<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 MARCH 31, 2006
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 001-16615
------------------------
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
incorporation or organization) Identification No.)
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer as defined in Rule 12b-2 of the
Exchange Act.
Large accelerated filer /X/ Accelerated filer / / Non-accelerated
filer / /
Indicate by check mark whether the Registrant is a shell company as defined
in Rule 12b-2 of the Exchange Act. Yes / / No /X/
The number of outstanding shares of Liberty Media Corporation's common stock
as of April 28, 2006 was:
Series A common stock 2,688,353,067 shares; and
Series B common stock 120,821,725 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
AMOUNTS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,680 1,946
Trade and other receivables, net.......................... 1,027 1,106
Inventory, net............................................ 749 719
Program rights............................................ 598 599
Derivative instruments (note 8)........................... 301 661
Other current assets...................................... 114 129
------- ------
Total current assets.................................... 4,469 5,160
------- ------
Investments in available-for-sale securities and other cost
investments, including $1,618 million and $1,581 million
pledged as collateral for share borrowing arrangements
(note 6).................................................. 19,126 18,497
Long-term derivative instruments (note 8)................... 912 1,123
Investments in affiliates, accounted for using the equity
method.................................................... 1,889 1,908
Property and equipment, at cost............................. 1,806 1,726
Accumulated depreciation.................................... (626) (595)
------- ------
1,180 1,131
------- ------
Intangible assets not subject to amortization:
Goodwill (note 7)......................................... 7,454 6,953
Trademarks................................................ 2,411 2,385
------- ------
9,865 9,338
------- ------
Intangible assets subject to amortization, net.............. 4,118 4,028
Other assets, at cost, net of accumulated amortization...... 820 767
------- ------
Total assets............................................ $42,379 41,952
======= ======
</Table>
(continued)
I-1
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS, CONTINUED
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
AMOUNTS IN MILLIONS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 458 516
Accrued liabilities....................................... 1,084 1,150
Derivative instruments (note 8)........................... 1,716 1,939
Current portion of debt (note 9).......................... 1,381 1,379
Other current liabilities................................. 211 302
-------- -------
Total current liabilities............................... 4,850 5,286
-------- -------
Long-term debt (note 9)..................................... 6,416 6,371
Long-term derivative instruments (note 8)................... 1,116 1,087
Deferred income tax liabilities............................. 8,928 8,728
Other liabilities........................................... 1,108 1,070
-------- -------
Total liabilities....................................... 22,418 22,542
-------- -------
Minority interests in equity of subsidiaries................ 377 290
Stockholders' equity (note 10):
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
2,684,715,346 shares at March 31, 2006 and 2,681,745,985
shares at December 31, 2005............................. 27 27
Series B common stock, $.01 par value. Authorized
400,000,000 shares; issued 130,852,925 shares at
March 31, 2006 and 131,062,825 shares at December 31,
2005.................................................... 1 1
Additional paid-in-capital................................ 29,098 29,074
Accumulated other comprehensive earnings, net of taxes.... 3,887 3,421
Accumulated deficit....................................... (13,304) (13,278)
-------- -------
19,709 19,245
Series B common stock held in treasury, at cost
(10,000,000 shares)..................................... (125) (125)
-------- -------
Total stockholders' equity.............................. 19,584 19,120
-------- -------
Commitments and contingencies (note 11)
Total liabilities and stockholders' equity.............. $ 42,379 41,952
======== =======
</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
MARCH 31,
-----------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS,
EXCEPT PER SHARE
AMOUNTS
Revenue:
Net sales from electronic retailing....................... $1,608 1,464
Communications and programming services................... 375 357
------ -----
1,983 1,821
------ -----
Operating costs and expenses:
Cost of sales--electronic retailing services.............. 1,000 914
Operating................................................. 398 374
Selling, general and administrative (including stock-based
compensation of $31 million and ($2) million in 2006 and
2005, respectively)..................................... 208 169
Depreciation and amortization............................. 162 161
------ -----
1,768 1,618
------ -----
Operating income........................................ 215 203
Other income (expense):
Interest expense.......................................... (148) (149)
Dividend and interest income.............................. 57 42
Share of earnings of affiliates, net...................... 8 5
Realized and unrealized gains (losses) on financial
instruments, net (note 8)............................... (193) 768
Gains (losses) on dispositions of assets, net............. 22 (380)
Other, net................................................ 4 (6)
------ -----
(250) 280
------ -----
Earnings (loss) from continuing operations before income
taxes and minority interests.......................... (35) 483
Income tax benefit (expense)................................ 102 (225)
Minority interests in earnings of subsidiaries.............. (4) (19)
------ -----
Earnings from continuing operations..................... 63 239
Earnings from discontinued operations, net of taxes (note
5)........................................................ -- 15
Cumulative effect of accounting change, net of taxes (note
2)........................................................ (89) --
------ -----
Net earnings (loss)..................................... $ (26) 254
====== =====
Earnings (loss) per common share (note 3):
Basic and diluted earnings from continuing operations..... $ .02 .09
Discontinued operations................................... -- --
Cumulative effect of accounting change.................... (.03) --
------ -----
Basic and diluted earnings (loss)......................... $ (.01) .09
====== =====
</Table>
See accompanying notes to condensed consolidated financial statements.
I-3
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
AMOUNTS IN MILLIONS
Net earnings (loss)......................................... $(26) 254
---- ------
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments.................. 20 107
Recognition of previously unrealized foreign currency
translation losses...................................... -- 306
Unrealized holding gains (losses) arising during the
period.................................................. 461 (1,403)
Recognition of previously unrealized gains on
available-for-sale securities, net...................... (15) (48)
Other comprehensive loss from discontinued operations..... -- (5)
---- ------
Other comprehensive earnings (loss)....................... 466 (1,043)
---- ------
Comprehensive earnings (loss)............................... $440 (789)
==== ======
</Table>
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>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
AMOUNTS IN MILLIONS
(NOTE 4)
Cash flows from operating activities:
Net earnings (loss)....................................... $ (26) 254
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Earnings from discontinued operations................... -- (15)
Cumulative effect of accounting change.................. 89 --
Depreciation and amortization........................... 162 161
Stock compensation...................................... 31 (2)
Payments of stock compensation.......................... -- (36)
Noncash interest expense................................ 26 25
Share of earnings of affiliates, net.................... (8) (5)
Realized and unrealized losses (gains) on financial
instruments, net...................................... 193 (768)
Losses (gains) on disposition of assets, net............ (22) 380
Minority interests in earnings of subsidiaries.......... 4 19
Deferred income tax expense (benefit)................... (150) 158
Other noncash charges, net.............................. 11 13
Changes in operating assets and liabilities, net of the
effects of acquisitions:
Current assets........................................ 1 77
Payables and other current liabilities................ (248) (154)
------ -----
Net cash provided by operating activities........... 63 107
------ -----
Cash flows from investing activities:
Cash proceeds from dispositions........................... 137 39
Net proceeds (payments) from settlement of derivatives.... 184 (7)
Cash paid for acquisitions, net of cash acquired.......... (597) --
Capital expended for property and equipment............... (59) (40)
Net sales of short term investments....................... 126 71
Investments in and loans to cost and equity investees..... (120) --
Other investing activities, net........................... 3 7
------ -----
Net cash provided (used) by investing activities.... (326) 70
------ -----
Cash flows from financing activities:
Borrowings of debt........................................ -- 60
Repayments of debt........................................ (2) (297)
Repurchases of subsidiary common stock.................... (29) (34)
Other financing activities, net........................... 25 52
------ -----
Net cash used by financing activities............... (6) (219)
------ -----
Effect of foreign currency exchange rates on cash........... 3 (11)
------ -----
Net cash provided to discontinued operations (revised, see
note 4):
Cash provided by operating activities..................... -- 11
Cash used by investing activities......................... -- (19)
Cash provided by financing activities..................... -- --
Change in available cash held by discontinued
operations.............................................. -- 6
------ -----
Net cash provided to discontinued operations........ -- (2)
------ -----
Net decrease in cash and cash equivalents........... (266) (55)
Cash and cash equivalents at beginning of period.... 1,946 1,387
------ -----
Cash and cash equivalents at end of period.......... $1,680 1,332
====== =====
</Table>
See accompanying notes to condensed consolidated financial statements.
I-5
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006
<Table>
<Caption>
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER
PREFERRED --------------------- PAID-IN COMPREHENSIVE ACCUMULATED
STOCK SERIES A SERIES B CAPITAL EARNINGS DEFICIT
--------- --------- --------- ---------- ------------- ------------
AMOUNTS IN MILLIONS
Balance at January 1, 2006...... $ -- 27 1 29,074 3,421 (13,278)
Net loss...................... -- -- -- -- -- (26)
Other comprehensive
earnings.................... -- -- -- -- 466 --
Losses in connection with
issuances of stock by
subsidiaries and affiliates,
net of taxes................ -- -- -- (1) -- --
Issuance of common stock upon
exercise of stock options... -- -- -- 2 -- --
Stock compensation............ -- -- -- 23 -- --
--------- -- --------- ------ ----- -------
Balance at March 31, 2006....... $ -- 27 1 29,098 3,887 (13,304)
========= == ========= ====== ===== =======
<Caption>
TOTAL
TREASURY STOCKHOLDERS'
STOCK EQUITY
-------- -------------
AMOUNTS IN MILLIONS
Balance at January 1, 2006...... (125) 19,120
Net loss...................... -- (26)
Other comprehensive
earnings.................... -- 466
Losses in connection with
issuances of stock by
subsidiaries and affiliates,
net of taxes................ -- (1)
Issuance of common stock upon
exercise of stock options... -- 2
Stock compensation............ -- 23
---- ------
Balance at March 31, 2006....... (125) 19,584
==== ======
</Table>
See accompanying notes to condensed consolidated financial statements.
I-6
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
(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 video and on-line
commerce, media, communications and entertainment industries in the United
States, Europe and Asia.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for such
periods have been included. The results of operations for any interim period are
not necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in Liberty's
Annual Report on Form 10-K for the year ended December 31, 2005.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Liberty considers (i) the estimate of the
fair value of its long-lived assets (including goodwill) and any resulting
impairment charges, (ii) its accounting for income taxes, (iii) the fair value
of its derivative instruments, (iv) its assessment of other-than-temporary
declines in fair value of its investments and (v) electronic retailing reserves
to be its most significant estimates.
Liberty holds investments that are accounted for using the equity method.
Liberty does not control the decision making process or business management
practices of these affiliates. Accordingly, Liberty relies on management of
these affiliates to provide it with accurate financial information prepared in
accordance with GAAP that Liberty uses in the application of the equity method.
In addition, Liberty relies on audit reports that are provided by the
affiliates' independent auditors on the financial statements of such affiliates.
The Company is not aware, however, of any errors in or possible misstatements of
the financial information provided by its equity affiliates that would have a
material effect on Liberty's condensed consolidated financial statements.
Certain prior period amounts have been reclassified for comparability with
the 2006 presentation.
(2) 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. The
Awards generally vest over a 4-5 year period and expire 7-10 years from the date
of grant. QVC has granted combination stock options/SARS ("QVC Awards") to
certain of its
I-7
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
employees. If the employee elects the SAR feature, the participant receives 75%
of the value of the QVC Award. The QVC Awards vest over 4 years and expire
10 years from the date of grant.
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 of
Financial Accounting Standards No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION" ("Statement 123") and supersedes Accounting Principles Board
Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion
No. 25"), establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services, primarily
focusing on transactions in which an entity obtains employee services.
Statement 123R generally requires companies to measure the cost of employee
services received in exchange for an award of equity instruments (such as stock
options and restricted stock) based on the grant-date fair value of the award,
and to recognize that cost over the period during which the employee is required
to provide service (usually the vesting period of the award). Statement 123R
also requires companies to measure the cost of employee services received in
exchange for an award of liability instruments (such as stock appreciation
rights that will be settled in cash) based on the current fair value of the
award, and to remeasure the fair value of the award at each reporting date.
The provisions of Statement 123R allow companies to adopt the standard using
the modified prospective method or to restate all periods for which
Statement 123 was effective. Liberty has adopted Statement 123R using the
modified prospective method, 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.
The Company adopted Statement 123R effective January 1, 2006. In connection
with such adoption, the Company recorded an $89 million transition adjustment,
net of related income taxes. Under Statement 123R, the QVC Awards are required
to be bifurcated into a liability award and an equity award. Conversely, under
APB Opinion No. 25, no liability was recorded. The transition adjustment
primarily represents the fair value of the liability portion of the QVC Awards
at January 1, 2006. The transition adjustment is reflected in the accompanying
condensed consolidated statement of operations as the cumulative effect of
accounting change. Also in connection with the adoption of Statement 123R, the
Company has eliminated its unearned compensation balance as of December 31, 2005
($24 million) against additional paid-in capital.
The Company has calculated the grant-date fair value for all of its equity
classified awards and any subsequent remeasurement of its liability classified
awards using the Black-Scholes Model. The Company has calculated the expected
term of the Awards using the methodology included in SEC Staff Accounting
Bulletin No. 107. The volatility used in the calculation is based on the implied
volatility of publicly traded Liberty options with a similar term (generally
20% - 21%). The Company uses the risk-free rate for Treasury Bonds with a term
similar to that of the subject options. The QVC Awards are also valued using the
Black-Scholes Model. The volatility used in the calculation is based on the
volatility of public companies similar to QVC (36%).
As of March 31, 2006, the total compensation cost related to unvested
Liberty and QVC equity awards was approximately $42 million. Such amount will be
recognized in the Company's consolidated statements of operations through 2010.
During the three months ended March 31, 2006, Liberty granted 2,473,275
options to certain of its officers and employees. Such options had an estimated
grant-date fair value of $2.28 per share.
I-8
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the three months ended March 31, 2006 and 2005, option holders
exercised 3,076,823 and 4,489,652 options, respectively. These options had an
aggregate intrinsic value of $23.5 million and $36.3 million, respectively.
The following table presents the number and weighted average exercise price
("WAEP") of certain options, SARs and options with tandem SARs to purchase
Liberty Series A and Series B common stock granted to certain officers,
employees and directors of the Company.
<Table>
<Caption>
LIBERTY LIBERTY
SERIES A SERIES B
COMMON COMMON
STOCK WAEP STOCK WAEP
-------- -------- -------- --------
NUMBERS OF OPTIONS IN THOUSANDS
Outstanding at January 1, 2006..................... 51,729 $ 9.23 29,965 $10.92
Granted.......................................... 2,473 $ 8.25 --
Exercised........................................ (3,077) $ 0.46 --
Canceled......................................... (20) $ 8.03 --
------ ------
Outstanding at March 31, 2006...................... 51,105 $ 9.71 29,965 $10.92
====== ======
Exercisable at March 31, 2006...................... 33,634 $10.45 28,165 $11.03
====== ======
</Table>
The following table provides additional information about the Company's
outstanding options to purchase Liberty Series A common stock at March 31, 2006.
<Table>
<Caption>
WEIGHTED
NO. OF WAEP OF AVERAGE AGGREGATE NO. OF WAEP OF AGGREGATE
OUTSTANDING RANGE OF OUTSTANDING REMAINING INTRINSIC EXERCISABLE EXERCISABLE INTRINSIC
OPTIONS EXERCISE PRICES OPTIONS LIFE VALUE OPTIONS OPTIONS VALUE
- ----------- ---------------- ----------- --------- --------- ----------- ----------- ---------
(000'S) (000'S) (000'S) (000'S)
3,948... $ 0.64 - $ 3.72 $ 0.96 0.3 years $28,621 3,948 $ 0.96 $28,621
24,031.. $ 5.55 - $ 9.87 $ 8.18 6.7 years 5,448 6,651 $ 8.11 2,495
22,191.. $10.65 - $ 12.16 $10.79 4.8 years -- 22,143 $10.79 --
935..... $16.82 - $251.69 $60.16 4.6 years -- 892 $61.46 --
------ ------- ------ -------
51,105.. $34,069 33,634 $31,116
====== ======= ====== =======
</Table>
The following table represents the number and weighted average grant-date
fair value ("WAFV") of unvested restricted shares of Series A common stock held
by certain officers and employees of the Company (numbers of shares in
thousands).
<Table>
<Caption>
LIBERTY
SERIES A
COMMON
STOCK WAFV
-------- --------
Outstanding at January 1, 2006.............................. 6,478 $10.06
Granted................................................... --
Vested.................................................... (3,858) $10.08
Forfeited................................................. (13) $10.08
------
Outstanding at March 31, 2006............................... 2,607 $10.03
======
</Table>
Prior to adoption of Statement 123R, the Company accounted for compensation
expense related to its Awards pursuant to the recognition and measurement
provisions of APB Opinion No. 25. All of the
I-9
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company's Awards were accounted for as variable plan awards, and compensation
was recognized based upon the percentage of the options that were vested and the
difference between the market price of the underlying common stock and the
exercise price of the options at the balance sheet date. The Company accounted
for QVC stock options using fixed-plan accounting. The following table
illustrates the effect on net income and earnings per share for the three months
ended March 31, 2005 if the Company had applied the fair value recognition
provisions of Statement 123 to its options. Compensation expense for SARs and
options with tandem SARs was the same under APB Opinion No. 25 and
Statement 123. Accordingly, no pro forma adjustment for such Awards is included
in the following table (amounts in millions, except per share amounts).
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31, 2005
------------------
Earnings from continuing operations......................... $239
Add stock-based compensation as determined under the
intrinsic value method, net of taxes.................... 1
Deduct stock-based compensation as determined under the
fair value method, net of taxes......................... (8)
----
Pro forma earnings from continuing operations............... $232
====
Basic and diluted earnings from continuing operations per
share:
As reported............................................... $.09
Pro forma................................................. $.08
</Table>
(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 2,801 million and
2,793 million weighted average outstanding shares for the three months ended
March 31, 2006 and 2005, respectively. The diluted EPS calculation for the three
months ended March 31, 2005 includes 14.6 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 statements of operations. Excluded from diluted EPS for the three
months ended March 31, 2006 and 2005 are 82 million and 61 million potential
common shares, respectively, because their inclusion would be anti-dilutive.
Liberty has announced its intention to create, subject to stockholder
approval, two new tracking stocks, one ("Liberty Interactive Stock") intended to
reflect the separate performance of Liberty's businesses engaged in video and
on-line commerce, including its subsidiaries, QVC, Inc. and Provide
Commerce, Inc. and its interests in IAC/InterActiveCorp and Expedia, Inc., the
second ("Liberty Capital Stock") intended to reflect the separate performance of
all of Liberty's assets and businesses not attributed to the Interactive Group.
If the proposal to create the tracking stocks is approved and completed, each
share of Liberty's existing Series A and Series B common stock would be
exchanged for .25 of a share of the same series of Liberty Interactive Stock and
..05 of a share of the same series of Liberty Capital Stock. Upon the issuance of
the tracking stocks, if completed, Liberty will disclose EPS attributable to
each of the Liberty Interactive Stock and the Liberty Capital Stock.
I-10
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for historical
attributed financial information for Liberty's proposed tracking stock groups.
(4) SUPPLEMENTAL DISCLOSURES TO STATEMENTS OF CASH FLOWS
Liberty has revised its 2005 statement of cash flows to separately disclose
the operating, investing and financing portions of the cash flows attributable
to discontinued operations. The Company previously had reported these amounts on
a combined basis.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Cash paid for acquisitions:
Fair value of assets acquired............................. $768 --
Net liabilities assumed................................... (48) --
Deferred tax liability.................................... (52) --
Minority interest......................................... (71) --
---- --------
Cash paid for acquisitions, net of cash acquired........ $597 --
==== ========
</Table>
(5) DISCONTINUED OPERATIONS
SPIN OFF OF DISCOVERY HOLDING COMPANY ("DHC")
On July 21, 2005, Liberty completed the spin-off (the "DHC Spin Off") of a
newly formed subsidiary, Discovery Holding Company. DHC's assets were comprised
of Liberty's 100% ownership interest in Ascent Media Group, LLC ("Ascent
Media"), Liberty's 50% ownership interest in Discovery Communications, Inc.
("Discovery") and $200 million in cash. In connection with the DHC Spin Off,
holders of Liberty common stock on July 15, 2005 received 0.10 of a share of DHC
Series A common stock for each share of Liberty Series A common stock owned and
0.10 of a share of DHC Series B common stock for each share of Liberty Series B
common stock owned. Upon completion of this transaction, DHC is a separate
publicly traded company. This transaction has been accounted for at historical
cost due to the pro rata nature of the distribution.
The condensed consolidated financial statements and accompanying notes of
Liberty have been prepared to reflect DHC as a discontinued operation.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of DHC have been excluded from the respective captions in the accompanying
condensed consolidated balance sheets, statements of operations, statements of
comprehensive earnings (loss) and statements of cash flows and have been
reported under the heading of discontinued operations in such condensed
consolidated financial statements.
Certain financial information for DHC, which is included in earnings from
discontinued operations for the three months ended March 31, 2005, is as follows
(amounts in millions):
<Table>
Revenue..................................................... $174
Earnings before income taxes................................ $ 26
</Table>
I-11
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain asset and liability amounts for DHC as of July 21, 2005 are as
follows (amounts in millions):
<Table>
Investment in Discovery..................................... $ 2,982
Goodwill.................................................... $ 2,135
Deferred tax liabilities.................................... $(1,060)
</Table>
(6) 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>
MARCH 31, DECEMBER 31,
2006 2005
--------- ------------
AMOUNTS IN MILLIONS
News Corporation............................................ $ 8,694 8,171
IAC/InterActiveCorp ("IAC")................................. 2,040 1,960
Time Warner Inc. ("Time Warner")(1)......................... 2,874 2,985
Sprint Nextel Corporation ("Sprint")(2)..................... 2,258 2,162
Motorola, Inc. ("Motorola")(3).............................. 1,696 1,672
Other available-for-sale equity securities(4)............... 1,097 1,088
Other available-for-sale debt securities(5)................. 384 389
Other cost investments and related receivables.............. 89 79
------- ------
19,132 18,506
Less short-term investments............................... (6) (9)
------- ------
$19,126 18,497
======= ======
</Table>
- ------------------------
(1) Includes $152 million and $158 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2006 and December 31, 2005,
respectively.
(2) Includes $104 million and $94 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2006 and December 31, 2005,
respectively.
(3) Includes $1,190 million and $1,173 million of shares pledged as collateral
for share borrowing arrangements at March 31, 2006 and December 31, 2005,
respectively.
(4) Includes $172 million and $156 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2006 and December 31, 2005,
respectively.
(5) At March 31, 2006, other available-for-sale debt securities include
$271 million of investments in third-party marketable debt securities held
by Liberty parent and $14 million of such securities held by subsidiaries of
Liberty. At December 31, 2005, such investments aggregated $371 million and
$18 million, respectively.
I-12
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
UNREALIZED HOLDING GAINS AND LOSSES
Unrealized holding gains and losses related to investments in
available-for-sale securities are summarized below.
<Table>
<Caption>
MARCH 31, 2006 DECEMBER 31, 2005
----------------------- -----------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- ----------
AMOUNTS IN MILLIONS
Gross unrealized holding gains.................. $6,228 -- 5,459 17
Gross unrealized holding losses................. $ (58) -- (27) --
</Table>
The aggregate fair value of securities with unrealized holding losses at
March 31, 2006 was $686 million. None of these securities had unrealized losses
for more than 12 continuous months.
(7) INTANGIBLE ASSETS
GOODWILL
Changes in the carrying amount of goodwill for the three months ended
March 31, 2006 are as follows:
<Table>
<Caption>
STARZ
ENTERTAINMENT
QVC, INC. GROUP LLC OTHER TOTAL
---------- ------------- -------- --------
AMOUNTS IN MILLIONS
Balance at January 1, 2006...................... $4,057 1,383 1,513 6,953
Acquisitions(1)............................... 4 -- 487 491
Foreign currency translation.................. 10 -- -- 10
Other......................................... 10 -- (10) --
------ ----- ----- -----
Balance at March 31, 2006....................... $4,081 1,383 1,990 7,454
====== ===== ===== =====
</Table>
- ------------------------
(1) During the first quarter of 2006, Liberty and its subsidiaries completed
several acquisitions, including the acquisition of all of the common stock
of Provide Commerce, Inc. that it did not already own and approximately 55%
of the common stock of FUN Technologies plc, for aggregate cash
consideration of $597 million, net of cash acquired. In connection with
these acquisitions, Liberty recorded goodwill of $491 million which
represents the difference between the consideration paid and the estimated
fair value of the assets acquired. Such goodwill is subject to adjustment
pending completion of the Company's purchase price allocation process.
AMORTIZABLE INTANGIBLE ASSETS
Amortization of intangible assets with finite useful lives was $120 million
and $118 million for the three months ended March 31, 2006 and 2005,
respectively. Based on its current amortizable intangible
I-13
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets, Liberty expects that amortization expense will be as follows for the
next five years (amounts in millions):
<Table>
<Caption>
Remainder of 2006. $ 357
2007........................................................ $437
2008........................................................ $403
2009........................................................ $357
2010........................................................ $346
</Table>
(8) DERIVATIVE INSTRUMENTS
The Company's derivative instruments are summarized as follows:
<Table>
<Caption>
TYPE OF MARCH 31, DECEMBER 31,
DERIVATIVE 2006 2005
- ---------- ---------- -------------
AMOUNTS IN MILLIONS
ASSETS
Equity collars............................................ $ 1,110 1,568
Put spread collars........................................ -- 133
Other..................................................... 103 83
------- ------
1,213 1,784
Less current portion...................................... (301) (661)
------- ------
$ 912 1,123
======= ======
LIABILITIES
Exchangeable debenture call option obligations............ $ 944 927
Put options............................................... 89 342
Equity collars............................................ 171 160
Borrowed shares........................................... 1,618 1,581
Other..................................................... 10 16
------- ------
2,832 3,026
Less current portion...................................... (1,716) (1,939)
------- ------
$ 1,116 1,087
======= ======
</Table>
Realized and unrealized gains (losses) on financial instruments are
comprised of the following:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call option
features.................................................. $ (17) 378
Change in fair value of equity collars...................... (157) 313
Change in fair value of put options......................... (9) (43)
Change in fair value of borrowed shares..................... (37) 106
Change in fair value of other derivatives................... 27 14
----- ---
$(193) 768
===== ===
</Table>
I-14
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) LONG-TERM DEBT
Debt is summarized as follows:
<Table>
<Caption>
OUTSTANDING CARRYING VALUE
PRINCIPAL --------------------------
MARCH 31, MARCH 31, DECEMBER 31,
2006 2006 2005
----------- ---------- -------------
AMOUNTS IN MILLIONS
Parent company debt:
Senior notes and debentures
3.5% Senior Notes due 2006..................... $ 121 121 121
Floating Rate Senior Notes due 2006............ 1,247 1,247 1,247
7.875% Senior Notes due 2009................... 670 666 666
7.75% Senior Notes due 2009.................... 234 235 235
5.7% Senior Notes due 2013..................... 802 800 800
8.5% Senior Debentures due 2029................ 500 495 495
8.25% Senior Debentures due 2030............... 902 895 895
Senior exchangeable debentures
4% Senior Exchangeable Debentures due 2029..... 869 252 251
3.75% Senior Exchangeable Debentures due
2030......................................... 810 232 231
3.5% Senior Exchangeable Debentures due 2031... 600 235 235
3.25% Senior Exchangeable Debentures due
2031......................................... 551 118 117
0.75% Senior Exchangeable Debentures due
2023......................................... 1,750 1,573 1,552
------ ------- -------
9,056 6,869 6,845
QVC bank credit facility........................... 800 800 800
Other subsidiary debt.............................. 128 128 105
------ ------- -------
Total debt....................................... $9,984 7,797 7,750
======
Less current maturities........................ (1,381) (1,379)
------- -------
Total long-term debt............................. $ 6,416 6,371
======= =======
</Table>
QVC BANK CREDIT FACILITY
Effective May 20, 2005, QVC entered into a $2 billion bank credit facility.
In March 2006, such facility was refinanced with a new $3.5 billion bank credit
facility (the "QVC Credit Facility"). The QVC Credit Facility is comprised of an
$800 million U.S. dollar term loan that was drawn at closing, an $800 million
U.S. dollar term loan that can be drawn at any time before September 30, 2006, a
$600 million multi-currency term loan that can be drawn at any time before
September 30, 2006, a $650 million U.S. dollar revolving loan and a
$650 million multi-currency revolving loan. The foregoing multi-currency loans
can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound sterling
or euros. All loans are due and payable on March 3, 2011, and accrue interest,
at the option of QVC, 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.
I-15
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OTHER SUBSIDIARY DEBT
Other subsidiary debt at March 31, 2006, is comprised primarily of
capitalized satellite transponder lease obligations.
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities at March 31, 2006 is as follows (amounts in millions):
<Table>
<Caption>
Fixed rate senior notes. $ 1,825
Floating rate senior notes.................................. $1,216
Senior debentures........................................... $1,411
Senior exchangeable debentures, including call option
obligation................................................ $3,866
</Table>
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at March 31, 2006.
(10) STOCKHOLDERS' EQUITY
As of March 31, 2006, there were 52.4 million shares of Liberty Series A
common stock and 30.0 million shares of Liberty Series B common stock reserved
for issuance under exercise privileges of outstanding stock options and
warrants.
(11) 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
March 31, 2006 is reflected as a liability in the accompanying condensed
consolidated balance sheet. The balance due as of March 31, 2006 is payable as
follows: $117 million in 2006, $19 million in 2007 and $14 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 March 31,
2006. SEG's estimate of amounts payable under these agreements is as follows:
$316 million in 2006; $254 million in 2007; $102 million in 2008; $90 million in
2009; $81 million in 2010; and $52 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
I-16
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 March 31, 2006, Liberty's guarantee for obligations for films
released by such date aggregated $613 million. While the guarantee amount for
films not yet released is not determinable, such amount is expected to be
significant. As noted above, SEG has recognized the liability for a portion of
its obligations under the output agreements. As this represents a commitment of
SEG, a consolidated subsidiary of Liberty, Liberty has not recorded a separate
liability for its guarantee of these obligations.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its sale,
such as tax, environmental, litigation and employment matters. Liberty generally
indemnifies the purchaser in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by Liberty. These
types of indemnification guarantees typically extend for a number of years.
Liberty is unable to estimate the maximum potential liability for these types of
indemnification guarantees as the sale agreements typically do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to these
indemnification guarantees.
OPERATING LEASES
Liberty and its subsidiaries lease business offices, have entered into
satellite transponder lease agreements and use certain equipment under lease
arrangements.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
INCOME TAXES
Since the date Liberty issued its exchangeable debentures, it has claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at
I-17
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
which it could have issued a fixed-rate debenture with similar terms and
conditions. In all instances, this policy has resulted in Liberty claiming
interest deductions significantly in excess of the cash interest currently paid
on its exchangeable debentures. Interest deducted in prior years on its
exchangeable debentures has contributed to net operating losses ("NOLs") that
may be carried to offset taxable income in 2006 and later years. These NOLs and
current interest deductions on the exchangeable debentures are being used to
offset taxable income currently being generated.
The IRS has issued Technical Advice Memorandums (the "TAMs") challenging the
current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge Liberty's tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to
Liberty's reported total tax expense as the resulting increase in current tax
expense would be offset by a decrease in deferred tax expense. However, the NOLs
Liberty has recorded would not be available to offset its current taxable
income, and Liberty would be required to make current federal income tax
payments. These federal income tax payments could prove to be significant.
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T Corp. and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement").
While Liberty was a subsidiary of AT&T, Liberty recorded its stand-alone tax
provision on a separate return basis. Under the AT&T Tax Sharing Agreement,
Liberty received a cash payment from AT&T in periods when Liberty generated
taxable losses and such taxable losses were utilized by AT&T to reduce its
consolidated income tax liability. To the extent such losses were not utilized
by AT&T, such amounts were available to reduce federal taxable income generated
by Liberty in future periods, similar to a net operating loss carryforward, and
were accounted for as a deferred federal income tax benefit. Subsequent to
Liberty's spin off from AT&T, if adjustments are made to amounts previously paid
under the AT&T Tax Sharing Agreement, such adjustments are reflected as
adjustments to additional paid-in capital. During the period from March 10, 1999
to December 31, 2002, Liberty received cash payments from AT&T aggregating
$670 million as payment for Liberty's taxable losses that AT&T utilized to
reduce its income tax liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with
Liberty's split off from AT&T, AT&T was required to pay Liberty an amount equal
to 35% of the amount of the net operating losses reflected in TCI's final
federal income tax return ("TCI NOLs") that had not been used as an offset to
Liberty's obligations under the AT&T Tax Sharing Agreement and that had been, or
were reasonably expected to be, utilized by AT&T. In connection with the split
off, Liberty received an $803 million payment for TCI's NOLs and recorded such
payment as an increase to additional paid-in capital. Liberty was not paid for
certain of TCI's NOLs ("SRLY NOLs") due to limitations and uncertainty regarding
AT&T's ability to use them to offset taxable income in the future. In the event
AT&T was ultimately able to use any of the SRLY NOLs, they would be required to
pay Liberty 35% of the amount of the SRLY NOLs used. In the fourth quarter of
2004 and in connection with the completion of an IRS audit of TCI's tax return
for 1994, it was determined that Liberty was required to recognize additional
taxable income related to the recapitalization of one of its investments
resulting in a tax liability of approximately $30 million. As a result of the
tax assessment, Liberty also received a corresponding amount of additional tax
basis in the investment. However, Liberty was able to cause AT&T to use a
portion of the SRLY NOLs to offset this taxable income, the benefit of which
resulted in the elimination of the $30 million tax liability and an increase to
additional paid-in capital.
I-18
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In the fourth quarter of 2004, AT&T requested a refund from Liberty of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by Liberty's losses. AT&T has asserted that Liberty's losses caused AT&T to pay
$70 million in alternative minimum tax ("AMT") that it would not have been
otherwise required to pay had Liberty's losses not been included in its return.
In 2004, Liberty estimated that it may ultimately pay AT&T up to $30 million of
the requested $70 million because Liberty believed AT&T received an AMT credit
of $40 million against income taxes resulting from the AMT previously paid.
Accordingly, Liberty accrued a $30 million liability with an offsetting
reduction of additional paid-in capital. The net effect of the completion of the
IRS tax audit noted above (including the benefit derived from AT&T for the
utilization of the SRLY NOLs) and Liberty's accrual of amounts due to AT&T was
an increase to deferred tax assets and an increase to other liabilities.
In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by Liberty's losses. In addition, the
information provided to Liberty in connection with AT&T's request showed that
AT&T had not yet claimed a credit for AMT previously paid. Accordingly, in the
fourth quarter of 2005, Liberty increased its accrual by approximately
$40 million (with a corresponding reduction of additional paid-in capital)
representing its estimate of the amount it may ultimately pay (excluding accrued
interest, if any) to AT&T as a result of this request. Although Liberty has not
reduced its accrual for any future refunds, Liberty believes it is entitled to a
refund when AT&T is able to realize a benefit in the form of a credit for the
AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by Liberty's losses. Liberty has
reviewed this claim and believes that its accrual as of December 31, 2005 is
adequate. Accordingly, no additional accrual was recorded during the three
months ended March 31, 2006.
Although for accounting purposes Liberty has accrued a portion of the
amounts claimed by AT&T to be owed by Liberty under the AT&T Tax Sharing
Agreement, Liberty believes there are valid defenses or set-off or similar
rights in its favor that may cause the total amount that it owes AT&T to be less
than the amounts accrued.
(12) 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.
Liberty evaluates performance and makes decisions about allocating resources
to its operating segments based on financial measures such as revenue, operating
cash flow, gross margin, average sales price per unit, number of units shipped,
and revenue or sales per customer equivalent. In addition, Liberty reviews
non-financial measures such as subscriber growth and penetration, as
appropriate.
Liberty defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding
stock-based compensation). Liberty believes this is an important indicator of
the operational strength and performance of its businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows
I-19
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 three months ended March 31, 2006, 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.
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.
PERFORMANCE MEASURES
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-------------------------------------------
2006 2005
-------------------- --------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW REVENUE FLOW
-------- --------- -------- ---------
AMOUNTS IN MILLIONS
QVC............................................. $1,555 355 1,464 323
SEG............................................. 259 41 254 48
Corporate and Other............................. 169 12 103 (9)
------ --- ----- ---
Consolidated Liberty............................ $1,983 408 1,821 362
====== === ===== ===
</Table>
OTHER INFORMATION
<Table>
<Caption>
MARCH 31, 2006
---------------------------------------
TOTAL INVESTMENTS CAPITAL
ASSETS IN AFFILIATES EXPENDITURES
-------- ------------- ------------
AMOUNTS IN MILLIONS
QVC.................................................. $15,598 1 42
SEG.................................................. 2,950 46 --
Corporate and Other.................................. 23,831 1,842 17
------- ----- --
Consolidated Liberty................................. $42,379 1,889 59
======= ===== ==
</Table>
I-20
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a reconciliation of consolidated segment
operating cash flow to earnings (loss) from continuing operations before income
taxes and minority interests:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
AMOUNTS IN MILLIONS
Consolidated segment operating cash flow.................... $ 408 362
Stock-based compensation.................................... (31) 2
Depreciation and amortization............................... (162) (161)
Interest expense............................................ (148) (149)
Realized and unrealized gains (losses) on financial
instruments, net.......................................... (193) 768
Gains (losses) on dispositions of assets, net............... 22 (380)
Other, net.................................................. 69 41
----- ----
Earnings (loss) from continuing operations before income
taxes and minority interests.............................. $ (35) 483
===== ====
</Table>
I-21
<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, including statements regarding our business,
product and marketing strategies, new service offerings, our tax sharing
arrangement with AT&T and estimated amounts payable under that arrangement,
revenue growth and subscriber trends at QVC and SEG, anticipated programming and
marketing costs at SEG, projected uses of cash for the remainder of 2006, the
primary funding sources for Liberty's investing and financing activities for the
remainder of 2006, the estimated value of our derivatives related to certain of
our AFS investments, and the anticipated non-material impact of certain
contingent liabilities related to legal and tax proceedings and other matters
arising in the ordinary course of our business. Where, in any forward-looking
statement, we express an expectation or belief as to future results or events,
such expectation or belief is expressed in good faith and believed to have a
reasonable basis, but such statements necessarily involve risks and
uncertainties and there can be no assurance that the statement of expectation or
belief will result or be achieved or accomplished. The following include some
but not all of the factors that could cause actual results or events to differ
materially from those anticipated:
- general economic and business conditions and industry trends;
- consumer spending levels, including the availability and amount of
individual consumer debt;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband distribution and movie studio
industries;
- uncertainties inherent in the development and integration of new business
lines and business strategies;
- changes in distribution and viewing of television programming, including
the expanded deployment of personal video recorders, video on demand and
IP television and their impact on home shopping networks;
- increased digital TV penetration and the impact on channel positioning of
our networks;
- rapid technological changes;
- capital spending for the acquisition and/or development of
telecommunications networks and services;
- uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new
television and telecommunications technologies;
- future financial performance, including availability, terms and deployment
of capital;
- fluctuations in foreign currency exchange rates and political unrest in
international markets;
- the ability of suppliers and vendors to deliver products, equipment,
software and services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
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- competitor responses to our products and services, and the products and
services of the entities in which we have interests; and
- threatened terrorists attacks and ongoing military action in the Middle
East and other parts of the world.
These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this Quarterly Report, and we expressly
disclaim any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any change in its
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying condensed consolidated financial statements
and the notes thereto and our Annual Report on Form 10-K for the year ended
December 31, 2005.
OVERVIEW
We are a holding company that owns controlling and noncontrolling interests
in a broad range of electronic retailing, media, communications and
entertainment companies. Our more significant operating subsidiaries, which are
also our reportable segments are QVC and Starz Entertainment Group. QVC markets
and sells a wide variety of consumer products in the United States and several
foreign countries, primarily by means of televised shopping programs 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.
Our "Corporate and Other" category includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
On Command Corporation ("On Command"), OpenTV Corp. ("OpenTV"),
TruePosition, Inc. ("TruePosition"), Provide Commerce, Inc. ("Provide") and FUN
Technologies, Inc. ("FUN"). On Command provides in-room, on-demand video
entertainment and information services to hotels, motels and resorts primarily
in the United States. OpenTV provides interactive television solutions,
including operating middleware, web browser software, interactive applications,
and consulting and support services. TruePosition provides equipment and
technology that deliver location-based services to wireless users. Provide,
which we acquired on February 9, 2006, operates an e-commerce marketplace of
websites for perishable goods, including flowers, gourmet foods, fruits and
desserts. FUN, which we acquired on March 10, 2006, operates websites that offer
casual gaming, sports information and fantasy sports services.
In addition to the foregoing businesses, we hold an approximate 20%
ownership interest in Expedia, Inc., which we account for as an equity method
investment, and we continue to maintain significant investments and related
derivative positions in public companies such as News Corporation,
IAC/InterActiveCorp, Time Warner Inc. and Sprint Nextel Corporation, which are
accounted for at their respective fair market values and are included in
corporate and other.
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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CONSOLIDATED OPERATING RESULTS
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
AMOUNTS IN MILLIONS
Revenue:
QVC....................................................... $1,555 1,464
SEG....................................................... 259 254
Corporate and other....................................... 169 103
------ -----
Consolidated revenue.................................... $1,983 1,821
====== =====
Operating Cash Flow:
QVC....................................................... $ 355 323
SEG....................................................... 41 48
Corporate and other....................................... 12 (9)
------ -----
Consolidated operating cash flow........................ $ 408 362
====== =====
Operating Income (Loss):
QVC....................................................... $ 212 200
SEG....................................................... 33 36
Corporate and other....................................... (30) (33)
------ -----
Consolidated operating income........................... $ 215 203
====== =====
</Table>
REVENUE. Our consolidated revenue increased $162 million or 8.9% for the
three months ended March 31, 2006, as compared to the corresponding prior year
period. This increase is due primarily to a $91 million or 6.2% increase for QVC
and $53 million attributable to Provide, which we acquired in February 2006. See
"OPERATING RESULTS BY BUSINESS" below for a more complete discussion of QVC's
and SEG's results of operations.
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative expenses
(excluding stock-based compensation). Our 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 12 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 $46 million or 12.7% during the
three months ended March 31, 2006, as compared to the corresponding prior year
period. This increase is due primarily to a $32 million or 9.9% increase in
QVC's operating cash flow resulting from higher revenue both domestically and
internationally and $12 million generated by Provide. These increases were
partially
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offset by a decrease in SEG's operating cash flow, which resulted primarily from
higher programming costs in 2006.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights for shares of our common
stock that are granted to certain of our officers and employees, (2) phantom
stock appreciation rights ("PSARs") granted to officers and employees of certain
of our subsidiaries pursuant to private equity plans and (3) amortization of
restricted stock grants.
Effective January 1, 2006, we adopted Statement No. 123R. Statement
No. 123R requires that we amortize the grant date fair value of our stock option
and SAR Awards that qualify as equity awards as stock compensation expense over
the vesting period of such Awards. Statement No. 123R also requires that we
record the liability for our liability awards at fair value each reporting
period and that the change in fair value be reflected as stock compensation
expense in our condensed consolidated statement of operations. Prior to adoption
of Statement No. 123R, the amount of expense associated with stock-based
compensation was generally based on the vesting of the related stock options and
stock appreciation rights and the market price of the underlying common stock,
as well as the vesting of PSARs and the equity value of the related subsidiary.
The expense reflected in our condensed consolidated financial statements was
based on the market price of the underlying common stock as of the date of the
financial statements.
In connection with our adoption of Statement 123R, we recorded an
$89 million transition adjustment, net of related income taxes, which primarily
reflects the fair value of the liability portion of the QVC Awards at
January 1, 2006. The transition adjustment is reflected in the accompanying
condensed consolidated statement of operations as the cumulative effect of
accounting change. In addition, we recorded $31 million of stock compensation
expense in 2006 compared with a credit to stock compensation of $2 million in
2005. As of March 31, 2006, the total compensation cost related to unvested
Liberty and QVC equity awards was approximately $42 million. Such amount will be
recognized in our consolidated statements of operations through 2010.
OPERATING INCOME. Consolidated operating income increased $12 million or
5.9% for the three months ended March 31, 2006, as compared to the corresponding
prior year period. This increase is the net effect of an increase in operating
income for QVC and operating income generated by Provide, partially offset by an
increase in corporate stock option expense due to the adoption of
Statement 123R.
OTHER INCOME AND EXPENSE
INTEREST EXPENSE. Interest expense was fairly comparable over the 2006 and
2005 periods, as interest on the QVC Credit Facility and the effects of
increases in the interest rates for our variable rate debt were offset by
decreases from parent company debt retirements.
DIVIDEND AND INTEREST INCOME. Dividend and interest income was $57 million
and $42 million for the three months ended March 31, 2006 and 2005,
respectively. Such income increased due to higher invested cash balances and
additional dividends on our News Corp. common stock in 2006. Interest and
dividend income for the three months ended March 31, 2006 was comprised of
interest income earned on invested cash ($18 million), dividends on News Corp.
common stock ($29 million), dividends on other AFS securities ($3 million), and
other ($7 million).
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REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of the
following:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
---------------------
2006 2005
--------- ---------
AMOUNTS IN MILLIONS
Change in fair value of exchangeable debenture call option
features.................................................. $ (17) 378
Change in fair value of equity collars...................... (157) 313
Change in fair value of put options......................... (9) (43)
Change in fair value of borrowed shares..................... (37) 106
Change in fair value of other derivatives................... 27 14
----- ---
$(193) 768
===== ===
</Table>
GAINS (LOSSES) ON DISPOSITIONS. We recognized gains on dispositions of
$22 million for the three months ended March 31, 2006 and losses on dispositions
of $380 million in 2005. 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 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 $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 2006 gains related primarily to
dispositions of certain 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.
INCOME TAXES. For the three months ended March 31, 2006, we had a pre-tax
loss of $35 million and we recognized an income tax benefit of $102 million.
Late in the first quarter of 2006, we decided to effect a restructuring
transaction which was effective on April 1, 2006, and which enabled us to
include TruePosition in our Federal consolidated tax group on a prospective
basis. As a result of this decision and considering our overall tax position, we
reversed $89 million of valuation allowance recorded against TruePosition's net
deferred tax assets into our statement of operations as a deferred tax benefit
in the first quarter of 2006. This valuation allowance did not relate to net
operating loss carryforwards or some other future tax deduction of TruePosition,
but rather related to temporary differences caused by revenue and cost amounts
that were recognized for tax purposes in prior periods, but have been deferred
for financial reporting purposes until future periods. Our effective tax rate
was 46.6% for the three months ended March 31, 2005 and differs from the U.S.
federal income tax rate of 35% primarily due to provisions for state and foreign
taxes.
NET EARNINGS (LOSS). Our net earnings (loss) was ($26) million and
$254 million for the three months ended March 31, 2006 and 2005, respectively.
Such change is due to the aforementioned fluctuations in revenue and expenses.
In addition, we recognized $15 million of earnings from discontinued operations
in 2005.
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 program is
aired live through its nationally televised shopping network--24 hours a day,
7 days a week ("QVC-US"). Internationally, QVC has electronic retailing program
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services based in the United Kingdom ("QVC-UK"), Germany ("QVC-Germany") and
Japan ("QVC-Japan"). QVC-UK broadcasts 24 hours a day with 17 hours of live
programming, and QVC-Germany and QVC-Japan each broadcast live 24 hours a day.
QVC's operating results are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Net revenue................................................. $1,555 1,464
Cost of sales............................................... (971) (914)
------ -----
Gross profit.............................................. 584 550
Operating expenses.......................................... (131) (129)
SG&A expenses (excluding stock-based compensation).......... (98) (98)
------ -----
Operating cash flow....................................... 355 323
Stock-based compensation--SG&A.............................. (25) (8)
Depreciation and amortization............................... (118) (115)
------ -----
Operating income.......................................... $ 212 200
====== =====
</Table>
Net revenue includes the following revenue by geographical area:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-----------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
QVC-US...................................................... $1,088 1,025
QVC-UK...................................................... 134 130
QVC-Germany................................................. 195 194
QVC-Japan................................................... 138 115
------ -----
Consolidated................................................ $1,555 1,464
====== =====
</Table>
QVC's consolidated net revenue increased 6.2% during the three months ended
March 31, 2006, as compared to the corresponding prior year period. The increase
in revenue is comprised of a $146 million increase due to an increase in the
number of units shipped from 34.6 million to 37.2 million and a $26 million
increase due to a 0.1% increase in the average sales price per unit. The revenue
increases were partially offset by a $44 million decrease due to unfavorable
foreign currency rates as the U.S. dollar strengthened against the UK pound
sterling, the euro and the Japanese yen and a $37 million decrease due primarily
to an increase in product returns. Returns as a percent of gross product revenue
increased from 18.3% in 2005 to 19.3% in 2006 due to a shift in the sales mix
from home products to apparel and accessories products, which typically have
higher return rates.
The number of homes receiving QVC's services are as follows:
<Table>
<Caption>
HOMES (IN MILLIONS)
--------------------------
MARCH 31, DECEMBER 31,
2006 2005
---------- -------------
QVC-US...................................................... 90.8 90.8
QVC-UK...................................................... 18.4 17.8
QVC-Germany................................................. 37.5 37.4
QVC-Japan................................................... 17.2 16.7
</Table>
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The QVC service is already received by substantially all of the cable
television and direct broadcast satellite homes in the U.S. and Germany. In
addition, the rate of growth in households is expected to diminish in the UK and
Japan. As these markets continue to mature, QVC also expects its consolidated
rate of growth in revenue to diminish. Future sales growth will primarily depend
on continued additions of new customers from homes already receiving the QVC
service, 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 months ended March 31, 2006, the changes in
revenue and expenses were also impacted by fluctuations in the exchange rates
for the UK pound sterling, the euro and the Japanese yen. In the event the U.S.
dollar continues to strengthen against these foreign currencies in the future,
QVC's reported revenue and operating cash flow will be negatively impacted. The
percentage increase in revenue for each of QVC's geographic areas in U.S.
dollars and in local currency is as follows:
<Table>
<Caption>
PERCENTAGE INCREASE
IN NET REVENUE
-----------------------------
THREE MONTHS ENDED
MARCH 31, 2006
-----------------------------
U.S. DOLLARS LOCAL CURRENCY
------------ --------------
QVC-US...................................................... 6.1% 6.1%
QVC-UK...................................................... 3.1% 11.7%
QVC-Germany................................................. 0.5% 9.1%
QVC-Japan................................................... 20.0% 33.6%
</Table>
QVC's gross profit percentage remained consistent at 37.6% of net revenue
for the three months ended March 31, 2006 and 2005.
QVC's operating expenses are comprised of commissions, order processing and
customer service expenses, provision for doubtful accounts, telecommunications
expense and credit card processing fees. Operating expenses increased 1.6% for
the three months ended March 31, 2006, as compared to the corresponding prior
year period. This increase is primarily due to the increases in sales volume. As
a percentage of net revenue, operating expenses decreased to 8.4% for the three
months ended March 31, 2006 from 8.8% for the comparable period in 2005. As a
percentage of net revenue, commissions and license fees decreased due to a
greater percentage of Internet sales for which lower commissions are required to
be paid. In addition, commission and license fee expense decreased as a
percentage of net revenue in QVC-Japan where certain distributors are paid the
greater of (i) a fixed fee per subscriber and (ii) a specified percentage of
sales. In the first quarter of 2006, more distributors started to receive
payments based on sales volume rather than a fixed fee per subscriber. The bad
debt provision decreased as a percentage of net revenue due to less write-offs
on the Company's private label credit card. Order processing and customer
service expense, telecommunication expense, and credit card processing fees
remained consistent as a percent of net revenue for the three months ended
March 31, 2006 compared to 2005.
QVC's SG&A expenses remained constant for the three months ended March 31,
2006, as compared to the corresponding prior year period.
SEG. Historically, SEG has provided premium programming distributed by
cable operators, direct-to-home satellite providers and other distributors
throughout the United States. In 2004 and 2005, SEG launched, via the Internet,
Starz Ticket and Vongo which are comprised of a stream of the
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Starz channel and other movie and entertainment content on an on-demand basis.
Starz Ticket and Vongo are each offered on a subscription basis, and in
addition, Vongo offers content on a pay-per-view basis. Substantially all of
SEG's revenue continues to be derived from the delivery of movies to subscribers
under affiliation agreements with television video programming distributors.
Some of SEG's affiliation agreements provide for payments to SEG based on the
number of subscribers that receive SEG's services. SEG also has fixed-rate
affiliation agreements with certain of its customers. Pursuant to these
agreements, the customers pay an agreed-upon rate regardless of the number of
subscribers. The agreed-upon rate is contractually increased annually or
semi-annually as the case may be, and these agreements, other than the Comcast
agreement described below, expire in 2006 through 2008. During the three months
ended March 31, 2006, 57.3% of SEG's revenue was generated by its three largest
customers, Comcast, Echostar Communications and DirecTV. SEG has entered into a
new affiliation agreement with Echostar which expires in June 2009. SEG's
affiliation agreement with DirecTV has been extended until May 31, 2006, and SEG
is currently in negotiations with DirecTV regarding a new agreement.
SEG's affiliation agreements generally do not provide for the inclusion of
its services in specific programming packages of the distributors. The previous
affiliation agreement with Comcast, however, did include a short-term packaging
commitment to carry the Encore and Thematic Multiplex channels (EMP) in
specified digital tiers on Comcast's cable systems. The affiliation agreement
originally expired at the end of 2010, and Comcast's packaging commitment
expired at the end of 2005. In the second quarter of 2005, SEG and Comcast
renegotiated their affiliation agreement. The new agreement eliminates Comcast's
packaging commitment for EMP and provides for a fixed fee payment structure,
with certain Consumer Price Index ("CPI") adjustments, for EMP through
September 2009. The agreement also provides for a guaranteed payment structure
for Comcast's carriage of Starz through December 2012 with contractual increases
for 2006 and 2007 and annual CPI adjustments for the remainder of the term. The
foregoing payment structure for EMP and Starz may be adjusted in the event
Comcast acquires or disposes of cable systems. Finally, Comcast has agreed to
the elimination of certain future marketing support commitments from SEG. As a
result of this new agreement, SEG's future revenue from Comcast for its EMP and
Starz products will not be impacted by any increases or decreases in actual
subscribers, except in the case of acquisitions or dispositions noted above. The
terms of the EMP and Starz payment structures can be extended by Comcast, at its
option, for a total of six years and five years, respectively.
SEG's operating results are as follows:
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
-------------------
2006 2005
-------- --------
AMOUNTS IN MILLIONS
Revenue..................................................... $ 259 254
Operating expenses.......................................... (189) (175)
SG&A expenses............................................... (29) (31)
----- ----
Operating cash flow....................................... 41 48
Depreciation and amortization............................... (8) (12)
----- ----
Operating income.......................................... $ 33 36
===== ====
</Table>
SEG's revenue increased $5 million or 2.0% for the three months ended
March 31, 2006 as compared to the corresponding prior year period. Such increase
is due to an $11 million increase resulting from growth in the average number of
subscription units for SEG's services partially offset by a $6 million decrease
due to a decrease in the effective rate for SEG's services.
SEG's Starz movie service and its Encore movie service are the primary
drivers of SEG's revenue. Starz average subscriptions increased 2.3% in 2006,
and Encore average subscriptions increased 6.6%.
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<Page>
The effects of these increases in subscription units are somewhat mitigated by
the fixed-rate affiliation agreements that SEG has entered into in recent years,
including SEG's new agreement with Comcast.
At March 31, 2006, cable, DTH satellite, and other distribution media
represented 67.1%, 31.4% and 1.5%, respectively, of SEG's total subscription
units.
SEG's operating expenses increased 8.0% for the three months ended
March 31, 2006, due primarily to increases in programming costs, which increased
from $165 million for the three months ended March 31, 2005 to $179 million in
2006. The increase in programming costs is due primarily to $16 million of
amortization of deposits previously made under certain of its output
arrangements.
SEG expects that its full-year programming costs in 2006 will be 5%-7%
higher than the 2005 costs due to the amortization described above. This
estimate is subject to a number of assumptions that could change depending on
the number and timing of movie titles actually becoming available to SEG and
their ultimate box office performance. Accordingly, the actual amount of cost
increases experienced by SEG may differ from the amounts noted above.
SEG's SG&A expenses decreased 6.5% for the three months ended March 31,
2006, as compared to the corresponding prior year period. This decrease is due
primarily to lower sales and marketing expenses of $3 million due to the
elimination of certain marketing support commitments under the new Comcast
affiliation agreement partially offset by marketing expenses related to the
commercial launch of Vongo. SEG expects that over the course of 2006, additional
marketing expenses for Vongo and its traditional services will exceed the
benefits derived from lower marketing support requirements for Comcast, and that
its full-year 2006 sales and marketing expenses will exceed those of 2005.
MATERIAL CHANGES IN FINANCIAL CONDITION
CORPORATE
Our sources of liquidity include our available cash balances, cash generated
by the operating activities of our privately-owned subsidiaries (to the extent
such cash exceeds the working capital needs of the subsidiaries and is not
otherwise restricted), proceeds from asset sales, monetization of our public
investment portfolio (including derivatives), debt and equity issuances, and
dividend and interest receipts.
During the three months ended March 31, 2006, our primary uses of corporate
cash were partial funding of the acquisition of Provide ($265 million), the
acquisition of approximately 55% of FUN ($200 million) and loans to WildBlue
Communications, an equity affiliate ($97 million). We funded these investing
activities with available cash on hand and proceeds from derivative settlements
and asset sales. The balance of the cash required to purchase Provide
($200 million) was funded with available cash of QVC.
Our projected uses of cash for the remainder of 2006 include approximately
$1,370 million to retire our senior notes that mature in September 2006 and
approximately $300 million for interest payments on our parent debt. In
addition, we may make additional investments in existing or new businesses.
However, we are unable to quantify such investments at this time.
In connection with our proposal to issue the tracking stocks, our board of
directors has authorized a share repurchase program pursuant to which we, if the
restructuring proposals are approved and implemented, may repurchase outstanding
shares of Liberty Interactive Stock and Liberty Capital Stock in the open market
or in privately negotiated transactions, from time to time, subject to market
conditions. Under the program, we may purchase shares of Liberty Capital Stock
for an aggregate purchase price of up to $1 billion and shares of Liberty
Interactive Stock for an aggregate purchase price of up to $1 billion. We may
alter or terminate the stock repurchase program at any time.
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We expect that our investing and financing activities will be funded with a
combination of borrowings under the QVC bank credit facility, cash on hand, cash
provided by operating activities, proceeds from collar expirations and
dispositions of non-strategic assets. At March 31, 2006, our sources of
liquidity include $1,965 million in cash and marketable debt securities and
$7,286 million of non-strategic AFS securities including related derivatives. In
addition, we own $8,694 million of News Corp. common stock and $2,040 million of
IAC/InterActiveCorp common stock, which we consider to be strategic assets. To
the extent we recognize any taxable gains from the sale of assets or the
expiration of derivative instruments, we may incur current tax expense and be
required to make tax payments, thereby reducing any cash proceeds received.
Our derivatives ("AFS Derivatives") related to certain of our AFS
investments provide us with an additional source of liquidity. Based on the put
price and assuming we deliver owned or borrowed shares to settle each of our AFS
Derivatives and excluding any provision for income taxes, we would be entitled
to cash proceeds of approximately $244 million during the remainder of 2006,
$385 million in 2007, zero in 2008, $1,180 million in 2009, $1,683 million in
2010 and $1,312 million thereafter upon settlement of our AFS Derivatives.
Prior to the maturity of our equity collars, the terms of certain of our
equity and narrow-band collars allow us to borrow against the future put option
proceeds at LIBOR or LIBOR plus an applicable spread, as the case may be. As of
March 31, 2006, such borrowing capacity aggregated approximately
$4,852 million. Such borrowings would reduce the cash proceeds upon settlement
noted in the preceding paragraph.
SUBSIDIARIES
Effective March 3, 2006, QVC refinanced its existing bank credit facility
with a new $3.5 billion bank credit facility. The QVC Credit Facility is
comprised of an $800 million U.S. dollar term loan that was drawn at closing, an
$800 million U.S. dollar term loan that can be drawn at any time before
September 30, 2006, a $600 million multi-currency term loan that can be drawn at
any time before September 30, 2006, a $650 million U.S. dollar revolving loan
and a $650 million multi-currency revolving loan. The foregoing multi-currency
loans can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound
sterling or euros. All loans are due and payable on March 3, 2011, and accrue
interest, at the option of QVC, at LIBOR plus an applicable margin or the
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 three months ended March 31, 2006, our subsidiaries funded
capital expenditures ($58 million) and the repurchase of certain subsidiary
common stock ($29 million) with cash on hand and cash generated by their
operating activities. Our subsidiaries currently expect to spend approximately
$430 million for capital expenditures in 2006, including $355 million by QVC.
These amounts are expected to be funded by the cash flows of the respective
subsidiary.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
SEG has entered into agreements with a number of motion picture producers
which obligate SEG to pay fees for the rights to exhibit certain films that are
released by these producers. The unpaid balance for Programming Fees for films
that were available for exhibition by SEG at March 31, 2006 is reflected as a
liability in the accompanying condensed consolidated balance sheet. The balance
due as of March 31, 2006 is payable as follows: $117 million in 2006,
$19 million in 2007 and $14 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 March 31,
2006. SEG's estimate of amounts payable under these agreements
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is as follows: $316 million in 2006; $254 million in 2007; $102 million in 2008;
$90 million in 2009; $81 million in 2010 and $52 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 March 31, 2006, Liberty's guarantee for studio
output obligations for films released by such date aggregated $613 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.
Since the date we issued our exchangeable debentures, we have claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which we could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in us claiming interest deductions significantly in excess
of the cash interest currently paid on our exchangeable debentures. Interest
deducted in prior years on our exchangeable debentures has contributed to NOLs
that may be carried to offset taxable income in 2006 and later years. These NOLs
and current interest deductions on our exchangeable debentures are being used to
offset taxable income currently being generated.
The IRS has issued Technical Advice Memorandums 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
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us in future periods, similar to a net operating loss carryforward. While we
were a subsidiary of AT&T, we recorded our stand-alone tax provision on a
separate return basis. Subsequent to our split off from AT&T, if adjustments are
made to amounts previously paid under the AT&T Tax Sharing Agreement, such
adjustments are reflected as adjustments to additional paid-in capital. During
the period from March 10, 1999 to December 31, 2002, we received cash payments
from AT&T aggregating $670 million as payment for our taxable losses that AT&T
utilized to reduce its income tax liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with the
split off from AT&T, AT&T was required to pay us an amount equal to 35% of the
amount of the net operating losses reflected in TCI's final federal income tax
return that had not been used as an offset to our obligations under the AT&T Tax
Sharing Agreement and that had been, or were reasonably expected to be, utilized
by AT&T. In connection with our split off from AT&T, we received an
$803 million payment for TCI's NOLs and recorded such payment as an increase to
additional paid-in capital. We were not paid for certain of TCI's NOLs due to
limitations and uncertainty regarding AT&T's ability to use them to offset
taxable income in the future. In the event AT&T was ultimately able to use any
of the SRLY NOLs, they would be required to pay us 35% of the amount of the SRLY
NOLs used. In the fourth quarter of 2004 and in connection with the completion
of an IRS audit of TCI's tax return for 1994, it was determined that we were
required to recognize additional taxable income related to the recapitalization
of one of our investments resulting in a tax liability of approximately
$30 million. As a result of the tax assessment, we also received a corresponding
amount of additional tax basis in the investment. However, we were able to cause
AT&T to use a portion of the SRLY NOLs to offset this taxable income, the
benefit of which resulted in the elimination of the $30 million tax liability
and an increase to additional paid-in capital.
In the fourth quarter of 2004, AT&T requested a refund from us of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by our losses. AT&T has asserted that our losses caused AT&T to pay $70 million
in alternative minimum tax that it would not have been otherwise required to pay
had our losses not been included in its return. In 2004, we estimated that we
may ultimately pay AT&T up to $30 million of the requested $70 million because
we believed AT&T received an AMT credit of $40 million against income taxes
resulting from the AMT previously paid. Accordingly, we accrued a $30 million
liability with an offsetting reduction of additional paid-in capital. The net
effect of the completion of the IRS tax audit noted above (including the benefit
derived from AT&T for the utilization of the SRLY NOLs) and our accrual of
amounts due to AT&T was an increase to deferred tax assets and an increase to
other liabilities.
In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by our losses. In addition, the information
provided to us in connection with AT&T's request showed that AT&T had not yet
claimed a credit for AMT previously paid. Accordingly, in the fourth quarter of
2005, we increased our accrual by approximately $40 million (with a
corresponding reduction of additional paid-in capital) representing our estimate
of the amount we may ultimately pay (excluding accrued interest, if any) to AT&T
as a result of this request. Although we have not reduced our accrual for any
future refunds, we believe we are entitled to a refund when AT&T is able to
realize a benefit in the form of a credit for the AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by our losses. We have reviewed this
claim and we believe that our accrual as of December 31, 2005 is adequate.
Accordingly, no additional accrual was recorded during the three months ended
March 31, 2006.
Although for accounting purposes we have accrued a portion of the amounts
claimed by AT&T to be owed by us under the AT&T Tax Sharing Agreement, we
believe there are valid defenses or set-off
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or similar rights in our favor that may cause the total amount that we owe AT&T
to be less than the amounts accrued.
In connection with agreements for the sale of certain assets, we typically
retain liabilities that relate to events occurring prior to the sale, such as
tax, environmental, litigation and employment matters. We generally indemnify
the purchaser in the event that a third party asserts a claim against the
purchaser that relates to a liability retained by us. These types of
indemnification guarantees typically extend for a number of years. We are unable
to estimate the maximum potential liability for these types of indemnification
guarantees as the sale agreements typically do not specify a maximum amount and
the amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time. Historically,
we have not made any significant indemnification payments under such agreements
and no amount has been accrued in the accompanying consolidated financial
statements with respect to these indemnification guarantees.
We have contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible we may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk in the normal course of business due to our
ongoing investing and financing activities and our subsidiaries in different
foreign countries. Market risk refers to the risk of loss arising from adverse
changes in stock prices, interest rates and foreign currency exchange rates. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. We have established policies, procedures
and internal processes governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by
(i) issuing fixed rate debt that we believe has a low stated interest rate and
significant term to maturity and (ii) issuing short-term variable rate debt to
take advantage of historically low short-term interest rates. As of March 31,
2006, the face amount of our fixed rate debt (considering the effects of
interest rate swap agreements) was $7,876 million, which had a weighted average
interest rate of 4.67%. Our variable rate debt of $2,108 million had a weighted
average interest rate of 6.10% at March 31, 2006. Had market interest rates been
100 basis points higher (representing an approximate 16% increase over our
variable rate debt effective cost of borrowing) throughout the three months
ended March 31, 2006, we would have recognized approximately $5 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.
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Among other factors, changes in the market prices of the securities
underlying our AFS Derivatives affect the fair market value of such AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying our 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
--------------------------------
EQUITY PUT
COLLARS(1) OPTIONS TOTAL
---------- -------- --------
AMOUNTS IN MILLIONS
Fair value at March 31, 2006........................ $ 939 (89) 850
5% increase in market prices........................ $ 810 (89) 721
10% increase in market prices....................... $ 681 (89) 592
5% decrease in market prices........................ $1,067 (89) 978
10% decrease in market prices....................... $1,197 (89) 1,108
</Table>
- ------------------------
(1) Includes narrow-band collars.
At March 31, 2006, the fair value of our AFS securities was
$19,043 million. Had the market price of such securities been 10% lower at
March 31, 2006, the aggregate value of such securities would have been
$1,904 million lower resulting in an increase to unrealized holding losses in
other comprehensive earnings (loss). Such decrease would be partially offset by
an increase in the value of our AFS Derivatives as noted in the table above.
In connection with certain of our AFS Derivatives, we periodically borrow
shares of the underlying securities from a counterparty and deliver these
borrowed shares in settlement of maturing derivative positions. In these
transactions, a similar number of shares that we own have been posted as
collateral with the counterparty. These share borrowing arrangements can be
terminated at any time at our option by delivering shares to the counterparty.
The counterparty can terminate these arrangements upon the occurrence of certain
events which limit the trading volume of the underlying security. The liability
under these share borrowing arrangements is marked to market each reporting
period with changes in value recorded in unrealized gains or losses in our
consolidated statement of operations. The shares posted as collateral under
these arrangements continue to be treated as AFS securities and are marked to
market each reporting period with changes in value recorded as unrealized gains
or losses in other comprehensive earnings.
We are exposed to foreign exchange rate fluctuations related primarily to
the monetary assets and liabilities and the financial results of QVC's foreign
subsidiaries. Assets and liabilities of foreign subsidiaries for which the
functional currency is the local currency are translated into U.S. dollars at
period-end exchange rates and the statements of operations are generally
translated at the average exchange rate for the period. Exchange rate
fluctuations on translating foreign currency financial statements into U.S.
dollars that result in unrealized gains or losses are referred to as translation
adjustments. Cumulative translation adjustments are recorded in other
comprehensive earnings (loss) as a separate component of stockholders' equity.
Transactions denominated in currencies other than the functional currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses, which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions. Cash flows from our operations in foreign
countries are generally translated at the average rate for the period.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a result of foreign currency
exchange rate fluctuations.
We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor the fair value of
interest rate swaps as well as the effective interest rate
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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 March 31, 2006 to
provide reasonable assurance that information required to be disclosed in its
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There has been no change in the Company's internal controls over financial
reporting that occurred during the three months ended March 31, 2006 that has
materially affected, or is reasonably likely to materially affect, its internal
controls over financial reporting.
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LIBERTY MEDIA CORPORATION
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For information regarding institution of, or material changes in, material
legal proceedings that have been reported this fiscal year, reference is made to
Part I, Item 3 of our Annual Report on Form 10-K filed on March 18, 2006
ITEM 6. EXHIBITS
(a) Exhibits
<Table>
10.1 $3,500,000,000 Credit Agreement, Dated as of March 3, 2006,
among QVC, Inc., as Borrower; the Lenders party hereto; JP
Morgan Chase Bank, N.A., as Administrative Agent; and
Wachovia Capital Markets, LLC, as Syndication Agent.
10.2 Form of Non-Qualified Stock Option Agreement under the
Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective April 19, 2004) [for certain
designated award recipients]
10.3 Form of Non-Qualified Stock Option Agreement under the
Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective April 19, 2004) [for all other award
recipients]
10.4 Form of Restricted Stock Award Agreement under the Liberty
Media Corporation 2000 Incentive Plan (As Amended and
Restated Effective April 19, 2004) [for certain designated
award recipients]
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
31.3 Rule 13a-14(a)/15d-14(a) Certification.
32 Section 1350 Certification
99.1 Attributed Financial Information
</Table>
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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: May 8, 2006 By: /s/ CHARLES Y. TANABE
-----------------------------------------
Charles Y. Tanabe
Senior Vice President and
General Counsel
Date: May 8, 2006 By: /s/ DAVID J.A. FLOWERS
-----------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: May 8, 2006 By: /s/ CHRISTOPHER W. SHEAN
-----------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)
</Table>
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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>
10.1 $3,500,000,000 Credit Agreement, Dated as of March 3, 2006,
among QVC, Inc., as Borrower; the Lenders party hereto; JP
Morgan Chase Bank, N.A., as Administrative Agent; and
Wachovia Capital Markets, LLC, as Syndication Agent.
10.2 Form of Non-Qualified Stock Option Agreement under the
Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective April 19, 2004) [for certain
designated award recipients]
10.3 Form of Non-Qualified Stock Option Agreement under the
Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective April 19, 2004) [for all other award
recipients]
10.4 Form of Restricted Stock Award Agreement under the Liberty
Media Corporation 2000 Incentive Plan (As Amended and
Restated Effective April 19, 2004) [for certain designated
award recipients]
31.1 Rule 13a-14(a)/15d-14(a) Certification.
31.2 Rule 13a-14(a)/15d-14(a) Certification.
31.3 Rule 13a-14(a)/15d-14(a) Certification.
32 Section 1350 Certification
99.1 Attributed Financial Information
</Table>