 million
pledged as collateral for share borrowing arrangements
(note 8).................................................. 19,861 18,497
Long-term derivative instruments (note 10).................. 1,129 1,123
Investments in affiliates, accounted for using the equity
method.................................................... 1,672 1,908
Property and equipment, at cost............................. 1,866 1,726
Accumulated depreciation.................................... (644) (595)
-------- -------
1,222 1,131
-------- -------
Intangible assets not subject to amortization:
Goodwill (note 9)......................................... 7,437 6,953
Trademarks................................................ 2,406 2,385
-------- -------
9,843 9,338
-------- -------
Intangible assets subject to amortization, net.............. 4,037 4,028
Other assets, at cost, net of accumulated amortization...... 818 767
-------- -------
Total assets............................................ $ 43,889 41,952
======== =======
(continued)
I-1
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
AMOUNTS IN MILLIONS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 463 516
Accrued liabilities....................................... 1,138 1,150
Derivative instruments (note 10).......................... 1,490 1,939
Current portion of debt (note 11)......................... 1,382 1,379
Other current liabilities................................. 225 302
-------- -------
Total current liabilities............................... 4,698 5,286
-------- -------
Long-term debt (note 11).................................... 6,839 6,371
Long-term derivative instruments (note 10).................. 1,067 1,087
Deferred income tax liabilities............................. 9,481 8,728
Other liabilities........................................... 1,182 1,070
-------- -------
Total liabilities....................................... 23,267 22,542
-------- -------
Minority interests in equity of subsidiaries................ 384 290
Stockholders' equity (note 12):
Preferred stock, $.01 par value. Authorized 50,000,000
shares; no shares issued................................ -- --
Liberty Capital Series A common stock, $.01 par value.
Authorized 400,000,000 shares; issued and outstanding
134,430,973 shares at June 30, 2006..................... 1 --
Liberty Capital Series B common stock, $.01 par value.
Authorized 25,000,000 shares; issued and outstanding
6,038,428 shares at June 30, 2006....................... -- --
Liberty Interactive Series A common stock, $.01 par value.
Authorized 2,000,000,000 shares; issued and outstanding
653,491,662 shares at June 30, 2006..................... 7 --
Liberty Interactive Series B common stock, $.01 par value.
Authorized 125,000,000 shares; issued and outstanding
30,188,821 shares at June 30, 2006...................... -- --
Series A common stock, $.01 par value. Issued and
outstanding 2,681,745,985 shares at December 31, 2005... -- 27
Series B common stock, $.01 par value. Issued 131,062,825
shares at December 31, 2005............................. -- 1
Additional paid-in-capital................................ 28,669 29,074
Accumulated other comprehensive earnings, net of taxes.... 4,387 3,421
Accumulated deficit....................................... (12,826) (13,278)
-------- -------
20,238 19,245
Series B common stock held in treasury, at cost
(10,000,000 shares at December 31, 2005)................ -- (125)
-------- -------
Total stockholders' equity.............................. 20,238 19,120
-------- -------
Commitments and contingencies (note 13)
Total liabilities and stockholders' equity.............. $ 43,889 41,952
======== =======
See accompanying notes to condensed consolidated financial statements.
I-2
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
Revenue:
Net sales from electronic retailing....................... $1,715 1,479 3,323 2,943
Communications and programming services................... 392 360 767 717
------ ----- ----- -----
2,107 1,839 4,090 3,660
------ ----- ----- -----
Operating costs and expenses:
Cost of sales--electronic retailing services.............. 1,054 922 2,054 1,836
Operating................................................. 416 382 814 756
Selling, general and administrative, including stock-based
compensation (note 4)................................... 221 186 429 355
Depreciation and amortization............................. 169 161 333 324
------ ----- ----- -----
1,860 1,651 3,630 3,271
------ ----- ----- -----
Operating income........................................ 247 188 460 389
Other income (expense):
Interest expense.......................................... (160) (146) (308) (295)
Dividend and interest income.............................. 40 23 97 65
Share of earnings of affiliates, net...................... 21 6 29 11
Realized and unrealized gains (losses) on financial
instruments, net (note 10).............................. 362 (288) 169 480
Gains (losses) on dispositions of assets, net............. 303 17 327 (361)
Other, net................................................ 9 (24) 13 (30)
------ ----- ----- -----
575 (412) 327 (130)
------ ----- ----- -----
Earnings (loss) from continuing operations before income
taxes and minority interests.......................... 822 (224) 787 259
Income tax benefit (expense)................................ (338) 102 (236) (123)
Minority interests in earnings of subsidiaries.............. (6) (4) (10) (23)
------ ----- ----- -----
Earnings (loss) from continuing operations.............. 478 (126) 541 113
Earnings from discontinued operations, net of taxes (note
7)........................................................ -- 19 -- 34
Cumulative effect of accounting change, net of taxes (note
4)........................................................ -- -- (89) --
------ ----- ----- -----
Net earnings (loss)..................................... $ 478 (107) 452 147
====== ===== ===== =====
Net earnings (loss):
Liberty Series A and Series B common stock................ $ 120 (107) 94 147
Liberty Capital common stock.............................. 269 -- 269 --
Liberty Interactive common stock.......................... 89 -- 89 --
------ ----- ----- -----
$ 478 (107) 452 147
====== ===== ===== =====
Basic and diluted earnings (loss) per common share from
continuing operations (note 5):
Liberty Series A and Series B common stock................ $ .04 (.04) .06 .04
Liberty Capital common stock.............................. $ 1.92 -- 1.92 --
Liberty Interactive common stock.......................... $ .13 -- .13 --
Basic and diluted net earnings (loss) per common share (note
5):
Liberty Series A and Series B common stock................ $ .04 (.04) .03 .05
Liberty Capital common stock.............................. $ 1.92 -- 1.92 --
Liberty Interactive common stock.......................... $ .13 -- .13 --
See accompanying notes to condensed consolidated financial statements.
I-3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Net earnings (loss)......................................... $478 (107) 452 147
---- ---- ----- ------
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments................ 59 (76) 79 31
Recognition of previously unrealized foreign currency
translation losses.................................... -- 6 -- 312
Unrealized holding gains (losses) arising during the
period................................................ 441 95 902 (1,308)
Recognition of previously unrealized gains on
available-for-sale securities, net.................... -- (12) (15) (60)
Other comprehensive loss from discontinued operations... -- (2) -- (7)
---- ---- ----- ------
Other comprehensive earnings (loss)..................... 500 11 966 (1,032)
---- ---- ----- ------
Comprehensive earnings (loss)............................... $978 (96) 1,418 (885)
==== ==== ===== ======
Comprehensive earnings (loss):
Liberty Series A and Series B common stock................ $315 (96) 755 (885)
Liberty Capital common stock.............................. 694 -- 694 --
Liberty Interactive common stock.......................... (31) -- (31) --
---- ---- ----- ------
$978 (96) 1,418 (885)
==== ==== ===== ======
See accompanying notes to condensed consolidated financial statements.
I-4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
(NOTE 6)
Cash flows from operating activities:
Net earnings.............................................. $ 452 147
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Earnings from discontinued operations................... -- (34)
Cumulative effect of accounting change.................. 89 --
Depreciation and amortization........................... 333 324
Stock-based compensation................................ 53 17
Payments of stock-based compensation.................... (1) (69)
Noncash interest expense................................ 53 50
Share of earnings of affiliates, net.................... (29) (11)
Realized and unrealized gains on financial instruments,
net................................................... (169) (480)
Losses (gains) on disposition of assets, net............ (327) 361
Minority interests in earnings of subsidiaries.......... 10 23
Deferred income tax expense............................. 68 17
Other noncash charges, net.............................. 18 49
Changes in operating assets and liabilities, net of the
effects of acquisitions:
Current assets........................................ 32 69
Payables and other current liabilities................ (55) (34)
------ ------
Net cash provided by operating activities........... 527 429
------ ------
Cash flows from investing activities:
Cash proceeds from dispositions........................... 920 52
Premium proceeds (payments) from origination of
derivatives............................................. (1) 17
Net proceeds (payments) from settlement of derivatives.... 200 (14)
Cash paid for acquisitions, net of cash acquired.......... (601) --
Capital expended for property and equipment............... (141) (94)
Net sales (purchases) of short term investments........... (5) 201
Investments in and loans to cost and equity investees..... (141) --
Other investing activities, net........................... -- (10)
------ ------
Net cash provided by investing activities........... 231 152
------ ------
Cash flows from financing activities:
Borrowings of debt........................................ 400 861
Repayments of debt........................................ (6) (1,432)
Repurchases of Liberty common stock....................... (341) --
Repurchases of subsidiary common stock.................... (162) (60)
Other financing activities, net........................... 40 74
------ ------
Net cash used by financing activities............... (69) (557)
------ ------
Effect of foreign currency exchange rates on cash........... 16 (29)
------ ------
Net cash provided to discontinued operations (revised, see
note 6):
Cash provided by operating activities..................... -- 31
Cash used by investing activities......................... -- (47)
Cash provided by financing activities..................... -- --
Change in available cash held by discontinued
operations.............................................. -- 10
------ ------
Net cash provided to discontinued operations........ -- (6)
------ ------
Net increase (decrease) in cash and cash
equivalents....................................... 705 (11)
Cash and cash equivalents at beginning of period.... 1,946 1,387
------ ------
Cash and cash equivalents at end of period.......... $2,651 1,376
====== ======
See accompanying notes to condensed consolidated financial statements.
I-5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2006
COMMON STOCK
---------------------------------------------------------------
LIBERTY
LIBERTY CAPITAL INTERACTIVE ADDITIONAL
PREFERRED ------------------- ------------------- PAID-IN
STOCK SERIES A SERIES B SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- -------- -------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
Balance at January 1, 2006..... $ -- 27 1 -- -- -- -- 29,074
Net earnings................. -- -- -- -- -- -- -- --
Other comprehensive
earnings................... -- -- -- -- -- -- -- --
Issuance of common stock upon
exercise of stock
options.................... -- -- -- -- -- -- -- 5
Retirement of treasury
stock...................... -- -- -- -- -- -- -- (125)
Distribution of Liberty
Capital and Liberty
Interactive common stock to
stockholders (notes 1 and
2)......................... -- (27) (1) 1 -- 7 -- 20
Liberty Interactive Series A
stock repurchases.......... -- -- -- -- -- -- -- (341)
Stock compensation........... -- -- -- -- -- -- -- 41
Other........................ -- -- -- -- -- -- -- (5)
--------- --- -------- -------- -------- -------- -------- ------
Balance at June 30, 2006....... $ -- -- -- 1 -- 7 -- 28,669
========= === ======== ======== ======== ======== ======== ======
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED TREASURY STOCKHOLDERS'
EARNINGS DEFICIT STOCK EQUITY
------------- ------------ -------- -------------
AMOUNTS IN MILLIONS
Balance at January 1, 2006..... 3,421 (13,278) (125) 19,120
Net earnings................. -- 452 -- 452
Other comprehensive
earnings................... 966 -- -- 966
Issuance of common stock upon
exercise of stock
options.................... -- -- -- 5
Retirement of treasury
stock...................... -- -- 125 --
Distribution of Liberty
Capital and Liberty
Interactive common stock to
stockholders (notes 1 and
2)......................... -- -- -- --
Liberty Interactive Series A
stock repurchases.......... -- -- -- (341)
Stock compensation........... -- -- -- 41
Other........................ -- -- -- (5)
----- ------- ---- ------
Balance at June 30, 2006....... 4,387 (12,826) -- 20,238
===== ======= ==== ======
See accompanying notes to condensed consolidated financial statements.
I-6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2006
(UNAUDITED)
(1) BASIS OF PRESENTATION
On May 9, 2006, Liberty Media Corporation (formerly known as Liberty Media
Holding Corporation, "Liberty" or the "Company") completed the previously
announced restructuring (the "Restructuring") pursuant to which the Company was
organized as a new holding company. In the Restructuring, Liberty became the new
publicly traded parent company of Liberty Media LLC (formerly known as Liberty
Media Corporation, "Old Liberty"). In the Restructuring, each holder of Old
Liberty's common stock received for each share of Old Liberty's Series A common
stock held immediately prior to the Merger, 0.25 of a share of the Company's
Liberty Interactive Series A common stock and 0.05 of a share of the Company's
Liberty Capital Series A common stock, and for each share of Old Liberty's
Series B common stock held immediately prior to the Merger, 0.25 of a share of
the Company's Liberty Interactive Series B common stock and 0.05 of a share of
the Company's Liberty Capital Series B common stock, in each case, with cash in
lieu of any fractional shares. Liberty is the successor reporting company to Old
Liberty.
The accompanying condensed consolidated financial statements include the
accounts of Liberty and its controlled subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Liberty is a holding company which, through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the video and on-line
commerce, media, communications and entertainment industries in the United
States, Europe and Asia.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for such
periods have been included. The results of operations for any interim period are
not necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in the Annual
Report on Form 10-K for the year ended December 31, 2005 filed by Old Liberty.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Liberty considers (i) the estimate of the
fair value of its long-lived assets (including goodwill) and any resulting
impairment charges, (ii) its accounting for income taxes, (iii) the fair value
of its derivative instruments, (iv) its assessment of other-than-temporary
declines in fair value of its investments and (v) electronic retailing reserves
to be its most significant estimates.
Liberty holds investments that are accounted for using the equity method.
Liberty does not control the decision making process or business management
practices of these affiliates. Accordingly, Liberty relies on management of
these affiliates to provide it with accurate financial information prepared in
I-7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
accordance with GAAP that Liberty uses in the application of the equity method.
In addition, Liberty relies on audit reports that are provided by the
affiliates' independent auditors on the financial statements of such affiliates.
The Company is not aware, however, of any errors in or possible misstatements of
the financial information provided by its equity affiliates that would have a
material effect on Liberty's condensed consolidated financial statements.
Certain prior period amounts have been reclassified for comparability with
the 2006 presentation.
(2) TRACKING STOCKS
On May 9, 2006, the stockholders of Old Liberty approved five related
proposals which allowed Old Liberty to restructure its company and
capitalization. As a result of the Restructuring, all of the Old Liberty
outstanding common stock was exchanged for two new tracking stocks, Liberty
Interactive common stock and Liberty Capital common stock issued by Liberty, a
newly formed holding company. Each tracking stock issued in the Restructuring is
intended to track and reflect the economic performance of one of two newly
designated groups, the Interactive Group and the Capital Group, respectively.
Tracking stock is a type of common stock that the issuing company intends to
reflect or "track" the economic performance of a particular business or "group,"
rather than the economic performance of the company as a whole. While the
Interactive Group and the Capital Group have separate collections of businesses,
assets and liabilities attributed to them, neither group is a separate legal
entity and therefore cannot own assets, issue securities or enter into legally
binding agreements. Holders of tracking stocks have no direct claim to the
group's stock or assets and are not represented by separate boards of directors.
Instead, holders of tracking stock are stockholders of the parent corporation,
with a single board of directors and subject to all of the risks and liabilities
of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which Liberty has
attributed to it. The assets and businesses Liberty has attributed to the
Interactive Group are those engaged in video and on-line commerce, and initially
include its interests in QVC, Inc., Provide Commerce, Inc., Expedia, Inc. and
IAC/InterActiveCorp, and hereafter will include such other businesses that
Liberty's board of directors may in the future determine to attribute to the
Interactive Group, including such other businesses as Liberty may acquire for
the Interactive Group. In addition, Liberty has attributed $4,476 million
principal amount (as of June 30, 2006) of its existing publicly-traded debt to
the Interactive Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of Liberty's businesses, assets and liabilities other
than those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group initially include Liberty's
subsidiaries Starz Entertainment Group LLC, On Command Corporation, OpenTV
Corp., FUN Technologies, Inc. and TruePosition, Inc., its equity affiliates GSN,
LLC and WildBlue Communications, Inc. and its interests in News Corporation,
Time Warner Inc. and Sprint Nextel Corporation, and hereafter will include such
other businesses that Liberty's board of directors may in the future determine
to attribute to the Capital Group, including such other businesses as Liberty
may acquire for the Capital Group. In addition, Liberty has attributed
$4,580 million principal amount (as of June 30, 2006) of its existing publicly
traded debt to the Capital Group.
I-8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for attributed
financial information for Liberty's tracking stock groups.
(3) RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 155, "ACCOUNTING FOR CERTAIN
HYBRID FINANCIAL INSTRUMENTS, AN AMENDMENT OF FASB STATEMENTS NO. 133 AND 140"
("Statement No. 155"). Statement No. 155, among other things, amends Statement
of Financial Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS" ("Statement No. 133"), and permits fair value remeasurement of
hybrid financial instruments that contain an embedded derivative that otherwise
would require bifurcation. Statement No. 155 is effective after the beginning of
an entity's first fiscal year that begins after September 15, 2006. Under
Statement No. 155, the Company may elect to account for its senior exchangeable
debentures at fair value rather than bifurcating such debentures into a debt
instrument and a derivative instrument as required by Statement No. 133. The
Company is evaluating the impact of Statement No. 155 on its financial
statements and has not yet made a determination as to what election it will make
with respect to the accounting for its senior exchangeable derivatives.
In June 2006, the FASB issued FASB Interpretation No. 48, "ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements, and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 is
effective for fiscal years beginning after December 15, 2006. While the Company
has not completed its evaluation of the impact of FIN 48 on its financial
statements, it believes that the application of FIN 48 will result in the
derecognition of certain tax liabilities currently reflected in the Company's
consolidated balance sheet with a corresponding decrease to the Company's
accumulated deficit. The Company is unable to quantify the amount of these
adjustments at this time.
(4) STOCK-BASED COMPENSATION
The Company has granted to certain of its employees options, stock
appreciation rights ("SARs") and options with tandem SARs (collectively,
"Awards") to purchase shares of Liberty Capital Series A and Series B common
stock and Liberty Interactive Series A and Series B common stock. The Awards
generally vest over a 4-5 year period and expire 7-10 years from the date of
grant. QVC has granted combination stock options/SARS ("QVC Awards") to certain
of its employees. If the employee elects the SAR feature, the participant
receives 75% of the value of the QVC Award. The QVC Awards vest over 4-5 years
and expire 10 years from the date of grant.
STATEMENT 123R
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123 (revised 2004), "SHARE-BASED PAYMENTS" ("Statement 123R").
Statement 123R, which is a revision of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("Statement 123")
and supersedes Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" ("APB Opinion No. 25"), establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, primarily focusing on
I-9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
transactions in which an entity obtains employee services. Statement 123R
generally requires companies to measure the cost of employee services received
in exchange for an award of equity instruments (such as stock options and
restricted stock) based on the grant-date fair value of the award, and to
recognize that cost over the period during which the employee is required to
provide service (usually the vesting period of the award). Statement 123R also
requires companies to measure the cost of employee services received in exchange
for an award of liability instruments (such as stock appreciation rights that
will be settled in cash) based on the current fair value of the award, and to
remeasure the fair value of the award at each reporting date.
The provisions of Statement 123R allow companies to adopt the standard using
the modified prospective method or to restate all periods for which Statement
123 was effective. Liberty has adopted Statement 123R using the modified
prospective method, and will continue to include in its financial statements for
periods that begin after December 31, 2005 pro forma information as though the
standard had been adopted for all periods presented.
The Company adopted Statement 123R effective January 1, 2006. In connection
with such adoption, the Company recorded an $89 million transition adjustment,
net of related income taxes. Under Statement 123R, the QVC Awards are required
to be bifurcated into a liability award and an equity award. Conversely, under
APB Opinion No. 25, no liability was recorded. The transition adjustment
primarily represents the fair value of the liability portion of the QVC Awards
at January 1, 2006. The transition adjustment is reflected in the accompanying
condensed consolidated statement of operations as the cumulative effect of
accounting change. Also, in connection with the adoption of Statement 123R, the
Company has eliminated its unearned compensation balance as of December 31, 2005
($24 million) against additional paid-in capital. Compensation expense related
to restricted shares granted to certain officers and employees of the Company
continues to be recorded as such stock vests.
The Company has calculated the grant-date fair value for all of its equity
classified awards and any subsequent remeasurement of its liability classified
awards using the Black-Scholes Model. The Company has calculated the expected
term of the Awards using the methodology included in SEC Staff Accounting
Bulletin No. 107. The volatility used in the calculation is based on the implied
volatility of publicly traded Liberty options with a similar term (generally
20%-21%). The Company uses the risk-free rate for Treasury Bonds with a term
similar to that of the subject options. The QVC Awards are also valued using the
Black-Scholes Model. The volatility used in the calculation is based on the
volatility of public companies similar to QVC (42%).
Included in selling, general and administrative expenses in the accompanying
condensed consolidated statements of operations are the following amounts of
stock-based compensation (amounts in millions):
Three months ended:
June 30, 2006............................................. $22
June 30, 2005............................................. $19
Six months ended:
June 30, 2006............................................. $53
June 30, 2005............................................. $17
I-10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
As of June 30, 2006, the total compensation cost related to unvested Liberty
and QVC equity awards was approximately $39 million. Such amount will be
recognized in the Company's consolidated statements of operations through 2010.
LIBERTY AWARDS
During 2006 and prior to the Restructuring, Liberty granted 2,623,275
options to purchase shares of Old Liberty Series A common stock to certain of
its officers, employees and directors. Such options had an estimated grant-date
fair value of $2.28 per share. During the six months ended June 30, 2005,
Liberty granted 2,055,000 options to certain of its officers, employees and
directors. Such options had an estimated grant-date fair value of $3.42 per
share.
The following tables present the number and weighted average exercise price
("WAEP") of certain options, SARs and options with tandem SARs to purchase
Liberty common stock granted to certain officers, employees and directors of the
Company.
LIBERTY LIBERTY
SERIES A SERIES B
COMMON COMMON
STOCK WAEP STOCK WAEP
-------- -------- -------- --------
NUMBERS OF OPTIONS IN THOUSANDS
Outstanding at January 1, 2006..................... 51,729 $ 9.23 29,965 $10.92
Granted.......................................... 2,623 $ 8.28 --
Exercised........................................ (6,659) $ 0.73 --
Canceled......................................... (117) $18.69 --
Converted to Liberty Capital and Liberty
Interactive.................................... (47,576) $10.34 (29,965) $10.92
------- -------
Outstanding at June 30, 2006....................... -- --
======= =======
LIBERTY LIBERTY
CAPITAL CAPITAL
SERIES A SERIES B
COMMON COMMON
STOCK WAEP STOCK WAEP
-------- -------- -------- --------
NUMBERS OF OPTIONS IN THOUSANDS
Outstanding at January 1, 2006................... -- --
Converted from Liberty Series A and Series B... 2,378 $ 94.62 1,498 $101.37
Granted........................................ -- --
Exercised...................................... (7) $ 65.39 --
Canceled....................................... (2) $186.03 --
----- -----
Outstanding at June 30, 2006..................... 2,369 $ 94.63 1,498 $101.37
===== =====
Exercisable at June 30, 2006..................... 1,528 $104.37 1,438 $102.03
===== =====
I-11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
LIBERTY LIBERTY
INTERACTIVE INTERACTIVE
SERIES A SERIES B
COMMON COMMON
STOCK WAEP STOCK WAEP
----------- -------- ----------- --------
NUMBERS OF OPTIONS IN THOUSANDS
Outstanding at January 1, 2006.................. -- --
Converted from Liberty Series A and Series
B........................................... 11,889 $21.48 7,491 $23.41
Granted....................................... -- --
Exercised..................................... (37) $14.84 --
Canceled...................................... (11) $42.23 --
------ -----
Outstanding at June 30, 2006.................... 11,841 $21.48 7,491 $23.41
====== =====
Exercisable at June 30, 2006.................... 7,641 $23.69 7,191 $23.56
====== =====
The aggregate intrinsic value of all options exercised during the six months
ended June 30, 2006 and 2005 was $50 million and $79 million, respectively.
The following table provides additional information about outstanding
options to purchase Liberty Capital Series A common stock at June 30, 2006.
NO. OF WEIGHTED AGGREGATE NO. OF AGGREGATE
OUTSTANDING RANGE OF WAEP OF AVERAGE INTRINSIC EXERCISABLE WAEP OF INTRINSIC
OPTIONS EXERCISE OUTSTANDING REMAINING VALUE OPTIONS EXERCISABLE VALUE
(000'S) PRICES OPTIONS LIFE (000'S) (000'S) OPTIONS (000'S)
----------- --------------------------- ----------- --------- --------- ----------- ----------- ---------
27 $18.00 - $ 35.00 $ 30.52 1.0 years $1,444 27 $ 30.52 $1,444
1,166 $35.00 - $ 85.00 $ 76.54 6.5 years 8,428 335 $ 75.96 2,614
1,136 $85.00 - $115.00 $100.70 4.6 years -- 1,127 $100.80 --
40 >$300.00 $500.50 4.7 years -- 39 $500.50 --
------ ------ ----- ------
2,369 $9,872 1,528 $4,058
====== ====== ===== ======
The following table provides additional information about outstanding
options to purchase Liberty Interactive Series A common stock at June 30, 2006.
NO. OF WEIGHTED AGGREGATE NO. OF AGGREGATE
OUTSTANDING RANGE OF WAEP OF AVERAGE INTRINSIC EXERCISABLE WAEP OF INTRINSIC
OPTIONS EXERCISE OUTSTANDING REMAINING VALUE OPTIONS EXERCISABLE VALUE
(000'S) PRICES OPTIONS LIFE (000'S) (000'S) OPTIONS (000'S)
----------- --------------------------- ----------- --------- --------- ----------- ----------- ---------
136 $ 4.00 - $10.00 $ 6.93 1.0 years $1,400 136 $ 6.93 $1,400
5,961 $10.00 - $20.00 $ 17.42 6.5 years 2,474 1,773 $ 17.36 1,076
5,548 $20.00 - $26.00 $ 22.94 4.6 years -- 5,536 $ 22.94 --
196 >$65.00 $113.60 4.7 years -- 196 $113.60 --
------ ------ ----- ------
11,841 $3,874 7,641 $2,476
====== ====== ===== ======
I-12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
The following tables present the number and weighted average grant-date fair
value ("WAFV") of unvested restricted shares of Liberty common stock held by
certain officers and employees of the Company.
LIBERTY
SERIES A
COMMON
STOCK WAFV
-------- --------
NUMBERS OF SHARES
IN THOUSANDS
Outstanding at January 1, 2006.............................. 6,478 $10.06
Granted................................................... --
Vested(1)................................................. (3,863) $10.08
Forfeited................................................. (13) $10.08
Converted to Liberty Capital and Liberty Interactive...... (2,602) $10.04
------
Outstanding at June 30, 2006................................ --
======
LIBERTY
CAPITAL
SERIES A
COMMON
STOCK WAFV
-------- --------
NUMBERS OF SHARES
IN THOUSANDS
Outstanding at January 1, 2006.............................. --
Converted from Liberty Series A........................... 130 $87.97
Granted................................................... --
Vested.................................................... --
Forfeited................................................. --
---
Outstanding at June 30, 2006................................ 130 $87.97
===
LIBERTY
INTERACTIVE
SERIES A
COMMON
STOCK WAFV
----------- --------
NUMBERS OF SHARES
IN THOUSANDS
Outstanding at January 1, 2006............................ --
Converted from Liberty Series A......................... 650 $22.55
Granted................................................. --
Vested.................................................. --
Forfeited............................................... --
---
Outstanding at June 30, 2006.............................. 650 $22.55
===
------------------------
(1) The aggregate fair value of restricted shares of Series A common stock that
vested during the six months ended June 30, 2006 and 2005 aggregated
$30.4 million and $29.8 million, respectively.
I-13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
QVC AWARDS
The following tables present the number and weighted average exercise price
of certain options, SARs and options with tandem SARs to purchase QVC common
stock granted to certain officers, employees and directors of QVC.
QVC
COMMON
STOCK WAEP
-------- ---------
Outstanding at January 1, 2006.......................... 166,048 $2,040.60
Granted............................................... 10,704 $2,972.25
Exercised............................................. (25,622) $1,882.75
Canceled.............................................. (580) $2,429.43
-------
Outstanding at June 30, 2006............................ 150,550 $2,100.16
=======
Exercisable at June 30, 2006............................ 66,693 $1,626.47
=======
The estimated fair value of QVC stock as of the most recent appraisal date
was $3,044 per share.
PRO FORMA DISCLOSURE
Prior to adoption of Statement 123R, the Company accounted for compensation
expense related to its Awards pursuant to the recognition and measurement
provisions of APB Opinion No. 25. All of the Company's Awards were accounted for
as variable plan awards, and compensation was recognized based upon the
percentage of the options that were vested and the difference between the market
price of the underlying common stock and the exercise price of the options at
the balance sheet date. The Company accounted for QVC stock options using
fixed-plan accounting. The following table illustrates the effect on earnings
from continuing operations and earnings per share for the three and six months
ended June 30, 2005 if the Company had applied the fair value recognition
provisions of Statement 123 to its options. Compensation expense for SARs and
options with tandem SARs was the same under APB Opinion No. 25 and Statement
123. Accordingly, no pro forma adjustment for such Awards is included in the
following table.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2005 2005
------------ ----------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
Earnings (loss) from continuing operations........... $(126) 113
Add stock-based compensation as determined under
the intrinsic value method, net of taxes......... 1 2
Deduct stock-based compensation as determined under
the fair value method, net of taxes.............. (9) (17)
----- ----
Pro forma earnings (loss) from continuing
operations......................................... $(134) 98
===== ====
Basic and diluted earnings (loss) from continuing
operations per share:
As reported...................................... $(.04) .04
Pro forma........................................ $(.05) .04
I-14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
(5) EARNINGS (LOSS) PER COMMON SHARE
LIBERTY SERIES A AND SERIES B COMMON STOCK
Basic earnings (loss) per common share ("EPS") is computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding for
the period. Diluted EPS presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning of the
periods presented.
The basic EPS calculation is based on 2,806 million and 2,803 million
weighted average outstanding shares of Liberty common stock for the period from
April 1, 2006 to May 10, 2006 and the period from January 1, 2006 to May 10,
2006, respectively, and 2,795 million and 2,794 million weighted average shares
outstanding for the three and six months ended June 30, 2005, respectively. The
diluted EPS calculation for the period from January 1, 2006 to May 10, 2006 and
for the six months ended June 30, 2006 and 2005 includes 5.3 million and
12.9 million dilutive securities, respectively. However, due to the relative
insignificance of these dilutive securities, their inclusion does not impact the
EPS amount as reported in the accompanying condensed consolidated statements of
operations.
The cumulative effect of accounting change per common share for the period
from January 1, 2006 to May 10, 2006 was a loss of $0.03.
Earnings from discontinued operations per common share for each of the three
and six month periods ended June 30, 2005 was $0.01.
LIBERTY CAPITAL COMMON STOCK
Liberty Capital EPS for the period from the Restructuring to June 30, 2006
was computed by dividing the net earnings attributable to the Capital Group by
the weighted average outstanding shares of Liberty Capital common stock for the
period (140 million). Due to the relative insignificance of the dilutive
securities for such period, their inclusion does not impact the EPS amount.
Excluded from diluted EPS for such period are 3.1 million potential common
shares because their inclusion would be anti-dilutive.
LIBERTY INTERACTIVE COMMON STOCK
Liberty Interactive EPS for the period from the Restructuring to June 30,
2006 was computed by dividing the net earnings attributable to the Interactive
Group by the weighted average outstanding shares of Liberty Interactive common
stock for the period (694 million). Due to the relative insignificance of the
dilutive securities for such period, their inclusion does not impact the EPS
amount. Excluded from diluted EPS for such period are 15.6 million potential
common shares because their inclusion would be anti-dilutive.
I-15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
(6) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
CASH PROVIDED TO DISCONTINUED OPERATIONS
Liberty has revised its 2005 statement of cash flows to separately disclose
the operating, investing and financing portions of the cash flows attributable
to discontinued operations. The Company previously had reported these amounts on
a combined basis.
CASH PAID FOR ACQUISITIONS
SIX MONTHS ENDED
JUNE 30,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Cash paid for acquisitions:
Fair value of assets acquired.......................... $770 --
Net liabilities assumed................................ (49) --
Deferred tax liability................................. (48) --
Minority interest...................................... (72) --
---- --------
Cash paid for acquisitions, net of cash acquired..... $601 --
==== ========
(7) DISCONTINUED OPERATIONS
SPIN OFF OF DISCOVERY HOLDING COMPANY ("DHC")
On July 21, 2005, Liberty completed the spin-off (the "DHC Spin Off") of a
newly formed subsidiary, Discovery Holding Company. DHC's assets were comprised
of Liberty's 100% ownership interest in Ascent Media Group, LLC ("Ascent
Media"), Liberty's 50% ownership interest in Discovery Communications, Inc.
("Discovery") and $200 million in cash. In connection with the DHC Spin Off,
holders of Liberty common stock on July 15, 2005 received 0.10 of a share of DHC
Series A common stock for each share of Liberty Series A common stock owned and
0.10 of a share of DHC Series B common stock for each share of Liberty Series B
common stock owned. Upon completion of this transaction, DHC is a separate
publicly traded company. This transaction has been accounted for at historical
cost due to the pro rata nature of the distribution.
The condensed consolidated financial statements and accompanying notes of
Liberty have been prepared to reflect DHC as a discontinued operation.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of DHC have been excluded from the respective captions in the accompanying
condensed consolidated balance sheets, statements of operations, statements of
comprehensive earnings (loss) and statements of cash flows and have been
reported under the heading of discontinued operations in such condensed
consolidated financial statements.
Certain income statement components of DHC, which are included in the
determination of earnings from discontinued operations for the six months ended
June 30, 2005, are as follows (amounts in millions):
Revenue..................................................... $352
Earnings before income taxes................................ $ 36
I-16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
Certain asset and liability amounts included in the spin off of DHC on
July 21, 2005 are as follows (amounts in millions):
Investment in Discovery..................................... $ 2,982
Goodwill.................................................... $ 2,135
Deferred tax liabilities.................................... $(1,060)
(8) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments are
summarized as follows:
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
AMOUNTS IN MILLIONS
Interactive Group
IAC/InterActiveCorp ("IAC").......................... $ 1,834 1,960
Other available-for-sale equity securities........... 115 124
------- ------
Total attributed Interactive Group................. 1,949 2,084
------- ------
Capital Group
News Corporation..................................... 10,020 8,171
Time Warner Inc. ("Time Warner")(1).................. 2,962 2,985
Sprint Nextel Corporation ("Sprint")(2).............. 1,747 2,162
Motorola, Inc. ("Motorola")(3)....................... 1,491 1,672
Other available-for-sale equity securities(4)........ 1,194 964
Other available-for-sale debt securities(5).......... 417 389
Other cost investments and related receivables....... 89 79
------- ------
Total attributed Capital Group..................... 17,920 16,422
------- ------
Consolidated Liberty............................. 19,869 18,506
Less short-term investments...................... (8) (9)
------- ------
$19,861 18,497
======= ======
------------------------
(1) Includes $157 million and $158 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2006 and December 31, 2005,
respectively.
(2) Includes $80 million and $94 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2006 and December 31, 2005,
respectively.
(3) Includes $1,046 million and $1,173 million of shares pledged as collateral
for share borrowing arrangements at June 30, 2006 and December 31, 2005,
respectively.
(4) Includes $193 million and $156 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2006 and December 31, 2005,
respectively.
(5) At June 30, 2006, other available-for-sale debt securities include
$400 million of investments in third-party marketable debt securities held
by Liberty parent and $17 million of such securities held by subsidiaries of
Liberty. At December 31, 2005, such investments aggregated $371 million and
$18 million, respectively.
I-17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
UNREALIZED HOLDING GAINS AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities are summarized below.
JUNE 30, 2006 DECEMBER 31, 2005
----------------------- -----------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- ----------
AMOUNTS IN MILLIONS
Gross unrealized holding gains.......... $6,917 -- 5,459 17
Gross unrealized holding losses......... $ (37) -- (27) --
The aggregate fair value of securities with unrealized holding losses at
June 30, 2006 was $502 million. None of these securities had unrealized losses
for more than 12 continuous months.
(9) INTANGIBLE ASSETS
GOODWILL
Changes in the carrying amount of goodwill for the six months ended
June 30, 2006 are as follows:
STARZ
ENTERTAINMENT
QVC, INC. GROUP LLC OTHER TOTAL
--------- ------------- -------- --------
AMOUNTS IN MILLIONS
Balance at January 1, 2006.............. $4,057 1,383 1,513 6,953
Acquisitions(1)....................... 4 -- 495 499
Disposition(2)........................ -- -- (124) (124)
Foreign currency translation.......... 40 -- -- 40
Other................................. 80 (12) 1 69
------ ----- ----- -----
Balance at June 30, 2006................ $4,181 1,371 1,885 7,437
====== ===== ===== =====
------------------------
(1) During the six months ended June 30, 2006, Liberty and its subsidiaries
completed several acquisitions, including the acquisition of all of the
common stock of Provide Commerce, Inc. that it did not already own and
approximately 55% of the common stock of FUN Technologies, Inc., for
aggregate cash consideration of $601 million, net of cash acquired. In
connection with these acquisitions, Liberty recorded goodwill of
$499 million which represents the difference between the consideration paid
and the estimated fair value of the assets acquired. Such goodwill is
subject to adjustment pending completion of the Company's purchase price
allocation process.
(2) During the second quarter of 2006, the Company sold its 50% investment in
Courtroom Television Network, LLC ("Court TV"). In connection with such
sale, the Company relieved $124 million of enterprise-level goodwill that
had been allocated to the Court TV investment.
AMORTIZABLE INTANGIBLE ASSETS
Amortization of intangible assets with finite useful lives was $243 million
and $237 million for the six months ended June 30, 2006 and 2005, respectively.
Based on its current amortizable intangible
I-18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
assets, Liberty expects that amortization expense will be as follows for the
next five years (amounts in millions):
Remainder of 2006........................................... $248
2007........................................................ $454
2008........................................................ $417
2009........................................................ $369
2010........................................................ $352
(10) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are summarized as follows:
JUNE 30, DECEMBER 31,
TYPE OF DERIVATIVE 2006 2005
------------------ -------- ------------
AMOUNTS IN MILLIONS
ASSETS
Equity collars....................................... $ 1,209 1,568
Put spread collars................................... -- 133
Other................................................ 118 83
------- ------
1,327 1,784
Less current portion................................. (198) (661)
------- ------
$ 1,129 1,123
======= ======
LIABILITIES
Borrowed shares...................................... $ 1,476 1,581
Exchangeable debenture call option obligations....... 787 927
Put options.......................................... -- 342
Equity collars....................................... 280 160
Other................................................ 14 16
------- ------
2,557 3,026
Less current portion................................. (1,490) (1,939)
------- ------
$ 1,067 1,087
======= ======
Realized and unrealized gains (losses) on financial instruments are
comprised of the following:
SIX MONTHS ENDED
JUNE 30,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call
option features........................................ $140 228
Change in fair value of equity collars................... (61) 349
Change in fair value of put options...................... (9) (71)
Change in fair value of borrowed shares.................. 105 (28)
Change in fair value of other derivatives................ (6) 2
---- ---
$169 480
==== ===
I-19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
(11) LONG-TERM DEBT
Debt is summarized as follows:
OUTSTANDING CARRYING VALUE
PRINCIPAL -----------------------
JUNE 30, JUNE 30, DECEMBER 31,
2006 2006 2005
----------- -------- ------------
AMOUNTS IN MILLIONS
Interactive Group
Senior notes and debentures
3.5% Senior Notes due 2006...................... $ 121 121 121
Floating Rate Senior Notes due 2006............. 1,247 1,247 1,247
7.875% Senior Notes due 2009.................... 670 667 666
7.75% Senior Notes due 2009..................... 234 235 235
5.7% Senior Notes due 2013...................... 802 800 800
8.5% Senior Debentures due 2029................. 500 495 495
8.25% Senior Debentures due 2030................ 902 895 895
QVC bank credit facility.......................... 1,200 1,200 800
QVC capital leases................................ 68 68 68
------- ------- ------
Total attributed Interactive Group debt....... 5,744 5,728 5,327
------- ------- ------
Capital Group
Senior exchangeable debentures
4% Senior Exchangeable Debentures due 2029...... 869 253 251
3.75% Senior Exchangeable Debentures due 2030... 810 232 231
3.5% Senior Exchangeable Debentures due 2031.... 600 236 235
3.25% Senior Exchangeable Debentures due 2031... 551 118 117
0.75% Senior Exchangeable Debentures due 2023... 1,750 1,594 1,552
Subsidiary debt................................... 60 60 37
------- ------- ------
Total attributed Capital Group debt........... 4,640 2,493 2,423
------- ------- ------
Total consolidated Liberty debt................... $10,384 8,221 7,750
=======
Less current maturities......................... (1,382) (1,379)
------- ------
Total long-term debt.............................. $ 6,839 6,371
======= ======
QVC BANK CREDIT FACILITY
Effective May 20, 2005, QVC entered into a $2 billion bank credit facility.
In March 2006, such facility was refinanced with a new $3.5 billion bank credit
facility (the "QVC Credit Facility"). The QVC Credit Facility is comprised of an
$800 million U.S. dollar term loan that was drawn at closing, an $800 million
U.S. dollar term loan that can be drawn at any time before September 30, 2006, a
$600 million multi-currency term loan that can be drawn at any time before
September 30, 2006, a $650 million U.S. dollar revolving loan and a
$650 million multi-currency revolving loan. The foregoing multi-currency loans
can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound sterling
or euros. All loans are due and payable on March 3, 2011, and accrue interest,
at the option of QVC,
I-20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
at LIBOR plus an applicable margin or the Alternate Base Rate, as defined in the
QVC Credit Facility, plus an applicable margin. QVC is required to pay a
commitment fee quarterly in arrears on the unused portion of the commitments.
OTHER SUBSIDIARY DEBT
Other subsidiary debt at June 30, 2006, is comprised primarily of
capitalized satellite transponder lease obligations.
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities at June 30, 2006 is as follows (amounts in millions):
Fixed rate senior notes..................................... $1,791
Floating rate senior notes.................................. $1,237
Senior debentures........................................... $1,368
Senior exchangeable debentures, including call option
obligation................................................ $3,830
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at June 30, 2006.
(12) STOCKHOLDERS' EQUITY
As of June 30, 2006, there were 2.4 million and 1.5 million shares of
Liberty Capital Series A common stock and Series B common stock, respectively,
reserved for issuance under exercise privileges of outstanding stock options.
As of June 30, 2006, there were 11.8 million and 7.5 million shares of
Liberty Interactive Series A common stock and Series B common stock,
respectively, reserved for issuance under exercise privileges of outstanding
stock options.
In addition to the Liberty Capital Series A and Series B common stock and
the Liberty Interactive Series A and Series B common stock, there are
300 million and 1,500 million shares of Liberty Capital Series C and Liberty
Interactive Series C common stock, respectively, authorized for issuance. As of
June 30, 2006, no shares of either Series C common stock were issued or
outstanding.
Prior to the Restructuring, the Company retired the 10,000,000 shares of
Liberty Series B common stock held in treasury and returned them to the status
of authorized and available for issuance.
During the period from May 10, 2006 to June 30, 2006, the Company
repurchased 19.3 million shares of Liberty Interactive Series A common stock in
the open market for aggregate cash consideration of $341 million. Such shares
were repurchased pursuant to a previously announced share repurchase program and
have been retired and returned to the status of authorized and available for
issuance.
I-21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
During the period from May 10, 2006 to June 30, 2006, the Company sold put
options on 1.27 million shares of Liberty Capital Series A common stock for
aggregate cash proceeds of approximately $2.5 million. Such put options have a
weighted average exercise price of $80.07 and expire within 60 days after
June 30, 2006. The Company accounts for these put options pursuant to Statement
of Financial Accounting Standards No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." Accordingly,
the put options have been recorded at fair value and changes in the fair value
are included in realized and unrealized gains (losses) on financial instrument
in the accompanying condensed consolidated statement of operations.
(13) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Entertainment Group LLC ("SEG"), a wholly-owned subsidiary of Liberty,
provides video programming distributed via the Internet and by cable operators,
direct-to-home satellite providers and other distributors throughout the United
States. SEG has entered into agreements with a number of motion picture
producers which obligate SEG to pay fees ("Programming Fees") for the rights to
exhibit certain films that are released by these producers. The unpaid balance
of Programming Fees for films that were available for exhibition by SEG at
June 30, 2006 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of June 30, 2006 is payable as
follows: $96 million in 2006, $20 million in 2007 and $15 million thereafter.
SEG has also contracted to pay Programming Fees for the rights to exhibit
films that have been released theatrically, but are not available for exhibition
by SEG until some future date. These amounts have not been accrued at June 30,
2006. SEG's estimate of amounts payable under these agreements is as follows:
$199 million in 2006; $471 million in 2007; $99 million in 2008; $93 million in
2009; $86 million in 2010; and $54 million thereafter.
In addition, SEG is also obligated to pay Programming Fees for all
qualifying films that are released theatrically in the United States by studios
owned by The Walt Disney Company ("Disney") through 2009, all qualifying films
that are released theatrically in the United States by studios owned by Sony
Pictures Entertainment ("Sony") through 2010 and all qualifying films produced
for theatrical release in the United States by Revolution Studios through 2006.
Films are generally available to SEG for exhibition 10 - 12 months after their
theatrical release. The Programming Fees to be paid by SEG are based on the
quantity and the domestic theatrical exhibition receipts of qualifying films. As
these films have not yet been released in theatres, SEG is unable to estimate
the amounts to be paid under these output agreements. However, such amounts are
expected to be significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, SEG has agreed to pay Sony a total of
$190 million in four annual installments of $47.5 million beginning in 2011.
This option expires December 31, 2007. If made, such payments to Sony would be
amortized ratably as programming expense over the extension period beginning in
2011. An extension of this agreement would also result in the payment by SEG of
Programming Fees for qualifying films released by Sony during the extension
period. If Disney elects to extend its contract, SEG would not be obligated to
pay any amounts in excess of its Programming Fees for qualifying films released
by Disney during the extension period. The Disney option expires December 31,
2007.
I-22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
GUARANTEES
Liberty guarantees SEG's obligations under certain of its studio output
agreements. At June 30, 2006, Liberty's guarantee for obligations for films
released by such date aggregated $693 million. While the guarantee amount for
films not yet released is not determinable, such amount is expected to be
significant. As noted above, SEG has recognized the liability for a portion of
its obligations under the output agreements. As this represents a commitment of
SEG, a consolidated subsidiary of Liberty, Liberty has not recorded a separate
liability for its guarantee of these obligations.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its sale,
such as tax, environmental, litigation and employment matters. Liberty generally
indemnifies the purchaser in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by Liberty. These
types of indemnification guarantees typically extend for a number of years.
Liberty is unable to estimate the maximum potential liability for these types of
indemnification guarantees as the sale agreements typically do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to these
indemnification guarantees.
OPERATING LEASES
Liberty and its subsidiaries lease business offices, have entered into
satellite transponder lease agreements and use certain equipment under lease
arrangements.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
INCOME TAXES
Since the date Liberty issued its exchangeable debentures, it has claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which it could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in Liberty claiming interest deductions significantly in
excess of the cash interest currently paid on its exchangeable debentures. In
this regard, Liberty has deducted $1,965 million in cumulative interest expense
associated with the exchangeable debentures since the Company's split-off from
AT&T. Of that amount, $571 million represents cash interest payments. Interest
deducted in prior years on its exchangeable debentures has contributed to net
operating losses ("NOLs") that may be carried to offset taxable income in 2006
and later years. These NOLs and current interest deductions on the exchangeable
debentures are being used to offset taxable income currently being generated.
I-23
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
The IRS has issued Technical Advice Memorandums (the "TAMs") challenging the
current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge Liberty's tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to
Liberty's reported total tax expense as the resulting increase in current tax
expense would be offset by a decrease in deferred tax expense. However, Liberty
would be required to make current federal income tax payments. These federal
income tax payments could prove to be significant.
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T Corp. and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement").
While Liberty was a subsidiary of AT&T, Liberty recorded its stand-alone tax
provision on a separate return basis. Under the AT&T Tax Sharing Agreement,
Liberty received a cash payment from AT&T in periods when Liberty generated
taxable losses and such taxable losses were utilized by AT&T to reduce its
consolidated income tax liability. To the extent such losses were not utilized
by AT&T, such amounts were available to reduce federal taxable income generated
by Liberty in future periods, similar to a net operating loss carryforward, and
were accounted for as a deferred federal income tax benefit. Subsequent to
Liberty's split off from AT&T, if adjustments are made to amounts previously
paid under the AT&T Tax Sharing Agreement, such adjustments are reflected as
adjustments to additional paid-in capital. During the period from March 10, 1999
to December 31, 2002, Liberty received cash payments from AT&T aggregating
$670 million as payment for Liberty's taxable losses that AT&T utilized to
reduce its income tax liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with
Liberty's split off from AT&T, AT&T was required to pay Liberty an amount equal
to 35% of the amount of the net operating losses reflected in TCI's final
federal income tax return ("TCI NOLs") that had not been used as an offset to
Liberty's obligations under the AT&T Tax Sharing Agreement and that had been, or
were reasonably expected to be, utilized by AT&T. In connection with the split
off, Liberty received an $803 million payment for TCI's NOLs and recorded such
payment as an increase to additional paid-in capital. Liberty was not paid for
certain of TCI's NOLs ("SRLY NOLs") due to limitations and uncertainty regarding
AT&T's ability to use them to offset taxable income in the future. In the event
AT&T was ultimately able to use any of the SRLY NOLs, they would be required to
pay Liberty 35% of the amount of the SRLY NOLs used. In the fourth quarter of
2004 and in connection with the completion of an IRS audit of TCI's tax return
for 1994, it was determined that Liberty was required to recognize additional
taxable income related to the recapitalization of one of its investments
resulting in a tax liability of approximately $30 million. As a result of the
tax assessment, Liberty also received a corresponding amount of additional tax
basis in the investment. However, Liberty was able to cause AT&T to use a
portion of the SRLY NOLs to offset this taxable income, the benefit of which
resulted in the elimination of the $30 million tax liability and an increase to
additional paid-in capital.
In the fourth quarter of 2004, AT&T requested a refund from Liberty of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by Liberty's losses. AT&T has asserted that Liberty's losses caused AT&T to pay
$70 million in alternative minimum tax ("AMT") that it would not have been
otherwise required to pay had Liberty's losses not been included in its return.
In 2004, Liberty estimated that it
I-24
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
may ultimately pay AT&T up to $30 million of the requested $70 million because
Liberty believed AT&T received an AMT credit of $40 million against income taxes
resulting from the AMT previously paid. Accordingly, Liberty accrued a
$30 million liability with an offsetting reduction of additional paid-in
capital. The net effect of the completion of the IRS tax audit noted above
(including the benefit derived from AT&T for the utilization of the SRLY NOLs)
and Liberty's accrual of amounts due to AT&T was an increase to deferred tax
assets and an increase to other liabilities.
In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by Liberty's losses. In addition, the
information provided to Liberty in connection with AT&T's request showed that
AT&T had not yet claimed a credit for AMT previously paid. Accordingly, in the
fourth quarter of 2005, Liberty increased its accrual by approximately
$40 million (with a corresponding reduction of additional paid-in capital)
representing its estimate of the amount it may ultimately pay (excluding accrued
interest, if any) to AT&T as a result of this request. Although Liberty has not
reduced its accrual for any future refunds, Liberty believes it is entitled to a
refund when AT&T is able to realize a benefit in the form of a credit for the
AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by Liberty's losses. Liberty has
reviewed this claim and believes that its accrual as of December 31, 2005 is
adequate. Accordingly, no additional accrual was recorded during the six months
ended June 30, 2006.
Although for accounting purposes Liberty has accrued a portion of the
amounts claimed by AT&T to be owed by Liberty under the AT&T Tax Sharing
Agreement, Liberty believes there are valid defenses or set-off or similar
rights in its favor that may cause the total amount that it owes AT&T to be less
than the amounts accrued; and under certain interpretations of the AT&T Tax
Sharing Agreement, Liberty may be entitled to further reimbursements from AT&T.
(14) OPERATING SEGMENTS
Liberty is a holding company which, through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the video and on-line
commerce, media, communications and entertainment industries. Upon completion of
the Restructuring and the issuance of its tracking stock, Liberty divided its
businesses into two groups: the Interactive Group and the Capital Group. Each of
the businesses in the tracking stock groups is separately managed. Liberty
identifies its reportable segments as (A) those consolidated subsidiaries that
represent 10% or more of its consolidated revenue, earnings before income taxes
or total assets and (B) those equity method affiliates whose share of earnings
represent 10% or more of Liberty's consolidated earnings before income taxes.
Liberty evaluates performance and makes decisions about allocating resources
to its operating segments based on financial measures such as revenue, operating
cash flow, gross margin, average sales price per unit, number of units shipped,
and revenue or sales per customer equivalent. In addition, Liberty reviews
non-financial measures such as subscriber growth and penetration, as
appropriate.
Liberty defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding
stock-based compensation). Liberty believes this is an important indicator of
the operational strength and performance of its businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows
I-25
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
management to view operating results and perform analytical comparisons and
benchmarking between businesses and identify strategies to improve performance.
This measure of performance excludes depreciation and amortization, stock-based
compensation, litigation settlements and restructuring and impairment charges
that are included in the measurement of operating income pursuant to GAAP.
Accordingly, operating cash flow should be considered in addition to, but not as
a substitute for, operating income, net income, cash flow provided by operating
activities and other measures of financial performance prepared in accordance
with GAAP. Liberty generally accounts for intersegment sales and transfers as if
the sales or transfers were to third parties, that is, at current prices.
For the six months ended June 30, 2006, Liberty has identified the following
businesses as its reportable segments:
- QVC--consolidated subsidiary included in the Interactive Group that
markets and sells a wide variety of consumer products in the U.S. and
several foreign countries, primarily by means of televised shopping
programs on the QVC networks and via the Internet through its domestic and
international websites.
- SEG--consolidated subsidiary included in the Capital Group that provides
video programming distributed via the Internet and by cable operators,
direct-to-home satellite providers and other distributors throughout the
United States.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different technologies, distribution channels and marketing
strategies. The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of significant
policies.
I-26
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
PERFORMANCE MEASURES
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2006 2005
-------------------- --------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW REVENUE FLOW
-------- --------- -------- ---------
AMOUNTS IN MILLIONS
Interactive Group
QVC................................... $3,185 733 2,943 647
Corporate and Other................... 138 17 -- (2)
------ --- ----- ---
3,323 750 2,943 645
------ --- ----- ---
Capital Group
SEG................................... 523 91 512 95
Corporate and Other................... 244 5 205 (10)
------ --- ----- ---
767 96 717 85
------ --- ----- ---
Consolidated Liberty.................... $4,090 846 3,660 730
====== === ===== ===
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2006 2005
-------------------- --------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW REVENUE FLOW
-------- --------- -------- ---------
AMOUNTS IN MILLIONS
Interactive Group
QVC................................... $1,630 378 1,479 324
Corporate and Other................... 85 7 -- (1)
------ --- ----- ---
1,715 385 1,479 323
------ --- ----- ---
Capital Group
SEG................................... 264 50 258 47
Corporate and Other................... 128 3 102 (2)
------ --- ----- ---
392 53 360 45
------ --- ----- ---
Consolidated Liberty.................... $2,107 438 1,839 368
====== === ===== ===
I-27
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2006
(UNAUDITED)
OTHER INFORMATION
JUNE 30, 2006
-------------------------------------
INVESTMENTS
TOTAL IN CAPITAL
ASSETS AFFILIATES EXPENDITURES
-------- ----------- ------------
AMOUNTS IN MILLIONS
Interactive Group
QVC........................................ $16,124 -- 98
Corporate and Other........................ 2,509 1,228 1
------- ----- ---
18,633 1,228 99
------- ----- ---
Capital Group
SEG........................................ 2,905 46 2
Corporate and Other........................ 22,537 398 40
------- ----- ---
25,442 444 42
------- ----- ---
Inter-Group eliminations..................... (186) -- --
------- ----- ---
Consolidated Liberty......................... $43,889 1,672 141
======= ===== ===
The following table provides a reconciliation of consolidated segment
operating cash flow to earnings (loss) from continuing operations before income
taxes and minority interests:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Consolidated segment operating cash flow.......... $ 438 368 846 730
Stock-based compensation.......................... (22) (19) (53) (17)
Depreciation and amortization..................... (169) (161) (333) (324)
Interest expense.................................. (160) (146) (308) (295)
Realized and unrealized gains (losses) on
financial instruments, net...................... 362 (288) 169 480
Gains (losses) on dispositions of assets, net..... 303 17 327 (361)
Other, net........................................ 70 5 139 46
----- ---- ---- ----
Earnings (loss) from continuing operations
before income taxes and minority interests.... $ 822 (224) 787 259
===== ==== ==== ====
I-28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our business,
product and marketing strategies, new service offerings, our tax sharing
arrangement with AT&T and estimated amounts payable under that arrangement,
revenue growth and subscriber trends at QVC and SEG, anticipated programming and
marketing costs at SEG, projected uses of cash for the remainder of 2006, the
primary funding sources for Liberty's investing and financing activities for the
remainder of 2006, the estimated value of our derivatives related to certain of
our AFS investments, and the anticipated non-material impact of certain
contingent liabilities related to legal and tax proceedings and other matters
arising in the ordinary course of our business. Where, in any forward-looking
statement, we express an expectation or belief as to future results or events,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but such statements necessarily involve risks and
uncertainties and there can be no assurance that the statement of expectation or
belief will result or be achieved or accomplished. The following include some
but not all of the factors that could cause actual results or events to differ
materially from those anticipated:
- general economic and business conditions and industry trends;
- consumer spending levels, including the availability and amount of
individual consumer debt;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband distribution and movie studio
industries;
- uncertainties inherent in the development and integration of new business
lines and business strategies;
- changes in distribution and viewing of television programming, including
the expanded deployment of personal video recorders, video on demand and
IP television and their impact on home shopping networks;
- increased digital TV penetration and the impact on channel positioning of
our networks;
- rapid technological changes;
- capital spending for the acquisition and/or development of
telecommunications networks and services;
- uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new
television and telecommunications technologies;
- future financial performance, including availability, terms and deployment
of capital;
- fluctuations in foreign currency exchange rates and political unrest in
international markets;
- the ability of suppliers and vendors to deliver products, equipment,
software and services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
I-29
- competitor responses to our products and services, and the products and
services of the entities in which we have interests; and
- threatened terrorists attacks and ongoing military action in the Middle
East and other parts of the world.
These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this Quarterly Report, and we expressly
disclaim any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any change in its
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying condensed consolidated financial statements
and the notes thereto and the Annual Report on Form 10-K for the year ended
December 31, 2005 filed by Old Liberty.
OVERVIEW
We are a holding company that owns controlling and noncontrolling interests
in a broad range of video and on-line commerce, media, communications and
entertainment companies. Our more significant operating subsidiaries, which are
also our reportable segments, are QVC and Starz Entertainment Group. QVC markets
and sells a wide variety of consumer products in the United States and several
foreign countries, primarily by means of televised shopping programs and via the
Internet through its domestic and international websites. SEG provides video
programming distributed via the Internet and by cable operators, direct-to-home
satellite providers and other distributors throughout the United States.
Our "Corporate and Other" category includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
On Command Corporation ("On Command"), OpenTV Corp. ("OpenTV"),
TruePosition, Inc. ("TruePosition"), Provide Commerce, Inc. ("Provide") and FUN
Technologies, Inc. ("FUN"). On Command provides in-room, on-demand video
entertainment and information services to hotels, motels and resorts primarily
in the United States. OpenTV provides interactive television solutions,
including operating middleware, web browser software, interactive applications,
and consulting and support services. TruePosition provides equipment and
technology that deliver location-based services to wireless users. Provide,
which we acquired on February 9, 2006, operates an e-commerce marketplace of
websites for perishable goods, including flowers, gourmet foods, fruits and
desserts. FUN, in which we acquired a 55% common stock interest on March 10,
2006, operates websites that offer casual gaming, sports information and fantasy
sports services.
In addition to the foregoing businesses, we hold an approximate 20%
ownership interest in Expedia, Inc., which we account for as an equity method
investment, and we continue to maintain significant investments and related
derivative positions in public companies such as News Corporation,
IAC/InterActiveCorp, Time Warner Inc. and Sprint Nextel Corporation, which are
accounted for at their respective fair market values and are included in
corporate and other.
TRACKING STOCKS
On May 9, 2006, our stockholders approved five related proposals which
allowed us to restructure our company and capitalization. As a result of the
Restructuring, all of the Old Liberty outstanding common stock was exchanged for
two new tracking stocks, Liberty Interactive common stock and Liberty Capital
common stock, issued by Liberty, a newly formed holding company. Each tracking
stock
I-30
issued in the Restructuring is intended to track and reflect the economic
performance of one of two newly designated groups, the Interactive Group and the
Capital Group, respectively.
Tracking stock is a type of common stock that the issuing company intends to
reflect or "track" the economic performance of a particular business or "group,"
rather than the economic performance of the company as a whole. While the
Interactive Group and the Capital Group have separate collections of businesses,
assets and liabilities attributed to them, neither group is a separate legal
entity and therefore cannot own assets, issue securities or enter into legally
binding agreements. Holders of tracking stocks have no direct claim to the
group's stock or assets and are not represented by separate boards of directors.
Instead, holders of tracking stock are stockholders of the parent corporation,
with a single board of directors and subject to all of the risks and liabilities
of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which we have
attributed to it. The assets and businesses we have attributed to the
Interactive Group are those engaged in video and on-line commerce, and initially
include our interests in QVC, Provide, Expedia and IAC/InterActiveCorp, and
hereafter will include such other businesses that our board of directors may in
the future determine to attribute to the Interactive Group, including such other
businesses as we may acquire for the Interactive Group. In addition, we have
attributed $4,476 million principal amount (as of June 30, 2006) of our existing
publicly-traded debt to the Interactive Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of our businesses, assets and liabilities other than
those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group initially include our subsidiaries
SEG, On Command, OpenTV, FUN and TruePosition, our equity affiliates GSN, LLC
and WildBlue Communications, Inc. and our interests in News Corporation, Time
Warner Inc. and Sprint Nextel Corporation, and hereafter will include such other
businesses that our board of directors may in the future determine to attribute
to the Capital Group, including such other businesses as we may acquire for the
Capital Group. In addition, we have attributed $4,580 million principal amount
(as of June 30, 2006) of our existing publicly-traded debt to the Capital Group.
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for attributed
financial information for our tracking stock groups.
I-31
LIBERTY MEDIA CORPORATION
MATERIAL CHANGES IN RESULTS OF OPERATIONS
CONSOLIDATED OPERATING RESULTS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
Interactive Group
QVC........................................ $1,630 1,479 3,185 2,943
Corporate and Other........................ 85 -- 138 --
------ ----- ----- -----
1,715 1,479 3,323 2,943
------ ----- ----- -----
Capital Group
SEG........................................ 264 258 523 512
Corporate and Other........................ 128 102 244 205
------ ----- ----- -----
392 360 767 717
------ ----- ----- -----
Consolidated Liberty..................... $2,107 1,839 4,090 3,660
====== ===== ===== =====
OPERATING CASH FLOW
Interactive Group
QVC........................................ $ 378 324 733 647
Corporate and Other........................ 7 (1) 17 (2)
------ ----- ----- -----
385 323 750 645
------ ----- ----- -----
Capital Group
SEG........................................ 50 47 91 95
Corporate and Other........................ 3 (2) 5 (10)
------ ----- ----- -----
53 45 96 85
------ ----- ----- -----
Consolidated Liberty..................... $ 438 368 846 730
====== ===== ===== =====
OPERATING INCOME (LOSS)
Interactive Group
QVC........................................ $ 242 193 454 393
Corporate and Other........................ 1 (1) 7 (2)
------ ----- ----- -----
243 192 461 391
------ ----- ----- -----
Capital Group
SEG........................................ 44 36 77 72
Corporate and Other........................ (40) (40) (78) (74)
------ ----- ----- -----
4 (4) (1) (2)
------ ----- ----- -----
Consolidated Liberty..................... $ 247 188 460 389
====== ===== ===== =====
REVENUE. Our consolidated revenue increased $268 million or 14.6% and
$430 million or 11.7% for the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year periods. These
increases are due primarily to $151 million or 10.2% and $242 million or 8.2%
increases for QVC and $85 million and $138 million attributable to Provide,
which we acquired in February 2006. See Management's Discussion and Analysis for
the Interactive Group and for the Capital Group below for a more complete
discussion of QVC's and SEG's results of operations.
I-32
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative expenses
(excluding stock-based compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures to evaluate our businesses and make decisions about allocating
resources among our businesses. We believe this is an important indicator of the
operational strength and performance of our businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows us to view operating results, perform analytical comparisons
and benchmarking between businesses and identify strategies to improve
performance. This measure of performance excludes such costs as depreciation and
amortization, stock-based compensation, litigation settlements and impairments
of long-lived assets that are included in the measurement of operating income
pursuant to generally accepted accounting principles. Accordingly, Operating
Cash Flow should be considered in addition to, but not as a substitute for,
operating income, net earnings, cash flow provided by operating activities and
other measures of financial performance prepared in accordance with GAAP. See
note 14 to the accompanying condensed consolidated financial statements for a
reconciliation of Operating Cash Flow to Earnings (Loss) from Continuing
Operations Before Income Taxes and Minority Interests.
Consolidated Operating Cash Flow increased $70 million or 19.0% and
$116 million or 15.9% during the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year periods. These
increases are due primarily to a $54 million or 16.7% and $86 million or 13.3%
increases in QVC's operating cash flow resulting from higher revenue both
domestically and internationally and $9 million and $21 million generated by
Provide for the quarter and six month period, respectively. The six month
increase was partially offset by a decrease in SEG's operating cash flow, which
resulted primarily from higher programming costs in 2006.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights for shares of our common
stock that are granted to certain of our officers and employees, (2) phantom
stock appreciation rights ("PSARs") granted to officers and employees of certain
of our subsidiaries pursuant to private equity plans and (3) amortization of
restricted stock grants.
Effective January 1, 2006, we adopted Statement No. 123R. Statement
No. 123R requires that we amortize the grant date fair value of our stock option
and SAR Awards that qualify as equity awards as stock compensation expense over
the vesting period of such Awards. Statement No. 123R also requires that we
record the liability for our liability awards at fair value each reporting
period and that the change in fair value be reflected as stock compensation
expense in our condensed consolidated statement of operations. Prior to adoption
of Statement No. 123R, the amount of expense associated with stock-based
compensation was generally based on the vesting of the related stock options and
stock appreciation rights and the market price of the underlying common stock,
as well as the vesting of PSARs and the equity value of the related subsidiary.
The expense reflected in our condensed consolidated financial statements was
based on the market price of the underlying common stock as of the date of the
financial statements.
In connection with our adoption of Statement 123R, we recorded an
$89 million transition adjustment, net of related income taxes, which primarily
reflects the fair value of the liability portion of the QVC Awards at
January 1, 2006. The transition adjustment is reflected in the accompanying
condensed consolidated statement of operations as the cumulative effect of
accounting change. In addition, we recorded $53 million of stock compensation
expense for the six months ended June 30, 2006, compared with $17 million for
the comparable period in 2005. As of June 30, 2006, the total compensation cost
related to unvested Liberty and QVC equity awards was approximately
$39 million. Such amount will be recognized in our consolidated statements of
operations through 2010.
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OPERATING INCOME. Consolidated operating income increased $59 million or
31.4% and $71 million or 18.3% for the three and six months ended June 30, 2006
and 2005, respectively, as compared to the corresponding prior year periods.
These increases are the net effect of an increase in operating income for QVC
and operating income generated by Provide, partially offset by an increase in
corporate stock option expense due to the adoption of Statement 123R.
OTHER INCOME AND EXPENSE
INTEREST EXPENSE. Interest expense increased 9.6% and 4.4% for the three
and six months ended June 30, 2006 and 2005, respectively. Such increases are
the net effect of interest on the QVC Credit Facility and the effects of
increases in the interest rates for our variable rate debt, partially offset by
decreases from retirements of our publicly-traded debt.
DIVIDEND AND INTEREST INCOME. Dividend and interest income was $97 million
and $65 million for the six months ended June 30, 2006 and 2005, respectively.
Such income increased in 2006 due to higher invested cash balances. Interest and
dividend income for the six months ended June 30, 2006 was comprised of interest
income earned on invested cash ($49 million), dividends on News Corp. common
stock ($29 million), dividends on other AFS securities ($6 million), and other
($13 million).
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of the
following:
SIX MONTHS ENDED
JUNE 30,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call
option features........................................ $140 228
Change in fair value of equity collars................... (61) 349
Change in fair value of put options...................... (9) (71)
Change in fair value of borrowed shares.................. 105 (28)
Change in fair value of other derivatives................ (6) 2
---- ---
$169 480
==== ===
GAINS (LOSSES) ON DISPOSITIONS. We recognized gains on dispositions of
$327 million for the six months ended June 30, 2006 and losses on dispositions
of $361 million in 2005. Our 2006 gains related to the sale of our 50%
investment in Court TV ($303 million, including the $124 million of allocated
goodwill) and dispositions of certain AFS securities. In the first quarter of
2005, we disposed of our interests in certain investments and recognized
$488 million of foreign currency translation losses, before related income
taxes, related to these two investments that were previously included in
accumulated other comprehensive earnings (loss). These foreign currency losses
were partially offset by gains on disposition of certain of our AFS securities
and other assets. The foregoing gains or losses were calculated based upon the
difference between the cost basis of the assets relinquished, as determined on
an average cost basis, and the fair value of the assets received.
INCOME TAXES. Our effective tax rate was 30.4% for the six months ended
June 30, 2006. Such rate is less than the U.S. federal income tax rate of 35%
due to a deferred tax benefit we recognized in the first quarter. Late in the
first quarter of 2006, we decided to effect a restructuring transaction which
was effective on April 1, 2006, and which enabled us to include TruePosition in
our Federal consolidated tax group on a prospective basis. As a result of this
decision and considering our overall tax position, we reversed $89 million of
valuation allowance recorded against TruePosition's net deferred tax assets into
our statement of operations as a deferred tax benefit in the first quarter of
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2006. This valuation allowance did not relate to net operating loss
carryforwards or some other future tax deduction of TruePosition, but rather
related to temporary differences caused by revenue and cost amounts that were
recognized for tax purposes in prior periods, but have been deferred for
financial reporting purposes until future periods. We recorded an additional
deferred tax benefit ($19 million) for a reduction in our estimated tax rate
used to calculate our deferred tax liabilities. These benefits were partially
offset by tax expense ($43 million) on the gain on sale of Court TV for which we
had higher book basis than tax basis and state ($18 million) and foreign
($17 million) tax expense. Our effective tax rate was 52.1% for the six months
ended June 30, 2005 and differs from the U.S. federal income tax rate of 35%
primarily due to provisions for state and foreign taxes.
NET EARNINGS. Our net earnings was $452 million and $147 million for the
six months ended June 30, 2006 and 2005, respectively. Such change is due to the
aforementioned fluctuations in revenue and expenses. In addition, we recognized
$34 million of earnings from discontinued operations in 2005.
MATERIAL CHANGES IN FINANCIAL CONDITION
CORPORATE
Our sources of liquidity include our available cash balances, cash generated
by the operating activities of our privately-owned subsidiaries (to the extent
such cash exceeds the working capital needs of the subsidiaries and is not
otherwise restricted), proceeds from asset sales, monetization of our public
investment portfolio (including derivatives), debt and equity issuances, and
dividend and interest receipts.
During the six months ended June 30, 2006, our primary uses of corporate
cash were funding of the acquisition of Provide ($465 million), the acquisition
of approximately 55% of the common stock of FUN ($200 million) and loans to
WildBlue Communications, an equity affiliate ($111 million). We funded these
investing activities with available cash on hand and proceeds from derivative
settlements and asset sales.
Our projected uses of cash for the remainder of 2006 include approximately
$1,370 million to retire our senior notes that mature in September 2006,
approximately $270 million for interest payments, approximately $230 million as
partial consideration for our purchase of IDT Entertainment and additional
repurchases of Liberty Interactive common stock. In addition, we may make
additional investments in existing or new businesses. However, we are unable to
quantify such investments at this time.
In connection with the issuance of our tracking stocks, our board of
directors authorized a share repurchase program pursuant to which we may
repurchase outstanding shares of Liberty Interactive Stock and Liberty Capital
Stock in the open market or in privately negotiated transactions, from time to
time, subject to market conditions. Under the program, we may purchase shares of
Liberty Capital Stock for an aggregate purchase price of up to $1 billion and
shares of Liberty Interactive Stock for an aggregate purchase price of up to
$1 billion. During the second quarter of 2006, we repurchased 19.3 million
shares of Liberty Interactive Series A common stock for aggregate cash
consideration of $341 million pursuant to this share repurchase program. Such
repurchases were funded with cash borrowings under the QVC Credit Facility. We
may alter or terminate the stock repurchase program at any time.
We expect that our investing and financing activities will be funded with a
combination of borrowings under the QVC Credit Facility, cash on hand, cash
provided by operating activities, proceeds from collar expirations and
dispositions of non-strategic assets. At June 30, 2006, our sources of liquidity
included $3,068 million in cash and marketable debt securities and
$7,090 million of non-strategic AFS securities including related derivatives. In
addition, we owned $10,020 million of News Corp. common stock and
$1,834 million of IAC/InterActiveCorp common stock, which we
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consider to be strategic assets. To the extent we recognize any taxable gains
from the sale of assets or the expiration of derivative instruments, we may
incur current tax expense and be required to make tax payments, thereby reducing
any cash proceeds received.
Our derivatives ("AFS Derivatives") related to certain of our AFS
investments provide us with an additional source of liquidity. Based on the put
price and assuming we deliver owned or borrowed shares to settle each of our AFS
Derivatives and excluding any provision for income taxes, we would be entitled
to cash proceeds of approximately $227 million during the remainder of 2006,
$385 million in 2007, zero in 2008, $1,180 million in 2009, $1,681 million in
2010 and $1,312 million thereafter upon settlement of our AFS Derivatives.
Prior to the maturity of our equity collars, the terms of certain of our
equity and narrow-band collars allow us to borrow against the future put option
proceeds at LIBOR or LIBOR plus an applicable spread, as the case may be. As of
June 30, 2006, such borrowing capacity aggregated approximately $4,850 million.
Such borrowings would reduce the cash proceeds upon settlement noted in the
preceding paragraph.
SUBSIDIARIES
Effective March 3, 2006, QVC refinanced its existing bank credit facility
with a new $3.5 billion bank credit facility. The QVC Credit Facility is
comprised of an $800 million U.S. dollar term loan that was drawn at closing, an
$800 million U.S. dollar term loan that can be drawn at any time before
September 30, 2006, a $600 million multi-currency term loan that can be drawn at
any time before September 30, 2006, a $650 million U.S. dollar revolving loan
and a $650 million multi-currency revolving loan. The foregoing multi-currency
loans can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound
sterling or euros. All loans are due and payable on March 3, 2011, and accrue
interest, at the option of QVC, at LIBOR plus an applicable margin or the
Alternate Base Rate, as defined in the QVC Credit Facility, plus an applicable
margin. QVC is required to pay a commitment fee quarterly in arrears on the
unused portion of the commitments.
During the six months ended June 30, 2006, our subsidiaries funded capital
expenditures ($140 million) and the repurchase of certain subsidiary common
stock ($162 million) with cash on hand and cash generated by their operating
activities. Our subsidiaries currently expect to spend approximately
$430 million for capital expenditures in 2006, including $355 million by QVC.
These amounts are expected to be funded by the cash flows of the respective
subsidiary.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
SEG has entered into agreements with a number of motion picture producers
which obligate SEG to pay fees for the rights to exhibit certain films that are
released by these producers. The unpaid balance for Programming Fees for films
that were available for exhibition by SEG at June 30, 2006 is reflected as a
liability in the accompanying condensed consolidated balance sheet. The balance
due as of June 30, 2006 is payable as follows: $96 million in 2006, $20 million
in 2007 and $15 million thereafter.
SEG has also contracted to pay Programming Fees for the rights to exhibit
films that have been released theatrically, but are not available for exhibition
by SEG until some future date. These amounts have not been accrued at June 30,
2006. SEG's estimate of amounts payable under these agreements is as follows:
$199 million in 2006; $471 million in 2007; $99 million in 2008; $93 million in
2009; $86 million in 2010 and $54 million thereafter.
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In addition, SEG is obligated to pay Programming Fees for all qualifying
films that are released theatrically in the United States by studios owned by
The Walt Disney Company through 2009, all qualifying films that are released
theatrically in the United States by studios owned by Sony Pictures
Entertainment through 2010 and all qualifying films produced for theatrical
release in the United States by Revolution Studios through 2006. Films are
generally available to SEG for exhibition 10 - 12 months after their theatrical
release. The Programming Fees to be paid by SEG are based on the quantity and
the domestic theatrical exhibition receipts of qualifying films. As these films
have not yet been released in theatres, SEG is unable to estimate the amounts to
be paid under these output agreements. However, such amounts are expected to be
significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, SEG has agreed to pay Sony a total of
$190 million in four annual installments of $47.5 million beginning in 2011.
This option expires December 31, 2007. If made, such payments to Sony would be
amortized ratably as programming expense over the extension period beginning in
2011. An extension of this agreement would also result in the payment by SEG of
Programming Fees for qualifying films released by Sony during the extension
period. If Disney elects to extend its contract, SEG would not be obligated to
pay any amounts in excess of its Programming Fees for qualifying films released
by Disney during the extension period. The Disney option expires December 31,
2007.
Liberty guarantees SEG's film licensing obligations under certain of its
studio output agreements. At June 30, 2006, Liberty's guarantee for studio
output obligations for films released by such date aggregated $693 million.
While the guarantee amount for films not yet released is not determinable, such
amount is expected to be significant. As noted above, SEG has recognized the
liability for a portion of its obligations under the output agreements. As this
represents a commitment of SEG, a consolidated subsidiary of ours, we have not
recorded a separate liability for our guarantee of these obligations.
From time to time we enter into total return debt swaps in connection with
our purchase of our own or third-party public and private indebtedness. Under
these arrangements, we direct a counterparty to purchase a specified amount of
the underlying debt security for our benefit. We initially post collateral with
the counterparty equal to a contractual percentage of the value of the purchased
securities. We earn interest income based upon the face amount and stated
interest rate of the underlying debt securities, and we pay interest expense at
market rates on the amount funded by the counterparty. In the event the fair
value of the underlying debt securities declines more than 10%, we are required
to post cash collateral for the decline, and we record an unrealized loss on
financial instruments. The cash collateral is further adjusted up or down for
subsequent changes in fair value of the underlying debt security. At June 30,
2006, the aggregated purchase price of debt securities underlying total return
debt swap arrangements, which related to $500 million principal amount of
certain of our publicly-trade debt, was $322 million. As of such date, we had
posted cash collateral equal to $64 million, In the event the fair value of the
purchased debt securities were to fall to zero, we would be required to post
additional cash collateral of $258 million. The posting of such collateral and
the related settlement of the agreements would reduce our outstanding debt by
$500 million.
Since the date we issued our exchangeable debentures, we have claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which we could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in us claiming interest deductions significantly in excess
of the cash interest currently paid on our exchangeable debentures. In this
regard, we have deducted $1,965 million in cumulative interest expense
associated with the exchangeable debentures since our split-off from AT&T. Of
that amount, $571 million represents cash interest payments. Interest deducted
in prior years on our exchangeable debentures has contributed to NOLs that may
be carried to offset taxable income in 2006
I-37
and later years. These NOLs and current interest deductions on our exchangeable
debentures are being used to offset taxable income currently being generated.
The IRS has issued Technical Advice Memorandums challenging the current
deductibility of interest expense claimed on exchangeable debentures issued by
other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge our tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to our
reported total tax expense as the resulting increase in current tax expense
would be offset by a decrease in our deferred tax expense. However, we would be
required to make current federal income tax payments. These federal income tax
payments could prove to be significant.
Pursuant to a tax sharing agreement between us and AT&T when we were a
subsidiary of AT&T, we received a cash payment from AT&T in periods when we
generated taxable losses and such taxable losses were utilized by AT&T to reduce
its consolidated income tax liability. To the extent such losses were not
utilized by AT&T, such amounts were available to reduce federal taxable income
generated by us in future periods, similar to a net operating loss carryforward.
While we were a subsidiary of AT&T, we recorded our stand-alone tax provision on
a separate return basis. Subsequent to our split off from AT&T, if adjustments
are made to amounts previously paid under the AT&T Tax Sharing Agreement, such
adjustments are reflected as adjustments to additional paid-in capital. During
the period from March 10, 1999 to December 31, 2002, we received cash payments
from AT&T aggregating $670 million as payment for our taxable losses that AT&T
utilized to reduce its income tax liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with the
split off from AT&T, AT&T was required to pay us an amount equal to 35% of the
amount of the net operating losses reflected in TCI's final federal income tax
return that had not been used as an offset to our obligations under the AT&T Tax
Sharing Agreement and that had been, or were reasonably expected to be, utilized
by AT&T. In connection with our split off from AT&T, we received an
$803 million payment for TCI's NOLs and recorded such payment as an increase to
additional paid-in capital. We were not paid for certain of TCI's NOLs due to
limitations and uncertainty regarding AT&T's ability to use them to offset
taxable income in the future. In the event AT&T was ultimately able to use any
of the SRLY NOLs, they would be required to pay us 35% of the amount of the SRLY
NOLs used. In the fourth quarter of 2004 and in connection with the completion
of an IRS audit of TCI's tax return for 1994, it was determined that we were
required to recognize additional taxable income related to the recapitalization
of one of our investments resulting in a tax liability of approximately
$30 million. As a result of the tax assessment, we also received a corresponding
amount of additional tax basis in the investment. However, we were able to cause
AT&T to use a portion of the SRLY NOLs to offset this taxable income, the
benefit of which resulted in the elimination of the $30 million tax liability
and an increase to additional paid-in capital.
In the fourth quarter of 2004, AT&T requested a refund from us of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by our losses. AT&T has asserted that our losses caused AT&T to pay $70 million
in alternative minimum tax that it would not have been otherwise required to pay
had our losses not been included in its return. In 2004, we estimated that we
may ultimately pay AT&T up to $30 million of the requested $70 million because
we believed AT&T received an AMT credit of $40 million against income taxes
resulting from the AMT previously paid. Accordingly, we accrued a $30 million
liability with an offsetting reduction of additional paid-in capital. The net
effect of the completion of the IRS tax audit noted above (including the benefit
derived from AT&T for the utilization of the SRLY NOLs) and our accrual of
amounts due to AT&T was an increase to deferred tax assets and an increase to
other liabilities.
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In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by our losses. In addition, the information
provided to us in connection with AT&T's request showed that AT&T had not yet
claimed a credit for AMT previously paid. Accordingly, in the fourth quarter of
2005, we increased our accrual by approximately $40 million (with a
corresponding reduction of additional paid-in capital) representing our estimate
of the amount we may ultimately pay (excluding accrued interest, if any) to AT&T
as a result of this request. Although we have not reduced our accrual for any
future refunds, we believe we are entitled to a refund when AT&T is able to
realize a benefit in the form of a credit for the AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by our losses. We have reviewed this
claim and we believe that our accrual as of December 31, 2005 is adequate.
Accordingly, no additional accrual was recorded during the six months ended
June 30, 2006.
Although for accounting purposes we have accrued a portion of the amounts
claimed by AT&T to be owed by us under the AT&T Tax Sharing Agreement, we
believe there are valid defenses or set-off or similar rights in our favor that
may cause the total amount that we owe AT&T to be less than the amounts accrued;
and under certain interpretations of the AT&T Tax Sharing Agreement, we may be
entitled to further reimbursements from AT&T.
In connection with agreements for the sale of certain assets, we typically
retain liabilities that relate to events occurring prior to the sale, such as
tax, environmental, litigation and employment matters. We generally indemnify
the purchaser in the event that a third party asserts a claim against the
purchaser that relates to a liability retained by us. These types of
indemnification guarantees typically extend for a number of years. We are unable
to estimate the maximum potential liability for these types of indemnification
guarantees as the sale agreements typically do not specify a maximum amount and
the amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time. Historically,
we have not made any significant indemnification payments under such agreements
and no amount has been accrued in the accompanying consolidated financial
statements with respect to these indemnification guarantees.
We have contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible we may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS, AN
AMENDMENT OF FASB STATEMENTS NO. 133 AND 140." Statement No. 155, among other
things, amends Statement No. 133, and permits fair value remeasurement of hybrid
financial instruments that contain an embedded derivative that otherwise would
require bifurcation. Statement No. 155 is effective after the beginning of an
entity's first fiscal year that begins after September 15, 2006. Under Statement
No. 155, the Company may elect to account for its senior exchangeable debentures
at fair value rather than bifurcating such debentures into a debt instrument and
a derivative instrument as required by Statement No. 133. The Company is
evaluating the impact of Statement No. 155 on its financial statements and has
not yet made a determination as to what election it will make with respect to
the accounting for its senior exchangeable derivatives.
In June 2006, the FASB issued FASB Interpretation No. 48, "ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109." FIN
48 clarifies the accounting for uncertainty in
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income taxes recognized in a company's financial statements, and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 is effective for fiscal years beginning after December 15,
2006. While we have not completed our evaluation of the impact of FIN 48 on our
financial statements, we believe that the application of FIN 48 will result in
the derecognition of certain tax liabilities currently reflected in our
consolidated balance sheet with a corresponding decrease to our accumulated
deficit. We are unable to quantify the amount of these adjustments at this time.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of business due to our
ongoing investing and financing activities and our subsidiaries in different
foreign countries. Market risk refers to the risk of loss arising from adverse
changes in stock prices, interest rates and foreign currency exchange rates. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. We have established policies, procedures
and internal processes governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by
(i) issuing fixed-rate debt that we believe has a low stated interest rate and
significant term to maturity and (ii) issuing variable rate debt with
appropriate maturities and interest rates. As of June 30, 2006, the face amount
of our fixed rate debt (considering the effects of interest rate swap
agreements) was $8,677 million, which had a weighted average interest rate of
4.73%. Our variable rate debt of $1,707 million had a weighted average interest
rate of 6.75% at June 30, 2006. Had market interest rates been 100 basis points
higher (representing an approximate 15% increase over our variable rate debt
effective cost of borrowing) throughout the six months ended June 30, 2006, we
would have recognized approximately $10 million of additional interest expense.
We are exposed to changes in stock prices primarily as a result of our
significant holdings in publicly traded securities. We continually monitor
changes in stock markets, in general, and changes in the stock prices of our
holdings, specifically. We believe that changes in stock prices can be expected
to vary as a result of general market conditions, technological changes,
specific industry changes and other factors. We use equity collars, put spread
collars, narrow-band collars, written put and call options and other financial
instruments to manage market risk associated with certain investment positions.
These instruments are recorded at fair value based on option pricing models.
Among other factors, changes in the market prices of the securities
underlying our AFS Derivatives affect the fair market value of such AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying our equity collars would have on the
fair market value of such derivatives. Such changes in fair market value would
be included in
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realized and unrealized gains (losses) on financial instruments in our statement
of operations (amounts in millions).
ESTIMATED AGGREGATE
FAIR VALUE OF
EQUITY COLLARS
-------------------
Fair value at June 30, 2006................................ $ 929
5% increase in market prices............................... $ 798
10% increase in market prices.............................. $ 666
5% decrease in market prices............................... $1,058
10% decrease in market prices.............................. $1,187
At June 30, 2006, the fair value of our AFS securities was $19,780 million.
Had the market price of such securities been 10% lower at June 30, 2006, the
aggregate value of such securities would have been $1,978 million lower
resulting in an increase to unrealized holding losses in other comprehensive
earnings (loss). Such decrease would be partially offset by an increase in the
value of our AFS Derivatives as noted in the table above.
In connection with certain of our AFS Derivatives, we periodically borrow
shares of the underlying securities from a counterparty and deliver these
borrowed shares in settlement of maturing derivative positions. In these
transactions, a similar number of shares that we own have been posted as
collateral with the counterparty. These share borrowing arrangements can be
terminated at any time at our option by delivering shares to the counterparty.
The counterparty can terminate these arrangements upon the occurrence of certain
events which limit the trading volume of the underlying security. The liability
under these share borrowing arrangements is marked to market each reporting
period with changes in value recorded in unrealized gains or losses in our
consolidated statement of operations. The shares posted as collateral under
these arrangements continue to be treated as AFS securities and are marked to
market each reporting period with changes in value recorded as unrealized gains
or losses in other comprehensive earnings.
We are exposed to foreign exchange rate fluctuations related primarily to
the monetary assets and liabilities and the financial results of QVC's foreign
subsidiaries. Assets and liabilities of foreign subsidiaries for which the
functional currency is the local currency are translated into U.S. dollars at
period-end exchange rates and the statements of operations are generally
translated at the average exchange rate for the period. Exchange rate
fluctuations on translating foreign currency financial statements into U.S.
dollars that result in unrealized gains or losses are referred to as translation
adjustments. Cumulative translation adjustments are recorded in other
comprehensive earnings (loss) as a separate component of stockholders' equity.
Transactions denominated in currencies other than the functional currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses, which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions. Cash flows from our operations in foreign
countries are generally translated at the average rate for the period.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a result of foreign currency
exchange rate fluctuations.
We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. We believe that
any losses incurred with regard to interest rate swaps would be offset by the
effects of interest rate movements on the underlying debt facilities. With
regard to equity collars, we monitor historical market trends relative to values
currently present in the market. We believe that any unrealized losses incurred
with regard to equity collars and swaps would be offset by the effects of fair
value changes on the underlying assets.
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These measures allow our management to measure the success of its use of
derivative instruments and to determine when to enter into or exit from
derivative instruments.
Our derivative instruments are executed with counterparties who are well
known major financial institutions with high credit ratings. While we believe
these derivative instruments effectively manage the risks highlighted above,
they are subject to counterparty credit risk. Counterparty credit risk is the
risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To protect
ourselves against credit risk associated with these counterparties we generally:
- execute our derivative instruments with several different counterparties,
and
- execute equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for our benefit, if
the respective counterparty's credit rating for its senior unsecured debt
were to reach certain levels, generally a rating that is below Standard &
Poor's rating of A- and/or Moody's rating of A3.
Due to the importance of these derivative instruments to our risk management
strategy, we actively monitor the creditworthiness of each of these
counterparties. Based on our analysis, we currently consider nonperformance by
any of our counterparties to be unlikely.
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INTERACTIVE GROUP
On May 9, 2006, our stockholders approved the Restructuring which, among
other things, resulted in the creation of two tracking stocks, one of which is
intended to reflect the separate performance of the Interactive Group. The
Interactive Group initially consists of our subsidiaries QVC and Provide, our
interests in IAC/InterActiveCorp and Expedia and $4,476 million principal amount
(as of June 30, 2006) of our existing publicly-traded debt.
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Interactive Group. Although
the Restructuring was not completed until May 9, 2006, the following discussion
is presented as though the Restructuring had been completed on January 1, 2005.
The results of operations of Provide are included in Corporate and Other in the
tables below. Fluctuations from 2005 to 2006 are due primarily to the
acquisition of Provide in February 2006. This discussion should be read in
conjunction with our condensed consolidated financial statements and notes
thereto included elsewhere in this Quarterly Report on Form 10-Q.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
QVC.......................................... $1,630 1,479 3,185 2,943
Corporate and Other.......................... 85 -- 138 --
------ ----- ----- -----
$1,715 1,479 3,323 2,943
====== ===== ===== =====
OPERATING CASH FLOW (DEFICIT)
QVC.......................................... $ 378 324 733 647
Corporate and Other.......................... 7 (1) 17 (2)
------ ----- ----- -----
$ 385 323 750 645
====== ===== ===== =====
OPERATING INCOME (LOSS)
QVC.......................................... $ 242 193 454 393
Corporate and Other.......................... 1 (1) 7 (2)
------ ----- ----- -----
$ 243 192 461 391
====== ===== ===== =====
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QVC. QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs
and, to a lesser extent, via the Internet. In the United States, the program is
aired live through its nationally televised shopping network--24 hours a day,
7 days a week ("QVC-US"). Internationally, QVC has electronic retailing program
services based in the United Kingdom ("QVC-UK"), Germany ("QVC-Germany") and
Japan ("QVC-Japan"). QVC-UK broadcasts 24 hours a day with 17 hours of live
programming, and QVC-Germany and QVC-Japan each broadcast live 24 hours a day.
QVC's operating results are as follows:
THREE MONTHS
ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Net revenue.................................. $ 1,630 1,479 3,185 2,943
Cost of sales................................ (1,007) (922) (1,978) (1,836)
------- ----- ------ ------
Gross profit............................... 623 557 1,207 1,107
Operating expenses........................... (138) (130) (269) (259)
SG&A expenses (excluding stock-based
compensation).............................. (107) (103) (205) (201)
------- ----- ------ ------
Operating cash flow........................ 378 324 733 647
Stock-based compensation--SG&A............... (16) (17) (41) (25)
Depreciation and amortization................ (120) (114) (238) (229)
------- ----- ------ ------
Operating income........................... $ 242 193 454 393
======= ===== ====== ======
Net revenue includes the following revenue by geographical area:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
QVC-US......................................... $1,140 1,034 2,228 2,059
QVC-UK......................................... 137 129 271 259
QVC-Germany.................................... 190 185 385 379
QVC-Japan...................................... 163 131 301 246
------ ----- ----- -----
Consolidated................................. $1,630 1,479 3,185 2,943
====== ===== ===== =====
QVC's consolidated net revenue increased 10.2% and 8.2% during the three and
six months ended June 30, 2006, respectively, as compared to the corresponding
prior year periods. The three month increase in revenue is comprised of a
$174 million increase due to an increase in the number of units shipped from
35.7 million to 39.1 million and a $12 million increase due to a 1.1% increase
in the average sales price per unit ("ASP"). The revenue increases were
partially offset by a $13 million decrease due to unfavorable foreign currency
rates as the U.S. dollar strengthened against the UK pound sterling, the euro
and the Japanese yen and a $22 million decrease due primarily to an increase in
product returns. The six month increase in revenue is comprised of a
$320 million increase due to an increase in the number of units shipped from
70.4 million to 76.3 million and a $38 million increase due to a 0.6% increase
in the ASP. The revenue increases were partially offset by a $57 million
decrease due to unfavorable foreign currency rates and a $59 million decrease
due primarily to an increase in product returns. Returns as a percent of gross
product revenue increased from 18.8% and 18.5% for the three and six months
ended June 30, 2005 to 19.2% and 19.3% in 2006 due to a shift in
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the sales mix from home products to apparel and accessories products, which
typically have higher return rates.
The number of homes receiving QVC's services are as follows:
HOMES (IN MILLIONS)
-----------------------
JUNE 30, DECEMBER 31,
2006 2005
-------- ------------
QVC-US.................................................. 91.1 90.8
QVC-UK.................................................. 18.7 17.8
QVC-Germany............................................. 37.6 37.4
QVC-Japan............................................... 17.8 16.7
The QVC service is already received by substantially all of the cable
television and direct broadcast satellite homes in the U.S. and Germany. In
addition, the rate of growth in homes receiving the service is expected to
diminish in the UK and Japan. As these markets continue to mature, QVC also
expects its consolidated rate of growth in revenue to diminish. Future sales
growth will primarily depend on continued additions of new customers from homes
already receiving the QVC service, continued growth in sales to existing
customers and growth in the number of cable and direct broadcast satellite
homes. QVC's future sales may also be affected by (i) the willingness of cable
and satellite distributors to continue carrying QVC's programming service,
(ii) QVC's ability to maintain favorable channel positioning, which may become
more difficult as distributors convert analog customers to digital,
(iii) changes in television viewing habits because of personal video recorders,
video-on-demand and IP television and (iv) general economic conditions.
As noted above, during the three and six months ended June 30, 2006, the
changes in revenue and expenses were also impacted by fluctuations in the
exchange rates for the UK pound sterling, the euro and the Japanese yen. In the
event the U.S. dollar continues to strengthen against these foreign currencies
in the future, QVC's reported revenue and operating cash flow will be negatively
impacted. The percentage increase in revenue for each of QVC's geographic areas
in U.S. dollars and in local currency is as follows:
PERCENTAGE INCREASE IN NET REVENUE
-------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2006 JUNE 30, 2006
----------------------------- -----------------------------
U.S. DOLLARS LOCAL CURRENCY U.S. DOLLARS LOCAL CURRENCY
------------ -------------- ------------ --------------
QVC-US....................... 10.3% 10.3% 8.2% 8.2%
QVC-UK....................... 6.2% 7.6% 4.6% 9.7%
QVC-Germany.................. 2.7% 3.1% 1.6% 6.1%
QVC-Japan.................... 24.4% 32.5% 22.4% 33.0%
QVC's gross profit percentage increased 50 and 30 basis points during the
three and six months ending June 30, 2006, respectively, as compared to the
corresponding prior year periods. The increases for both periods are primarily
due to lower inventory obsolescence provisions and to a lesser extent, higher
initial margins due to a shift in the sales mix from home products to higher
margin apparel and accessories products.
QVC's operating expenses are principally comprised of commissions, order
processing and customer service expenses, provision for doubtful accounts,
telecommunications expense and credit card processing fees. Operating expenses
increased 6.2% and 3.9% for the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year periods. These
increases are primarily due to the increases in sales volume. As a percentage of
net revenue, operating expenses decreased to 8.5% for the three months ended
June 30, 2006 from 8.8% for the comparable period in 2005 and decreased to 8.4%
from 8.8% for the six-month period. As a percentage of net revenue,
I-45
commissions and license fees decreased due to a greater percentage of Internet
sales for which lower commissions are required to be paid. In addition,
commission and license fee expense decreased as a percentage of net revenue in
QVC-Japan where certain distributors are paid the greater of (i) a fixed fee per
subscriber and (ii) a specified percentage of sales. In the first quarter of
2006, more distributors started to receive payments based on sales volume rather
than a fixed fee per subscriber. The bad debt provision decreased as a
percentage of net revenue in both periods due to lower write-offs on the
Company's private label credit card. As a percent of net revenue, order
processing and customer service expenses decreased in both periods due to
increased Internet sales, the higher ASP and efficiencies in call staffing.
Telecommunications expense and credit card processing fees remained consistent
as a percent of net revenue in 2006 as compared to 2005.
QVC's SG&A expenses, which include personnel, information technology,
marketing and advertising expenses, were relatively flat for the three and six
months ended June 30, 2006, as compared to the corresponding prior year periods.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Interactive Group's primary sources of liquidity are QVC's cash on hand,
cash generated by the operating activities of QVC and Provide, to the extent
such cash is not otherwise restricted, and availability under QVC's bank credit
facility. In addition, we may issue additional shares of Liberty Interactive
Stock, and we may issue additional debt and attribute such debt to the
Interactive Group, and in either case, make the proceeds available to the
Interactive Group.
During the six months ended June 30, 2006, the Interactive Group's primary
uses of cash were funding the acquisition of Provide ($465 million), repurchases
of QVC common stock, capital expenditures and the repurchase of outstanding
Liberty Interactive common stock. In connection with the issuance of our
tracking stocks, our board of directors authorized a share repurchase program
pursuant to which we may repurchase up to $1 billion of outstanding shares of
Liberty Interactive Stock in the open market or in privately negotiated
transactions, from time to time, subject to market conditions. During the second
quarter of 2006, we repurchased 19.3 million shares of Liberty Interactive
Series A common stock for aggregate cash consideration of $341 million pursuant
to this share repurchase program. We may alter or terminate the stock repurchase
program at any time.
The projected uses of Interactive Group cash for the remainder of 2006
include approximately $1,370 million to retire senior notes that mature in
September 2006, approximately $210 million for interest payments on debt
attributed to the Interactive Group, additional tax payments to the Capital
Group and additional repurchases of Liberty Interactive common stock. In
addition, we may make additional investments in existing or new businesses and
attribute such investments to the Interactive Group. However, we are unable to
quantify such investments at this time.
Effective March 3, 2006, QVC refinanced its existing bank credit facility
with a new $3.5 billion bank credit facility. The QVC Credit Facility is
comprised of an $800 million U.S. dollar term loan that was drawn at closing, an
$800 million U.S. dollar term loan that can be drawn at any time before
September 30, 2006, a $600 million multi-currency term loan that can be drawn at
any time before September 30, 2006, a $650 million U.S. dollar revolving loan
and a $650 million multi-currency revolving loan. The foregoing multi-currency
loans can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound
sterling or euros. All loans are due and payable on March 3, 2011, and accrue
interest, at the option of QVC, at LIBOR plus an applicable margin or the
Alternate Base Rate, as defined in the QVC Credit Facility, plus an applicable
margin. QVC is required to pay a commitment fee quarterly in arrears on the
unused portion of the commitments.
During the six months ended June 30, 2006, QVC funded capital expenditures
($98 million) and the repurchase of its common stock from officers and employees
($159 million) with cash on hand and
I-46
cash generated by operating activities. QVC currently expects to spend
approximately $355 million for capital expenditures in 2006. These amounts are
expected to be funded by the cash flows of QVC.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
Our businesses attributed to the Interactive Group have contingent
liabilities related to legal and tax proceedings and other matters arising in
the ordinary course of business. Although it is reasonably possible these
businesses may incur losses upon conclusion of such matters, an estimate of any
loss or range of loss cannot be made. In the opinion of management, it is
expected that amounts, if any, which may be required to satisfy such
contingencies will not be material in relation to the Interactive Group's
attributed financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Interactive Group is exposed to market risk in the normal course of
business due to its ongoing investing and financing activities and QVC's
subsidiaries in different foreign countries. Market risk refers to the risk of
loss arising from adverse changes in stock prices, interest rates and foreign
currency exchange rates. The risk of loss can be assessed from the perspective
of adverse changes in fair values, cash flows and future earnings. We have
established policies, procedures and internal processes governing management of
market risks and the use of financial instruments to manage exposure to such
risks.
The Interactive Group is exposed to changes in interest rates primarily as a
result of its borrowings used to maintain liquidity and to fund business
operations. The nature and amount of its long-term and short-term debt are
expected to vary as a result of future requirements, market conditions and other
factors. As of June 30, 2006, the face amount of the Interactive Group's fixed
rate debt (considering the effects of interest rate swap agreements) was
$4,097 million, which had a weighted average interest rate of 7.15%. The
Interactive Group's variable rate debt of $1,647 million had a weighted average
interest rate of 6.80% at June 30, 2006.
The Interactive Group is exposed to changes in stock prices primarily as a
result of its investments in IAC/InterActiveCorp and Expedia. We continually
monitor changes in stock markets, in general, and changes in the stock prices of
our holdings, specifically. We believe that changes in stock prices can be
expected to vary as a result of general market conditions, technological
changes, specific industry changes and other factors.
The Interactive Group is exposed to foreign exchange rate fluctuations
related primarily to the monetary assets and liabilities and the financial
results of QVC's foreign subsidiaries. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated into U.S. dollars at period-end exchange rates and the statements of
operations are generally translated at the average exchange rate for the period.
Exchange rate fluctuations on translating foreign currency financial statements
into U.S. dollars that result in unrealized gains or losses are referred to as
translation adjustments. Cumulative translation adjustments are recorded in
other comprehensive earnings (loss) as a separate component of stockholders'
equity. Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses, which are reflected in income as unrealized (based on period-end
translations) or realized upon settlement of the transactions. Cash flows from
operations in foreign countries are generally translated at the average rate for
the period. Accordingly, the Interactive Group may experience economic loss and
a negative impact on attributed earnings and equity solely as a result of
foreign currency exchange rate fluctuations.
I-47
CAPITAL GROUP
The other tracking stock created in the Restructuring is intended to reflect
the separate performance of the Capital Group. The Capital Group is comprised of
our subsidiaries and assets not attributed to the Interactive Group, including
controlling interests in SEG, On Command, TruePosition, FUN and OpenTV, as well
as minority investments in News Corporation, Time Warner Inc., Sprint Nextel
Corporation and other public and private companies and approximately
$4,580 million principal amount of our existing publicly-traded debt.
The following discussion and analysis provides information concerning the
attributed results of operations and financial condition of the Capital Group.
Although the Restructuring was not completed until May 9, 2006, the following
discussion is presented as though the Restructuring had been completed on
January 1, 2005. This discussion should be read in conjunction with our
condensed consolidated financial statements and notes thereto included elsewhere
in this Quarterly Report on Form 10-Q.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
SEG............................................. $264 258 523 512
Corporate and Other............................. 128 102 244 205
---- --- --- ---
$392 360 767 717
==== === === ===
OPERATING CASH FLOW (DEFICIT)
SEG............................................. $ 50 47 91 95
Corporate and Other............................. 3 (2) 5 (10)
---- --- --- ---
$ 53 45 96 85
==== === === ===
OPERATING INCOME (LOSS)
SEG............................................. $ 44 36 77 72
Corporate and Other............................. (40) (40) (78) (74)
---- --- --- ---
$ 4 (4) (1) (2)
==== === === ===
REVENUE. The Capital Group's combined revenue increased $32 million or 8.9%
and $50 million or 7.0% for the three and six months ended June 30, 2006,
respectively, as compared to the corresponding prior year periods. These
increases are due primarily to $11 million and $23 million increases for
TruePosition and $11 million and $13 million attributable to FUN, which we
acquired in March 2006.
OPERATING CASH FLOW. The Capital Group's Operating Cash Flow increased
$8 million or 17.8% and $11 million or 12.9% during the three and six months
ended June 30, 2006, respectively, as compared to the corresponding prior year
periods. These increases are due primarily to $5 million and $14 million
increases in TruePosition's operating cash flow for the three and six month
periods, respectively.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights for shares of our common
stock that are granted to certain of our officers and employees, (2) phantom
stock appreciation rights ("PSARs") granted to officers and employees of
I-48
certain of our subsidiaries pursuant to private equity plans and
(3) amortization of restricted stock grants.
Effective January 1, 2006, we adopted Statement No. 123R. Statement
No. 123R requires that we amortize the grant date fair value of our stock option
and SAR Awards that qualify as equity awards as stock compensation expense over
the vesting period of such Awards. Statement No. 123R also requires that we
record the liability for our liability awards at fair value each reporting
period and that the change in fair value be reflected as stock compensation
expense in our condensed consolidated statement of operations. Prior to adoption
of Statement No. 123R, the amount of expense associated with stock-based
compensation was generally based on the vesting of the related stock options and
stock appreciation rights and the market price of the underlying common stock,
as well as the vesting of PSARs and the equity value of the related subsidiary.
The expense reflected in our condensed consolidated financial statements was
based on the market price of the underlying common stock as of the date of the
financial statements.
In connection with our adoption of Statement 123R, the Capital Group
recorded a $2 million transition adjustment, net of related income taxes, which
primarily reflects the difference between the fair value and the intrinsic value
of the Capital Group liability awards at January 1, 2006. The transition
adjustment is reflected in the accompanying condensed consolidated statement of
operations as the cumulative effect of accounting change. In addition, the
Capital Group recorded $9 million of stock compensation expense for the six
months ended June 30, 2006 compared with a credit to stock compensation of
$8 million in 2005.
OPERATING INCOME. The Capital Group's operating income increased
$8 million and $1 million for the three and six months ended June 30, 2006 and
2005, respectively, as compared to the corresponding prior year periods.
Improvements in operating income for TruePosition, SEG and On Command were
partially offset by operating losses for FUN.
OTHER INCOME AND EXPENSE
INTEREST EXPENSE. Interest expense was fairly comparable over the 2006 and
2005 periods. The slight increase is due primarily to an increase in the
amortization of the discount on the exchangeable debentures.
DIVIDEND AND INTEREST INCOME. Dividend and interest income was $78 million
and $47 million for the six months ended June 30, 2006 and 2005, respectively.
Such income increased due to higher invested cash balances. Interest and
dividend income for the six months ended June 30, 2006 was comprised of interest
income earned on invested cash ($32 million), dividends on News Corp. common
stock ($29 million), dividends on other AFS securities ($6 million), and other
($11 million).
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of the
following:
SIX MONTHS ENDED
JUNE 30,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call
option features........................................ $140 228
Change in fair value of equity collars................... (61) 349
Change in fair value of put options...................... (9) (71)
Change in fair value of borrowed shares.................. 105 (27)
Change in fair value of other derivatives................ (23) 52
---- ---
$152 531
==== ===
I-49
GAINS (LOSSES) ON DISPOSITIONS. The Capital Group recognized gains on
dispositions of $327 million for the six months ended June 30, 2006 and losses
on dispositions of $401 million in 2005. The Capital Group's 2006 gains related
to the sale of its 50% investment in Court TV ($303 million, including the
$124 million of allocated goodwill) and dispositions of certain AFS securities.
In the first quarter of 2005, we disposed of interests in certain investments
attributed to the Capital Group and recognized $488 million of foreign currency
translation losses, before related income taxes, related to these two
investments that were previously included in accumulated other comprehensive
earnings (loss). These foreign currency losses were partially offset by gains on
disposition of certain AFS securities and other assets. The foregoing gains or
losses were calculated based upon the difference between the cost basis of the
assets relinquished, as determined on an average cost basis, and the fair value
of the assets received.
INCOME TAXES. For the six months ended June 30, 2006, the Capital Group had
an effective tax rate of 25.1%. Such rate is less than the U.S. federal rate of
35% due to a deferred tax benefit recognized in the first quarter. Late in the
first quarter of 2006, we decided to effect a restructuring transaction which
was effective on April 1, 2006, and which enabled us to include TruePosition in
our Federal consolidated tax group on a prospective basis. As a result of this
decision and considering our overall tax position, we reversed $89 million of
valuation allowance recorded against TruePosition's net deferred tax assets into
the Capital Group's attributed statement of operations as a deferred tax benefit
in the first quarter of 2006. This valuation allowance did not relate to net
operating loss carryforwards or some other future tax deduction of TruePosition,
but rather related to temporary differences caused by revenue and cost amounts
that were recognized for tax purposes in prior periods, but have been deferred
for financial reporting purposes until future periods. Such deferred tax benefit
was partially offset by tax expense on the gain on sale of Court TV for which we
had higher book basis than tax basis. The Capital Group's effective tax rate was
42.3% for the six months ended June 30, 2005 and differs from the U.S. federal
income tax rate of 35% primarily due to provisions for state and foreign taxes.
NET EARNINGS (LOSS). The Capital Group's net earnings was $338 million and
$79 million for the six months ended June 30, 2006 and 2005, respectively. Such
change is due to the aforementioned fluctuations in revenue and expenses. In
addition, the Capital Group recognized $34 million of earnings from discontinued
operations in 2005.
SEG. Historically, SEG has provided premium programming distributed by
cable operators, direct-to-home satellite providers and other distributors
throughout the United States. In 2004 and 2005, SEG launched, via the Internet,
Starz Ticket and Vongo which are comprised of a stream of the Starz channel and
other movie and entertainment content on an on-demand basis. Starz Ticket and
Vongo are each offered on a subscription basis, and in addition, Vongo offers
content on a pay-per-view basis. Notwithstanding the launches of these new
services, substantially all of SEG's revenue continues to be derived from the
delivery of movies to subscribers under affiliation agreements with television
video programming distributors. Some of SEG's affiliation agreements provide for
payments to SEG based on the number of subscribers that receive SEG's services.
SEG also has fixed-rate affiliation agreements with certain of its customers.
Pursuant to these agreements, the customers pay an agreed-upon rate regardless
of the number of subscribers. The agreed-upon rate is contractually increased
annually or semi-annually as the case may be, and these agreements, other than
the Comcast agreement described below, expire in 2006 through 2008. During the
six months ended June 30, 2006, 57.5% of SEG's revenue was generated by its
three largest customers, Comcast, Echostar Communications and DirecTV. SEG has
entered into a new affiliation agreement with Echostar which expires in
June 2009. SEG's affiliation agreement with DirecTV expired June 30, 2006, and
SEG is currently in negotiations with DirecTV regarding a new agreement. Until a
new agreement is consummated with DirecTV, SEG will recognize revenue from
DirecTV on a cash basis.
I-50
SEG's affiliation agreements generally do not provide for the inclusion of
its services in specific programming packages of the distributors. The previous
affiliation agreement with Comcast, however, did include a short-term packaging
commitment to carry the Encore and Thematic Multiplex channels (EMP) in
specified digital tiers on Comcast's cable systems. The affiliation agreement
originally expired at the end of 2010, and Comcast's packaging commitment
expired at the end of 2005. In the second quarter of 2005, SEG and Comcast
renegotiated their affiliation agreement. The new agreement eliminates Comcast's
packaging commitment for EMP and provides for a fixed fee payment structure,
with certain Consumer Price Index ("CPI") adjustments, for EMP through
September 2009. The agreement also provides for a guaranteed payment structure
for Comcast's carriage of Starz through December 2012 with contractual increases
for 2006 and 2007 and annual CPI adjustments for the remainder of the term. The
foregoing payment structure for EMP and Starz may be adjusted in the event
Comcast acquires or disposes of cable systems. Finally, Comcast has agreed to
the elimination of certain future marketing support commitments from SEG. As a
result of this new agreement, SEG's future revenue from Comcast for its EMP and
Starz products will not be impacted by any increases or decreases in actual
subscribers, except in the case of acquisitions or dispositions noted above. The
terms of the EMP and Starz payment structures can be extended by Comcast, at its
option, for a total of six years and five years, respectively.
SEG's operating results are as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Revenue........................................... $ 264 258 523 512
Operating expenses................................ (188) (176) (377) (351)
SG&A expenses..................................... (26) (35) (55) (66)
----- ---- ---- ----
Operating cash flow............................. 50 47 91 95
Depreciation and amortization..................... (6) (11) (14) (23)
----- ---- ---- ----
Operating income................................ $ 44 36 77 72
===== ==== ==== ====
SEG's revenue increased $6 million or 2.3% and $11 million or 2.1% for the
three and six months ended June 30, 2006, respectively, as compared to the
corresponding prior year periods. The three month increase is due to a
$14 million increase resulting from growth in the average number of subscription
units for SEG's services partially offset by an $8 million decrease due to a
decrease in the effective rate for SEG's services. The six month increase is due
to a $25 million increase resulting from growth in the average number of
subscription units for SEG's services partially offset by a $14 million decrease
due to a decrease in the effective rate for SEG's services.
SEG's Starz movie service and its Encore movie service are the primary
drivers of SEG's revenue. Starz average subscriptions increased 5.8% and 3.8%
for the three and six months ended June 30, 2006, respectively, and Encore
average subscriptions increased 8.3% and 7.4%. The effects of these increases in
subscription units are somewhat mitigated by the fixed-rate affiliation
agreements that SEG has entered into in recent years.
At June 30, 2006, cable, DTH satellite, and other distribution media
represented 67.2%, 31.3% and 1.5%, respectively, of SEG's total subscription
units.
SEG's operating expenses increased 6.8% and 7.4% for the three and six
months ended June 30, 2006, respectively, due primarily to increases in
programming costs, which increased from $167 million for the three months ended
June 30, 2005 to $180 million in 2006 and from $332 million for the six months
ended June 30, 2005 to $359 million in 2006. The increases in programming costs
are due
I-51
primarily to $16 million and $32 million of additional amortization of deposits
previously made under certain of its output arrangements. Such amortization was
partially offset by a decrease in programming costs due to a lower percentage of
first-run movie exhibitions (which have a relatively higher cost per title) as
compared to the number of library product exhibitions.
SEG expects that its full-year programming costs in 2006 will be 5%-7%
higher than the 2005 costs due to the amortization described above. This
estimate is subject to a number of assumptions that could change depending on
the number and timing of movie titles actually becoming available to SEG and
their ultimate box office performance. Accordingly, the actual amount of cost
increases experienced by SEG may differ from the amounts noted above.
SEG's SG&A expenses decreased 25.7% and 16.7% for the three and six months
ended June 30, 2006, respectively, as compared to the corresponding prior year
periods. These decreases are due primarily to lower sales and marketing expenses
of $10 million and $13 million due to the elimination of certain marketing
support commitments under the new Comcast affiliation agreement and less
marketing activity with other affiliates, partially offset by marketing expenses
related to the commercial launch of Vongo. SEG expects that over the course of
2006, additional marketing expenses for Vongo and its traditional services will
exceed the benefits derived from lower marketing support requirements for
Comcast, and that its full-year 2006 sales and marketing expenses may exceed
those of 2005.
MATERIAL CHANGES IN FINANCIAL CONDITION
The Capital Group's sources of liquidity include available cash balances,
cash generated by the operating activities of its privately-owned subsidiaries
(to the extent such cash exceeds the working capital needs of the subsidiaries
and is not otherwise restricted), proceeds from asset sales, monetization of its
public investment portfolio (including derivatives) and dividend and interest
receipts. In addition, we may issue additional shares of Liberty Capital common
stock, and we may issue debt and attribute such debt to the Capital Group, and
in either case, make the cash proceeds available to the Capital Group.
During the six months ended June 30, 2006, the Capital Group's primary uses
of cash were the acquisition of approximately 55% of the common stock of FUN
($200 million), loans to WildBlue Communications, an equity affiliate
($111 million), and net cash transfers of $236 million to the Interactive Group
prior to the Restructuring. These investing activities were funded with
available cash on hand and proceeds from derivative settlements and asset sales.
The projected uses of Capital Group cash for the remainder of 2006 include
approximately $60 million for interest payments on debt attributed to the
Capital Group. In addition, we may make additional investments in existing or
new businesses and attribute such investments to the Capital Group. However, we
are unable to quantify such investments at this time.
In connection with the issuance of our tracking stocks, our board of
directors authorized a share repurchase program pursuant to which we may
repurchase up to $1 billion of outstanding shares of Liberty Capital Stock in
the open market or in privately negotiated transactions, from time to time,
subject to market conditions. We may alter or terminate the stock repurchase
program at any time.
We expect that the Capital Group's investing and financing activities will
be funded with a combination of cash on hand, cash provided by operating
activities, proceeds from collar expirations and dispositions of non-strategic
assets. At June 30, 2006, the Capital Group's sources of liquidity include
$2,143 million in cash and marketable debt securities and $6,975 million of
non-strategic AFS securities including related derivatives. In addition, we have
attributed to the Capital Group $10,020 million of News Corp. common stock which
we consider to be a strategic asset. To the extent the Capital Group recognizes
any taxable gains from the sale of assets or the expiration of derivative
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instruments, we may incur current tax expense and be required to make tax
payments, thereby reducing any cash proceeds attributable to the Capital Group.
Our derivatives related to certain of our AFS investments provide the
Capital Group with an additional source of liquidity. Based on the put price and
assuming we deliver owned or borrowed shares to settle each of the AFS
Derivatives and excluding any provision for income taxes, the Capital Group
would have attributed to its cash proceeds of approximately $227 million during
the remainder of 2006, $385 million in 2007, zero in 2008, $1,180 million in
2009, $1,681 million in 2010 and $1,312 million thereafter upon settlement of
its AFS Derivatives.
Prior to the maturity of the equity collars, the terms of certain of the
equity and narrow-band collars allow borrowings against the future put option
proceeds at LIBOR or LIBOR plus an applicable spread, as the case may be. As of
June 30, 2006, such borrowing capacity aggregated approximately $4,850 million.
Such borrowings would reduce the cash proceeds upon settlement noted in the
preceding paragraph.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
The following commitments and contingencies have been attributed to the
Captial Group:
- SEG Programming Fee commitments,
- total return debt swaps,
- exchangeable debenture tax contingency,
- AT&T Tax Sharing Agreement.
For more information regarding these matters, see footnote 13 to the
accompanying condensed consolidated financial statements or our consolidated
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS discussion
above.
In connection with agreements for the sale of certain assets, we typically
retain and attribute to the Capital Group liabilities that relate to events
occurring prior to the sale, such as tax, environmental, litigation and
employment matters. We generally indemnify the purchaser in the event that a
third party asserts a claim against the purchaser that relates to such a
liability. These types of indemnification guarantees typically extend for a
number of years. We are unable to estimate the maximum potential liability for
these types of indemnification guarantees as the sale agreements typically do
not specify a maximum amount and the amounts are dependent upon the outcome of
future contingent events, the nature and likelihood of which cannot be
determined at this time. Historically, we have not made any significant
indemnification payments under such agreements and no amount has been accrued in
the Capital Group's attributed financial statements with respect to these
indemnification guarantees.
Businesses attributed to the Capital Group have contingent liabilities
related to legal and tax proceedings and other matters arising in the ordinary
course of business. Although it is reasonably possible these businesses may
incur losses upon conclusion of such matters, an estimate of any loss or range
of loss cannot be made. In the opinion of management, it is expected that
amounts, if any, which may be required to satisfy such contingencies will not be
material in relation to the Capital Group's attributed financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Capital Group is exposed to market risk in the normal course of business
due to its ongoing investing and financing activities. Market risk refers to the
risk of loss arising from adverse changes in stock prices, interest rates and
foreign currency exchange rates. The risk of loss can be assessed from the
perspective of adverse changes in fair values, cash flows and future earnings.
We have established
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policies, procedures and internal processes governing its management of market
risks and the use of financial instruments to manage its exposure to such risks.
The Capital Group is exposed to changes in interest rates primarily as a
result of its borrowing activities used to maintain liquidity and to fund
business operations. The nature and amount of its long-term and short-term debt
are expected to vary as a result of future requirements, market conditions and
other factors. As of June 30, 2006, the face amount of the Capital Group's fixed
rate debt (considering the effects of interest rate swap agreements) was
$4,580 million, which had a weighted average interest rate of 2.6%.
The Capital Group is exposed to changes in stock prices primarily as a
result of its significant holdings in publicly traded securities. We continually
monitor changes in stock markets, in general, and changes in the stock prices of
our holdings, specifically. We believe that changes in stock prices can be
expected to vary as a result of general market conditions, technological
changes, specific industry changes and other factors. We use equity collars, put
spread collars, narrow-band collars, written put and call options and other
financial instruments to manage market risk associated with certain investment
positions. These instruments are recorded at fair value based on option pricing
models.
Among other factors, changes in the market prices of the securities
underlying the AFS Derivatives affect the fair market value of such AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying the Capital Group's equity collars
would have on the fair market value of such derivatives. Such changes in fair
market value would be included in realized and unrealized gains (losses) on
financial instruments in the Capital Group's attributed statement of operations
(amounts in millions).
ESTIMATED AGGREGATE
FAIR VALUE OF
EQUITY COLLARS
-------------------
Fair value at June 30, 2006................................ $ 929
5% increase in market prices............................... $ 798
10% increase in market prices.............................. $ 666
5% decrease in market prices............................... $1,058
10% decrease in market prices.............................. $1,187
At June 30, 2006, the fair value of the Capital Group's AFS securities was
$17,831 million. Had the market price of such securities been 10% lower at
June 30, 2006, the aggregate value of such securities would have been
$1,783 million lower resulting in an increase to unrealized holding losses in
other comprehensive earnings (loss). Such decrease would be partially offset by
an increase in the value of the Capital Group's AFS Derivatives as noted in the
table above.
In connection with certain of our AFS Derivatives, we periodically borrow
shares of the underlying securities from a counterparty and delivers these
borrowed shares in settlement of maturing derivative positions. In these
transactions, a similar number of shares that we have attributed to the Capital
Group have been posted as collateral with the counterparty. These share
borrowing arrangements can be terminated at any time at our option by delivering
shares to the counterparty. The counterparty can terminate these arrangements
upon the occurrence of certain events which limit the trading volume of the
underlying security. The liability under these share borrowing arrangements is
marked to market each reporting period with changes in value recorded in
unrealized gains or losses in the Capital Group's attributed statement of
operations. The shares posted as collateral under these arrangements continue to
be treated as AFS securities and are marked to market each reporting period with
changes in value recorded as unrealized gains or losses in other comprehensive
earnings.
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ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of
management, including its chief executive officer, principal accounting officer
and principal financial officer (the "Executives"), of the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Executives concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2006 to provide
reasonable assurance that information required to be disclosed in its reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There has been no change in the Company's internal controls over financial
reporting identified in connection with the evaluation described above that
occurred during the three months ended June 30, 2006 that has materially
affected, or is reasonably likely to materially affect, its internal controls
over financial reporting.
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LIBERTY MEDIA CORPORATION
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding institution of, or material changes in, material
legal proceedings that have been reported this fiscal year, reference is made to
Part II, Item 1 of the Quarterly Report on Form 10-Q filed by Old Liberty on
May 8, 2006 and Part I, Item 3 of the Annual Report on Form 10-K filed by Old
Liberty on March 8, 2006. There have been no material developments in such legal
proceedings during the three months ended June 30, 2006.
ITEM 1A. RISK FACTORS
THE RISKS DESCRIBED BELOW SUPPLEMENT AND SUPERSEDE THE RISKS DESCRIBED IN
PART I, ITEM 1A OF THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 2005, FILED BY OLD LIBERTY ON MARCH 8, 2006. THE RISKS DESCRIBED
BELOW AND ELSEWHERE IN THIS QUARTERLY REPORT ARE NOT THE ONLY ONES THAT RELATE
TO OUR BUSINESSES OR OUR CAPITALIZATION. THE RISKS DESCRIBED BELOW ARE
CONSIDERED TO BE THE MOST MATERIAL. HOWEVER, THERE MAY BE OTHER UNKNOWN OR
UNPREDICTABLE ECONOMIC, BUSINESS, COMPETITIVE, REGULATORY OR OTHER FACTORS THAT
ALSO COULD HAVE MATERIAL ADVERSE EFFECTS ON OUR BUSINESSES. PAST FINANCIAL
PERFORMANCE MAY NOT BE A RELIABLE INDICATOR OF FUTURE PERFORMANCE AND HISTORICAL
TRENDS SHOULD NOT BE USED TO ANTICIPATE RESULTS OR TRENDS IN FUTURE PERIODS. IF
ANY OF THE EVENTS DESCRIBED BELOW WERE TO OCCUR, OUR BUSINESSES, PROSPECTS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS AND/OR CASH FLOWS COULD BE MATERIALLY
ADVERSELY AFFECTED.
RISKS FACTORS RELATING TO THE OWNERSHIP OF OUR COMMON STOCK
The risks described below apply to the ownership of tracking stock in
general, and our common stock in particular.
OUR BOARD OF DIRECTORS CAN CAUSE A SEPARATION OF EITHER GROUP FROM OUR
COMPANY BY REDEEMING STOCK OF THAT GROUP FOR STOCK OF A "QUALIFYING" SUBSIDIARY,
IN WHICH CASE OUR STOCKHOLDERS MAY SUFFER A LOSS IN VALUE. Our board of
directors may, without stockholder approval, redeem all or a portion of the
shares of Liberty Interactive common stock or Liberty Capital common stock for
shares of one or more of our "qualifying" subsidiaries that own only assets and
liabilities attributed to the Interactive Group or the Capital Group, as the
case may be, provided that our board of directors has determined that the
redemption is expected to qualify for nonrecognition of gain or loss (in whole
or in part) for U.S. federal income tax purposes to the holders of the common
stock being redeemed. Such a redemption would result in the subsidiary or
subsidiaries becoming independent of us. If our board of directors chooses to
redeem shares of common stock of a group:
- the value of the subsidiary shares received in the redemption could be or
become less than the value of the common stock redeemed; and/or
- the market value of any remaining shares of Liberty Interactive common
stock or Liberty Capital common stock may decrease from their market value
immediately before the redemption.
The value of the subsidiary shares and/or the market value of the remaining
shares of Liberty Interactive common stock and/or Liberty Capital common stock
may decrease in part because the subsidiary and/or our remaining businesses may
no longer benefit from the advantages of doing business under common ownership.
HOLDERS OF LIBERTY INTERACTIVE COMMON STOCK AND LIBERTY CAPITAL COMMON STOCK
ARE COMMON STOCKHOLDERS OF OUR COMPANY AND ARE, THEREFORE, SUBJECT TO RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMPANY AS A WHOLE, EVEN IF A HOLDER OWNS
SHARES OF ONLY THE COMMON STOCK OF ONE OF OUR GROUPS. We retain legal title to
all of our assets and our capitalization does not limit our legal
responsibility, or that of our subsidiaries, for the liabilities attributed to
either the Interactive Group or the Capital Group.
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Holders of Liberty Interactive common stock and Liberty Capital common stock do
not have any legal rights related to specific assets attributed to either of the
Interactive Group or the Capital Group and, in any liquidation, holders of
Liberty Interactive common stock and holders of Liberty Capital common stock are
entitled to receive a pro rata share of our available net assets based on the
number of liquidation units that are attributed to each group.
WE COULD BE REQUIRED TO USE ASSETS ATTRIBUTED TO ONE GROUP TO PAY
LIABILITIES ATTRIBUTED TO ANOTHER GROUP. The assets attributed to one group are
potentially subject to the liabilities attributed to the other group, even if
those liabilities arise from lawsuits, contracts or indebtedness that are
attributed to such other group. No provision of our amended charter prevents us
from satisfying liabilities of one group with assets of the other group, and our
creditors are not in any way limited by our tracking stock capitalization from
proceeding against any assets they could have proceeded against if we did not
have a tracking stock capitalization.
THE MARKET PRICE OF LIBERTY INTERACTIVE COMMON STOCK AND LIBERTY CAPITAL
COMMON STOCK MAY NOT REFLECT THE PERFORMANCE OF THE INTERACTIVE GROUP AND THE
CAPITAL GROUP, RESPECTIVELY, AS WE INTEND. We cannot assure you that the market
price of the common stock of a group does, in fact, reflect the performance of
the group of businesses, assets and liabilities attributed to that group.
Holders of Liberty Interactive common stock and Liberty Capital common stock are
common stockholders of our company as a whole and, as such, are subject to all
risks associated with an investment in our company and all of our businesses,
assets and liabilities. As a result, the market price of each series of stock of
a group may simply reflect the performance of our company as a whole or may more
independently reflect the performance of some or all of the group of assets
attributed to such group. In addition, investors may discount the value of the
stock of a group because it is part of a common enterprise rather than a
stand-alone entity.
THE MARKET PRICE OF THE LIBERTY INTERACTIVE COMMON STOCK AND THE LIBERTY
CAPITAL COMMON STOCK MAY BE VOLATILE, COULD FLUCTUATE SUBSTANTIALLY AND COULD BE
AFFECTED BY FACTORS THAT DO NOT AFFECT TRADITIONAL COMMON STOCK. To the extent
the market price of the Liberty Interactive common stock or the Liberty Capital
common stock track the performance of more focused groups of businesses, assets
and liabilities than those of our company as a whole, the market prices of these
stocks may be more volatile than that experienced by our common stock before we
implemented our tracking stock structure. The market prices of the Liberty
Interactive common stock and the Liberty Capital common stock may be materially
affected by, among other things:
- actual or anticipated fluctuations in either group's operating results or
in the operating results of particular companies attributable to either
group;
- potential acquisition activity by us or the companies in which we invest;
- issuances of debt or equity securities to raise capital by us or the
companies in which we invest and the manner in which that debt or the
proceeds of an equity issuance are attributed to each of the groups;
- changes in financial estimates by securities analysts regarding the
Liberty Interactive common stock or the Liberty Capital common stock or
the companies attributable to either group;
- the complex nature and the potential difficulties investors may have in
understanding the terms of the Liberty Interactive common stock and the
Liberty Capital common stock, as well as concerns regarding the possible
effect of certain of those terms on an investment in the stock relating to
either group; or
- general market conditions.
II-2
THE MARKET VALUE OF BOTH THE LIBERTY INTERACTIVE COMMON STOCK AND THE
LIBERTY CAPITAL COMMON STOCK COULD BE ADVERSELY AFFECTED BY EVENTS INVOLVING THE
ASSETS AND BUSINESSES ATTRIBUTED TO ONLY ONE OF SUCH GROUPS. Events relating to
one of our groups, such as earnings announcements or announcements of new
products or services, acquisitions or dispositions that the market does not view
favorably, may adversely affect the market value of the common stock of both of
our groups. Because we are the issuer of both the Liberty Interactive common
stock and the Liberty Capital common stock, an adverse market reaction to events
relating to the assets and businesses attributed to one of our groups may, by
association, cause an adverse reaction to the common stock of the other group.
This could occur even if the triggering event is not material to us as a whole.
In addition, the incurrence of significant indebtedness by us or any of our
subsidiaries on behalf of one group, including indebtedness incurred or assumed
in connection with acquisitions of or investments in businesses, would continue
to affect our credit rating, and that of our subsidiaries, and therefore could
increase the borrowing costs of businesses attributable to the other group or
the borrowing costs of our company as a whole.
WE MAY NOT PAY DIVIDENDS EQUALLY OR AT ALL ON LIBERTY INTERACTIVE COMMON
STOCK OR LIBERTY CAPITAL COMMON STOCK. We do not presently intend to pay cash
dividends on either the Liberty Interactive common stock or the Liberty Capital
common stock for the foreseeable future. However, we have the right to pay
dividends on the shares of common stock of each group in equal or unequal
amounts. In addition, any dividends or distributions on, or repurchases of,
shares relating to either group will reduce our assets legally available to be
paid as dividends on the shares relating to the other group.
OUR TRACKING STOCK CAPITAL STRUCTURE COULD CREATE CONFLICTS OF INTEREST, AND
OUR BOARD OF DIRECTORS MAY MAKE DECISIONS THAT COULD ADVERSELY AFFECT ONLY SOME
HOLDERS OF OUR COMMON STOCK. Our tracking stock capital structure could give
rise to occasions when the interests of holders of stock of one group might
diverge or appear to diverge from the interests of holders of stock of the other
group. In addition, given the nature of their businesses, there may be inherent
conflicts of interests between the Interactive Group and the Capital Group. Our
officers and directors owe fiduciary duties to all of our stockholders. The
fiduciary duties owed by such officers and directors are to our company as a
whole, and decisions deemed to be in the best interest of our company may not be
in the best interest of a particular group when considered independently.
Examples include:
- decisions as to the terms of any business relationships that may be
created between the Interactive Group and the Capital Group or the terms
of any transfer of assets between the groups;
- decisions as to the allocation of consideration between the holders of the
Liberty Interactive common stock and the Liberty Capital common stock, or
between the stocks relating to either group, to be received in connection
with a merger involving our company;
- decisions as to the allocation of corporate opportunities between the two
groups, especially where the opportunities might meet the strategic
business objectives of both groups;
- decisions as to operational and financial matters that could be considered
detrimental to one group but beneficial to the other;
- decisions as to the conversion of shares of Liberty Interactive common
stock into shares of Liberty Capital common stock;
- decisions regarding the creation of, and, if created, the subsequent
increase or decrease of any inter-group interest that one group may own in
the other;
- decisions as to the internal or external financing attributable to
businesses or assets attributed to either group;
- decisions as to the dispositions of assets of either group; and
II-3
- decisions as to the payment of dividends on the stock relating to either
group.
In addition, if directors own disproportionate interests (in percentage or
value terms) in the Liberty Interactive common stock or the Liberty Capital
common stock, that disparity could create or appear to create conflicts of
interest when they are faced with decisions that could have different
implications for the holders of the Liberty Interactive common stock and the
Liberty Capital common stock.
OTHER THAN PURSUANT TO CERTAIN GENERAL MANAGEMENT AND ALLOCATION POLICIES,
WE HAVE NOT ADOPTED ANY SPECIFIC PROCEDURES FOR CONSIDERATION OF MATTERS
INVOLVING A DIVERGENCE OF INTERESTS AMONG HOLDERS OF SHARES OF STOCK RELATING TO
THE TWO DIFFERENT GROUPS, OR AMONG HOLDERS OF DIFFERENT SERIES OF STOCK RELATING
TO A SPECIFIC GROUP. Our board of directors has adopted certain general
management and allocation policies to serve as guidelines in making decisions
regarding the relationships between the Interactive Group and the Capital Group
with respect to matters such as tax liabilities and benefits, inter-group loans,
attribution of assets to either group, financing alternatives, corporate
opportunities and similar items. These procedures are general and do not provide
specific guidance for addressing matters involving a divergence of interests
among holders of shares of stock relating to the two different groups, or among
holders of different series of stock relating to a specific group. Rather than
develop additional specific procedures in advance, our board of directors
intends to exercise its judgment from time to time, depending on the
circumstances, as to how best to:
- obtain information regarding the divergence (or potential divergence) of
interests;
- determine under what circumstances to seek the assistance of outside
advisers;
- determine whether a committee of our board of directors should be
appointed to address a specific matter and the appropriate members of that
committee; and
- assess what is in its best interests and the best interests of all of our
stockholders.
HOLDERS OF SHARES OF STOCK RELATING TO A PARTICULAR GROUP MAY NOT HAVE ANY
REMEDIES IF ANY ACTION BY OUR DIRECTORS OR OFFICERS HAS AN ADVERSE EFFECT ON
ONLY THAT STOCK, OR ON A PARTICULAR SERIES OF THAT STOCK. Principles of Delaware
law and the provisions of our amended charter may protect decisions of our board
of directors that have a disparate impact upon holders of shares of stock
relating to a particular group, or upon holders of any series of stock relating
to a particular group. Under Delaware law, our board of directors has a duty to
act with due care and in the best interests of all of our stockholders,
regardless of the stock, or series, they hold. Principles of Delaware law
established in cases involving differing treatment of multiple classes or series
of stock provide that a board of directors owes an equal duty to all common
stockholders and does not have separate or additional duties to any subset of
stockholders. Recent judicial opinions in Delaware involving tracking stocks
have established that decisions by directors or officers involving differing
treatment of holders of tracking stocks may be judged under the business
judgment rule. The business judgment rule generally provides that a director or
officer of our company may be deemed to have satisfied his or her fiduciary
duties to our company if that person acts in a manner he or she believes in good
faith to be in the best interests of our company as a whole, and not of any
single group of our stockholders. As a result, in some circumstances, our
directors or officers may be required to make a decision that is viewed as
adverse to the holders of shares relating to a particular group or to the
holders of a particular series of that stock. Therefore, under the principles of
Delaware law referred to above and the business judgment rule, you may not be
able to challenge decisions that you believe have a disparate impact upon the
stockholders of the two groups if our board of directors is disinterested,
adequately informed with respect to its decisions and acts in good faith, on
behalf of all its stockholders.
OUR BOARD OF DIRECTORS MAY CHANGE THE MANAGEMENT AND ALLOCATION POLICIES TO
THE DETRIMENT OF EITHER GROUP WITHOUT STOCKHOLDER APPROVAL. Our board of
directors has adopted certain management and
II-4
allocation policies to serve as guidelines in making decisions regarding the
relationships between the Interactive Group and the Capital Group with respect
to matters such as tax liabilities and benefits, inter-group loans, attribution
of assets to either group, financing alternatives, corporate opportunities and
similar items. Our board of directors may at any time change, or make exceptions
to these policies. Because these policies relate to matters concerning the day
to day management of our company as opposed to significant corporate actions,
such as a merger involving our company or a sale of substantially all of our
assets, no stockholder approval is required with respect to their adoption or
amendment. A decision to change, or make exceptions to, these policies or adopt
additional policies could disadvantage one group while advantaging the other
group.
STOCKHOLDERS WILL NOT VOTE ON HOW TO ATTRIBUTE CONSIDERATION RECEIVED IN
CONNECTION WITH A MERGER INVOLVING OUR COMPANY AMONG HOLDERS OF LIBERTY
INTERACTIVE COMMON STOCK AND LIBERTY CAPITAL COMMON STOCK. Our amended charter
does not contain any provisions governing how consideration received in
connection with a merger or consolidation involving our company is to be
attributed to the holders of Liberty Interactive common stock and holders of
Liberty Capital common stock or to the holders of different series of stock, and
neither the holders of Liberty Interactive common stock nor the holders of
Liberty Capital common stock will have a separate class vote in the event of
such a merger or consolidation. Consistent with applicable principles of
Delaware law, our board of directors will seek to divide the type and amount of
consideration received in a merger or consolidation involving our company
between holders of Liberty Interactive common stock and Liberty Capital common
stock in a fair manner. As the different ways the board of directors may divide
the consideration between holders of stock relating to the different groups, and
among holders of different series of stock, might have materially different
results, the consideration to be received by holders of Liberty Interactive
common stock and Liberty Capital common stock in any such merger or
consolidation may be materially less valuable than the consideration they would
have received if they had a separate class vote on such merger or consolidation.
WE MAY DISPOSE OF ASSETS OF EITHER THE INTERACTIVE GROUP OR THE CAPITAL
GROUP WITHOUT YOUR APPROVAL. Delaware law requires stockholder approval only for
a sale or other disposition of all or substantially all of the assets of our
company taken as a whole, and our amended charter does not require a separate
class vote in the case of a sale of a significant amount of assets of either
group. As long as the assets attributed to either the Interactive Group or the
Capital Group represent less than substantially all of our assets, we may
approve sales and other dispositions of any amount of the assets of that group
without any stockholder approval. Based on the current composition of the
groups, we believe that a sale of all or substantially all of the assets of
either group, on a stand alone basis, would not be considered a sale of
substantially all of the assets of our company requiring stockholder approval.
If we dispose of all or substantially all of the assets of either group
(which means, for this purpose, assets representing 80% of the fair market value
of the total assets of the disposing group, as determined by our board of
directors), we will be required, if the disposition is not an exempt disposition
under the terms of our amended charter, to choose one or more of the following
three alternatives:
- declare and pay a dividend on the disposing group's common stock;
- redeem shares of the disposing group's common stock according to ratios
set out in our amended charter; and/or
- convert all of the disposing group's outstanding common stock into common
stock of the other group.
In this type of a transaction, holders of the disposing group's common stock
may receive less value than the value that a third-party buyer might pay for all
or substantially all of the assets of the disposing group.
II-5
Our board of directors will decide, in its sole discretion, how to proceed
and is not required to select the option that would result in the highest value
to holders of either group of our common stock.
HOLDERS OF LIBERTY INTERACTIVE COMMON STOCK OR LIBERTY CAPITAL COMMON STOCK
MAY RECEIVE LESS CONSIDERATION UPON A SALE OF THE ASSETS ATTRIBUTED TO THAT
GROUP THAN IF THAT GROUP WERE A SEPARATE COMPANY. If the Interactive Group or
the Capital Group were a separate, independent company and its shares were
acquired by another person, certain costs of that sale, including corporate
level taxes, might not be payable in connection with that acquisition. As a
result, stockholders of a separate, independent company might receive a greater
amount of proceeds than the holders of Liberty Interactive common stock or the
Liberty Capital common stock would receive upon a sale of all or substantially
all of the assets of the group to which their shares relate. In addition, we
cannot assure you that in the event of such a sale the per share consideration
to be paid to holders of Liberty Interactive common stock or Liberty Capital
common stock, as the case may be, will be equal to or more than the per share
value of that share of stock prior to or after the announcement of a sale of all
or substantially all of the assets of the applicable group.
IF WE SELL ALL OR SUBSTANTIALLY ALL OF THE ASSETS ATTRIBUTED TO THE
INTERACTIVE GROUP OR THE CAPITAL GROUP, OUR BOARD OF DIRECTORS MAY TAKE ACTIONS
WITH RESPECT TO THE SHARES OF COMMON STOCK OF THAT GROUP WHICH COULD RESULT IN A
LOSS OF VALUE FOR STOCKHOLDERS. We have the right to dispose of the assets of
the Interactive Group or the Capital Group, in whole or in part. If we dispose
of all or substantially all of the assets of either group, then our board of
directors can decide to: (i) dividend an amount equal to the net proceeds to
holders of that group's common stock, on a pro rata basis; (ii) convert the
shares of that group's common stock into shares of the other group's common
stock at a 110% premium to market; (iii) redeem shares of that group's common
stock for cash, securities or other assets with a fair value equal to such net
proceeds; or (iv) do a combination of the foregoing. There is no requirement
that the action taken by our board of directors be tax-free to the holders of
the shares of common stock of that group. In any of the foregoing cases,
stockholders could suffer a loss in the value of their investment in our
company.
FOLLOWING MAY 9, 2007, THE FIRST ANNIVERSARY OF THE IMPLEMENTATION OF OUR
TRACKING STOCK STRUCTURE (ABSENT AN EARLIER TRIGGERING EVENT), OUR BOARD OF
DIRECTORS MAY IN ITS SOLE DISCRETION ELECT TO CONVERT LIBERTY INTERACTIVE COMMON
STOCK INTO LIBERTY CAPITAL COMMON STOCK, THEREBY CHANGING THE NATURE OF YOUR
INVESTMENT AND POSSIBLY DILUTING YOUR ECONOMIC INTEREST IN OUR COMPANY, WHICH
COULD RESULT IN A LOSS IN VALUE TO YOU. Our amended charter permits our board
of directors, in its sole discretion, after May 9, 2007 (absent an earlier
triggering event), to convert each share of each Liberty Interactive Series A,
Series B and Series C common stock into a number of shares of the corresponding
series of Liberty Capital common stock at a ratio based on the relative trading
prices of the Liberty Interactive Series A common stock (or another series of
Liberty Interactive common stock subject to certain limitations) and the Liberty
Capital Series A common stock (or another series of Liberty Capital common stock
subject to certain limitations) over a specified 60-trading day period. We
cannot predict the impact on the market value of our stock of (1) our board of
directors' ability to effect any such conversion or (2) the exercise of this
conversion right by us. In addition, our board of directors may effect such a
conversion at a time when the market value of its stock could cause the
stockholders of one group to be disadvantaged.
HOLDERS OF LIBERTY INTERACTIVE COMMON STOCK AND HOLDERS OF LIBERTY CAPITAL
COMMON STOCK VOTE TOGETHER AND HAVE LIMITED SEPARATE VOTING RIGHTS. Holders of
Liberty Interactive common stock and Liberty Capital common stock vote together
as a single class, except in certain limited circumstances prescribed by our
amended charter and under Delaware law. Each share of Series B common stock of
each group has ten votes per share, and each share of Series A common stock of
each group has one vote per share. Holders of Series C common stock of either
group have no voting rights, other than those required under Delaware law. When
holders of Liberty Interactive common stock and Liberty
II-6
Capital common stock vote together as a single class, holders having a majority
of the votes are in a position to control the outcome of the vote even if the
matter involves a conflict of interest among our stockholders or has a greater
impact on one group than the other.
OUR CAPITAL STRUCTURE AS WELL AS THE FACT THAT THE INTERACTIVE GROUP AND THE
CAPITAL GROUP ARE NOT INDEPENDENT COMPANIES MAY INHIBIT OR PREVENT ACQUISITION
BIDS FOR THE INTERACTIVE GROUP OR THE CAPITAL GROUP. If the Interactive Group
and the Capital Group were separate independent companies, any person interested
in acquiring either the Interactive Group or the Capital Group without
negotiating with management could seek control of that group by obtaining
control of its outstanding voting stock, by means of a tender offer, or by means
of a proxy contest. Although we intend Liberty Interactive common stock and
Liberty Capital common stock to reflect the separate economic performance of the
Interactive Group and the Capital Group, respectively, those groups are not
separate entities and a person interested in acquiring only one group without
negotiation with our management could obtain control of that group only by
obtaining control of a majority in voting power of all of the outstanding shares
of common stock of our company. The existence of shares of common stock, and
different series of shares, relating to different groups could present
complexities and in certain circumstances pose obstacles, financial and
otherwise, to an acquiring person that are not present in companies which do not
have capital structures similar to ours.
CHANGES IN THE TAX LAW OR IN THE INTERPRETATION OF CURRENT TAX LAW MAY
RESULT IN THE CESSATION OF THE ISSUANCE OF SHARES OF LIBERTY INTERACTIVE COMMON
STOCK AND/OR LIBERTY CAPITAL COMMON STOCK OR THE CONVERSION OF LIBERTY
INTERACTIVE COMMON STOCK INTO LIBERTY CAPITAL COMMON STOCK. If, due to a change
in tax law or a change in the interpretation of current tax law, there are
adverse tax consequences resulting from the issuance of Liberty Interactive
common stock and/or Liberty Capital common stock, it is possible that we would
not issue additional shares of Liberty Interactive common stock and/or Liberty
Capital common stock even if we would otherwise choose to do so. This
possibility could affect the value of Liberty Interactive common stock and
Liberty Capital common stock then outstanding. In addition, we may elect to
convert Liberty Interactive common stock into Liberty Capital common stock,
thereby diluting the interests of holders of Liberty Capital common stock and
changing the nature of your investment, which could result in a loss in value.
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 amended charter and
bylaws may discourage, delay or prevent a change in control of our company that
a stockholder may consider favorable. These provisions include:
- authorizing a capital structure with multiple series of common stock, a
Series B common stock of each group that entitles the holders to ten votes
per share, a Series A common stock of each group that entitles the holder
to one vote per share, and a Series C common stock of each group that
except as otherwise required by applicable law, entitles the holder to no
voting rights;
- 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; and
- 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.
II-7
Our chairman, John C. Malone, has the power to direct the vote of
approximately 30% of our outstanding voting power and approximately 89% of our
outstanding Series B shares.
RISK FACTORS RELATING TO OUR COMPANY, THE INTERACTIVE GROUP AND THE CAPITAL
GROUP
The risks described below apply to our company and to the businesses, assets
and liabilities attributable to both the Interactive Group and the Capital
Group.
WE DO NOT HAVE THE RIGHT TO MANAGE OUR BUSINESS AFFILIATES, WHICH MEANS WE
ARE NOT ABLE TO 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 (generally those companies in which we have less than a
majority stake) attributed to either the Interactive Group or the Capital Group.
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 vary from agreement to agreement. Although our board representation and
veto rights may enable us to exercise influence over the management or policies
of a business affiliate, enable us to prevent the sale of material assets by a
business affiliate in which we own less than a majority voting interest or
prevent us from paying dividends or making distributions to its stockholders or
partners, they will not enable us to cause these actions to be taken.
IF WE FAIL TO MEET REQUIRED CAPITAL CALLS TO A 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 are a party to
stockholder and partnership agreements relating to our equity interest in
business affiliates 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 business affiliate, may have adverse
consequences to us and the group to which that business affiliate is attributed.
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. See "--A substantial
portion of the consolidated debt attributed to each group is held above the
operating subsidiary level, and we could be unable in the future to obtain cash
in amounts sufficient to service that debt and our other financial obligations."
below.
THE LIQUIDITY AND VALUE OF OUR INTERESTS IN OUR BUSINESS AFFILIATES MAY BE
AFFECTED BY MARKET CONDITIONS BEYOND OUR CONTROL THAT COULD CAUSE US TO TAKE
SIGNIFICANT IMPAIRMENT CHARGES DUE TO OTHER THAN TEMPORARY DECLINES IN THE
MARKET VALUE OF OUR AVAILABLE FOR SALE SECURITIES. Included among the assets
attributable to each group are equity interests in one or more publicly-traded
companies which are accounted for as available for sale securities. The value of
these interests may be affected by economic and market conditions that are
beyond our control. We are required by U.S. generally accepted accounting
principles to determine, from time to time, whether a decline in the market
value of any of those investments below our cost for that investment is other
than temporary. If we determine that the decline is other than temporary, we are
required to write down its cost to a new cost basis, with the amount of the
write-down accounted for as a realized loss in the determination of net income
for the period in which the write-down occurs. We have at times realized
significant losses due to other than temporary declines in the fair value of
certain of our available for sale securities, and our company and either group
may be required to realize further losses of this nature in future periods. A
number of factors are used in determining the fair value of an investment and
whether any decline in an investment is other than temporary. As the assessment
of fair value and any resulting impairment losses requires a high degree of
judgment and includes significant estimates and assumptions, the actual amount
we may eventually realize for an investment could differ materially from our
assessment of the
II-8
value of that investment made in an earlier period. In addition, our ability to
liquidate these interests without adversely affecting their value may be
limited.
A SUBSTANTIAL PORTION OF THE CONSOLIDATED DEBT ATTRIBUTED TO EACH GROUP IS
HELD ABOVE THE OPERATING SUBSIDIARY LEVEL, AND WE COULD BE UNABLE IN THE FUTURE
TO OBTAIN CASH IN AMOUNTS SUFFICIENT TO SERVICE THAT DEBT AND OUR OTHER
FINANCIAL OBLIGATIONS. As of June 30, 2006, Liberty Media LLC, which is a
wholly owned subsidiary of our company, had $9.056 billion principal amount of
debt outstanding. Our ability to meet the financial obligations of Liberty Media
LLC and our other financial obligations will depend upon our ability to access
cash. Our sources of cash include our available cash balances, net cash from
operating activities, dividends and interest from our investments, availability
under credit facilities, monetization of our public investment portfolio and
proceeds from asset sales. There are no assurances that we will maintain the
amounts of cash, cash equivalents or marketable securities that we maintained
over the past few years.
The ability of our operating subsidiaries to pay dividends or to make other
payments or advances to us or Liberty Media LLC depends on their individual
operating results and any statutory, regulatory or contractual restrictions to
which they may be or may become subject. Some of our subsidiaries are subject to
loan agreements that restrict sales of assets and prohibit or limit the payment
of dividends or the making of distributions, loans or advances to stockholders
and partners.
Neither we nor Liberty Media LLC will generally receive cash, in the form of
dividends, loans, advances or otherwise, from our business affiliates. In this
regard, we will 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 our company or Liberty
Media LLC.
BOTH THE INTERACTIVE GROUP AND THE CAPITAL GROUP DEPEND ON A LIMITED NUMBER
OF POTENTIAL CUSTOMERS FOR CARRIAGE OF THEIR PROGRAMMING. The cable television
and direct-to-home satellite industries have been undergoing a period of
consolidation. As a result, the number of potential buyers of the programming
services attributable to these groups is decreasing. In this more concentrated
market, there can be no assurance that the owned and affiliated program
suppliers attributed to either group will be able to obtain or maintain carriage
of their programming services by distributors on commercially reasonable terms
or at all.
RAPID TECHNOLOGICAL ADVANCES COULD RENDER THE PRODUCTS AND SERVICES OFFERED
BY BOTH GROUP'S SUBSIDIARIES AND BUSINESS AFFILIATES OBSOLETE OR
NON-COMPETITIVE. The subsidiaries and business affiliates attributed to each
group must stay abreast of rapidly evolving technological developments and
offerings to remain competitive and increase the utility of their services.
These subsidiaries and business affiliates must be able to incorporate new
technologies into their products in order to address the needs of their
customers. There can be no assurance that they will be able to compete with
advancing technology, and any failure to do so may adversely affect the group to
which they are attributed.
CERTAIN OF OUR SUBSIDIARIES AND BUSINESS AFFILIATES DEPEND ON THEIR
RELATIONSHIPS WITH THIRD PARTY DISTRIBUTION CHANNELS, SUPPLIERS AND ADVERTISERS
AND ANY ADVERSE CHANGES IN THESE RELATIONSHIPS COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND THOSE ATTRIBUTED TO EITHER GROUP. An important
component of the success of our subsidiaries and business affiliates is their
ability to maintain their existing, as well as build new, relationships with
third party distribution channels, suppliers and advertisers, among other
parties. Adverse changes in existing relationships or the inability to enter
into new arrangements with these parties on favorable terms, if at all, could
have a significant adverse effect on our results of operations and those
attributed to either group.
ADVERSE EVENTS OR TRENDS IN THE INDUSTRIES IN WHICH THE SUBSIDIARIES AND
BUSINESS AFFILIATES ATTRIBUTED TO EITHER GROUP OPERATE COULD HARM THAT
GROUP. In general, the subsidiaries and business affiliates in both groups are
sensitive to trends and events that are outside their control. For example,
adverse trends or
II-9
events, such as general downturns, decreases in consumer spending and natural or
other disasters, among other adverse events and trends, could have a
significantly negative impact on both groups.
THE SUBSIDIARIES AND BUSINESS AFFILIATES ATTRIBUTABLE TO EACH GROUP ARE
SUBJECT TO RISKS OF ADVERSE GOVERNMENT REGULATION. Programming services, cable
television systems, the Internet, telephony services and satellite carriers are
subject to varying degrees of regulation in the United States by the Federal
Communications Commission and other entities and in foreign countries by similar
entities. Such regulation and legislation are subject to the political process
and have been in constant flux over the past decade. The application of various
sales and use tax provisions under state, local and foreign law to certain of
the Interactive Group's subsidiaries' and business affiliates' products and
services sold via the Internet, television and telephone is subject to
interpretation by the applicable taxing authorities, and no assurance can be
given that such authorities will not take a contrary position to that taken by
those subsidiaries and business affiliates, which could have a material adverse
effect on their business. In addition, there have been numerous attempts at the
federal, state and local levels to impose additional taxes on online commerce
transactions. Moreover, substantially every foreign country in which our
subsidiaries or business affiliates have, or may in the future make, an
investment regulates, in varying degrees, the distribution, content and
ownership of programming services and foreign investment in programming
companies and wireline and wireless cable communications, satellite and
telephony services and the Internet. Further material changes in the law and
regulatory requirements must be anticipated, and there can be no assurance that
the business and the business of the affiliates attributed to each group will
not be adversely affected by future legislation, new regulation or deregulation.
THE SUCCESS OF CERTAIN OF THE GROUPS' SUBSIDIARIES AND BUSINESS AFFILIATES
WHOSE BUSINESSES INVOLVE THE INTERNET DEPENDS ON MAINTAINING THE INTEGRITY OF
THEIR SYSTEMS AND INFRASTRUCTURE. A fundamental requirement for online commerce
and communications is the secure transmission of confidential information, such
as credit card numbers or other personal information, over public networks. If
the security measures of any of our subsidiaries or business affiliates engaged
in online commerce were to be compromised, it could have a detrimental effect on
their reputation and adversely affect their ability to attract customers.
Computer viruses transmitted over the Internet have significantly increased
in recent years, thereby increasing the possibility of disabling attacks on and
damage to websites of our subsidiaries and business affiliates whose businesses
are dependent on the Internet. In addition, certain of the subsidiaries and
business affiliates attributed to each group rely on third-party computer
systems and service providers to facilitate and process a portion of their
transactions. Any interruptions, outages or delays in these services, or a
deterioration in their performance, could impair the ability of these
subsidiaries and business affiliates to process transactions for their customers
and the quality of service they can offer to them.
CERTAIN OF THE SUBSIDIARIES AND BUSINESS AFFILIATES ATTRIBUTED TO BOTH
GROUPS HAVE SIGNIFICANT OPERATIONS OUTSIDE OF THE UNITED STATES THAT ARE SUBJECT
TO NUMEROUS OPERATIONAL AND FINANCIAL RISKS. Certain of the subsidiaries and
business affiliates attributed to both groups have significant operations in
countries other than the United States and are subject to the following risks
inherent in international operations:
- fluctuations in currency exchange rates;
- longer payment cycles for sales in foreign countries that may increase the
uncertainty associated with recoverable accounts;
- recessionary conditions and economic instability affecting overseas
markets;
- potentially adverse tax consequences;
- export and import restrictions, tariffs and other trade barriers;
II-10
- increases in taxes and governmental royalties and fees;
- involuntary renegotiation of contracts with foreign governments;
- changes in foreign and domestic laws and policies that govern operations
of foreign-based companies;
- difficulties in staffing and managing international operations; and
- political unrest that may result in disruptions of services that are
critical to their international businesses.
THE SUCCESS OF CERTAIN OF THE SUBSIDIARIES AND BUSINESS AFFILIATES
ATTRIBUTED TO EACH GROUP IS DEPENDENT UPON AUDIENCE ACCEPTANCE OF ITS PROGRAMS
AND PROGRAMMING SERVICES WHICH IS DIFFICULT TO PREDICT. Entertainment content
production and premium subscription television program services are inherently
risky businesses because the revenue derived from the production and
distribution of a cable program and the exhibition of theatrical feature films
and other programming depend primarily upon their acceptance by the public,
which is difficult to predict. The commercial success of a cable program or
premium subscription television service depends upon the quality and acceptance
of other competing programs and films released into the marketplace at or near
the same time, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, many of which are difficult to predict. Audience sizes for
cable programming and premium subscription television program services are
important factors when cable television and DTH satellite providers negotiate
affiliation agreements and, in the case of cable programming, when advertising
rates are negotiated. Consequently, low public acceptance of cable programs and
premium subscription television program services will have an adverse effect on
the results of operations of the Interactive Group and the Capital Group.
INCREASED PROGRAMMING AND CONTENT COSTS MAY ADVERSELY AFFECT
PROFITS. Subsidiaries and business affiliates attributable to each group
produce programming and incur costs for all types of creative talent including
actors, writers and producers. These subsidiaries and business affiliates also
acquire programming, such as movies and television series, from television
production companies and movie studios. An increase in the costs of programming
may lead to decreased profitability.
RISK FACTORS RELATING TO QVC
The risks described below are unique to QVC, which constitutes the primary
business attributed to the Interactive Group.
QVC CONDUCTS ITS MERCHANDISING BUSINESSES UNDER HIGHLY COMPETITIVE
CONDITIONS. Although QVC is the nation's largest home shopping network, it has
numerous and varied competitors at the national and local levels, including
conventional and specialty department stores, other specialty stores, mass
merchants, value retailers, discounters, and Internet and mail-order retailers.
Competition is characterized by many factors, including assortment, advertising,
price, quality, service, location, reputation and credit availability. If QVC
does not compete effectively with regard to these factors, its results of
operations could be materially and adversely affected.
QVC'S SALES AND OPERATING RESULTS DEPEND ON ITS ABILITY TO PREDICT OR
RESPOND TO CONSUMER PREFERENCES. QVC's sales and operating results depend in
part on its ability to predict or respond to changes in consumer preferences and
fashion trends in a timely manner. QVC develops new retail concepts and
continuously adjusts its product mix in an effort to satisfy customer demands.
Any sustained failure to identify and respond to emerging trends in lifestyle
and consumer preferences could have a material adverse affect on QVC's business.
Consumer spending may be affected by many factors outside of QVC's control,
including competition from store-based retailers, mail-order and Internet
companies, consumer confidence and preferences, and general economic conditions.
II-11
QVC's success depends in large part on its ability to recruit and retain key
employees capable of executing its unique business model. QVC has a business
model that requires it to recruit and retain key employees with the skills
necessary for a unique business that demands knowledge of the general retail
industry, television production, direct to consumer marketing and fulfillment
and the Internet. We can not assure you that if QVC experiences turnover of its
key employees, they will be able to recruit and retain acceptable replacements
because the market for such employees is very competitive and limited.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) N/A
(b) N/A
(c) Purchases of Equity Securities by the Issuer
(D) MAXIMUM NUMBER
(OR APPROXIMATE
DOLLAR VALUE) OF
(B) (C) TOTAL NUMBER OF SHARES THAT MAY YET
(A) TOTAL NUMBER AVERAGE SHARES PURCHASED AS PART BE PURCHASED UNDER
OF SHARES PRICE PAID OF PUBLICLY ANNOUNCED THE PLANS OR
PERIOD PURCHASED PER SHARE PLANS OR PROGRAMS PROGRAMS
------ ---------------- ---------- ------------------------ -------------------
April 1-30, 2006..... -- -- -- $1,000,000,000
May 1-31, 2006....... 7,177,246 $18.09 7,177,246 $ 870,187,379
June 1-30, 2006...... 12,098,651 $17.37 12,098,651 $ 659,994,458
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on May 9, 2006, the
following matters were voted on and approved by the stockholders of the Company:
1. Election of the following to the Company's Board of Directors:
VOTES FOR VOTES WITHHELD
------------- --------------
Donne F. Fisher.......................................... 3,595,084,157 299,279,951
Gregory B. Maffei........................................ 3,579,850,785 314,513,323
M. LaVoy Robison......................................... 3,595,142,057 299,222,051
The foregoing nominees also served on the Company's board of directors prior
to the annual meeting. The term of the following directors continued following
the annual meeting: Robert R. Bennett, Paul A. Gould, John C. Malone, David E.
Rapley and Larry E. Romrell. Broker non-votes had no effect on voting for the
election of directors, and abstentions and unreturned proxies have been treated
as votes withheld.
VOTES FOR VOTES AGAINST ABSTENTIONS
------------- ------------- -----------
2. Approval of the Merger Proposal pursuant to which 3,122,233,958 69,758,327 274,883,595
Liberty Media Corporation became a wholly-owned
subsidiary of a newly formed holding company
(New Liberty), and New Liberty became the
publicly-traded parent company of Liberty Media
Corporation.
3. Approval of the Tracking Stock Proposal to amend 3,115,202,831 76,785,477 274,887,572
and restate New Liberty's certificate of
incorporation to provide for the creation of
two new tracking stocks.
II-12
VOTES FOR VOTES AGAINST ABSTENTIONS
------------- ------------- -----------
4. Approval of the Optional Conversion Proposal top 3,077,555,164 114,101,093 275,219,623
rovide the board of directors with discretion
to convert shares of Liberty Interactive common
stock into share of Liberty Capital common
stock (except in certain circumstances).
5. Approval of the Optional Redemption Proposal to 3,095,828,903 96,427,587 274,619,390
provide the board of directors with discretion
to redeem shares of Liberty Interactive common
stock or Liberty Capital common stock for
shares of a company whose assets consist
entirely of assets which were previously
attributed to the group to which the redeemed
shares relate.
6. Approval of the Group Disposition Proposal to 3,094,948,506 97,451,372 274,476,002
provide the board of directors with discretion
to permit the sale of all or substantially all
of the assets of a group without the vote of
the holders of the stock of that group, if the
net proceeds of such sale are distributed to
the holders of that stock, that stock is
converted into stock of the other group, or a
combination of the foregoing is effected.
There were 427,488,228 broker non-votes with respect to proposals 2-6 above.
7. Ratification of KPMG LLP as the Company's 3,604,830,782 15,442,931 274,090,395
independent auditors for the fiscal year ended
December 31, 2006. There were no broker
non-votes with respect to this proposal.
Included in abstentions for proposals 2-7 are 270,772,067 votes for which
proxies were not returned.
ITEM 6. EXHIBITS
(a) Exhibits
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession:
2.1 Agreement and Plan of Merger, dated April 6, 2006, by and
among Liberty Media LLC, the Registrant and LMC
MergerSub, Inc. (incorporated by reference to Exhibit 2.1 to
Amendment No. 1 to the Registration Statement on Form S-4 of
the Registrant, as filed on April 6, 2006 (File
No. 333-132452))
4 Instruments Defining the Rights of Security Holders:
4.1 Specimen certificate for shares of the Registrant's Liberty
Interactive Series A common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K of the Registrant, as filed on May 15,
2006 (File No. 000-51990) (the "May 15 8-K"))
4.2 Specimen certificate for shares of the Registrant's Liberty
Interactive Series B common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.2 to the May 15
8-K)
II-13
4.3 Specimen certificate for shares of the Registrant's Liberty
Capital Series A common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.3 to the May 15 8-K)
4.4 Specimen certificate for shares of the Registrant's Liberty
Capital Series B common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.4 to the May 15 8-K)
10 Material Contracts:
10.1 Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective May 9, 2006) (the "Incentive Plan")
(incorporated by reference to Exhibit 10.1 to the May 15
8-K)
10.2 Liberty Media Corporation 2002 Nonemployee Director
Incentive Plan (As Amended and Restated Effective May 9,
2006) (the "Director Plan") (incorporated by reference to
the May 15 8-K)
10.3 Form of Non-Qualified Stock Option Agreement under the
Incentive Plan [for certain designated award recipients]
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Liberty Media LLC for the quarter
ended March 31, 2006, as filed on May 8, 2006 (File
No. 001-16615) (the "Old Liberty 10-Q"))
10.4 Form of Non-Qualified Stock Option Agreement under the
Incentive Plan [for all other award recipients](incorporated
by reference to Exhibit 10.3 to the Old Liberty 10-Q)
10.5 Form of Restricted Stock Award Agreement under the Incentive
Plan [for certain designated award recipients](incorporated
by reference to Exhibit 10.4 to the Old Liberty 10-Q)
10.6 Form of Stock Appreciation Rights Agreement under the
Incentive Plan (incorporated by reference to Exhibit 10.18
to the Annual Report on Form 10-K of Liberty Media LLC for
the year ended December 31, 2004, as filed on March 15, 2005
(File No. 001-16615) (the "Old Liberty 10-K"))
10.7 Form of Stock Appreciation Rights Agreement under the
Director Plan (incorporated by reference to Exhibit 10.21 to
the Old Liberty 10-K)
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
99.1 Attributed Financial Information for Tracking Stock Groups*
------------------------
* Filed herewith
II-14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY MEDIA CORPORATION
Date: August 9, 2006 By: /s/ CHARLES Y. TANABE
------------------------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel
Date: August 9, 2006 By: /s/ DAVID J.A. FLOWERS
------------------------------------------
David J.A. Flowers
Senior Vice President
and Treasurer
(Principal Financial Officer)
Date: August 9, 2006 By: /s/ CHRISTOPHER W. SHEAN
------------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)
II-15
EXHIBIT INDEX
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
2 Plan of Acquisition, Reorganization, Arrangement, Liquidation or
Succession:
2.1 Agreement and Plan of Merger, dated April 6, 2006, by and
among Liberty Media LLC, the Registrant and LMC
MergerSub, Inc. (incorporated by reference to Exhibit 2.1 to
Amendment No. 1 to the Registration Statement on Form S-4 of
the Registrant, as filed on April 6, 2006 (File
No. 333-132452))
4 Instruments Defining the Rights of Security Holders:
4.1 Specimen certificate for shares of the Registrant's Liberty
Interactive Series A common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.1 to the Current
Report on Form 8-K of the Registrant, as filed on May 15,
2006 (File No. 000-51990) (the "May 15 8-K"))
4.2 Specimen certificate for shares of the Registrant's Liberty
Interactive Series B common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.2 to the May 15
8-K)
4.3 Specimen certificate for shares of the Registrant's Liberty
Capital Series A common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.3 to the May 15 8-K)
4.4 Specimen certificate for shares of the Registrant's Liberty
Capital Series B common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.4 to the May 15 8-K)
10 Material Contracts:
10.1 Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective May 9, 2006) (the "Incentive Plan")
(incorporated by reference to Exhibit 10.1 to the May 15
8-K)
10.2 Liberty Media Corporation 2002 Nonemployee Director
Incentive Plan (As Amended and Restated Effective May 9,
2006) (the "Director Plan") (incorporated by reference to
the May 15 8-K)
10.3 Form of Non-Qualified Stock Option Agreement under the
Incentive Plan [for certain designated award recipients]
(incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Liberty Media LLC for the quarter
ended March 31, 2006, as filed on May 8, 2006 (File
No. 001-16615) (the "Old Liberty 10-Q"))
10.4 Form of Non-Qualified Stock Option Agreement under the
Incentive Plan [for all other award recipients]
(incorporated by reference to Exhibit 10.3 to the Old
Liberty 10-Q)
10.5 Form of Restricted Stock Award Agreement under the Incentive
Plan [for certain designated award recipients] (incorporated
by reference to Exhibit 10.4 to the Old Liberty 10-Q)
10.6 Form of Stock Appreciation Rights Agreement under the
Incentive Plan (incorporated by reference to Exhibit 10.18
to the Annual Report on Form 10-K of Liberty Media LLC for
the year ended December 31, 2004, as filed on March 15, 2005
(File No. 001-16615) (the "Old Liberty 10-K"))
10.7 Form of Stock Appreciation Rights Agreement under the
Director Plan (incorporated by reference to Exhibit 10.21 to
the Old Liberty 10-K)
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
99.1 Attributed Financial Information for Tracking Stock Groups*
------------------------
* Filed herewith