<Page>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
<Table>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-20421
LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)
<Table>
STATE OF DELAWARE 84-1288730
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12300 LIBERTY BOULEVARD
ENGLEWOOD, COLORADO 80112
(Address of principal executive offices) (Zip Code)
</Table>
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 an accelerated filer as
defined in Rule 12b-2 of the Exchange Act. Yes /X/ No / /
The number of outstanding shares of Liberty Media Corporation's common stock
as of July 29, 2005 was:
Series A common stock 2,681,355,252 shares; and
Series B common stock 121,062,825 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
AMOUNTS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,387 1,408
Trade and other receivables, net.......................... 1,068 1,186
Inventory, net............................................ 623 712
Derivative instruments (note 7)........................... 1,286 827
Other current assets...................................... 699 642
------- -------
Total current assets.................................... 5,063 4,775
------- -------
Investments in available-for-sale securities and other cost
investments (note 5)...................................... 19,569 21,860
Long-term derivative instruments (note 7)................... 1,173 1,601
Investments in affiliates, accounted for using the equity
method.................................................... 3,666 3,734
Property and equipment, at cost............................. 2,178 2,105
Accumulated depreciation.................................... (802) (713)
------- -------
1,376 1,392
------- -------
Intangible assets not subject to amortization:
Goodwill (note 6)......................................... 9,113 9,073
Trademarks................................................ 2,388 2,388
------- -------
11,501 11,461
------- -------
Intangible assets subject to amortization, net.............. 4,257 4,437
Other assets, at cost, net of accumulated amortization...... 800 770
Assets of discontinued operations (note 4).................. -- 151
------- -------
Total assets............................................ $47,405 50,181
======= =======
</Table>
(continued)
I-1
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
AMOUNTS IN MILLIONS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 435 457
Accrued liabilities....................................... 714 837
Accrued stock-based compensation.......................... 160 236
Program rights payable.................................... 138 200
Derivative instruments (note 7)........................... 1,499 1,179
Other current liabilities................................. 396 298
-------- --------
Total current liabilities............................... 3,342 3,207
-------- --------
Long-term debt (note 8)..................................... 8,057 8,566
Long-term derivative instruments (note 7)................... 1,050 1,812
Deferred income tax liabilities............................. 9,987 10,734
Other liabilities........................................... 951 826
Liabilities of discontinued operations (note 4)............. -- 151
-------- --------
Total liabilities....................................... 23,387 25,296
-------- --------
Minority interests in equity of subsidiaries................ 273 299
Stockholders' equity (note 9):
Preferred stock, $.01 par value. Authorized 50,000,000
shares; no shares issued................................ -- --
Series A common stock, $.01 par value. Authorized
4,000,000,000 shares; issued and outstanding
2,681,317,190 shares at June 30, 2005 and 2,678,895,158
shares at December 31, 2004............................. 27 27
Series B common stock, $.01 par value. Authorized
400,000,000 shares; issued 131,062,825 shares at June
30, 2005 and December 31, 2004.......................... 1 1
Additional paid-in-capital................................ 33,792 33,765
Accumulated other comprehensive earnings, net of taxes.... 3,195 4,227
Unearned compensation..................................... (47) (64)
Accumulated deficit....................................... (13,098) (13,245)
-------- --------
23,870 24,711
Series B common stock held in treasury, at cost
(10,000,000 shares)..................................... (125) (125)
-------- --------
Total stockholders' equity.............................. 23,745 24,586
-------- --------
Commitments and contingencies (note 10)
Total liabilities and stockholders' equity.............. $ 47,405 50,181
======== ========
</Table>
See accompanying notes to condensed consolidated financial statements.
I-2
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004* 2005 2004*
-------- -------- -------- --------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
Revenue:
Net sales from electronic retailing.................... $1,479 1,289 2,943 2,572
Communications and programming services................ 538 512 1,069 981
------ ----- ----- -----
2,017 1,801 4,012 3,553
------ ----- ----- -----
Operating costs and expenses:
Cost of sales--electronic retailing services........... 922 804 1,836 1,615
Operating.............................................. 497 414 982 812
Selling, general and administrative ("SG&A")........... 211 210 425 400
Stock-based compensation--SG&A (note 2)................ 23 10 21 11
Litigation settlements................................. -- -- -- (42)
Depreciation and amortization.......................... 181 179 359 357
------ ----- ----- -----
1,834 1,617 3,623 3,153
------ ----- ----- -----
Operating income..................................... 183 184 389 400
Other income (expense):
Interest expense....................................... (146) (149) (295) (298)
Dividend and interest income........................... 23 28 65 73
Share of earnings of affiliates, net................... 21 36 49 43
Realized and unrealized gains (losses) on financial
instruments, net (note 7)............................ (288) (374) 480 (583)
Gains (losses) on dispositions of assets, net.......... 17 14 (363) 232
Nontemporary declines in fair value of investments..... -- (128) -- (128)
Other, net............................................. (24) (4) (30) 15
------ ----- ----- -----
(397) (577) (94) (646)
------ ----- ----- -----
Earnings (loss) from continuing operations before
income taxes and minority interests................ (214) (393) 295 (246)
Income tax benefit (expense)............................. 104 87 (132) 21
Minority interests in earnings of subsidiaries........... (4) (5) (23) (5)
------ ----- ----- -----
Earnings (loss) from continuing operations........... (114) (311) 140 (230)
Discontinued operations, net of taxes (note 4)........... 7 (3) 7 (94)
------ ----- ----- -----
Net earnings (loss).................................. $ (107) (314) 147 (324)
====== ===== ===== =====
Earnings (loss) per common share (note 3):
Basic and diluted earnings (loss) from continuing
operations........................................... $ (.04) (.11) .05 (.08)
Discontinued operations................................ -- -- -- (.03)
------ ----- ----- -----
Basic and diluted earnings (loss)...................... $ (.04) (.11) .05 (.11)
====== ===== ===== =====
</Table>
- ------------------------
* See note 4.
See accompanying notes to condensed consolidated financial statements.
I-3
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004* 2005 2004*
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Net earnings (loss)........................................ $(107) (314) 147 (324)
----- ---- ------ ----
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments................. (79) (6) 23 (25)
Recognition of previously unrealized foreign currency
translation losses..................................... 6 -- 312 --
Unrealized holding gains (losses) arising during the
period................................................. 96 11 (1,307) 387
Recognition of previously unrealized losses (gains) on
available-for-sale securities, net..................... (12) 70 (60) (35)
Other comprehensive loss from discontinued operations.... -- (81) -- (62)
----- ---- ------ ----
Other comprehensive earnings (loss)...................... 11 (6) (1,032) 265
----- ---- ------ ----
Comprehensive loss......................................... $ (96) (320) (885) (59)
===== ==== ====== ====
</Table>
- ------------------------
* See note 4.
See accompanying notes to condensed consolidated financial statements.
I-4
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004*
-------- --------
AMOUNTS IN
MILLIONS
Cash flows from operating activities:
Earnings (loss) from continuing operations................ $ 140 (230)
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by operating activities:
Depreciation and amortization........................... 359 357
Stock-based compensation................................ 21 11
Payments of stock-based compensation.................... (71) --
Noncash interest expense................................ 50 48
Share of earnings of affiliates, net.................... (49) (43)
Realized and unrealized losses (gains) on financial
instruments, net....................................... (480) 583
Losses (gains) on disposition of assets, net............ 363 (232)
Nontemporary declines in fair value of investments...... -- 128
Minority interests in earnings of subsidiaries.......... 23 5
Deferred income tax expense (benefit)................... 25 (149)
Other noncash charges (credits), net.................... 49 (13)
Changes in operating assets and liabilities, net of the
effects of acquisitions:
Receivables........................................... 109 55
Inventory............................................. 80 (71)
Other current assets.................................. (106) (186)
Payables and other current liabilities................ (82) 178
------- -------
Net cash provided by operating activities............. 431 441
------- -------
Cash flows from investing activities:
Cash proceeds from dispositions........................... 52 495
Premium proceeds from origination of derivatives.......... 17 --
Net proceeds (payments) from settlement of derivatives.... (14) 103
Capital expended for property and equipment............... (145) (105)
Net sales of short term investments....................... 201 164
Investments in and loans to equity affiliates............. -- (20)
Investments in and loans to cost investees................ -- (938)
Cash paid for acquisitions, net of cash acquired.......... -- (127)
Other investing activities, net........................... (6) --
------- -------
Net cash provided (used) by investing activities...... 105 (428)
------- -------
Cash flows from financing activities:
Borrowings of debt........................................ 861 --
Repayments of debt........................................ (1,432) (154)
Repurchases of subsidiary common stock.................... (60) (96)
Other financing activities, net........................... 74 27
------- -------
Net cash used by financing activities................. (557) (223)
------- -------
Net cash used by discontinued operations.............. -- (833)
------- -------
Net decrease in cash and cash equivalents............. (21) (1,043)
Cash and cash equivalents at beginning of period...... 1,408 2,974
------- -------
Cash and cash equivalents at end of period............ $ 1,387 1,931
======= =======
</Table>
- ------------------------------
* See note 4.
See accompanying notes to condensed consolidated financial statements.
I-5
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PREFERRED ------------------- PAID-IN COMPREHENSIVE UNEARNED ACCUMULATED
STOCK SERIES A SERIES B CAPITAL EARNINGS, NET COMPENSATION DEFICIT
--------- -------- -------- ---------- ------------- ------------ -----------
AMOUNTS IN MILLIONS
Balance at January 1,
2005................... $ -- 27 1 33,765 4,227 (64) (13,245)
Net earnings........... -- -- -- -- -- -- 147
Other comprehensive
loss................. -- -- -- -- (1,032) -- --
Issuance of common
stock upon exercise
of stock options..... -- -- -- 9 -- -- --
Issuance of common
stock for investment
in available-for-sale
security............. -- -- -- 14 -- -- --
Amortization of
deferred
compensation......... -- -- -- -- -- 16 --
Cancellation of
restricted stock..... -- -- -- (1) -- 1 --
Stock compensation for
Liberty options held
by Liberty Global,
Inc. ("LGI")
employees............ -- -- -- 1 -- -- --
Stock compensation for
LGI options held by
Liberty employees.... -- -- -- 1 -- -- --
Other.................. -- -- -- 3 -- -- --
--------- -- -------- ------ ------ --- -------
Balance at June 30,
2005................... $ -- 27 1 33,792 3,195 (47) (13,098)
========= == ======== ====== ====== === =======
<Caption>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
-------- -------------
AMOUNTS IN MILLIONS
Balance at January 1,
2005................... (125) 24,586
Net earnings........... -- 147
Other comprehensive
loss................. -- (1,032)
Issuance of common
stock upon exercise
of stock options..... -- 9
Issuance of common
stock for investment
in available-for-sale
security............. -- 14
Amortization of
deferred
compensation......... -- 16
Cancellation of
restricted stock..... -- --
Stock compensation for
Liberty options held
by Liberty Global,
Inc. ("LGI")
employees............ -- 1
Stock compensation for
LGI options held by
Liberty employees.... -- 1
Other.................. -- 3
---- ------
Balance at June 30,
2005................... (125) 23,745
==== ======
</Table>
See accompanying notes to condensed consolidated financial statements.
I-6
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Liberty Media Corporation and its controlled subsidiaries
(collectively, "Liberty" or the "Company," unless the context otherwise
requires). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Liberty is a holding company which, through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the electronic
retailing, media, communications and entertainment industries in the United
States, Europe and Asia.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States ("GAAP") for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X as
promulgated by the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by GAAP for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation of
the results for such periods have been included. The results of operations for
any interim period are not necessarily indicative of results for the full year.
These condensed consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto contained in
Liberty's Annual Report on Form 10-K for the year ended December 31, 2004.
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) the fair value of its derivative instruments and
(iii) its assessment of other-than-temporary declines in fair value of its
investments to be its most significant estimates.
Liberty holds a number of investments that are accounted for using the
equity method. Liberty does not control the decision making process or business
management practices of these affiliates. Accordingly, Liberty relies on
management of these affiliates 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 2005 presentation.
(2) STOCK-BASED COMPENSATION
The Company has granted to certain of its employees options, stock
appreciation rights ("SARs") and options with tandem SARs (collectively,
"Awards") to purchase shares of Liberty Series A and Series B common stock.
I-7
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
The Company accounts for compensation expense related to its Awards pursuant
to the recognition and measurement provisions of Accounting Principles Board
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion
No. 25"). All of the Company's Awards are accounted for as variable plan awards,
and compensation is recognized based upon the percentage of the options that are
vested and the difference between the market price of the underlying common
stock and the exercise price of the options at the balance sheet date. The
following table illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION," ("Statement 123") to its options. Compensation expense for SARs
and options with tandem SARs is the same under APB Opinion No. 25 and Statement
123. Accordingly, no pro forma adjustment for such Awards is included in the
following table.
<Table>
<Caption>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS
Earnings (loss) from continuing operations......... $(114) (311) 140 (230)
Add stock-based compensation as determined under
the intrinsic value method, net of taxes....... 2 1 4 3
Deduct stock-based compensation as determined
under the fair value method, net of taxes...... (14) (11) (24) (24)
----- ---- --- ----
Pro forma earnings (loss) from continuing
operations....................................... $(126) (321) 120 (251)
===== ==== === ====
Basic and diluted earnings (loss) from continuing
operations per share:
As reported...................................... $(.04) (.11) .05 (.08)
Pro forma........................................ $(.05) (.11) .04 (.09)
</Table>
In December 2004, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (revised 2004), "SHARE-BASED PAYMENTS"
("Statement 123R"). Statement 123R, which is a revision of Statement 123 and
supersedes APB Opinion No. 25, establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services, primarily focusing on transactions in which an entity obtains employee
services. Statement 123R generally requires companies to measure the cost of
employee services received in exchange for an award of equity instruments (such
as stock options and restricted stock) based on the grant-date fair value of the
award, and to recognize that cost over the period during which the employee is
required to provide service (usually the vesting period of the award). Statement
123R also requires companies to measure the cost of employee services received
in exchange for an award of liability instruments (such as stock appreciation
rights) based on the current fair value of the award, and to remeasure the fair
value of the award at each reporting date.
Public companies, such as Liberty, were originally required to adopt
Statement 123R as of the beginning of the first interim period that begins after
June 15, 2005. On April 14, 2005, the Securities and Exchange Commission amended
the effective date to the beginning of a registrant's next fiscal year, or
January 1, 2006 for calendar-year companies, such as Liberty. Accordingly, the
provisions of
I-8
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
Statement 123R will affect the accounting for all awards granted, modified,
repurchased or cancelled after January 1, 2006. The accounting for awards
granted, but not vested, prior to January 1, 2006 will also be impacted. The
provisions of Statement 123R allow companies to adopt the standard on a
prospective basis or to restate all periods for which Statement 123 was
effective. Liberty expects to adopt Statement 123R on a prospective basis, and
will include in its financial statements for periods that begin after
December 31, 2005 pro forma information as though the standard had been adopted
for all periods presented.
While Liberty has not yet quantified the impact of adopting Statement 123R,
it believes that such adoption could have a significant impact on its operating
income and net earnings in the future.
(3) 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. The basic EPS calculation is based on 2,795 million and
2,917 million for the three months ended June 30, 2005 and 2004, respectively,
and 2,794 million and 2,910 million weighted average shares outstanding for the
six months ended June 30, 2005 and 2004, respectively. The diluted EPS
calculation for the six months ended June 30, 2005 includes 12.9 million
dilutive securities. However, due to the relative insignificance of these
dilutive securities, their inclusion does not impact the EPS amount as reported
in the accompanying condensed consolidated statement of operations. Excluded
from diluted EPS for the six months ended June 30, 2005 and 2004 are
56.8 million and 88.4 million potential common shares, respectively, because
their inclusion would be anti-dilutive.
(4) DISCONTINUED OPERATIONS
SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC. ("LMI")
On June 7, 2004 (the "Spin Off Date"), Liberty completed the spin off (the
"LMI Spin Off") of its wholly-owned subsidiary, LMI, to its shareholders.
Substantially all of the assets and businesses of LMI were attributed to
Liberty's former International Group segment. In connection with the LMI Spin
Off, holders of Liberty common stock on June 1, 2004 (the "Record Date")
received 0.05 of a share of LMI Series A common stock for each share of Liberty
Series A common stock owned at 5:00 p.m. New York City time on the Record Date
and 0.05 of a share of LMI Series B common stock for each share of Liberty
Series B common stock owned at 5:00 p.m. New York City time on the Record Date.
The LMI Spin Off is intended to qualify as a tax-free spin off. For accounting
purposes, the LMI Spin Off is deemed to have occurred on June 1, 2004, and no
gain or loss was recognized by Liberty in connection with the LMI Spin Off.
In addition to the assets in Liberty's International Group operating
segment, Liberty also contributed certain monetary assets to LMI in connection
with the LMI Spin Off.
DMX MUSIC
During the fourth quarter of 2004, the executive committee of the board of
directors of Liberty approved a plan to dispose of Liberty's approximate 56%
ownership interest in Maxide
I-9
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
Acquisition, Inc. (d/b/a DMX Music, "DMX"). DMX is principally engaged in
programming, distributing and marketing digital and analog music services to
homes and businesses and was included in Liberty's Networks Group operating
segment. On February 14, 2005, DMX commenced proceedings under Chapter 11 of the
United States Bankruptcy Code. As a result of marketing efforts conducted prior
to the bankruptcy filing, DMX entered into an arrangement, which was subject to
the approval by the Bankruptcy Court, to sell substantially all of its operating
assets to an independent third party. Other prospective buyers had an
opportunity to submit offers to purchase all or a portion of those assets by
May 6, 2005. On May 9, 2005, a public auction was conducted at which the
aforementioned independent third party was the successful bidder. The results of
that auction were approved by the Bankruptcy Court on May 10, 2005. On May 16,
2005, the Bankruptcy Court entered its written order approving the transaction,
and the sale transaction has been consummated. As a result of the DMX bankruptcy
filing, Liberty has deconsolidated DMX. For financial reporting purposes such
deconsolidation was deemed to be effective January 1, 2005.
The condensed consolidated financial statements and accompanying notes of
Liberty have been prepared to reflect LMI and DMX as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of LMI (for periods prior to the Spin Off Date) and DMX (for periods prior
to January 1, 2005) have been excluded from the respective captions in the
accompanying condensed consolidated balance sheets, statements of operations,
statements of comprehensive earnings (loss) and statements of cash flows and
have been reported under the heading of discontinued operations in such
condensed consolidated financial statements.
Certain combined financial information for LMI and DMX, which is included in
loss from discontinued operations for the six months ended June 30, 2004, is as
follows (amounts in millions):
<Table>
Revenue..................................................... $1,045
Loss before income taxes and minority interests............. $ (160)
</Table>
SPIN OFF OF DISCOVERY HOLDING COMPANY
In the first quarter of 2005, Liberty's Board of Directors approved a
resolution authorizing the spin-off (the "DHC Spin Off") of a newly formed
subsidiary, Discovery Holding Company ("DHC"). The DHC Spin Off was effected as
a tax-free distribution of DHC's shares to Liberty's shareholders on July 21,
2005. At the time of the DHC Spin Off, DHC's assets were comprised of Liberty's
100% ownership interest in Ascent Media Group, Inc. ("Ascent Media"), Liberty's
50% ownership interest in Discovery Communications, Inc. ("Discovery") and
$200 million in cash. Upon completion of this transaction, DHC is a separate
publicly traded company. This transaction will be accounted for at historical
cost due to the pro rata nature of the distribution. Subsequent to the
completion of the DHC Spin Off, the historical results of operations of DHC for
periods prior to the DHC Spin Off will be included in discontinued operations in
Liberty's consolidated financial statements. Summarized combined balance sheet
and statement of operations data for DHC (excluding the $200 million cash
contribution) is presented in the table below.
I-10
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
COMBINED BALANCE SHEETS
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
AMOUNTS IN MILLIONS
ASSETS
Cash and cash equivalents............................... $ 11 22
Other current assets.................................... 168 177
Investment in Discovery................................. 2,980 2,946
Property and equipment, net............................. 270 259
Goodwill................................................ 2,135 2,135
Other assets............................................ 20 26
------ -----
Total assets.......................................... $5,584 5,565
====== =====
LIABILITIES AND EQUITY
Accounts payable........................................ $ 35 33
Accrued liabilities..................................... 43 54
Other current liabilities............................... 17 22
Deferred tax liabilities................................ 1,097 1,084
Other liabilities....................................... 24 25
Equity.................................................. 4,368 4,347
------ -----
Total liabilities and equity.......................... $5,584 5,565
====== =====
</Table>
COMBINED STATEMENTS OF OPERATIONS
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
AMOUNTS IN MILLIONS
Revenue................................................... $ 352 306
Operating expenses........................................ (313) (258)
Stock-based compensation.................................. (4) (1)
Depreciation and amortization............................. (37) (35)
----- ----
Operating income (loss)................................. (2) 12
Share of earnings of Discovery............................ 38 38
Income tax expense........................................ (15) (16)
----- ----
Net earnings............................................ $ 21 34
===== ====
</Table>
I-11
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
(5) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in available-for-sale securities and other cost investments are
summarized as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
AMOUNTS IN MILLIONS
News Corporation....................................... $ 8,422 9,667
IAC/InterActiveCorp.................................... 3,325 3,824
Time Warner Inc.(1).................................... 2,861 3,330
Sprint Corporation..................................... 2,315 2,342
Motorola, Inc.(2)...................................... 1,351 1,273
Viacom, Inc............................................ 486 552
Other available-for-sale equity securities(3).......... 616 471
Other available-for-sale debt securities(4)............ 115 317
Other cost investments and related receivables......... 84 87
------- ------
19,575 21,863
Less short-term investments.......................... (6) (3)
------- ------
$19,569 21,860
======= ======
</Table>
- ------------------------
(1) Includes $152 million and $176 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2005 and December 31, 2004,
respectively.
(2) Includes $694 million and $654 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2005 and December 31, 2004,
respectively.
(3) Includes $89 million and $77 million of shares pledged as collateral for
share borrowing arrangements at June 30, 2005 and December 31, 2004,
respectively.
(4) At June 30, 2005, other available-for-sale debt securities include
$95 million of investments in third-party marketable debt securities held by
Liberty parent and $20 million of such securities held by subsidiaries of
Liberty. At December 31, 2004, such investments aggregated $276 million and
$41 million, respectively.
UNREALIZED HOLDING GAINS AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities are summarized below.
<Table>
<Caption>
JUNE 30, 2005 DECEMBER 31, 2004
----------------------- -----------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- ----------
AMOUNTS IN MILLIONS
Gross unrealized holding gains.......... $5,492 18 7,292 19
Gross unrealized holding losses......... $ (413) -- (15) --
</Table>
The aggregate fair value of securities with unrealized holding losses at
June 30, 2005 was $3,883 million. None of these securities had unrealized losses
for more than 12 continuous months.
I-12
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
(6) INTANGIBLE ASSETS
GOODWILL
Changes in the carrying amount of goodwill for the six months ended
June 30, 2005 are as follows:
<Table>
<Caption>
STARZ
ENTERTAINMENT
QVC GROUP LLC DHC OTHER TOTAL
-------- ------------- -------- -------- --------
AMOUNTS IN MILLIONS
Balance at January 1, 2005......... $4,048 1,383 2,135 1,507 9,073
Foreign currency translation..... 39 -- -- (1) 38
Other............................ 4 -- -- (2) 2
------ ----- ----- ----- -----
Balance at June 30, 2005........... $4,091 1,383 2,135 1,504 9,113
====== ===== ===== ===== =====
</Table>
AMORTIZABLE INTANGIBLE ASSETS
Amortization of intangible assets with finite useful lives was $238 million
and $240 million for the six months ended June 30, 2005 and 2004, 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):
<Table>
Remainder of 2005........................................... $243
2006........................................................ $445
2007........................................................ $401
2008........................................................ $365
2009........................................................ $343
</Table>
I-13
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
(7) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are summarized as follows:
<Table>
<Caption>
JUNE 30, DECEMBER 31,
TYPE OF DERIVATIVE 2005 2004
- ------------------ -------- ------------
AMOUNTS IN MILLIONS
ASSETS
Equity collars....................................... $ 2,093 2,016
Put spread collars................................... 296 291
Other................................................ 70 121
------- ------
2,459 2,428
Less current portion................................. (1,286) (827)
------- ------
$ 1,173 1,601
======= ======
LIABILITIES
Exchangeable debenture call option obligations....... $ 874 1,102
Put options.......................................... 515 445
Equity collars....................................... 121 398
Borrowed shares...................................... 935 907
Other................................................ 104 139
------- ------
2,549 2,991
Less current portion................................. (1,499) (1,179)
------- ------
$ 1,050 1,812
======= ======
</Table>
Realized and unrealized gains (losses) on financial instruments are
comprised of the following:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call option
features................................................ $228 70
Change in fair value of equity collars.................... 349 (453)
Change in fair value of put options....................... (71) (12)
Change in fair value of borrowed shares................... (28) (162)
Change in fair value of put spread collars................ 5 5
Change in fair value of other derivatives................. (3) (31)
---- ----
$480 (583)
==== ====
</Table>
I-14
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
(8) LONG-TERM DEBT
Debt is summarized as follows:
<Table>
<Caption>
OUTSTANDING CARRYING VALUE
PRINCIPAL -----------------------
JUNE 30, JUNE 30, DECEMBER 31,
2005 2005 2004
----------- -------- ------------
AMOUNTS IN MILLIONS
Parent company debt:
Senior notes and debentures
3.5% Senior Notes due 2006.............................. $ 224 224 513
Floating Rate Senior Notes due 2006..................... 1,398 1,398 2,463
7.875% Senior Notes due 2009............................ 716 711 711
7.75% Senior Notes due 2009............................. 234 235 235
5.7% Senior Notes due 2013.............................. 802 800 800
8.5% Senior Debentures due 2029......................... 500 495 495
8.25% Senior Debentures due 2030........................ 959 952 951
Senior exchangeable debentures
4% Senior Exchangeable Debentures due 2029.............. 869 250 249
3.75% Senior Exchangeable Debentures due 2030........... 810 229 228
3.5% Senior Exchangeable Debentures due 2031............ 600 233 231
3.25% Senior Exchangeable Debentures due 2031........... 559 118 118
0.75% Senior Exchangeable Debentures due 2023........... 1,750 1,512 1,473
------- ------ -----
9,421 7,157 8,467
QVC bank credit facility.................................... 800 800 --
Other subsidiary debt....................................... 110 110 109
------- ------ -----
Total debt................................................ $10,331 8,067 8,576
=======
Less current maturities................................. (10) (10)
------ -----
Total long-term debt...................................... $8,057 8,566
====== =====
</Table>
PARENT COMPANY DEBT
During the six months ended June 30, 2005, and pursuant to a previously
announced debt reduction plan, Liberty retired $1,355 million principal amount
of its parent company debt (primarily comprised of its senior notes) for
aggregate cash consideration of $1,367 million plus accrued interest. In
connection with these debt retirements, Liberty recognized a loss on early
extinguishment of debt of $13 million, which is included in other income
(expense) in the accompanying condensed consolidated statement of operations.
QVC BANK CREDIT FACILITY
Effective May 20, 2005, QVC entered into a $2 billion bank credit facility
(the "QVC Credit Facility"). The QVC Credit Facility is comprised of an
$800 million term loan that was drawn at closing, a $400 million U.S. dollar
term loan that can be drawn at any time before September 30, 2006, a
$400 million multi-currency term loan that can be drawn at any time before
September 30, 2006, a
I-15
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
$200 million U.S. dollar revolving loan and a $200 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 May 20, 2010, and accrue interest, at the option of QVC, at LIBOR
plus an applicable margin or the Alternative Base Rate, as defined in the QVC
Credit Facility, plus an applicable margin. QVC is required to pay a commitment
fee quarterly in arrears on the unused portion of the commitments.
OTHER SUBSIDIARY DEBT
Other subsidiary debt at June 30, 2005, is comprised primarily of
capitalized satellite transponder lease obligations.
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities at June 30, 2005 is as follows (amounts in millions):
<Table>
Fixed rate senior notes..................................... $1,979
Floating Rate Notes......................................... $1,370
Senior debentures........................................... $1,485
Senior exchangeable debentures, including call option
obligation................................................ $3,794
</Table>
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at June 30, 2005.
(9) STOCKHOLDERS' EQUITY
As of June 30, 2005, there were 45.8 million shares of Liberty Series A
common stock and 28.2 million shares of Liberty Series B common stock reserved
for issuance under exercise privileges of outstanding stock options and
warrants.
At December 31, 2004, Liberty had entered into zero-strike call spreads
("Z-Call") with respect to six million shares of its Series A common stock. The
Z-Call is comprised of a call option purchased by Liberty from the counterparty
with a zero strike price and a similar call option purchased by the counterparty
from Liberty with a strike price equal to the market price of the Series A
common stock on the date of execution (the "Counterparty Strike Price"). Upon
expiration of the Z-Call, Liberty can purchase the subject shares of Series A
common stock from the counterparty for no additional cost, and the counterparty
can purchase the same shares from Liberty at the Counterparty Strike Price, or
the parties can net cash settle. Liberty accounted for the Z-Calls pursuant to
Statement of Financial Accounting Standards No. 150, "ACCOUNTING FOR CERTAIN
FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY"
("Statement 150"). Liberty net cash settled all of its Z-Calls during the first
quarter of 2005 for net cash proceeds of $63 million, which primarily
represented the return of collateral posted by Liberty in 2004. Changes in the
fair value of the Z-Calls prior to settlement are included in realized and
unrealized gains (losses) on financial instruments in the accompanying condensed
consolidated statement of operations.
I-16
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
(10) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Entertainment Group LLC ("SEG"), a wholly-owned subsidiary of Liberty,
provides premium video programming distributed by cable operators,
direct-to-home satellite providers and other distributors throughout the United
States. SEG has entered into agreements with a number of motion picture
producers which obligate SEG to pay fees ("Programming Fees") for the rights to
exhibit certain films that are released by these producers. The unpaid balance
of Programming Fees for films that were available for exhibition by SEG at
June 30, 2005 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of June 30, 2005 is payable as
follows: $107 million in 2005, $49 million in 2006 and $13 million thereafter.
SEG has also contracted to pay Programming Fees for the rights to exhibit
films that have been released theatrically, but are not available for exhibition
by SEG until some future date. These amounts have not been accrued at June 30,
2005. SEG's estimate of amounts payable under these agreements is as follows:
$193 million in 2005; $472 million in 2006; $118 million in 2007; $105 million
in 2008; $91 million in 2009; and $133 million thereafter.
In addition, SEG is also obligated to pay Programming Fees for all
qualifying films that are released theatrically in the United States by studios
owned by The Walt Disney Company ("Disney") through 2009, all qualifying films
that are released theatrically in the United States by studios owned by Sony
Pictures Entertainment ("Sony") through 2010 and all qualifying films produced
for theatrical release in the United States by Revolution Studios through 2006.
Films are generally available to SEG for exhibition 10 - 12 months after their
theatrical release. The Programming Fees to be paid by SEG are based on the
quantity and the domestic theatrical exhibition receipts of qualifying films. As
these films have not yet been released in theatres, SEG is unable to estimate
the amounts to be paid under these output agreements. However, such amounts are
expected to be significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, SEG has agreed to pay Sony a total of
$190 million in four annual installments of $47.5 million beginning in 2011.
This option expires December 31, 2007. If made, SEG's payments to Sony would be
amortized ratably as programming expense over the extension period beginning in
2011. An extension of this agreement would also result in the payment by SEG of
Programming Fees for qualifying films released by Sony during the extension
period. If Disney elects to extend its contract, SEG would not be obligated to
pay any amounts in excess of its Programming Fees for qualifying films released
by Disney during the extension period. The Disney option expires December 31,
2007.
GUARANTEES
Liberty guarantees SEG's obligations under certain of its studio output
agreements. At June 30, 2005, Liberty's guarantee for obligations for films
released by such date aggregated $702 million. While the guarantee amount for
films not yet released is not determinable, such amount is expected to be
significant. As noted above, SEG has recognized the liability for a portion of
its obligations under the output agreements. As this represents a commitment of
SEG, a consolidated subsidiary of Liberty, Liberty has not recorded a separate
liability for its guarantee of these obligations.
I-17
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
At June 30, 2005, Liberty has guaranteed Y4.5 billion ($40 million) of the
bank debt of Jupiter Telecommunications, Co., Ltd. ("J-COM"), a former equity
affiliate that provides broadband services in Japan. Liberty's guarantees expire
as the underlying debt matures and is repaid. The debt maturity dates range from
2005 to 2018. Liberty's investment in J-COM was attributed to LMI in the LMI
Spin Off. In connection with the LMI Spin Off, LMI has indemnified Liberty for
any amounts Liberty is required to fund under these guarantees.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its sale,
such as tax, environmental, litigation and employment matters. Liberty generally
indemnifies the purchaser in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by Liberty. These
types of indemnification guarantees typically extend for a number of years.
Liberty is unable to estimate the maximum potential liability for these types of
indemnification guarantees as the sale agreements typically do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to these
indemnification guarantees.
OPERATING LEASES
Liberty and its subsidiaries lease business offices, have entered into
satellite transponder lease agreements and use certain equipment under lease
arrangements.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
LOSS CONTRACT
Subsequent to June 30, 2005, TruePosition entered into an agreement with one
of its major customers whereby TruePosition will remove and replace certain
location-based equipment supplied by another vendor and currently installed in
the customer's network. TruePosition expects that the incremental revenue it
will receive for such removal and replacement will be approximately
$64 million. Pursuant to the provisions of Statement of Position 97-2, "SOFTWARE
REVENUE RECOGNITION," a portion of the revenue will be recognized currently from
the sale and installation of the equipment, and a portion will be recognized in
future periods as hardware and software maintenance services are provided.
TruePosition currently estimates that due to this revenue allocation it will
incur a loss on the sale and installation of the equipment of approximately
$75 million. TruePosition and Liberty will recognize this loss in the third
quarter of 2005. The hardware and software maintenance revenue and related costs
are expected to be recognized over a five-year period, which is the estimated
economic life of the underlying equipment. TruePosition entered into this
agreement because it believes future revenue from the customer's continuing
network build-out and expansion will exceed the loss computed on the
I-18
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
equipment component of the contractual arrangement. However, no assurance can be
given that future business from this customer will be sufficient to offset the
loss incurred on this portion of the contract.
INCOME TAXES
Since issuance, we have claimed interest deductions on our exchangeable
debentures for federal income tax purposes based on the "comparable yield" at
which we could have issued a fixed-rate debenture with similar terms and
conditions. In all instances, this has resulted in us claiming interest
deductions significantly in excess of the cash interest currently paid on our
exchangeable debentures. Interest deducted in prior years on our exchangeable
debentures has contributed to net operating losses ("NOLs") that may be carried
to offset taxable income in 2005 and later years. Both these NOLs and current
interest deductions on our exchangeable debentures are being used to offset
taxable income currently being generated.
The IRS has issued two Technical Advice Memorandums (the "TAMs") challenging
the current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge our tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to our
reported total tax expense as the resulting increase in current tax expense
would be offset by a decrease in our deferred tax expense. However, the NOLs we
have recorded would not be available to offset our current taxable income, and
we would be required to make current federal income tax payments. These federal
income tax payments could prove to be significant.
(11) OPERATING SEGMENTS
Liberty is a holding company which, through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the electronic
retailing, media, communications and entertainment industries. Each of these
businesses is separately managed. Liberty identifies its reportable segments as
(A) those consolidated subsidiaries that represent 10% or more of its
consolidated revenue, earnings before income taxes or total assets and
(B) those equity method affiliates whose share of earnings represent 10% or more
of Liberty's earnings before income taxes. In 2004, we had organized our
businesses into four groups--Interactive Group, Networks Group, International
Group and Corporate and Other. On June 7, 2004, we completed the spin off of our
wholly-owned subsidiary, LMI, to our shareholders. Substantially all of the
assets and businesses of LMI were included in our International Group. In the
first quarter of 2005, our board of directors approved a resolution authorizing
the spin off of our newly formed subsidiary, Discovery Holding Company. The DHC
Spin Off was completed on July 21, 2005. DHC's assets are comprised of our 100%
ownership interest in Ascent Media, which was included in our Interactive Group,
and our 50% ownership interest in Discovery, which was included in our Networks
Group, and $200 million in cash. As a result of the LMI Spin Off and the DHC
Spin Off, we now operate and analyze our businesses individually, rather than
combining them with other businesses into Groups. 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,
I-19
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
Liberty reviews non-financial measures such as average prime time rating, prime
time audience delivery, subscriber growth and penetration, as appropriate.
Liberty defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding
stock-based compensation). Liberty believes this is an important indicator of
the operational strength and performance of its businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows management to view operating results and perform analytical
comparisons and benchmarking between businesses and identify strategies to
improve performance. This measure of performance excludes depreciation and
amortization, stock-based compensation, litigation settlements and restructuring
and impairment charges that are included in the measurement of operating income
pursuant to GAAP. Accordingly, operating cash flow should be considered in
addition to, but not as a substitute for, operating income, net income, cash
flow provided by operating activities and other measures of financial
performance prepared in accordance with GAAP. Liberty generally accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current prices.
For the six months ended June 30, 2005, Liberty has identified the following
businesses as its reportable segments:
- QVC--consolidated subsidiary that markets and sells a wide variety of
consumer products in the U.S. and several foreign countries, primarily by
means of televised shopping programs on the QVC networks and via the
Internet through its domestic and international websites.
- SEG--consolidated subsidiary that provides premium programming distributed
by cable operators, direct-to-home satellite providers and other
distributors throughout the United States.
- Ascent Media--consolidated subsidiary that provides sound, video and
ancillary post-production and distribution services to the motion picture
and television industries in the United States, Europe and Asia.
Subsequent to the DHC Spin Off, Ascent Media will no longer be a
subsidiary or reportable segment of Liberty.
- Discovery--50% owned equity affiliate that provides original and purchased
cable and satellite television programming in the United States and over
160 other countries. Subsequent to the DHC Spin Off, Discovery will no
longer be an equity affiliate or reportable segment of Liberty.
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-20
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
PERFORMANCE MEASURES
<Table>
<Caption>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
2005 2004
-------------------- --------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW REVENUE FLOW
-------- --------- -------- ---------
AMOUNTS IN MILLIONS
QVC..................................... $ 2,943 647 2,572 548
SEG..................................... 512 95 470 131
DHC:
Ascent Media.......................... 352 42 306 48
Discovery............................. 1,261 332 1,115 320
Corporate and Other..................... 205 (15) 205 (1)
Eliminations............................ (1,261) (332) (1,115) (320)
------- ---- ------ ----
Consolidated Liberty.................... $ 4,012 769 3,553 726
======= ==== ====== ====
</Table>
<Table>
<Caption>
THREE MONTHS ENDED JUNE 30,
-------------------------------------------
2005 2004
-------------------- --------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW REVENUE FLOW
-------- --------- -------- ---------
AMOUNTS IN MILLIONS
QVC..................................... $1,479 324 1,289 278
SEG..................................... 258 47 238 62
DHC:
Ascent Media.......................... 178 21 160 26
Discovery............................. 660 184 587 183
Corporate and Other..................... 102 (5) 114 7
Eliminations............................ (660) (184) (587) (183)
------ ---- ----- ----
Consolidated Liberty.................... $2,017 387 1,801 373
====== ==== ===== ====
</Table>
I-21
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 2005
(UNAUDITED)
OTHER INFORMATION
<Table>
<Caption>
JUNE 30,2005
-------------------------------------
INVESTMENTS
TOTAL IN CAPITAL
ASSETS AFFILIATES EXPENDITURES
-------- ----------- ------------
AMOUNTS IN MILLIONS
QVC.......................................... $15,079 3 50
SEG.......................................... 2,945 47 2
DHC:
Ascent Media............................... 937 4 51
Discovery.................................. 3,242 17 61
Corporate and Other.......................... 28,444 3,612 42
Eliminations................................. (3,242) (17) (61)
------- ----- ---
Consolidated Liberty......................... $47,405 3,666 145
======= ===== ===
</Table>
The following tables provide a reconciliation of consolidated segment
operating cash flow to earnings (loss) from continuing operations before income
taxes and minority interests:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
-------------------
2005 2004
-------- --------
AMOUNTS IN MILLIONS
Consolidated segment operating cash flow.................. $ 769 726
Stock-based compensation.................................. (21) (11)
Litigation settlements.................................... -- 42
Depreciation and amortization............................. (359) (357)
Interest expense.......................................... (295) (298)
Share of earnings of affiliates........................... 49 43
Realized and unrealized gains (losses) on financial
instruments, net........................................ 480 (583)
Gains (losses) on dispositions of assets, net............. (363) 232
Nontemporary declines in fair value of investments........ -- (128)
Other, net................................................ 35 88
----- ----
Earnings (loss) from continuing operations before income
taxes and minority interests............................ $ 295 (246)
===== ====
</Table>
I-22
<Page>
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. To the extent that such statements are not
recitations of historical fact, such statements constitute forward-looking
statements which, by definition, involve risks and uncertainties. Where, in any
forward-looking statement, we express an expectation or belief as to future
results or events, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
statement of expectation or belief will result or be achieved or accomplished.
The following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:
- general economic and business conditions and industry trends;
- consumer spending levels, including the availability and amount of
individual consumer debt;
- spending on domestic and foreign television advertising;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband distribution and movie studio
industries;
- uncertainties inherent in the development and integration of new business
lines and business strategies;
- changes in distribution and viewing of television programming, including
the expanded deployment of personal video recorders, video on demand and
IP television and their impact on television advertising revenue and home
shopping networks;
- increased digital TV penetration and the impact on channel positioning of
our networks;
- rapid technological changes;
- capital spending for the acquisition and/or development of
telecommunications networks and services;
- uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new
television and telecommunications technologies;
- future financial performance, including availability, terms and deployment
of capital;
- fluctuations in foreign currency exchange rates and political unrest in
international markets;
- the ability of suppliers and vendors to deliver products, equipment,
software and services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
- competitor responses to our products and services, and the products and
services of the entities in which we have interests; and
- threatened terrorists attacks and ongoing military action in the Middle
East and other parts of the world.
I-23
<Page>
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, 2004.
OVERVIEW
We are a holding company that owns controlling and noncontrolling interests
in a broad range of electronic retailing, media, communications and
entertainment companies.
In 2004, we had organized our businesses into four groups--Interactive
Group, Networks Group, International Group and Corporate and Other. On June 7,
2004, we completed the spin off of our wholly-owned subsidiary, LMI, to our
shareholders. Substantially all of the assets and businesses of LMI were
included in our International Group. In the first quarter of 2005, our board of
directors approved a resolution authorizing the spin off of our newly formed
subsidiary, Discovery Holding Company. The DHC Spin Off was completed on
July 21, 2005. DHC's assets are comprised of our 100% ownership interest in
Ascent Media, which was included in our Interactive Group, our 50% ownership
interest in Discovery Communications, which was included in our Networks Group
and $200 million in cash. As a result of the LMI Spin Off and the DHC Spin Off,
we now operate and analyze our businesses individually, rather than combining
them with other businesses into Groups.
Our most significant consolidated businesses at June 30, 2005 are QVC, SEG
and Ascent Media. Discovery is our most significant equity method investment at
June 30, 2005. Subsequent to the DHC Spin Off, Ascent Media and Discovery will
no longer be included in our financial position or results of operations. 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. SEG provides premium programming distributed by cable operators,
direct-to-home satellite providers and other distributors throughout the United
States. Ascent Media provides sound, video and ancillary post-production and
distribution services to the motion picture and television industries in the
United States, Europe and Asia. Discovery operates cable and satellite
television networks in the United States and around the world.
QVC has identified improved domestic growth and continued international
growth as key areas of focus in 2005. QVC's steps to achieving these goals will
include (1) continued domestic and international efforts to increase the number
of customers who have access to and use its service and (2) continued expansion
of brand selection and available products. The key challenges to achieving these
goals in both the U.S. and international markets are (1) increased competition
from other home shopping and Internet retailers, (2) advancements in technology,
such as video on demand and personal video recorders, which may alter TV viewing
habits and (3) maintaining favorable channel positioning as digital TV
penetration increases.
In 2005, SEG is concentrating its efforts on improving performance by
(1) expanding distribution of its services through co-operative marketing
efforts with its primary distributors, (2) exploiting the increased penetration
of digital TV and video on demand and (3) growing distribution of new services,
such as Internet delivery of movies. The challenges that SEG faces include the
continued consolidation of the cable and satellite TV distribution industries
and negotiating favorable new affiliation agreements as existing agreements
expire.
I-24
<Page>
In 2005, Ascent Media is focusing on leveraging its broad array of media
services to market itself as a full service provider to new and existing
customers within the motion picture and television industries. With facilities
in the U.S., United Kingdom and Asia, Ascent Media also hopes to increase its
services to multinational companies. The challenges that Ascent Media faces
include differentiating its products and services to help maintain or increase
operating margins and financing capital expenditures for equipment and other
items to satisfy customers' desire for services using the latest technology.
Certain of our subsidiaries and affiliates are dependent on the
entertainment industry for entertainment, educational and informational
programming. In addition, a significant portion of the revenue of certain of our
affiliates is generated by the sale of advertising on their networks. A downturn
in the economy could reduce (i) the development of new television and motion
picture programming, thereby adversely impacting their supply of service
offerings; (ii) consumer disposable income and consumer demand for their
products and services; and (iii) the amount of resources allocated for network
and cable television advertising by major corporations.
The "Corporate and Other" category includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
On Command Corporation ("On Command"), OpenTV Corp. ("OpenTV") and
TruePosition, Inc. ("TruePosition"). On Command provides in-room, on-demand
video entertainment and information services to hotels, motels and resorts
primarily in the United States. OpenTV provides interactive television
solutions, including operating middleware, web browser software, interactive
applications, and consulting and support services. TruePosition provides
equipment and technology that deliver location-based services to wireless users.
In addition to the foregoing businesses, we continue to maintain significant
investments in public companies such as News Corporation, IAC/InterActiveCorp,
Time Warner Inc., Motorola, Inc. and Sprint Corporation, which are accounted for
as available-for-sale ("AFS") securities and are included in corporate and
other.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
To assist you in understanding and analyzing our business in the same manner
we do, we have organized the following discussion of our results of operations
into two parts: Consolidated Operating Results, and Operating Results by
Business.
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<Page>
CONSOLIDATED OPERATING RESULTS
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
AMOUNTS IN MILLIONS
REVENUE
QVC.................................... $1,479 1,289 2,943 2,572
SEG.................................... 258 238 512 470
Ascent Media........................... 178 160 352 306
Corporate and other.................... 102 114 205 205
------ ----- ----- -----
Consolidated revenue............... $2,017 1,801 4,012 3,553
====== ===== ===== =====
OPERATING CASH FLOW
QVC.................................... $ 324 278 647 548
SEG.................................... 47 62 95 131
Ascent Media........................... 21 26 42 48
Corporate and other.................... (5) 7 (15) (1)
------ ----- ----- -----
Consolidated operating cash flow... $ 387 373 769 726
====== ===== ===== =====
OPERATING INCOME (LOSS)
QVC.................................... $ 193 164 393 317
SEG.................................... 36 48 72 101
Ascent Media........................... (3) 5 1 11
Corporate and other.................... (43) (33) (77) (29)
------ ----- ----- -----
Consolidated operating income...... $ 183 184 389 400
====== ===== ===== =====
</Table>
REVENUE. Our consolidated revenue increased 12.0% and 12.9% for the three
and six months ended June 30, 2005, respectively, as compared to the
corresponding prior year periods. These increases are due to increases in
revenue for each of our reportable segments. See "OPERATING RESULTS BY BUSINESS"
below for a more complete discussion of these increases.
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative expenses
(excluding stock-based compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures to evaluate our businesses and make decisions about allocating
resources among our businesses. We believe this is an important indicator of the
operational strength and performance of our businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows us to view operating results, perform analytical comparisons
and benchmarking between businesses and identify strategies to improve
performance. This measure of performance excludes such costs as depreciation and
amortization, stock-based compensation, litigation settlements and impairments
of long-lived assets that are included in the measurement of operating income
pursuant to generally accepted accounting principles. Accordingly, Operating
Cash Flow should be considered in addition to, but not as a substitute for,
operating income, net earnings, cash flow provided by operating activities and
other measures of financial performance prepared in accordance with GAAP. See
note 11 to the accompanying condensed consolidated financial statements for a
reconciliation of Operating Cash Flow to Earnings (loss) from Continuing
Operations Before Income Taxes and Minority Interests.
Consolidated Operating Cash Flow increased 3.8% and 5.9% during the three
and six months ended June 30, 2005, respectively, as compared to the
corresponding prior year periods. These increases are due primarily to an
increase in QVC's operating cash flow resulting from higher revenue
I-26
<Page>
both domestically and internationally. The QVC increases were partially offset
by a decrease in SEG's operating cash flow, which resulted primarily from higher
programming costs in 2005.
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. The amount of expense associated with stock-based
compensation is generally based on the vesting of the related stock options and
stock appreciation rights and the market price of the underlying common stock,
as well as the vesting of PSARs and the equity value of the related subsidiary.
The expense reflected in our condensed consolidated financial statements is
based on the market price of the underlying common stock as of the date of the
financial statements and is subject to future adjustment based on market price
fluctuations, vesting percentages and, ultimately, on the final determination of
market value when the options are exercised.
LITIGATION SETTLEMENTS. During the six months ended June 30, 2004,
TruePosition settled a patent infringement lawsuit that resulted in income of
$42 million.
OPERATING INCOME. Consolidated operating income decreased $1 million for
the three month period and decreased $11 million for the six month period ended
June 30, 2005, as compared to the corresponding prior year periods. These
changes are the net effect of a decrease for SEG (due to increased programming
costs) and corporate and other (due to the TruePosition favorable litigation
settlement in 2004) and an increase in operating income for QVC.
OTHER INCOME AND EXPENSE
INTEREST EXPENSE. Interest expense was fairly comparable over the 2005 and
2004 periods, as the effects of increases in the interest rates for our variable
rate debt in 2005 were offset by decreases from debt retirements.
DIVIDEND AND INTEREST INCOME. Dividend and interest income was $65 million
and $73 million for the six months ended June 30, 2005 and 2004, respectively.
Interest and dividend income for the six months ended June 30, 2005 was
comprised of interest income earned on invested cash ($22 million), dividends on
News Corp. common stock ($21 million), dividends on other AFS securities
($13 million), and other ($9 million).
INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD. A summary
of our share of earnings (losses) of affiliates is as follows:
<Table>
<Caption>
PERCENTAGE SIX MONTHS ENDED
OWNERSHIP AT JUNE 30,
JUNE 30, -------------------
2005 2005 2004
------------ -------- --------
AMOUNTS IN MILLIONS
Discovery..................................... 50% $38 38
Court TV...................................... 50% 18 10
Other......................................... Various (7) (5)
--- --
$49 43
=== ==
</Table>
GAINS (LOSSES) ON DISPOSITIONS. We recognized losses on dispositions of
$363 million for the six months ended June 30, 2005 and gains on dispositions of
$232 million for the six months ended June 30, 2004. Included in our accumulated
other comprehensive earnings (loss) at December 31, 2004 was $123 million, net
of income taxes, of foreign currency translation losses related to Cablevision
S.A. ("Cablevision"), a former equity method investment, and $175 million, net
of income taxes, of foreign
I-27
<Page>
currency translation losses related to Telewest Global, Inc. ("Telewest"),
another former equity method investment. In the first quarter of 2005, we
disposed of our interests in each of Cablevision and Telewest. Accordingly, we
recognized approximately $488 million of foreign currency translation losses,
before related income taxes, related to these two investments that were
previously included in accumulated other comprehensive earnings (loss). These
foreign currency losses were partially offset by gains on disposition of certain
of our AFS securities and other assets. Our 2004 gains related primarily to the
sale of certain of our AFS securities. The foregoing gains or losses were
calculated based upon the difference between the cost basis of the assets
relinquished, as determined on an average cost basis, and the fair value of the
assets received.
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of the
following:
<Table>
<Caption>
SIX MONTHS ENDED
JUNE 30,
----------------------
2005 2004
-------- --------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call option
features................................................ $228 70
Change in fair value of equity collars.................... 349 (453)
Change in fair value of put options....................... (71) (12)
Change in fair value of borrowed shares................... (28) (162)
Change in fair value of put spread collars................ 5 5
Change in fair value of other derivatives................. (3) (31)
---- ----
$480 (583)
==== ====
</Table>
INCOME TAXES. Our effective tax rate was 48.5% for the six months ended
June 30, 2005 and 8.4% for the six months ended June 30, 2004. Our effective tax
rate differs from the U.S. federal income tax rate of 35% primarily due to
provisions for state and foreign taxes.
OPERATING RESULTS BY BUSINESS
QVC. QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs
and, to a lesser extent, via the Internet. In the United States, the programs
are aired 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
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<Page>
("QVC-Japan"). QVC-UK broadcasts live 19 hours a day, and QVC-Germany broadcasts
live 24 hours a day. In May 2004, QVC-Japan increased its daily broadcast time
from 17 hours to 24 hours.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Net revenue............................ $1,479 1,289 2,943 2,572
Cost of sales.......................... (922) (804) (1,836) (1,615)
------ ----- ------ ------
Gross profit....................... 557 485 1,107 957
Operating expenses..................... (130) (115) (259) (230)
SG&A expenses.......................... (103) (92) (201) (179)
------ ----- ------ ------
Operating cash flow................ 324 278 647 548
Stock-based compensation............... (17) (8) (25) (17)
Depreciation and amortization.......... (114) (106) (229) (214)
------ ----- ------ ------
Operating income................... $ 193 164 393 317
====== ===== ====== ======
</Table>
Net revenue includes the following revenue by geographical area:
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
AMOUNTS IN MILLIONS
QVC-US................................. $1,034 930 2,059 1,862
QVC-UK................................. 129 109 259 221
QVC-Germany............................ 185 152 379 307
QVC-Japan.............................. 131 98 246 182
------ ----- ----- -----
Consolidated........................... $1,479 1,289 2,943 2,572
====== ===== ===== =====
</Table>
QVC's consolidated net revenue increased 14.7% and 14.4% during the three
and six months ended June 30, 2005, respectively, as compared to the
corresponding prior year periods. The three month increase was driven by (i) an
11.2% increase in the number of units shipped from 32.1 million in 2004 to
35.7 million in 2005, (ii) a 1.4% to 4.5% increase in the average sales price
per unit ("ASP") (calculated in local currency) in each of QVC's markets, except
QVC-UK, and (iii) the impact of favorable foreign currency rate fluctuations.
The six month increase in revenue is the result of (i) an 11.2% increase in the
number of units shipped from 63.3 million to 70.4 million (ii) a 2.6% to 5.0%
increase in ASP in each market, except QVC-UK and (iii) the impact of favorable
foreign currency rate fluctuation. In addition, the percentage of U.S. Internet
sales to total U.S. sales increased from 14.7% to 17.3% for the six months ended
June 30, 2004 and 2005, respectively. The ASP in local currency for QVC-UK
decreased 4.3% and 4.7% for the three and six month periods, respectively, due
to purchases of lower priced items within the jewelry category and a shift in
product mix to lower priced apparel and accessories. Average sales per
subscriber also increased in each of QVC's markets in 2005. Returns as a percent
of gross product revenue increased from 17.3% for the three months ended
June 30, 2004 to 18.8% for the comparable period in 2005 and from 17.9% to 18.5%
for the six months ended June 30, 2005 due to a shift in the mix from home
products to jewelry, apparel and accessory products. Each of
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<Page>
QVC's markets added subscribers in 2005. The number of homes receiving QVC's
services are as follows:
<Table>
<Caption>
HOMES
-----------------------
JUNE 30, DECEMBER 31,
2005 2004
-------- ------------
(IN MILLIONS)
QVC-US.................................................. 89.9 88.4
QVC-UK.................................................. 17.1 15.6
QVC-Germany............................................. 37.1 35.7
QVC-Japan............................................... 15.6 14.7
</Table>
As the QVC service is already received by substantially all of the cable
television and direct broadcast satellite homes in the U.S. and Germany, future
sales growth in these countries will primarily depend on continued additions of
new customers from homes already receiving the QVC service, continued growth in
sales to existing customers and growth in the number of cable and direct
broadcast satellite homes. QVC's future sales may also be affected by (i) the
willingness of cable and satellite distributors to continue carrying QVC's
programming service, (ii) QVC's ability to maintain favorable channel
positioning, which may become more difficult as distributors convert analog
customers to digital, (iii) changes in television viewing habits because of
personal video recorders, video on demand and IP television and (iv) general
economic conditions.
As noted above, during the three and six months ended June 30, 2005, the
increases in revenue and expenses were also impacted by changes in the exchange
rates for the UK pound sterling, the euro and the Japanese yen. In the event the
U.S. dollar strengthens against these foreign currencies in the future, QVC's
revenue and operating cash flow will be negatively impacted. The percentage
increase in revenue for each of QVC's geographic areas in U.S. dollars and in
local currency is as follows:
<Table>
<Caption>
PERCENTAGE INCREASE IN NET REVENUE
-------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2005 JUNE 30, 2005
----------------------------- -----------------------------
U.S. DOLLARS LOCAL CURRENCY U.S. DOLLARS LOCAL CURRENCY
------------ -------------- ------------ --------------
QVC-US....................... 11.2% 11.2% 10.6% 10.6%
QVC-UK....................... 18.3% 15.1% 17.2% 13.7%
QVC-Germany.................. 21.7% 16.6% 23.5% 18.1%
QVC-Japan.................... 33.7% 31.1% 35.2% 32.6%
</Table>
Gross profit percentage was relatively comparable over the 2005 and 2004
periods increasing less than 10 basis points for the three months ended
June 30, 2005 and 40 basis points for the six months ended June 30, 2005.
QVC's operating expenses are comprised of commissions, order processing and
customer service expenses, provision for doubtful accounts, and credit card
processing fees. Operating expenses increased 13.0% and 12.6% for the three and
six months ended June 30, 2005, respectively, as compared to the corresponding
prior year periods. These increases are primarily due to the increases in sales
volume. As a percentage of net revenue, operating expenses decreased to 8.8%
from 8.9% for each of the three and six month periods ended June 30, 2005, as
compared to the corresponding prior year periods. As a percentage of net
revenue, order processing and customer service expenses decreased as a result of
reduced personnel expense due to increased Internet sales and efficiencies in
call handling and staffing. In addition, QVC's telecommunications expenses
decreased in 2005 due to new contracts with certain of its service providers.
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<Page>
QVC's SG&A expenses increased 12.0% and 12.3% for the three and six months
ended June 30, 2005, respectively, as compared to the corresponding prior year
periods. The majority of these increases is due to increases in personnel,
information technology and other outside service costs. Personnel cost increases
reflect the addition of personnel to support the increased sales of QVC's
foreign operations. Information technology expenditure increases are the result
of higher third-party service costs related to various software projects, as
well as higher software maintenance fees. Increases in other outside services
are the result of increased consulting expenses due to Sarbanes-Oxley compliance
and higher funding fees associated with QVC's private label credit card, which
is managed by an unrelated third party.
SEG. SEG provides premium programming distributed by cable operators,
direct-to-home ("DTH") satellite providers and other distributors throughout the
United States. The majority of SEG's revenue is derived from the delivery of
movies to subscribers under affiliation agreements with these video programming
distributors.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Revenue................................ $ 258 238 512 470
Operating expenses..................... (176) (142) (351) (278)
SG&A expenses.......................... (35) (34) (66) (61)
----- ---- ---- ----
Operating cash flow................ 47 62 95 131
Stock-based compensation............... -- -- -- (3)
Depreciation and amortization.......... (11) (14) (23) (27)
----- ---- ---- ----
Operating income................... $ 36 48 72 101
===== ==== ==== ====
</Table>
SEG's revenue increased 8.4% and 8.9% for the three and six months ended
June 30, 2005, respectively, as compared to the corresponding prior year
periods. This increase is primarily due to an increase in the average number of
subscription units for SEG's Thematic Multiplex, Starz and Encore services. The
Thematic Multiplex service is a group of up to six channels, each of which
exhibits movies based on an individual theme. Total average subscription units,
which represent the number of SEG services that are purchased by cable, DTH and
other distribution media customers, increased 10.9% and 12.0% during the three
and six months ended June 30, 2005, respectively, as compared to the
corresponding periods in 2004. During the six months ended June 30, 2005, 59.2%
of SEG's revenue was generated by its three largest customers. SEG's affiliation
agreement with Echostar Communications has been extended until August 10, 2005,
and SEG is currently in negotiations with Echostar regarding a new agreement.
SEG's affiliation agreement with DirecTV expires in March 2006.
While SEG's average subscription units increased 12.0% for the first half of
2005, as compared to the first half of 2004, total period-end subscription units
increased 3.6% from December 31, 2004 to June 30, 2005. As in past years, SEG's
channels were not included in promotional offers of many of the multichannel
distributors during the first quarter of the year. This lack of promotional
offers, combined with normal churn and rate increases implemented by affiliates,
results in growth in SEG's subscription units that is generally lower in the
first half of the year than in the last half.
As noted above, the increase in subscription units is due primarily to
subscription units for the Thematic Multiplex service, which has a lower
subscription rate than other SEG services. In addition, SEG has entered into
fixed-rate affiliation agreements with certain of its customers. Pursuant to
these agreements, the customers pay a fixed rate regardless of the number of
subscribers. The fixed rate is increased annually or semi-annually as the case
may be, and the agreements expire in 2006 through
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<Page>
2008. Due to the foregoing factors, the percentage increase in average
subscriptions exceeds the percentage increase in revenue.
SEG's affiliation agreements generally do not provide for the inclusion of
its services in specific programming packages of the distributors. The
affiliation agreement with Comcast, however, did include a short-term packaging
commitment to carry the Encore and Thematic Multiplex channels (EMP) in
specified digital tiers on Comcast's cable systems. The affiliation agreement
originally expired at the end of 2010, and Comcast's packaging commitment
expired at the end of 2005. In the second quarter of 2005, SEG and Comcast
renegotiated their affiliation agreement. The new agreement eliminates Comcast's
packaging commitment for EMP and provides for a fixed fee payment structure,
with certain CPI adjustments, for EMP through 2009. The agreement also provides
for a guaranteed payment structure for Comcast's carriage of Starz through 2012
with contractual increases for 2006 and 2007 and annual CPI adjustments for the
remainder of the term. The foregoing payment structure for EMP and Starz may be
adjusted in the event Comcast acquires or disposes of cable systems. Finally,
Comcast has agreed to the elimination of certain future marketing support
commitments from SEG. As a result of this new agreement, SEG's future revenue
from Comcast for its EMP and Starz products will not be impacted by any
increases or decreases in actual subscribers, except in the case of acquisitions
or dispositions noted above. The terms of the EMP and Starz payment structures
can be extended by Comcast, at its option, for a toal of six years and five
years, respectively.
SEG's period-end subscription units are presented in the table below.
<Table>
<Caption>
SUBSCRIPTIONS
---------------------------------------------------
JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
SERVICE OFFERING 2005 2005 2004 2004
- ---------------- -------- --------- ------------ -------------
IN MILLIONS
Thematic Multiplex................ 136.3 131.5 130.3 125.5
Encore............................ 24.9 24.5 24.5 23.9
Starz............................. 14.1 14.0 14.1 13.7
Movieplex......................... 3.7 3.8 3.9 4.2
----- ----- ----- -----
179.0 173.8 172.8 167.3
===== ===== ===== =====
</Table>
At June 30, 2005, cable, DTH satellite, and other distribution media
represented 65.9%, 33.0% and 1.1%, respectively, of SEG's total subscription
units.
SEG's operating expenses increased 23.9% and 26.3% for the three and
six months ended June 30, 2005, respectively, due to increases in programming
costs, which increased from $133 million for the three months ended June 30,
2004 to $167 million in 2005 and from $260 million for the six months ended
June 30, 2004 to $332 million in 2005. Such increases are due primarily to
(i) a higher cost per title due to new rate cards for movie titles under certain
of its license agreements and (ii) 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 in the first half of 2005.
SEG expects that its full year 2005 programming costs will exceed the 2004
costs by approximately $100 million to $120 million due to the factors described
above. Assuming a similar quantity of movie titles is available to SEG in 2006
and the box office performance of such titles is consistent with the performance
of titles received in 2005, SEG expects that its 2006 programming expense will
be less than 10% higher than its 2005 programming expense. These estimates are
subject to a number of assumptions that could change depending on the number and
timing of movie titles actually becoming available to SEG and their ultimate box
office performance. Accordingly, the actual amount of cost increases experienced
by SEG may differ from the amounts noted above. SEG currently does not expect to
generate increases in revenue or reductions in other costs to fully offset the
2005
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<Page>
programming increases. Accordingly, the increased programming costs are expected
to result in a reduction to SEG's operating income in 2005.
SEG's SG&A expenses increased 2.9% and 8.2% for the three and six months
ended June 30, 2005, respectively, as compared to the corresponding prior year
periods. These increases are due primarily to an $8 million credit recorded by
SEG in 2004 related to the recovery of certain accounts receivable from Adelphia
Communications, partially offset by lower sales and marketing expenses in 2005.
During the six months ended June 30, 2004, SEG participated in national
marketing campaigns with certain of its larger multichannel television
distributors. These campaigns were scaled back in 2005. As a result, sales and
marketing expenses decreased $7 million and $4 million for the three and
six months ended June 30, 2005, respectively, as compared to the corresponding
periods in 2004.
ASCENT MEDIA. As noted above, subsequent to the date of the DHC Spin Off,
Ascent Media will no longer by included in our financial position or results of
operations. Ascent Media provides sound, video and ancillary post production and
distribution services to the
motion picture and television industries in the United States, Europe and
Asia. Accordingly, Ascent Media is dependent on the television and movie
production industries and the commercial advertising market for a substantial
portion of its revenue.
<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
AMOUNTS IN MILLIONS
Revenue................................ $ 178 160 352 306
Operating expenses..................... (115) (95) (226) (183)
SG&A expenses.......................... (42) (39) (84) (75)
----- --- ---- ----
Operating cash flow................ 21 26 42 48
Stock-based compensation............... (4) (1) (4) (1)
Depreciation and amortization.......... (20) (20) (37) (36)
----- --- ---- ----
Operating income (loss)............ $ (3) 5 1 11
===== === ==== ====
</Table>
Ascent Media's revenue increased 11.3% and 15.0% during the three and
six months ended June 30, 2005, respectively, as compared to the corresponding
prior year periods. The majority of these increases is due to new business
growth for Ascent Media's Networks Group and acquisitions by its Creative
Services and Media Management Groups.
Ascent Media's operating expenses increased 21.1% and 23.5% during the three
and six months ended June 30, 2005, respectively, as compared to the
corresponding prior year periods. These increases are due to increases in
expenses such as personnel and material costs that vary with revenue, as well as
the acquisitions noted above. As a percent of revenue, Ascent Media's operating
expenses increased to 64.6% and 64.2% for the three and six months ended
June 30, 2005, as compared to 59.4% and 59.8% for the comparable periods in
2004. These increases are due primarily to (i) the addition of more labor
intensive, lower margin systems integration projects and (ii) the renewal of
uplink agreements with lower margins in Ascent Media's Networks Group.
Ascent Media's SG&A expenses increased 7.7% and 12.0% during the three and
six months ended June 30, 2005, respectively, as compared to the corresponding
prior year periods. These increases are due primarily to the acquisitions by
Ascent Media's Media Management and Creative Services Groups and various
individually insignificant increases.
OTHER. Other consolidated subsidiary revenue and operating cash flow were
relatively comparable over the 2005 and 2004 periods. The change in operating
loss for the six months ended June 30, 2005
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for our other consolidated subsidiaries is due primarily to the litigation
settlement income that TruePosition recognized in the first quarter of 2004.
MATERIAL CHANGES IN FINANCIAL CONDITION
CORPORATE
Our sources of liquidity include our available cash balances, cash generated
by the operating activities of our privately-owned subsidiaries (to the extent
such cash exceeds the working capital needs of the subsidiaries and is not
otherwise restricted), proceeds from asset sales, monetization of our public
investment portfolio (including derivatives), debt and equity issuances, and
dividend and interest receipts.
During the six months ended June 30, 2005, our primary corporate use of cash
was the retirement of $1,355 million principal amount of parent company debt for
aggregate cash payments of $1,367 million plus accrued interest. We made a
portion of these debt retirements pursuant to tender offers that we completed in
the second quarter of 2005. The tender offers consisted of two separate offers.
In one offer, we offered to purchase any and all of our 3.50% Senior Notes due
2006 (the "3.50% Notes") at a price of $988.02, plus any accrued and unpaid
interest, for each $1,000 principal amount tendered; and in the second offer, we
offered to purchase up to a specified maximum amount of our Floating Rate Senior
Notes due 2006 (the "Floating Rate Notes"), at a price of $1,012.36, plus any
accrued and unpaid interest, for each $1,000 principal amount tendered. We also
offered to pay an additional $2.50 per $1,000 Floating Rate Note tendered by
April 15, 2005. The maximum principal amount of Floating Rate Notes to be
purchased was equal to the difference between the $1.0 billion cap on the
aggregate principal amount subject to the tender offers and the aggregate
principal amount of 3.50% Notes that we accepted for purchase in the offer for
the 3.50% Notes.
The offer for the 3.50% Notes expired at 5:00 p.m., New York City time, on
Friday, April 15, 2005, and $200.2 million principal amount of 3.50% Notes were
validly tendered by bondholders and accepted for payment by us. The offer for
the Floating Rate Notes expired at midnight, New York City time, on Tuesday,
May 3, 2005, and $1,427.1 million of the Floating Rate Notes were validly
tendered (including $1,416.3 million that were tendered prior to April 15,
2005). Pursuant to the terms of the tender offer, we accepted $799.8 million of
such Floating Rate Notes for payment. We funded the debt repurchases under our
tender offer with cash on hand and proceeds from a short-term credit facility
collateralized by certain of our derivative instruments. This short-term credit
facility was subsequently repaid with proceeds from the QVC Credit Facility.
At June 30, 2005, we have $1,502 million in cash and marketable debt
securities, $8,441 million of non-strategic AFS securities (including related
derivatives with an estimated fair value of $812 million) and $10,331 million of
total face amount of debt. In addition, we own $8,422 million of News Corp.
common stock and $3,325 million of IAC/InterActiveCorp common stock, which we
consider to be strategic assets. Accordingly, we believe that our liquidity
position at June 30, 2005 is very strong.
Our projected uses of cash for the remainder of 2005 include the completion
of our debt reduction program by either settling outstanding total return bond
swaps for cash payments of $345 million or by taking advantage of other
opportunities to retire debt. In addition to our debt repayments, we may make
additional investments in existing or new businesses. However, we are unable to
quantify such investments at this time.
Our derivatives ("AFS Derivatives") related to certain of our AFS
investments provide us with an additional source of liquidity. Based on the put
price and assuming we physically settle each of our AFS Derivatives and
excluding any provision for income taxes, we would be entitled to cash proceeds
of approximately $1,014 million in 2005, $395 million in 2006, $385 million in
2007, $101 million in 2008, $1,383 million in 2009, and $3,001 million
thereafter upon settlement of our AFS Derivatives.
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Prior to the maturity of our equity collars, the terms of certain of our
equity and narrow-band collars allow us to borrow against the future put option
proceeds at LIBOR or LIBOR plus an applicable spread, as the case may be. As of
June 30, 2005, such borrowing capacity aggregated approximately $5,943 million.
Such borrowings would reduce the cash proceeds upon settlement noted in the
preceding paragraph.
Based on currently available information, we expect to receive approximately
$110 million in dividend and interest income during the year ended December 31,
2005. Based on current debt levels and current interest rates, we expect to make
interest payments of approximately $490 million during the year ended
December 31, 2005, approximately $465 million of which relates to parent company
debt.
As of December 31, 2004, each of Standard and Poor's Rating Service ("S&P"),
Moody's Investors Service ("Moody's") and Fitch Ratings ("Fitch") rated our
senior debt at the lowest level of investment grade. At that date, S&P and
Moody's both had a negative ratings outlook, while Fitch had a stable outlook.
On March 15, 2005, S&P and Fitch each lowered its rating on our senior debt to
one level below investment grade. On May 13, 2005 Moody's announced that it had
placed our senior debt under review. None of our existing indebtedness includes
any covenant under which a default would occur as a result of such downgrades.
However, such downgrades could adversely affect our access to the public debt
markets and our overall cost of future corporate borrowings. Notwithstanding the
foregoing, we do not believe that the downgrades will adversely impact the
ability of our subsidiaries to arrange bank financing or our ability to borrow
against the value of our equity collars.
SUBSIDIARIES
Effective May 20, 2005, QVC entered into a $2 billion bank credit facility.
The QVC Credit Facility is comprised of an $800 million term loan that was drawn
at closing, a $400 million U.S. dollar term loan that can be drawn at any time
before September 30, 2006, a $400 million multi-currency term loan that can be
drawn at any time before September 30, 2006, a $200 million U.S. dollar
revolving loan and a $200 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 May 20,
2010, and accrue interest, at the option of QVC, at LIBOR plus an applicable
margin or the Alternative Base Rate, as defined in the QVC Credit Facility, plus
an applicable margin. QVC is required to pay a commitment fee quarterly in
arrears on the unused portion of the commitments.
During the six months ended June 30, 2005, our subsidiaries funded capital
expenditures ($145 million) and the repurchase of certain subsidiary common
stock ($50 million) with cash on hand and cash generated by their operating
activities.
Our subsidiaries (excluding Ascent Media) currently expect to spend
approximately $300 million for capital expenditures in 2005, including
$225 million by QVC. These amounts are expected to be funded by the available
cash and cash flows of the respective subsidiary.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
Subsequent to June 30, 2005, TruePosition entered into an agreement with one
of its major customers whereby TruePosition will remove and replace certain
location-based equipment supplied by another vendor and currently installed in
the customer's network. TruePosition expects that the incremental revenue it
will receive for such removal and replacement will be approximately
$64 million. Pursuant to the provisions of Statement of Position 97-2, "SOFTWARE
REVENUE RECOGNITION," a portion of the revenue will be recognized currently from
the sale and installation of the equipment, and a portion will be recognized in
future periods as hardware and software maintenance services are provided.
TruePosition currently estimates that due to this revenue allocation it will
incur a loss on the sale and
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installation of the equipment of approximately $75 million. TruePosition and
Liberty will recognize this loss in the third quarter of 2005. The hardware and
software maintenance revenue and related costs are expected to be recognized
over a five-year period, which is the estimated economic life of the underlying
equipment. TruePosition entered into this agreement because it believes future
revenue from the customer's continuing network build-out and expansion will
exceed the loss computed on the equipment component of the contractual
arrangement. However, no assurance can be given that future business from this
customer will be sufficient to offset the loss incurred on this portion of the
contract.
SEG has entered into agreements with a number of motion picture producers
which obligate SEG to pay fees for the rights to exhibit certain films that are
released by these producers. The unpaid balance for Programming Fees for films
that were available for exhibition by SEG at June 30, 2005 is reflected as a
liability in the accompanying condensed consolidated balance sheet. The balance
due as of June 30, 2005 is payable as follows: $107 million in 2005,
$49 million in 2006 and $13 million thereafter.
SEG has also contracted to pay Programming Fees for the rights to exhibit
films that have been released theatrically, but are not available for exhibition
by SEG until some future date. These amounts have not been accrued at June 30,
2005. SEG's estimate of amounts payable under these agreements is as follows:
$193 million in 2005; $472 million in 2006; $118 million in 2007; $105 million
in 2008; $91 million in 2009 and $133 million thereafter.
In addition, SEG is obligated to pay Programming Fees for all qualifying
films that are released theatrically in the United States by studios owned by
The Walt Disney Company through 2009, all qualifying films that are released
theatrically in the United States by studios owned by Sony Pictures
Entertainment through 2010 and all qualifying films produced for theatrical
release in the United States by Revolution Studios through 2006. Films are
generally available to SEG for exhibition 10 - 12 months after their theatrical
release. The Programming Fees to be paid by SEG are based on the quantity and
the domestic theatrical exhibition receipts of qualifying films. As these films
have not yet been released in theatres, SEG is unable to estimate the amounts to
be paid under these output agreements. However, such amounts are expected to be
significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, SEG has agreed to pay Sony a total of
$190 million in four annual installments of $47.5 million beginning in 2011.
This option expires December 31, 2007. If made, SEG's payments to Sony would be
amortized ratably as programming expense over the extension period beginning in
2011. An extension of this agreement would also result in the payment by SEG of
Programming Fees for qualifying films released by Sony during the extension
period. If Disney elects to extend its contract, SEG would not be obligated to
pay any amounts in excess of its Programming Fees for qualifying films released
by Disney during the extension period. The Disney option expires December 31,
2007.
Liberty guarantees SEG's film licensing obligations under certain of its
studio output agreements. At June 30, 2005, Liberty's guarantee for studio
output obligations for films released by such date aggregated $702 million.
While the guarantee amount for films not yet released is not determinable, such
amount is expected to be significant. As noted above, SEG has recognized the
liability for a portion of its obligations under the output agreements. As this
represents a commitment of SEG, a consolidated subsidiary of ours, we have not
recorded a separate liability for our guarantee of these obligations.
At June 30, 2005, we guaranteed Y4.5 billion ($40 million) of the bank debt
of J-COM, a former equity affiliate that provides broadband services in Japan.
Our guarantees expire as the underlying debt matures and is repaid. The debt
maturity dates range from 2005 to 2018. Our investment in J-COM was attributed
to LMI in the LMI Spin Off. In connection with the LMI Spin Off, LMI has
indemnified us for any amounts we are required to fund under these guarantees.
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From time to time we enter into total return debt swaps in connection with
our purchase of our own or third-party public and private indebtedness. Under
these arrangements, we direct a counterparty to purchase a specified amount of
the underlying debt security for our benefit. We initially post collateral with
the counterparty equal to 10% of the value of the purchased securities. We earn
interest income based upon the face amount and stated interest rate of the
underlying debt securities, and we pay interest expense at market rates on the
amount funded by the counterparty. In the event the fair value of the underlying
debt securities declines more than 10%, we are required to post cash collateral
for the decline, and we record an unrealized loss on financial instruments. The
cash collateral is further adjusted up or down for subsequent changes in fair
value of the underlying debt security. At June 30, 2005, the aggregate purchase
price of debt securities underlying total return debt swap arrangements, all of
which related to our senior notes and debentures, was $384 million. As of such
date, we had posted cash collateral equal to $38 million. In the event the fair
value of the purchased debt securities were to fall to zero, we would be
required to post additional cash collateral of $346 million. The posting of such
collateral and the related settlement of the agreements would reduce our
outstanding debt by an equal amount.
Since issuance, we have claimed interest deductions on our exchangeable
debentures for federal income tax purposes based on the "comparable yield" at
which we could have issued a fixed-rate debenture with similar terms and
conditions. In all instances, this has resulted in us claiming interest
deductions significantly in excess of the cash interest currently paid on our
exchangeable debentures. Interest deducted in prior years on our exchangeable
debentures has contributed to NOLs that may be carried to offset taxable income
in 2005 and later years. Both these NOLs and current interest deductions on our
exchangeable debentures are being used to offset taxable income currently being
generated.
The IRS has issued two Technical Advice Memorandums challenging the current
deductibility of interest expense claimed on exchangeable debentures issued by
other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge our tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to our
reported total tax expense as the resulting increase in current tax expense
would be offset by a decrease in our deferred tax expense. However, the NOLs we
have recorded would not be available to offset our current taxable income, and
we would be required to make current federal income tax payments. These federal
income tax payments could prove to be significant.
Pursuant to a tax sharing agreement between us and AT&T when we were a
subsidiary of AT&T, we received a cash payment from AT&T in periods when we
generated taxable losses and such taxable losses were utilized by AT&T to reduce
its consolidated income tax liability. To the extent such losses were not
utilized by AT&T, such amounts were available to reduce federal taxable income
generated by us in future periods, similar to a net operating loss carryforward.
During the period from March 10, 1999 to December 31, 2002, we received cash
payments from AT&T aggregating $555 million as payment for our taxable losses
that AT&T utilized to reduce its income tax liability. In the fourth quarter of
2004, AT&T requested a refund from us of $70 million, plus accrued interest,
relating to losses it generated in 2002 and 2003 and was able to carry back to
offset taxable income previously offset by our losses. In the event AT&T
generated capital losses in 2004 and is able to carry back such losses to offset
taxable income previously offset by our losses, we may be required to refund as
much as an additional $229 million (excluding any accrued interest) to AT&T. We
are currently unable to estimate how much, if any, we will ultimately refund to
AT&T, but we believe that any such refund, if made, would not be material to our
financial position.
In connection with agreements for the sale of certain assets, we typically
retain liabilities that relate to events occurring prior to the sale, such as
tax, environmental, litigation and employment matters. We generally indemnify
the purchaser in the event that a third party asserts a claim against the
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purchaser that relates to a liability retained by us. These types of
indemnification guarantees typically extend for a number of years. We are unable
to estimate the maximum potential liability for these types of indemnification
guarantees as the sale agreements typically do not specify a maximum amount and
the amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time. Historically,
we have not made any significant indemnification payments under such agreements
and no amount has been accrued in the accompanying consolidated financial
statements with respect to these indemnification guarantees.
We have contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible we may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
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 financial activities and our subsidiaries in different
foreign countries. Market risk refers to the risk of loss arising from adverse
changes in stock prices, interest rates and foreign currency exchange rates. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. We have established policies, procedures
and internal processes governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by
(i) issuing fixed rate debt that we believe has a low stated interest rate and
significant term to maturity and (ii) issuing short-term variable rate debt to
take advantage of historically low short-term interest rates. As of June 30,
2005, the face amount of our fixed rate debt (considering the effects of
interest rate swap agreements) was $7,746 million, which had a weighted average
interest rate of 4.8%. Our variable rate debt of $2,585 million had a weighted
average interest rate of 4.8% at June 30, 2005. Had market interest rates been
100 basis points higher (representing an approximate 20.9% increase over our
variable rate debt effective cost of borrowing) throughout the six months ended
June 30, 2005, we would have recognized approximately $16 million of additional
interest expense.
We are exposed to changes in stock prices primarily as a result of our
significant holdings in publicly traded securities. We continually monitor
changes in stock markets, in general, and changes in the stock prices of our
holdings, specifically. We believe that changes in stock prices can be expected
to vary as a result of general market conditions, technological changes,
specific industry changes and other factors. We use equity collars, put spread
collars, narrow-band collars, written put and call options and other financial
instruments to manage market risk associated with certain investment positions.
These instruments are recorded at fair value based on option pricing models.
Equity collars provide us with a put option that gives us the right to require
the counterparty to purchase a specified number of shares of the underlying
security at a specified price (the "Company Put Price") at a specified date in
the future. Equity collars also provide the counterparty with a call option that
gives the counterparty the right to purchase the same securities at a specified
price at a specified date in the future. The put option and the call option
generally have equal fair values at the time of origination resulting in no cash
receipts or payments. Narrow-band collars are equity collars in which the put
and call prices are
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set so that the call option has a relatively higher fair value than the put
option at the time of origination. In these cases we receive cash equal to the
difference between such fair values.
Put spread collars provide us and the counterparty with put and call options
similar to equity collars. In addition, put spread collars provide the
counterparty with a put option that gives it the right to require us to purchase
the underlying securities at a price that is lower than the Company Put Price.
The inclusion of the secondary put option allows us to secure a higher call
option price while maintaining net zero cash to enter into the collar. However,
the inclusion of the secondary put exposes us to market risk if the underlying
security trades below the put spread price and may restrict our ability to
borrow against the derivative.
Among other factors, changes in the market prices of the securities
underlying the AFS Derivatives affect the fair market value of the AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying our AFS Derivatives would have on the
fair market value of such derivatives. Such changes in fair market value would
be included in realized and unrealized gains (losses) on financial instruments
in our statement of operations.
<Table>
<Caption>
ESTIMATED AGGREGATE FAIR VALUE
------------------------------------------------------
PUT
EQUITY SPREAD PUT CALL
COLLARS(1) COLLARS OPTIONS OPTIONS TOTAL
---------- -------- -------- -------- --------
AMOUNTS IN MILLIONS
Fair value at June 30, 2005........................... $1,972 296 (515) (55) 1,698
5% increase in market prices.......................... $1,801 296 (496) (58) 1,543
10% increase in market prices......................... $1,630 296 (478) (62) 1,386
5% decrease in market prices.......................... $2,143 296 (534) (53) 1,852
10% decrease in market prices......................... $2,315 296 (553) (51) 2,007
</Table>
- ------------------------
(1) Includes narrow-band collars.
At June 30, 2005, the fair value of our AFS securities was $19,491 million.
Had the market price of such securities been 10% lower at June 30, 2005, the
aggregate value of such securities would have been $1,949 million lower
resulting in an increase to unrealized holding losses in other comprehensive
earnings (loss). Such decrease would be partially offset by an increase in the
value of our AFS Derivatives as noted in the table above.
In connection with certain of our AFS Derivatives, we periodically borrow
shares of the underlying securities from a counterparty and deliver these
borrowed shares in settlement of maturing derivative positions. In these
transactions, a similar number of shares that we own have been posted as
collateral with the counterparty. These share borrowing arrangements can be
terminated at any time at our option by delivering shares to the counterparty.
The counterparty can terminate these arrangements upon the occurrence of certain
events which limit the trading volume of the underlying security. The liability
under these share borrowing arrangements is marked to market each reporting
period with changes in value recorded in unrealized gains or losses in our
consolidated statement of operations. The shares posted as collateral under
these arrangements continue to be treated as AFS securities and are marked to
market each reporting period with changes in value recorded as unrealized gains
or losses in other comprehensive earnings.
We are exposed to foreign exchange rate fluctuations related primarily to
the monetary assets and liabilities and the financial results of QVC's and
Ascent Media'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
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translation adjustments. Cumulative translation adjustments are recorded in
other comprehensive earnings (loss) as a separate component of stockholders'
equity. Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses, which are reflected in income as unrealized (based on period-end
translations) or realized upon settlement of the transactions. Cash flows from
our operations in foreign countries are generally translated at the average rate
for the period. Accordingly, we may experience economic loss and a negative
impact on earnings and equity with respect to our holdings solely as a result of
foreign currency exchange rate fluctuations.
We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. We believe that
any losses incurred with regard to interest rate swaps would be offset by the
effects of interest rate movements on the underlying debt facilities. With
regard to equity collars, we monitor historical market trends relative to values
currently present in the market. We believe that any unrealized losses incurred
with regard to equity collars and swaps would be offset by the effects of fair
value changes on the underlying assets. 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.
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, 2005 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 that occurred during the three months ended June 30, 2005 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.
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LIBERTY MEDIA CORPORATION
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND
ROBERT R. BENNETT. On September 4, 2001, we entered into agreements with
Deutsche Telekom AG pursuant to which we would purchase its entire interest in
six of nine regional cable television companies in Germany. In February 2002, we
failed to receive regulatory approval for our proposed acquisition. On July 27,
2001, Klesch & Company Limited initiated a lawsuit against us, our chairman,
John C. Malone, and our chief executive officer, Robert R. Bennett, in the
United States District Court for the District of Colorado alleging, among other
things, breach of fiduciary duty, fraud and breach of contract in connection
with actions alleged to have been taken by us with respect to what then was a
proposed transaction with Deutsche Telekom. Klesch sought damages in an
unspecified amount in that action, which was the subject of a jury trial that
began on August 30, 2004. On September 28, 2004, the jury returned a verdict in
our favor on all the legal claims asserted by the plaintiff. The jury also
rejected the plaintiff's claims that Messrs. Malone and Bennett had committed
fraud in their dealings with the plaintiff. On March 30, 2005, the court entered
a judgment in accordance with the jury's verdict and, in addition, entered a
judgment in our favor with respect to various equitable claims asserted by the
plaintiff. The plaintiff has appealed the judgment, and we have filed a response
to the appeal. We are not aware of any basis for the reversal of the trial
court's judgment, and we intend to contest the appeal vigorously.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On April 8, 2005, we issued an aggregate of 1,082,016 shares of our
Series A common stock, par value $.01 per share (the "LMC Shares"), to a
subsidiary of IDT Corporation in exchange for the common stock of two other
subsidiaries of IDT Corporation, which at the time of the transaction, owned in
the aggregate 865,710 shares of Telewest Global, Inc. ("TGI") common stock, par
value $.01 per share. Based on the closing price of our common stock on
April 8, 2005, the aggregate value of the LMC Shares issued was $11,252,966. The
issuance of the LMC Shares was exempt from the registration requirements of the
Securities Act of 1933, as amended, pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting of stockholders held on June 8, 2005, the
following matters were voted on and approved by the stockholders of the Company:
Election of the following to the Company's Board of Directors:
<Table>
<Caption>
VOTES FOR VOTES WITHHELD
------------- --------------
David E. Rapley.................................. 3,541,367,920 52,932,907
Larry E. Romrell................................. 3,518,469,609 75,831,218
</Table>
The foregoing nominees also served on the Company's board of directors prior
to the annual meeting. The term of the following directors continued following
the annual meeting: Robert R. Bennett, Donne F. Fisher, Paul A. Gould, John C.
Malone and M. LaVoy Robison. Broker non-votes had no effect on voting for the
election of directors, and abstentions have been treated as votes withheld.
Ratification of KPMG LLP as the Company's independent auditors for the
fiscal year ended December 31, 2005 (3,537,968,081 votes For; 53,266,875 votes
Against; and 3,065,871 Abstentions). There were no broker non-votes with respect
to this proposal.
II-1
<Page>
ITEM 6. EXHIBITS
(a) Exhibits
<Table>
10 $2,000,000,000 Credit Agreement, Dated as of May 20, 2005,
among QVC, Inc., as Borrower; The Lenders Party Hereto;
JPMorgan Chase Bank, N.A., as Administrative Agent; and
Wachovia Capital Markets, LLC, as Syndication Agent.
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
</Table>
II-2
<Page>
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.
<Table>
LIBERTY MEDIA CORPORATION
Date: August 5, 2005 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
Senior Vice President and General Counsel
Date: August 5, 2005 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: August 5, 2005 By: /s/ CHRISTOPHER W. SHEAN
-----------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)
</Table>
II-3
<Page>
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):
<Table>
10 $2,000,000,000 Credit Agreement, Dated as of May 20, 2005,
among QVC, Inc., as Borrower; The Lenders Party Hereto;
JPMorgan Chase Bank, N.A., as Administrative Agent; and
Wachovia Capital Markets, LLC, as Syndication Agent.
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
</Table>