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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2007
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-51990
LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 84-1288730
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (720) 875-5400
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act.
Large accelerated filer /X/ Accelerated filer / / Non-accelerated filer
/ /
Indicate by check mark whether the Registrant is a shell company as defined
in Rule 12b-2 of the Exchange Act. Yes / / No /X/
The number of outstanding shares of Liberty Media Corporation's common stock
as of July 31, 2007 was:
Series A Liberty Capital common stock 123,140,940 shares;
Series B Liberty Capital common stock 5,988,020 shares;
Series A Liberty Interactive common stock 602,175,656 shares; and
Series B Liberty Interactive common stock 29,941,436 shares.
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--------------------------------------------------------------------------------
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2007 2006
--------- -------------
AMOUNTS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,194 3,107
Trade and other receivables, net.......................... 1,183 1,276
Inventory, net............................................ 862 831
Program rights............................................ 564 531
Financial instruments (note 11)........................... 174 239
Other current assets...................................... 122 233
Assets of discontinued operations (note 7)................ -- 512
------- ------
Total current assets.................................... 6,099 6,729
------- ------
Investments in available-for-sale securities and other cost
investments, including $1,361 million and $1,482 million
pledged as collateral for share borrowing arrangements
(note 8).................................................. 20,177 21,622
Long-term financial instruments (note 11)................... 1,091 1,340
Investments in affiliates, accounted for using the equity
method.................................................... 1,796 1,842
Investment in special purpose entity (note 9)............... 750 --
Property and equipment, at cost............................. 1,756 1,531
Accumulated depreciation.................................... (459) (385)
------- ------
1,297 1,146
------- ------
Intangible assets not subject to amortization:
Goodwill (note 10)........................................ 7,899 7,588
Trademarks................................................ 2,491 2,471
Other..................................................... 171 --
------- ------
10,561 10,059
------- ------
Intangible assets subject to amortization, net.............. 3,998 3,910
Other assets, net (note 9).................................. 1,805 990
------- ------
Total assets............................................ $47,574 47,638
======= ======
(continued)
I-1
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
JUNE 30, DECEMBER 31,
2007 2006
--------- -------------
AMOUNTS IN MILLIONS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 434 508
Accrued interest.......................................... 141 214
Other accrued liabilities................................. 1,001 1,035
Financial instruments (note 11)........................... 1,365 1,484
Current portion of debt (note 12)......................... 220 114
Other current liabilities................................. 281 113
Liabilities of discontinued operations (note 7)........... -- 101
-------- -------
Total current liabilities............................... 3,442 3,569
-------- -------
Long-term debt (including $4,171 million measured at fair
value at June 30, 2007) (note 12)......................... 11,645 8,909
Long-term financial instruments (note 11)................... 131 1,706
Deferred income tax liabilities............................. 8,975 9,661
Other liabilities........................................... 1,465 1,870
-------- -------
Total liabilities....................................... 25,658 25,715
-------- -------
Minority interests in equity of subsidiaries (note 9)....... 892 290
Stockholders' equity (note 14):
Preferred stock, $.01 par value. Authorized
50,000,000 shares; no shares issued..................... -- --
Series A Liberty Capital common stock, $.01 par value.
Authorized 400,000,000 shares; issued and outstanding
123,110,645 shares at June 30, 2007 and
134,503,165 shares at December 31, 2006................. 1 1
Series B Liberty Capital common stock, $.01 par value.
Authorized 25,000,000 shares; issued and outstanding
5,998,020 shares at June 30, 2007 and 6,014,680 shares
at December 31, 2006.................................... -- --
Series A Liberty Interactive common stock, $.01 par value.
Authorized 2,000,000,000 shares; issued and outstanding
603,298,421 shares at June 30, 2007 and
623,061,760 shares at December 31, 2006................. 6 6
Series B Liberty Interactive common stock, $.01 par value.
Authorized 125,000,000 shares; issued and outstanding
29,944,850 shares at June 30, 2007 and
29,971,039 shares at December 31, 2006.................. -- --
Additional paid-in capital................................ 26,324 28,112
Accumulated other comprehensive earnings, net of taxes.... 5,531 5,952
Accumulated deficit....................................... (10,838) (12,438)
-------- -------
Total stockholders' equity.............................. 21,024 21,633
-------- -------
Commitments and contingencies (note 15)
Total liabilities and stockholders' equity.............. $ 47,574 47,638
======== =======
See accompanying notes to condensed consolidated financial statements.
I-2
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
Revenue:
Net retail sales.......................................... $1,791 1,715 3,562 3,323
Communications and programming services................... 402 310 754 603
------ ----- ----- -----
2,193 2,025 4,316 3,926
------ ----- ----- -----
Operating costs and expenses:
Cost of sales............................................. 1,112 1,054 2,222 2,054
Operating................................................. 434 361 818 706
Selling, general and administrative, including stock-based
compensation (note 4)................................... 248 207 477 398
Depreciation and amortization............................. 172 146 323 287
------ ----- ----- -----
1,966 1,768 3,840 3,445
------ ----- ----- -----
Operating income........................................ 227 257 476 481
Other income (expense):
Interest expense.......................................... (145) (160) (295) (308)
Dividend and interest income.............................. 64 39 139 95
Share of earnings of affiliates, net...................... 16 21 25 29
Realized and unrealized gains (losses) on financial
instruments, net (note 11).............................. (251) 362 93 169
Gains on dispositions of assets, net...................... 629 303 635 327
Other, net................................................ 5 9 5 13
------ ----- ----- -----
318 574 602 325
------ ----- ----- -----
Earnings from continuing operations before income taxes
and minority interests................................. 545 831 1,078 806
Income tax benefit (expense)................................ 372 (340) 170 (240)
Minority interests in earnings of subsidiaries.............. (15) (9) (19) (15)
------ ----- ----- -----
Earnings from continuing operations..................... 902 482 1,229 551
Earnings (loss) from discontinued operations, net of taxes
(note 7).................................................. 107 (4) 149 (10)
Cumulative effect of accounting change, net of taxes
(note 4).................................................. -- -- -- (89)
------ ----- ----- -----
Net earnings............................................ $1,009 478 1,378 452
====== ===== ===== =====
Net earnings:
Liberty Series A and Series B common stock................ $ -- 120 -- 94
Liberty Capital common stock.............................. 907 269 1,185 269
Liberty Interactive common stock.......................... 102 89 193 89
------ ----- ----- -----
$1,009 478 1,378 452
====== ===== ===== =====
Basic earnings from continuing operations per common share
(note 5):
Liberty Series A and Series B common stock................ $ -- .04 -- .06
Liberty Capital common stock.............................. $ 6.11 1.94 7.67 1.94
Liberty Interactive common stock.......................... $ .16 .13 .30 .13
Diluted earnings from continuing operations per common share
(note 5):
Liberty Series A and Series B common stock................ $ -- .04 -- .06
Liberty Capital common stock.............................. $ 6.11 1.94 7.62 1.94
Liberty Interactive common stock.......................... $ .16 .13 .30 .13
Basic net earnings per common share (note 5):
Liberty Series A and Series B common stock................ $ -- .04 -- .03
Liberty Capital common stock.............................. $ 6.92 1.92 8.78 1.92
Liberty Interactive common stock.......................... $ .16 .13 .30 .13
Diluted net earnings per common share (note 5):
Liberty Series A and Series B common stock................ $ -- .04 -- .03
Liberty Capital common stock.............................. $ 6.92 1.92 8.71 1.92
Liberty Interactive common stock.......................... $ .16 .13 .30 .13
See accompanying notes to condensed consolidated financial statements.
I-3
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Net earnings................................................ $1,009 478 1,378 452
------ --- ----- -----
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments.................. 11 58 22 78
Unrealized holding gains (losses) arising during the
period.................................................. (322) 441 (47) 902
Recognition of previously unrealized gains on
available-for-sale securities, net...................... (392) -- (396) (15)
Other comprehensive earnings from discontinued operations
(note 7)................................................ -- 1 -- 1
------ --- ----- -----
Other comprehensive earnings (loss)....................... (703) 500 (421) 966
------ --- ----- -----
Comprehensive earnings...................................... $ 306 978 957 1,418
====== === ===== =====
Comprehensive earnings (loss):
Liberty Series A and Series B common stock................ $ -- 315 -- 755
Liberty Capital common stock.............................. 245 694 776 694
Liberty Interactive common stock.......................... 61 (31) 181 (31)
------ --- ----- -----
$ 306 978 957 1,418
====== === ===== =====
See accompanying notes to condensed consolidated financial statements.
I-4
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS
ENDED
JUNE 30,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
(NOTE 6)
Cash flows from operating activities:
Net earnings.............................................. $ 1,378 452
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Loss (earnings) from discontinued operations............ (149) 10
Cumulative effect of accounting change.................. -- 89
Depreciation and amortization........................... 323 287
Stock-based compensation................................ 40 51
Payments of stock-based compensation.................... (35) (1)
Noncash interest expense................................ 6 53
Share of earnings of affiliates, net.................... (25) (29)
Realized and unrealized gains on financial instruments,
net.................................................... (93) (169)
Gains on disposition of assets, net..................... (635) (327)
Minority interests in earnings of subsidiaries.......... 19 15
Deferred income tax expense (benefit)................... (247) 71
Other noncash charges, net.............................. 13 18
Changes in operating assets and liabilities, net of the
effects of acquisitions and dispositions:
Current assets........................................ 2 29
Payables and other current liabilities................ (81) (55)
------- -----
Net cash provided by operating activities........... 516 494
------- -----
Cash flows from investing activities:
Cash proceeds from dispositions........................... 520 920
Net proceeds (payments) from settlement of financial
instruments............................................. (65) 200
Cash paid for acquisitions, net of cash acquired.......... (126) (601)
Cash received in exchange transactions.................... 1,154 --
Capital expended for property and equipment............... (179) (104)
Net purchases of short term investments................... (191) (5)
Investments in and loans to cost and equity investees..... (810) (140)
Net increase in restricted cash........................... (734) --
Repurchases of subsidiary common stock.................... -- (159)
Other investing activities, net........................... 19 --
------- -----
Net cash provided (used) by investing activities.... (412) 111
------- -----
Cash flows from financing activities:
Borrowings of debt........................................ 1,384 400
Repayments of debt........................................ (336) (6)
Repurchases of Liberty common stock....................... (1,836) (341)
Contribution from minority owner.......................... 750 --
Other financing activities, net........................... 19 37
------- -----
Net cash provided (used) by financing activities.... (19) 90
------- -----
Effect of foreign currency exchange rates on cash........... 1 16
------- -----
Net cash provided to discontinued operations:
Cash provided by operating activities..................... 8 33
Cash used by investing activities......................... (9) (42)
Cash provided by financing activities..................... -- 3
Change in available cash held by discontinued
operations.............................................. 2 2
------- -----
Net cash provided by (to) discontinued operations... 1 (4)
------- -----
Net increase in cash and cash equivalents........... 87 707
Cash and cash equivalents at beginning of period.... 3,107 1,896
------- -----
Cash and cash equivalents at end of period.......... $ 3,194 2,603
======= =====
See accompanying notes to condensed consolidated financial statements.
I-5
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2007
COMMON STOCK
-----------------------------------------
LIBERTY CAPITAL LIBERTY INTERACTIVE ADDITIONAL
PREFERRED ------------------- ------------------- PAID-IN
STOCK SERIES A SERIES B SERIES A SERIES B CAPITAL
--------- -------- -------- -------- -------- ----------
AMOUNTS IN MILLIONS
Balance at January 1, 2007.......................... $ -- 1 -- 6 -- 28,112
Net earnings...................................... -- -- -- -- -- --
Other comprehensive loss.......................... -- -- -- -- -- --
Issuance of common stock for acquisition.......... -- -- -- -- -- 7
Cumulative effects of accounting changes, net
(notes 12 and 13)............................... -- -- -- -- -- --
Issuance of common stock upon exercise of stock
options......................................... -- -- -- -- -- 30
Series A Liberty Capital stock repurchases........ -- -- -- -- -- (1,305)
Series A Liberty Interactive stock repurchases.... -- -- -- -- (531)
Stock compensation................................ -- -- -- -- -- 20
Other............................................. -- -- -- -- -- (9)
--------- -------- -------- -------- --- ------
Balance at June 30, 2007............................ $ -- 1 -- 6 -- 26,324
========= ======== ======== ======== === ======
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE ACCUMULATED STOCKHOLDERS'
EARNINGS DEFICIT EQUITY
------------- ------------ -------------
AMOUNTS IN MILLIONS
Balance at January 1, 2007.......................... 5,952 (12,438) 21,633
Net earnings...................................... -- 1,378 1,378
Other comprehensive loss.......................... (421) -- (421)
Issuance of common stock for acquisition.......... -- -- 7
Cumulative effects of accounting changes, net
(notes 12 and 13)............................... -- 222 222
Issuance of common stock upon exercise of stock
options......................................... -- -- 30
Series A Liberty Capital stock repurchases........ -- -- (1,305)
Series A Liberty Interactive stock repurchases.... -- -- (531)
Stock compensation................................ -- -- 20
Other............................................. -- -- (9)
----- ------- ------
Balance at June 30, 2007............................ 5,531 (10,838) 21,024
===== ======= ======
See accompanying notes to condensed consolidated financial statements.
I-6
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
(UNAUDITED)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Liberty Media Corporation and its controlled subsidiaries
(collectively, "Liberty" or the "Company," unless the context otherwise
requires). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Liberty, 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.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for such
periods have been included. The results of operations for any interim period are
not necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in Liberty's
Annual Report on Form 10-K for the year ended December 31, 2006.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Liberty considers (i) the estimate of the
fair value of its long-lived assets (including goodwill) and any resulting
impairment charges, (ii) its accounting for income taxes, (iii) the fair value
of its derivative instruments, (iv) its assessment of other-than-temporary
declines in fair value of its investments and (v) 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 condensed consolidated financial statements.
Certain prior period amounts have been reclassified for comparability with
the 2007 presentation.
(2) Tracking Stocks
On May 9, 2006, Liberty completed a restructuring (the "Restructuring")
pursuant to which the Company was organized as a new holding company and issued
two new tracking stocks. In the Restructuring, Liberty became the new publicly
traded parent company of Liberty Media LLC
I-7
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
("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 Series A Liberty
Interactive common stock and 0.05 of a share of the Company's Series A Liberty
Capital 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
Series B Liberty Interactive common stock and 0.05 of a share of the Company's
Series B Liberty Capital common stock, in each case, with cash in lieu of any
fractional shares. Liberty is the successor reporting company to Old Liberty.
Each tracking stock is intended to track and reflect the economic performance of
one of two 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"), Backcountry.com, Inc. ("Backcountry"),
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 for the Interactive
Group. In addition, Liberty has attributed $3,107 million principal amount
(as of June 30, 2007) of its senior notes and debentures 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 ("Starz Entertainment"), Starz Media, LLC ("Starz Media"),
FUN Technologies, Inc. ("FUN"), Atlanta National League Baseball Club, Inc.
(the "Atlanta Braves"), Leisure Arts, Inc. ("Leisure Arts"), TruePosition, Inc.
("TruePosition") and WFRV and WJMN Television Station, Inc. ("WFRV TV Station");
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
$5,233 million principal amount (as of June 30, 2007) of its senior exchangeable
debentures and bank debt to the Capital Group.
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for attributed
financial information for Liberty's tracking stock groups.
I-8
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("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
financial statements.
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.
(4) Stock-Based Compensation
The Company has granted to certain of its employees and employees of its
subsidiaries options, stock appreciation rights ("SARs") and options with tandem
SARs (collectively, "Awards") to purchase shares of Series A and Series B
Liberty Capital common stock and Series A and Series B Liberty Interactive
common stock. The Awards generally vest over a 4-5 year period and expire
7-10 years from the date of grant. Upon exercise of Awards that are settled in
common stock, Liberty issues new shares from its authorized, but unissued
shares.
STATEMENT 123R
Liberty accounts for compensation related to Awards granted to its employees
pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004),
"SHARE-BASED PAYMENT" ("Statement 123R"). Statement 123R established 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 Company adopted Statement 123R effective January 1, 2006. In connection
with such adoption, the Company recorded an $89 million transition adjustment,
net of related income taxes.
The Company has calculated the grant-date fair value for all of its equity
classified awards and any subsequent remeasurement of its liability classified
awards using the Black-Scholes Model. Prior to
I-9
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2007, the Company calculated the expected term of the Awards using the
methodology included in SEC Staff Accounting Bulletin No. 107. In 2007, the
Company estimated the expected term of the Awards based on historical exercise
and forfeiture data. The volatility used in the calculation for Awards granted
in 2007 is 20.8% for Liberty Interactive Awards and 17.5% for Liberty Capital
Awards and is based on the historical volatility of Liberty's stocks and the
implied volatility of publicly traded Liberty options. The Company uses the
risk-free rate for Treasury Bonds with a term similar to that of the subject
options.
Included in selling, general and administrative expenses in the accompanying
condensed consolidated statements of operations are the following amounts of
stock-based compensation (amounts in millions):
Three months ended:
June 30, 2007............................................. $18
June 30, 2006............................................. $21
Six months ended:
June 30, 2007............................................. $40
June 30, 2006............................................. $51
As of June 30, 2007, the total compensation cost related to unvested Liberty
equity awards was approximately $68 million. Such amount will be recognized in
the Company's consolidated statements of operations over a weighted average
period of approximately 2.0 years.
LIBERTY AWARDS
During the six months ended June 30, 2007, Liberty granted 402,503 options
to purchase shares of Series A Liberty Capital common stock and
2,021,755 options to purchase shares of Series A Liberty Interactive common
stock to certain of its directors, officers and employees and officers and
employees of certain subsidiaries. Liberty used the Black-Scholes Model to
estimate the grant date fair value of such options. The Series A Liberty Capital
options and the Series A Liberty Interactive options granted in 2007 had a
weighted average grant-date fair value of $27.79 and $6.60, respectively.
The following table presents the number and weighted average exercise price
("WAEP") of options, SARs and options with tandem SARs to purchase Liberty
common stock granted to certain officers, employees and directors of
the Company.
SERIES A SERIES B SERIES A SERIES B
LIBERTY LIBERTY LIBERTY LIBERTY
CAPITAL CAPITAL INTERACTIVE INTERACTIVE
COMMON COMMON COMMON COMMON
STOCK WAEP STOCK WAEP STOCK WAEP STOCK WAEP
--------- -------- --------- -------- ----------- -------- ----------- --------
NUMBERS OF OPTIONS IN THOUSANDS
Outstanding at January 1, 2007... 2,318 $ 93.24 1,498 $101.37 21,503 $19.71 7,491 $23.41
Granted........................ 403 $109.38 -- 2,022 $23.88 --
Exercised...................... (202) $ 82.52 -- (1,549) $17.47 --
Forfeited...................... (17) $275.00 -- (366) $35.57 --
Repurchased.................... -- -- (510) $17.76 --
----- ----- ------ -----
Outstanding at June 30, 2007..... 2,502 $ 94.30 1,498 $101.37 21,100 $20.02 7,491 $23.41
===== ===== ====== =====
Exercisable at June 30, 2007..... 1,575 $ 96.86 1,468 $101.69 9,149 $21.56 7,341 $23.48
===== ===== ====== =====
I-10
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides additional information about outstanding
options to purchase Liberty common stock at June 30, 2007.
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)
----------- ----------- --------- --------- ----------- ----------- ---------
Series A Capital...... 2,502 $ 94.30 5.0 years $63,786 1,575 $ 96.86 $38,071
Series B Capital...... 1,498 $101.37 3.9 years $24,923 1,468 $101.69 $23,948
Series A
Interactive......... 21,100 $ 20.02 5.4 years $61,450 9,149 $ 21.56 $16,774
Series B
Interactive......... 7,491 $ 23.41 3.9 years $ 1,103 7,341 $ 23.48 $ 735
(5) 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 2,806 million and 2,803 million
weighted average outstanding shares of Liberty common stock for the period from
April 1, 2006 to May 10, 2006 and the period from January 1, 2006 to May 10,
2006, respectively.
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.
Loss from discontinued operations per common share for the period from
January 1, 2006 to May 10, 2006 was less than $.01.
LIBERTY CAPITAL COMMON STOCK
The basic and diluted EPS calculation is based on the following weighted
average outstanding shares. Excluded from diluted EPS for the six months ended
June 30, 2007 are less than 1 million potential common shares because their
inclusion would be anti-dilutive.
LIBERTY CAPITAL COMMON STOCK
------------------------------------------------
THREE PERIOD FROM
MONTHS SIX MONTHS MAY 11, 2006
ENDED ENDED TO
JUNE 30, 2007 JUNE 30, 2007 JUNE 30, 2006
-------------- -------------- --------------
NUMBERS OF SHARES IN MILLIONS
Basic EPS............................................... 131 135 140
Stock options........................................... -- 1 --
--- --- ---
Diluted EPS............................................. 131 136 140
=== === ===
Earnings from discontinued operations per common share for the three and six
months ended June 30, 2007 was $.82 and 1.10, respectively.
I-11
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LIBERTY INTERACTIVE COMMON STOCK
The basic and diluted EPS calculation is based on the following weighted
average outstanding shares. Excluded from diluted EPS for the six months ended
June 30, 2007 are approximately 2 million potential common shares because their
inclusion would be anti-dilutive.
LIBERTY INTERACTIVE COMMON STOCK
------------------------------------------------
THREE PERIOD FROM
MONTHS SIX MONTHS MAY 11, 2006
ENDED ENDED TO
JUNE 30, 2007 JUNE 30, 2007 JUNE 30, 2006
-------------- -------------- --------------
NUMBERS OF SHARES IN MILLIONS
Basic EPS............................................... 648 650 694
Stock options........................................... 4 4 --
--- --- ---
Diluted EPS............................................. 652 654 694
=== === ===
(6) Supplemental Disclosures to Statements of Cash Flows
SIX MONTHS
ENDED
JUNE 30,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Cash paid for acquisitions:
Fair value of assets acquired............................. $ 168 770
Net liabilities assumed................................... (34) (49)
Deferred tax liabilities.................................. -- (48)
Minority interest......................................... (1) (72)
Common stock issued....................................... (7) --
------ ---
Cash paid for acquisitions, net of cash acquired........ $ 126 601
====== ===
Available-for-sale securities exchanged for consolidated
subsidiaries and cash..................................... $1,718 --
====== ===
(7) Discontinued Operations
SALE OF OPENTV CORP.
On January 16, 2007, Liberty completed the sale of its controlling interest
in OpenTV Corp. ("OPTV") to an unaffiliated third party for cash consideration
of $132 million, $20 million of which was deposited in an escrow account to fund
potential indemnification claims by the third party made prior to the first
anniversary of the closing. Pursuant to an agreement between Liberty and OPTV,
$5.4 million of the amount received by Liberty at closing was remitted to OPTV,
and OPTV will be entitled to 71.4% of any amounts released from the escrow
account in the future. Liberty recognized a pre-tax gain of $65 million upon
consummation of the sale. Such gain is included in earnings from discontinued
operations in the accompanying condensed consolidated statement of operations.
OPTV was attributed to the Capital Group.
I-12
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SALE OF ASCENT ENTERTAINMENT GROUP, INC.
On April 4, 2007, Liberty consummated a transaction with an unaffiliated
third party pursuant to which Liberty sold its 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. Liberty
recognized a pre-tax gain of $163 million upon consummation of the sale. Such
gain is included in earnings from discontinued operations. AEG's primary
operating subsidiary is On Command Corporation. Subsequent to the closing,
Liberty owns approximately 9% of the buyer's outstanding common stock. AEG was
attributed to the Capital Group.
The condensed consolidated financial statements and accompanying notes of
Liberty have been prepared to reflect OPTV and AEG as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of OPTV and AEG have been excluded from the respective captions in the
accompanying condensed consolidated balance sheets, statements of operations,
statements of comprehensive earnings (loss) and statements of cash flows and
have been reported under the heading of discontinued operations in such
condensed consolidated financial statements.
(8) Investments in Available-for-Sale Securities and Other Cost Investments
Investments in available-for-sale securities and other cost investments are
summarized as follows:
JUNE 30, DECEMBER 31,
2007 2006
--------- -------------
AMOUNTS IN MILLIONS
Capital Group
News Corporation.......................................... $11,198 11,158
Time Warner Inc. ("Time Warner")(1)....................... 2,161 3,728
Sprint Nextel Corporation(2).............................. 1,810 1,651
Motorola, Inc.(3)......................................... 1,310 1,522
Other available-for-sale equity securities(4)............. 711 830
Other available-for-sale debt securities.................. 338 135
Other cost investments and related receivables............ 43 34
------- ------
Total attributed Capital Group.......................... 17,571 19,058
------- ------
Interactive Group
IAC/InterActiveCorp....................................... 2,396 2,572
Other..................................................... 210 --
------- ------
Total attributed Interactive Group...................... 2,606 2,572
------- ------
Consolidated Liberty.................................. 20,177 21,630
Less short-term investments........................... -- (8)
------- ------
$20,177 21,622
======= ======
------------------------
(1) Includes $191 million and $198 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2007 and December 31, 2006,
respectively.
(2) Includes $187 million and $170 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2007 and December 31, 2006,
respectively.
I-13
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) Includes $919 million and $1,068 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2007 and December 31, 2006,
respectively.
(4) Includes $64 million and $46 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2007 and December 31, 2006,
respectively.
TIME WARNER
On May 17, 2007, Liberty completed a transaction (the "Time Warner
Exchange") with Time Warner in which Liberty exchanged approximately
68.5 million shares of Time Warner common stock valued at $1,479 million,
subject to a working capital adjustment, for a subsidiary of Time Warner which
holds the Atlanta Braves, Leisure Arts and $984 million in cash. Liberty
recognized a pre-tax gain of $582 million based on the difference between the
fair value and the weighted average cost basis of the Time Warner shares
exchanged.
On a pro forma basis, the results of operations of the Atlanta Braves and
Leisure Arts are not significant to those of Liberty for the six months ended
June 30, 2007 and 2006.
UNREALIZED HOLDING GAINS AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities are summarized below.
JUNE 30, 2007 DECEMBER 31, 2006
----------------------- -----------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- ----------
AMOUNTS IN MILLIONS
Gross unrealized holding gains.......................... $8,633 -- 9,335 --
Gross unrealized holding losses......................... $ (1) -- (1) --
The aggregate fair value of securities with unrealized holding losses at
June 30, 2007 was $6 million. None of these securities had unrealized losses for
more than 12 continuous months.
(9) Investment in Special Purpose Entity
In April 2007, Liberty and a third party financial institution
(the "Financial Institution") jointly created a series of special purpose
entities (the "Investment Fund"). Pursuant to the terms of the Investment Fund,
a Liberty subsidiary borrowed $750 million from the Financial Institution with
the intent to invest such proceeds in a portfolio of selected debt and
mezzanine-level instruments of companies in the telecommunications, media and
technology sectors (the "Debt Securities") that Liberty believes have favorable
risk/return profiles. One of the special purpose entities in the Investment Fund
("MFC") is a variable interest entity in which the Financial Institution has
been deemed the primary beneficiary and thus its parent for consolidation
purposes. Liberty contributed the borrowed funds to MFC in exchange for a
mandatorily redeemable preferred stock interest. MFC subsequently invested the
proceeds as an equity investment in another special purpose entity ("LCAP
Investments LLC") which will make and hold the investments in the Debt
Securities. A Liberty subsidiary separately made a nominal investment in LCAP
Investments LLC which allows it to serve as its Managing Member. LCAP
Investments LLC is considered a variable interest entity in which Liberty is
deemed the primary beneficiary as a result of various special profit and loss
allocations set forth in the governing agreements. As a result, LCAP
Investments LLC is treated as a consolidated subsidiary
I-14
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of Liberty. Liberty is required to post cash collateral for the benefit of the
Financial Institution of up to 20% of the cost of the Debt Securities.
The various accounting treatment determinations noted above for MFC and LCAP
Investments LLC, as prescribed by FIN 46, "CONSOLIDATION OF VARIABLE INTEREST
ENTITIES," and Statement of Financial Accounting Standards No. 150, "ACCOUNTING
FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY," and related interpretations, have resulted in Liberty recording a
balance sheet gross-up of the elements in the Investment Fund. The cash balances
and Debt Securities held by LCAP Investments LLC are consolidated with Liberty
and included in restricted cash and AFS securities, respectively. The
$750 million of bank financing held by the Liberty subsidiary is included in
Liberty's consolidated debt balance. In addition, the preferred stock interest
in MFC is presented separately as a long-term asset, and the equity interest
held by MFC in LCAP Investments LLC is reflected as minority interest in
Liberty's condensed consolidated balance sheet. The structural form of the
Investment Fund did not meet the GAAP requirements necessary to offset, net or
otherwise eliminate the gross-up of balance sheet accounts.
The amount of restricted cash in the Investment Fund at June 30, 2007 is
$734 million and is reflected in other long-term assets in Liberty's condensed
consolidated balance sheet.
(10) Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill for the six months ended
June 30, 2007 are as follows:
STARZ
QVC ENTERTAINMENT OTHER TOTAL
-------- ------------- -------- --------
AMOUNTS IN MILLIONS
Balance at January 1, 2007............................... $5,416 1,371 801 7,588
Acquisitions(1)........................................ -- -- 329 329
Foreign currency translation........................... 13 -- -- 13
Other(2)............................................... (31) -- -- (31)
------ ----- ----- -----
Balance at June 30, 2007................................. $5,398 1,371 1,130 7,899
====== ===== ===== =====
------------------------
(1) The increase in goodwill relates primarily to the Time Warner Exchange and
an exchange transaction with CBS Corporation in which Liberty received WFRV
TV Station. The amount of goodwill recorded represents the difference
between the consideration given up and the estimated fair value of the
assets acquired. Such goodwill is subject to adjustment pending the
completion of the Company's purchase price allocation process.
(2) Other for QVC relates to the reversal of certain tax reserves in connection
with the adoption of FIN 48 (see note 13). Such tax reserves were
established prior to Liberty's acquisition of a controlling interest in QVC
in 2003. Accordingly, the offset to the reversal of the tax reserves is a
reduction of goodwill.
I-15
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
AMORTIZABLE INTANGIBLE ASSETS
Amortization of intangible assets with finite useful lives was $251 million
and $230 million for the six months ended June 30, 2007 and 2006, respectively.
Based on its current amortizable intangible assets, Liberty expects that
amortization expense will be as follows for the next five years (amounts
in millions):
Remainder of 2007........................................... $259
2008........................................................ $481
2009........................................................ $434
2010........................................................ $402
2011........................................................ $375
(11) Financial Instruments
The Company's financial instruments are summarized as follows:
JUNE 30, DECEMBER 31,
TYPE OF FINANCIAL INSTRUMENT 2007 2006
---------------------------- --------- -------------
AMOUNTS IN MILLIONS
ASSETS
Equity collars...................................... $ 1,041 1,218
Other............................................... 224 361
------- ------
1,265 1,579
Less current portion................................ (174) (239)
------- ------
$ 1,091 1,340
======= ======
LIABILITIES
Borrowed shares..................................... $ 1,361 1,482
Exchangeable debenture call option obligations(1)... -- 1,280
Equity collars...................................... 131 416
Other............................................... 4 12
------- ------
1,496 3,190
Less current portion................................ (1,365) (1,484)
------- ------
$ 131 1,706
======= ======
I-16
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized and unrealized gains (losses) on financial instruments are
comprised of changes in fair value of the following:
SIX MONTHS
ENDED
JUNE 30,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Senior exchangeable debentures(1)........................... $ 61 --
Equity collars.............................................. (71) (61)
Borrowed shares............................................. 121 105
Exchangeable debenture call option obligations(1)........... -- 140
Other derivatives........................................... (18) (15)
---- ----
$ 93 169
==== ====
------------------------
(1) See note 12 regarding the accounting for the Company's senior exchangeable
debentures.
I-17
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) Long-Term Debt
Debt is summarized as follows:
OUTSTANDING CARRYING VALUE
PRINCIPAL -------------------------
JUNE 30, JUNE 30, DECEMBER 31,
2007 2007 2006
----------- --------- -------------
AMOUNTS IN MILLIONS
Capital Group
Senior exchangeable debentures
0.75% Senior Exchangeable Debentures due 2023.......... $ 1,750 2,148 1,637
4% Senior Exchangeable Debentures due 2029............. 869 578 254
3.75% Senior Exchangeable Debentures due 2030.......... 810 470 234
3.5% Senior Exchangeable Debentures due 2031........... 503 504 238
3.25% Senior Exchangeable Debentures due 2031.......... 551 471 119
Liberty bank facility.................................... 750 750 --
Subsidiary debt.......................................... 103 103 158
------- ------- -----
Total attributed Capital Group debt.................. 5,336 5,024 2,640
------- ------- -----
Interactive Group
Senior notes and debentures
7.875% Senior Notes due 2009........................... 670 667 667
7.75% Senior Notes due 2009............................ 233 234 234
5.7% Senior Notes due 2013............................. 802 801 800
8.5% Senior Debentures due 2029........................ 500 495 495
8.25% Senior Debentures due 2030....................... 902 895 895
QVC bank credit facilities............................... 3,675 3,675 3,225
Other subsidiary debt.................................... 74 74 67
------- ------- -----
Total attributed Interactive Group debt.............. 6,856 6,841 6,383
------- ------- -----
Total consolidated Liberty debt.......................... $12,192 11,865 9,023
=======
Less current maturities................................ (220) (114)
------- -----
Total long-term debt....................................... $11,645 8,909
======= =====
SENIOR EXCHANGEABLE DEBENTURES
Effective January 1, 2007, Liberty adopted 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 of Financial Accounting Standards No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("Statement
133"), and permits fair value remeasurement of hybrid financial instruments that
contain an embedded derivative that otherwise would require bifurcation. Under
Statement 133, Liberty reported the fair value of the call option feature
separate from the long-term debt. The long-term debt portion was reported as the
difference between the face amount of the debenture and the fair value of the
call option feature on the date of issuance and was accreted through interest
expense to its face amount over the expected term of the debenture. Pursuant to
the provisions of Statement 155, Liberty now accounts for its senior
exchangeable debentures at fair value rather than bifurcating such instruments
into a debt instrument and a derivative instrument. Increases in the fair value
of the
I-18
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
exchangeable debentures are included in realized and unrealized gains on
financial instruments in the accompanying condensed consolidated statements of
operations and aggregated $61 million for the six months ended June 30, 2007.
The impact--increase/(decrease)--on Liberty's balance sheet of the adoption
of Statement 155 is as follows (amounts in millions):
Long-term financial instrument liabilities.................. $(1,280)
Long-term debt.............................................. $ 1,848
Deferred income tax liabilities............................. $ (216)
Accumulated deficit......................................... $ 352
LIBERTY BANK FACILITY
Represents borrowings related to the Investment Fund described in note 9
above. Borrowings accrue interest at a rate of LIBOR plus an applicable margin.
QVC BANK CREDIT FACILITIES
QVC is party to an unsecured $3.5 billion bank credit facility dated
March 3, 2006 (the "March 2006 Credit Agreement"). The March 2006 Credit
Agreement is comprised of an $800 million U.S. dollar term loan, an
$800 million U.S. dollar term loan, a $600 million multi-currency term loan that
was drawn in U.S. dollars, 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.
QVC is party to a second credit agreement dated October 4, 2006, as amended
on March 20, 2007 (the "October 2006 Credit Agreement"), which provides for an
additional unsecured $1.75 billion credit facility, consisting of an
$800 million initial term loan, 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 December 31, 2007 and are subject to reductions in the
principal amount available. The loans are scheduled to mature on
October 4, 2011.
All loans under the March 2006 Credit Agreement and the October 2006 Credit
Agreement 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 the respective Administrative Agent from time to time. QVC is required to pay
a commitment fee quarterly in arrears on the unused portion of the commitments.
The credit agreements contain restrictive covenants regarding, among other
matters, the maintenance of certain financial ratios and limitations on
indebtedness, liens, encumbrances, dispositions, guarantees and dividends. QVC
was in compliance with its debt covenants at June 30, 2007. 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 borrowings.
QVC INTEREST RATE SWAP ARRANGEMENTS
During 2006, QVC entered into ten separate interest rate swap arrangements
with an aggregate notional amount of $2,200 million to manage the cash flow risk
associated with interest payments on its
I-19
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
variable rate debt. The swap arrangements provide for QVC to make fixed payments
at rates ranging from 4.9575% to 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 condensed consolidated balance sheet.
OTHER SUBSIDIARY DEBT
Other subsidiary debt at June 30, 2007, is comprised of capitalized
satellite transponder lease obligations and bank debt of certain subsidiaries.
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities that are not reported at fair value in the accompanying
condensed consolidated balance sheet at June 30, 2007 is as follows (amounts
in millions):
Senior notes................................................ $1,678
Senior debentures........................................... $1,379
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at June 30, 2007.
(13) Income Taxes
FIN 48
Effective January 1, 2007, Liberty adopted 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. In instances where the Company has taken or expects to take a tax
position in its tax return and the Company believes it is more likely than not
that such tax position will be upheld by the relevant taxing authority, the
Company may record a benefit for such tax position in its consolidated financial
statements.
The impact--increase/(decrease)--on Liberty's balance sheet of the adoption
of FIN 48 is as follows (amounts in millions):
Tax liabilities (including interest and penalties).......... $(634)
Goodwill.................................................... $ (31)
Deferred tax liabilities.................................... $ 36
Accumulated deficit......................................... $(574)
Other assets................................................ $ 7
I-20
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of January 1, 2007, the Company had recorded tax reserves of
$422 million related to unrecognized tax benefits for uncertain tax positions.
If such tax benefits were to be recognized for financial statement purposes,
$360 million would be reflected in the Company's tax expense and affect its
effective tax rate. Liberty's estimate of its unrecognized tax benefits related
to uncertain tax positions requires a high degree of judgment, which may be
subject to change in the future. However, based on information currently
available to it, Liberty does not believe it is reasonably possible that its
judgments will change significantly in the next 12 months.
When the tax law requires interest to be paid on an underpayment of income
taxes, the Company recognizes interest expense from the first period the
interest would begin accruing according to the relevant tax law. Such interest
expense is included in interest expense in the accompanying condensed
consolidated statements of operations. Any accrual of penalties related to
underpayment of income taxes on uncertain tax positions is included in other
income (expense) in the accompanying condensed consolidated statements of
operations. As of January 1, 2007, the Company had recorded $18 million of
accrued interest and penalties related to uncertain tax positions.
As of June 30, 2007, the Company's 2001 and 2002 tax years are closed for
federal income tax purposes, although tax loss carryforwards from those years
are still subject to adjustment. The Company's tax years 2003 through 2006
remain subject to examination by the IRS for federal income tax purposes.
EFFECTIVE TAX RATE
The Time Warner Exchange and the CBS Exchange qualify as IRC Section 355
transactions, and therefore do not trigger federal or state income tax
obligations. In addition, upon consummation of the exchange transactions,
deferred tax liabilities previously recorded for the difference between
Liberty's book and tax bases in its Time Warner and CBS Corporation investments
in the amount of $354 million were reversed with an offset to income tax
benefit. Accordingly, an income tax benefit adjustment of approximately
$541 million will be included in Liberty's reconciliation of computed "expected"
income taxes to actual income taxes for the year ended December 31, 2007.
(14) Stockholders' Equity
As of June 30, 2007, there were 2.5 million and 1.5 million shares of
Series A and Series B Liberty Capital common stock, respectively, reserved for
issuance under exercise privileges of outstanding stock options.
As of June 30, 2007, there were 21.1 million and 7.5 million shares of
Series A and Series B Liberty Interactive common stock, respectively, reserved
for issuance under exercise privileges of outstanding stock options.
In addition to the Series A and Series B Liberty Capital common stock and
the Series A and Series B Liberty Interactive common stock, there are
300 million and 1,500 million shares of Series C Liberty Capital and Series C
Liberty Interactive common stock, respectively, authorized for issuance. As of
June 30, 2007, no shares of either Series C common stock were issued
or outstanding.
During the six months ended June 30, 2007, the Company repurchased
2.0 million shares of Series A Liberty Interactive common stock in the open
market for aggregate cash consideration of $46.2 million. Such shares were
repurchased pursuant to a previously announced share repurchase program and have
been retired and returned to the status of authorized and available
for issuance.
I-21
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In addition, on May 15, 2007, Liberty commenced a tender offer pursuant to
which it sought to purchase up to 19,417,476 shares of Series A Liberty
Interactive common stock at a price not greater than $25.75 or less than $23.75
per share. The tender offer expired on June 12, 2007, and 27,543,660 shares of
Series A Liberty Interactive common stock were properly tendered at or below a
purchase price of $24.95 per share. The final proration factor was approximately
70.3952% and Liberty accepted for purchase 19,417,476 shares at a price of
$24.95 per share, or aggregate cash consideration of $484.5 million.
Liberty commenced a tender offer on March 7, 2007 that it subsequently
amended on March 20, 2007. Pursuant to the tender offer, as amended, Liberty
sought to purchase up to 8,849,500 shares of Series A Liberty Capital common
stock at a price not greater than $113.00 or less than $105.00 per share. The
tender offer expired on April 5, 2007, and 11,858,343 shares of Series A Liberty
Capital common stock were properly tendered. Liberty exercised its right to
purchase an additional 2% of its outstanding Series A Liberty Capital common
stock and accepted for purchase 11,540,680 shares at a price of $113.00 per
share or aggregate cash consideration of $1,305 million (including transaction
costs).
During the six months ended June 30, 2007, the Company sold put options on
Series A Liberty Capital common stock for aggregate cash proceeds of
approximately $5.5 million. As of June 30, 2007, put options with respect to
approximately 1,307,000 shares of Series A Liberty Capital common stock with a
weighted average put price of $114.78 remained outstanding. Such put options
expire on or before August 31, 2007. The Company accounts for these put options
pursuant to Statement of Financial Accounting Standards No. 150, "ACCOUNTING
FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND
EQUITY." Accordingly, the put options are recorded in financial 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 condensed consolidated statement of operations.
(15) Commitments and Contingencies
FILM RIGHTS
Starz Entertainment, a wholly-owned subsidiary of Liberty, provides video
programming distributed by cable operators, direct-to-home satellite providers,
other distributors and via the Internet 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 June 30, 2007 is reflected as a liability
in the accompanying condensed consolidated balance sheet. The balance due as of
June 30, 2007 is payable as follows: $139 million in 2007, $15 million in 2008
and $23 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 June 30, 2007. Starz Entertainment's estimate
of amounts payable under these agreements is as follows: $203 million in 2007;
$409 million in 2008; $90 million in 2009; $74 million in 2010; $31 million in
2011; and $68 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
I-22
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
studios owned by Sony Pictures Entertainment ("Sony") through 2010 and all
qualifying films produced for theatrical release in the United States by
Revolution Studios, an equity affiliate, 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, such payments to Sony
would be amortized ratably as programming expense over the extension period
beginning in 2011. An extension of this agreement would also result in the
payment by Starz Entertainment of Programming Fees for qualifying films released
by Sony during the extension period. If Disney elects to extend its contract,
Starz Entertainment would not be obligated to pay any amounts in excess of its
Programming Fees for qualifying films released by Disney during the extension
period. The Disney option expires December 31, 2007.
GUARANTEES
Liberty guarantees Starz Entertainment's obligations under certain of its
studio output agreements. At June 30, 2007, Liberty's guarantee for obligations
for films released by such date aggregated $694 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 condensed consolidated financial statements with respect to these
indemnification guarantees.
EMPLOYMENT CONTRACTS
The Atlanta Braves and certain of their players and coaches have entered
into long-term employment contracts whereby such individuals' compensation is
guaranteed. Amounts due under guaranteed contracts as of June 30, 2007
aggregated $148 million, which is payable as follows: $42 million in 2007,
$65 million in 2008, $19 million in 2009 and $22 million thereafter. In addition
to the foregoing amounts, certain players and coaches may earn incentive
compensation under the terms of their employment contracts.
I-23
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATING LEASES
Liberty and its subsidiaries lease business offices and other facilities,
have entered into satellite transponder lease agreements and use certain
equipment under lease arrangements.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
INCOME TAXES
Since the date Liberty issued its exchangeable debentures, it has claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which it could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in Liberty claiming interest deductions significantly in
excess of the cash interest currently paid on its exchangeable debentures. In
this regard, Liberty has deducted $2,577 million in cumulative interest expense
associated with the exchangeable debentures since the Company's 2001 split-off
from AT&T. Of that amount, $785 million represents cash interest payments.
Interest deducted in prior years on its exchangeable debentures has contributed
to net operating losses ("NOLs") that may be carried to offset taxable income in
2006 and later years. These NOLs and current interest deductions on the
exchangeable debentures are being used to offset taxable income currently being
generated.
The IRS has issued Technical Advice Memorandums (the "TAMs") challenging the
current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures.
The IRS has made inquiries and started an examination of Liberty's exchangeable
debentures. If the IRS were to challenge Liberty's tax treatment of these
interest deductions, and ultimately win such challenge, there would be no impact
to Liberty's reported total tax expense as the resulting increase in current tax
expense would be offset by a decrease in deferred tax expense. However, Liberty
would be required to make current federal income tax payments and may be
required to make interest payments to the IRS. These payments could prove to
be significant.
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 Corp. and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement").
While Liberty was a subsidiary of AT&T, Liberty recorded its stand-alone tax
provision on a separate return basis. Under the AT&T Tax Sharing Agreement,
Liberty received a cash payment from AT&T in periods when Liberty generated
taxable losses and such taxable losses were utilized by AT&T to reduce its
consolidated income tax liability. To the extent such losses were not utilized
by AT&T, such amounts were available to reduce federal taxable income generated
by Liberty in future periods, similar to a net operating loss carryforward, and
were accounted for as a deferred federal income tax benefit. Subsequent to
Liberty's split off from AT&T, if adjustments are made to amounts previously
paid under the AT&T Tax Sharing Agreement, such adjustments are reflected as
adjustments to additional paid-in capital.
I-24
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with
Liberty's split off from AT&T, AT&T was required to pay Liberty an amount equal
to 35% of the amount of the net operating losses reflected in TCI's final
federal income tax return ("TCI NOLs") that had not been used as an offset to
Liberty's obligations under the AT&T Tax Sharing Agreement and that had been, or
were reasonably expected to be, utilized by AT&T. In connection with the split
off, Liberty received an $803 million payment for TCI's NOLs and recorded such
payment as an increase to additional paid-in capital. Liberty was not paid for
certain of TCI's NOLs ("SRLY NOLs") due to limitations and uncertainty regarding
AT&T's ability to use them to offset taxable income in the future. In the event
AT&T was ultimately able to use any of the SRLY NOLs, AT&T would be required to
pay Liberty 35% of the amount of the SRLY NOLs used.
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.
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 has been 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.
(16) 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 the issuance
of its tracking stocks, Liberty divided its businesses into two groups: the
Interactive Group and the Capital Group. Each of the businesses in the tracking
stock groups is separately managed. Liberty identifies its reportable segments
as (A) those consolidated subsidiaries that represent 10% or more of its
consolidated revenue, earnings before income taxes or
I-25
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
total assets and (B) those equity method affiliates whose share of earnings
represent 10% or more of Liberty's consolidated earnings before income taxes.
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 measure 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, separately reported
litigation settlements and restructuring and impairment charges that are
included in the measurement of operating income pursuant to GAAP. Accordingly,
operating cash flow should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow provided by operating activities
and other measures of financial performance prepared in accordance with GAAP.
Liberty generally accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current prices.
For the six months ended June 30, 2007, Liberty has identified the following
businesses as its reportable segments:
- QVC--consolidated subsidiary attributed to the Interactive Group that
markets and sells a wide variety of consumer products in the U.S. and
several foreign countries, primarily by means of televised shopping
programs on the QVC networks and via the Internet through its domestic and
international websites.
- Starz Entertainment--consolidated subsidiary attributed to the Capital
Group that provides video 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.
I-26
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERFORMANCE MEASURES
SIX MONTHS ENDED JUNE 30,
-----------------------------------------------------
2007 2006
------------------------- -------------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW (DEFICIT) REVENUE FLOW (DEFICIT)
-------- -------------- -------- --------------
AMOUNTS IN MILLIONS
Interactive Group
QVC................................ $3,377 757 3,185 733
Corporate and other................ 185 18 138 17
------ --- ----- ---
3,562 775 3,323 750
------ --- ----- ---
Capital Group
Starz Entertainment................ 519 128 523 91
Corporate and other................ 235 (64) 80 (22)
------ --- ----- ---
754 64 603 69
------ --- ----- ---
Consolidated Liberty................. $4,316 839 3,926 819
====== === ===== ===
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------------
2007 2006
------------------------- -------------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW (DEFICIT) REVENUE FLOW (DEFICIT)
-------- -------------- -------- --------------
AMOUNTS IN MILLIONS
Interactive Group
QVC................................ $1,693 383 1,630 378
Corporate and other................ 98 10 85 7
------ --- ----- ---
1,791 393 1,715 385
------ --- ----- ---
Capital Group
Starz Entertainment................ 254 55 264 50
Corporate and other................ 148 (31) 46 (11)
------ --- ----- ---
402 24 310 39
------ --- ----- ---
Consolidated Liberty................. $2,193 417 2,025 424
====== === ===== ===
I-27
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER INFORMATION
JUNE 30, 2007
-------------------------------------
INVESTMENTS
TOTAL IN CAPITAL
ASSETS AFFILIATES EXPENDITURES
-------- ----------- ------------
AMOUNTS IN MILLIONS
Interactive Group
QVC........................................ $19,577 -- 162
Corporate and other........................ 5,785 1,279 5
Intragroup elimination..................... (5,810) -- --
------- ----- ---
19,552 1,279 167
------- ----- ---
Capital Group
Starz Entertainment........................ 2,835 -- 3
Corporate and other........................ 25,303 517 9
------- ----- ---
28,138 517 12
------- ----- ---
Inter-group eliminations..................... (116) -- --
------- ----- ---
Consolidated Liberty......................... $47,574 1,796 179
======= ===== ===
The following table provides a reconciliation of consolidated segment
operating cash flow to earnings from continuing operations before income taxes
and minority interests:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Consolidated segment operating cash flow.................... $ 417 424 839 819
Stock-based compensation.................................... (18) (21) (40) (51)
Depreciation and amortization............................... (172) (146) (323) (287)
Interest expense............................................ (145) (160) (295) (308)
Realized and unrealized gains (losses) on financial
instruments, net.......................................... (251) 362 93 169
Gains on dispositions of assets, net........................ 629 303 635 327
Other, net.................................................. 85 69 169 137
----- ---- ----- ----
Earnings from continuing operations before income taxes
and minority interests.................................. $ 545 831 1,078 806
===== ==== ===== ====
I-28
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our business,
product and marketing strategies, new service offerings, our tax sharing
arrangement with AT&T and estimated amounts payable under that arrangement,
revenue growth and subscriber trends at QVC and Starz Entertainment, anticipated
programming and marketing costs at Starz Entertainment, our projected sources
and uses of cash for the remainder of 2007, the estimated value of our
derivatives related to certain of our AFS investments, and the anticipated
non-material impact of certain contingent liabilities related to legal and tax
proceedings and other matters arising in the ordinary course of our business.
Where, in any forward-looking statement, we express an expectation or belief as
to future results or events, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but such statements necessarily
involve risks and uncertainties and there can be no assurance that the statement
of expectation or belief will result or be achieved or accomplished. The
following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:
- consumer 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;
- 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;
I-29
- rapid technological changes;
- capital spending for the acquisition and/or development of
telecommunications networks and services;
- threatened terrorists 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.
For additional risk factors, please see our Annual Report on Form 10-K
for the year ended December 31, 2006. These forward-looking statements and such
risks, uncertainties and other factors speak only as of the date of this
Quarterly Report, and we expressly disclaim any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein, to reflect any change in its expectations with regard thereto, or any
other change in events, conditions or circumstances on which any such statement
is based.
The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying condensed consolidated financial statements
and the notes thereto and our Annual Report on Form 10-K for the year ended
December 31, 2006.
OVERVIEW
We own controlling and noncontrolling interests in a broad range of video
and on-line commerce, media, communications and entertainment companies. Our
more significant operating subsidiaries, which are also our reportable segments,
are QVC and Starz Entertainment. 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
video programming distributed by cable operators, direct-to-home satellite
providers, other distributors and via the Internet throughout the
United States.
Our "Corporate and Other" category includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
Provide Commerce, Inc., Starz Media, LLC, FUN Technologies, Inc., Atlanta
National League Baseball Club, Inc., Leisure Arts, Inc. TruePosition, Inc.,
BuySeasons, Inc., Backcountry.com, Inc. and WFRV and WJMN Television
Station, 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
August 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 controlling interest in March 2006, operates websites that
offer casual gaming, sports information and fantasy sports services. The Atlanta
Braves, which we acquired in May 2007, own the Atlanta Braves, a major league
baseball club, as well as certain of the Atlanta Braves' minor league clubs.
Leisure Arts, which we acquired in May 2007, publishes and markets needlework,
craft, decorating, entertaining and other lifestyle interest "how-to" books.
TruePosition provides equipment and technology that deliver location-based
services to wireless users. BuySeasons, which we acquired in August 2006,
operates BuyCostumes.com, an online retailer of costumes, accessories, decor and
party supplies. Backcountry, which we acquired in June 2007, operates six
websites offering outdoor and backcountry sports gear and clothing. WFRV TV
Station, which we acquired in April 2007, is a CBS broadcast affiliate that
serves Green Bay, Wisconsin and Escanaba, Michigan.
In addition to the foregoing businesses, we hold an approximate 23%
ownership interest in Expedia, Inc., which we account for as an equity method
investment, and we continue to maintain
I-30
significant investments and related financial instruments in public companies
such as News Corporation, Time Warner, IAC/InterActiveCorp and Sprint Nextel
Corporation, which are accounted for at their respective fair market values and
are included in corporate and other.
TRACKING STOCKS
On May 9, 2006, we completed a restructuring pursuant to which we, among
other things, issued 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.
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 subsidaries QVC, Provide, BuySeasons and Backcountry 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
$3,107 million principal amount (as of June 30, 2007) of our senior notes and
debentures 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, the Atlanta Braves, Leisure Arts, TruePosition
and WFRV TV Station, our equity affiliates GSN, LLC and WildBlue
Communications, Inc. and our interests in News Corporation, Time Warner 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 $5,233 million principal amount
(as of June 30, 2007) of our senior exchangeable debentures and bank debt to the
Capital Group.
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for attributed
financial information for our tracking stock groups.
2007 COMPLETED AND PENDING TRANSACTIONS
In addition to the sales of OPTV and AEG described in note 7 to the
accompanying condensed consolidated financial statements, we have several other
completed and pending transactions. Among these are:
On April 16, 2007, we completed a transaction (the "CBS Exchange") with CBS
Corporation pursuant to which we exchanged our 7.6 million shares of CBS
Class B common stock valued at $239 million for a subsidiary of CBS that holds
WFRV TV Station and approximately $170 million in cash.
I-31
On May 17, 2007 we completed the Time Warner Exchange in which we exchanged
approximately 68.5 million shares of Time Warner common stock, subject to a
working capital adjustment, for a subsidiary of Time Warner which holds the
Atlanta Braves, Leisure Arts and $984 million in cash.
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% ownership interest in News Corporation for a
subsidiary of News Corporation which would own an approximate 38% interest in
The DIRECTV Group, Inc., three regional sports television networks and
approximately $588 million in cash. Consummation of the exchange, which is
subject to various closing conditions, including regulatory approval and receipt
of a favorable ruling from the IRS confirming that the exchange is tax-free, is
expected in the fall of 2007.
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.
2006 ACQUISITIONS. In addition to the 2007 acquisitions noted above, we
completed several acquisitions in 2006 that impact the comparability of our 2006
and 2007 results of operations. Those acquisitions and the months in which they
occurred are: Provide in February 2006, FUN in March 2006 and BuySeasons and
Starz Media in August 2006.
CONSOLIDATED OPERATING RESULTS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
Interactive Group
QVC..................................................... $1,693 1,630 3,377 3,185
Corporate and Other..................................... 98 85 185 138
------ ----- ----- -----
1,791 1,715 3,562 3,323
------ ----- ----- -----
Capital Group
Starz Entertainment..................................... 254 264 519 523
Corporate and Other..................................... 148 46 235 80
------ ----- ----- -----
402 310 754 603
------ ----- ----- -----
Consolidated Liberty.................................. $2,193 2,025 4,316 3,926
====== ===== ===== =====
I-32
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
OPERATING CASH FLOW (DEFICIT)
Interactive Group
QVC..................................................... $ 383 378 757 733
Corporate and Other..................................... 10 7 18 17
------ ----- ----- -----
393 385 775 750
------ ----- ----- -----
Capital Group
Starz Entertainment..................................... 55 50 128 91
Corporate and Other..................................... (31) (11) (64) (22)
------ ----- ----- -----
24 39 64 69
------ ----- ----- -----
Consolidated Liberty.................................. $ 417 424 839 819
====== ===== ===== =====
OPERATING INCOME (LOSS)
Interactive Group
QVC..................................................... $ 244 242 487 454
Corporate and Other..................................... 3 1 4 7
------ ----- ----- -----
247 243 491 461
------ ----- ----- -----
Capital Group
Starz Entertainment..................................... 42 44 102 77
Corporate and Other..................................... (62) (30) (117) (57)
------ ----- ----- -----
(20) 14 (15) 20
------ ----- ----- -----
Consolidated Liberty.................................. $ 227 257 476 481
====== ===== ===== =====
REVENUE. Our consolidated revenue increased $168 million or 8.3% and
$390 million or 9.9% for the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. The three
month increase is due primarily to a $63 million or 3.9% increase for QVC,
$66 million generated by Starz Media, which we acquired in August 2006 and
$50 million generated by the Atlanta Braves, which we acquired in May 2007. The
six month increase is due to a $192 million or 6.0% increase for QVC,
$127 million generated by Starz Media and $50 million generated by the Atlanta
Braves. In addition, we recognized a full six months of revenue for Provide and
FUN in 2007. These increases were partially offset by $27 million and
$51 million decreases for TruePosition for the three and six months ended
June 30, 2007, respectively. 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, absent any further
contractual changes, TruePosition will not recognize any revenue under this
contract until 2008. TruePosition's services contract with its other major
customer, T-Mobile, Inc., has a similar provision which prevents TruePosition
from recognizing revenue. It should be noted, however, that both Cingular
Wireless and T-Mobile are paying currently for services they receive and that
the aforementioned deferrals have normal gross profit margins included. See
Management's Discussion and Analysis for the Interactive Group and for the
Capital Group below for a more complete discussion of QVC's and Starz
Entertainment's results of operations.
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative expenses
(excluding stock-based compensation). Our
I-33
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
measure is an important indicator of the operational strength and performance of
our businesses, including each business's ability to service debt and fund
capital expenditures. In addition, this measure allows us to view operating
results, perform analytical comparisons and benchmarking between businesses and
identify strategies to improve performance. This measure of performance excludes
such costs as depreciation and amortization, stock-based compensation,
separately reported litigation settlements and impairments of long-lived assets
that are included in the measurement of operating income pursuant to generally
accepted accounting principles. Accordingly, Operating Cash Flow should be
considered in addition to, but not as a substitute for, operating income, net
earnings, cash flow provided by operating activities and other measures of
financial performance prepared in accordance with GAAP. See note 16 to the
accompanying condensed consolidated financial statements for a reconciliation of
Operating Cash Flow to Earnings (Loss) from Continuing Operations Before Income
Taxes and Minority Interests.
Consolidated Operating Cash Flow decreased $7 million or 1.7% and increased
$20 million or 2.4% during the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. The three
month decrease is due primarily to an $18 million decrease in operating cash
flow for TruePosition due to the reduction in revenue noted above and a
$16 million operating cash flow deficit for Starz Media partially offset by
increases for QVC, Provide, Starz Entertainment and the Atlanta Braves. The six
month increase is due to Starz Entertainment, QVC and the Atlanta Braves
partially offset by operating cash flow deficits for Starz Media of $26 million
and TruePosition of $43 million.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights for shares of our common
stock that are granted to certain of our officers and employees, (2) phantom
stock appreciation rights ("PSARs") granted to officers and employees of certain
of our subsidiaries pursuant to private equity plans and (3) amortization of
restricted stock grants.
Effective January 1, 2006, we adopted Statement 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 condensed consolidated
statements of operations.
In connection with our adoption of Statement 123R, we recorded an
$89 million transition adjustment, net of related income taxes. The transition
adjustment is reflected in the accompanying condensed consolidated statement of
operations as the cumulative effect of accounting change. We recorded
$40 million of stock compensation expense for the six months ended June 30,
2007, compared with $51 million for the comparable period in 2006. As of
June 30, 2007, the total compensation cost related to our unvested equity awards
was approximately $68 million. Such amount will be recognized in our
consolidated statements of operations over a weighted average period of
approximately 2.0 years.
OPERATING INCOME. Consolidated operating income decreased $30 million or
11.7% and $5 million or 1.0% for the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. These changes
are the net effect of an increase in operating income for Starz Entertainment
and QVC, partially offset by operating losses generated by Starz Media of
$34 million and TruePosition of $45 million. We currently expect Starz Media to
continue incurring operating cash flow deficits and operating losses for the
next two to three years.
I-34
OTHER INCOME AND EXPENSE
Components of Other Income (Expense) are as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Interest expense
Interactive Group......................................... $(105) (97) (219) (190)
Capital Group............................................. (40) (63) (76) (118)
----- ---- ---- ----
Consolidated Liberty.................................... $(145) (160) (295) (308)
===== ==== ==== ====
Dividend and interest income
Interactive Group......................................... $ 12 10 23 19
Capital Group............................................. 52 29 116 76
----- ---- ---- ----
Consolidated Liberty.................................... $ 64 39 139 95
===== ==== ==== ====
Share of earnings (losses) of affiliates
Interactive Group......................................... $ 24 17 39 21
Capital Group............................................. (8) 4 (14) 8
----- ---- ---- ----
Consolidated Liberty.................................... $ 16 21 25 29
===== ==== ==== ====
Realized and unrealized gains (losses) on financial
instruments, net
Interactive Group......................................... $ (4) (3) (2) 17
Capital Group............................................. (247) 365 95 152
----- ---- ---- ----
Consolidated Liberty.................................... $(251) 362 93 169
===== ==== ==== ====
Gains on dispositions, net
Interactive Group......................................... $ 12 -- 12 --
Capital Group............................................. 617 303 623 327
----- ---- ---- ----
Consolidated Liberty.................................... $ 629 303 635 327
===== ==== ==== ====
Other, net
Interactive Group......................................... $ 4 12 4 13
Capital Group............................................. 1 (3) 1 --
----- ---- ---- ----
Consolidated Liberty.................................... $ 5 9 5 13
===== ==== ==== ====
INTEREST EXPENSE. Consolidated interest expense decreased for the six
months ended June 30, 2007 and 2006. However, interest expense attributable to
the Interactive Group increased $29 million or 15.3% for the six-month period
due to increased borrowings on the QVC credit facilities. Interest expense
attributable to the Capital Group decreased $42 million for the six months ended
June 30, 2007 due to our adoption of Statement 155 and the resulting change in
accounting for our senior exchangeable debentures. Our 2006 interest expense
included $47 million of accretion related to our exchangeable debentures. See
note 12 to the accompanying condensed consolidated financial statements.
DIVIDEND AND INTEREST INCOME. Interest income for the Capital Group
increased in 2007 due to higher invested cash balances. Interest and dividend
income attributable to the Capital Group for the six months ended June 30, 2007
was comprised of interest income earned on invested cash ($62 million),
dividends on News Corporation common stock ($29 million), dividends on other AFS
securities ($10 million), and other ($15 million).
I-35
SHARE OF EARNINGS OF AFFILIATES. Our share of earnings (losses) of
affiliates for the six months ended June 30, 2007 are $39 million for the
Interactive Group and ($14) million for the Capital Group. The increase in share
of earnings for the Interactive Group is attributable to GSI Commerce
($11 million), which was a cost investment for most of 2006, and Expedia
($7 million). The decrease in share of earnings for the Capital Group is due to
CourtTV ($10 million), which we sold in 2006 and WildBlue ($12 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% ownership interest in News Corporation for a
subsidiary of News Corporation, which would own News Corporation's approximate
38% interest in The DIRECTV Group, Inc., three regional sports television
networks and approximately $588 million in cash. Consummation of the exchange,
which is subject to various closing conditions, including regulatory approval
and receipt of a favorable ruling from the IRS that the exchange is tax free, is
expected in the fall of 2007. Upon consummation, 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 reported net income for the
year ended December 31, 2006 of $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:
SIX MONTHS
ENDED
JUNE 30,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Senior exchangeable debentures.............................. $ 61 --
Equity collars.............................................. (71) (61)
Borrowed shares............................................. 121 105
Exchangeable debenture call option obligations.............. -- 140
Other derivatives........................................... (18) (15)
---- ---
$ 93 169
==== ===
GAINS ON DISPOSITION, NET. Gains on dispositions in 2007 include
$582 million related to the Time Warner Exchange and $31 million related to the
CBS Exchange.
INCOME TAXES. For the six months ended June 30, 2007, we recorded pre-tax
earnings of $1,059 million and an income tax benefit of $170 million. The Time
Warner Exchange and the CBS Exchange qualify as IRC Section 355 transactions,
and therefore do not trigger federal or state income tax obligations. In
addition, upon consummation of the exchange transactions, deferred tax
liabilities previously recorded for the difference between our book and tax
bases in our Time Warner and CBS Corporation investments in the amount of
$354 million were reversed with an offset to income tax benefit.
NET EARNINGS. Our net earnings were $1,378 million and $452 million for six
months ended June 30, 2007 and 2006, respectively. Such change is due to the
aforementioned fluctuations in revenue and expenses. In addition, we recognized
$149 million and ($10) million of earnings (loss) from discontinued operations
in 2007 and 2006, respectively. The 2007 earnings from discontinued operations
include pre-tax gains of $65 million and $163 million from the disposition of
OpenTV and AEG, respectively. In 2006, we also recognized a transition
adjustment of $89 million related to the adoption of Statement 123R.
I-36
MATERIAL CHANGES IN FINANCIAL CONDITION
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
attributed to one group may be used to satisfy liabilities attributed to the
other group, the following discussion assumes 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 six months ended June 30, 2007, the
Interactive Group's primary uses of cash were debt repayments ($180 million),
capital expenditures ($167 million), tax payments to the Capital Group
($182 million), the acquisition of Backcountry ($120 million) and the repurchase
of outstanding Liberty Interactive common stock. In connection with the issuance
of our tracking stocks, our board of directors authorized a share repurchase
program pursuant to which we could repurchase up to $1 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. In the
fourth quarter of 2006, our board of directors authorized us to repurchase up to
an additional $1 billion of outstanding shares of Liberty Interactive common
stock. During the six months ended June 30, 2007, we repurchased 2.0 million
shares of Liberty Interactive Series A common stock in the open market for
aggregate cash consideration of $46.2 million. In addition, on May 15, 2007, we
commenced a tender offer pursuant to which we sought to purchase up to
19,417,476 shares of Series A Liberty Interactive common stock at a price not
greater than $25.75 or less than $23.75 per share. The tender offer expired on
June 12, 2007, and 27,543,660 shares of Series A Liberty Interactive common
stock were properly tendered. The final proration factor was approximately
70.3952% and we accepted for purchase 19,417,476 shares at a price of $24.95 per
share, or aggregate cash consideration of $484.5 million. During the period from
May 11, 2006 through June 30, 2007, we have repurchased an aggregate of
$1,485 million of Liberty Interactive common stock. We may alter or terminate
the stock repurchase program at any time.
The Interactive Group's uses of cash in 2007 were primarily funded with cash
from operations and borrowings under the QVC credit facilities. As of June 30,
2007, the Interactive Group had a cash balance of $806 million.
The projected uses of Interactive Group cash for the remainder of 2007
include approximately $230 million for interest payments on QVC debt and parent
debt attributed to the Interactive Group, $180 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.
As of June 30, 2007, the aggregate commitments under QVC's credit agreements
were $5.25 billion, and outstanding borrowings were $3.675 billion. 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.
I-37
CAPITAL GROUP. During the six months ended June 30, 2007, the Capital
Group's primary uses of cash were the repurchase of Series A Liberty Capital
common stock as described below ($1,305 million), debt repayments
($156 million) and loans and investments ($810 million).
In connection with the issuance of our tracking stocks, our board of
directors authorized a share repurchase program pursuant to which we could
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. That amount was increased to approximately
$1.3 billion in connection with a tender offer for Liberty Capital stock that
was completed in April 2007. In May 2007, our board of directors authorized the
repurchase of an additional $1 billion of Liberty Capital common stock. We may
alter or terminate the program at any time.
In order to implement our share repurchase program for Liberty Capital
common stock, we commenced a tender offer on March 7, 2007 that we subsequently
amended on March 20, 2007. Pursuant to the tender offer, as amended, we sought
to purchase up to 8,849,500 shares of Series A Liberty Capital common stock at a
price not greater than $113.00 or less than $105.00 per share. The tender offer
expired on April 5, 2007, and 11,858,343 shares of Series A Liberty Capital
common stock were properly tendered. We exercised our right to purchase an
additional 2% of our outstanding Series A Liberty Capital common stock and
accepted for purchase 11,540,680 shares at a price of $113.00 per share or
aggregate cash consideration of $1,305 million (including transaction costs). We
funded the cash consideration with available cash on hand.
The Capital Group's sources of liquidity for the six months ended June 30,
2007 include cash from the Time Warner Exchange ($984 million) and the CBS
Exchange ($170 million), cash proceeds from the sale of AEG ($332 million) and
OPTV ($112 million), available cash on hand and proceeds from the settlement
of derivatives.
In addition, in April 2007, we borrowed $750 million of bank financing with
an interest rate of LIBOR plus an applicable margin. We intend to invest such
proceeds in a portfolio of selected debt and mezzanine-level instruments of
companies in the telecommunications, media and technology sectors that we
believe have favorable risk/return profiles. Although no assurance can be given,
we expect to make such investments over the next 18-24 months.
In June 2007, we announced that we intend to make an offer to purchase all
of the common shares of FUN that we do not already own. Our offer will be
subject to certain conditions, and if completed, we estimate our cash payments
will be approximately $100 million. In addition, the projected uses of Capital
Group cash for the remainder of 2007 include approximately $80 million for
interest payments on debt attributed to the Capital Group. We may also 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.
We expect that the Capital Group's investing and financing activities will
be funded with a combination of cash on hand, cash proceeds from 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 June 30, 2007, the Capital Group's
sources of liquidity include $2,726 million in cash and marketable debt
securities and $5,724 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 related to certain of our AFS investments provide the
Capital Group with an additional source of liquidity. Based on the put price and
assuming we deliver owned or borrowed shares to settle each of the AFS
Derivatives and excluding any provision for income taxes, the Capital Group
would have attributed to it cash proceeds of approximately $245 million in 2007,
$21 million in
I-38
2008, $1,223 million in 2009, $1,675 million in 2010 and $446 million in 2011
upon settlement of its AFS Derivatives.
Prior to the maturity of the equity collars, the terms of certain of these
instruments allow borrowings against the future put option proceeds at LIBOR or
LIBOR plus an applicable spread, as the case may be. As of June 30, 2007, such
borrowing capacity aggregated approximately $3,610 million. Such borrowings
would reduce the cash proceeds upon settlement noted in the 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.
See note 15 to the accompanying condensed consolidated financial statements
for a discussion of our commitments and contingencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of business due to our
ongoing investing and financing activities and our subsidiaries in different
foreign countries. Market risk refers to the risk of loss arising from adverse
changes in stock prices, interest rates and foreign currency exchange rates. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. We have established policies, procedures
and internal processes governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by
(i) issuing fixed-rate debt that we believe has a low stated interest rate and
significant term to maturity, (ii) issuing variable rate debt with appropriate
maturities and interest rates and (iii) entering into interest rate swap
arrangements when we deem appropriate. As of June 30, 2007, the face amount of
the Interactive Group's fixed rate debt (considering the effects of interest
rate swap agreements) was $5,369 million, which had a weighted average interest
rate of 6.4%. The Interactive Group's variable rate debt of $1,487 million had a
weighted average interest rate of 6.7% at June 30, 2007. As of June 30, 2007,
the face amount of the Capital Group's fixed rate debt was $4,486 million, which
had a weighted average interest rate of 2.5%.
Each of the Interactive Group and the Capital Group are exposed to changes
in stock prices primarily as a result of our significant holdings in publicly
traded securities. We continually monitor changes in stock markets, in general,
and changes in the stock prices of our holdings, specifically. We believe that
changes in stock prices can be expected to vary as a result of general market
conditions, technological changes, specific industry changes and other factors.
We use equity collars, written put and call options and other financial
instruments to manage market risk associated with certain investment positions.
These instruments are recorded at fair value based on option pricing models.
Among other factors, changes in the market prices of the securities
underlying our AFS Derivatives affect the fair market value of such AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying our equity collars that have been
attributed to the Capital Group would have on the fair market value of such
derivatives. Such changes
I-39
in fair market value would be included in realized and unrealized gains (losses)
on financial instruments in our statement of operations.
ESTIMATED AGGREGATE
FAIR VALUE
------------------------------
EQUITY
COLLARS OTHER TOTAL
-------- -------- --------
AMOUNTS IN MILLIONS
Fair value at June 30, 2007........................... $ 910 97 1,007
5% increase in market prices.......................... $ 814 105 919
10% increase in market prices......................... $ 716 113 829
5% decrease in market prices.......................... $1,006 88 1,094
10% decrease in market prices......................... $1,101 80 1,181
At June 30, 2007, the fair value of our AFS securities attributed to the
Interactive Group was $2,606 million and the fair value of our AFS securities
attributed to the Capital Group was $17,528 million. Had the market price of
such securities been 10% lower at June 30, 2007, the aggregate value of such
securities would have been $261 million and $1,753 million lower, respectively,
resulting in a decrease to unrealized holding gains in other comprehensive
earnings (loss). 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.
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 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 generally 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.
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
I-40
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. These measures allow our management to measure the success of its use of
derivative instruments and to determine when to enter into or exit from
derivative instruments.
Our derivative instruments are executed with counterparties who are well
known major financial institutions with high credit ratings. While we believe
these derivative instruments effectively manage the risks highlighted above,
they are subject to counterparty credit risk. Counterparty credit risk is the
risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To protect
ourselves against credit risk associated with these counterparties
we generally:
- execute our derivative instruments with several different counterparties,
and
- execute equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for our benefit, if
the respective counterparty's credit rating for its senior unsecured debt
were to reach certain levels, generally a rating that is below Standard &
Poor's rating of A- and/or Moody's rating of A3.
Due to the importance of these derivative instruments to our risk management
strategy, we actively monitor the creditworthiness of each of these
counterparties. Based on our analysis, we currently consider nonperformance by
any of our counterparties to be unlikely.
INTERACTIVE GROUP
The Interactive Group consists of our subsidiaries QVC, Provide, BuySeasons
and Backcountry, our interests in IAC/InterActiveCorp, Expedia and GSI
Commerce, Inc. and $3,107 million principal amount (as of June 30, 2007) of our
senior notes and debentures.
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Interactive 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, 2006.
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 2006 to 2007 are due primarily to the
acquisitions of Provide in February 2006 and BuySeasons in August 2006. This
discussion should be read in conjunction with (1) our condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and (2) the Attributed Financial Information for Tracking
Stock Groups filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q.
I-41
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
QVC.......................................... $1,693 1,630 3,377 3,185
Corporate and other.......................... 98 85 185 138
------ ----- ----- -----
$1,791 1,715 3,562 3,323
====== ===== ===== =====
OPERATING CASH FLOW
QVC.......................................... $ 383 378 757 733
Corporate and other.......................... 10 7 18 17
------ ----- ----- -----
$ 393 385 775 750
====== ===== ===== =====
OPERATING INCOME
QVC.......................................... $ 244 242 487 454
Corporate and other.......................... 3 1 4 7
------ ----- ----- -----
$ 247 243 491 461
====== ===== ===== =====
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, the program is aired live through
its nationally televised shopping network--24 hours a day, 7 days a week
("QVC-US"). Internationally, QVC has electronic retailing program services based
in the United Kingdom ("QVC-UK"), Germany ("QVC-Germany") and Japan
("QVC-Japan"). QVC-UK broadcasts 24 hours a day with 17 hours of live
programming, and QVC-Germany and QVC-Japan each broadcast live 24 hours a day.
QVC's operating results are as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Net revenue................................. $ 1,693 1,630 3,377 3,185
Cost of sales............................... (1,058) (1,007) (2,118) (1,978)
------- ------ ------ ------
Gross profit.............................. 635 623 1,259 1,207
Operating expenses.......................... (143) (138) (284) (269)
SG&A expenses (excluding stock-based
compensation)............................. (109) (107) (218) (205)
------- ------ ------ ------
Operating cash flow....................... 383 378 757 733
Stock-based compensation--SG&A.............. (5) (16) (16) (41)
Depreciation and amortization............... (134) (120) (254) (238)
------- ------ ------ ------
Operating income.......................... $ 244 242 487 454
======= ====== ====== ======
I-42
Net revenue is generated in the following geographic areas:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
QVC-US......................................... $1,184 1,140 2,358 2,228
QVC-UK......................................... 160 137 312 271
QVC-Germany.................................... 198 190 413 385
QVC-Japan...................................... 151 163 294 301
------ ----- ----- -----
$1,693 1,630 3,377 3,185
====== ===== ===== =====
QVC's consolidated net revenue increased 3.9% and 6.0% during the three and
six months ended June 30, 2007, respectively, as compared to the corresponding
prior year period. The three month increase in revenue is comprised of a
$38 million increase due to a 2.0% increase in the number of units shipped from
39.1 million to 39.9 million, a $7 million increase due to a 0.3% increase in
the average sales price per unit ("ASP") and a $17 million increase due to
favorable foreign currency rates as the U.S. dollar weakened against the UK
pound sterling and the euro, net of the negative effect a stronger U.S. dollar
compared to the Japanese yen. The six month increase in revenue is comprised of
a $114 million increase due to a 3.3% increase in the number of units shipped
from 76.3 million to 78.8 million, a $29 million increase due to a 0.7% increase
in the ASP and a $48 million net increase due to changes in foreign currency
exchange rates. In addition, returns as a percent of gross product revenue
decreased from 19.2% to 19.0% for the three month periods and decreased from
19.3% for the six months ended June 30, 2006 to 19.0% in 2007 due to a shift in
the sales mix from jewelry products to accessory products, which typically have
lower return rates.
During the three and six months ended June 30, 2007, net revenue was
negatively impacted by continued weakness in the jewelry category particularly
in the U.S., U.K. and German businesses due in part to higher gold prices.
QVC-Germany net revenue in local currency declined relative to the prior periods
due to softness in the home textile category, a 300 basis point increase in the
German value added tax (VAT) rate and higher usage of markdowns in the fashion
category. QVC-Japan net revenue declined in local currency during the three
months ended June 30, 2007 as compared to the prior year period due to the
heightened regulatory focus on health and beauty product presentations which
began in March 2007.
The number of homes receiving QVC's services are as follows:
HOMES (IN MILLIONS)
-------------------------
JUNE 30, DECEMBER 31,
2007 2006
--------- -------------
QVC-US.................................................. 90.9 90.7
QVC-UK.................................................. 21.0 19.4
QVC-Germany............................................. 37.7 37.5
QVC-Japan............................................... 19.9 18.7
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
I-43
digital, (iii) changes in television viewing habits because of personal video
recorders, video-on-demand and IP television and (iv) general economic
conditions.
As noted above, during the three and six months ended June 30, 2007, the
changes in revenue and expenses were also impacted by fluctuations in the
exchange rates for the UK pound sterling, the euro and the Japanese yen. In the
event the U.S. dollar strengthens against these foreign currencies in the
future, QVC's reported revenue and operating cash flow will be negatively
impacted. The percentage increase in revenue for each of QVC's geographic areas
in U.S. dollars and in local currency is as follows:
PERCENTAGE INCREASE (DECREASE) IN NET REVENUE
---------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2007
------------------------------ ------------------------------
U.S. DOLLARS LOCAL CURRENCY U.S. DOLLARS LOCAL CURRENCY
------------- -------------- ------------- --------------
QVC-US....................... 3.9% 3.9% 5.8% 5.8%
QVC-UK....................... 16.8% 7.5% 15.1% 4.4%
QVC-Germany.................. 4.2% (2.8)% 7.3% (0.6)%
QVC-Japan.................... (7.4)% (1.7)% (2.3)% 1.7%
QVC's gross profit percentage decreased approximately 70 basis points and
60 basis points during the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. These
decreases are due primarily to higher product distribution costs as well as a
higher inventory obsolescence provision in 2007.
QVC's operating expenses are principally comprised of commissions, order
processing and customer service expenses, provision for doubtful accounts,
telecommunications expense and credit card processing fees. Operating expenses
increased 3.6% and 5.6% for the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. These
increases are primarily due to the increase in sales volume. As a percentage of
net revenue, operating expenses remained relatively consistent during 2007, as
compared to 2006.
QVC's SG&A expenses include personnel, information technology, marketing and
advertising expenses. Such expenses increased 1.9% and 6.3% for the three and
six months ended June 30, 2007, respectively, as compared to the corresponding
prior year period. The six month increase is due primarily to (i) an $8 million
increase in personnel expenses due to merit and headcount increases and (ii) a
$5 million accrual for a legal settlement.
QVC's operating cash flow increased 1.3% and 3.3% for the three and six
months ended June 30, 2007, respectively, as compared to the corresponding prior
year period. Such percentage increases in operating cash flow were less than the
percentage increase in revenue primarily due to the decrease in gross profit
percentage discussed above, as well as the $5 million accrual for a legal
settlement included in SG&A expenses.
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, the Atlanta Braves, Leisure Arts, TruePosition
and WFRV TV Station, as well as minority interests in GSN, LLC, WildBlue
Communications, News Corporation, Time Warner, Sprint Nextel Corporation and
other public and private companies and $5,233 million principal amount (as of
June 30, 2007) of our senior exchangeable debentures and bank debt.
We exchanged our CBS Corporation common stock for WFRV TV Station and cash
on April 16, 2007, and we exchanged some of our Time Warner common stock for the
Atlanta Braves, Leisure Arts and cash on May 17, 2007. We acquired Starz Media
from IDT Corporation in August 2006.
I-44
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, 2006. This discussion should be read in conjunction with (1) our
condensed consolidated financial statements and notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and (2) the Attributed Financial
Information for Tracking Stock Groups filed as Exhibit 99.1 to this Quarterly
Report on Form 10-Q.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
Starz Entertainment............................. $254 264 519 523
Corporate and other............................. 148 46 235 80
---- --- ---- ---
$402 310 754 603
==== === ==== ===
OPERATING CASH FLOW (DEFICIT)
Starz Entertainment............................. $ 55 50 128 91
Corporate and other............................. (31) (11) (64) (22)
---- --- ---- ---
$ 24 39 64 69
==== === ==== ===
OPERATING INCOME (LOSS)
Starz Entertainment............................. $ 42 44 102 77
Corporate and other............................. (62) (30) (117) (57)
---- --- ---- ---
$(20) 14 (15) 20
==== === ==== ===
REVENUE. The Capital Group's combined revenue increased $92 million or
29.7% and $151 million or 25.0% for the three and six months ended June 30,
2007, respectively, as compared to the corresponding prior year period. Starz
Media, which we acquired in August 2006, generated $66 million and $127 million
for the three and six months ended June 30, 2007, respectively, and the Atlanta
Braves generated $50 million of revenue in the second quarter. These increases
were partially offset by $27 million and $51 million decreases for TruePosition
for those same periods. 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, absent any further
contractual changes, TruePosition will not recognize any revenue under this
contract until 2008. TruePosition's services contract with its other major
customer, T-Mobile, Inc., has a similar provision which prevents TruePosition
from recognizing revenue. It should be noted, however, that both Cingular
Wireless and T-Mobile are paying currently for services they receive and that
the aforementioned deferrals have normal gross profit margins included.
OPERATING CASH FLOW. The Capital Group's Operating Cash Flow decreased
$15 million and $5 million during the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. These
decreases are due primarily to Starz Media ($16 million and $26 million) and
TruePosition ($22 million and $43 million) partially offset by increases for
Starz Entertainment.
I-45
OPERATING INCOME. The Capital Group's operating income decreased
$34 million and $35 million for the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. The
improvement in operating income for Starz Entertainment was more than offset by
operating losses for TruePosition of $45 million and Starz Media of
$34 million. We currently expect Starz Media to continue incurring operating
cash flow deficits and operating losses for the next two to three years.
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. Substantially 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 generally 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 six months ended June 30, 2007, 70.2% of Starz Entertainment's
revenue was generated by its four largest customers, Comcast Corporation,
Echostar Communications, The DIRECTV Group, Inc. and Time Warner Inc., each of
which individually generated more than 10% of Starz Entertainment's revenue for
such period.
Starz Entertainment's operating results are as follows:
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2007 2006 2007 2006
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Revenue........................................... $ 254 264 519 523
Operating expenses................................ (171) (188) (338) (377)
SG&A expenses..................................... (28) (26) (53) (55)
----- ---- ---- ----
Operating cash flow............................. 55 50 128 91
Stock-based compensation.......................... (7) -- (14) --
Depreciation and amortization..................... (6) (6) (12) (14)
----- ---- ---- ----
Operating income................................ $ 42 44 102 77
===== ==== ==== ====
Starz Entertainment's revenue decreased $10 million or 3.8% and $4 million
or 0.8% for the three and six months ended June 30, 2007, respectively, as
compared to the corresponding prior year period. The three month decrease is due
to a $24 million decrease due to a lower effective rate for Starz
Entertainment's services, partially offset by a $14 million increase resulting
from growth in the average number of subscription units for Starz
Entertainment's services. The six month decrease is due to a lower effective
rate ($34 million) partially offset by a $30 million increase resulting from
higher average subscription units.
Starz Entertainment's affiliation agreements with DirecTV and another
affiliate have expired. In addition, the affiliate agreement with Time Warner,
which originally expired on December 31, 2006, has been extended to
September 30, 2007. Starz Entertainment is currently in negotiations with each
of these affiliates regarding new agreements. There can be no assurance that any
new agreements with these affiliates will have economic terms comparable to the
old agreements. In the event new affiliation agreements do not have comparable
terms, Starz Entertainment's revenue and operating cash flow could be adversely
impacted. In this regard, DirecTV and the other affiliate are currently making
I-46
payments to Starz Entertainment at rates lower than the expired contracts
required. Starz Entertainment is recognizing revenue from these two affiliates
based on such payments, contributing to the lower effective rate in 2007
noted above. In addition, the sale of Adelphia Communication's systems to
Comcast and Time Warner in 2006 has also contributed to the lower effective
rate.
The Starz movie service and the Encore movie service are the primary drivers
of Starz Entertainment's revenue. Starz average subscription units increased
7.4% and 8.3% for the three and six months ended June 30, 2007, respectively,
and Encore average subscription units increased 5.8% and 5.8%, respectively, for
such periods. The effects of these increases in subscription units are somewhat
mitigated by Starz Entertainment's fixed-rate affiliation agreements. In this
regard, approximately 38% of Starz Entertainment's revenue was earned under its
fixed-rate affiliation agreements during the six months ended June 30, 2007.
At June 30, 2007, cable, DTH satellite, and other distribution media
represented 66.5%, 31.3% and 2.2%, respectively, of Starz Entertainment's total
subscription units.
Starz Entertainment's operating expenses decreased 9.0% and 10.3% for the
three and six months ended June 30, 2007, respectively, due primarily to a
reduction in programming costs, which decreased from $180 million for the three
months ended June 30, 2006 to $162 million in 2007 and from $359 million for the
six months ended June 30, 2006 to $319 million in 2007. The decrease in
programming costs is due primarily to a lower effective rate for the movie
titles exhibited in 2007. Such decrease was partially offset by an increase in
the percentage of first-run movie exhibitions (which have a relatively higher
cost per title) as compared to the number of library product exhibitions.
Starz Entertainment expects that its full-year 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 and a
lower effective rate for certain titles. 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 estimated decreases noted above.
Starz Entertainment's SG&A expenses increased $2 million or 7.7% and
decreased $2 million or 3.6% for the three and six months ended June 30, 2007,
respectively, as compared to the corresponding prior year period. These
fluctuations are due primarily to changes in sales and marketing expenses in
2007, as compared to 2006. To a certain extent, the timing of Starz
Entertainment's sales and marketing expenses are determined by Starz
Entertainment's affiliates, and Starz Entertainment currently expects its full
year 2007 sales and marketing expenses to exceed those of 2006 due to expected
increases in affiliate and consumer marketing costs.
ITEM 4. CONTROLS AND PROCEDURES
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of
management, including its chief executive officer, principal accounting officer
and principal financial officer (the "Executives"), of the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Executives concluded that the Company's
disclosure controls and procedures were effective as of June 30, 2007 to provide
reasonable assurance that information required to be disclosed in its reports
filed or submitted under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There has been no change in the Company's internal controls over financial
reporting identified in connection with the evaluation described above that
occurred during the six months ended June 30, 2007 that has materially affected,
or is reasonably likely to materially affect, its internal controls over
financial reporting.
I-47
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding institution of, or material changes in, material
legal proceedings that have been reported this fiscal year, reference is made to
Part II, Item 1 of our Quarterly Report on Form 10-Q filed on May 8, 2007 and
Part I, Item 3 of our Annual Report on Form 10-K filed on March 1, 2007. Except
as described below, there have been no material developments in such legal
proceedings during the three months ended June 30, 2007.
KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND
ROBERT R. BENNETT. In March 2005, the United States District Court for the
District of Colorado entered a judgment in our favor and in favor of Messrs.
Malone and Bennett with respect to the plaintiff's claims for damages arising
from a failed attempt to acquire six regional cable television companies in
Germany. In April 2007, the United States Court of Appeals for the Tenth Circuit
affirmed the judgment entered by the trial court. The time period for the
plaintiff to appeal that decision to the United States Supreme Court has lapsed
and, accordingly, that judgment is now final.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) N/A
(b) N/A
(c) Purchases of Equity Securities by the Issuer
SERIES A LIBERTY INTERACTIVE 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
------ ---------------- -------------- ------------------------ ----------------------
April 2007............... 457,627 $24.17 457,627 $1,000.7 million
May 2007................. 31,100 $24.09 31,100 $1,000.0 million
June 2007................ 19,417,476 $24.95 19,417,476 $ 515.5 million
---------- ----------
Total.................. 19,906,203 19,906,203
========== ==========
Liberty's program to repurchase shares of Liberty Interactive common stock
was approved by its board of directors and disclosed in its 2006 Annual Proxy
Statement dated April 7, 2006. In November 2006, Liberty's board of directors
increased the aggregate amount of Liberty Interactive common stock that can be
repurchased from $1 billion to $2 billion. Liberty may alter or terminate the
program at any time.
SERIES A LIBERTY CAPITAL 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
------ ---------------- -------------- ------------------------ ----------------------
April 2007............... 11,540,680 $113.00 11,540,680 $ 1,000 million
May 2007................. -- --
June 2007................ -- --
---------- ----------
Total.................. 11,540,680 11,540,680
========== ==========
II-1
Liberty's program to repurchase shares of Liberty Capital common stock was
approved by its board of directors and disclosed in its 2006 Annual Proxy
Statement dated April 7, 2006. In May 2007, Liberty's board of directors
increased the aggregate amount of Liberty Capital common stock that can be
repurchased to $2.3 billion. Liberty may alter or terminate the program at
any time.
In addition to the shares listed in the tables above, 515 shares of
Series A Liberty Capital common stock and 1,304 shares of Series A Liberty
Interactive common stock were surrendered in the second quarter of 2007 by
certain of our officers to pay withholding for vested restricted stock.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on May 1, 2007, the
following matters were voted on and approved by the stockholders of
the Company:
1. Election of the following to the Company's Board of Directors:
VOTES FOR VOTES WITHHELD
------------- --------------
Robert R. Bennett................................ 1,004,672,138 110,702,000
Paul A. Gould.................................... 990,768,796 124,605,342
John C. Malone................................... 921,971,977 193,402,161
The foregoing nominees also served on the Company's board of directors prior
to the annual meeting. The term of the following directors continued following
the annual meeting: Donne F. Fisher, Gregory B. Maffei, David E. Rapley,
M. LaVoy Robison and Larry E. Romrell. Broker non-votes had no effect on voting
for the election of directors, and abstentions and unreturned proxies have been
treated as votes withheld.
VOTES FOR VOTES AGAINST ABSTENTIONS
----------- ------------- -----------
2. Approval of the Liberty Media Corporation 2007
Incentive Plan...................................... 598,684,948 302,264,004 3,469,060
There were 110,425,581 broker non-votes with respect to this proposal.
3. Ratification of KPMG LLP as the Company's independent
auditors for the fiscal year ended December 31,
2007................................................. 1,007,699,570 4,650,105 2,493,918
There were no broker non-votes with respect to this proposal.
For each of proposals 2 and 3, proxies representing 100,530,545 votes were
not returned.
ITEM 6. EXHIBITS
(a) 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):
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
99.1 Attributed Financial Information for Tracking Stock Groups*
------------------------
* Filed herewith
II-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY MEDIA CORPORATION
Date: August 8, 2007 By: /s/ GREGORY B. MAFFEI
-------------------------------------------
Gregory B. Maffei
President and Chief Executive Officer
Date: August 8, 2007 By: /s/ DAVID J.A. FLOWERS
-------------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: August 8, 2007 By: /s/ CHRISTOPHER W. SHEAN
-------------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)
II-3
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):
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
99.1 Attributed Financial Information for Tracking Stock Groups*
------------------------
* Filed herewith