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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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 Identification No.)
incorporation or organization)
12300 LIBERTY BOULEVARD 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (720) 875-5400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Liberty Capital Series A Common Stock, par value $.01 per share...... Nasdaq National Market
Liberty Capital Series B Common Stock, par value $.01 per share...... Nasdaq National Market
Liberty Interactive Series A Common Stock, par value $.01 per share.. Nasdaq National Market
Liberty Interactive Series B Common Stock, par value $.01 per share.. Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes /X/ No / /
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes / / No /X/
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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 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 Act). Yes / / No /X/
The aggregate market value of the voting stock held by nonaffiliates of
Liberty Media Corporation computed by reference to the last sales price of such
stock, as of the closing of trading on June 30, 2006, was approximately
$22.5 billion.
The number of shares outstanding of Liberty Media Corporation's common stock
as of January 31, 2007 was:
Liberty Capital Series A Common Stock--134,503,546;
Liberty Capital Series B Common Stock--6,014,680;
Liberty Interactive Series A Common Stock--622,365,227; and
Liberty Interactive Series B Common Stock--29,971,039 shares.
Documents Incorporated by Reference
The Registrant's definitive proxy statement for its 2007 Annual Meeting of
Shareholders is hereby
incorporated by reference into Part III of this Annual Report on Form 10-K
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LIBERTY MEDIA CORPORATION
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
------
Item 1. Business.................................................... I-1
Item 1A. Risk Factors................................................ I-19
Item 1B. Unresolved Staff Comments................................... I-30
Item 2. Properties.................................................. I-30
Item 3. Legal Proceedings........................................... I-31
Item 4. Submission of Matters to a Vote of Security Holders......... I-31
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......... II-1
Item 6. Selected Financial Data..................................... II-3
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. II-4
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... II-29
Item 8. Financial Statements and Supplementary Data................. II-32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. II-32
Item 9A. Controls and Procedures..................................... II-32
Item 9B. Other Information........................................... II-33
PART III
Item 10. Directors, Executive Officers and Corporate Governance...... III-1
Item 11. Executive Compensation...................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ III-1
Item 13. Certain Relationships and Related Transactions, and Director
Independence.............................................. III-1
Item 14. Principal Accounting Fees and Services...................... III-1
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. IV-1
PART I.
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Liberty Media Corporation 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.
Through our subsidiaries, we operate in North America, Europe and Asia. Our
principal businesses and assets include QVC, Inc. and Starz, LLC and interests
in IAC/InterActiveCorp, Expedia, Inc. and News Corporation.
RECENT DEVELOPMENTS
On May 9, 2006, we completed a restructuring pursuant to which we were
organized as a new holding company, and we became the new publicly traded parent
company of Liberty Media LLC, which was formerly known as Liberty Media
Corporation, and which we refer to as "Old Liberty". As a result of the
restructuring, all of the Old Liberty outstanding common stock was exchanged for
our two new tracking stocks, Liberty Interactive common stock and Liberty
Capital common stock. 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. We
are the successor reporting company to Old Liberty.
A 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 that group. The assets and businesses we have attributed to the
Interactive Group are those engaged in video and on-line commerce, and include
our subsidiaries QVC, Inc., Provide Commerce, Inc. and BuySeasons, Inc., and our
interests in Expedia, Inc. and IAC/InterActiveCorp. The Interactive Group will
also include such other businesses, assets and liabilities that our board of
directors may in the future determine to attribute to the Interactive Group,
including such other businesses and assets as we may acquire for the Interactive
Group. In addition, we have attributed $3,108 million principal amount (as of
December 31, 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 include our subsidiaries: Starz
Entertainment, LLC (formerly known as Starz Entertainment Group LLC), Starz
Media, LLC (formerly known as IDT Entertainment, Inc.), TruePosition, Inc., FUN
Technologies, Inc. and On Command Corporation; our equity affiliates: GSN, LLC
and WildBlue Communications, Inc.; and our interests in News Corporation, Time
Warner Inc. and Sprint Nextel Corporation. The Capital Group will also include
such other businesses, assets and liabilities that our board of directors may in
the future determine to attribute to the Capital Group, including such other
businesses and assets as we may acquire for the Capital Group. In addition, we
have attributed $4,580 million principal amount (as of December 31, 2006) of our
existing publicly traded debt to the Capital Group.
I-1
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed
financial information for our tracking stock groups.
In connection with our restructuring and the issuance of our tracking
stocks, our board of directors authorized the repurchase of up to $1 billion of
outstanding Liberty Interactive common stock and up to $1 billion of Liberty
Capital common stock in the open market or in privately negotiated transactions,
subject to market conditions. Our board subsequently increased the aggregate
amount of Liberty Interactive common stock that can be repurchased to
$2 billion. During the period from the restructuring to December 31, 2006, we
repurchased 51.6 million shares of Liberty Interactive Series A common stock for
aggregate cash consideration of $954 million pursuant to our stock repurchase
program.
In the fourth quarter of 2006, QVC, Inc., our wholly owned subsidiary,
increased its borrowing capacity from $3.5 billion to $5.25 billion by entering
into a new $1.75 billion unsecured credit agreement. Such agreement has
substantially the same terms as QVC's previously existing credit agreement and
matures in October 2011. We used funds borrowed under QVC's credit facilities to
retire our Senior Notes that matured in September 2006.
In December 2006, we announced that we had entered into an exchange
agreement with News Corporation pursuant to which, if completed, we would
exchange our approximate 16.2% ownership interest in News Corporation for a
subsidiary of News Corporation, which would own News Corporation's approximate
38.5% interest in The DirecTV Group, Inc., three regional sports television
networks and approximately $550 million in cash. Consummation of the exchange,
which is subject to various closing conditions, including approval by News
Corporation's shareholders, regulatory approval and receipt of a favorable
ruling from the IRS confirming that the exchange is tax-free, is expected in
mid-2007.
* * * * *
Certain statements in this Annual Report on Form 10-K 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 Corp. and estimated amounts payable under that
arrangement, revenue growth and subscriber trends at QVC, Inc. and Starz
Entertainment, LLC, anticipated programming and marketing costs at Starz
Entertainment, our projected sources and uses of cash, the estimated value of
our derivative instruments, 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 business. In particular, statements under
Item 1. "Business," Item 1A. "Risk-Factors," Item 2. "Properties," Item 3.
"Legal Proceedings," Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk" contain forward-looking statements. 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 there can be no assurance that the
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:
- customer demand for our products and services and our ability to adapt to
changes in demand;
- competitor responses to our products and services, and the products and
services of the entities in which we have interests;
- uncertainties inherent in the development and integration of new business
lines and business strategies;
I-2
- uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new
television and telecommunications technologies;
- our future financial performance, including availability, terms and
deployment of capital;
- our ability to successfully integrate and recognize anticipated
efficiencies and benefits from the businesses we acquire;
- 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;
- 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;
- 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;
- threatened terrorist attacks and ongoing military action in the Middle
East and other parts of the world; and
- fluctuations in foreign currency exchange rates and political unrest in
international markets.
These forward-looking statements and such risks, uncertainties and other factors
speak only as of the date of this Annual 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 our
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based. When considering such
forward-looking statements, you should keep in mind the factors described in
Item 1A, "Risk Factors" and other cautionary statements contained in this Annual
Report. Such risk factors and statements describe circumstances which could
cause actual results to differ materially from those contained in any
forward-looking statement.
This Annual Report includes information concerning public companies in which
we have minority interests that file reports and other information with the SEC
in accordance with the Securities Exchange Act of 1934. Information contained in
this Annual Report concerning those companies has been derived from the reports
and other information filed by them with the SEC. If you would like further
information about these companies, the reports and other information they file
with the SEC
I-3
can be accessed on the Internet website maintained by the SEC at www.sec.gov.
Those reports and other information are not incorporated by reference in this
Annual Report.
(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Through our ownership of interests in subsidiaries and other companies, we
are primarily engaged in the video and on-line commerce, media, communications
and entertainment industries. Each of these businesses is separately managed.
We identify our reportable segments as (A) those consolidated subsidiaries
that represent 10% or more of our consolidated revenue, earnings before income
taxes or total assets and (B) those equity method affiliates whose share of
earnings represent 10% or more of our pre-tax earnings. Financial information
related to our operating segments can be found in note 18 to our consolidated
financial statements found in Part II of this report.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The following table identifies our more significant subsidiaries and
minority investments within each of the Capital Group and the Interactive Group.
CAPITAL GROUP
CONSOLIDATED SUBSIDIARIES
Starz, LLC
Starz Entertainment, LLC
Starz Media, LLC
TruePosition, Inc.
FUN Technologies, Inc. (TSX:FUN; AIM:FUN)
On Command Corporation (1)
EQUITY AND COST METHOD INVESTMENTS
GSN, LLC
WildBlue Communications, Inc.
News Corporation (NYSE:NWS; NYSE:NWSa)
Time Warner Inc. (NYSE:TWX) (2)
Sprint Nextel Corporation (NYSE:S) (2)
INTERACTIVE GROUP
CONSOLIDATED SUBSIDIARIES
QVC, Inc.
Provide Commerce, Inc.
BuySeasons, Inc.
EQUITY AND COST METHOD INVESTMENTS
Expedia, Inc. (Nasdaq:EXPE)
IAC/InterActiveCorp (Nasdaq:IACI)
------------------------
(1) In December 2006, we announced that we had entered into a definitive
agreement to sell Ascent Entertainment Group, Inc., the parent company of On
Command, to Lodgenet Entertainment Corporation for $332 million in cash and
2.05 million shares of Lodgenet common stock valued at approximately
$50 million. The transaction, which is subject to regulatory approval and
other customary closing conditions, is expected to close in mid-2007. We are
accounting for Ascent Entertainment Group as assets held for sale and have
presented its results of operations in earnings (loss) from discontinued
operations in our consolidated statements of operations.
I-4
(2) Represents an available-for-sale security in which we have less than a 5%
ownership interest and that we consider a non-strategic financial asset in
our portfolio.
CAPITAL GROUP
The Capital Group is focused primarily on video programming and
communications technology and services involving cable, satellite, the Internet
and other distribution media. We expect to grow the businesses attributed to the
Capital Group by creating new opportunities for our existing businesses and by
acquiring companies that leverage and complement those businesses. Over time, we
expect to convert many of our non-strategic assets into operating assets or into
cash that we would use to pursue such opportunities. We may also explore other
financial transactions and investments with attractive risk and return
characteristics.
STARZ ENTERTAINMENT, LLC
Starz Entertainment, LLC ("Starz Entertainment"), a wholly-owned subsidiary,
provides premium movie networks and programming distributed by cable,
direct-to-home satellite, telephony, the Internet and other distribution media
providers in the United States. Starz Entertainment's primary service offerings
are (1) Starz, which is primarily a first-run movie service that generally
includes Starz plus five multiplex channels branded with the Starz name, each of
which exhibits movies targeted to a specific audience and (2) Encore, which airs
first-run movies and classic contemporary movies and generally includes six
additional thematic multiplex channels branded with the Encore name, each of
which exhibits movies based upon individual themes. Starz is generally purchased
by subscribers as an a-la-carte premium service for which subscribers pay a
separate monthly charge. Distributors may also package Starz with other premium
services. Encore is generally purchased by subscribers as part of a digital
package, which includes a variety of general entertainment digital networks.
Distributors may also sell Encore on an a-la-carte basis or packaged with Starz.
Starz Entertainment's services also include MoviePlex, a "theme by day" channel
featuring a different thematic multiplex channel each day, on a weekly rotation;
IndiePlex, featuring art house and independent films; RetroPlex, featuring
"classic" movies; Starz On Demand; Encore on Demand; Movieplex on Demand and a
high definition feed of the Starz channel on StarzHD. In addition, Starz
Entertainment distributes via the Internet Vongo, a subscription package
comprising Starz plus approximately 1,000 movies and 1,500 other video
selections on an on-demand basis, as well as other selected pay-per-view movies.
As of December 31, 2006, Starz Entertainment had 15.5 million Starz
subscriptions and 27.3 million Encore subscriptions.
Programming networks distribute their services through a number of
distribution technologies, including cable television, direct-to-home satellite,
broadcast television and the Internet. Programming services may be delivered to
subscribers as part of a video distributor's analog or digital package of
programming services for a fixed monthly fee, or may be delivered individually
as a "premium" programming service for a separate monthly charge. Premium
services may be scheduled or "on-demand." Additionally, single programs or
movies may be delivered on a pay-per-view basis for a per program fee. Whether a
programming service is basic, premium or pay-per-view, the programmer generally
enters into separate multi-year affiliation agreements with those distributors
that agree to carry the service. Programmers may also provide their pay-per-view
and subscription on-demand services directly to consumers via the Internet.
Basic programming services derive their revenue principally from the sale of
advertising time on their networks and from per subscriber license fees received
from distributors. Their continued ability to generate both advertising revenue
and subscriber license fees is dependent on these services' ability to maintain
and renew their affiliation agreements. Premium and pay-per-view services do not
sell advertising and primarily generate their revenue from subscriber fees.
The majority of Starz Entertainment's revenue is derived from the delivery
of movies to subscribers under long-term affiliation agreements with cable
systems and direct broadcast satellite
I-5
systems, including Comcast Cable, DirecTV, EchoStar, Time Warner, Charter
Communications, Cox Communications, Cablevision Systems, Insight Communications,
Mediacom Communications and the National Cable Television Cooperative. Some of
Starz Entertainment's affiliation agreements provide for payments based on the
number of subscribers that receive Starz Entertainment's services. Starz
Entertainment also has affiliation agreements with certain of its customers
pursuant to which those customers pay an agreed-upon rate regardless of the
number of subscribers. These affiliation agreements generally provide for
contractual rate increases or rate increases tied to the annual increase in the
Consumer Price Index. Starz Entertainment's agreement with Comcast requires
Comcast to carry the Encore and Thematic Multiplex channels through
September 2009 and Starz through December 2012. Starz Entertainment's
affiliation agreement with EchoStar expires in June 2009. The affiliation
agreement with DirecTV has expired, and Starz Entertainment is currently in
negotiations regarding a multi-year distribution agreement for Starz
Entertainment's service offerings. In addition, the affiliation agreement with
Time Warner, which originally expired on December 31, 2006, has been extended
through May 31, 2007 with provisions for further extensions through June 30,
2007. Starz Entertainment's other affiliation agreements expire between now and
December 2009. For the year ended December 31, 2006, Starz Entertainment earned
67.8% of its total revenue from Comcast, DirecTV, EchoStar and Time Warner,
collectively.
The costs of acquiring rights to programming, including Internet protocol
rights, are Starz Entertainment's principal expenses. In order to exhibit
theatrical motion pictures, Starz Entertainment enters into agreements to
acquire rights from major motion picture producers including Hollywood Pictures,
Touchstone Pictures, Miramax Films, Disney, Revolution Studios, Sony's Columbia
Pictures, Screen Gems and Sony Pictures Classics. Starz Entertainment also has
exclusive rights to air first-run output from an independent studio. These
output agreements expire between 2007 and 2011, with extensions, at the option
of two studios, potentially extending the expiration dates of those agreements
to 2013 and 2014.
Starz Entertainment uplinks its programming to five non-preemptible,
protected transponders on three domestic satellites. "Protected" status means
that, in the event of a transponder failure, Starz Entertainment's signal will
be transferred to a spare transponder or, if none is available, to a preemptible
transponder located on the same satellite or, in certain cases, to a transponder
on another satellite owned by the same service provider if one is available at
the time of the failure. "Non-preemptible" status means that, in the event of a
transponder failure, Starz Entertainment's transponders cannot be preempted in
favor of a user of a "protected" failure. Starz Entertainment leases its
transponders under long-term lease agreements. At December 31, 2006, Starz
Entertainment's transponder leases had termination dates ranging from 2018 to
2021. Starz Entertainment transmits to these transponders from its uplink center
in Englewood, Colorado.
STARZ MEDIA, LLC
In 2006, we acquired IDT Entertainment from IDT Corp. and renamed it Starz
Media. Starz Media's operations include home video distribution, live-action
television and film production, and theatrical and non-theatrical animation.
Starz Media's home video distribution business is operated through its Starz
Home Entertainment subsidiary utilizing the Anchor Bay and Manga brands. Anchor
Bay and Manga acquire and license content for home video distribution and have a
combined library of over 3,850 titles including THOMAS THE TANK ENGINE, 3RD ROCK
FROM THE SUN, GREATEST AMERICAN HERO, and others. These titles are distributed
through national retailers, including Wal-Mart, Target and Best Buy. Generally,
these retailers have the right to return unsold products.
The live-action and animation television film production business comprises
three business units: Starz Productions, Starz Animation and Film Roman. Starz
Productions develops and produces proprietary live-action and animated content
for television and direct-to-video/DVD distribution. The live-action operations
focus on horror, science fiction, supernatural and thriller films and include
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MASTERS OF HORROR, a film series shown on Showtime, and MASTERS OF SCI FI, a
film series to be shown on ABC. Animated series include ME, ELOISE, THE HAPPY
ELF, and WOW! WOW! WUBZY being shown on Nick Jr.
Through studios based in the United States and Canada, Starz Animation and
Film Roman develop and produce 2D and 3D animated content for distribution
theatrically, on television and direct-to-video/DVD. Animation production is
focused on proprietary content and is also performed for third parties. In the
third quarter of 2006, Starz Animation released its first full-length animated
film, EVERYONE'S HERO, in theaters. Starz Animation has two additional animated
films currently in production that are expected to be released theatrically in
2008. Film Roman's third-party projects include THE SIMPSONS and KING OF THE
HILL, which are owned and distributed by Fox TV.
Domestically, Starz Media utilizes Twentieth Century Fox ("Fox") to
distribute and market its theatrical animated filmed products, while
internationally it uses foreign sales agents to contract with foreign
distributors. Fox is paid a distribution fee for its services. The domestic box
office receipts are divided between the theatrical distributors and Starz Media
based upon negotiated contractual arrangements on a film by film basis. The
foreign sales agent will negotiate with distributors on a territory by territory
basis with some contracts requiring minimum guarantees. The international
theatrical sales for EVERYONE'S HERO were not significant due to the genre of
the movie.
In the U.S., Starz Media incurs significant marketing, advertising and print
costs before and during the theatrical release of a film in an effort to
generate awareness of the film, to increase the consumer's intent to view the
film, and to generate significant consumer interest in subsequent home video and
other ancillary markets. These costs are expensed as incurred. Therefore, Starz
Media will incur losses prior to theatrical release of a film. The foreign
distributors are normally responsible for the marketing and advertising of films
in each of their respective territories.
Starz Entertainment and Starz Media are both wholly-owned subsidiaries of
our newly formed subsidiary, Starz, LLC. We believe that the acquisition of
Starz Media will provide opportunities to exploit all the key domestic and
international video distribution vehicles: theatrical, premium television, home
video, syndication and Internet. Starz, LLC will have the opportunity to test
new programming ideas on a single platform and then migrate the successful ones
to other distribution outlets.
TRUEPOSITION, INC.
TruePosition, Inc. develops and markets technology for locating wireless
phones and other wireless devices enabling wireless carriers, application
providers and other enterprises to provide E-911 services domestically and other
location-based services to mobile users worldwide. "E-911" or "Enhanced 911"
refers to a Federal Communications Commission mandate requiring wireless
carriers to implement wireless location capability. Cingular Wireless began
deploying TruePosition's technology in late 2002, and T-Mobile USA began
deploying such technology in 2003. As of December 31, 2006, both wireless
carriers are actively deploying TruePosition's technology and using the
technology for E-911. In addition, as of December 31, 2006 four smaller wireless
carriers have deployed or started to deploy TruePosition's technology. Although
many of the following services have not yet been developed, and may not be
developed successfully or at all, TruePosition's wireless location technology
could also be used to implement a number of commercial location-based services
including (1) comfort and security related applications, including child, pet
and elderly tracking; (2) convenience/information services such as "concierge"
and "personal navigation" to identify and provide directions to the nearest
restaurant, ATM, or gas station or allow travelers to obtain other information
specific to their location; (3) corporate applications, such as fleet or asset
tracking to enable enterprises to better manage mobile assets to optimize
service or cut costs; (4) entertainment/community services such as "friend
finder" or "m-dating" to allow mobile users to create a localized community of
people with similar interests and receive notification when another group member
is close-by; (5) mobile commerce services to help
I-7
users shop or purchase goods or services from the retailer closest to their
current location; and (6) safety related applications to help public or private
safety organizations find or track mobile users in need of assistance or help
locate stolen property.
TruePosition earns revenue from the sale of hardware and licensing of
software required to generate location records for wireless phones and other
wireless devices on a cellular network and from the design, installation,
testing and commissioning of such hardware and software. In addition,
TruePosition earns software maintenance revenue through the provision of ongoing
technical and software support. TruePosition has not earned revenue from other
location-based services to date. Substantially all of TruePosition's reported
revenue in 2004, 2005 and 2006 was derived from Cingular Wireless. Recognition
of revenue earned from T-Mobile is deferred in accordance with the software
recognition rules under generally accepted accounting principles pending
delivery of specified elements, which to date have not been delivered.
The TruePosition-Registered Trademark- Finder-TM- system is a passive
network overlay system designed to enable mobile wireless service providers to
determine the location of all network wireless devices, including cellular and
PCS telephones. Using patented time difference of arrival (TDOA) and angle of
arrival (AOA) technology, the TruePosition Finder-TM- system calculates the
latitude and longitude of a designated wireless telephone or other transmitter
and forwards this information in real time to application software. TruePosition
offerings cover multiple major wireless technologies including Time Division
Multiple Access (TDMA), Analog Mobile Phone Service (AMPS) and Global System
Mobile (GSM).
We own approximately 89% of the common equity of TruePosition and 100% of
the TruePosition preferred stock, which preferred stock has a liquidation
preference of $427 million at December 31, 2006.
FUN TECHNOLOGIES INC.
FUN Technologies Inc's. primary business is the provision of online and
interactive casual games and sports content. FUN provides its services through
two divisions: FUN Games and FUN Sports. The FUN Games division operates a skill
games business through which it operates and licenses various formats of skill
games including (i) pay-for-play, person-to-person and tournament-based
interactive skill games, (ii) free games, (iii) downloadable games and
(iv) subscription games. The FUN Sports division operates fantasy sports
services offering editorial content, sports data, games and leagues to consumers
and corporate distributors.
FUN Games offers a wide range of free and cash-based skill games via its own
Internet sites and its distribution partners. Cash-based skill games are games
in which participants must pay an entry stake to compete against each other for
a prize, and in which the winner is determined based on skill rather than on
chance. FUN provides private-label gaming systems and services to large
interactive entertainment groups, including America Online, EA Sports, Pogo and
MSN. FUN Games earns revenue from fees collected for online tournaments and
games managed as well as game download and subscription fees.
FUN Sports develops, operates and licenses fantasy league-hosting software,
content, real-time sports statistics and interactive games delivered via
broadband. The FUN Sports division has private-label distribution agreements
with America Online, the National Basketball Association and Nascar.com, among
others. Through the Company's own websites, including www.fanball.com and
www.CDMSports.com, FUN Sports provides fantasy sports contests, content,
strategy and insight. It also owns Fanball.com radio and produces print
publications called "Just Cheat Sheets", "Fantasy Racing" and "Fantasy Football
Weekly".
The FUN Sports division also provides real-time sports information services
for sports enthusiasts through its destination site www.DonBest.com. DonBest
provides subscription services for live odds,
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major line move alerts, injury reports, statistical reports, and offers
customized information delivery services and publishes this information real
time to its subscribers. DonBest does not participate in any gambling activities
such as accepting or making wagers.
We own approximately 53% of the outstanding common shares of FUN.
ON COMMAND CORPORATION
On Command Corporation, a wholly-owned subsidiary, is a provider of in-room
video entertainment and information services to hotels, motels and resorts
(which we collectively refer to as hotels) primarily in the United States. On
Command had an installed base of approximately 832,000 rooms at December 31,
2006.
The hotels providing On Command's services collect fees from their guests
for the use of On Command's services and are provided a commission equal to a
negotiated percentage of the net revenue earned by On Command for such usage.
The amount of revenue realized by On Command is affected by a variety of
factors, including among others, hotel occupancy rates, the "buy rate" or
percentage of occupied rooms that buy movies or services, the quality of On
Command's pay-per-view movie offerings, business and leisure travel patterns and
changes in the number of rooms served. With the exception of December, which is
generally On Command's lowest month for revenue, On Command typically does not
experience significant variations in its monthly revenue that can be attributed
solely to seasonal factors.
On Command primarily provides its services under long-term contracts to
hotel corporations, hotel management companies, and individually owned and
franchised hotel properties. On Command's services are offered predominantly in
the large deluxe, luxury, and upscale hotel categories serving business
travelers. At December 31, 2006, contracts covering approximately 34.3% of On
Command's installed rooms have expired, or are scheduled to expire, if not
otherwise renewed, during the two-year period ending December 31, 2008.
Marriott, Hyatt and Hilton accounted for approximately 34.9%, 9.3% and 8.6%
respectively, of On Command's room revenue for the year ended December 31, 2006.
These revenue percentages represent all chain affiliations including owned,
managed and franchised hotels.
As noted above, in December 2006, we announced that we had entered into a
definitive agreement to sell Ascent Entertainment Group, Inc., the parent
company of On Command, to Lodgenet Entertainment Corporation for $332 million in
cash and 2.05 million shares of Lodgenet common stock valued at approximately
$50 million. The transaction, which is subject to regulatory approval and other
customary closing conditions, is expected to close in mid-2007.
GSN, LLC
GSN, LLC owns and operates GSN. With approximately 61 million Nielsen
subscribers as of December 31, 2006, GSN is a basic cable network dedicated to
game-related programming and interactive game playing. GSN offers 24-hour
programming featuring game shows, casino games, reality series, documentaries
and other game-related shows. GSN features a full prime-time schedule of
interactive programming, which allows viewers a chance to play along with GSN's
televised games via GSN.com. GSN programming also includes 12 hours per week of
participation television branded as PLAYMANIA. PLAYMANIA contains live
interactive game content where home viewers become contestants, playing a
multitude of interactive word games, number games and puzzles.
GSN's revenue is primarily derived from the delivery of its programming to
subscribers under long-term affiliation agreements with cable systems, direct
broadcast satellite systems and Telco video providers and from the sale of
advertising on its network. GSN's affiliation agreements provide for payments
based on the number of subscribers that receive GSN's services and expire
between now and
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2011. GSN is currently out of contract with DirecTV, a distributor that accounts
for approximately 25% of GSN's current subscriber base, and is in negotiations
for the renewal of such contract. For the year ended December 31, 2006, GSN
earned approximately 11% of its total revenue from each of Comcast and DirecTV.
We and Sony Pictures Entertainment, a division of Sony Corporation of
America, which is a subsidiary of Sony Corporation, each own 50% of GSN, LLC.
GSN's day-to-day operations are managed by a management committee of its board
of managers. Pursuant to GSN's operating agreement, we and Sony each have the
right to designate half of the members of the management committee. Also
pursuant to the operating agreement, we and Sony have agreed that direct
transfers of our interests in GSN and certain indirect transfers that result in
a change of control of the transferring party are subject to a right of first
refusal in favor of the non-transferring member.
WILDBLUE COMMUNICATIONS, INC.
WildBlue Communications, Inc. delivers two-way broadband Internet access via
satellite to homes and small businesses in rural markets underserved by
terrestrial broadband alternatives. WildBlue provides coverage across the
continental United States using a 26-inch dish and satellite modem. WildBlue has
a prepaid license for Ka-band capacity on a geostationary satellite located at
111.1 degrees West Longitude. The expected life of the satellite is
approximately 15 years. In the event the satellite fails at any time through
July 2007, WildBlue is entitled to reimbursement of the cash prepayments made
for the license. In December 2006, WildBlue successfully launched a second
satellite which is owned by WildBlue and is expected to be placed into
commercial service late in the first quarter of 2007.
WildBlue launched its service in mid-2005 and generates revenue by charging
subscription fees for its Internet access services as well as fees for equipment
sales and related installation charges. At December 31, 2006, WildBlue had over
120,000 subscribers.
We own an approximate 32% equity interest in WildBlue.
NEWS CORPORATION
News Corporation is a diversified international media and entertainment
company with operations in eight industry segments, including filmed
entertainment, television, cable network programming, direct broadcast satellite
television, magazines and inserts, newspapers, book publishing and other. News
Corporation's activities are conducted principally in the United States,
continental Europe, the United Kingdom, Asia, Australia and the Pacific Basin.
News Corporation is a holding company that conducts all of its activities
through subsidiaries and affiliates. Its principal subsidiaries and affiliates
are Fox Entertainment Group, Inc., Twentieth Century Fox Film Corporation, Fox
Television Holdings, Inc., Fox Broadcasting Company, Fox Sports Networks, Inc.,
NDS Group plc, News America Marketing In-Store Services, Inc., News American
Marketing FSI, Inc., News International Limited, News Limited, HarperCollins
Publishers, Inc., HarperCollins Publishers Limited, STAR Group Limited, BSkyB
and The DIRECTV Group. We own shares representing an approximate 16.2% equity
interest and an approximate 19% voting interest in News Corporation
As discussed above, we have entered into an exchange agreement with News
Corporation pursuant to which, if completed, we would exchange our ownership
interest in News Corporation for a subsidiary of News Corporation which would
own News Corporation's interests in The DirecTV Group, Inc., three regional
sports television networks and approximately $550 million in cash. Consummation
of the exchange, which is subject to various closing conditions, including
approval by News Corporation's shareholders, regulatory approval and receipt of
a favorable ruling from the IRS confirming that the exchange is tax-free, is
expected in mid-2007.
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INTERACTIVE GROUP
Anchored by QVC, the Interactive Group is focused on video and online
commerce. Our strategy is to continue QVC's organic growth in its existing
markets while exploring opportunities for expansion in additional international
markets. We will also seek to leverage the strength of QVC as a video and
web-based retailer by acquiring complementary businesses. In this regard, we
acquired Provide Commerce and BuySeasons in 2006.
QVC, INC.
QVC, Inc., a wholly-owned subsidiary, markets and sells a wide variety of
consumer products in the U.S. and several foreign countries primarily by means
of merchandise-focused televised shopping programs on the QVC television
networks and via the Internet through its domestic and international websites.
QVC programming is divided into segments that are televised live with a host who
presents the merchandise, sometimes with the assistance of a guest representing
the product vendor, and conveys information relating to the product to QVC's
viewers. QVC's websites offer a complement to televised shopping by allowing
consumers to purchase a wide assortment of goods that were previously offered on
the QVC networks, as well as other items that are available from QVC only via
its websites. For the year ended December 31, 2006, approximately 20% of QVC's
domestic revenue and approximately 18% of QVC's total revenue was generated from
sales of merchandise ordered through its various websites.
QVC offers a variety of merchandise at competitive prices. QVC purchases, or
obtains on consignment, products from domestic and foreign manufacturers and
wholesalers, often on favorable terms based upon the volume of the transactions.
QVC classifies its merchandise into three groups: home, apparel/accessories and
jewelry. For the year ended December 31, 2006, home, apparel/ accessories and
jewelry accounted for approximately 44%, 35% and 21%, respectively, of QVC's net
revenue generated by its United States operations. QVC offers products in each
of these merchandise groups that are exclusive to QVC, as well as popular brand
name and other products also available from other retailers. QVC's exclusive
products are often endorsed by celebrities, designers and other well known
personalities. QVC does not depend on any single supplier or designer for a
significant portion of its inventory.
QVC distributes its television programs, via satellite or optical fiber, to
multichannel video program distributors for retransmission to subscribers in the
United States, the United Kingdom, Germany, Japan and neighboring countries that
receive QVC's broadcast signals. In the U.S., QVC uplinks its programming from
its uplink facility in Pennsylvania to a protected, non-preemptible transponder
on a domestic satellite. QVC's international business units each obtain
uplinking services from third parties and transmit their programming to
non-preemptible transponders on five international satellites. QVC's transponder
service agreement for its domestic transponder expires in 2019. QVC's
transponder service agreements for its international transponders expire in 2008
through 2013.
QVC enters into long-term affiliation agreements with satellite and cable
television operators who downlink QVC's programming and distribute the
programming to their customers. QVC's affiliation agreements with these
distributors have termination dates ranging from 2007 to 2016. QVC's ability to
continue to sell products to its customers is dependent on its ability to
maintain and renew these affiliation agreements in the future.
In return for carrying the QVC signals, each programming distributor in the
United States, the United Kingdom and Germany receives an allocated portion,
based upon market share, of up to 5% of the net sales of merchandise sold via
the television programs to customers located in the programming distributor's
service areas. In Japan, some programming distributors receive an agreed-upon
monthly fee per subscriber regardless of the net sales, while others earn a
variable percentage of net sales. In
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addition to sales-based commissions or per-subscriber fees, QVC also makes
payments to distributors in the United States for carriage and to secure
favorable positioning on channel 35 or below on the distributor's channel
line-up. QVC believes that a portion of its sales are attributable to purchases
resulting from channel "browsing" and that a channel position near broadcast
networks and more popular cable networks increases the likelihood of such
purchases. As a result of the ongoing conversion of analog cable customers to
digital, channel positioning has become more critical due to the increased
channel options on the digital line-up.
QVC's shopping program is telecast live 24 hours a day to approximately
91 million homes in the United States. QVC Shopping Channel reaches
approximately 19 million households in the United Kingdom and the Republic of
Ireland and is broadcast 24 hours a day with 17 hours of live programming. QVC's
shopping network in Germany, reaches approximately 38 million households
throughout Germany and Austria and is broadcast live 24 hours a day. QVC Japan,
QVC's joint venture with Mitsui & Co., LTD, reaches approximately 19 million
households and is broadcast live 24 hours a day.
QVC strives to maintain promptness and efficiency in order taking and
fulfillment. QVC has four domestic phone centers that can direct calls from one
call center to another as volume mandates, which reduces a caller's hold time,
helping to ensure that orders will not be lost as a result of hang-ups. QVC also
has one phone center in each of the United Kingdom and Japan and two call
centers in Germany. QVC also utilizes computerized voice response units, which
handle approximately 34% of all orders taken. QVC has seven distribution centers
worldwide and is able to ship approximately 92% of its orders within 48 hours.
QVC's business is seasonal due to a higher volume of sales in the fourth
calendar quarter related to year-end holiday shopping. In recent years, QVC has
earned 22%-23% of its revenue in each of the first three quarters of the year
and 32%-33% of its revenue in the fourth quarter of the year.
PROVIDE COMMERCE, INC.
Provide Commerce, Inc., a wholly-owned subsidiary that we acquired in
February 2006, operates an e-commerce marketplace of websites that offers
high-quality perishable products direct from suppliers to consumers. Provide
Commerce combines an online storefront, proprietary supply chain management
technology, established supplier relationships and integrated logistical
relationships with Federal Express Corporation and United Parcel Service, Inc.
to create a market platform that bypasses traditional supply chains of
wholesalers, distributors and retailers. Provide Commerce derives its revenue
primarily from the sale of flowers and plants on its proflowers.com website and
from the sale of gourmet foods from its branded websites: Cherry Moon Farms, for
fresh premium fruits; Uptown Prime, for premium meats and seafood; Secret Spoon,
for fresh sweets and confections; and Shari's Berries, for chocolate-dipped
berries and related gifting products. Provide Commerce also enters into
arrangements with businesses desiring to offer high-quality, time-sensitive or
perishable products to customers on a co-branded or private label basis,
designing and hosting dedicated websites on behalf of such clients.
Provide Commerce initially launched its marketplace to sell and deliver
flowers. Provide Commerce later expanded its offerings to include premium meats
and seafood, fresh premium fruits and confections. The sale of flowers continues
to be Provide Commerce's most significant product comprising approximately 94%
of its sales. The sale of flowers is seasonal with over 65% of sales coming from
purchases for Valentine's Day and Mother's Day in the first and second quarters
of the year. Provide Commerce depends on three suppliers for approximately 55%
of its floral products. The loss of any of these suppliers could adversely
impact Provide Commerce.
Provide Commerce believes that one of the keys to its success is the ability
to deliver products on time and fresher than its competitors thereby providing a
better value for its customers. Provide
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Commerce maintains a customer service center located at its corporate
headquarters to respond to customer phone calls and emails 24 hours a day, seven
days a week. Due to the retail nature of its business, no single customer
accounted for more than 10% of Provide Commerce's revenue in 2006.
BUYSEASONS, INC.
BuySeasons, Inc., a wholly-owned subsidiary that we acquired in
August 2006, operates BuyCostumes.com, an on-line retailer of costumes,
accessories, decor and party supplies. BuyCostumes.com provides a single
destination for children and adults looking for solutions for celebration and
costuming events. BuySeasons earns revenue from the sale of its costumes and
accessories to retail customers who order via the BuyCostumes.com website.
Additionally, BuySeasons earns revenue from its BuySeasons Direct business which
offers drop-ship fulfillment of its products for other retailers. While over 90%
of BuySeason's products are also available from other on-line and traditional
brick-and-mortar retailers, BuySeasons believes that no other single retailer
offers the range of products within its niche that BuySeasons offers. BuySeasons
also has exclusive arrangements to purchase products that are only available
from BuySeasons. BuySeasons works with manufacturers to design costumes and
accessories for which BuySeasons has exclusive rights for a predetermined period
of time. BuySeasons purchases its products from various suppliers, both domestic
and international. BuySeasons depends on two suppliers for approximately 30% of
its costumes and accessories. The loss of either of these suppliers could
adversely impact BuySeasons.
BuySeasons believes that the key to its success is a combination of a large
assortment of on-line products, value pricing and a high level of customer
service. BuySeason's business is highly seasonal with nearly 75% of its revenue
earned in September and October due to the Halloween holiday. BuySeasons
maintains a customer service center at its corporate headquarters. Customer
service representatives are available 24 hours a day, seven days a week during
its busy season to respond to customer questions. BuySeasons also leases
warehouse space to store inventory and ship orders to customers. The customer
service center and warehouse staffing is scalable, and BuySeasons employs
contract labor to react to higher volume during the peak Halloween season.
EXPEDIA, INC.
Expedia, Inc. is among the world's leading travel services companies, making
travel products and services available to leisure and corporate travelers in the
United States and abroad through a diversified portfolio of brands, including
Expedia, Hotels.com, Hotwire, Expedia Corporate Travel, Classic Custom Vacations
and a range of other domestic and international brands and businesses. Expedia's
various brands and businesses target the needs of different consumers, including
those who are focused exclusively on price and those who are focused on the
breadth of product selection and quality of services. Expedia has created an
easily accessible global travel marketplace, allowing customers to research,
plan and book travel products and services from travel suppliers and allows
these travel suppliers to efficiently reach and provide their products and
services to Expedia customers. Through its diversified portfolio of domestic and
international brands and businesses, Expedia makes available, on a stand-alone
and package basis, travel products and services provided by numerous airlines,
lodging properties, car rental companies, cruise lines and destination service
providers, such as attractions and tours. Using a portfolio approach for
Expedia's brands and businesses allows it to target a broad range of customers
looking for different value propositions. Expedia reaches many customers in
several countries and multiple continents through its various brands and
businesses, typically customizing international points of sale to reflect local
language, currency, customs, traveler behavior and preferences and local hotel
markets, all of which may vary from country to country.
Expedia generates revenue by reserving travel services as the merchant of
record and reselling these services to customers at a profit. Expedia also
generates revenue by passing reservations booked by its customers to the
relevant services for a fee or commission.
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We indirectly own an approximate 21% equity interest and a 53% voting
interest in Expedia. We have entered into governance arrangements pursuant to
which Mr. Barry Diller, Chairman of the Board and Senior Executive Officer of
Expedia, is currently entitled to vote our shares of Expedia, subject to certain
limitations. Through our governance arrangements we have the right to appoint
and have appointed two of the ten members of Expedia's board of directors.
IAC/INTERACTIVECORP
IAC/InterActiveCorp is a multi-brand interactive commerce company
transacting business worldwide via the Internet, television and the telephone.
IAC's portfolio of companies collectively enables direct-to-consumer
transactions across many areas, including home shopping, event ticketing,
personals, travel, teleservices and local services.
IAC consists of the following sectors:
- Retailing, which includes HSN, Cornerstone Brands, Inc., Shoebuy.com and
international home shopping channels;
- Services, which includes Ticketmaster, Lending Tree and its affiliated
brands and businesses, and service outsourcers;
- Media and Advertising, which includes Ask.com and Citysearch; and
- Membership and Subscriptions, which includes match.com, Entertainment
Publications, which promotes merchants through consumer savings, and
Interval International, which offers services to time share vacation
owners.
IAC's businesses largely act as intermediaries between suppliers and
consumers. IAC aggregates supply from a variety of sources and captures consumer
demand across a variety of channels.
We indirectly own an approximate 24% equity interest and a 57% voting
interest in IAC. We have entered into governance arrangements pursuant to which
Mr. Barry Diller, Chairman of the Board and CEO of IAC, is currently entitled to
vote our shares of IAC, subject to certain limitations. Through our governance
arrangements we have the right to appoint and have appointed two of thirteen
members of IAC's board of directors.
REGULATORY MATTERS
PROGRAMMING AND INTERACTIVE TELEVISION SERVICES
In the United States, the FCC regulates the providers of satellite
communications services and facilities for the transmission of programming
services, the cable television systems that carry such services, and, to some
extent, the availability of the programming services themselves through its
regulation of program licensing. Cable television systems in the United States
are also regulated by municipalities or other state and local government
authorities. Cable television systems are currently subject to federal rate
regulation on the provision of basic service, except where subject to effective
competition under FCC rules, and continued rate regulation or other franchise
conditions could place downward pressure on the fees cable television companies
are willing or able to pay for programming services in which we have interests.
Regulatory carriage requirements also could adversely affect the number of
channels available to carry the programming services in which we have an
interest.
REGULATION OF PROGRAM LICENSING. The Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Cable Act) directed the FCC to promulgate
regulations regarding the sale and acquisition of cable programming between
multi-channel video programming distributors (including cable operators) and
satellite-delivered programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations adopted
by the FCC preclude
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virtually all exclusive programming contracts between cable operators and
satellite programmers affiliated with any cable operator (unless the FCC first
determines the contract serves the public interest) and generally prohibit a
cable operator that has an attributable interest in a satellite programmer from
improperly influencing the terms and conditions of sale to unaffiliated
multi-channel video programming distributors. Further, the 1992 Cable Act
requires that such affiliated programmers make their programming services
available to cable operators and competing multi-channel video programming
distributors such as multi-channel multi-point distribution systems, which we
refer to as MMDS, and direct broadcast satellite distributors on terms and
conditions that do not unfairly discriminate among distributors. The
Telecommunications Act of 1996 extended these rules to programming services in
which telephone companies and other common carriers have attributable ownership
interests. The FCC revised its program licensing rules by implementing a damages
remedy in situations where the defendant knowingly violates the regulations and
by establishing a timeline for the resolution of complaints, among other things.
Although we no longer own Liberty Cablevision of Puerto Rico Ltd. ("LCPR"), FCC
rules continue to attribute an ownership interest in LCPR to us, thereby
subjecting us and satellite-delivered programming services in which we have an
interest to the program access rules. The prohibition on exclusive programming
contracts is scheduled to sunset in 2007, but the FCC likely will initiate a
rulemaking proceeding regarding extension of such prohibition of exclusive
contracts.
REGULATION OF CARRIAGE OF PROGRAMMING. Under the 1992 Cable Act, the FCC
has adopted regulations prohibiting cable operators from requiring a financial
interest in a programming service as a condition to carriage of such service,
coercing exclusive rights in a programming service or favoring affiliated
programmers so as to restrain unreasonably the ability of unaffiliated
programmers to compete.
REGULATION OF OWNERSHIP. The 1992 Cable Act required the FCC, among other
things, (1) to prescribe rules and regulations establishing reasonable limits on
the number of channels on a cable system that will be allowed to carry
programming in which the owner of such cable system has an attributable interest
and (2) to consider the necessity and appropriateness of imposing limitations on
the degree to which multi-channel video programming distributors (including
cable operators) may engage in the creation or production of video programming.
In 1993, the FCC adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provided for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carried
minority-controlled programming services. The regulations also grandfathered
existing carriage arrangements that exceeded the channel limits, but required
new channel capacity to be devoted to unaffiliated programming services until
the system achieved compliance with the regulations. These channel occupancy
limits applied only up to 75 activated channels on the cable system, and the
rules did not apply to local or regional programming services. However, in 2001,
the United States Court of Appeals for the District of Columbia Circuit found
that the FCC had failed to justify adequately the channel occupancy limit,
vacated the FCC's decision and remanded the rule to the FCC for further
consideration. In response to the Court's decision, the FCC issued further
notices of proposed rulemaking in 2001 and in 2005 to consider channel occupancy
limitations. Even if these rules were readopted by the FCC, they would have
little impact on programming companies in which we have interests based upon our
current attributable ownership interests in cable systems.
In its 2001 decision, the Court of Appeals also vacated the FCC's rule
imposing a thirty percent limit on the number of subscribers served by systems
nationwide in which a multiple system operator can have an attributable
ownership interest. The FCC presently is conducting a rulemaking regarding this
ownership limitation and its ownership attribution standards.
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The FCC's rules also generally had prohibited common ownership of a cable
system and broadcast television station with overlapping service areas. In 2002,
the United States Court of Appeals for the District of Columbia Circuit held
that the FCC's decision to retain the cable/broadcast cross-ownership rule was
arbitrary and capricious and vacated the rule. The FCC did not seek Supreme
Court review of this decision or initiate a new rulemaking proceeding. The FCC
rules continue to prohibit common ownership of a cable system and MMDS with
overlapping service areas.
REGULATION OF CARRIAGE OF BROADCAST STATIONS. The 1992 Cable Act granted
broadcasters a choice of must carry rights or retransmission consent rights. The
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast signals
selecting must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the Cable Communications
Policy Act of 1984, which require cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial use
by unaffiliated third parties and permit franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public,
educational and government access channels, could adversely affect some or
substantially all of the programming companies in which we have interests by
limiting the carriage of such services in cable systems with limited channel
capacity. In 2001, the FCC adopted rules relating to the cable carriage of
digital television signals. Among other things, the rules clarify that a
digital-only television station can assert a right to analog or digital carriage
on a cable system. The FCC initiated a further proceeding to determine whether
television stations may assert rights to carriage of both analog and digital
signals during the transition to digital television and to carriage of all
digital signals. In 2005, the FCC denied mandatory dual carriage of a television
station's analog and digital signals during the digital television transition
and also denied mandatory carriage of all of a television station's digital
signals, other than its "primary" signal. Television station owners continue to
seek reconsideration of the FCC's decision and may seek judicial review or
legislative change of the FCC's decision.
CLOSED CAPTIONING AND VIDEO DESCRIPTION REGULATION. The Telecommunications
Act of 1996 also required the FCC to establish rules and an implementation
schedule to ensure that video programming is fully accessible to the hearing
impaired through closed captioning. The rules adopted by the FCC require
substantial closed captioning over an eight to ten year phase-in period, which
began in 2000, with only limited exemptions. As a result, the programming
companies in which we have interests may incur costs for closed captioning.
A-LA-CARTE PROCEEDING. In 2004, the FCC's Media Bureau conducted a notice
of inquiry proceeding regarding the feasibility of selling video programming
services "a-la-carte," i.e. on an individual or small tier basis. The Media
Bureau released a report in 2004, which concluded that a-la-carte sales of video
programming services would not result in lower video programming costs for most
consumers and that they would adversely affect video programming networks. On
February 9, 2006, the Media Bureau released a new report which stated that the
2004 report was flawed and which concluded that a-la-carte sales could be in the
best interests of consumers. Although the FCC cannot mandate a-la-carte sales,
its endorsement of the concept could encourage Congress to consider proposals to
mandate a-la-carte sales or otherwise seek to impose greater regulatory controls
on how cable programming is sold. The programming companies that distribute
their services in tiers or packages of programming services would experience
decreased distribution if a-la-carte carriage were mandated.
COPYRIGHT REGULATION. The programming companies in which we have interests
must obtain any necessary music performance rights from the rights holders.
These rights generally are controlled by the music performance rights
organizations of the American Society of Composers, Authors and Publishers
(ASCAP), Broadcast Music, Inc. (BMI) and the Society of European Stage Authors
and Composers
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(SESAC), each with rights to the music of various artists. The programming
companies in which we have interests generally have obtained the necessary
rights through separate agreements with ASCAP, BMI and SESAC, which have
negotiated agreements with some programmers that include new rate structures and
may require retroactive rate increases. Certain of the programming companies
also have obtained licenses for music performance rights outside the United
States through various licensing agencies located in the foreign countries in
which their services are distributed.
SATELLITES AND UPLINK. In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry. The FCC also regulates the earth stations uplinking to
and/or downlinking from such satellites.
INTERNET SERVICES
The Internet businesses in which we have interests are subject, both
directly and indirectly, to various laws and governmental regulations. Certain
of our subsidiaries engaged in the provision of goods and services over the
Internet must comply with federal and state laws and regulations applicable to
online communications and commerce. For example, the Children's Online Privacy
Protection Act prohibits web sites from collecting personally identifiable
information online from children under age 13 without parental consent and
imposes a number of operational requirements. Certain email activities are
subject to the Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, commonly known as the CAN-SPAM Act. The CAN-SPAM Act
regulates the sending of unsolicited commercial email by requiring the email
sender, among other things, to comply with specific disclosure requirements and
to provide an "opt-out" mechanism for recipients. Both of these laws include
statutory penalties for non-compliance. Various states also have adopted laws
regulating certain aspects of Internet communications. Goods sold over the
Internet also must comply with traditional regulatory requirements, such as the
Federal Trade Commission requirements regarding truthful and accurate claims.
With regard to state and local taxes, legislation enacted by Congress in 2004
extended the moratorium on such taxes on Internet access and commerce until
November 1, 2007.
Congress and individual states may consider additional online privacy
legislation. Other Internet-related laws and regulations enacted in the future
may cover issues such as defamatory speech, copyright infringement, pricing and
characteristics and quality of products and services. The future adoption of
such laws or regulations may slow the growth of commercial online services and
the Internet, which could in turn cause a decline in the demand for the services
and products of the Internet companies in which we have interests and increase
such companies' costs of doing business or otherwise have an adverse effect on
their businesses, operating results and financial conditions. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues such as property ownership, libel, personal privacy and
taxation is uncertain and could expose these companies to substantial liability.
OTHER REGULATION
We also have significant ownership interests on a cost basis in other
entities, such as News Corporation and Sprint Nextel Corporation, which are
extensively regulated. For example, the broadcast stations owned and the direct
broadcast satellite service controlled by News Corp. are subject to a variety of
FCC regulations. Sprint Nextel is subject not only to federal regulation but
also to regulation in varying degrees, depending on the jurisdiction, by state
and local regulatory authorities.
I-17
PROPOSED CHANGES IN REGULATION
The regulation of programming services, cable television systems and
satellite licensees is subject to the political process and has been in constant
flux over the past decade. Further material changes in the law and regulatory
requirements must be anticipated and there can be no assurance that our business
will not be adversely affected by future legislation, new regulation or
deregulation.
COMPETITION
Our businesses that engage in video and on-line commerce compete with
traditional offline and online retailers ranging from large department stores to
specialty shops, other electronic retailers, direct marketing retailers, such as
mail order and catalog companies, and discount retailers. In addition, QVC and
IAC's subsidiary, Home Shopping Network, compete for access to customers and
audience share with other conventional forms of entertainment and content.
Provide Commerce competes with online floral providers such as 1-800-FLOWERS and
Hallmark Flowers and floral wire services such as FTD and Teleflora. We believe
that the principal competitive factors in the markets in which our electronic
commerce businesses compete are high-quality products, freshness, brand
recognition, selection, convenience, price, website performance, customer
service and accuracy of order shipment.
Our businesses that distribute programming for cable and satellite
television compete with other programmers for distribution on a limited number
of channels. Increasing concentration in the multichannel video distribution
industry could adversely affect the programming companies in which we have
interests by reducing the number of distributors to whom they sell their
programming, subjecting more of their programming sales to volume discounts and
increasing the distributors' bargaining power in negotiating new affiliation
agreements. Once distribution is obtained, the programming services of our
programming businesses compete for viewers and advertisers with other cable and
off-air broadcast television programming services as well as with other
entertainment media, including home video, pay-per-view services, online
activities, movies and other forms of news, information and entertainment. Our
programming businesses also compete for creative talent and programming content.
In addition, Starz Entertainment relies on third parties for substantially all
of its programming content whereas Starz Entertainment's competitors produce
some of their own programming content. We believe that the principal competitive
factors for our programming businesses are prices charged for programming, the
quantity, quality and variety of the programming offered and the effectiveness
of marketing efforts.
Our businesses that offer services through the Internet compete with
businesses that offer their own services directly through the Internet as well
as with online and offline providers of similar services including providers of
ticketing services, lending services, travel agencies, operators of destination
search sites and search-centric portals, search technology providers, online
advertising networks, site aggregation companies, media, telecommunications and
cable companies, Internet service providers and niche competitors that focus on
a specific category or geography. Expedia also competes with hoteliers and
airlines as well as travel planning service providers, including aggregator
sites that offer inventory from multiple suppliers, such as airline sites,
Orbitz, Travelocity and Priceline, and with American Express and Navigant
International, providers of corporate travel services. We believe that the
principal competitive factors in the markets in which our businesses that offer
services through the Internet engage are selection, price, availability of
inventory, convenience, brand recognition, accessibility, customer service,
reliability, website performance, and ease of use.
Starz Media faces competition from companies within the entertainment
business and from alternative forms of leisure entertainment. Starz Media's
animated films compete directly with other animation producer/motion picture
studio teams including Pixar, Disney, DreamWorks, and Blue Sky/ Twentieth
Century Fox, among others. Because of the importance of the domestic theatrical
market in determining revenue from other sources, the primary competition for
Starz Media's planned theatrical films and its other filmed products comes from
both animated and live-action films that are targeted at
I-18
similar audiences and released into the domestic theatrical market at
approximately the same time as Starz Media's films. In addition to competing for
box office receipts, Starz Media competes with other film studios over optimal
release dates and the number of motion picture screens on which movies are
exhibited. In addition, it competes with other films released into the
international theatrical market and the worldwide home video/DVD and television
markets. Starz Media also competes with other movie studios for the services of
creative and technical personnel, particularly in the fields of animation and
technical direction.
The Anchor Bay and Manga distribution operations compete with the
distribution divisions of major theatrical production companies, as well as with
several other independent home video/DVD distribution companies, including
GoodTimes Entertainment, Lyrick Studios, Sony Wonder and VIZ Entertainment.
EMPLOYEES
As of December 31, 2006, we had 65 corporate employees, and our consolidated
subsidiaries had an aggregate of approximately 14,700 employees. We believe that
our employee relations are good.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For financial information related to the geographic areas in which we do
business, see note 18 to our consolidated financial statements found in Part II
of this report.
(e) AVAILABLE INFORMATION
All of our filings with the Securities and Exchange Commission (the "SEC"),
including our Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to
such filings are available on our Internet website free of charge generally
within 24 hours after we file such material with the SEC. Our website address is
www.libertymedia.com.
Our corporate governance guidelines, code of ethics, compensation committee
charter, nominating and corporate governance committee charter, and audit
committee charter are available on our website. In addition, we will provide a
copy of any of these documents, free of charge, to any shareholder who calls or
submits a request in writing to Investor Relations, Liberty Media Corporation,
12300 Liberty Boulevard, Englewood, Colorado 80112, Tel. No. (877) 772-1518.
The information contained on our website is not incorporated by reference
herein.
ITEM 1A. RISK FACTORS
THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS ANNUAL 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
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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. 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, including tax liabilities, attributed to
the other group, even if those liabilities arise from lawsuits, contracts or
indebtedness that are attributed to such other group. While our current
management and allocation policies provide that transfers of assets between
groups will result in the creation of an inter-group loan or an inter-group
interest, 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
I-20
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 the market
prices of our common stock would have been had we never 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.
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,
I-21
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, financial and tax 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
- 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.
I-22
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 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.
I-23
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. In addition, there is no
requirement that any such transaction be tax-free to the holders of the
disposing group's common stock.
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
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.
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 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
I-24
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 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;
I-25
- 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.
Our chairman, John C. Malone, has the power to direct the vote of
approximately 30% of our outstanding voting power and approximately 90% 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
I-26
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 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 December 31, 2006, Liberty Media LLC, which is a
wholly owned subsidiary of our company, had $7.7 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.
I-27
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 events, such as general economic 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.
I-28
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.
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.
I-29
QVC HAS OPERATIONS OUTSIDE OF THE UNITED STATES THAT ARE SUBJECT TO NUMEROUS
OPERATIONAL AND FINANCIAL RISKS. QVC has 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;
- 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
We own our corporate headquarters in Englewood, Colorado. All of our other
real or personal property is owned or leased by our subsidiaries and business
affiliates.
QVC owns its corporate headquarters and operations center in West Chester,
Pennsylvania. It also owns call centers in San Antonio, Texas, Port St. Lucie,
Florida, Chesapeake, Virginia and Bochum, Germany, as well as a call center and
warehouse in Knowsley, United Kingdom. QVC owns a distribution center in
Hucklehoven, Germany and distribution centers in Lancaster, Pennsylvania,
Suffolk, Virginia and Rocky Mount, North Carolina. To supplement the facilities
it owns, QVC also leases various facilities in the United States, the United
Kingdom, Germany and Japan for retail outlet stores, office space, warehouse
space and call center locations.
Starz Entertainment owns its corporate headquarters in Englewood, Colorado.
In addition, Starz Entertainment leases office space for its business affairs
and sales staff at five locations around the United States.
Starz Media leases space for its executive offices, distribution and sales
operations, and production studio facilities in Burbank, California, Troy,
Michigan, Beverly Hills, California and New York, New York. Starz Media also
leases space for its international production and distribution operations in
Toronto, Ontario, Vancouver, British Columbia, London, England and Melbourne,
Australia.
On Command leases its corporate headquarters in Denver, Colorado. It also
leases 120,000 square feet of light manufacturing and storage space in Denver,
Colorado and 42,000 square feet of office space in San Jose, California. On
Command also has a number of small leased facilities in the United States,
Canada and Mexico.
I-30
Our other subsidiaries and business affiliates own or lease the fixed assets
necessary for the operation of their respective businesses, including office
space, transponder space, headends, cable television and telecommunications
distribution equipment, telecommunications switches and customer equipment
(including converter boxes). Our management believes that our current facilities
are suitable and adequate for our business operations for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS.
KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND
ROBERT R. BENNETT. On September 4, 2001, we entered into agreements with
Deutsche Telekom AG pursuant to which we would purchase its entire interest in
six of nine regional cable television companies in Germany. In February 2002, we
failed to receive regulatory approval for our proposed acquisition. On July 27,
2001, Klesch & Company Limited initiated a lawsuit against us, our chairman,
John C. Malone, and our former chief executive officer, Robert R. Bennett, in
the United States District Court for the District of Colorado alleging, among
other things, breach of fiduciary duty, fraud and breach of contract in
connection with actions alleged to have been taken by us with respect to what
then was a proposed transaction with Deutsche Telekom. Klesch sought damages in
an unspecified amount in that action, which was the subject of a jury trial that
began on August 30, 2004. On September 28, 2004, the jury returned a verdict in
our favor on all of the legal claims asserted by the plaintiff. The jury also
rejected the plaintiff's claims that Messrs. Malone and Bennett had committed
fraud in their dealings with the plaintiff. On March 30, 2005, the court entered
a judgment in accordance with the jury's verdict, and in addition ruled in our
favor on various equitable claims asserted by the plaintiffs. The plaintiff has
appealed the judgment to the United States Court of Appeals for the Tenth
Circuit. Both sides have submitted briefs, and oral arguments were held on
November 15, 2006. To date, we have not received notice of any decision by the
Court.
DR. LEO KIRCH, INDIVIDUALLY AND AS ASSIGNEE, KGL POOL GMBH, AND
INTERNATIONAL TELEVISION TRADING CORP. V. LIBERTY MEDIA CORPORATION, JOHN
MALONE, DEUTSCHE BANK, AG, AND DR. ROLF-ERNST BREUER. Dr. Kirch was the primary
owner of KirchGroup, a German cable television and media conglomerate. On
September 4, 2001, we entered into agreements with Deutsche Telekom AG pursuant
to which we would purchase its entire interest in six of nine regional cable
television companies in Germany. In February 2002, we failed to receive
regulatory approval for our proposed acquisition and the transactions with
Deutsche Telekom were never consummated. On January 14, 2004, Dr. Kirch, KGL
Pool GBH, and International Television Trading Corp. added our company, and our
chairman, John C. Malone, to a lawsuit they had initiated against Deutsche Bank
and Dr. Breuer on February 3, 2003. In that lawsuit, which was filed in the
United States District Court for the Southern District of New York, the
plaintiffs' claims against us included, among other things, interference with
contract, and interference with prospective economic advantage arising from an
alleged conspiracy among our company, Dr. Malone, Deutsche Bank and Dr. Breuer
pursuant to which we allegedly were involved in effecting transactions that led
to the collapse of the KirchGroup's control of the German cable market in an
effort to facilitate our agreements with Deutsche Telekom. Dr. Kirch, KGL Pool
and International Television sought damages in an unspecified amount. We and
Dr. Malone filed a motion to dismiss the lawsuit for failure to state a claim
upon which relief can be granted. That motion, as well as the other defendants'
motion to dismiss on the same grounds, was granted by the court on
September 24, 2004. The plaintiffs appealed the court's dismissal of the case to
the United States Court of Appeals for the Second Circuit. On appeal, the case
was remanded to the trial court for a determination on the issue of whether the
case should be dismissed on grounds of FORUM NON CONVENIENS. On November 8,
2006, the trial court ruled on this issue and dismissed the suit on such
grounds. To date, we have not received notice of any further actions taken by
the plaintiffs with respect to the claims made in this proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
I-31
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
We issued our tracking stocks, Liberty Capital Series A and Series B common
stock (LCAPA and LCAPB) and Liberty Interactive Series A and Series B common
stock (LINTA and LINTB), on May 10, 2006. Holders of our predecessor's common
stock received .25 of a share of LINTA and .05 of a share of LCAPA in exchange
for each share of Series A common stock held and .25 of a share of LINTB and .05
of a share of LCAPB in exchange for each share of Series B common stock held.
Each series of our tracking stock trades on the Nasdaq National Market. Prior to
May 10, 2006, our two series of common stock, Series A and Series B, traded on
the New York Stock Exchange under the symbols L and LMC.B, respectively. The
following table sets forth the range of high and low sales prices of shares of
our common stock for the years ended December 31, 2006 and 2005.
SERIES A SERIES B
(L) (LMC.B)
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
2005
First quarter............................................. $10.93 9.97 11.60 10.30
Second quarter............................................ $10.64 10.01 11.06 10.20
Third quarter through July 20, 2005*...................... $10.28 9.89 10.75 10.00
July 21 through September 30, 2005*....................... $ 8.90 7.98 10.15 8.12
Fourth quarter............................................ $ 8.18 7.59 8.56 7.55
2006
First quarter............................................. $ 8.44 7.73 8.50 7.80
Second quarter through May 9, 2006........................ $ 8.76 8.20 8.90 8.20
LIBERTY CAPITAL
-----------------------------------------
SERIES A SERIES B
(LCAPA) (LCAPB)
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
2006
Second quarter--May 10, 2006 through June 30, 2006........ $83.95 77.00 87.99 79.26
Third quarter............................................. $87.02 80.01 87.25 80.73
Fourth quarter............................................ $98.80 83.32 99.46 84.34
LIBERTY INTERACTIVE
-----------------------------------------
SERIES A SERIES B
(LINTA) (LINTB)
------------------- -------------------
HIGH LOW HIGH LOW
-------- -------- -------- --------
2006
Second quarter--May 10, 2006 through June 30, 2006........ $20.25 16.28 20.09 15.98
Third quarter............................................. $20.60 15.84 20.50 16.00
Fourth quarter............................................ $23.29 19.85 23.13 19.61
------------------------
* Our spin off of DHC was completed on July 21, 2005.
II-1
HOLDERS
As of January 31, 2007, there were approximately 68,000 and less than 1,000
beneficial holders of our Liberty Capital Series A and Series B common stock,
respectively, and approximately 74,000 and less than 1,000 beneficial holders of
our Liberty Interactive Series A and Series B common stock, respectively.
DIVIDENDS
We have not paid any cash dividends on our common stock, and we have no
present intention of so doing. Payment of cash dividends, if any, in the future
will be determined by our Board of Directors in light of our earnings, financial
condition and other relevant considerations.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information required by this item is incorporated by reference to our
definitive proxy statement for our 2007 Annual Meeting of shareholders.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER
LIBERTY INTERACTIVE SERIES A COMMON STOCK
-------------------------------------------------------------------------------------
(D) MAXIMUM NUMBER
(OR APPROXIMATE DOLLAR
(C) TOTAL NUMBER OF VALUE) OF SHARES THAT
(A) TOTAL NUMBER (B) AVERAGE SHARES PURCHASED AS PART MAY YET BE PURCHASED
OF SHARES PRICE PAID PER OF PUBLICLY ANNOUNCED UNDER THE PLANS OR
PERIOD PURCHASED SHARE PLANS OR PROGRAMS PROGRAMS(1)
------ ---------------- -------------- ------------------------ ----------------------
October 2006............. 5,129,246 $ 21.22 5,129,246 $ 160.5 million
November 2006............ 3,443,499 $ 22.51 3,443,499 $ 1,082.9 million
December 2006............ 1,578,700 $ 22.66 1,578,700 $ 1,047.2 million
---------- ----------
Total.................. 10,151,445 10,151,445
========== ==========
------------------------
(1) Our program to repurchase shares of Liberty Interactive common stock was
approved by our board of directors and disclosed in our 2006 Annual Proxy
dated April 7, 2006. In November 2006, our board of directors increased the
aggregate amount of Liberty Interactive common stock that can be repurchased
from $1 billion to $2 billion. We may alter or terminate the program at any
time.
II-2
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected historical information relating to our
financial condition and results of operations for the past five years. The
following data should be read in conjunction with our consolidated financial
statements.
DECEMBER 31,
----------------------------------------------------
2006 2005 2004 2003(2) 2002
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
SUMMARY BALANCE SHEET DATA(1):
Investments in available-for-sale securities and
other cost investments........................... $21,622 18,489 21,834 19,544 14,156
Investment in affiliates........................... $ 1,842 1,908 784 745 3,420
Assets of discontinued operations.................. $ 512 516 6,258 9,741 8,985
Total assets....................................... $47,638 41,965 50,181 54,225 40,324
Long-term debt(3).................................. $ 8,909 6,370 8,566 9,417 3,646
Stockholders' equity............................... $21,633 19,120 24,586 28,842 24,682
YEARS ENDED DECEMBER 31,
----------------------------------------------------
2006 2005 2004 2003(2) 2002
-------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
SUMMARY STATEMENT OF OPERATIONS DATA(1):
Revenue............................................... $8,613 7,646 6,743 2,934 1,010
Operating income (loss)(4)............................ $1,021 944 788 (841) 189
Realized and unrealized gains (losses) on financial
instruments, net.................................... $ (279) 257 (1,284) (661) 2,127
Gains (losses) on dispositions, net................... $ 607 (361) 1,411 1,128 (526)
Nontemporary declines in fair value of investments.... $ (4) (449) (129) (22) (5,793)
Earnings (loss) from continuing operations(4)......... $ 709 (43) 105 (1,144) (2,783)
Basic and diluted earnings (loss) from continuing
operations per common share(5):
Liberty common stock................................ $ .07 (.02) .04 (.42) (1.07)
Liberty Capital common stock........................ $ .24 -- -- -- --
Liberty Interactive common stock.................... $ .73 -- -- -- --
------------------------
(1) In the fourth quarter of 2006, we executed agreements to sell our interests
in OpenTV Corp. ("OPTV") and Ascent Entertainment Group ("AEG"), which is
the parent company of On Command Corporation, in separate transactions to
unrelated third parties. Our consolidated financial statements and selected
financial information have been prepared to reflect OPTV and AEG as
discontinued operations. Accordingly, the assets and liabilities, and
revenue, costs and expenses of OPTV and AEG have been excluded from the
respective captions in our consolidated financial statements and selected
financial information and have been reported under the heading of
discontinued operations. See note 5 to our consolidated financial statements
for additional information regarding OPTV and AEG.
(2) On September 17, 2003, we completed our acquisition of Comcast Corporation's
approximate 56% ownership in QVC, Inc. for approximately $7.9 billion,
comprised of cash, floating rate senior notes and shares of our Series A
common stock. When combined with our previous ownership of approximately 42%
of QVC, we owned 98% of QVC upon consummation of the transaction, which is
deemed to have occurred on September 1, 2003, and we have consolidated QVC's
financial position and results of operations since that date.
II-3
(3) Excludes the call option portion of our exchangeable debentures. See note 9
to our consolidated financial statements.
(4) Our 2003 operating loss and loss from continuing operations include a
$1,352 million goodwill impairment charge related to our wholly-owned
subsidiary, Starz Entertainment, LLC (formerly known as Starz Entertainment
Group LLC).
(5) Basic and diluted earnings per share have been calculated for Liberty
Capital and Liberty Interactive common stock for the period from May 10,
2006 to December 31, 2006. EPS has been calculated for Liberty common stock
for all periods prior to May 10, 2006.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying consolidated financial statements and the
notes thereto.
OVERVIEW
We are a holding company that owns controlling and non-controlling interests
in a broad range of video and on-line commerce, media, communications and
entertainment companies. Our more significant operating subsidiaries are
QVC, Inc. and Starz Entertainment, LLC. 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 on the QVC networks and via the Internet
through its domestic and international websites. Starz Entertainment provides
premium programming distributed by cable operators, direct-to-home satellite
providers, other distributors and via the Internet throughout the United States.
In 2006, we began implementing a strategy to convert passive investments
into operating businesses. We exchanged our cost investment in IDT Corporation
for IDT's subsidiary IDT Entertainment, and we signed an agreement with News
Corporation to exchange our investment in News Corporation for a News
Corporation subsidiary which would own News Corporations' 38.5% interest in The
DirecTV Group, three regional sports television networks and cash. In addition,
we acquired controlling interests in Provide Commerce, Inc., FUN
Technologies, Inc. and BuySeasons, Inc.
Our "Corporate and Other" segment includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
Provide Commerce, Inc., Starz Media, LLC, FUN Technologies, Inc.,
TruePosition, Inc. and BuySeasons, Inc. Provide, which we acquired in
February 2006, operates an e-commerce marketplace of websites for perishable
goods, including flowers, gourmet foods, fruits and desserts. Starz Media, which
we acquired in the third quarter of 2006, is focused on developing, acquiring,
producing and distributing live-action, computer-generated and traditional
television animated productions for the home video, film, broadcast and
direct-to-consumer markets. FUN, in which we acquired a 55% common stock
interest in March 2006, operates websites that offer casual gaming, sports
information and fantasy sports services. TruePosition provides equipment and
technology that deliver location-based services to wireless users. BuySeasons,
which we acquired in August 2006, operates BuyCostumes.com, an on-line retailer
of costumes, accessories, decor and party supplies.
In addition to the foregoing businesses, we hold an approximate 21% 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 value and are included in corporate and other.
II-4
TRACKING STOCKS
On May 9, 2006, we completed a restructuring pursuant to which we were
organized as a new holding company, and we became the new publicly traded parent
company of Liberty Media LLC, which was formerly known as Liberty Media
Corporation, and which we refer to as "Old Liberty". As a result of the
restructuring, all of the Old Liberty outstanding common stock was exchanged for
our two new tracking stocks, Liberty Interactive common stock and Liberty
Capital common stock. 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.
A 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 include
our subsidiaries QVC, Provide and BuySeasons and our interests in Expedia and
IAC/InterActiveCorp. The Interactive Group will also 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 $3,108 million principal
amount (as of December 31, 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 include our subsidiaries Starz
Entertainment, Starz Media, 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. The Capital Group will also 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 December 31, 2006) of our existing publicly-traded debt
to the Capital Group.
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed
financial information for our tracking stock groups.
DISCONTINUED OPERATIONS
In the fourth quarter of 2006, we committed to two separate transactions
pursuant to which we intend to sell our interests in OpenTV Corp and Ascent
Entertainment Group ("AEG") to unrelated third parties. The agreement to sell
OpenTV was executed in October 2006 and provided for us to sell all of our
controlling interest in OpenTV for approximately $132 million in cash. Pursuant
to an agreement with OpenTV, we would pay OpenTV up to approximately
$20 million of the sales proceeds on the first anniversary of the closing,
subject to the satisfaction of certain conditions. The transaction was completed
on January 16, 2007. The agreement to sell AEG, of which the primary asset is
100% of the common stock of On Command Corporation, was executed in
December 2006 and provides that if the transaction is completed, we would sell
our interest in AEG for $332 million in cash and 2.05 million shares of common
stock of the buyer valued at approximately $50 million. The transaction,
II-5
which is subject to regulatory approval and customary closing conditions, is
expected to close in mid-2007.
OpenTV and AEG each meet the criteria of Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, for classification as assets held for sale as of December 31, 2006 and
were included in the Capital Group.
On July 21, 2005, we completed the spin off of our wholly-owned subsidiary,
Discovery Holding Company ("DHC"), to our shareholders. At the time of the spin
off, DHC's assets were comprised of our 100% ownership interest in Ascent Media
Group, our 50% ownership interest in Discovery Communications, Inc. and
$200 million in cash. The spin off is intended to qualify as a tax-free spin
off. We recognized no gain or loss in connection with the spin off due to the
pro rata nature of the distribution.
On June 7, 2004, we completed the spin off of our wholly-owned subsidiary,
Liberty Media International, Inc. ("LMI"), to our shareholders. Substantially
all of the assets and businesses of LMI were attributed to our International
Group segment. The spin off is intended to qualify as a tax-free spin off. For
accounting purposes, the spin off is deemed to have occurred on June 1, 2004,
and we recognized no gain or loss in connection with the spin off due to the pro
rata nature of the distribution.
During the fourth quarter of 2004, the executive committee of our board of
directors approved a plan to dispose of our approximate 56% ownership interest
in Maxide Acquisition, Inc. (d/b/a DMX Music, "DMX"). On February 14, 2005, DMX
commenced proceedings under Chapter 11 of the United States Bankruptcy Code. On
May 16, 2005, The Bankruptcy Court approved the sale of substantially all of the
operating assets of DMX to an independent third party. As a result of the DMX
bankruptcy filing, we deconsolidated DMX effective December 31, 2004.
Our consolidated financial statements and accompanying notes have been
prepared to reflect OpenTV, AEG, DHC, LMI and DMX as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of these subsidiaries have been excluded from the respective captions in
the accompanying 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
consolidated financial statements.
STRATEGIES AND CHALLENGES OF BUSINESS UNITS
QVC has identified improved domestic growth and continued international
growth as key areas of focus in 2007. QVC's steps to achieving these goals will
include (1) continued domestic and international efforts to increase the number
of customers who have access to and use its service, (2) continued expansion of
brand selection and available domestic products and (3) continued development
and enhancement of the QVC websites to drive Internet commerce. The key
challenges to achieving these goals in both the U.S. and international markets
are (1) increased competition from other home shopping and Internet retailers,
(2) advancements in technology, such as video on demand and personal video
recorders, which may alter TV viewing habits, (3) maintaining favorable channel
positioning as digital TV penetration increases and (4) successful management
transition.
Starz Entertainment views (1) negotiating new affiliation agreements with
key distributors and (2) increasing subscribers to its on-demand and more
traditional cable and satellite delivered services, as well as its Internet
delivered services, as key initiatives in 2007. Starz Entertainment faces
several key obstacles in its attempt to meet these goals, including: (1) cable
operators' promotion of bundled service offerings rather than premium video
services; (2) the impact on viewer habits of new technologies such as video on
demand and personal video recorders; (3) continued consolidation in the
II-6
broadband and satellite distribution industries; and (4) an increasing number of
alternative movie and programming sources.
RESULTS OF OPERATIONS
GENERAL. We provide in the tables below information regarding our
Consolidated Operating Results and Other Income and Expense, as well as
information regarding the contribution to those items of our reportable segments
categorized by the tracking stock group to which those segments are attributed.
The "corporate and other" category for each tracking stock group consists of
those assets within the category which are attributed to such tracking stock
group. For a more detailed discussion and analysis of the financial results of
the principal reporting segments of each tracking stock group, see "Interactive
Group" and "Capital Group" below.
II-7
CONSOLIDATED OPERATING RESULTS
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
REVENUE
Interactive Group
QVC..................................................... $7,074 6,501 5,687
Corporate and Other..................................... 252 -- --
------ ----- -----
7,326 6,501 5,687
------ ----- -----
Capital Group
Starz Entertainment..................................... 1,033 1,004 963
Corporate and Other..................................... 254 141 93
------ ----- -----
1,287 1,145 1,056
------ ----- -----
Consolidated Liberty.................................. $8,613 7,646 6,743
====== ===== =====
OPERATING CASH FLOW (DEFICIT)
Interactive Group
QVC..................................................... $1,656 1,422 1,230
Corporate and Other..................................... 24 (5) (6)
------ ----- -----
1,680 1,417 1,224
------ ----- -----
Capital Group
Starz Entertainment..................................... 186 171 239
Corporate and Other..................................... (83) (47) (72)
------ ----- -----
103 124 167
------ ----- -----
Consolidated Liberty.................................. $1,783 1,541 1,391
====== ===== =====
OPERATING INCOME (LOSS)
Interactive Group
QVC..................................................... $1,130 921 760
Corporate and Other..................................... -- (5) (12)
------ ----- -----
1,130 916 748
------ ----- -----
Capital Group
Starz Entertainment..................................... 163 105 148
Corporate and Other..................................... (272) (77) (108)
------ ----- -----
(109) 28 40
------ ----- -----
Consolidated Liberty.................................. $1,021 944 788
====== ===== =====
REVENUE. Our consolidated revenue increased 12.6% in 2006 and 13.4% in
2005, as compared to the corresponding prior year. The 2006 increase is due
primarily to an 8.8% or $573 million increase at QVC and our 2006 acquisitions
of Provide ($220 million), Starz Media ($86 million), FUN ($42 million) and
BuySeasons ($32 million). The 2005 increase was driven primarily by growth of
14.3% at QVC and growth of 4.3% at Starz Entertainment. In addition,
TruePosition's revenue increased $77 million as it continued to increase
delivery and acceptance of its equipment in Cingular Wireless's markets. See
Management's Discussion and Analysis for the Interactive Group and the Capital
Group below for a more complete discussion of QVC's and Starz Entertainment's
results of operations.
II-8
In November 2006, TruePosition signed an amendment to its existing services
contract with Cingular Wireless that requires TruePosition to develop and
deliver additional software features. Because vendor specific objective evidence
related to the value of these additional features does not exist, TruePosition
is required to defer revenue recognition until all of the features have been
delivered. TruePosition estimates that these features will be delivered in the
first quarter of 2008. Accordingly, TruePosition will not recognize any revenue
under this contract until 2008. TruePosition recognized approximately
$105 million of revenue under this contract in 2006 prior to signing the
amendment.
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative ("SG&A")
expenses (excluding stock 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 compensation, litigation settlements and impairments of
long-lived assets that are included in the measurement of operating income
pursuant to generally accepted accounting principles ("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.
See note 18 to the accompanying consolidated financial statements for a
reconciliation of Operating Cash Flow to Earnings (Loss) From Continuing
Operations Before Income Taxes and Minority Interest.
Consolidated Operating Cash Flow increased $242 million or 15.7% and
$150 million or 10.8% in 2006 and 2005, respectively, as compared to the
corresponding prior year. The 2006 increase is due to a $234 million or 16.5%
increase at QVC and a $15 million or 8.8% increase at Starz Entertainment.
Operating cash flow for Provide of $24 million and BuySeasons of $6 million were
offset by operating cash flow deficits for Starz Media of $24 million and FUN of
$11 million. The 2005 increase is due to a $192 million increase for QVC and a
$30 million improvement for TruePosition, partially offset by a $68 million
decrease for Starz Entertainment.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights ("SARs") 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 of Financial Accounting
Standards No. 123R (revised 2004), "SHARE-BASED PAYMENT" ("Statement 123R").
Statement 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 123R also requires
that we record our liability awards at fair value each reporting period and that
the change in fair value be reflected as stock compensation expense in our
consolidated statement of operations. Prior to adoption of Statement 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
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 of $31 million,
which primarily reflects the fair value of the
II-9
liability portion of QVC's stock option awards at January 1, 2006. The
transition adjustment is reflected in the accompanying consolidated statement of
operations as the cumulative effect of accounting change. In addition, we
recorded $67 million of stock compensation expense for the year ended
December 31, 2006, compared with $52 million for the comparable period in 2005.
The 2006 stock compensation expense is net of a $24 million credit related to
the terminations of QVC's stock option plan as described in note 13 to the
accompanying consolidated financial statements. As of December 31, 2006, the
total unrecognized compensation cost related to unvested Liberty equity awards
was approximately $59 million. Such amount will be recognized in our
consolidated statements of operations over a weighted average period of
approximately 2 years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased in
2006 due to our acquisitions and capital expenditures partially offset by a
decrease at Starz Entertainment due to certain intangibles becoming fully
amortized. As the businesses we acquired in 2006 are not capital intensive, we
do not expect them to have a significant impact on our depreciation in the
future. Depreciation and amortization decreased slightly in 2005 due to certain
assets becoming fully amortized, partially offset by an increase in depreciable
assets due to capital expenditures.
IMPAIRMENT OF LONG-LIVED ASSETS. We acquired our interest in FUN in
March 2006. Subsequent to our acquisition, the market value of FUN's stock has
declined significantly due to the performance of certain of FUN's subsidiaries
and uncertainty surrounding government legislation of Internet gambling which we
believe the market perceives as potentially impacting FUN's skill gaming
business. In connection with our annual evaluation of the recoverability of
FUN's goodwill, we received a third-party valuation, which indicated that the
carrying value of FUN's goodwill exceeded its market value. Accordingly, we
recognized a $111 million impairment charge related to goodwill and a
$2 million impairment charge related to trademarks.
OPERATING INCOME (LOSS). We generated consolidated operating income of
$1,021 million, $944 million and $788 million in 2006, 2005 and 2004,
respectively. The 2006 increase is due to increases for QVC ($209 million) and
Starz Entertainment ($58 million), partially offset by losses generated by FUN
($140 million, including the above-described impairment charges) and Starz Media
($29 million) as well as an increase in corporate stock compensation expense of
$34 million due to the adoption of Statement 123R. Our operating income in 2005
is attributable to QVC ($921 million) and Starz Entertainment ($105 million)
partially offset by operating losses of our other consolidated subsidiaries and
corporate expenses.
II-10
OTHER INCOME AND EXPENSE
Components of Other Income (Expense) are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Interest expense
Interactive Group......................................... $(417) (374) (385)
Capital Group............................................. (263) (252) (234)
----- ---- ------
Consolidated Liberty.................................... $(680) (626) (619)
===== ==== ======
Dividend and interest income
Interactive Group......................................... $ 40 35 20
Capital Group............................................. 174 108 110
----- ---- ------
Consolidated Liberty.................................... $ 214 143 130
===== ==== ======
Share of earnings of affiliates
Interactive Group......................................... $ 47 9 (3)
Capital Group............................................. 44 4 18
----- ---- ------
Consolidated Liberty.................................... $ 91 13 15
===== ==== ======
Realized and unrealized gains (losses) on financial
instruments, net
Interactive Group......................................... $ 20 (17) (17)
Capital Group............................................. (299) 274 (1,267)
----- ---- ------
Consolidated Liberty.................................... $(279) 257 (1,284)
===== ==== ======
Gains (losses) on dispositions, net
Interactive Group......................................... $ -- 40 7
Capital Group............................................. 607 (401) 1,404
----- ---- ------
Consolidated Liberty.................................... $ 607 (361) 1,411
===== ==== ======
Nontemporary declines in fair value of investments
Interactive Group......................................... $ -- -- --
Capital Group............................................. (4) (449) (129)
----- ---- ------
Consolidated Liberty.................................... $ (4) (449) (129)
===== ==== ======
Other, net
Interactive Group......................................... $ 23 (38) 4
Capital Group............................................. (5) (1) (30)
----- ---- ------
Consolidated Liberty.................................... $ 18 (39) (26)
===== ==== ======
INTEREST EXPENSE. Consolidated interest expense increased 8.6% and 1.1% for
the years ended December 31, 2006 and 2005, respectively, as compared to the
corresponding prior year. Interest expense attributable to the Interactive Group
increased 11.5% in 2006 due to increased borrowings by QVC, which were used to
retire certain of our publicly-traded debt and for repurchases of Liberty
Interactive common stock. The increase in 2005 is due to lower outstanding debt
balances, more than offset by higher interest rates on our variable rate debt.
DIVIDEND AND INTEREST INCOME. Interest income for the Capital Group
increased in 2006 due to higher invested cash balances. Interest and dividend
income for the year ended December 31, 2006 was comprised of interest income
earned on invested cash ($84 million), dividends on News Corporation common
stock ($57 million), dividends on other available-for-sale ("AFS") securities
($20 million) and
II-11
other ($13 million). If our exchange transaction with News Corporation described
below is completed as currently contemplated, we expect that our dividend income
from News Corporation in 2007 will be approximately 50% of the 2006 amount and
zero in subsequent years.
SHARE OF EARNINGS OF AFFILIATES. Our 2006 share of earnings of affiliates
are attributable to Expedia ($50 million) and other investees ($41 million). In
December 2006, we announced that we had entered into an exchange agreement with
News Corporation pursuant to which, if completed, we would exchange our
approximate 16.2% ownership interest in News Corporation for a subsidiary of
News Corporation, which would own News Corporation's approximate 38.5% interest
in The DirecTV Group, Inc., three regional sports television networks and
approximately $550 million in cash. Consummation of the exchange, which is
subject to various closing conditions, including approval by News Corporation's
shareholders, regulatory approval and receipt of a favorable ruling from the IRS
that the exchange is tax free, is expected in mid- 2007. Upon consummation, if
completed, we will account for our interest in The DirecTV Group using the
equity method of accounting, which could result in a significant increase in our
share of earnings of affiliates in future periods. In this regard, The DirecTV
Group announced that its net income for the year ended December 31, 2006 was
$1,420 million.
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of changes
in the fair value of the following:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Exchangeable debenture call option obligations.............. $(353) 172 (129)
Equity collars.............................................. (59) 311 (941)
Borrowed shares............................................. (32) (205) (227)
Put options................................................. -- (66) 2
Other derivatives........................................... 165 45 11
----- ---- ------
$(279) 257 (1,284)
===== ==== ======
GAINS (LOSSES) ON DISPOSITIONS. Aggregate gains (losses) from dispositions
are comprised of the following.
YEARS ENDED
DECEMBER 31,
------------------------------
TRANSACTION 2006 2005 2004
----------- -------- -------- --------
(AMOUNTS IN MILLIONS)
CAPITAL GROUP
Sale of investment in Court TV.............................. $303 -- --
Sale of investment in Freescale............................. 256 -- --
Sale of investment in Telewest Global, Inc.................. -- (266) --
Sale of investment in Cablevision S.A....................... -- (188) --
Sale of News Corporation non-voting shares.................. -- -- 844
Exchange transaction with Comcast........................... -- -- 387
Other, net.................................................. 48 53 173
---- ---- -----
607 (401) 1,404
---- ---- -----
INTERACTIVE GROUP
Other, net.................................................. -- 40 7
---- ---- -----
$607 (361) 1,411
==== ==== =====
II-12
In the above transactions, the gains or losses were calculated based upon
the difference between the carrying value of the assets relinquished, as
determined on an average cost basis, compared to the fair value of the assets
received. See notes 6, 11 and 15 to the accompanying consolidated financial
statements for a discussion of the foregoing transactions.
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS. During 2006, 2005 and
2004, we determined that certain of our cost investments experienced
other-than-temporary declines in value. As a result, the cost bases of such
investments were adjusted to their respective fair values based primarily on
quoted market prices at the date each adjustment was deemed necessary. These
adjustments are reflected as nontemporary declines in fair value of investments
in our consolidated statements of operations. The impairment recorded in 2005
includes $352 million related to our investment in News Corporation voting
shares.
INCOME TAXES. Our effective tax rate was 26.2% in 2006, 74.6% in 2005 and
60.2% in 2004. Our 2006 rate is less than the U.S. federal income tax rate of
35% due, in part, to a deferred tax benefit we recognized when 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 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. In addition, we recorded
deferred tax benefits of $105 million for changes in our estimated foreign tax
rate based on our projections of our ability to use foreign tax credits in the
future and $25 million for changes in our estimated state tax rate used to
calculate our deferred tax liabilities. These benefits were partially offset by
current tax expense of $43 million on the gain on sale of Court TV for which we
had higher book basis than tax basis and $39 million for impairment of goodwill
that is not deductible for tax purposes. In addition, we recorded state
($34 million) and foreign ($20 million) tax expense.
Our effective tax rate in 2005 was greater than the U.S. federal income tax
rate of 35% primarily due to a tax benefit of $147 million that we recorded as a
result of a change in our estimated effective state and foreign tax rates. In
the third quarter of 2005, we assessed our weighted average state tax rate in
connection with our spin off of Discovery Holding Company. As a result of this
assessment, we decreased our state tax rate used in calculating the amount of
our deferred tax liabilities and recognized a deferred income tax benefit of
$131 million. Also in 2005, we reduced our estimated foreign tax rate related to
QVC and recognized a tax benefit of $16 million. These tax benefits were
partially offset by our foreign tax expense and an increase in our valuation
allowance for deferred tax assets of subsidiaries that we do not consolidate for
tax purposes. Our effective tax rate in 2004 differed from the U.S. federal
income tax rate of 35% primarily due to foreign and state taxes.
Historically, we have not made federal income tax payments due to our
ability to use prior year net operating and capital losses carryforwards to
offset current year taxable income. However, based on current projections, we
believe that we will use our available net operating and capital losses in 2007,
and that we will start making federal income tax payments to the extent that we
continue to generate taxable income in the future. These payments could prove to
be significant.
NET EARNINGS (LOSS). Our net earnings (loss) was $840 million, ($33)
million and $46 million for the years ended December 31, 2006, 2005 and 2004,
respectively, and was the result of the above-described fluctuations in our
revenue and expenses. In addition, we recognized earnings (loss) from
discontinued operations of $220 million, $10 million and ($59) million for the
years ended December 31, 2006, 2005 and 2004, respectively. Included in our 2006
earnings from discontinued operations are tax benefits of
II-13
$236 million related to our excess outside tax basis in OPTV and AEG over our
basis for financial reporting.
LIQUIDITY AND CAPITAL RESOURCES
While the Interactive Group and the Capital Group are not separate legal
entities and the assets and liabilities attributed to each group remain assets
and liabilities of our consolidated company, we manage the liquidity and
financial resources of each group separately. Keeping in mind that assets of one
group may be used to satisfy liabilities of the other group, the following
discussion assumes, consistent with management expectations, that future
liquidity needs of each group will be funded by the financial resources
attributed to each respective group.
The following are potential sources of liquidity for each group to the
extent the identified asset or transaction has been attributed to such group:
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.
INTERACTIVE GROUP. During the year ended December 31, 2006, the Interactive
Group's primary uses of cash were the retirement of $1,369 million principal
amount of senior notes that matured in September 2006, funding the acquisition
of Provide ($465 million), repurchases of QVC common stock ($331 million),
capital expenditures ($259 million), tax payments to the Capital Group
($173 million), stock compensation payments ($111 million) and the repurchase of
outstanding Liberty Interactive common stock. Our board of directors has
authorized a share repurchase program pursuant to which we may repurchase up to
$2 billion of outstanding shares of Liberty Interactive common stock in the open
market or in privately negotiated transactions, from time to time, subject to
market conditions. During the period from May 10, 2006 to December 31, 2006, we
repurchased 51.6 million shares of Liberty Interactive Series A common stock for
aggregate cash consideration of $954 million pursuant to this share repurchase
program. We may alter or terminate the stock repurchase program at any time.
The Interactive Group's uses of cash in 2006 were primarily funded with cash
from operations and borrowings under QVC's credit facilities. As of
December 31, 2006, the Interactive Group had a cash balance of $946 million.
The projected uses of Interactive Group cash for 2007 include approximately
$430 million for interest payments on QVC debt and parent debt attributed to the
Interactive Group, $350 million for capital expenditures, 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
do not have any commitments to make new investments at this time.
Effective March 3, 2006, QVC refinanced its existing bank credit facility
with a new $3.5 billion bank credit facility, which was subsequently amended on
October 4, 2006 (the "March 2006 Credit Agreement"). The March 2006 Credit
Agreement 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 was drawn on
September 18, 2006, a $600 million multi-currency term loan that was drawn in
U.S. dollars on September 18, 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 a rate equal to (i) LIBOR for the interest period selected by QVC
plus a margin that varies based on QVC's leverage ratio or (ii) the higher of
the Federal Funds Rate plus 0.50% or the prime rate announced by JP Morgan Chase
Bank, N.A. from time to time. QVC is required to pay a commitment fee quarterly
in arrears on the unused portion of the commitments.
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On October 4, 2006, QVC entered into a new credit agreement (the
"October 2006 Credit Agreement"), which provides for an additional unsecured
$1.75 billion credit facility, consisting of an $800 million initial term loan
made on October 13, 2006 and $950 million of delayed draw term loans to be made
after closing from time to time upon the request of QVC. The delayed draw term
loans are available until September 30, 2007 and are subject to reductions in
the principal amount available starting on March 31, 2007. The loans will bear
interest at a rate equal to (i) LIBOR for the interest period selected by QVC
plus a margin that varies based on QVC's leverage ratio or (ii) the higher of
the Federal Funds Rate plus 0.50% or the prime rate announced by Wachovia Bank,
N.A. from time to time. The loans are scheduled to mature on October 4, 2011.
Aggregate commitments under the March 2006 Credit Agreement and the
October 2006 Credit Agreement are $5.25 billion, and outstanding borrowings
aggregated $3.225 billion at December 31, 2006. QVC's ability to borrow the
unused capacity is dependent on its continuing compliance with the covenants
contained in the agreements at the time of, and after giving effect to, a
requested borrowing.
CAPITAL GROUP. During the year ended December 31, 2006, the Capital Group's
primary uses of cash were the acquisition of Starz Media ($290 million) and FUN
($200 million), loans to WildBlue Communications, an equity affiliate
($187 million), and net cash transfers of $293 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 2007 include approximately
$130 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 do not have any
commitments to make new 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 common
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. As of December 31, 2006, we have not repurchased
any shares of Liberty Capital common stock pursuant to this repurchase program.
We expect that the Capital Group's investing and financing activities will
be funded with a combination of cash on hand, cash proceeds from sales of
OpenTV, AEG and our exchange transaction with News Corporation, cash provided by
operating activities, tax payments from the Interactive Group, proceeds from
collar expirations and dispositions of non-strategic assets. At December 31,
2006, the Capital Group's sources of liquidity include $2,288 million in cash
and marketable debt securities and $7,386 million of non-strategic AFS
securities including related derivatives. To the extent the Capital Group
recognizes 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 attributable to the Capital
Group.
Our derivatives ("AFS 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 as they mature and excluding any provision
for income taxes, the Capital Group would have attributed to it cash proceeds of
approximately $322 million in 2007, zero in 2008, $1,180 million in 2009,
$1,680 million in 2010, $446 million in 2011 and $866 million in 2013 upon
settlement of its AFS Derivatives.
Prior to the maturity of the equity collars, the terms of certain of the
equity collars allow borrowings against the future put option proceeds at LIBOR
or LIBOR plus an applicable spread, as the case may be. As of December 31, 2006,
such borrowing capacity aggregated approximately $4,494 million. Such borrowings
would reduce the cash proceeds upon settlement noted in the
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preceding paragraph. In the event we complete our exchange transaction with News
Corporation as currently contemplated, such borrowing capacity would be reduced
by $916 million.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
CAPITAL GROUP
The following contingencies and obligations have been attributed to the
Capital Group:
Starz Entertainment has entered into agreements with a number of motion
picture producers which obligate Starz Entertainment to pay fees ("Programming
Fees") for the rights to exhibit certain films that are released by these
producers. The unpaid balance under agreements for film rights related to films
that were available for exhibition by Starz Entertainment at December 31, 2006
is reflected as a liability in the accompanying consolidated balance sheet. The
balance due as of December 31, 2006 is payable as follows: $110 million in 2007;
$9 million in 2008; and $8 million thereafter.
Starz Entertainment 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 Starz Entertainment until some future date. These
amounts have not been accrued at December 31, 2006. Starz Entertainment's
estimate of amounts payable under these agreements is as follows: $538 million
in 2007; $148 million in 2008; $93 million in 2009; $87 million in 2010;
$31 million in 2011 and $67 million thereafter.
In addition, Starz Entertainment 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 Starz Entertainment for exhibition 10 - 12 months after
their theatrical release. The Programming Fees to be paid by Starz Entertainment
are based on the quantity and domestic theatrical exhibition receipts of
qualifying films. As these films have not yet been released in theatres, Starz
Entertainment 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, Starz Entertainment 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, Starz Entertainment's
payments to Sony would be amortized ratably over the extension period beginning
in 2011. An extension of this agreement would also result in the payment by
Starz Entertainment of Programming Fees for qualifying films released by Sony
during the extension period. If Disney elects to extend its contract, Starz
Entertainment is not obligated to pay any amounts in excess of its Programming
Fees for qualifying films released by Disney during the extension period.
Liberty guarantees Starz Entertainment's film licensing obligations under
certain of its studio output agreements. At December 31, 2006, Liberty's
guarantees for studio output obligations for films released by such date
aggregated $695 million. While the guarantee amount for films not yet released
is not determinable, such amount is expected to be significant. As noted above,
Starz Entertainment has recognized the liability for a portion of its
obligations under the output agreements. As this represents a commitment of
Starz Entertainment, a consolidated subsidiary of ours, we have not recorded a
separate liability for our guarantees of these obligations.
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
II-16
currently paid on our exchangeable debentures. In this regard, we have deducted
$2,218 million in cumulative interest expense associated with the exchangeable
debentures since our 2001 split off from AT&T Corp. Of that amount,
$629 million represents cash interest payments. Interest deducted in prior years
on our 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 our exchangeable debentures are being used to
offset taxable income currently being generated.
The IRS has issued Technical Advice Memorandums ("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 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 and may be required to make
interest payments to the IRS. These payments could prove to be significant.
Pursuant to a tax sharing agreement (the "AT&T 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 spin
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 our
split off from AT&T, AT&T was required to pay us an amount equal to 35% of the
amount of the net operating loss carryforward ("TCI NOLs") 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 the TCI NOLs and recorded
such payment as an increase to additional paid-in capital. We were not paid for
certain of the TCI 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 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 ("AMT") 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
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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 our deferred tax assets and an increase to our 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 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 made for AT&T's March 2006 request.
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.
CAPITAL GROUP AND INTERACTIVE GROUP
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
consolidated financial statements.
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Information concerning the amount and timing of required payments, both
accrued and off-balance sheet, under our contractual obligations at
December 31, 2006 is summarized below:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------
LESS THAN AFTER
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
-------- --------- --------- --------- --------
(AMOUNTS IN MILLIONS)
ATTRIBUTED CAPITAL GROUP CONTRACTUAL OBLIGATIONS
Long-term debt(1)................................ $ 4,738 103 1,812 66 2,757
Interest payments(2)............................. 2,520 128 235 218 1,939
Long-term derivative instruments................. 1,901 1,484 -- 155 262
Operating lease obligations...................... 61 10 18 12 21
Programming Fees(3).............................. 1,091 648 258 118 67
Purchase orders and other obligations............ 21 21 -- -- --
------- ----- ----- ----- -----
Total Capital Group............................ 10,332 2,394 2,323 569 5,046
------- ----- ----- ----- -----
ATTRIBUTED INTERACTIVE GROUP CONTRACTUAL
OBLIGATIONS
Long-term debt(1)................................ 6,400 11 925 3,243 2,221
Interest payments(2)............................. 3,987 427 825 570 2,165
Long-term derivative instruments................. 9 -- -- 9 --
Operating lease obligations...................... 72 18 27 17 10
Purchase orders and other obligations............ 1,013 1,013 -- -- --
------- ----- ----- ----- -----
Total Interactive Group........................ 11,481 1,469 1,777 3,839 4,396
------- ----- ----- ----- -----
CONSOLIDATED CONTRACTUAL OBLIGATIONS
Long-term debt(1)................................ 11,138 114 2,737 3,309 4,978
Interest payments(2)............................. 6,507 555 1,060 788 4,104
Long-term derivative instruments................. 1,910 1,484 -- 164 262
Operating lease obligations...................... 133 28 45 29 31
Programming Fees(3).............................. 1,091 648 258 118 67
Purchase orders and other obligations............ 1,034 1,034 -- -- --
------- ----- ----- ----- -----
Total consolidated............................. $21,813 3,863 4,100 4,408 9,442
======= ===== ===== ===== =====
------------------------
(1) Includes all debt instruments, including the call option feature related to
our exchangeable debentures. Amounts are stated at the face amount at
maturity and may differ from the amounts stated in our consolidated balance
sheet to the extent debt instruments (i) were issued at a discount or
premium or (ii) have elements which are reported at fair value in our
consolidated balance sheet. Also includes capital lease obligations. Amounts
do not assume additional borrowings or refinancings of existing debt.
(2) Amounts (i) are based on our outstanding debt at December 31, 2006,
(ii) assume the interest rates on our floating rate debt remain constant at
the December 31, 2006 rates and (iii) assume that our existing debt is
repaid at maturity.
(3) Does not include Programming Fees for films not yet released theatrically,
as such amounts cannot be estimated.
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 155, among other
things, amends Statement of Financial Accounting Standards No. 133, "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," and permits fair value
II-19
remeasurement of hybrid financial instruments that contain an embedded
derivative that otherwise would require bifurcation. Statement 155 is effective
after the beginning of an entity's first fiscal year that begins after
September 15, 2006. We intend to adopt the provisions of Statement 155 effective
January 1, 2007 and to account for our senior exchangeable debentures at fair
value rather than bifurcating such debentures into a debt instrument and a
derivative instrument as required by Statement 133. If we had adopted Statement
155 as of December 31, 2006, we would have recorded an increase to long-term
debt of $1.9 billion, a decrease to long-term derivative instruments of
$1.3 billion and an increase to accumulated deficit of $600 million.
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 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.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "FAIR VALUE MEASUREMENTS", which defines fair value,
establishes a framework for measuring fair value under GAAP and expands
disclosures about fair value measurements. Statement 157 applies to other
accounting pronouncements that require or permit fair value measurements. The
new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those fiscal
years. We are currently evaluating the potential impact of the adoption of
Statement 157 on our consolidated balance sheet, statements of operations and
comprehensive earnings (loss), and statements of cash flows.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115." Statement 159
permits entities to choose to measure many financial instruments, such as
available-for-sale securities, and certain other items at fair value and to
recognize the changes in fair value of such instruments in the entity's
statement of operations. Currently under Statement of Financial Accounting
Standards No. 115, entities are required to recognize changes in fair value of
available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15, 2007. We are currently
evaluating the potential impacts of Statement 159 on our financial statements
and have not made a determination as to which of our financial instruments, if
any, we will choose to apply the provisions of Statement 159.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with GAAP requires
us 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. Listed below are the
accounting estimates that we believe are critical to our financial statements
due to the degree of uncertainty regarding the estimates or assumptions involved
and the magnitude of the asset, liability, revenue or expense being reported.
All of these accounting estimates and assumptions, as well as the resulting
impact to our financial statements, have been discussed with our audit
committee.
CARRYING VALUE OF INVESTMENTS. Our cost and equity method investments
comprise a significant portion of our total assets at each of December 31, 2006
and 2005. We account for these investments
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pursuant to Statement of Financial Accounting Standards No. 115, Statement of
Financial Accounting Standards No. 142, Accounting Principles Board Opinion
No. 18, EITF Topic 03-1 and SAB No. 59. These accounting principles require us
to periodically evaluate our investments to determine if decreases in fair value
below our cost bases are other than temporary or "nontemporary." If a decline in
fair value is determined to be nontemporary, we are required to reflect such
decline in our statement of operations. Nontemporary declines in fair value of
our cost investments are recognized on a separate line in our statement of
operations, and nontemporary declines in fair value of our equity method
investments are included in share of losses of affiliates in our statement of
operations.
The primary factors we consider in our determination of whether declines in
fair value are nontemporary are the length of time that the fair value of the
investment is below our carrying value; and the financial condition, operating
performance and near term prospects of the investee. In addition, we consider
the reason for the decline in fair value, be it general market conditions,
industry specific or investee specific; analysts' ratings and estimates of
12 month share price targets for the investee; changes in stock price or
valuation subsequent to the balance sheet date; and our intent and ability to
hold the investment for a period of time sufficient to allow for a recovery in
fair value. Fair value of our publicly traded investments is based on the market
prices of the investments at the balance sheet date. We estimate the fair value
of our other cost and equity investments using a variety of methodologies,
including cash flow multiples, discounted cash flow, per subscriber values, or
values of comparable public or private businesses. Impairments are calculated as
the difference between our carrying value and our estimate of fair value. As our
assessment of the fair value of our investments and any resulting impairment
losses and the timing of when to recognize such charges requires a high degree
of judgment and includes significant estimates and assumptions, actual results
could differ materially from our estimates and assumptions.
Our evaluation of the fair value of our investments and any resulting
impairment charges are made as of the most recent balance sheet date. Changes in
fair value subsequent to the balance sheet date due to the factors described
above are possible. Subsequent decreases in fair value will be recognized in our
statement of operations in the period in which they occur to the extent such
decreases are deemed to be nontemporary. Subsequent increases in fair value will
be recognized in our statement of operations only upon our ultimate disposition
of the investment.
At December 31, 2006, we had unrealized holding losses of $1 million related
to certain of our AFS equity securities.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS. We use various derivative
instruments, including equity collars, written put and call options, interest
rate swaps and foreign exchange contracts, to manage fair value and cash flow
risk associated with many of our investments, some of our debt and transactions
denominated in foreign currencies. We account for these derivative instruments
pursuant to Statement 133 and Statement of Financial Accounting Standards
No. 149, "AMENDMENT OF STATEMENT NO. 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." Statement 133 and Statement 149 require that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of our derivatives are included in realized and unrealized gains (losses)
on derivative instruments in our statement of operations.
We use the Black-Scholes model to estimate the fair value of our derivative
instruments that we use to manage market risk related to certain of our AFS
securities. The Black-Scholes model incorporates a number of variables in
determining such fair values, including expected volatility of the underlying
security and an appropriate discount rate. We obtain volatility rates from
independent sources based on the expected volatility of the underlying security
over the term of the derivative instrument. The volatility assumption is
evaluated annually to determine if it should be adjusted, or more often if there
are indications that it should be adjusted. We obtain a discount rate at the
inception of the derivative instrument and update such rate each reporting
period based on our
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estimate of the discount rate at which we could currently settle the derivative
instrument. At December 31, 2006, the expected volatilities used to value our
AFS Derivatives generally ranged from 19% to 26% and the discount rates ranged
from 5.1% to 5.4%. Considerable management judgment is required in estimating
the Black-Scholes variables. Actual results upon settlement or unwinding of our
derivative instruments may differ from these estimates.
Changes in our assumptions regarding (1) the discount rate and (2) the
volatility rates of the underlying securities that are used in the Black-Scholes
model would have the most significant impact on the valuation of our AFS
Derivatives. The table below summarizes changes in these assumptions and the
resulting impacts on our estimate of fair value.
ESTIMATED AGGREGATE
FAIR VALUE OF AFS DOLLAR VALUE
ASSUMPTION DERIVATIVES CHANGE
---------- ------------------- ------------
(AMOUNTS IN MILLIONS)
As recorded at December 31, 2006............................ $ 983 --
25% increase in discount rate............................... $ 830 (153)
25% decrease in discount rate............................... $1,136 153
25% increase in expected volatilities....................... $ 925 (58)
25% decrease in expected volatilities....................... $1,060 77
CARRYING VALUE OF LONG-LIVED ASSETS. Our property and equipment, intangible
assets and goodwill (collectively, our "long-lived assets") also comprise a
significant portion of our total assets at December 31, 2006 and 2005. We
account for our long-lived assets pursuant to Statement of Financial Accounting
Standards No. 142 and Statement of Financial Accounting Standards No. 144. These
accounting standards require that we periodically, or upon the occurrence of
certain triggering events, assess the recoverability of our long-lived assets.
If the carrying value of our long-lived assets exceeds their estimated fair
value, we are required to write the carrying value down to fair value. Any such
writedown is included in impairment of long-lived assets in our consolidated
statement of operations. A high degree of judgment is required to estimate the
fair value of our long-lived assets. We may use quoted market prices, prices for
similar assets, present value techniques and other valuation techniques to
prepare these estimates. In addition, we may obtain independent third-party
appraisals in certain circumstances. We may need to make estimates of future
cash flows and discount rates as well as other assumptions in order to implement
these valuation techniques. Accordingly, any value ultimately derived from our
long-lived assets may differ from our estimate of fair value. As each of our
operating segments has long-lived assets, this critical accounting policy
affects the financial position and results of operations of each segment.
RETAIL RELATED ADJUSTMENTS AND ALLOWANCES. QVC records adjustments and
allowances for sales returns, inventory obsolescence and uncollectible
receivables. Each of these adjustments is estimated based on historical
experience. Sales returns are calculated as a percent of sales and are netted
against revenue in our statement of operations. For the years ended
December 31, 2006 and 2005, sales returns represented 18.5% and 18.0% of QVC's
gross product revenue, respectively. The inventory obsolescence is calculated as
a percent of QVC's inventory at the end of a reporting period, and is included
in cost of goods sold in our statement of operations. At December 31, 2006,
QVC's inventory is $915 million and the obsolescence adjustment is $95 million.
QVC's allowance for doubtful accounts is calculated as a percent of accounts
receivable at the end of a reporting period, and the change in such allowance is
recorded as bad debt expense in our statement of operations. At December 31,
2006, QVC's trade accounts receivable are $973 million, net of the allowance for
doubtful accounts of $60 million. Each of these adjustments requires management
judgment and may not reflect actual results.
II-22
INCOME TAXES. We are required to estimate the amount of tax payable or
refundable for the current year and the deferred income tax liabilities and
assets for the future tax consequences of events that have been reflected in our
financial statements or tax returns for each taxing jurisdiction in which we
operate. This process requires our management to make judgments regarding the
timing and probability of the ultimate tax impact of the various agreements and
transactions that we enter into. Based on these judgments we may record tax
reserves or adjustments to valuation allowances on deferred tax assets to
reflect the expected realizability of future tax benefits. Actual income taxes
could vary from these estimates due to future changes in income tax law,
significant changes in the jurisdictions in which we operate, our inability to
generate sufficient future taxable income or unpredicted results from the final
determination of each year's liability by taxing authorities. These changes
could have a significant impact on our financial position.
INTERACTIVE GROUP
On May 9, 2006, our stockholders approved our corporate 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 consists of our subsidiaries QVC, Provide and BuySeasons,
our interests in IAC/InterActiveCorp and Expedia and $3,108 million principal
amount (as of December 31, 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, which is
principally comprised of QVC. Although our restructuring was not completed until
May 9, 2006, the following discussion is presented as though the restructuring
had been completed on January 1, 2004. The results of operations of Provide and
BuySeasons are included in Corporate and Other since their respective date of
acquisition in the tables below. Fluctuations in Corporate and Other from 2005
to 2006 are due primarily to the acquisitions of Provide and BuySeasons in 2006.
This discussion should be read in conjunction with (1) our consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K and (2) the Unaudited Attributed Financial Information for Tracking
Stock Groups filed as Exhibit 99.1 to this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
REVENUE
QVC......................................................... $7,074 6,501 5,687
Corporate and Other......................................... 252 -- --
------ ----- -----
$7,326 6,501 5,687
------ ----- -----
OPERATING CASH FLOW (DEFICIT)
QVC......................................................... $1,656 1,422 1,230
Corporate and Other......................................... 24 (5) (6)
------ ----- -----
$1,680 1,417 1,224
------ ----- -----
OPERATING INCOME (LOSS)
QVC......................................................... $1,130 921 760
Corporate and Other......................................... -- (5) (12)
------ ----- -----
$1,130 916 748
====== ===== =====
II-23
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 via the Internet. In the United States, QVC's programs are aired through its
nationally televised shopping network 24 hours a day ("QVC-US").
Internationally, QVC's program services are 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.
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Net revenue................................................. $7,074 6,501 5,687
Cost of sales............................................... (4,426) (4,112) (3,594)
------ ------ ------
Gross profit.............................................. 2,648 2,389 2,093
Operating expenses.......................................... (579) (570) (497)
SG&A expenses (excluding stock-based compensation).......... (413) (397) (366)
------ ------ ------
Operating cash flow....................................... 1,656 1,422 1,230
Stock-based compensation.................................... (50) (52) (33)
Depreciation and amortization............................... (476) (449) (437)
------ ------ ------
Operating income.......................................... $1,130 921 760
====== ====== ======
Net revenue is generated in the following geographical areas:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
QVC-US...................................................... $4,983 4,640 4,141
QVC-UK...................................................... 612 554 487
QVC-Germany................................................. 848 781 643
QVC-Japan................................................... 631 526 416
------ ----- -----
$7,074 6,501 5,687
====== ===== =====
QVC's net revenue increased 8.8% and 14.3% for the years ended December 31,
2006 and 2005, respectively, as compared to the corresponding prior year, as
average sales per customer increased in both years. The 2006 increase in revenue
is comprised of a $582 million increase due to an increase in the number of
units shipped from 154.4 million to 165.7 million and an $88 million increase
due to a 2.0% increase in the average sales price per unit ("ASP"). The revenue
increases were partially offset by a $11 million decrease due to unfavorable
foreign currency rates and an $86 million decrease due primarily to an increase
in estimated product returns. Returns as a percent of gross product revenue
increased from 18.0% in 2005 to 18.5% in 2006 due to a continued shift in the
mix from home products to apparel and accessories products, which typically have
higher return rates.
The 2005 increase in revenue is comprised of a $779 million increase due to
an increase in the number of units shipped from 138.0 million to 154.4 million
and a $204 million increase due to a 3.7% increase in the ASP. The revenue
increases were partially offset by a $145 million decrease due primarily to an
increase in product returns and a $24 million decrease due to unfavorable
foreign currency exchange rates. Returns as a percent of gross product revenue
increased from 17.6% in 2004 to 18.0% in 2005 due to a shift in the sales mix
from home products to jewelry, apparel and accessories products.
II-24
The number of homes receiving QVC's services are as follows:
HOMES (IN MILLIONS)
------------------------------
DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
QVC-US...................................................... 90.7 90.0 88.4
QVC-UK...................................................... 19.4 17.8 15.6
QVC-Germany................................................. 37.9 37.4 35.7
QVC-Japan................................................... 18.7 16.7 14.7
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 households 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 and continued growth in sales to existing customers. 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 years ended December 31, 2006 and 2005, the
changes in revenue and expenses were also impacted by changes in the exchange
rates for the UK pound sterling, the euro and the Japanese yen. In the event the
U.S. dollar strengthens against these foreign currencies in the future, QVC's
revenue and operating cash flow will be negatively impacted. The percentage
increase in revenue for each of QVC's geographic areas in dollars and in local
currency is as follows:
PERCENTAGE INCREASE IN NET REVENUE
-------------------------------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------------------- -----------------------------
U.S. DOLLARS LOCAL CURRENCY U.S. DOLLARS LOCAL CURRENCY
------------ -------------- ------------ --------------
QVC-US....................................... 7.4% 7.4% 12.1% 12.1%
QVC-UK....................................... 10.5% 8.4% 13.8% 15.1%
QVC-Germany.................................. 8.6% 7.1% 21.5% 21.9%
QVC-Japan.................................... 20.0% 26.1% 26.4% 29.4%
QVC's gross profit percentage was 37.4%, 36.7% and 36.8% for the years ended
December 31, 2006, 2005 and 2004, respectively. The increase in the gross profit
percentage in 2006 was due to higher initial margins due to a shift in the sales
mix from home products to higher margin apparel and accessories products and to
a lower inventory obsolescence provision. The slight gross profit percentage
decrease in 2005 was due primarily to a higher inventory obsolescence provision.
QVC's operating expenses are comprised of commissions and license fees,
order processing and customer service expense, credit card processing fees,
telecommunications expense and provision for doubtful accounts. Operating
expenses increased 1.6% and 14.7% for the years ended December 31, 2006 and
2005, respectively, as compared to the corresponding prior year period. The 2005
increase is primarily due to the increase in sales volume. Operating expenses
increased at a lower rate than sales in 2006 due primarily to commissions and
bad debt expense. As a percentage of net revenue, operating expenses were 8.2%,
8.8% and 8.7% for 2006, 2005 and 2004, respectively. Commissions, as a percent
of net revenue, were fairly consistent in 2004 and 2005 and decreased in 2006,
as compared to 2005. The decrease in 2006 is due to a greater percentage of
Internet sales for which lower commissions are required to be paid. In addition,
commissions decreased as a percentage of revenue in QVC-Japan where certain
distributors are paid the greater of (i) a fixed fee per subscriber and (ii) a
specified
II-25
percentage of sales. In 2006, more distributors started to receive payments
based on sales volume rather than a fixed fee per subscriber. QVC's bad debt
provision decreased as a percent of net revenue in 2006 due to lower write-offs
on QVC's private label credit card. As a percent of net revenue, order
processing and customer service expenses remained constant in 2006, but
decreased in each segment in 2005 as compared to 2004. The 2005 decrease is the
result of reduced personnel expense due to increased Internet sales, and
operator efficiencies in call handling and staffing. QVC's telecommunications
expenses as a percent of revenue remained consistent in 2006, but decreased in
2005 due to new contracts with certain of its service providers. Credit card
processing fees remained consistent as a percent of net revenue for each of the
years ended December 31, 2006, 2005 and 2004.
QVC's SG&A expenses include personnel, information technology, marketing and
advertising expenses. Such expenses increased 4.0% and 8.5% during the years
ended December 31, 2006 and 2005, respectively, as compared to the corresponding
prior year. Due to the fixed cost and discretionary nature of many of these
expenses, SG&A expenses increased at a lower rate than revenue in 2006. In
addition, QVC settled certain franchise tax audit issues and reversed
$15 million of reserves recorded in prior years. The majority of the 2005
increase reflects a $23 million increase in personnel costs due to the addition
of employees to support the increased sales of QVC's foreign operations. In
addition, statutory sales and use tax increased $6 million in 2005.
QVC's depreciation and amortization expense increased for the years ended
December 31, 2006 and 2005. Such increases are due to fixed asset and software
additions.
CAPITAL GROUP
The other tracking stock created in our 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 Starz Entertainment, Starz Media, FUN and TruePosition,
as well as minority investments in News Corporation, Time Warner Inc., Sprint
Nextel Corporation and other public and private companies and $4,580 million
principal amount (as of December 31, 2006) of our existing publicly-traded debt.
We acquired the U.S. and U.K. operations of Starz Media from IDT Corporation
("IDT") in August 2006, and the Canadian and Australian operations in
September 2006. The aggregate consideration was valued for accounting purposes
at $525 million and was comprised of 14.9 million shares of IDT Class B common
stock, 7,500 shares of IDT Telecom, Inc., a subsidiary of IDT, and $290 million
in cash. Starz Media's operations include animated feature film production,
proprietary live action and animated series production, contracted 2D animation
production and DVD distribution.
The following discussion and analysis provides information concerning the
attributed results of operations and financial condition of the Capital Group.
Although our restructuring was not completed until May 9, 2006, the following
discussion is presented as though the restructuring had been completed on
January 1, 2004. This discussion should be read in conjunction with (1) our
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K and (2) the Unaudited Attributed Financial
Information for Tracking Stock Groups filed as Exhibit 99.1 to this Annual
Report on Form 10-K.
II-26
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
REVENUE
Starz Entertainment......................................... $1,033 1,004 963
Corporate and Other......................................... 254 141 93
------ ----- -----
$1,287 1,145 1,056
====== ===== =====
OPERATING CASH FLOW (DEFICIT)
Starz Entertainment......................................... $ 186 171 239
Corporate and Other......................................... (83) (47) (72)
------ ----- -----
$ 103 124 167
====== ===== =====
OPERATING INCOME (LOSS)
Starz Entertainment......................................... $ 163 105 148
Corporate and Other......................................... (272) (77) (108)
------ ----- -----
$ (109) 28 40
====== ===== =====
REVENUE. The Capital Group's combined revenue increased $142 million or
12.4% and $89 million or 8.4% for the years ended December 31, 2006 and 2005,
respectively, as compared to the corresponding prior year. The 2006 increase is
due to Starz Entertainment, as well as our acquisitions of Starz Media and FUN,
which contributed $86 million and $42 million of revenue, respectively. The 2005
revenue increase was driven primarily by a $77 million increase for TruePosition
and a $41 million increase for Starz Entertainment. TruePosition's revenue
increased as it continued to increase delivery and acceptance of its equipment
in Cingular Wireless's markets.
In November 2006, TruePosition signed an amendment to its existing services
contract with Cingular Wireless that requires TruePosition to develop and
deliver additional software features. Because vendor specific objective evidence
related to the value of these additional features does not exist, TruePosition
is required to defer revenue recognition until all of the features have been
delivered. TruePosition estimates that these features will be delivered in the
first quarter of 2008. Accordingly, TruePosition will not recognize any revenue
under this contract until 2008. TruePosition recognized approximately
$105 million of revenue under this contract in 2006 prior to signing the
amendment.
OPERATING CASH FLOW. The Capital Group's Operating Cash Flow decreased
$21 million or 16.9% and $43 million or 25.7% in 2006 and 2005, respectively, as
compared to the corresponding prior year. The decrease in 2006 is due primarily
to an operating cash flow deficit generated by Starz Media, as advertising costs
for the animated film EVERYONE'S HERO exceeded the revenue it earned. The
increase in operating cash flow for Starz Entertainment was partially offset by
an operating cash flow deficit of $11 million for FUN. The 2005 decrease is due
primarily to a $68 million decrease for Starz Entertainment, partially offset by
a $30 million improvement for TruePosition.
IMPAIRMENT OF LONG-LIVED ASSETS. We acquired our interest in FUN in
March 2006. Subsequent to our acquisition, the market value of FUN's stock has
declined significantly due to the performance of certain of FUN's subsidiaries
and uncertainty surrounding government legislation of Internet gambling which we
believe the market perceives as potentially impacting FUN's skill gaming
business. In connection with our annual evaluation of the recoverability of
FUN's goodwill, we received a third-party valuation, which indicated that the
carrying value of FUN's goodwill exceeded its market value. Accordingly, we
recognized a $111 million impairment charge related to goodwill and a
$2 million impairment charge related to trademarks.
II-27
OPERATING INCOME (LOSS). The improvement in operating income for Starz
Entertainment in 2006 was more than offset by operating losses for Starz Media
and FUN, as well as an increase in corporate stock compensation expense. The
2005 decrease in operating income for Starz Entertainment was partially offset
by lower amortization of corporate intangibles and lower corporate stock
compensation expense.
STARZ ENTERTAINMENT. Historically, Starz Entertainment has provided premium
programming distributed by cable operators, direct-to-home satellite providers
and other distributors throughout the United States. In addition, Starz
Entertainment has launched Vongo, a subscription Internet service which is
comprised of Starz and other movie and entertainment content. Vongo also offers
content on a pay-per-view basis. Through 2006, virtually all of Starz
Entertainment's revenue continues to be derived from the delivery of movies to
subscribers under affiliation agreements with television video programming
distributors. Some of Starz Entertainment's affiliation agreements provide for
payments to Starz Entertainment based on the number of subscribers that receive
Starz Entertainment's services. Starz Entertainment 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, expire in 2007 through
2012. During the year ended December 31, 2006, 67.8% of Starz Entertainment's
revenue was generated by its four largest customers, Comcast, Echostar
Communications, DirecTV and Time Warner. Starz Entertainment's affiliation
agreement with DirecTV expired on June 30, 2006. In addition, the affiliation
agreement with Time Warner, which originally expired on December 31, 2006, has
been extended through May 31, 2007 with provisions for further extensions
through June 30, 2007. Starz Entertainment is currently in negotiations with
DirecTV and Time Warner regarding new agreements. There can be no assurance that
any new agreements with DirecTV or Time Warner will have economic terms
comparable to the old agreements.
Starz Entertainment's operating results are as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Revenue..................................................... $1,033 1,004 963
Operating expenses.......................................... (741) (706) (603)
SG&A expenses............................................... (106) (127) (121)
------ ----- ----
Operating cash flow....................................... 186 171 239
Stock-based compensation.................................... 3 (17) (28)
Depreciation and amortization............................... (26) (49) (63)
------ ----- ----
Operating income.......................................... $ 163 105 148
====== ===== ====
Starz Entertainment's revenue increased 2.9% and 4.3% for the years ended
December 31, 2006 and 2005, respectively, as compared to the corresponding prior
year. The 2006 increase is due to a $56 million increase resulting from an
increase in the average number of subscription units for Starz Entertainment's
services partially offset by a $27 million decrease due to a decrease in the
effective rate for Starz Entertainment services. The 2005 increase in revenue is
due to an $85 million increase resulting from a rise in the average number of
subscription units for Starz Entertainment's services partially offset by a
$52 million decrease due to a reduction in the effective rate for Starz
Entertainment's services.
Starz Entertainment's Starz movie service and its Encore and Thematic
Multiplex channels ("EMP") movie service are the primary drivers of Starz
Entertainment's revenue. Starz average subscriptions increased 5.7% and 6.7% in
2006 and 2005, respectively; and EMP average subscriptions increased 6.6% and
8.0% in 2006 and 2005, respectively. The effects on revenue of these increases
in
II-28
subscriptions units are somewhat mitigated by the fixed-rate affiliation
agreements that Starz Entertainment has entered into in recent years.
At December 31, 2006, cable, direct broadcast satellite, and other
distribution represented 66.6%, 31.6% and 1.8%, respectively, of Starz
Entertainment's total subscription units.
Starz Entertainment's operating expenses increased $35 million or 5.0% and
$103 million or 17.1% for the years ended December 31, 2006 and 2005,
respectively, as compared to the corresponding prior year. Such increases are
due primarily to increases in programming costs, which increased from
$564 million in 2004 to $668 million in 2005 and to $703 million in 2006. The
2006 programming increase is due primarily to $63 million of additional
amortization of deposits previously made under certain of its output
arrangements. Such amortization was partially offset by a lower cost per title
for movies under certain license agreements and 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. The 2005 increase in programming costs is due to (1) a $55 million
increase resulting from a higher percentage of first-run movie exhibitions as
compared to the number of library product exhibitions in 2005 and (2) a
$49 million increase due to a higher cost per title for movie titles under
certain of Starz Entertainment's license agreements.
Starz Entertainment expects that its programming costs in 2007 will be 6%-9%
lower than the 2006 costs due to Starz Entertainment receiving fewer first-run
titles under certain of its output arrangements in 2007. 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 Starz Entertainment and
their ultimate box office performance. Accordingly, the actual amount of costs
experienced by Starz Entertainment may differ from the amounts noted above.
Starz Entertainment's SG&A expenses decreased $21 million or 16.5% and
increased $6 million or 5.0% during 2006 and 2005, respectively, as compared to
the corresponding prior year. The 2006 decrease is due primarily to lower sales
and marketing expenses of $18 million due to the elimination of certain
marketing support commitments under the Comcast affiliation agreement and less
marketing with other affiliates, partially offset by marketing expenses related
to the commercial launch of Vongo. The 2005 increase in SG&A expenses is due to
(1) $11 million of consulting and marketing expenses incurred in connection with
Starz Entertainment's 2005 development and 2006 launch of Vongo, and (2) a
$12 million credit recorded by Starz Entertainment in 2004 related to the
recovery of certain accounts receivable from Adelphia Communications and other
customers. These increases were offset by a $16 million decrease in sales and
marketing as Starz Entertainment participated in fewer national marketing
campaigns and obtained reduced marketing commitments under a new affiliation
agreement with Comcast in 2005.
Starz Entertainment has outstanding phantom stock appreciation rights held
by its former chief executive officer. Compensation relating to the phantom
stock appreciation rights has been recorded based upon the estimated fair value
of Starz Entertainment. The amount of expense associated with the phantom stock
appreciation rights is generally based on the vesting of such rights and the
change in the fair value of Starz Entertainment.
ITEM 7A. 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 financial 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.
II-29
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 entering into
interest rate swap arrangements and 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 December 31, 2006, the face amount of the Interactive
Group's fixed rate debt (considering the effects of interest rate swap
agreements) was $5,374 million, which had a weighted average interest rate of
6.5%. The Interactive Group's variable rate debt of $1,026 million had a
weighted average interest rate of 6.1% at December 31, 2006. As of December 31,
2006, the face amount of the Capital Group's fixed rate debt was
$4,584 million, which had a weighted average interest rate of 2.6%.
Each of the Interactive Group and the Capital Group is 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, 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.
Equity collars provide us with a put option that gives us the right to require
the counterparty to purchase a specified number of shares of the underlying
security at a specified price at a specified date in the future. Equity collars
also provide the counterparty with a call option that gives the counterparty the
right to purchase the same securities at a specified price at a specified date
in the future. The put option and the call option generally have equal fair
values at the time of origination resulting in no cash receipts or payments.
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 that have been
attributed to the Capital Group 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 our consolidated statement
of operations.
ESTIMATED AGGREGATE FAIR VALUE
------------------------------------
EQUITY COLLARS OTHER TOTAL
-------------- -------- --------
(AMOUNTS IN MILLIONS)
Fair value at December 31, 2006............................. $ 802 181 983
5% increase in market prices................................ $ 663 208 871
10% increase in market prices............................... $ 521 235 756
5% decrease in market prices................................ $ 937 154 1,091
10% decrease in market prices............................... $1,069 127 1,196
At December 31, 2006, the fair value of our AFS securities attributed to the
Interactive Group was $2,572 million and the fair value of our AFS securities
attributed to the Capital Group was $19,024 million. Had the market price of
such securities been 10% lower at December 31, 2006, the aggregate value of such
securities would have been $257 million and $1,902 million lower, respectively,
resulting in a decrease to unrealized holding gains in other comprehensive
earnings. The decrease attributable to the Capital Group would be partially
offset by an increase in the value of our AFS Derivatives as noted in the table
above.
II-30
From time to time and in connection with certain of our AFS Derivatives, we
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 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 at
any time. 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 holding gains or losses in other comprehensive earnings.
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
our operations in foreign countries are translated at the average rate for the
period. Accordingly, the Interactive Group 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.
From time to time we enter into debt swaps and swap arrangements with
respect to our or third-party public and private indebtedness. Under these
arrangements, we initially post collateral with the counterparty equal to a
contractual percentage of the value of the referenced securities. We earn
interest income based upon the face amount and stated interest rate of the
referenced 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 a pre-determined amount, 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 December 31, 2006, the
aggregate notional amount of debt securities referenced under our debt swap
arrangements, which related to $830 million principal amount of certain of our
publicly traded debt, was $592 million. As of such date, we had posted cash
collateral equal to $109 million. In the event the fair value of the referenced
debt securities were to fall to zero, we would be required to post additional
cash collateral of $483 million. The posting of such collateral and the related
settlement of the agreements would reduce the principal amount of our
outstanding debt by $830 million.
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.
II-31
These measures allow our management to evaluate the success of our 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.
Our counterparty credit risk by financial institution is summarized below:
AGGREGATE FAIR VALUE OF
DERIVATIVE INSTRUMENTS AT
COUNTERPARTY DECEMBER 31, 2006
------------ -------------------------
(AMOUNTS IN MILLIONS)
Counterparty A.............................................. $ 504
Counterparty B.............................................. 494
Other....................................................... 581
------
$1,579
======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Liberty Media Corporation are filed
under this Item, beginning on Page II-36. The financial statement schedules
required by Regulation S-X are filed under Item 15 of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. 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 December 31, 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.
II-32
See page II-34 for MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING.
See page II-35 for REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
for our accountant's attestation regarding our internal control over financial
reporting.
There has been no change in the Company's internal control over financial
reporting that occurred during the three months ended December 31, 2006 that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
II-33
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Liberty Media Corporation's management is responsible for establishing and
maintaining adequate internal control over the Company's financial reporting.
The Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements and related
disclosures in accordance with generally accepted accounting principles. The
Company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions of the Company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the consolidated financial statements and related
disclosures in accordance with generally accepted accounting principles;
(3) provide reasonable assurance that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and (4) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the consolidated
financial statements and related disclosures.
Because of inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
The Company assessed the design and effectiveness of internal control over
financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in INTERNAL CONTROL-
INTEGRATED FRAMEWORK.
Based upon our assessment using the criteria contained in COSO, management
has concluded that, as of December 31, 2006, Liberty Media Corporation's
internal control over financial reporting is effectively designed and operating
effectively.
Liberty Media Corporation's independent registered public accountants
audited the consolidated financial statements and related disclosures in the
Annual Report on Form 10-K and have issued an audit report on management's
assessment of the Company's internal control over financial reporting. This
report appears on page II-35 of this Annual Report on Form 10-K.
II-34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting appearing on
page II-34, that Liberty Media Corporation and subsidiaries maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of Liberty Media Corporation is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Liberty Media Corporation and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in
our opinion, Liberty Media Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Liberty Media Corporation and subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of operations, comprehensive earnings
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2006, and our report dated February 28,
2007 expressed an unqualified opinion on those consolidated financial
statements.
KPMG LLP
Denver, Colorado
February 28, 2007
II-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited the accompanying consolidated balance sheets of Liberty
Media Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, comprehensive earnings (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Liberty
Media Corporation and subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in note 3 to the accompanying consolidated financial
statements, effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123(R), SHARE BASED PAYMENT.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Liberty Media
Corporation's internal control over financial reporting as of December 31, 2006,
based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 28, 2007 expressed an unqualified opinion
on management's assessment of, and the effective operation of, internal control
over financial reporting.
KPMG LLP
Denver, Colorado
February 28, 2007
II-36
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
2006 2005*
-------- --------
(AMOUNTS IN
MILLIONS)
Assets
Current assets:
Cash and cash equivalents................................. $ 3,099 1,896
Trade and other receivables, net.......................... 1,276 1,059
Inventory, net............................................ 831 719
Program rights............................................ 531 599
Financial instruments (note 7)............................ 239 661
Other current assets...................................... 241 127
Assets of discontinued operations (note 5)................ 512 516
------- -------
Total current assets.................................... 6,729 5,577
------- -------
Investments in available-for-sale securities and other cost
investments, including $1,482 million and $1,581 million
pledged as collateral for share borrowing arrangements
(note 6).................................................. 21,622 18,489
Long-term financial instruments (note 7).................... 1,340 1,123
Investments in affiliates, accounted for using the equity
method (note 8)........................................... 1,842 1,908
Property and equipment, at cost............................. 1,531 1,196
Accumulated depreciation.................................... (385) (250)
------- -------
1,146 946
------- -------
Intangible assets not subject to amortization (note 3):
Goodwill.................................................. 7,588 6,809
Trademarks................................................ 2,471 2,385
------- -------
10,059 9,194
------- -------
Intangible assets subject to amortization, net (note 3)..... 3,910 3,975
Other assets, at cost, net of accumulated amortization...... 990 753
------- -------
Total assets............................................ $47,638 41,965
======= =======
(continued)
II-37
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2006 AND 2005
2006 2005*
-------- --------
(AMOUNTS IN
MILLIONS)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.......................................... $ 508 492
Accrued interest.......................................... 214 153
Other accrued liabilities................................. 1,035 978
Financial instruments (note 7)............................ 1,484 1,939
Current portion of debt (note 9).......................... 114 1,379
Other current liabilities................................. 113 289
Liabilities of discontinued operations (note 5)........... 101 114
------- -------
Total current liabilities............................... 3,569 5,344
------- -------
Long-term debt (note 9)..................................... 8,909 6,370
Long-term financial instruments (note 7).................... 1,706 1,087
Deferred income tax liabilities (note 10)................... 9,784 8,696
Other liabilities........................................... 1,747 1,058
------- -------
Total liabilities......................................... 25,715 22,555
------- -------
Minority interests in equity of subsidiaries................ 290 290
Stockholders' equity (note 11):
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
134,503,165 shares at December 31, 2006................. 1 --
Liberty Capital Series B common stock, $.01 par value.
Authorized 25,000,000 shares; issued and outstanding
6,014,680 shares at December 31, 2006................... -- --
Liberty Interactive Series A common stock, $.01 par value.
Authorized 2,000,000,000 shares; issued and outstanding
623,061,760 shares at December 31, 2006................. 6 --
Liberty Interactive Series B common stock, $.01 par value.
Authorized 125,000,000 shares; issued and outstanding
29,971,039 shares at December 31, 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................................ 28,112 29,074
Accumulated other comprehensive earnings, net of taxes
("AOCE") (note 15)...................................... 5,943 3,412
AOCE of discontinued operations........................... 9 9
Accumulated deficit....................................... (12,438) (13,278)
------- -------
21,633 19,245
Series B common stock held in treasury, at cost
(10,000,000 shares at December 31, 2005)................ -- (125)
------- -------
Total stockholders' equity............................ 21,633 19,120
------- -------
Commitments and contingencies (note 17)
Total liabilities and stockholders' equity.............. $47,638 41,965
======= =======
------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-38
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005* 2004*
-------- -------- --------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS)
Revenue:
Net retail sales.......................................... $7,326 6,501 5,687
Communications and programming services................... 1,287 1,145 1,056
------ ------ ------
8,613 7,646 6,743
------ ------ ------
Operating costs and expenses:
Cost of sales............................................. 4,565 4,112 3,594
Operating................................................. 1,526 1,397 1,160
Selling, general and administrative, including stock-based
compensation (note 3)................................... 806 648 696
Litigation settlement..................................... -- -- (42)
Depreciation.............................................. 119 92 91
Amortization.............................................. 463 453 456
Impairment of long-lived assets (note 3).................. 113 -- --
------ ------ ------
7,592 6,702 5,955
------ ------ ------
Operating income........................................ 1,021 944 788
Other income (expense):
Interest expense.......................................... (680) (626) (619)
Dividend and interest income.............................. 214 143 130
Share of earnings of affiliates, net...................... 91 13 15
Realized and unrealized gains (losses) on financial
instruments, net (note 7)............................... (279) 257 (1,284)
Gains (losses) on dispositions, net (notes 6, 11 and
15)..................................................... 607 (361) 1,411
Nontemporary declines in fair value of investments (note
6)...................................................... (4) (449) (129)
Other, net................................................ 18 (39) (26)
------ ------ ------
(33) (1,062) (502)
------ ------ ------
Earnings (loss) from continuing operations before income
taxes and minority interest............................ 988 (118) 286
Income tax benefit (expense) (note 10)...................... (252) 126 (159)
Minority interests in earnings of subsidiaries.............. (27) (51) (22)
------ ------ ------
Earnings (loss) from continuing operations.............. 709 (43) 105
Earnings (loss) from discontinued operations, net of taxes
(note 5).................................................. 220 10 (59)
Cumulative effect of accounting change, net of taxes (note
3)........................................................ (89) -- --
------ ------ ------
Net earnings (loss)..................................... $ 840 (33) 46
====== ====== ======
Net earnings (loss):
Liberty Series A and Series B common stock................ $ 94 (33) 46
Liberty Capital common stock.............................. 260 -- --
Liberty Interactive common stock.......................... 486 -- --
------ ------ ------
$ 840 (33) 46
====== ====== ======
Basic and diluted earnings (loss) from continuing operations
per common share (note 3):
Liberty Series A and Series B common stock................ $ .07 (.02) .04
Liberty Capital common stock.............................. $ .24 -- --
Liberty Interactive common stock.......................... $ .73 -- --
Basic and diluted net earnings (loss) per common share (note
3):
Liberty Series A and Series B common stock................ $ .03 (.01) .02
Liberty Capital common stock.............................. $ 1.86 -- --
Liberty Interactive common stock.......................... $ .73 -- --
------------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-39
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005* 2004*
-------- -------- --------
(AMOUNTS IN MILLIONS)
Net earnings (loss)......................................... $ 840 (33) 46
------ ------ -----
Other comprehensive earnings (loss), net of taxes (note 15):
Foreign currency translation adjustments.................. 111 (5) 20
Recognition of previously unrealized foreign currency
translation losses...................................... -- 312 --
Unrealized holding gains (losses) arising during the
period.................................................. 2,605 (1,121) 1,490
Recognition of previously unrealized losses (gains) on
available-for-sale securities, net...................... (185) 217 (486)
Reclass unrealized gain on available-for-sale security to
equity method investment................................ -- (197) --
Other comprehensive earnings (loss) from discontinued
operations (note 5)..................................... -- (7) (54)
------ ------ -----
Other comprehensive earnings (loss)....................... 2,531 (801) 970
------ ------ -----
Comprehensive earnings (loss)............................... $3,371 (834) 1,016
====== ====== =====
Comprehensive earnings (loss):
Liberty Series A and Series B common stock................ $ 755 (834) 1,016
Liberty Capital common stock.............................. 1,787 -- --
Liberty Interactive common stock.......................... 829 -- --
------ ------ -----
$3,371 (834) 1,016
====== ====== =====
------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-40
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005* 2004*
-------- -------- --------
(AMOUNTS IN MILLIONS)
(SEE NOTE 4)
Cash flows from operating activities:
Net earnings (loss)....................................... $ 840 (33) 46
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss (earnings) from discontinued operations............ (220) (10) 59
Cumulative effect of accounting change.................. 89 -- --
Depreciation and amortization........................... 582 545 547
Impairment of long-lived assets......................... 113 -- --
Stock-based compensation................................ 67 52 98
Payments of stock-based compensation.................... (115) (103) (10)
Noncash interest expense................................ 108 101 96
Share of earnings of affiliates, net.................... (91) (13) (15)
Realized and unrealized losses (gains) on financial
instruments, net....................................... 279 (257) 1,284
Losses (gains) on disposition of assets, net............ (607) 361 (1,411)
Nontemporary decline in fair value of investments....... 4 449 129
Minority interests in earnings of subsidiaries.......... 27 51 22
Deferred income tax benefit............................. (465) (389) (194)
Other noncash charges, net.............................. 44 41 20
Changes in operating assets and liabilities, net of the
effect of acquisitions and dispositions:
Current assets........................................ (310) (175) (532)
Payables and other current liabilities................ 660 446 647
------- ------ ------
Net cash provided by operating activities........... 1,005 1,066 786
------- ------ ------
Cash flows from investing activities:
Cash proceeds from dispositions......................... 1,322 49 479
Premium proceeds from origination of derivatives........ 59 473 193
Net proceeds from settlement of derivatives............. 101 461 322
Investments in and loans to cost and equity investees... (235) (24) (960)
Cash paid for acquisitions, net of cash acquired........ (876) (1) (91)
Capital expenditures.................................... (278) (168) (128)
Net sales (purchases) of short term investments......... 287 (85) 263
Repurchases of subsidiary common stock.................. (331) (95) (171)
Other investing activities, net......................... 66 (7) 103
------- ------ ------
Net cash provided by investing activities............. 115 603 10
------- ------ ------
Cash flows from financing activities:
Borrowings of debt...................................... 3,229 861 --
Repayments of debt...................................... (2,191) (1,801) (1,006)
Repurchases of Liberty common stock..................... (954) -- (547)
Other financing activities, net......................... (20) 89 28
------- ------ ------
Net cash provided (used) by financing activities...... 64 (851) (1,525)
------- ------ ------
Effect of foreign currency exchange rates on cash........... 18 (45) 3
------- ------ ------
Net cash provided to discontinued operations:
Cash provided by operating activities..................... 62 75 260
Cash used by investing activities......................... (67) (110) (289)
Cash provided by financing activities..................... 6 11 1,005
Change in available cash held by discontinued
operations.............................................. -- (177) (1,839)
------- ------ ------
Net cash provided by (to) discontinued operations....... 1 (201) (863)
------- ------ ------
Net increase (decrease) in cash and cash
equivalents.......................................... 1,203 572 (1,589)
Cash and cash equivalents at beginning of year........ 1,896 1,324 2,913
------- ------ ------
Cash and cash equivalents at end of year.............. $ 3,099 1,896 1,324
======= ====== ======
------------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-41
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
COMMON STOCK
-----------------------------------------
LIBERTY CAPITAL
PREFERRED -------------------
STOCK SERIES A SERIES B SERIES A SERIES B
--------- -------- -------- -------- --------
(AMOUNTS IN MILLIONS)
Balance at January 1, 2004................................ $ -- 27 2 -- --
Net earnings............................................ -- -- -- -- --
Other comprehensive earnings (loss)..................... -- -- -- -- --
Issuance of Series A common stock for acquisitions...... -- -- -- -- --
Issuance of Series A common stock in exchange for Series
B common stock (note 11).............................. -- 1 (1) -- --
Acquisition of Series A common stock (note 11).......... -- (1) -- -- --
Amortization of deferred compensation................... -- -- -- -- --
Distribution to stockholders for spin off of Liberty
Media International ("LMI") (note 5).................. -- -- -- -- --
Stock compensation for Liberty options held by LMI
employees............................................. -- -- -- -- --
Stock compensation for LMI options held by Liberty
employees............................................. -- -- -- -- --
Other................................................... -- -- -- -- --
--------- --- --- --- ---
Balance at December 31, 2004.............................. -- 27 1 -- --
Net loss................................................ -- -- -- -- --
Other comprehensive loss................................ -- -- -- -- --
Issuance of Series A common stock for investment in
available-for-sale security........................... -- -- -- -- --
Amortization of deferred compensation................... -- -- -- -- --
Distribution to stockholders for spin off of Discovery
Holding Company ("DHC") (note 5)...................... -- -- -- -- --
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes............. -- -- -- -- --
Issuance of common stock upon exercise of stock
options............................................... -- -- -- -- --
AT&T tax sharing agreement adjustments (note 17)........ -- -- -- -- --
Adjustment of spin off of LMI........................... -- -- -- -- --
Other................................................... -- -- -- -- --
--------- --- --- --- ---
Balance at December 31, 2005.............................. -- 27 1 -- --
Net earnings............................................ -- -- -- -- --
Other comprehensive earnings............................ -- -- -- -- --
Retirement of treasury stock............................ -- -- -- -- --
Distribution of Liberty Capital and Liberty Interactive
common stock to stockholders (notes 1 and 2).......... -- (27) (1) 1 --
Issuance of common stock upon exercise of stock
options............................................... -- -- -- -- --
Stock compensation...................................... -- -- -- -- --
Issuance of Liberty Interactive Series A common stock
for acquisition....................................... -- -- -- -- --
Liberty Interactive Series A stock repurchases.......... -- -- -- -- --
Other................................................... -- -- -- -- --
--------- --- --- --- ---
Balance at December 31, 2006.............................. $ -- -- -- 1 --
========= === === === ===
COMMON STOCK
-------------------
LIBERTY AOCE
INTERACTIVE ADDITIONAL FROM
------------------- PAID-IN DISCONTINUED
SERIES A SERIES B CAPITAL AOCE OPERATIONS
-------- -------- ---------- -------- ------------
(AMOUNTS IN MILLIONS)
Balance at January 1, 2004................................ -- -- 38,903 3,233 (32)
Net earnings............................................ -- -- -- -- --
Other comprehensive earnings (loss)..................... -- -- -- 1,024 (54)
Issuance of Series A common stock for acquisitions...... -- -- 152 -- --
Issuance of Series A common stock in exchange for Series
B common stock (note 11).............................. -- -- 125 -- --
Acquisition of Series A common stock (note 11).......... -- -- (1,016) -- --
Amortization of deferred compensation................... -- -- 31 -- --
Distribution to stockholders for spin off of Liberty
Media International ("LMI") (note 5).................. -- -- (4,512) (51) 107
Stock compensation for Liberty options held by LMI
employees............................................. -- -- (4) -- --
Stock compensation for LMI options held by Liberty
employees............................................. -- -- 17 -- --
Other................................................... -- -- 5 -- --
--- --- ------ ----- ----
Balance at December 31, 2004.............................. -- -- 33,701 4,206 21
Net loss................................................ -- -- -- -- --
Other comprehensive loss................................ -- -- -- (794) (7)
Issuance of Series A common stock for investment in
available-for-sale security........................... -- -- 14 -- --
Amortization of deferred compensation................... -- -- 38 -- --
Distribution to stockholders for spin off of Discovery
Holding Company ("DHC") (note 5)...................... -- -- (4,609) -- (5)
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes............. -- -- (22) -- --
Issuance of common stock upon exercise of stock
options............................................... -- -- 10 -- --
AT&T tax sharing agreement adjustments (note 17)........ -- -- (40) -- --
Adjustment of spin off of LMI........................... -- -- (28) -- --
Other................................................... -- -- 10 -- --
--- --- ------ ----- ----
Balance at December 31, 2005.............................. -- -- 29,074 3,412 9
Net earnings............................................ -- -- -- -- --
Other comprehensive earnings............................ -- -- -- 2,531 --
Retirement of treasury stock............................ -- -- (125) -- --
Distribution of Liberty Capital and Liberty Interactive
common stock to stockholders (notes 1 and 2).......... 7 -- 20 -- --
Issuance of common stock upon exercise of stock
options............................................... -- -- 4 -- --
Stock compensation...................................... -- -- 62 -- --
Issuance of Liberty Interactive Series A common stock
for acquisition....................................... -- -- 36 -- --
Liberty Interactive Series A stock repurchases.......... (1) -- (953) -- --
Other................................................... -- -- (6) -- --
--- --- ------ ----- ----
Balance at December 31, 2006.............................. 6 -- 28,112 5,943 9
=== === ====== ===== ====
TOTAL
ACCUMULATED TREASURY STOCKHOLDERS'
DEFICIT STOCK EQUITY
------------- --------- -------------
(AMOUNTS IN MILLIONS)
Balance at January 1, 2004................................ (13,291) -- 28,842
Net earnings............................................ 46 -- 46
Other comprehensive earnings (loss)..................... -- -- 970
Issuance of Series A common stock for acquisitions...... -- -- 152
Issuance of Series A common stock in exchange for Series
B common stock (note 11).............................. -- (125) --
Acquisition of Series A common stock (note 11).......... -- -- (1,017)
Amortization of deferred compensation................... -- -- 31
Distribution to stockholders for spin off of Liberty
Media International ("LMI") (note 5).................. -- -- (4,456)
Stock compensation for Liberty options held by LMI
employees............................................. -- -- (4)
Stock compensation for LMI options held by Liberty
employees............................................. -- -- 17
Other................................................... -- -- 5
------- ---- ------
Balance at December 31, 2004.............................. (13,245) (125) 24,586
Net loss................................................ (33) -- (33)
Other comprehensive loss................................ -- -- (801)
Issuance of Series A common stock for investment in
available-for-sale security........................... -- -- 14
Amortization of deferred compensation................... -- -- 38
Distribution to stockholders for spin off of Discovery
Holding Company ("DHC") (note 5)...................... -- -- (4,614)
Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes............. -- -- (22)
Issuance of common stock upon exercise of stock
options............................................... -- -- 10
AT&T tax sharing agreement adjustments (note 17)........ -- -- (40)
Adjustment of spin off of LMI........................... -- -- (28)
Other................................................... -- -- 10
------- ---- ------
Balance at December 31, 2005.............................. (13,278) (125) 19,120
Net earnings............................................ 840 -- 840
Other comprehensive earnings............................ -- -- 2,531
Retirement of treasury stock............................ -- 125 --
Distribution of Liberty Capital and Liberty Interactive
common stock to stockholders (notes 1 and 2).......... -- -- --
Issuance of common stock upon exercise of stock
options............................................... -- -- 4
Stock compensation...................................... -- -- 62
Issuance of Liberty Interactive Series A common stock
for acquisition....................................... -- -- 36
Liberty Interactive Series A stock repurchases.......... -- -- (954)
Other................................................... -- -- (6)
------- ---- ------
Balance at December 31, 2006.............................. (12,438) -- 21,633
======= ==== ======
See accompanying notes to consolidated financial statements.
II-42
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(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 Restructuring, 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 Restructuring,
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 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 North America,
Europe and Asia.
(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 that group. The assets and businesses Liberty has attributed to
the Interactive Group are those engaged in video and on-line commerce, and
include its interests in QVC, Inc. ("QVC"), Provide Commerce, Inc. ("Provide"),
BuySeasons, Inc. ("BuySeasons"), Expedia, Inc. and IAC/InterActiveCorp. The
Interactive Group will also include such other businesses, assets and
liabilities that Liberty's board of directors may in the future determine to
attribute to the Interactive Group, including such other businesses and assets
as Liberty may acquire
II-43
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
for the Interactive Group. In addition, Liberty has attributed $3,108 million
principal amount (as of December 31, 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 include Liberty's subsidiaries: Starz
Entertainment, LLC (formerly known as Starz Entertainment Group LLC) ("Starz
Entertainment"), Starz Media, LLC (formerly known as IDT Entertainment, Inc.)
("Starz Media"), TruePosition, Inc. ("TruePosition") and FUN Technologies, Inc.
("FUN"); its equity affiliates: GSN, LLC and WildBlue Communications, Inc.; and
its interests in News Corporation, Time Warner Inc. and Sprint Nextel
Corporation. The Capital Group will also include such other businesses, assets
and liabilities that Liberty's board of directors may in the future determine to
attribute to the Capital Group, including such other businesses and assets as
Liberty may acquire for the Capital Group. In addition, Liberty has attributed
$4,580 million principal amount (as of December 31, 2006) of its existing
publicly traded debt to the Capital Group.
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed
financial information for Liberty's tracking stock groups.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of acquisition.
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance aggregated $72 million and $66 million at December 31, 2006 and 2005,
respectively. A summary of activity in the allowance for doubtful accounts is as
follows:
ADDITIONS
BALANCE ------------------------- BALANCE
BEGINNING CHARGED DEDUCTIONS- END OF
OF YEAR TO EXPENSE ACQUISITIONS WRITE-OFFS YEAR
--------- ---------- ------------ ----------- --------
(AMOUNTS IN MILLIONS)
2006....................................... $66 27 14 (35) 72
=== ==== ==== ==== ====
2005....................................... $63 37 -- (34) 66
=== ==== ==== ==== ====
2004....................................... $78 19 -- (34) 63
=== ==== ==== ==== ====
INVENTORY
Inventory, consisting primarily of products held for sale, is stated at the
lower of cost or market. Cost is determined by the average cost method, which
approximates the first-in, first-out method.
II-44
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
PROGRAM RIGHTS
Program rights are amortized on a film-by-film basis over the anticipated
number of exhibitions. Program rights payable are initially recorded at the
estimated cost of the programs when the film is available for airing.
INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs generally includes the cost of
proprietary films and television programs that have been released, completed and
not released, in production, and in development or pre-production. Capitalized
costs include the acquisition of story rights, the development of stories,
production labor, postproduction costs and allocable overhead and interest
costs. Investment in films and television programs is stated at the lower of
unamortized cost or estimated fair value on an individual film basis. Investment
in films and television programs is amortized using the individual-film-forecast
method, whereby the costs are charged to expense and participation and residual
costs are accrued based on the proportion that current revenue from the films
bear to an estimate of total revenue anticipated from all markets (ultimate
revenue). Ultimate revenue estimates may not exceed ten years following the date
of initial release or from the date of delivery of the first episode for
episodic television series.
Estimates of ultimate revenue involve uncertainty and it is therefore
possible that reductions in the carrying value of investment in films and
television programs may be required as a consequence of changes in management's
future revenue estimates.
Investment in films and television programs in development or pre-production
is periodically reviewed to determine whether they will ultimately be used in
the production of a film. Costs of films in development or pre-production are
charged to expense if the project is abandoned, or if the film has not been set
for production within three years from the time of the first capitalized
transaction.
The investment in films and television programs is reviewed for impairment
on a title-by-title basis when an event or change in circumstances indicates
that a film should be assessed. If the estimated fair value of a film is less
than its unamortized cost, then the excess of unamortized costs over the
estimated fair value is charged to expense.
INVESTMENTS
All marketable equity and debt securities held by the Company are classified
as available-for-sale ("AFS") and are carried at fair value. Unrealized holding
gains and losses on AFS securities are carried net of taxes as a component of
accumulated other comprehensive earnings in stockholders' equity. Realized gains
and losses are determined on an average cost basis. Other investments in which
the Company's ownership interest is less than 20% and are not considered
marketable securities are carried at cost.
For those investments in affiliates in which the Company has the ability to
exercise significant influence, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize the Company's share of net earnings or losses of the affiliates as
they occur rather than as dividends or other distributions are received. Losses
are limited to the extent of the Company's investment in, advances to and
commitments for the investee. The Company's share of net earnings or loss of
affiliates also includes any other-than-temporary declines in fair value
recognized during the period.
II-45
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as increases or decreases in stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The primary factors the Company considers in its determination
are the length of time that the fair value of the investment is below the
Company's carrying value; and the financial condition, operating performance and
near term prospects of the investee. In addition, the Company considers the
reason for the decline in fair value, be it general market conditions, industry
specific or investee specific; analysts' ratings and estimates of 12 month share
price targets for the investee; changes in stock price or valuation subsequent
to the balance sheet date; and the Company's intent and ability to hold the
investment for a period of time sufficient to allow for a recovery in fair
value. If the decline in fair value is deemed to be nontemporary, the cost basis
of the security is written down to fair value. In situations where the fair
value of an investment is not evident due to a lack of a public market price or
other factors, the Company uses its best estimates and assumptions to arrive at
the estimated fair value of such investment. The Company's assessment of the
foregoing factors involves a high degree of judgment and accordingly, actual
results may differ materially from the Company's estimates and judgments.
Writedowns for cost investments and AFS securities are included in the
consolidated statements of operations as nontemporary declines in fair values of
investments. Writedowns for equity method investments are included in share of
earnings (losses) of affiliates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses various derivative instruments including equity collars,
written put and call options, bond swaps and interest rate swaps to manage fair
value and cash flow risk associated with many of its investments and some of its
variable rate debt. Liberty's derivative instruments are executed with
counterparties who are well known major financial institutions. While Liberty
believes these derivative instruments effectively manage the risks highlighted
above, they are subject to counterparty credit risk. Counterparty credit risk is
the risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To protect
itself against credit risk associated with these counterparties the Company
generally:
- executes its derivative instruments with several different counterparties,
and
- executes equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for the Company's
benefit, if the respective counterparty's credit rating for its senior
unsecured debt were to reach certain levels, generally a rating that is
below Standard & Poor's rating of A- and/or Moody's rating of A3.
Due to the importance of these derivative instruments to its risk management
strategy, Liberty actively monitors the creditworthiness of each of its
counterparties. Based on its analysis, the Company currently considers
nonperformance by any of its counterparties to be unlikely.
Liberty accounts for its derivatives pursuant to Statement of Financial
Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("Statement 133") and related amendments and interpretations. All
derivatives, whether designated in hedging relationships or not, are recorded on
the balance sheet at fair value. If the derivative is designated as a fair value
hedge, the
II-46
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive earnings and are recognized in
the statement of operations when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. If the derivative is not designated as a hedge, changes in the fair
value of the derivative are recognized in earnings. During 2006, the Company
entered into several interest rate swap agreements to mitigate the cash flow
risk associated with interest payments related to certain of its variable rate
debt. These interest rate swap arrangements have been designated as cash flow
hedges. The Company assesses the effectiveness of its interest rate swaps using
the hypothetical derivative method. Hedge ineffectiveness had no impact on
earnings for the year ended December 31, 2006. None of the Company's other
derivatives have been designated as hedges.
The fair value of the Company's equity collars and other similar derivative
instruments is estimated using third party estimates or the Black-Scholes model.
The Black-Scholes model incorporates a number of variables in determining such
fair values, including expected volatility of the underlying security and an
appropriate discount rate. The Company obtains volatility rates from independent
sources based on the expected volatility of the underlying security over the
term of the derivative instrument. The volatility assumption is evaluated
annually to determine if it should be adjusted, or more often if there are
indications that it should be adjusted. A discount rate is obtained at the
inception of the derivative instrument and updated each reporting period based
on the Company's estimate of the discount rate at which it could currently
settle the derivative instrument. Considerable management judgment is required
in estimating the Black-Scholes variables. Actual results upon settlement or
unwinding of derivative instruments may differ materially from these estimates.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, is stated at
cost. Depreciation is computed using the straight-line method using estimated
useful lives of 3 to 20 years for support equipment and 10 to 40 years for
buildings and improvements.
INTANGIBLE ASSETS
The Company accounts for its intangible assets pursuant to Statement of
Financial Accounting Standards No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
("Statement 142"). Statement 142 requires that goodwill and other intangible
assets with indefinite useful lives (collectively, "indefinite lived intangible
assets") not be amortized, but instead be tested for impairment at least
annually. Equity method goodwill is also not amortized, but continues to be
considered for impairment under Accounting Principles Board Opinion No. 18.
Statement 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS" ("Statement 144").
Statement 142 requires the Company to perform an annual assessment of
whether there is an indication that goodwill is impaired. To accomplish this,
the Company identifies its reporting units and determines the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units. Statement 142
requires the Company to consider equity method affiliates as separate reporting
units. As a result, a portion of the Company's
II-47
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
enterprise-level goodwill balance is allocated to various reporting units which
include a single equity method investment as its only asset. This allocation is
performed for goodwill impairment testing purposes only and does not change the
reported carrying value of the investment. However, to the extent that all or a
portion of an equity method investment which is part of a reporting unit
containing allocated goodwill is disposed of in the future, the allocated
portion of goodwill will be relieved and included in the calculation of the gain
or loss on disposal.
The Company determines the fair value of its reporting units using
independent appraisals, public trading prices and other means. The Company then
compares the fair value of each reporting unit to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair value,
the Company compares the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation, to its carrying amount, and records an impairment charge to
the extent the carrying amount exceeds the implied fair value.
GOODWILL
Changes in the carrying amount of goodwill are as follows:
STARZ
QVC ENTERTAINMENT OTHER TOTAL
-------- ------------- -------- --------
(AMOUNTS IN MILLIONS)
Balance at January 1, 2005................................ $5,264 1,383 156 6,803
Foreign currency translation adjustments................ 23 -- -- 23
Other................................................... (14) -- (3) (17)
------ ----- ---- -----
Balance at December 31, 2005.............................. 5,273 1,383 153 6,809
Acquisitions(1)......................................... 5 -- 878 883
Disposition(2).......................................... -- -- (124) (124)
Impairment(3)........................................... -- -- (111) (111)
Foreign currency translation adjustments................ 60 -- -- 60
Other(4)................................................ 78 (12) 5 71
------ ----- ---- -----
Balance at December 31, 2006.............................. $5,416 1,371 801 7,588
====== ===== ==== =====
------------------------
(1) During the year ended December 31, 2006, Liberty and its subsidiaries
completed several acquisitions, including the acquisition of controlling
interests in Provide, FUN, BuySeasons and IDT Entertainment, Inc., for
aggregate cash consideration of $876 million, net of cash acquired, the
issuance of Liberty common stock and the assumption of debt. In connection
with these acquisitions, Liberty recorded goodwill of $883 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,
including finalization of third-party valuations.
(2) During the second quarter of 2006, the Company sold its 50% interest 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.
(3) Liberty acquired its interest in FUN in March 2006. Subsequent to its
acquisition, the market value of FUN's stock has declined significantly due
to the performance of certain of FUN's subsidiaries
II-48
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
and uncertainty surrounding government legislation of Internet gambling
which Liberty believes the market perceives as potentially impacting FUN's
skill gaming business. In connection with its annual evaluation of the
recoverability of FUN's goodwill, Liberty received a third-party valuation,
which indicated that the carrying value of FUN's goodwill exceeded its
market value. Accordingly, Liberty recognized a $111 million impairment
charge related to goodwill.
(4) Other activity for QVC represents Liberty's acquisition of shares of QVC
common stock held by employees and officers of QVC. Amounts recorded as
goodwill represent the difference between the price paid for such minority
interest and the carrying amount of the minority interest less amounts
allocated to other intangible assets.
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
Intangible assets subject to amortization are comprised of the following:
DECEMBER 31, 2006 DECEMBER 31, 2005
---------------------------------- ----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
(AMOUNTS IN MILLIONS)
Distribution rights........................ $2,699 (981) 1,718 2,628 (788) 1,840
Customer relationships..................... 2,545 (581) 1,964 2,356 (393) 1,963
Other...................................... 699 (471) 228 543 (371) 172
------ ------ ----- ----- ------ -----
Total...................................... $5,943 (2,033) 3,910 5,527 (1,552) 3,975
====== ====== ===== ===== ====== =====
Amortization of intangible assets with finite useful lives was
$463 million, $453 million and $456 million for the years ended December 31,
2006, 2005 and 2004, respectively. Based on its amortizable intangible assets as
of December 31, 2006, Liberty expects that amortization expense will be as
follows for the next five years (amounts in millions):
2007....................................................... $462
2008....................................................... $430
2009....................................................... $389
2010....................................................... $363
2011....................................................... $352
IMPAIRMENT OF LONG-LIVED ASSETS
Statement 144 requires that the Company periodically review the carrying
amounts of its property and equipment and its intangible assets (other than
goodwill) to determine whether current events or circumstances indicate that
such carrying amounts may not be recoverable. If the carrying amount of the
asset is greater than the expected undiscounted cash flows to be generated by
such asset, an impairment adjustment is to be recognized. Such adjustment is
measured by the amount that the carrying value of such assets exceeds their fair
value. The Company generally measures fair value by considering sale prices for
similar assets or by discounting estimated future cash flows using an
appropriate discount rate. Considerable management judgment is necessary to
estimate the fair value of assets. Accordingly, actual results could vary
significantly from such estimates. Assets to be disposed of are carried at the
lower of their financial statement carrying amount or fair value less costs to
sell.
II-49
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
MINORITY INTERESTS
Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable portion of
the common equity of those subsidiaries. Further, the minority interests' share
of losses is not recognized if the minority holders of common equity of
subsidiaries have the right to cause the Company to repurchase such holders'
common equity.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the United States ("U.S.") dollar.
The functional currency of the Company's foreign operations generally is the
applicable local currency for each foreign subsidiary. Assets and liabilities of
foreign subsidiaries are translated at the spot rate in effect at the applicable
reporting date, and the consolidated statements of operations are translated at
the average exchange rates in effect during the applicable period. The resulting
unrealized cumulative translation adjustment, net of applicable income taxes, is
recorded as a component of accumulated other comprehensive earnings in
stockholders' equity.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in the accompanying consolidated statements of operations
and comprehensive earnings as unrealized (based on the applicable period-end
exchange rate) or realized upon settlement of the transactions.
REVENUE RECOGNITION
Revenue is recognized as follows:
- Revenue from retail sales is recognized at the time of shipment to
customers. An allowance for returned merchandise is provided as a
percentage of sales based on historical experience. The total reduction in
sales due to returns for the years ended December 31, 2006, 2005 and 2004
aggregated $1,554 million, $1,375 million and $1,165 million,
respectively.
- Programming revenue is recognized in the period during which programming
is provided, pursuant to affiliation agreements.
- Revenue from sales and licensing of software and related service and
maintenance is recognized pursuant to Statement of Position No. 97-2,
"SOFTWARE REVENUE RECOGNITION." For multiple element contracts with vendor
specific objective evidence, the Company recognizes revenue for each
specific element when the earnings process is complete. If vendor specific
objective evidence does not exist, revenue is deferred and recognized on a
straight-line basis over the remaining term of the maintenance period
after all other elements have been delivered.
- Revenue relating to proprietary films is recognized in accordance with
Statement of Position (SOP) 00-02, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS
OF FILMS. Revenue from the theatrical release of feature films is
recognized at the time of exhibition based on the Company's participation
in box office receipts. Revenue from television licensing is recognized
when the film or program is complete in accordance with the terms of the
arrangement, the license period has begun and is available for telecast or
exploitation.
II-50
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
COST OF SALES
Cost of sales primarily includes actual product cost, provision for obsolete
inventory, buying allowances received from suppliers, shipping and handling
costs and warehouse costs.
ADVERTISING COSTS
Advertising costs generally are expensed as incurred. Advertising expense
aggregated $112 million, $45 million and $47 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Co-operative marketing costs are
recognized as advertising expense to the extent an identifiable benefit is
received and fair value of the benefit can be reasonably measured. Otherwise,
such costs are recorded as a reduction of revenue.
STOCK-BASED COMPENSATION
FASB STATEMENT 123R
As more fully described in note 13, the Company has granted to its employees
and employees of its subsidiaries options, stock appreciation rights ("SARs")
and options with tandem SARs to purchase shares of Liberty common stock
(collectively, "Awards"). In addition, QVC had granted combination stock
options/SARs ("QVC Awards") to certain of its employees. In December 2004, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123 (revised 2004), "SHARE-BASED PAYMENT" ("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 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.
The Company adopted Statement 123R effective January 1, 2006. In connection
with such adoption, the Company recorded an $89 million transition adjustment,
which is net of related income taxes of $31 million. Under Statement 123R, the
QVC Awards were required to be bifurcated into a liability award and an equity
award. Previously, 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 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 January 1, 2004
II-51
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
of $98 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.
Included in selling, general and administrative expenses in the accompanying
consolidated statements of operations are the following amounts of stock-based
compensation (amounts in millions):
Years ended:
December 31, 2006........................................... $67
December 31, 2005........................................... $52
December 31, 2004........................................... $98
As of December 31, 2006, the total unrecognized compensation cost related to
unvested Liberty equity awards was approximately $59 million. Such amount will
be recognized in the Company's consolidated statements of operations over a
weighted average period of approximately 2 years.
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 intrinsic value of the
options at the balance sheet date. The Company accounted for QVC Awards using
fixed-plan accounting. The following table illustrates the effect on earnings
from continuing operations and earnings per share for the years ended
December 31, 2005 and 2004 as 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.
YEARS ENDED
DECEMBER 31,
-------------------
2005 2004
-------- --------
(AMOUNTS IN
MILLIONS,
EXCEPT PER
SHARE
AMOUNTS)
Earnings (loss) from continuing operations.................. $ (43) 105
Add stock compensation as determined under the intrinsic
value method, net of taxes.............................. 2 2
Deduct stock compensation as determined under the fair
value method, net of taxes.............................. (42) (41)
----- ---
Pro forma earnings (loss) from continuing operations........ $ (83) 66
===== ===
Basic and diluted earnings (loss) from continuing operations
per share:
As reported............................................... $(.02) .04
Pro forma................................................. $(.03) .02
IMPACT OF SPIN OFF TRANSACTIONS
In connection with the spin off of Liberty subsidiaries Liberty Media
International ("LMI") and Discovery Holding Company ("DHC") in 2004 and 2005,
respectively, certain employees of Liberty
II-52
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
received LMI and DHC options. Liberty records compensation expense related to
these awards based on the grant date fair value over the remaining vesting
period.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying value amounts and income tax bases of assets and liabilities and the
expected benefits of utilizing net operating loss and tax credit carryforwards.
The deferred tax assets and liabilities are calculated using enacted tax rates
in effect for each taxing jurisdiction in which the company operates for the
year in which those temporary differences are expected to be recovered or
settled. Net deferred tax assets are then reduced by a valuation allowance if
the Company believes it more-likely-than-not such net deferred tax assets will
not be realized. The effect on deferred tax assets and liabilities of an enacted
change in tax rates is recognized in income in the period that includes the
enactment date.
EARNINGS (LOSS) PER COMMON SHARE
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.
LIBERTY SERIES A AND SERIES B COMMON STOCK
The basic EPS calculation is based on 2,803 million weighted average
outstanding shares of Liberty common stock for the period from January 1, 2006
to May 10, 2006, and 2,795 million and 2,856 million weighted average shares
outstanding for the years ended December 31, 2005 and 2004, respectively. The
diluted EPS calculation for the period from January 1, 2006 to May 10, 2006 and
for the year ended December 31, 2004 includes 5 million and 14 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 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 (loss) from discontinued operations per common share is as follows:
January 1, 2006 to May 10, 2006............................. $ --
Year ended December 31, 2005................................ $ --
Year ended December 31, 2004................................ $(.02)
LIBERTY CAPITAL COMMON STOCK
Liberty Capital EPS for the period from the Restructuring to December 31,
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
II-53
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
diluted EPS for the period from the Restructuring to December 31, 2006 are
approximately 3 million potential common shares because their inclusion would be
anti-dilutive.
Earnings from discontinued operations per common share for the period from
the Restructuring to December 31, 2006 is $1.62.
LIBERTY INTERACTIVE COMMON STOCK
Liberty Interactive EPS for the period from the Restructuring to
December 31, 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 (670 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 the period from the
Restructuring to December 31, 2006 are approximately 13 million potential common
shares because their inclusion would be anti-dilutive.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparability with
the 2006 presentation.
ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("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 nontemporary declines in value of its
investments and (v) its estimates of retail related adjustments and allowances
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
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 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 155"). Statement 155,
among other things, amends Statement 133 and permits fair value remeasurement of
hybrid financial instruments that contain an embedded derivative that otherwise
would require bifurcation. Statement 155 is effective after the beginning of an
entity's first fiscal year that begins after September 15, 2006. The Company
intends to adopt the provisions of Statement 155 effective January 1, 2007 and
account for its senior exchangeable debentures at fair value rather than
bifurcating such debentures into a debt instrument and a derivative instrument
as
II-54
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
required by Statement 133. If the Company had adopted Statement 155 as of
December 31, 2006, it would have recorded an increase to long-term debt of
$1.9 billion, a decrease to long-term derivative instruments of $1.3 billion and
an increase to accumulated deficit of $600 million.
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.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "FAIR VALUE MEASUREMENTS"("Statement 157"), which defines
fair value, establishes a framework for measuring fair value under GAAP and
expands disclosures about fair value measurements. Statement 157 applies to
other accounting pronouncements that require or permit fair value measurements.
The new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those fiscal
years. Liberty is currently evaluating the potential impact of the adoption of
Statement 157 on its consolidated balance sheet, statements of operations and
comprehensive earnings (loss), and statements of cash flows.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115" ("Statement
159"). Statement 159 permits entities to choose to measure many financial
instruments, such as available-for-sale securities, and certain other items at
fair value and to recognize the changes in fair value of such instruments in the
entity's statement of operations. Currently under Statement of Financial
Accounting Standards No. 115, entities are required to recognize changes in fair
value of available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15, 2007. Liberty is currently
evaluating the potential impacts of Statement 159 on its financial statements
and has not made a determination as to which of its financial instruments, if
any, it will choose to apply the provisions of Statement 159.
II-55
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(4) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Cash paid for acquisitions:
Fair value of assets acquired............................. $1,494 1 79
Net liabilities assumed................................... (227) -- --
Deferred tax liabilities.................................. (48) -- --
Minority interest......................................... (72) -- 12
Exchange of cost investment............................... (235) -- --
Common stock issued....................................... (36) -- --
------ --- ---
Cash paid for acquisitions, net of cash acquired........ $ 876 1 91
====== === ===
Cash paid for interest...................................... $ 510 477 515
====== === ===
Cash paid for income taxes.................................. $ 152 161 49
====== === ===
(5) DISCONTINUED OPERATIONS
SALE OF OPENTV CORP.
In October 2006, Liberty entered into an agreement with an unaffiliated
third party to sell Liberty's controlling interest in OpenTV Corp. ("OPTV") for
cash consideration of $132 million. As part of an agreement with OPTV, Liberty
would pay up to $20 million of the cash proceeds to OPTV on the first
anniversary of the closing, subject to the satisfaction of certain conditions.
The sale was consummated on January 16, 2007. OPTV was attributed to the Capital
Group.
SALE OF ASCENT ENTERTAINMENT GROUP, INC.
In December 2006, Liberty entered into an agreement with an unaffiliated
third party to sell Liberty's 100% ownership interest in Ascent Entertainment
Group, Inc. ("AEG") for $332 million in cash and 2.05 million shares of common
stock of the buyer valued at approximately $50 million. AEG's primary operating
subsidiary is On Command Corporation. Consummation of the transaction is subject
to customary closing conditions, including regulatory approval, and is expected
to occur in mid-2007. Subsequent to the closing, if consummated, Liberty would
own approximately 9.9% of the buyer's outstanding common stock. AEG was
attributed to the Capital Group.
SPIN OFF OF DISCOVERY HOLDING COMPANY
On July 21, 2005 (the "DHC Spin Off Date"), Liberty completed the spin off
(the "DHC Spin Off") of DHC to its shareholders. The DHC Spin Off was effected
as a dividend by Liberty to holders of its Series A and Series B common stock of
shares of DHC Series A and Series B common stock, respectively. 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. The DHC Spin Off did not involve the payment of any consideration
by the holders of Liberty common stock and is intended to qualify as a tax-free
transaction. At the time of the DHC Spin Off, DHC's assets were
II-56
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
comprised of Liberty's 100% ownership interest in Ascent Media Group, LLC,
Liberty's 50% ownership interest in Discovery Communications, Inc. and
$200 million in cash.
Following the DHC Spin Off, DHC and Liberty operate independently, and
neither has any stock ownership, beneficial or otherwise, in the other. In
connection with the DHC Spin Off, DHC and Liberty entered into certain
agreements in order to govern certain of the ongoing relationships between
Liberty and DHC after the DHC Spin Off and to provide for an orderly transition.
These agreements include a Reorganization Agreement, a Facilities and Services
Agreement, a Tax Sharing Agreement and a Short-Term Credit Facility.
The DHC Reorganization Agreement provides for, among other things, the
principal corporate transactions required to effect the DHC Spin Off and cross
indemnities. Pursuant to the DHC Facilities and Services Agreement, Liberty
provides DHC with office space and certain general and administrative services
including legal, tax, accounting, treasury, engineering and investor relations
support. DHC reimburses Liberty for direct, out-of-pocket expenses incurred by
Liberty in providing these services and for DHC's allocable portion of
facilities costs and costs associated with any shared services or personnel.
Under the DHC Tax Sharing Agreement, Liberty generally is responsible for
U.S. federal, state and local and foreign income taxes owing with respect to
consolidated returns which include both Liberty and DHC. DHC is responsible for
all other taxes with respect to returns which include DHC, but do not include
Liberty whether accruing before, on or after the DHC Spin Off. The DHC Tax
Sharing Agreement requires that DHC will not take, or fail to take, any action
where such action, or failure to act, would be inconsistent with or prohibit the
DHC Spin Off from qualifying as a tax-free transaction. Moreover, DHC has
indemnified Liberty for any loss resulting from such action or failure to act,
if such action or failure to act precludes the DHC Spin Off from qualifying as a
tax-free transaction.
SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC.
On June 7, 2004 (the "LMI Spin Off Date"), Liberty completed the spin off
(the "LMI Spin Off") of its wholly-owned subsidiary, Liberty Media
International, Inc., to its shareholders. Substantially all of the assets and
businesses of LMI were attributed to Liberty's former International Group
segment. In connection with the LMI Spin Off, holders of Liberty common stock on
June 1, 2004 received 0.05 of a share of LMI Series A common stock for each
share of Liberty Series A common stock owned and 0.05 of a share of LMI
Series B common stock for each share of Liberty Series B common stock owned. The
LMI Spin Off is intended to qualify as a tax-free spin off. For accounting
purposes, the LMI Spin Off is deemed to have occurred on June 1, 2004, and no
gain or loss was recognized by Liberty in connection with the LMI Spin Off due
to the pro rata nature of the distribution.
Following the LMI Spin Off, LMI and Liberty operate independently. In
connection with the LMI Spin Off, LMI and Liberty entered into certain
agreements in order to govern certain of the ongoing relationships between
Liberty and LMI after the LMI Spin Off and to provide for an orderly transition.
These agreements include a Reorganization Agreement and a Tax Sharing Agreement.
The LMI Reorganization Agreement provided for, among other things, the
principal corporate transactions required to effect the LMI Spin Off and cross
indemnities.
Under the LMI Tax Sharing Agreement, Liberty generally is responsible for
U.S. federal, state and local and foreign income taxes owing with respect to
consolidated returns which include both Liberty
II-57
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
and LMI. LMI is responsible for all other taxes with respect to returns which
include LMI, but do not include Liberty whether accruing before, on or after the
LMI Spin Off. The LMI Tax Sharing Agreement requires that LMI will not take, or
fail to take, any action where such action, or failure to act, would be
inconsistent with or prohibit the LMI Spin Off from qualifying as a tax-free
transaction. Moreover, LMI has indemnified Liberty for any loss resulting from
such action or failure to act, if such action or failure to act precludes the
LMI Spin Off from qualifying as a tax-free transaction.
In the third quarter of 2005, Liberty filed its 2004 tax return and adjusted
the amount of net operating loss and capital loss carryforwards allocated to
LMI. Such adjustment resulted in an increase to Liberty's deferred income tax
liabilities and a reduction of additional paid-in capital of $28 million.
DMX MUSIC
During the fourth quarter of 2004, the executive committee of the board of
directors of Liberty approved a plan to dispose of Liberty's approximate 56%
ownership interest in Maxide Acquisition, Inc. (d/b/a DMX Music, "DMX"). On
February 14, 2005, DMX commenced proceedings under Chapter 11 of the United
States Bankruptcy Code. DMX entered into an arrangement, subject to the approval
by the Bankruptcy Court, to sell substantially all of its operating assets to an
independent third party. On May 16, 2005, the Bankruptcy Court entered a written
order approving the transaction, and the sale transaction was completed. As a
result of the DMX Bankruptcy filing, Liberty deconsolidated DMX effective
December 31, 2004. In connection with its decision to dispose of its ownership
interest, Liberty recognized a $23 million impairment loss to write down the
carrying value of the net assets of DMX to their estimated fair value based upon
the aforementioned arrangement to sell the assets. Such loss has been included
in loss from discontinued operations in the accompanying consolidated financial
statements for the year ended December 31, 2004.
The consolidated financial statements and accompanying notes of Liberty have
been prepared reflecting OPTV, AEG, DHC, LMI and DMX as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of these subsidiaries have been excluded from the respective captions in
the accompanying consolidated balance sheets, statements of operations,
statements of comprehensive earnings (loss) and statements of cash flows and
have been reported separately in such consolidated financial statements.
Certain combined statement of operations information for OPTV, AEG, DHC, LMI
and DMX, which is included in earnings (loss) from discontinued operations, is
as follows:
YEARS ENDED
DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Revenue..................................................... $335 704 2,081
Loss before income taxes and minority interests............. $(30) (1) (159)
Liberty's tax basis in the common stock of each of OPTV and AEG as of
December 31, 2006 exceeds their respective carrying amounts reported for
financial reporting purposes. As of December 31, 2006, Liberty has recognized a
deferred tax asset of $236 million for this excess tax basis with an offsetting
deferred tax benefit, which is included in earnings from discontinued operations
in the accompanying consolidated statement of operations. In 2004, Liberty
recognized a similar deferred tax benefit of $38 million related to its tax
basis in DMX and reported such benefit in its income tax
II-58
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
benefit for continuing operations for the year ended December 31, 2004. Liberty
has revised its 2004 presentation to report the deferred tax benefit for DMX as
a component of loss from discontinued operations.
(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in AFS securities, which are recorded at their respective fair
market values, and other cost investments are summarized as follows:
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
Capital Group
News Corporation.......................................... $11,158 8,171
Time Warner Inc. ("Time Warner")(1)....................... 3,728 2,985
Sprint Nextel Corporation ("Sprint")(2)................... 1,651 2,162
Motorola, Inc. ("Motorola")(3)............................ 1,522 1,672
Other AFS equity securities(4)............................ 830 964
Other AFS debt securities(5).............................. 135 372
Other cost investments and related receivables............ 34 79
------- ------
Total attributed Capital Group.......................... 19,058 16,405
------- ------
Interactive Group
IAC/InterActiveCorp ("IAC")............................... 2,572 1,960
Other AFS securities...................................... -- 124
------- ------
Total attributed Interactive Group...................... 2,572 2,084
------- ------
Consolidated Liberty........................................ 21,630 18,489
Less short-term investments............................... (8) --
------- ------
$21,622 18,489
======= ======
------------------------
(1) Includes $198 million and $158 million of shares pledged as collateral for
share borrowing arrangements at December 31, 2006 and 2005, respectively.
(2) Includes $170 million and $94 million of shares pledged as collateral for
share borrowing arrangements at December 31, 2006 and 2005, respectively.
(3) Includes $1,068 million and $1,173 million of shares pledged as collateral
for share borrowing arrangements at December 31, 2006 and 2005,
respectively.
(4) Includes $46 million and $156 million of shares pledged as collateral for
share borrowing arrangements at December 31, 2006 and 2005, respectively.
(5) At December 31, 2006, other AFS debt securities include $127 million of
investments in third-party marketable debt securities held by Liberty parent
and $8 million of such securities held by subsidiaries of Liberty. At
December 31, 2005, such investments aggregated $372 million and zero,
respectively.
II-59
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
NEWS CORPORATION
In December 2006, Liberty announced that it had entered into an exchange
agreement with News Corporation pursuant to which, if completed, Liberty would
exchange its approximate 16.2% ownership interest in News Corporation for a
subsidiary of News Corporation, which would own News Corporation's approximate
38.5% interest in The DirecTV Group, Inc., three regional sports television
networks and approximately $550 million in cash. Consummation of the exchange,
which is subject to various closing conditions, including approval by News
Corporation's shareholders, regulatory approval and receipt of a favorable
ruling from the IRS confirming that the exchange is tax-free, is expected in mid
2007.
In November 2004, Liberty entered into total return equity swaps with a
financial institution with respect to 92 million shares of News Corporation
voting stock ("NWS"). Pursuant to the terms of the swap, the financial
institution acquired the 92 million shares of NWS for Liberty's benefit for a
weighted average strike price of $17.48. In December 2004, Liberty elected to
terminate the swaps. In connection with such termination, Liberty delivered
86.9 million shares of News Corporation non-voting stock ("NWSA") with a fair
market value of $1,608 million in exchange for the 92 million shares of NWS with
a fair market value of $1,749 million. Accordingly, Liberty recognized a pre-tax
gain on the swap transaction of $141 million, which is included in realized and
unrealized gains on financial instruments and a pre-tax gain on the exchange of
NWSA for NWS of $710 million, which is included in gains on dispositions. At
December 31, 2006, Liberty has an approximate 16.2% economic interest and an
approximate 19.1% voting interest in News Corporation.
IAC/INTERACTIVECORP
Effective August 9, 2005, IAC completed the spin-off of its subsidiary,
Expedia, Inc. ("Expedia"). Shareholders of IAC, including Liberty, received one
share of Expedia for each share of IAC owned. Subsequent to the spin-off of
Expedia, Liberty owned approximately 20% of the outstanding Expedia common stock
representing a 52% voting interest. However, under existing governance
arrangements, the Chairman of Expedia is currently entitled to vote Liberty's
shares of Expedia, subject to certain limitations. As Liberty has appointed two
out of ten members of Expedia's board of directors, it accounts for this
investment using the equity method of accounting. Liberty allocated its pre-spin
off carrying value in IAC between IAC and Expedia based on the relative trading
prices of IAC and Expedia. Unrealized holding gains included in the carrying
value allocated to Expedia were reversed as part of this allocation.
At December 31, 2006, Liberty owns approximately 24% of IAC common stock
representing an approximate 57% voting interest. However, under existing
governance arrangements, the Chairman of IAC is currently entitled to vote
Liberty's shares, and due to the fact that Liberty has rights to appoint only
two of thirteen members to the IAC board of directors, Liberty's ability to
exert significant influence over IAC is limited at this time. Accordingly,
Liberty accounts for this investment as an AFS security.
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS
During the years ended December 31, 2006, 2005 and 2004, Liberty determined
that certain of its AFS securities (including News Corporation in 2005) and cost
investments experienced nontemporary declines in value. The primary factors
considered by Liberty in determining the timing of the recognition for the
majority of these impairments was the length of time the investments traded
below
II-60
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Liberty's cost bases and the lack of near-term prospects for recovery in the
stock prices. As a result, the carrying amounts of such investments were
adjusted to their respective fair values based primarily on quoted market prices
at the balance sheet date. These adjustments are reflected as nontemporary
declines in fair value of investments in the consolidated statements of
operations. The amount of nontemporary decline recognized for Liberty's News
Corporation voting shares in 2005 was $352 million.
UNREALIZED HOLDINGS GAINS AND LOSSES
Unrealized holding gains and losses related to investments in AFS securities
are summarized below.
DECEMBER 31, 2006 DECEMBER 31, 2005
----------------------- ---------------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- --------------
(AMOUNTS IN MILLIONS)
Gross unrealized holding gains................... $9,335 -- 5,459 17
Gross unrealized holding losses.................. $ (1) -- (27) --
The aggregate fair value of securities with unrealized holding losses at
December 31, 2006 was $6 million. None of these securities had unrealized losses
for more than 12 continuous months.
(7) FINANCIAL INSTRUMENTS
The Company's financial instruments are summarized as follows:
DECEMBER 31,
-------------------
TYPE OF DERIVATIVE 2006 2005
------------------ -------- --------
(AMOUNTS IN
MILLIONS)
ASSETS
Equity collars............................................ $1,218 1,568
Put spread collars........................................ -- 133
Other..................................................... 361 83
------ ------
1,579 1,784
Less current portion...................................... (239) (661)
------ ------
$1,340 1,123
====== ======
LIABILITIES
Borrowed shares........................................... $1,482 1,581
Exchangeable debenture call option obligations............ 1,280 927
Put options............................................... -- 342
Equity collars............................................ 416 160
Other..................................................... 12 16
------ ------
3,190 3,026
Less current portion...................................... (1,484) (1,939)
------ ------
$1,706 1,087
====== ======
II-61
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
EQUITY COLLARS AND PUT OPTIONS
The Company has entered into equity collars, written put and call options
and other financial instruments to manage market risk associated with its
investments in certain marketable securities. These instruments are recorded at
fair value based on option pricing models. Equity collars provide the Company
with a put option that gives the Company the right to require the counterparty
to purchase a specified number of shares of the underlying security at a
specified price at a specified date in the future. Equity collars also provide
the counterparty with a call option that gives the counterparty the right to
purchase the same securities at a specified price at a specified date in the
future. The put option and the call option generally have equal fair values at
the time of origination resulting in no cash receipts or payments.
BORROWED SHARES
From time to time and in connection with certain of its derivative
instruments, Liberty borrows 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 are
owned by Liberty have been posted as collateral with the counterparty. These
share borrowing arrangements can be terminated at any time at Liberty's option
by delivering shares to the counterparty. The counterparty can terminate these
arrangements at any time. 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 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.
EXCHANGEABLE DEBENTURE CALL OPTION OBLIGATIONS
Liberty has issued senior exchangeable debentures which are exchangeable for
the value of a specified number of shares of Sprint and Embarq Corporation
common stock, Motorola common stock, Viacom Class B and CBS Corporation Class B
common stock or Time Warner common stock, as applicable. (See note 9 for a more
complete description of the exchangeable debentures.)
Under Statement 133, the call option feature of the exchangeable debentures
is reported separately from the long-term debt portion in Liberty's consolidated
balance sheets at fair value. Changes in the fair value of the call option
obligations are recognized as unrealized gains (losses) on derivative
instruments in Liberty's consolidated statements of operations.
II-62
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS
Realized and unrealized gains (losses) on financial instruments are
comprised of changes in the fair value of the following:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Exchangeable debenture call option obligations.............. $(353) 172 (129)
Equity collars.............................................. (59) 311 (941)
Borrowed shares............................................. (32) (205) (227)
Put options................................................. -- (66) 2
Other derivatives........................................... 165 45 11
----- ---- ------
$(279) 257 (1,284)
===== ==== ======
(8) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Liberty has various investments accounted for using the equity method. The
following table includes Liberty's carrying amount and percentage ownership of
the more significant investments in affiliates at December 31, 2006 and the
carrying amount at December 31, 2005:
DECEMBER 31, DECEMBER 31,
2006 2005
------------------------ ------------
PERCENTAGE CARRYING CARRYING
OWNERSHIP AMOUNT AMOUNT
---------- -------- ------------
(DOLLAR AMOUNTS IN MILLIONS)
Expedia..................................................... 21% $1,254 1,213
GSN......................................................... 50% 253 255
Court TV.................................................... N/A -- 297
Other....................................................... various 335 143
------ -----
$1,842 1,908
====== =====
EXPEDIA
IAC completed the spin off of Expedia on August 9, 2005. Accordingly, the
Company recorded its share of earnings of Expedia for the five months ended
December 31, 2005. The fair value of the
II-63
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Company's investment in Expedia was $1,452 million and $1,659 million at
December 31, 2006 and 2005, respectively. Summarized unaudited financial
information for Expedia is as follows:
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
Current assets.............................................. $1,183 590
Property and equipment...................................... 137 91
Goodwill.................................................... 5,861 5,860
Intangible assets........................................... 1,029 1,177
Other assets................................................ 59 39
------ -----
Total assets.............................................. $8,269 7,757
====== =====
Current liabilities......................................... $1,400 1,438
Deferred income taxes....................................... 369 369
Other liabilities........................................... 534 144
Minority interest........................................... 62 72
Stockholders' equity........................................ 5,904 5,734
------ -----
Total liabilities and equity.............................. $8,269 7,757
====== =====
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
Revenue..................................................... $2,238 2,119
Cost of revenue............................................. (503) (480)
------ ------
Gross profit.............................................. 1,735 1,639
Selling, general and administrative expenses................ (1,273) (1,116)
Amortization................................................ (111) (126)
------ ------
Operating income.......................................... 351 397
Interest income............................................. 32 51
Other income (expense)...................................... 1 (33)
Income tax expense.......................................... (139) (186)
------ ------
Net earnings.............................................. $ 245 229
====== ======
II-64
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(9) LONG-TERM DEBT
Debt is summarized as follows:
OUTSTANDING CARRYING VALUE
PRINCIPAL DECEMBER 31,
DECEMBER 31, -------------------
2006 2006 2005
------------ -------- --------
(AMOUNTS IN MILLIONS)
Capital Group
Senior exchangeable debentures
4% Senior Exchangeable Debentures due 2029.............. $ 869 254 251
3.75% Senior Exchangeable Debentures due 2030........... 810 234 231
3.5% Senior Exchangeable Debentures due 2031............ 600 238 235
3.25% Senior Exchangeable Debentures due 2031........... 551 119 117
0.75% Senior Exchangeable Debentures due 2023........... 1,750 1,637 1,552
Subsidiary debt........................................... 158 158 37
------- ------ ------
Total attributed Capital Group.......................... 4,738 2,640 2,423
------- ------ ------
Interactive Group
Senior notes and debentures
3.5% Senior Notes due 2006.............................. -- -- 121
Floating Rate Senior Notes due 2006..................... -- -- 1,247
7.875% Senior Notes due 2009............................ 670 667 666
7.75% Senior Notes due 2009............................. 234 234 235
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 facilities................................ 3,225 3,225 800
Other subsidiary debt..................................... 67 67 67
------- ------ ------
Total attributed Interactive Group...................... 6,400 6,383 5,326
------- ------ ------
Total consolidated Liberty.............................. $11,138 9,023 7,749
=======
Less current maturities................................. (114) (1,379)
------ ------
Total long-term debt.................................... $8,909 6,370
====== ======
SENIOR NOTES AND DEBENTURES
Interest on the Senior Notes and Senior Debentures is payable semi-annually
based on the date of issuance.
The Senior Notes and Senior Debentures are stated net of an aggregate
unamortized discount of $17 million at each of December 31, 2006 and 2005. Such
discount is being amortized to interest expense in the accompanying consolidated
statements of operations.
SENIOR EXCHANGEABLE DEBENTURES
Each $1,000 debenture of Liberty's 4% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 11.4743 shares of Sprint
common stock and .5737 shares of Embarq
II-65
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Corporation ("Embarq"), which Sprint spun off to its shareholders in May 2006.
Liberty may, at its election, pay the exchange value in cash, Sprint and Embarq
common stock or a combination thereof. Liberty, at its option, may redeem the
debentures, in whole or in part, for cash generally equal to the face amount of
the debentures plus accrued interest.
Each $1,000 debenture of Liberty's 3.75% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 8.3882 shares of Sprint
common stock and .4194 shares of Embarq common stock. Liberty may, at its
election, pay the exchange value in cash, Sprint and Embarq common stock or a
combination thereof. Liberty, at its option, may redeem the debentures, in whole
or in part, for cash equal to the face amount of the debentures plus accrued
interest.
Each $1,000 debenture of Liberty's 3.5% Senior Exchangeable Debentures (the
"Motorola Exchangeables") is exchangeable at the holder's option for the value
of 36.8189 shares of Motorola common stock and, prior to the cash distribution
described below, 4.0654 shares of Freescale Semiconductor, Inc. ("Freescale"),
which Motorola spun off to its shareholders in December 2004. Such exchange
value is payable, at Liberty's option, in cash, Motorola stock or a combination
thereof. Liberty, at its option, may redeem the debentures, in whole or in part,
for cash generally equal to the adjusted principal amount of the debentures plus
accrued interest. As a result of the cash distribution described below, the
adjusted principal amount of each $1,000 debenture is $837.38. Effective
December 1, 2006, a consortium of private equity firms purchased all of the
common stock of Freescale, including the Freescale common stock owned by
Liberty. Pursuant to the terms of the indenture covering the Motorola
Exchangeables, Liberty announced that it would make a cash distribution of
$162.62 per $1,000 bond to holders of such bonds. Such distribution was made in
January 2007, and Liberty reduced its outstanding debt by $97.6 million.
Each $1,000 debenture of Liberty's 3.25% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 9.2833 shares of Viacom
Class B common stock and 9.2833 shares of CBS Corporation ("CBS") Class B common
stock, which Viacom spun off to its shareholders in December 2005. Such exchange
value is payable at Liberty's option in cash, Viacom and CBS stock or a
combination thereof. Liberty, at its option, may redeem the debentures, in whole
or in part, for cash equal to the face amount of the debentures plus accrued
interest.
Each $1,000 debenture of Liberty's 0.75% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 57.4079 shares of Time
Warner common stock. Liberty may, at its election, pay the exchange value in
cash, Time Warner common stock, shares of Liberty common stock or a combination
thereof. On or after April 5, 2008, Liberty, at its option, may redeem the
debentures, in whole or in part, for shares of Time Warner common stock, cash or
any combination thereof equal to the face amount of the debentures plus accrued
interest. On March 30, 2008, March 30, 2013 or March 30, 2018, each holder may
cause Liberty to purchase its exchangeable debentures, and Liberty, at its
election, may pay the purchase price in shares of Time Warner common stock,
cash, Liberty common stock, or any combination thereof.
Interest on the Company's exchangeable debentures is payable semi-annually
based on the date of issuance. At maturity, all of the Company's exchangeable
debentures are payable in cash.
In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported at fair value and separately from the
long-term debt in the consolidated balance sheet. The reported amount of the
long-term debt portion of the exchangeable debentures is calculated as the
difference between the face amount of the debentures and the fair value of the
call option feature on
II-66
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
the date of issuance. The long-term debt is accreted to its face amount over the
expected term of the debenture using the effective interest method. Accordingly,
at December 31, 2006, the difference between the principal amount and the
carrying value of the long-term debt portion is the unamortized fair value of
the call option feature that was recorded at the date of issuance of the
respective debentures. Accretion related to the Company's exchangeable
debentures aggregated $95 million, $89 million and $83 million during the years
ended December 31, 2006, 2005 and 2004, respectively, and is included in
interest expense in the accompanying consolidated statements of operations.
QVC BANK CREDIT FACILITIES
Effective May 20, 2005, QVC entered into an unsecured $2 billion bank credit
facility. In March 2006, such facility was refinanced with a new unsecured
$3.5 billion bank credit facility, which was subsequently amended on October 4,
2006 (the "March 2006 Credit Agreement"). The March 2006 Credit Agreement 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 was drawn on September 18, 2006, a
$600 million multi-currency term loan that was drawn in U.S. dollars on
September 18, 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
a rate equal to (i) LIBOR for the interest period selected by QVC plus a margin
that varies based on QVC's leverage ratio or (ii) the higher of the Federal
Funds Rate plus 0.50% or the prime rate announced by JP Morgan Chase Bank, N.A.
from time to time. The weighted average interest rate for all borrowings under
the March 2006 Credit Agreement at December 31, 2006 was 6.11%. QVC is required
to pay a commitment fee quarterly in arrears on the unused portion of the
commitments.
On October 4, 2006, QVC entered into a new credit agreement (the
"October 2006 Credit Agreement"), which provides for an additional unsecured
$1.75 billion credit facility, consisting of an $800 million initial term loan
made on October 13, 2006 and $950 million of delayed draw term loans to be made
from time to time upon the request of QVC. The delayed draw term loans are
available until September 30, 2007 and are subject to reductions in the
principal amount available starting on March 31, 2007. The loans bear interest
at a rate equal to (i) LIBOR for the interest period selected by QVC plus a
margin that varies based on QVC's leverage ratio or (ii) the higher of the
Federal Funds Rate plus 0.50% or the prime rate announced by Wachovia Bank, N.A.
from time to time. The weighted average interest rate for all borrowings under
the October 2006 Credit Agreement at December 31, 2006 was 6.10%. QVC is
required to pay a commitment fee quarterly in arrears on the unused portion of
the commitments. The loans are scheduled to mature on October 4, 2011.
The March 2006 Credit Agreement and the October 2006 Credit Agreement
contain restrictive covenants, which require among other things, the maintenance
of certain financial ratios and include limitations on indebtedness, liens,
encumbrances, dispositions, guarantees and dividends. QVC was in compliance with
its debt covenants at December 31, 2006. QVC's ability to borrow the unused
portion of its credit agreements is dependent on its continuing compliance with
such covenants both before and after giving effect to such additional borrowing.
II-67
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
QVC INTEREST RATE SWAP ARRANGEMENTS
During 2006, QVC entered into seven separate interest rate swap arrangements
with an aggregate notional amount of $1,400 million to manage the cash flow risk
associated with interest payments on its variable rate debt. The swap
arrangements provide for QVC to make fixed payments at a rate of 4.9575% and to
receive variable payments at 3 month LIBOR. QVC also entered into three separate
interest rate swap arrangements with an aggregate notional amount of
$800 million. These swap arrangements provide for QVC to make fixed payments at
a rate of 5.2928% and to receive variable payments at 3 month LIBOR. All of the
swap arrangements expire in March 2011 contemporaneously with the maturity of
the March 2006 Credit Agreement. Liberty accounts for the swap arrangements as
cash flow hedges with the effective portions of changes in the fair value
reflected in other comprehensive earnings in the accompanying consolidated
balance sheet.
OTHER SUBSIDIARY DEBT
Other subsidiary debt at December 31, 2006 is comprised of capitalized
satellite transponder lease obligations and Starz Media bank debt.
FIVE YEAR MATURITIES
The U.S. dollar equivalent of the annual principal maturities of Liberty's
debt for each of the next five years is as follows (amounts in millions):
2007....................................................... $ 114
2008....................................................... $1,768
2009....................................................... $ 969
2010....................................................... $ 69
2011....................................................... $3,240
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 is as follows:
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
Fixed rate senior notes..................................... $1,678 1,838
Senior debentures........................................... $1,422 1,347
Senior exchangeable debentures, including call option
obligation................................................ $4,361 3,858
Liberty believes that the carrying amount of its subsidiary debt, which is
primarily variable rate debt, approximated fair value at December 31, 2006.
II-68
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(10) INCOME TAXES
Income tax benefit (expense) consists of:
YEARS ENDED
DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Current:
Federal................................................... $(513) (100) (178)
State and local........................................... (92) (75) (61)
Foreign................................................... (112) (88) (114)
----- ---- ----
(717) (263) (353)
----- ---- ----
Deferred:
Federal................................................... 362 219 123
State and local........................................... 99 172 63
Foreign................................................... 4 (2) 8
----- ---- ----
465 389 194
----- ---- ----
Income tax benefit (expense)................................ $(252) 126 (159)
===== ==== ====
Income tax benefit (expense) differs from the amounts computed by applying
the U.S. federal income tax rate of 35% as a result of the following:
YEARS ENDED
DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Computed expected tax benefit (expense)..................... $(336) 59 (92)
Change in estimated foreign and state tax rates............. 130 147 2
State and local income taxes, net of federal income taxes... (34) 7 (4)
Foreign taxes, net of foreign tax credits................... (20) (31) (47)
Change in valuation allowance affecting tax expense......... 76 (40) (3)
Impairment of goodwill not deductible for tax purposes...... (39) -- --
Disposition of nondeductible goodwill in sales
transaction............................................... (43) -- --
Minority interest........................................... (10) (10) (6)
Dividends received deduction................................ 12 12 --
Disqualifying disposition of incentive stock options not
deductible for book purposes.............................. 14 -- --
Other, net.................................................. (2) (18) (9)
----- --- ----
Income tax benefit (expense)................................ $(252) 126 (159)
===== === ====
II-69
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below:
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
Deferred tax assets:
Net operating and capital loss carryforwards.............. $ 470 513
Accrued stock compensation................................ 79 90
Other future deductible amounts........................... 485 399
------ -----
Deferred tax assets..................................... 1,034 1,002
Valuation allowance..................................... (93) (155)
------ -----
Net deferred tax assets................................. 941 847
------ -----
Deferred tax liabilities:
Investments............................................... 6,885 6,048
Intangible assets......................................... 2,362 2,523
Discount on exchangeable debentures....................... 981 1,006
Other..................................................... 369 89
------ -----
Deferred tax liabilities................................ 10,597 9,666
------ -----
Net deferred tax liabilities................................ $9,656 8,819
====== =====
The Company's deferred tax assets and liabilities are reported in the
accompanying consolidated balance sheets as follows:
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
Current deferred tax asset.................................. $ (128) (46)
Current deferred tax liabilities............................ -- 169
Long-term deferred tax liabilities.......................... 9,784 8,696
------ -----
Net deferred tax liabilities................................ $9,656 8,819
====== =====
The Company's valuation allowance decreased $76 million in 2006 related to
the recognition of a tax benefit and increased $14 million due to acquisitions.
At December 31, 2006, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $893 million
which, if not utilized to reduce taxable income in future periods, will expire
as follows: 2009: $351 million; 2011: $169 million and beyond 2011:
$373 million. Of the foregoing net operating and capital loss carryforward
amount, approximately $288 million is subject to certain limitations and may not
be currently utilized. The remaining $605 million is currently available to be
utilized to offset future taxable income of Liberty's consolidated tax group.
II-70
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
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 $2,218 million in cumulative interest expense
associated with the exchangeable debentures since the Company's 2001 split off
from AT&T Corp. ("AT&T"). Of that amount, $629 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 its exchangeable debentures are being used to offset taxable
income currently being generated.
The IRS has issued Technical Advice Memorandums ("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 its deferred tax expense. However,
Liberty would be required to make current federal income tax payments and may be
required to make interest payments to the IRS. These payments could prove to be
significant.
(11) STOCKHOLDERS' EQUITY
PREFERRED STOCK
Liberty's preferred stock is issuable, from time to time, with such
designations, preferences and relative participating, optional or other rights,
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in a resolution or resolutions providing for the issue of such
preferred stock adopted by Liberty's Board of Directors. As of December 31,
2006, no shares of preferred stock were issued.
COMMON STOCK
Liberty's Capital Series A common stock and Interactive Series A common
stock each has one vote per share, and its Capital Series B common stock and
Interactive Series B common stock each has ten votes per share. Each share of
the Series B common stock is exchangeable at the option of the holder for one
share of Series A common stock of the same group.
As of December 31, 2006, there were 2.3 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 December 31, 2006, there were 21.5 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
December 31, 2006, no shares of either Series C common stock were issued or
outstanding.
II-71
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
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.
PURCHASES OF COMMON STOCK
During the period from May 10, 2006 to December 31, 2006, the Company
repurchased 51.6 million shares of Liberty Interactive Series A common stock in
the open market for aggregate cash consideration of $954 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.
During the period from May 10, 2006 to December 31 2006, the Company sold
put options on Liberty Capital Series A common stock and Liberty Interactive
Series A common stock for aggregate cash proceeds of approximately $7 million.
All such put options expired out of the money prior to December 31, 2006. The
Company accounted 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
were recorded in derivative instrument liabilities at fair value and changes in
the fair value are included in realized and unrealized gains (losses) on
financial instruments in the accompanying consolidated statement of operations.
During 2005, Liberty sold put options with respect to shares of its
Series A common stock for net cash proceeds of $2 million. All such puts expired
out of the money in 2006.
During the year ended December 31, 2004, the Company acquired approximately
96.0 million shares of its Series B common stock from the estate and family of
the late founder of Liberty's former parent in exchange for approximately
105.4 million shares of Liberty Series A common stock.
On July 28, 2004, Liberty completed a transaction with Comcast pursuant to
which Liberty repurchased 120.3 million shares of its Series A common stock
(valued at $1,017 million) held by Comcast in exchange for 100% of the stock of
Encore ICCP, Inc. ("Encore ICCP"), a wholly owned subsidiary of Liberty. At the
time of the exchange, Encore ICCP held Liberty's 10% ownership interest in E!
Entertainment Television, Liberty's 100% ownership interest in International
Channel Networks, all of Liberty's rights, benefits and obligations under a TCI
Music contribution agreement, and $547 million in cash. The transaction also
resolved all litigation pending between Comcast and Liberty regarding the TCI
Music contribution agreement, to which Comcast succeeded as part of its
acquisition of AT&T Broadband in November of 2002. In connection with this
transaction, Liberty recognized a pre-tax gain on disposition of assets of
$387 million.
During 2004, Liberty entered into zero-strike call spreads ("Z-Call") with
respect to six million shares of its Series A common stock. Liberty net cash
settled all of its Z-calls during the first quarter of 2005 for net cash
proceeds of $63 million, which primarily represented the return of collateral
posted by Liberty in 2004. Liberty accounts for the Z-Calls pursuant to
Statement No. 150. Changes in the fair value of the Z-Calls are included in
realized and unrealized gains (losses) on derivative instruments in the
accompanying consolidated statement of operations.
II-72
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(12) TRANSACTIONS WITH OFFICERS AND DIRECTORS
CHAIRMAN'S EMPLOYMENT AGREEMENT
The Chairman's employment agreement provides for, among other things,
deferral of a portion (not in excess of 40%) of the monthly compensation payable
to him for all employment years commencing on or after January 1, 1993. The
deferred amounts will be payable in monthly installments over a 20-year period
commencing on the termination of the Chairman's employment, together with
interest thereon at the rate of 8% per annum compounded annually from the date
of deferral to the date of payment. The aggregate liability under this
arrangement at December 31, 2006 is $2.0 million, and is included in other
liabilities in the accompanying consolidated balance sheet.
The Chairman's employment agreement also provides that in the event of
termination of his employment with Liberty, he will be entitled to receive 240
consecutive monthly payments equal to $15,000 increased at the rate of 12% per
annum compounded annually from January 1, 1988 to the date payment commences
($115,350 per month as of December 31, 2006). Such payments would commence on
the first day of the month succeeding the termination of employment. In the
event of the Chairman's death, his beneficiaries would be entitled to receive
the foregoing monthly payments. The aggregate liability under this arrangement
at December 31, 2006 is $27.7 million, and is included in other liabilities in
the accompanying consolidated balance sheet.
The Company's Chairman deferred a portion of his monthly compensation under
his previous employment agreement with Tele-Communications, Inc. ("TCI"). The
Company assumed the obligation to pay that deferred compensation in connection
with the TCI/AT&T Merger in 1999. The deferred obligation (together with
interest at the rate of 13% per annum compounded annually), which aggregated
$15.7 million at December 31, 2006 and is included in other liabilities in the
accompanying consolidated balance sheets, is payable on a monthly basis,
following the occurrence of specified events, under the terms of the previous
employment agreement. The rate at which interest accrues on the deferred
obligation was established in 1983 pursuant to the previous employment
agreement.
OTHER
In September 2000, certain officers of Liberty purchased a 6% common stock
interest in a subsidiary for $1.3 million. Such subsidiary owned an indirect
interest in an entity that held certain of Liberty's investments in satellite
and technology related assets. Liberty and the officers entered into a
shareholders agreement in which the officers could require Liberty to purchase,
after five years, all or part of their common stock interest in exchange for
Liberty Series A stock at the then fair market value. In addition, Liberty had
the right to purchase, in exchange for Liberty Series A common stock, the common
stock interests held by the officers at fair market value at any time. During
2001, two of the officers resigned their positions with the Company, and the
Company purchased their respective interests in the subsidiary for the original
purchase price plus 6% interest. In December 2005, Liberty redeemed all of the
remaining shares of common stock of the subsidiary from the officers for
aggregate cash proceeds of $80.
(13) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
LIBERTY--INCENTIVE PLANS
Pursuant to the Liberty Media Corporation 2000 Incentive Plan, as amended
from time to time (the "Liberty Incentive Plan"), the Company has granted to
certain of its employees stock options,
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
SARs and stock options with tandem SARs (collectively, "Awards") to purchase
shares of Liberty Capital and Liberty Interactive Series A and Series B common
stock. The Liberty Incentive Plan provides for Awards to be made in respect of a
maximum of 48 million shares of common stock of Liberty. Liberty issues new
shares upon exercise of equity awards.
On December 17, 2002, shareholders of the Company approved the Liberty Media
Corporation 2002 Nonemployee Director Incentive Plan, as amended from time to
time (the "NDIP"). Under the NDIP, the Liberty Board of Directors (the "Liberty
Board") has the full power and authority to grant eligible nonemployee directors
stock options, SARs, stock options with tandem SARs, and restricted stock.
LIBERTY--GRANTS
Awards granted pursuant to the Liberty Incentive Plan and the NDIP during
2004 through the Restructuring in 2006 are provided in the table below. The
exercise prices in the table represent the exercise price on the date of grant
and have not been adjusted for the effects of the LMI Spin Off, the DHC Spin Off
or the Restructuring, as applicable.
WEIGHTED
WEIGHTED AVERAGE
NUMBER OF AVERAGE GRANT
GRANT GRANT AWARDS EXERCISE VESTING DATE FAIR
YEAR GRANT GROUP TYPE GRANTED PRICE PERIOD TERM VALUE
----- ------------------------------ -------- --------- -------- -------- -------- ---------
SERIES A AWARDS
2004 Employees..................... SARs 4,011,450 $ 8.45 5 years 10 years $4.36
2004 Non-employee directors........ SARs 66,000 $11.00 1 year 10 years $5.84
2005 Employees..................... Options 9,076,750 $ 8.26 4 years 7 years $2.34
2005 Non-employee directors........ SARs 55,000 $10.36 1 year 10 years $4.50
2006 Employees..................... Options 2,473,275 $ 8.24 4 years 7 years $2.28
2006 Non-employee directors........ Options 150,000 $ 8.70 1 year 10 years $2.74
SERIES B AWARDS
2005 Employees..................... Options 1,800,000 $ 9.21 3 years 10 years $4.67
Subsequent to the Restructuring, Liberty granted 10,018,000 options to
purchase Liberty Interactive Series A stock to officers and employees of certain
of its subsidiaries. Such options had an estimated weighted average grant-date
fair value of $4.94 per share.
The estimated fair values of the options noted above are based on the
Black-Scholes model. The key assumptions used in the model for purposes of these
calculations generally include the following: (a) a discount rate equal to the
Treasury rate for bonds with the same expected term as the Award; (b) a 21%
volatility factor; (c) the expected term of the Award; (d) the closing price of
the respective common stock on the date of grant; and (e) an expected dividend
rate of zero.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
LIBERTY--OUTSTANDING AWARDS
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 --
Forfeited................................................ (117) $18.69 --
Converted to Liberty Capital and Liberty Interactive..... (47,576) $10.34 (29,965) $10.92
------- -------
Outstanding at December 31, 2006........................... -- --
======= =======
LIBERTY CAPITAL LIBERTY INTERACTIVE
------------------------------------------- -------------------------------------------
SERIES A SERIES B SERIES A SERIES B
COMMON COMMON COMMON COMMON
STOCK WAEP STOCK WAEP 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 11,889 $21.48 7,491 $23.41
Granted.......................... -- -- 10,018 $18.04 --
Exercised........................ (39) $ 57.40 -- (187) $13.06 --
Forfeited........................ (21) $268.28 -- (217) $34.32 --
----- ----- ------ -----
Outstanding at December 31, 2006... 2,318 $ 93.24 1,498 $101.37 21,503 $19.71 7,491 $23.41
===== ===== ====== =====
Exercisable at December 31, 2006... 1,620 $100.33 1,438 $102.03 8,393 $22.59 7,191 $23.56
===== ===== ====== =====
The following table provides additional information about outstanding
options to purchase Liberty common stock at December 31, 2006.
NO. OF WEIGHTED AGGREGATE NO. OF AGGREGATE
OUTSTANDING WAEP OF AVERAGE INTRINSIC EXERCISABLE WAEP OF INTRINSIC
OPTIONS OUTSTANDING REMAINING VALUE OPTIONS EXERCISABLE VALUE
(000'S) OPTIONS LIFE (000'S) (000'S) OPTIONS (000'S)
----------- ----------- --------- --------- ----------- ----------- ---------
Capital Series A...... 2,318 $ 93.24 5.0 years $25,671 1,620 $100.33 $10,883
Capital Series B...... 1,498 $101.37 4.4 years $ 1,171 1,438 $102.03 $ 390
Interactive Series
A................... 21,503 $ 19.71 5.7 years $60,413 8,393 $ 22.59 $11,942
Interactive Series
B................... 7,491 $ 23.41 4.4 years $ 950 7,191 $ 23.56 $ 317
LIBERTY--EXERCISES
The aggregate intrinsic value of all options exercised during the years
ended December 31, 2006, 2005 and 2004 was $52 million, $109 million and
$16 million, respectively.
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LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
LIBERTY--RESTRICTED STOCK
The following table presents 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 as of December 31, 2006 (numbers
of shares in thousands).
NUMBER
OF SHARES WAFV
--------- --------
Liberty Capital Series A.................................... 175 $90.17
Liberty Interactive Series A................................ 747 $22.55
The aggregate fair value of all restricted shares of Liberty common stock
that vested during the years ended December 31, 2006, 2005 and 2004 was
$30 million, $35 million and less than $1 million, respectively.
QVC AWARDS
QVC had a qualified and nonqualified combination stock option/stock
appreciation rights plan (collectively, the "Tandem Plan") for employees,
officers, directors and other persons designated by the Stock Option Committee
of QVC's board of directors. Under the Tandem Plan, the option price was
generally equal to the fair market value, as determined by an independent
appraisal, of a share of the underlying common stock of QVC at the date of the
grant. If the eligible participant elected the SAR feature of the Tandem Plan,
the participant received 75% of the excess of the fair market value of a share
of QVC common stock over the exercise price of the option to which it was
attached at the exercise date. QVC applied fixed plan accounting in accordance
with APB Opinion No. 25. Under the Tandem Plan, option/SAR terms were ten years
from the date of grant, with options/SARs generally becoming exercisable over
four years from the date of grant. During the years ended December 31, 2006,
2005 and 2004, QVC received cash proceeds from the exercise of options
aggregating $48 million, $46 million and $39 million, respectively. In 2005 and
2004, QVC also repurchased shares of common stock issued upon exercise of stock
options in prior years. Cash payments aggregated $71 million and $168 million,
respectively, for these repurchases.
On August 14, 2006, QVC terminated the Tandem Plan and offered to exchange
Liberty Interactive Share Units, as defined below, for all outstanding unvested
QVC Awards as of September 30, 2006 (the "Exchange Offer"). At the time of the
Exchange Offer, there were 150,234 outstanding options to purchase QVC common
stock. Of those outstanding options, 70,168 were vested and exercisable and
80,066 were unvested. Each holder of unvested QVC options who accepted the
Exchange Offer received Liberty Interactive Share Units in an amount equal to
the in-the-money value of the exchanged QVC options divided by the closing
market price of Liberty Interactive Series A common stock on the trading day
preceding commencement of the Exchange Offer. Liberty Interactive Share Units
vest on the same vesting schedule as the unvested QVC Awards and represent the
right to receive a cash payment equal to the value of Liberty Interactive common
stock on the vesting date. All unvested QVC Awards were exchanged for
approximately 2,348,000 Liberty Interactive Share Units. Liberty accounted for
the Exchange Offer as a settlement of the outstanding unvested QVC Awards. The
difference between the fair value of the Liberty Interactive Share Units and the
fair value of unvested QVC Awards has been reflected as a reduction to
stock-based compensation in the accompanying consolidated statement of
operations.
II-76
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Also on August 14, 2006, a subsidiary of Liberty offered to purchase for
cash all outstanding shares of QVC common stock owned by officers and employees
of QVC and all vested QVC Awards (the "Tender Offer"). Officers and employees of
QVC owned 54,973 shares or 1.09% of QVC common stock at the time of the Tender
Offer. The Exchange Offer and the Tender Offer both expired on September 30,
2006. All vested QVC Awards and 49,575 outstanding shares of QVC common stock
were tendered as of September 30, 2006 resulting in cash payments aggregating
approximately $258 million. The remaining 5,398 shares of QVC common stock were
redeemed subsequent to September 30, 2006 for additional aggregate cash payments
of approximately $17 million. Liberty accounted for the cash paid for
outstanding shares of QVC common stock as the acquisition of a minority
interest. The difference between the cash paid and the carrying value of the
minority interest was allocated to intangible assets using a purchase accounting
model. The cash paid for vested options was less than the carrying value of the
related liability. Such difference has been reflected as a reduction to
stock-based compensation in the accompanying consolidated statement of
operations. The aggregate credit to stock-based compensation for the Exchange
Offer and the Tender Offer was $24 million. Subsequent to the completion of the
foregoing transactions, Liberty owns 100% of the equity of QVC.
STARZ ENTERTAINMENT
Starz Entertainment has outstanding Phantom Stock Appreciation Rights
("PSARS") held by its former chief executive officer. Such PSARs are fully
vested and expire on October 17, 2011, and Starz Entertainment has accrued
$130 million as of December 31, 2006 related to the PSARs. Such amount is
payable in cash, Liberty common stock or a combination thereof. In
December 2005, Starz Entertainment terminated a second PSAR plan for certain of
its other executive officers and made cash payments aggregating $7 million upon
termination.
OTHER
Certain of the Company's other subsidiaries have stock based compensation
plans under which employees and non-employees are granted options or similar
stock based awards. Awards made under these plans vest and become exercisable
over various terms. The awards and compensation recorded, if any, under these
plans is not significant to Liberty.
(14) EMPLOYEE BENEFIT PLANS
Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Plan"), which provides its employees and the employees of
certain of its subsidiaries an opportunity for ownership in the Company and
creates a retirement fund. The Liberty 401(k) Plan provides for employees to
make contributions to a trust for investment in Liberty common stock, as well as
several mutual funds. The Company and its subsidiaries make matching
contributions to the Liberty 401(k) Plan based on a percentage of the amount
contributed by employees. In addition, certain of the Company's subsidiaries
have similar employee benefit plans. Employer cash contributions to all plans
aggregated $30 million, $22 million and $22 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
II-77
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(15) OTHER COMPREHENSIVE EARNINGS (LOSS)
Accumulated other comprehensive earnings (loss) included in Liberty's
consolidated balance sheets and consolidated statements of stockholders' equity
reflect the aggregate of foreign currency translation adjustments and unrealized
holding gains and losses on AFS securities.
The change in the components of accumulated other comprehensive earnings
(loss), net of taxes, is summarized as follows:
ACCUMULATED
FOREIGN UNREALIZED OTHER
CURRENCY HOLDING COMPREHENSIVE
TRANSLATION GAINS (LOSSES) EARNINGS (LOSS),
ADJUSTMENTS ON SECURITIES NET OF TAXES
----------- -------------- ----------------
(AMOUNTS IN MILLIONS)
Balance at January 1, 2004.............................. $(286) 3,519 3,233
Other comprehensive earnings.......................... 20 1,004 1,024
Contribution to LMI................................... -- (51) (51)
Other activity........................................ 9 (9) --
----- ------ -----
Balance at December 31, 2004............................ (257) 4,463 4,206
Other comprehensive earnings (loss)................... 307 (1,101) (794)
----- ------ -----
Balance at December 31, 2005............................ 50 3,362 3,412
Other comprehensive earnings.......................... 111 2,420 2,531
----- ------ -----
Balance at December 31, 2006............................ $ 161 5,782 5,943
===== ====== =====
Included in Liberty's accumulated other comprehensive earnings (loss) at
December 31, 2004 was $123 million, net of income taxes, of foreign currency
translation losses related to Cablevision, S.A. ("Cablevision"), a former equity
method investment of Liberty, and $186 million, net of income taxes, of foreign
currency translation losses related to Telewest Global, Inc. ("Telewest"),
another former equity method investment of Liberty. In the first quarter of
2005, Liberty disposed of its interests in Cablevision and Telewest.
Accordingly, Liberty recognized in its statement of operations $488 million of
foreign currency translation losses (before income tax benefits) related to
Cablevision and Telewest that were previously included in accumulated other
comprehensive earnings (loss).
II-78
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
The components of other comprehensive earnings (loss) are reflected in
Liberty's consolidated statements of comprehensive earnings (loss) net of taxes.
The following table summarizes the tax effects related to each component of
other comprehensive earnings (loss).
TAX NET-OF-
BEFORE-TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
---------- --------- --------
(AMOUNTS IN MILLIONS)
Year ended December 31, 2006:
Foreign currency translation adjustments.................... $ 179 (68) 111
Unrealized holding gains on securities arising during
period.................................................... 4,202 (1,597) 2,605
Reclassification adjustment for holding gains realized in
net loss.................................................. (298) 113 (185)
------- ------ ------
Other comprehensive earnings.............................. $ 4,083 (1,552) 2,531
======= ====== ======
Year ended December 31, 2005:
Foreign currency translation adjustments.................... $ (8) 3 (5)
Reclassification adjustment for currency losses realized in
net earnings.............................................. 503 (191) 312
Unrealized holding losses on securities arising during
period.................................................... (1,808) 687 (1,121)
Reclassification adjustment for holding gains realized in
net earnings.............................................. 350 (133) 217
Reclass unrealized gain on AFS security..................... (318) 121 (197)
------- ------ ------
Other comprehensive loss.................................. $(1,281) 487 (794)
======= ====== ======
Year ended December 31, 2004:
Foreign currency translation adjustments.................... $ 33 (13) 20
Unrealized holding losses on securities arising during
period.................................................... 2,443 (953) 1,490
Reclassification adjustment for holding gains realized in
net earnings.............................................. (797) 311 (486)
------- ------ ------
Other comprehensive earnings.............................. $ 1,679 (655) 1,024
======= ====== ======
(16) TRANSACTIONS WITH RELATED PARTIES
Starz Entertainment pays Revolution Studios ("Revolution"), an equity
affiliate, fees for the rights to exhibit films produced by Revolution. Payments
aggregated $69 million, $84 million and $99 million in 2006, 2005 and 2004,
respectively.
(17) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Entertainment, a wholly-owned subsidiary of Liberty, provides premium
video programming distributed by cable operators, direct-to-home satellite
providers and other distributors throughout the United States. Starz
Entertainment has entered into agreements with a number of motion picture
producers which obligate Starz Entertainment 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 Starz Entertainment at December 31, 2006 is reflected as a
liability in the accompanying consolidated balance sheet. The balance due as of
December 31, 2006 is payable as follows: $110 million in 2007; $9 million in
2008; and $8 million thereafter.
Starz Entertainment has also contracted to pay Programming Fees for films
that have been released theatrically, but are not available for exhibition by
Starz Entertainment until some future date.
II-79
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
These amounts have not been accrued at December 31, 2006. Starz Entertainment's
estimate of amounts payable under these agreements is as follows: $538 million
in 2007; $148 million in 2008; $93 million in 2009; $87 million in 2010;
$31 million in 2011 and $67 million thereafter.
In addition, Starz Entertainment 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 through 2006.
Films are generally available to Starz Entertainment for exhibition
10-12 months after their theatrical release. The Programming Fees to be paid by
Starz Entertainment are based on the quantity and the domestic theatrical
exhibition receipts of qualifying films. As these films have not yet been
released in theatres, Starz Entertainment 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, Starz Entertainment 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, Starz Entertainment's
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 Starz Entertainment of Programming Fees for qualifying
films released by Sony during the extension period. If Disney elects to extend
its contract, Starz Entertainment is not 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.
GUARANTEES
Liberty guarantees Starz Entertainment's obligations under certain of its
studio output agreements. At December 31, 2006, Liberty's guarantees for
obligations for films released by such date aggregated $695 million. While the
guarantee amount for films not yet released is not determinable, such amount is
expected to be significant. As noted above, Starz Entertainment has recognized
the liability for a portion of its obligations under the output agreements. As
this represents a commitment of Starz Entertainment, 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 consolidated financial statements with respect to these
indemnification guarantees.
II-80
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
OPERATING LEASES
Liberty leases business offices, has entered into satellite transponder
lease agreements and uses certain equipment under lease arrangements. Rental
expense under such arrangements amounted to $32 million, $33 million and
$39 million for the years ended December 31, 2006, 2005 and 2004, respectively.
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 2006 follows (amounts in millions):
Years ending December 31:
2007....................................................... $28
2008....................................................... $24
2009....................................................... $21
2010....................................................... $16
2011....................................................... $13
Thereafter................................................. $31
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus, it is
anticipated that future lease commitments will not be less than the amount shown
for 2006.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
consolidated financial statements.
OTHER
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was a party
to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). 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
II-81
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
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 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 made for AT&T's March 2006
request.
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.
II-82
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(18) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS
Liberty is a holding company, which through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the video and on-line
commerce, media, communications and entertainment industries. Upon completion of
the Restructuring and the issuance of its tracking stocks, Liberty attributed
its businesses to one of 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 pre-tax earnings. The
segment presentation for prior periods has been conformed to the current period
segment presentation.
Liberty evaluates performance and makes decisions about allocating resources
to its 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 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 year ended December 31, 2006, Liberty has identified the following
consolidated subsidiaries as its reportable segments:
- QVC--consolidated subsidiary included in the Interactive Group that
markets and sells a wide variety of consumer products in the United States
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.
- Starz Entertainment--consolidated subsidiary included in the Capital Group
that provides premium programming distributed by cable operators,
direct-to-home satellite providers, other distributors and via the
Internet 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.
II-83
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
PERFORMANCE MEASURES
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
2006 2005 2004
-------------------- -------------------- --------------------
OPERATING OPERATING OPERATING
REVENUE CASH FLOW REVENUE CASH FLOW REVENUE CASH FLOW
-------- --------- -------- --------- -------- ---------
(AMOUNTS IN MILLIONS)
Interactive Group
QVC.................................. $7,074 1,656 6,501 1,422 5,687 1,230
Corporate and other.................. 252 24 -- (5) -- (6)
------ ----- ----- ----- ----- -----
7,326 1,680 6,501 1,417 5,687 1,224
------ ----- ----- ----- ----- -----
Capital Group
Starz Entertainment.................. 1,033 186 1,004 171 963 239
Corporate and other.................. 254 (83) 141 (47) 93 (72)
------ ----- ----- ----- ----- -----
1,287 103 1,145 124 1,056 167
------ ----- ----- ----- ----- -----
Consolidated Liberty................. $8,613 1,783 7,646 1,541 6,743 1,391
====== ===== ===== ===== ===== =====
BALANCE SHEET INFORMATION
DECEMBER 31,
---------------------------------------------------
2006 2005
------------------------ ------------------------
TOTAL INVESTMENTS TOTAL INVESTMENTS
ASSETS IN AFFILIATES ASSETS IN AFFILIATES
-------- ------------- -------- -------------
(AMOUNTS IN MILLIONS)
Interactive Group
QVC................................................ $19,100 104 15,615 2
Corporate and other................................ 5,661 1,254 4,585 1,227
Intragroup elimination............................. (4,941) -- (1,849) --
------- ----- ------ -----
19,820 1,358 18,351 1,229
------- ----- ------ -----
Capital Group
Starz Entertainment................................ 2,825 -- 2,966 45
Corporate and other................................ 24,512 484 20,268 634
Assets of discontinued operations.................. 512 -- 516 --
------- ----- ------ -----
27,849 484 23,750 679
------- ----- ------ -----
Intergroup eliminations............................ (31) -- (136) --
------- ----- ------ -----
Consolidated Liberty............................... $47,638 1,842 41,965 1,908
======= ===== ====== =====
II-84
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
The following table provides a reconciliation of segment operating cash flow
to earnings (loss) from continuing operations before income taxes and minority
interest:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
Consolidated segment operating cash flow.................... $1,783 1,541 1,391
Stock-based compensation.................................... (67) (52) (98)
Litigation settlement....................................... -- -- 42
Depreciation and amortization............................... (582) (545) (547)
Impairment of long-lived assets............................. (113) -- --
Interest expense............................................ (680) (626) (619)
Realized and unrealized gains (losses) on derivative
instruments, net.......................................... (279) 257 (1,284)
Gains (losses) on dispositions, net......................... 607 (361) 1,411
Nontemporary declines in fair value of investments.......... (4) (449) (129)
Other, net.................................................. 323 117 119
------ ----- ------
Earnings (loss) from continuing operations before income
taxes and minority interest............................... $ 988 (118) 286
====== ===== ======
REVENUE BY GEOGRAPHIC AREA
Revenue by geographic area based on the location of customers is as follows:
YEARS ENDED DECEMBER 31,
------------------------------
2006 2005 2004
-------- -------- --------
(AMOUNTS IN MILLIONS)
United States............................................... $6,504 5,784 5,194
Germany..................................................... 848 781 643
Other foreign countries..................................... 1,261 1,081 906
------ ----- -----
Consolidated Liberty........................................ $8,613 7,646 6,743
====== ===== =====
LONG-LIVED ASSETS BY GEOGRAPHIC AREA
DECEMBER 31,
-------------------
2006 2005
-------- --------
(AMOUNTS IN
MILLIONS)
United States............................................... $ 678 586
Germany..................................................... 119 204
Other foreign countries..................................... 349 156
------ ---
Consolidated Liberty........................................ $1,146 946
====== ===
II-85
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
2006:
Revenue................................................... $1,901 2,025 2,016 2,671
====== ===== ===== =====
Operating income.......................................... $ 224 257 236 304
====== ===== ===== =====
Earnings from continuing operations....................... $ 69 482 63 95
====== ===== ===== =====
Net earnings (loss):
Series A and Series B common stock...................... $ (26) 120 -- --
====== ===== ===== =====
Capital Group common stock.............................. $ -- 269 (51) 42
====== ===== ===== =====
Interactive Group common stock.......................... $ -- 89 114 283
====== ===== ===== =====
Basic and diluted earnings (loss) from continuing
operations per common share:
Series A and Series B common stock...................... $ .02 .04 -- --
====== ===== ===== =====
Liberty Capital common stock............................ $ -- 1.94 (.36) (1.34)
====== ===== ===== =====
Liberty Interactive common stock........................ $ -- .13 .17 .43
====== ===== ===== =====
Basic and diluted net earnings (loss) per common share:
Series A and Series B common stock...................... $ (.01) .04 -- --
====== ===== ===== =====
Liberty Capital common stock............................ $ -- 1.92 (.36) .30
====== ===== ===== =====
Liberty Interactive common stock........................ $ -- .13 .17 .43
====== ===== ===== =====
2005:
Revenue................................................... $1,742 1,760 1,772 2,372
====== ===== ===== =====
Operating income.......................................... $ 215 197 189 343
====== ===== ===== =====
Earnings (loss) from continuing operations................ $ 245 (123) (86) (79)
====== ===== ===== =====
Net earnings (loss)....................................... $ 254 (107) (94) (86)
====== ===== ===== =====
Basic and diluted earnings (loss) from continuing
operations per common shares.............................. $ .09 (.05) (.03) (.03)
====== ===== ===== =====
Basic and diluted net earnings (loss) per common share.... $ .09 (.04) (.03) (.03)
====== ===== ===== =====
II-86
PART III.
The following required information is incorporated by reference to our
definitive proxy statement for our 2007 Annual Meeting of Shareholders presently
scheduled to be held in the second quarter of 2007:
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
We will file our definitive proxy statement for our 2007 Annual Meeting of
shareholders with the Securities and Exchange Commission on or before April 30,
2007.
III-1
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) FINANCIAL STATEMENTS
PAGE NO.
Included in Part II of this Report: ---------
Liberty Media Corporation:
Report of Independent Registered Public Accounting Firm... II-36
Consolidated Balance Sheets, December 31, 2006 and 2005... II-37
Consolidated Statements of Operations, Years ended
December 31, 2006, 2005 and 2004........................ II-39
Consolidated Statements of Comprehensive Earnings (Loss),
Years ended December 31, 2006, 2005 and 2004............ II-40
Consolidated Statements of Cash Flows, Years Ended
December 31, 2006, 2005 and 2004........................ II-41
Consolidated Statements of Stockholders' Equity, Years
ended December 31, 2006, 2005 and 2004.................. II-42
Notes to Consolidated Financial Statements, December 31,
2006, 2005 and 2004..................................... II-43
(a) (2) FINANCIAL STATEMENT SCHEDULES
(i) All schedules have been omitted because they are not applicable, not
material or the required information is set forth in the financial
statements or notes thereto.
(a) (3) EXHIBITS
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):
3--Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of Liberty Media
Corporation ("Liberty"), dated May 9, 2006 (incorporated by
reference to Exhibit 1 to the Registration Statement on
Form 8-A of Liberty (File No. 000-51990) as filed on May 9,
2006 (the "Form 8-A")).
3.2 Bylaws of Liberty, as adopted May 9, 2006 (incorporated by
reference to Exhibit 2 of the Form 8-A).
4--Instruments Defining the Rights of Securities Holders, including
Indentures:
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 Liberty's
Current Report on Form 8-K (File No. 000-51990), filed on
May 9, 2006 (the "May 2006 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 2006
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 2006
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 2006
8-K).
IV-1
10--Material Contracts:
10.1 Inter-Group Agreement dated as of March 9, 1999, between
AT&T Corp. and Liberty Media LLC ("Old Liberty"), Liberty
Media Group LLC and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-4 of
Old Liberty (File No. 333-86491) as filed on September 3,
1999, the "Old Liberty S-4 Registration Statement").
10.2 Ninth Supplement to Inter-Group Agreement dated as of
June 14, 2001, between and among AT&T Corp., on the one
hand, and Old Liberty, Liberty Media Group LLC, AGI LLC,
Liberty SP, Inc., LMC Interactive, Inc. and Liberty
AGI, Inc., on the other hand (incorporated by reference to
Exhibit 10.25 to the Registration Statement on Form S-1 of
Old Liberty (File No. 333-66034) as filed on July 27, 2001).
10.3 Intercompany Agreement dated as of March 9, 1999, between
Old Liberty and AT&T Corp. (incorporated by reference to
Exhibit 10.3 to the Old Liberty S-4 Registration Statement).
10.4 Tax Sharing Agreement dated as of March 9, 1999, by and
among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI
Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity
listed on the signature pages thereof (incorporated by
reference to Exhibit 10.4 to the Old Liberty S-4
Registration Statement).
10.5 First Amendment to Tax Sharing Agreement dated as of
May 28, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.5 to the Old Liberty S-4 Registration Statement).
10.6 Second Amendment to Tax Sharing Agreement dated as of
September 24, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form S-1 of
Old Liberty (File No. 333-93917) as filed on December 30,
1999 (the "Old Liberty S-1 Registration Statement")).
10.7 Third Amendment to Tax Sharing Agreement dated as of
October 20, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.7 to the Old Liberty S-l Registration Statement).
10.8 Fourth Amendment to Tax Sharing Agreement dated as of
October 28, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.8 to the Old Liberty S-l Registration Statement).
10.9 Fifth Amendment to Tax Sharing Agreement dated as of
December 6, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.9 to the Old Liberty S-l Registration Statement).
10.10 Sixth Amendment to Tax Sharing Agreement dated as of
December 10, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty
IV-2
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.10 to the Old
Liberty S-l Registration Statement).
10.11 Seventh Amendment to Tax Sharing Agreement dated as of
December 30, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.11 to the Old Liberty S-l Registration
Statement).
10.12 Eighth Amendment to Tax Sharing Agreement dated as of
July 25, 2000, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 of
Old Liberty (File No. 333-55998) as filed on February 21,
2001).
10.13 Instrument dated January 14, 2000, adding The Associated
Group, Inc. as a party to the Tax Sharing Agreement dated as
of March 9, 1999, as amended, among The Associated
Group, Inc., AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Old Liberty S-1 Registration
Statement).
10.14 Restated and Amended Employment Agreement dated November 1,
1992, between Tele-Communications, Inc. and John C. Malone
(assumed by Old Liberty as of March 9, 1999), and the
amendment thereto dated June 30, 1999 and effective as of
March 9, 1999, between Old Liberty and John C. Malone
(collectively, the "Malone Employment Agreement")
(incorporated by reference to Exhibit 10.6 to the Old
Liberty S-4 Registration Statement).
10.15 Second Amendment to Malone Employment Agreement effective
January 1, 2003 (incorporated by reference to Exhibit 10.15
to Old Liberty's Annual Report on Form 10-K for the year
ended December 31, 2003 (File No. 001-16615) as filed on
March 15, 2004 (the "Old Liberty 2003 10-K")).
10.16 Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective February 22, 2007) (the "2000
Incentive Plan").*
10.17 Liberty Media Corporation 2007 Incentive Plan (the "2007
Incentive Plan").*
10.18 Form of Non-Qualified Stock Option Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan [for certain
designated award recipients] (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Old
Liberty for the quarter ended March 31, 2006 (File
No. 001-16615) as filed on May 8, 2006 (the "Old Liberty
10-Q")).
10.19 Form of Non-Qualified Stock Option Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan [for all other
award recipients] (incorporated by reference to
Exhibit 10.3 of the Old Liberty 10-Q).
10.20 Form of Restricted Stock Award Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan [for certain
designated award recipients] (incorporated by reference to
Exhibit 10.4 to the Old Liberty 10-Q).
10.21 Form of Stock Appreciation Rights Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan (incorporated by
reference to Exhibit 10.18 to the Annual Report on
Form 10-K of Old Liberty for the year ended December 31,
2004 (File No. 001-16615) as filed on March 15, 2005 (the
"Old Liberty 2005 10-K")).
IV-3
10.22 Liberty Media Corporation 2002 Nonemployee Director
Incentive Plan (As Amended and Restated Effective May 9,
2006) (the "Director Plan") (incorporated by reference to
Exhibit 10.2 to the May 2006 8-K).
10.23 Form of Stock Appreciation Rights Agreement under the
Director Plan (incorporated by reference to Exhibit 10.21 to
the Old Liberty 2005 10-K).
10.24 Liberty Media Corporation 2006 Deferred Compensation Plan
(incorporated by reference to Exhibit 99.1 to Liberty's
Current Report on Form 8-K (File No. 000-51990) as filed on
January 5, 2007).
10.25 Letter Agreement, dated as of May 8, 2003, between Robert R.
Bennett and Old Liberty regarding Mr. Bennett's personal use
of Liberty's aircraft (incorporated by reference to
Exhibit 10.19 to the Old Liberty 2003 10-K).
10.26 Time Sharing Agreement regarding personal use of Liberty's
aircraft, dated as of March 29, 2005, between Robert R.
Bennett and Old Liberty (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Old
Liberty for the period ended March 31, 2005 (File
No. 001-16615) as filed on May 9, 2005 (the "Liberty First
Quarter 2005 10-Q").
10.27 Letter Agreement regarding personal use of Liberty's
aircraft, dated as of May 4, 2005, between Robert R. Bennett
and Old Liberty (incorporated by reference to Exhibit 10.2
to the Liberty First Quarter 2005 10-Q).
10.28 Employment Agreement, dated as of December 28, 2005, between
Old Liberty and Mr. Bennett (incorporated by reference to
Exhibit 99.1 to Old Liberty's Current Report on Form 8-K
(File No. 001-16615) as filed on December 30, 2005 (the "Old
Liberty December 2005 8-K")).
10.29 Amended and Restated Deferred Compensation Agreement, dated
as of December 28, 2005, between Old Liberty and
Mr. Bennett (incorporated by reference to Exhibit 99.2 to
the Old Liberty December 2005 8-K).
10.30 Amended and Restated Deferred Compensation Agreement, dated
as of December 28, 2005, between Mr. Bennett and Old Liberty
(incorporated by reference to Exhibit 99.3 to the Old
Liberty December 2005 8-K).
10.31 Deferred Compensation Agreement, dated as of July 1, 2005,
between Mr. Bennett and Old Liberty (incorporated by
reference to Exhibit 99.4 to the Old Liberty December 2005
8-K).
10.32 Call Agreement, dated as of February 9, 1998 (the "Call
Agreement"), between Liberty (as successor of Old Liberty
which was the assignee of Tele-Communications, Inc.) and the
Malone Group (incorporated by reference to Exhibit 7(n) to
Mr. Malone's Amendment No. 8 to Schedule 13D filed in
respect of Tele-Communications, Inc. on February 19, 1998
(File No. 005-44063)).
10.33 Letter, dated as of March 5, 1999, from
Tele-Communications, Inc. and Old Liberty addressed to
Mr. Malone and Leslie Malone relating to the Call Agreement
(incorporated by reference to Exhibit 7(f) to Mr. Malone's
Schedule 13D filed in respect of AT&T on March 30, 1999
(File No. 005-32542)).
10.34 $3,500,000,000 Credit Agreement, dated as of March 3, 2006,
among QVC, Inc., as Borrower; the Lenders party hereto; JP
Morgan Chase Bank, N.A., as Administrative Agent; and
Wachovia Capital Markets, LLC, as Syndication Agent (the
"March 2006 Credit Agreement") (incorporated by reference to
Exhibit 10.1 to the Old Liberty 10-Q).
10.35 Amendment dated October 4, 2006 to the March 2006 Credit
Agreement (incorporated by reference to Exhibit 99.2 to
Liberty's Current Report on Form 8-K (File No. 000-51990) as
filed
IV-4
on October 10, 2006 (the "October 2006 8-K")).
10.36 $1,750,000,000 Credit Agreement, dated as of October 4, 2006
among QVC, Wachovia Bank, N.A., as Administrative Agent,
Bank of America N.A. and J.P. Morgan Securities Inc., as
Syndication Agents, and the lenders party thereto from time
to time (incorporated by reference to Exhibit 99.1 to the
October 2006 8-K).
10.37 Form of Indemnification Agreement between Liberty and its
executive officers/directors.*
10.38 Share Exchange Agreement, dated as of December 22, 2006, by
and between News Corporation and Liberty (the "News
Agreement").*
10.39 Tax Matters Agreement, dated as of December 22, 2006, by and
between News Corporation and Liberty (which is Exhibit A-I
to the News Agreement).*
21 Subsidiaries of Liberty Media Corporation.*
23 Consent of KPMG LLP.*
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 Unaudited Attributed Financial Information for Tracking
Stock Groups.*
------------------------
* Filed herewith.
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ GREGORY B. MAFFEI
------------------------------------------------
Gregory B. Maffei
DATED: MARCH 1, 2007 CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE
--------------------------------------------- -------------------------------------- -------------
/s/ JOHN C. MALONE
------------------------------------ Chairman of the Board and Director March 1, 2007
John C. Malone
/s/ GREGORY B. MAFFEI
------------------------------------ Director, Chief Executive Officer and March 1, 2007
Gregory B. Maffei President
/s/ ROBERT R. BENNETT
------------------------------------ Director March 1, 2007
Robert R. Bennett
/s/ DONNE F. FISHER
------------------------------------ Director March 1, 2007
Donne F. Fisher
/s/ PAUL A. GOULD
------------------------------------ Director March 1, 2007
Paul A. Gould
/s/ DAVID E. RAPLEY
------------------------------------ Director March 1, 2007
David E. Rapley
/s/ M. LAVOY ROBISON
------------------------------------ Director March 1, 2007
M. LaVoy Robison
/s/ LARRY E. ROMRELL
------------------------------------ Director March 1, 2007
Larry E. Romrell
/s/ DAVID J.A. FLOWERS
------------------------------------ Senior Vice President and Treasurer March 1, 2007
David J.A. Flowers (Principal Financial Officer)
/s/ CHRISTOPHER W. SHEAN
------------------------------------ Senior Vice President and Controller March 1, 2007
Christopher W. Shean (Principal Accounting Officer)
IV-6
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):
3--Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of Liberty Media Corporation
("Liberty"), dated May 9, 2006 (incorporated by reference to Exhibit 1 to
the Registration Statement on Form 8-A of Liberty (File No. 000-51990) as
filed on May 9, 2006 (the "Form 8-A")).
3.2 Bylaws of Liberty, as adopted May 9, 2006 (incorporated by reference
to Exhibit 2 of the Form 8-A).
4--Instruments Defining the Rights of Securities Holders, including Indentures:
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 Liberty's Current Report on Form 8-K (File
No. 000-51990), filed on May 9, 2006 (the "May 2006 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 2006 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 2006 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 2006 8-K).
10--Material Contracts:
10.1 Inter-Group Agreement dated as of March 9, 1999, between AT&T Corp.
and Liberty Media LLC ("Old Liberty"), Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof (incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-4 of
Old Liberty (File No. 333-86491) as filed on September 3, 1999, the "Old
Liberty S-4 Registration Statement").
10.2 Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001,
between and among AT&T Corp., on the one hand, and Old Liberty, Liberty
Media Group LLC, AGI LLC, Liberty SP, Inc., LMC Interactive, Inc. and
Liberty AGI, Inc., on the other hand (incorporated by reference to
Exhibit 10.25 to the Registration Statement on Form S-1 of Old Liberty
(File No. 333-66034) as filed on July 27, 2001).
10.3 Intercompany Agreement dated as of March 9, 1999, between Old Liberty
and AT&T Corp. (incorporated by reference to Exhibit 10.3 to the Old
Liberty S-4 Registration Statement).
10.4 Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T
Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group
LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof (incorporated
by reference to Exhibit 10.4 to the Old Liberty S-4 Registration
Statement).
10.5 First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by
and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.5 to the Old Liberty S-4
Registration Statement).
10.6 Second Amendment to Tax Sharing Agreement dated as of September 24,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Old Liberty (File No. 333-93917) as filed on
December 30, 1999 (the "Old Liberty S-1 Registration Statement")).
10.7 Third Amendment to Tax Sharing Agreement dated as of October 20, 1999,
by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.7 to the Old Liberty S-l
Registration Statement).
10.8 Fourth Amendment to Tax Sharing Agreement dated as of October 28,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.8 to the Old Liberty S-l
Registration Statement).
10.9 Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999,
by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.9 to the Old Liberty S-l
Registration Statement).
10.10 Sixth Amendment to Tax Sharing Agreement dated as of December 10,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.10 to the Old Liberty
S-l Registration Statement).
10.11 Seventh Amendment to Tax Sharing Agreement dated as of December 30,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.11 to the Old Liberty
S-l Registration Statement).
10.12 Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000,
by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.12 to the Registration
Statement on Form S-1 of Old Liberty (File No. 333-55998) as filed on
February 21, 2001).
10.13 Instrument dated January 14, 2000, adding The Associated Group, Inc.
as a party to the Tax Sharing Agreement dated as of March 9, 1999, as
amended, among The Associated Group, Inc., AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media
Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity
listed on the signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Old Liberty S-1 Registration Statement).
10.14 Restated and Amended Employment Agreement dated November 1, 1992,
between Tele-Communications, Inc. and John C. Malone (assumed by Old
Liberty as of March 9, 1999), and the amendment thereto dated June 30,
1999 and effective as of March 9, 1999, between Old Liberty and John C.
Malone (collectively, the "Malone Employment Agreement") (incorporated by
reference to Exhibit 10.6 to the Old Liberty S-4 Registration Statement).
10.15 Second Amendment to Malone Employment Agreement effective January 1,
2003 (incorporated by reference to Exhibit 10.15 to Old Liberty's Annual
Report on Form 10-K for the year ended December 31, 2003 (File
No. 001-16615) as filed on March 15, 2004 (the "Old Liberty 2003 10-K")).
10.16 Liberty Media Corporation 2000 Incentive Plan (As Amended and Restated
Effective February 22, 2007) (the "2000 Incentive Plan").*
10.17 Liberty Media Corporation 2007 Incentive Plan (the "2007 Incentive
Plan").*
10.18 Form of Non-Qualified Stock Option Agreement under the 2000 Incentive
Plan and the 2007 Incentive Plan [for certain designated award
recipients] (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Old Liberty for the quarter ended March 31, 2006
(File No. 001-16615) as filed on May 8, 2006 (the "Old Liberty 10-Q")).
10.19 Form of Non-Qualified Stock Option Agreement under the 2000 Incentive
Plan and the 2007 Incentive Plan [for all other award recipients]
(incorporated by reference to Exhibit 10.3 of the Old Liberty 10-Q).
10.20 Form of Restricted Stock Award Agreement under the 2000 Incentive Plan
and the 2007 Incentive Plan [for certain designated award recipients]
(incorporated by reference to Exhibit 10.4 to the Old Liberty 10-Q).
10.21 Form of Stock Appreciation Rights Agreement under the 2000 Incentive
Plan and the 2007 Incentive Plan (incorporated by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of Old Liberty for the
year ended December 31, 2004 (File No. 001-16615) as filed on March 15,
2005 (the "Old Liberty 2005 10-K")).
10.22 Liberty Media Corporation 2002 Nonemployee Director Incentive Plan (As
Amended and Restated Effective May 9, 2006) (the "Director Plan")
(incorporated by reference to Exhibit 10.2 to the May 2006 8-K).
10.23 Form of Stock Appreciation Rights Agreement under the Director Plan
(incorporated by reference to Exhibit 10.21 to the Old Liberty 2005
10-K).
10.24 Liberty Media Corporation 2006 Deferred Compensation Plan
(incorporated by reference to Exhibit 99.1 to Liberty's Current Report on
Form 8-K (File No. 000-51990) as filed on January 5, 2007).
10.25 Letter Agreement, dated as of May 8, 2003, between Robert R. Bennett
and Old Liberty regarding Mr. Bennett's personal use of Liberty's
aircraft (incorporated by reference to Exhibit 10.19 to the Old Liberty
2003 10-K).
10.26 Time Sharing Agreement regarding personal use of Liberty's aircraft,
dated as of March 29, 2005, between Robert R. Bennett and Old Liberty
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q of Old Liberty for the period ended March 31, 2005 (File
No. 001-16615) as filed on May 9, 2005 (the "Liberty First Quarter 2005
10-Q").
10.27 Letter Agreement regarding personal use of Liberty's aircraft, dated
as of May 4, 2005, between Robert R. Bennett and Old Liberty
(incorporated by reference to Exhibit 10.2 to the Liberty First Quarter
2005 10-Q).
10.28 Employment Agreement, dated as of December 28, 2005, between Old
Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.1 to Old
Liberty's Current Report on Form 8-K (File No. 001-16615) as filed on
December 30, 2005 (the "Old Liberty December 2005 8-K")).
10.29 Amended and Restated Deferred Compensation Agreement, dated as of
December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by
reference to Exhibit 99.2 to the Old Liberty December 2005 8-K).
10.30 Amended and Restated Deferred Compensation Agreement, dated as of
December 28, 2005, between Mr. Bennett and Old Liberty (incorporated by
reference to Exhibit 99.3 to the Old Liberty December 2005 8-K).
10.31 Deferred Compensation Agreement, dated as of July 1, 2005, between
Mr. Bennett and Old Liberty (incorporated by reference to Exhibit 99.4 to
the Old Liberty December 2005 8-K).
10.32 Call Agreement, dated as of February 9, 1998 (the "Call Agreement"),
between Liberty (as successor of Old Liberty which was the assignee of
Tele-Communications, Inc.) and the Malone Group (incorporated by
reference to Exhibit 7(n) to Mr. Malone's Amendment No. 8 to
Schedule 13D filed in respect of Tele-Communications, Inc. on
February 19, 1998 (File No. 005-44063)).
10.33 Letter, dated as of March 5, 1999, from Tele-Communications, Inc. and
Old Liberty addressed to Mr. Malone and Leslie Malone relating to the
Call Agreement (incorporated by reference to Exhibit 7(f) to
Mr. Malone's Schedule 13D filed in respect of AT&T on March 30, 1999
(File No. 005-32542)).
10.34 $3,500,000,000 Credit Agreement, dated as of March 3, 2006, among
QVC, Inc., as Borrower; the Lenders party hereto; JP Morgan Chase Bank,
N.A., as Administrative Agent; and Wachovia Capital Markets, LLC, as
Syndication Agent (the "March 2006 Credit Agreement") (incorporated by
reference to Exhibit 10.1 to the Old Liberty 10-Q).
10.35 Amendment dated October 4, 2006 to the March 2006 Credit Agreement
(incorporated by reference to Exhibit 99.2 to Liberty's Current Report on
Form 8-K (File No. 000-51990) as filed on October 10, 2006 (the
"October 2006 8-K")).
10.36 $1,750,000,000 Credit Agreement, dated as of October 4, 2006 among
QVC, Wachovia Bank, N.A., as Administrative Agent, Bank of America N.A.
and J.P. Morgan Securities Inc., as Syndication Agents, and the lenders
party thereto from time to time (incorporated by reference to
Exhibit 99.1 to the October 2006 8-K).
10.37 Form of Indemnification Agreement between Liberty and its executive
officers/directors.*
10.38 Share Exchange Agreement, dated as of December 22, 2006, by and
between News Corporation and Liberty (the "News Agreement").*
10.39 Tax Matters Agreement, dated as of December 22, 2006, by and between
News Corporation and Liberty (which is Exhibit A-I to the News
Agreement).*
21--Subsidiaries of Liberty Media Corporation.*
23--Consent of KPMG LLP.*
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 Unaudited Attributed Financial Information for Tracking Stock Groups.*
------------------------
* Filed herewith.