<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, 2007
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 000-51990
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 30, 2007 was:
Liberty Capital Series A common stock 123,018,487 shares;
Liberty Capital Series B common stock 6,003,480 shares;
Liberty Interactive Series A common stock 621,670,949 shares; and
Liberty Interactive Series B common stock 29,965,039 shares.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
AMOUNTS IN MILLIONS
ASSETS
Current assets:
Cash and cash equivalents................................. $ 2,970 3,107
Trade and other receivables, net.......................... 1,178 1,276
Inventory, net............................................ 885 831
Program rights............................................ 517 531
Financial instruments (note 10)........................... 293 239
Other current assets...................................... 121 233
Assets of discontinued operations (note 7)................ 283 512
-------- -------
Total current assets.................................... 6,247 6,729
-------- -------
Investments in available-for-sale securities and other cost
investments, including $1,320 million and $1,482 million
pledged as collateral for share borrowing arrangements
(note 8).................................................. 22,237 21,622
Long-term financial instruments (note 10)................... 1,176 1,340
Investments in affiliates, accounted for using the equity
method.................................................... 1,872 1,842
Property and equipment, at cost............................. 1,614 1,531
Accumulated depreciation.................................... (420) (385)
-------- -------
1,194 1,146
-------- -------
Intangible assets not subject to amortization:
Goodwill (note 9)......................................... 7,575 7,588
Trademarks................................................ 2,471 2,471
-------- -------
10,046 10,059
-------- -------
Intangible assets subject to amortization, net.............. 3,810 3,910
Other assets, at cost, net of accumulated amortization...... 1,041 990
-------- -------
Total assets.............................................. $ 47,623 47,638
======== =======
</Table>
(continued)
I-1
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
AMOUNTS IN MILLIONS
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 475 508
Accrued interest.......................................... 90 214
Other accrued liabilities................................. 913 1,035
Financial instruments (note 10)........................... 1,322 1,484
Current portion of debt (note 11)......................... 179 114
Other current liabilities................................. 78 113
Liabilities of discontinued operations (note 7)........... 43 101
-------- -------
Total current liabilities............................... 3,100 3,569
-------- -------
Long-term debt (including $4,063 million measured at fair
value at March 31, 2007) (note 11)........................ 10,325 8,909
Long-term financial instruments (note 10)................... 384 1,706
Deferred income tax liabilities............................. 9,798 9,661
Other liabilities........................................... 1,382 1,870
-------- -------
Total liabilities....................................... 24,989 25,715
-------- -------
Minority interests in equity of subsidiaries................ 139 290
Stockholders' equity (note 13):
Preferred stock, $.01 par value. Authorized 50,000,000
shares; no shares issued................................ -- --
Liberty Capital Series A common stock, $.01 par value.
Authorized 400,000,000 shares; issued and outstanding
134,555,981 shares at March 31, 2007 and 134,503,165
shares at December 31, 2006............................. 1 1
Liberty Capital Series B common stock, $.01 par value.
Authorized 25,000,000 shares; issued and outstanding
6,003,480 shares at March 31, 2007 and 6,014,680 shares
at December 31, 2006.................................... -- --
Liberty Interactive Series A common stock, $.01 par value.
Authorized 2,000,000,000 shares; issued and outstanding
622,007,367 shares at March 31, 2007 and 623,061,760
shares at December 31, 2006............................. 6 6
Liberty Interactive Series B common stock, $.01 par value.
Authorized 125,000,000 shares; issued and outstanding
29,965,039 shares at March 31, 2007 and 29,971,039
shares at December 31, 2006............................. -- --
Additional paid-in-capital................................ 28,101 28,112
Accumulated other comprehensive earnings, net of taxes.... 6,234 5,952
Accumulated deficit....................................... (11,847) (12,438)
-------- -------
Total stockholders' equity.............................. 22,495 21,633
-------- -------
Commitments and contingencies (note 14)
Total liabilities and stockholders' equity.............. $ 47,623 47,638
======== =======
</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,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS,
EXCEPT PER
SHARE AMOUNTS
Revenue:
Net retail sales.......................................... $1,771 1,608
Communications and programming services................... 352 293
------ -----
2,123 1,901
------ -----
Operating costs and expenses:
Cost of sales............................................. 1,110 1,000
Operating................................................. 384 345
Selling, general and administrative, including stock-based
compensation (note 4)................................... 229 191
Depreciation and amortization............................. 151 141
------ -----
1,874 1,677
------ -----
Operating income........................................ 249 224
Other income (expense):
Interest expense.......................................... (150) (148)
Dividend and interest income.............................. 75 56
Share of earnings of affiliates, net...................... 9 8
Realized and unrealized gains (losses) on financial
instruments, net (note 10).............................. 344 (193)
Gains on dispositions of assets, net...................... 6 24
Other, net................................................ -- 4
------ -----
284 (249)
------ -----
Earnings (loss) from continuing operations before income
taxes and minority interests........................... 533 (25)
Income tax benefit (expense)................................ (202) 100
Minority interests in earnings of subsidiaries.............. (4) (6)
------ -----
Earnings from continuing operations..................... 327 69
Earnings (loss) from discontinued operations, net of taxes
(note 7).................................................. 42 (6)
Cumulative effect of accounting change, net of taxes (note
4)........................................................ -- (89)
------ -----
Net earnings (loss)..................................... $ 369 (26)
====== =====
Net earnings (loss):
Liberty Series A and Series B common stock................ $ -- (26)
Liberty Capital common stock.............................. 278 --
Liberty Interactive common stock.......................... 91 --
------ -----
$ 369 (26)
====== =====
Basic and diluted earnings from continuing operations per
common share (note 5):
Liberty Series A and Series B common stock................ $ -- .02
Liberty Capital common stock.............................. $ 1.68 --
Liberty Interactive common stock.......................... $ .14 --
Basic and diluted net earnings (loss) per common share (note
5):
Liberty Series A and Series B common stock................ $ -- (.01)
Liberty Capital common stock.............................. $ 1.98 --
Liberty Interactive common stock.......................... $ .14 --
</Table>
See accompanying notes to condensed consolidated financial statements.
I-3
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
<Table>
<Caption>
THREE
MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Net earnings (loss)......................................... $369 (26)
---- ---
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments.................. 11 20
Unrealized holding gains arising during the period........ 275 461
Recognition of previously unrealized gains on
available-for-sale securities, net...................... (4) (15)
---- ---
Other comprehensive earnings.............................. 282 466
---- ---
Comprehensive earnings...................................... $651 440
==== ===
Comprehensive earnings:
Liberty Series A and Series B common stock................ $ -- 440
Liberty Capital common stock.............................. 531 --
Liberty Interactive common stock.......................... 120 --
---- ---
$651 440
==== ===
</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,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
(NOTE 6)
Cash flows from operating activities:
Net earnings (loss)....................................... $ 369 (26)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss (earnings) from discontinued operations............ (42) 6
Cumulative effect of accounting change.................. -- 89
Depreciation and amortization........................... 151 141
Stock-based compensation................................ 22 30
Payments of stock-based compensation.................... (20) --
Noncash interest expense................................ 3 26
Share of earnings of affiliates, net.................... (9) (8)
Realized and unrealized losses (gains) on financial
instruments, net....................................... (344) 193
Gains on disposition of assets, net..................... (6) (24)
Minority interests in earnings of subsidiaries.......... 4 6
Deferred income tax expense (benefit)................... 164 (148)
Other noncash charges, net.............................. 4 11
Changes in operating assets and liabilities, net of the
effects of acquisitions and dispositions:
Current assets........................................ 15 2
Payables and other current liabilities................ (105) (250)
------ -----
Net cash provided by operating activities........... 206 48
------ -----
Cash flows from investing activities:
Cash proceeds from dispositions........................... 121 137
Net proceeds from settlement of derivatives............... 76 184
Cash paid for acquisitions, net of cash acquired.......... (6) (597)
Capital expended for property and equipment............... (87) (45)
Net sales (purchases) of short term investments........... (172) 126
Investments in and loans to cost and equity investees..... (39) (120)
Repurchases of subsidiary common stock.................... -- (29)
Other investing activities, net........................... 13 3
------ -----
Net cash used by investing activities............... (94) (341)
------ -----
Cash flows from financing activities:
Borrowings of debt........................................ 131 --
Repayments of debt........................................ (329) (2)
Repurchases of Liberty common stock....................... (34) --
Other financing activities, net........................... (19) 28
------ -----
Net cash provided (used) by financing activities.... (251) 26
------ -----
Effect of foreign currency exchange rates on cash........... 2 3
------ -----
Net cash provided to discontinued operations:
Cash provided by operating activities..................... 10 15
Cash used by investing activities......................... (9) (14)
Cash used by financing activities......................... -- (3)
Change in available cash held by discontinued
operations.............................................. (1) (3)
------ -----
Net cash provided to discontinued operations........ -- (5)
------ -----
Net decrease in cash and cash equivalents........... (137) (269)
Cash and cash equivalents at beginning of period.... 3,107 1,896
------ -----
Cash and cash equivalents at end of period.......... $2,970 1,627
====== =====
</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, 2007
<Table>
<Caption>
COMMON STOCK
-----------------------------------------
LIBERTY ACCUMULATED
LIBERTY CAPITAL INTERACTIVE ADDITIONAL OTHER
PREFERRED ------------------- ------------------- PAID-IN COMPREHENSIVE
STOCK SERIES A SERIES B SERIES A SERIES B CAPITAL EARNINGS
--------- -------- -------- -------- -------- ---------- -------------
AMOUNTS IN MILLIONS
Balance at
January 1, 2007.... $ -- 1 -- 6 -- 28,112 5,952
Net earnings....... -- -- -- -- -- -- --
Other comprehensive
earnings......... -- -- -- -- -- -- 282
Cumulative effects
of accounting
changes, net
(notes 11 and
12).............. -- -- -- -- -- -- --
Issuance of common
stock upon
exercise of stock
options.......... -- -- -- -- -- 12 --
Liberty Interactive
Series A stock
repurchases...... -- -- -- -- (34) --
Stock
compensation..... -- -- -- -- -- 13 --
Other.............. -- -- -- -- -- (2) --
--------- -------- -------- -------- --- ------ -----
Balance at March 31,
2007............... $ -- 1 -- 6 -- 28,101 6,234
========= ======== ======== ======== === ====== =====
<Caption>
TOTAL
ACCUMULATED STOCKHOLDERS'
DEFICIT EQUITY
------------ -------------
AMOUNTS IN MILLIONS
Balance at
January 1, 2007.... (12,438) 21,633
Net earnings....... 369 369
Other comprehensive
earnings......... -- 282
Cumulative effects
of accounting
changes, net
(notes 11 and
12).............. 222 222
Issuance of common
stock upon
exercise of stock
options.......... -- 12
Liberty Interactive
Series A stock
repurchases...... -- (34)
Stock
compensation..... -- 13
Other.............. -- (2)
------- ------
Balance at March 31,
2007............... (11,847) 22,495
======= ======
</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, 2007
(UNAUDITED)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include the
accounts of Liberty Media Corporation and its controlled subsidiaries
(collectively, "Liberty" or the "Company," unless the context otherwise
requires). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Liberty, through its ownership of interests in subsidiaries and other
companies, is primarily engaged in the video and on-line commerce, media,
communications and entertainment industries in North America, Europe and Asia.
The accompanying interim unaudited condensed consolidated financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles ("GAAP") for interim financial information and the
instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the results for such
periods have been included. The results of operations for any interim period are
not necessarily indicative of results for the full year. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto contained in Liberty's
Annual Report on Form 10-K for the year ended December 31, 2006.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. Liberty considers (i) the estimate of the
fair value of its long-lived assets (including goodwill) and any resulting
impairment charges, (ii) its accounting for income taxes, (iii) the fair value
of its derivative instruments, (iv) its assessment of other-than-temporary
declines in fair value of its investments and (v) its estimates of
retail-related adjustments and allowances to be its most significant estimates.
Liberty holds investments that are accounted for using the equity method.
Liberty does not control the decision making process or business management
practices of these affiliates. Accordingly, Liberty relies on management of
these affiliates to provide it with accurate financial information prepared in
accordance with GAAP that Liberty uses in the application of the equity method.
In addition, Liberty relies on audit reports that are provided by the
affiliates' independent auditors on the financial statements of such affiliates.
The Company is not aware, however, of any errors in or possible misstatements of
the financial information provided by its equity affiliates that would have a
material effect on Liberty's condensed consolidated financial statements.
Certain prior period amounts have been reclassified for comparability with
the 2007 presentation.
(2) Tracking Stocks
On May 9, 2006, Liberty completed a restructuring (the "Restructuring")
pursuant to which the Company was organized as a new holding company and issued
two new tracking stocks. In the Restructuring, Liberty became the new publicly
traded parent company of Liberty Media LLC ("Old
I-7
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Liberty"). In the Restructuring, each holder of Old Liberty's common stock
received for each share of Old Liberty's Series A common stock held immediately
prior to the Restructuring, 0.25 of a share of the Company's Liberty Interactive
Series A common stock and 0.05 of a share of the Company's Liberty Capital
Series A common stock, and for each share of Old Liberty's Series B common stock
held immediately prior to the Restructuring, 0.25 of a share of the Company's
Liberty Interactive Series B common stock and 0.05 of a share of the Company's
Liberty Capital Series B common stock, in each case, with cash in lieu of any
fractional shares. Liberty is the successor reporting company to Old Liberty.
Each tracking stock is intended to track and reflect the economic performance of
one of two designated groups, the Interactive Group and the Capital Group,
respectively.
Tracking stock is a type of common stock that the issuing company intends to
reflect or "track" the economic performance of a particular business or "group,"
rather than the economic performance of the company as a whole. While the
Interactive Group and the Capital Group have separate collections of businesses,
assets and liabilities attributed to them, neither group is a separate legal
entity and therefore cannot own assets, issue securities or enter into legally
binding agreements. Holders of tracking stocks have no direct claim to the
group's stock or assets and are not represented by separate boards of directors.
Instead, holders of tracking stock are stockholders of the parent corporation,
with a single board of directors and subject to all of the risks and liabilities
of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which Liberty has
attributed to that group. The assets and businesses Liberty has attributed to
the Interactive Group are those engaged in video and on-line commerce, and
include its interests in QVC, Inc. ("QVC"), Provide Commerce, Inc. ("Provide"),
BuySeasons, Inc. ("BuySeasons"), Expedia, Inc. and IAC/InterActiveCorp. The
Interactive Group will also include such other businesses, assets and
liabilities that Liberty's board of directors may in the future determine to
attribute to the Interactive Group, including such other businesses and assets
as Liberty may acquire for the Interactive Group. In addition, Liberty has
attributed $3,108 million principal amount (as of March 31, 2007) of its
existing publicly-traded debt to the Interactive Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of Liberty's businesses, assets and liabilities other
than those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group include Liberty's subsidiaries: Starz
Entertainment, LLC ("Starz Entertainment"), Starz Media, LLC ("Starz Media"),
TruePosition, Inc. ("TruePosition") and FUN Technologies, Inc. ("FUN"); its
equity affiliates: GSN, LLC and WildBlue Communications, Inc.; and its interests
in News Corporation, Time Warner Inc. and Sprint Nextel Corporation. The Capital
Group will also include such other businesses, assets and liabilities that
Liberty's board of directors may in the future determine to attribute to the
Capital Group, including such other businesses and assets as Liberty may acquire
for the Capital Group. In addition, Liberty has attributed $4,482 million
principal amount (as of March 31, 2007) of its existing publicly traded debt to
the Capital Group.
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for attributed
financial information for Liberty's tracking stock groups.
(3) Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "FAIR VALUE MEASUREMENTS"
("Statement 157"), which defines fair value, establishes a framework for
measuring fair value under GAAP and expands disclosures about fair value
measurements. Statement 157 applies to other accounting pronouncements that
require or
I-8
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
permit fair value measurements. The new guidance is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and for
interim periods within those fiscal years. Liberty is currently evaluating the
potential impact of the adoption of Statement 157 on its financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115" ("Statement
159"). Statement 159 permits entities to choose to measure many financial
instruments, such as available-for-sale securities, and certain other items at
fair value and to recognize the changes in fair value of such instruments in the
entity's statement of operations. Currently under Statement of Financial
Accounting Standards No. 115, entities are required to recognize changes in fair
value of available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15, 2007. Liberty is currently
evaluating the potential impacts of Statement 159 on its financial statements
and has not made a determination as to which of its financial instruments, if
any, it will choose to apply the provisions of Statement 159.
(4) Stock-Based Compensation
The Company has granted to certain of its employees and employees of its
subsidiaries options, stock appreciation rights ("SARs") and options with tandem
SARs (collectively, "Awards") to purchase shares of Liberty Capital Series A and
Series B common stock and Liberty Interactive Series A and Series B common
stock. The Awards generally vest over a 4-5 year period and expire 7-10 years
from the date of grant. Upon exercise of Awards that are settled in common
stock, Liberty issues new shares from its authorized, but unissued shares.
STATEMENT 123R
Liberty accounts for compensation related to Awards granted to its employees
pursuant to Statement of Financial Accounting Standards No. 123 (revised 2004),
"SHARE-BASED PAYMENTS" ("Statement 123R"). Statement 123R established standards
for the accounting for transactions in which an entity exchanges its equity
instruments for goods or services, primarily focusing on transactions in which
an entity obtains employee services. Statement 123R generally requires companies
to measure the cost of employee services received in exchange for an award of
equity instruments (such as stock options and restricted stock) based on the
grant-date fair value of the award, and to recognize that cost over the period
during which the employee is required to provide service (usually the vesting
period of the award). Statement 123R also requires companies to measure the cost
of employee services received in exchange for an award of liability instruments
(such as stock appreciation rights that will be settled in cash) based on the
current fair value of the award, and to remeasure the fair value of the award at
each reporting date.
The Company adopted Statement 123R effective January 1, 2006. In connection
with such adoption, the Company recorded an $89 million transition adjustment,
net of related income taxes.
The Company has calculated the grant-date fair value for all of its equity
classified awards and any subsequent remeasurement of its liability classified
awards using the Black-Scholes Model. Prior to 2007, the Company calculated the
expected term of the Awards using the methodology included in SEC Staff
Accounting Bulletin No. 107. In 2007, the Company estimated the expected term of
the Awards based on historical exercise and forfeiture data. The volatility used
in the calculation for Awards granted in 2007 is 20.8% for Liberty Interactive
Awards and 17.5% for Liberty Capital Awards and is based on the historical
volatility of Liberty's stocks and the implied volatility of publicly traded
Liberty
I-9
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
options. The Company uses the risk-free rate for Treasury Bonds with a term
similar to that of the subject options.
Included in selling, general and administrative expenses in the accompanying
condensed consolidated statements of operations are the following amounts of
stock-based compensation (amounts in millions):
<Table>
Three months ended:
March 31, 2007............................................ $22
March 31, 2006............................................ $30
</Table>
As of March 31, 2007, the total compensation cost related to unvested
Liberty equity awards was approximately $76 million. Such amount will be
recognized in the Company's consolidated statements of operations over a
weighted average period of approximately 2.1 years.
LIBERTY AWARDS
During the three months ended March 31, 2007, Liberty granted 395,953
options to purchase shares of Liberty Capital Series A common stock and
1,993,205 options to purchase shares of Liberty Interactive Series A common
stock to certain of its officers and employees and officers and employees of
certain subsidiaries. Liberty used the Black-Scholes Model to estimate the grant
date fair value of such options. The Liberty Capital Series A options and the
Liberty Interactive Series A options granted in 2007 had a weighted average
grant-date fair value of $27.71 and $6.58, respectively.
The following tables present the number and weighted average exercise price
("WAEP") of certain options, SARs and options with tandem SARs to purchase
Liberty common stock granted to certain officers, employees and directors of the
Company.
<Table>
<Caption>
LIBERTY LIBERTY LIBERTY LIBERTY
CAPITAL CAPITAL INTERACTIVE INTERACTIVE
SERIES A SERIES B SERIES A SERIES B
COMMON COMMON COMMON COMMON
STOCK WAEP STOCK WAEP STOCK WAEP STOCK WAEP
-------- -------- -------- -------- ----------- -------- ----------- --------
NUMBERS OF OPTIONS IN THOUSANDS
Outstanding at January 1, 2007... 2,318 $ 93.24 1,498 $101.37 21,503 $19.71 7,491 $23.41
Granted........................ 396 $109.27 -- 1,993 $23.87 --
Exercised...................... (111) $ 72.53 -- (494) $18.91 --
Forfeited...................... (17) $279.05 -- (114) $74.83 --
----- ----- ------ -----
Outstanding at March 31, 2007.... 2,586 $ 94.28 1,498 $101.37 22,888 $19.80 7,491 $23.41
===== ===== ====== =====
Exercisable at March 31, 2007.... 1,588 $ 97.22 1,438 $102.03 9,507 $21.26 7,191 $23.56
===== ===== ====== =====
</Table>
The following table provides additional information about outstanding
options to purchase Liberty common stock at March 31, 2007.
<Table>
<Caption>
NO. OF WEIGHTED AGGREGATE NO. OF AGGREGATE
OUTSTANDING WAEP OF AVERAGE INTRINSIC EXERCISABLE WAEP OF INTRINSIC
OPTIONS OUTSTANDING REMAINING VALUE OPTIONS EXERCISABLE VALUE
(000'S) OPTIONS LIFE (000'S) (000'S) OPTIONS (000'S)
----------- ----------- --------- --------- ----------- ----------- ---------
Capital Series A...... 2,586 $ 94.28 5.2 years $47,604 1,588 $ 97.22 $26,669
Capital Series B...... 1,498 $101.37 4.2 years $13,791 1,438 $102.03 $12,286
Interactive Series
A................... 22,888 $ 19.80 5.6 years $98,680 9,507 $ 21.26 $30,678
Interactive Series
B................... 7,491 $ 23.41 4.2 years $ 1,755 7,191 $ 23.56 $ 585
</Table>
I-10
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed by dividing net
earnings (loss) by the weighted average number of common shares outstanding for
the period. Diluted EPS presents the dilutive effect on a per share basis of
potential common shares as if they had been converted at the beginning of the
periods presented.
LIBERTY SERIES A AND SERIES B COMMON STOCK
The basic EPS calculation is based on 2,801 million weighted average
outstanding shares of Liberty common stock for the three months ended March 31,
2006.
The cumulative effect of accounting change per common share for the three
months ended March 31, 2006 was a loss of $0.03.
Loss from discontinued operations per common share for the three months
ended March 31, 2006 was less than $.01.
LIBERTY CAPITAL COMMON STOCK
Liberty Capital EPS for the three months ended March 31, 2007 was computed
by dividing the net earnings attributable to the Capital Group by the weighted
average outstanding shares of Liberty Capital common stock for the period
(140.5 million). Due to the relative insignificance of the dilutive securities
for such period, their inclusion does not impact the EPS amount. Excluded from
diluted EPS for the three months ended March 31, 2007 are less than 1 million
potential common shares because their inclusion would be anti-dilutive.
Earnings from discontinued operations per common share for the three months
ended March 31, 2007 was $.30.
LIBERTY INTERACTIVE COMMON STOCK
Liberty Interactive EPS for the three months ended March 31, 2007 was
computed by dividing the net earnings attributable to the Interactive Group by
the weighted average outstanding shares of Liberty Interactive common stock for
the period (652.1 million). Due to the relative insignificance of the dilutive
securities for such period, their inclusion does not impact the EPS amount.
Excluded from diluted EPS for the three months ended March 31, 2007 are
approximately 9 million potential common shares because their inclusion would be
anti-dilutive.
I-11
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) Supplemental Disclosures to Statements of Cash Flows
CASH PAID FOR ACQUISITIONS
<Table>
<Caption>
THREE
MONTHS
ENDED
MARCH 31,
---------------------
2007 2006
---------- --------
AMOUNTS IN
MILLIONS
Cash paid for acquisitions:
Fair value of assets acquired............................. $ 8 768
Net liabilities assumed................................... (2) (48)
Deferred tax liabilities.................................. -- (52)
Minority interest......................................... -- (71)
---------- ---
Cash paid for acquisitions, net of cash acquired........ $ 6 597
========== ===
</Table>
(7) Discontinued Operations
SALE OF OPENTV CORP.
On January 16, 2007, Liberty completed the sale of its controlling interest
in OpenTV Corp. ("OPTV") to an unaffiliated third party for cash consideration
of $132 million, $20 million of which was deposited in an escrow account to fund
potential indemnification claims by the third party made prior to the first
anniversary of the closing. Pursuant to an agreement between Liberty and OPTV,
$5.4 million of the amount received by Liberty at closing was remitted to OPTV
and OPTV will be entitled to 71.4% of any amounts released from the escrow
account in the future. Liberty recognized a pre-tax gain of $65 million upon
consummation of the sale. Such gain is included in earnings from discontinued
operations in the accompanying condensed consolidated statement of operations.
OPTV was attributed to the Capital Group.
SALE OF ASCENT ENTERTAINMENT GROUP, INC.
In December 2006, Liberty entered into an agreement with an unaffiliated
third party to sell Liberty's 100% ownership interest in Ascent Entertainment
Group, Inc. ("AEG") for $332 million in cash and 2.05 million shares of common
stock of the buyer valued at approximately $50 million. AEG's primary operating
subsidiary is On Command Corporation. Consummation of the transaction occurred
on April 4, 2007. Subsequent to the closing, Liberty owns approximately 9.2% of
the buyer's outstanding common stock. AEG was attributed to the Capital Group.
The condensed consolidated financial statements and accompanying notes of
Liberty have been prepared to reflect OPTV and AEG as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of OPTV and AEG have been excluded from the respective captions in the
accompanying condensed consolidated balance sheets, statements of operations,
statements of comprehensive earnings (loss) and statements of cash flows and
have been reported under the heading of discontinued operations in such
condensed consolidated financial statements.
I-12
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Certain income statement components of OPTV and AEG, which are included in
the determination of earnings (loss) from discontinued operations are as
follows:
<Table>
<Caption>
THREE
MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Revenue..................................................... $59 82
Earnings (loss) before income taxes......................... $62 (8)
</Table>
(8) Investments in Available-for-Sale Securities and Other Cost Investments
Investments in available-for-sale securities and other cost investments are
summarized as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
AMOUNTS IN MILLIONS
Capital Group
News Corporation.................................... $12,106 11,158
Time Warner Inc.(1)................................. 3,376 3,728
Sprint Nextel Corporation(2)........................ 1,657 1,651
Motorola, Inc.(3)................................... 1,308 1,522
Other available-for-sale equity securities(4)....... 847 830
Other available-for-sale debt securities............ 299 135
Other cost investments and related receivables...... 34 34
------- ------
Total attributed Capital Group.................... 19,627 19,058
------- ------
Interactive Group
IAC/InterActiveCorp................................. 2,610 2,572
------- ------
Total attributed Interactive Group................ 2,610 2,572
------- ------
Consolidated Liberty............................ 22,237 21,630
Less short-term investments..................... -- (8)
------- ------
$22,237 21,622
======= ======
</Table>
- ------------------------
(1) Includes $179 million and $198 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2007 and December 31, 2006,
respectively.
(2) Includes $171 million and $170 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2007 and December 31, 2006,
respectively.
(3) Includes $917 million and $1,068 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2007 and December 31, 2006,
respectively.
(4) Includes $53 million and $46 million of shares pledged as collateral for
share borrowing arrangements at March 31, 2007 and December 31, 2006,
respectively.
I-13
<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, 2007 DECEMBER 31, 2006
----------------------- -----------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES SECURITIES SECURITIES
---------- ---------- ---------- ----------
AMOUNTS IN MILLIONS
Gross unrealized holding gains.......... $9,781 -- 9,335 --
Gross unrealized holding losses......... $ (1) -- (1) --
</Table>
The aggregate fair value of securities with unrealized holding losses at
March 31, 2007 was $6 million. None of these securities had unrealized losses
for more than 12 continuous months.
(9) Intangible Assets
GOODWILL
Changes in the carrying amount of goodwill for the three months ended
March 31, 2007 are as follows:
<Table>
<Caption>
STARZ
QVC ENTERTAINMENT OTHER TOTAL
-------- ------------- -------- --------
AMOUNTS IN MILLIONS
Balance at January 1, 2007................ $5,416 1,371 801 7,588
Acquisitions............................ -- -- 14 14
Foreign currency translation............ 6 -- -- 6
Other(1)................................ (31) -- (2) (33)
------ ----- --- -----
Balance at March 31, 2007................. $5,391 1,371 813 7,575
====== ===== === =====
</Table>
- ------------------------
(1) Other for QVC relates to the reversal of certain tax reserves in connection
with the adoption of FIN 48 (see note 12). Such tax reserves were
established prior to Liberty's acquisition of a controlling interest in QVC
in 2003. Accordingly, the offset to the reversal of the tax reserves is a
reduction of goodwill.
AMORTIZABLE INTANGIBLE ASSETS
Amortization of intangible assets with finite useful lives was $116 million
and $114 million for the three months ended March 31, 2007 and 2006,
respectively. Based on its current amortizable intangible assets, Liberty
expects that amortization expense will be as follows for the next five years
(amounts in millions):
<Table>
Remainder of 2007........................................... $348
2008........................................................ $433
2009........................................................ $390
2010........................................................ $358
2011........................................................ $351
</Table>
I-14
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) Financial Instruments
The Company's financial instruments are summarized as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
TYPE OF FINANCIAL INSTRUMENT 2007 2006
- ---------------------------- ---------- -------------
AMOUNTS IN MILLIONS
ASSETS
Equity collars...................................... $ 1,155 1,218
Other............................................... 314 361
------- ------
1,469 1,579
Less current portion................................ (293) (239)
------- ------
$ 1,176 1,340
======= ======
LIABILITIES
Borrowed shares..................................... $ 1,320 1,482
Exchangeable debenture call option obligations(1)... -- 1,280
Equity collars...................................... 366 416
Other............................................... 20 12
------- ------
1,706 3,190
Less current portion................................ (1,322) (1,484)
------- ------
$ 384 1,706
======= ======
</Table>
Realized and unrealized gains (losses) on financial instruments are
comprised of changes in fair value of the following:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Senior exchangeable debentures(1)........................... $170 --
Equity collars.............................................. 64 (157)
Borrowed shares............................................. 161 (37)
Exchangeable debenture call option obligations(1)........... -- (17)
Other derivatives........................................... (51) 18
---- ----
$344 (193)
==== ====
</Table>
- ------------------------
(1) See note 11 regarding the accounting for the Company's senior exchangeable
debentures.
I-15
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) Long-Term Debt
Debt is summarized as follows:
<Table>
<Caption>
OUTSTANDING CARRYING VALUE
PRINCIPAL ------------------------
MARCH 31, MARCH 31, DECEMBER 31,
2007 2007 2006
----------- --------- ------------
AMOUNTS IN MILLIONS
Capital Group
Senior exchangeable debentures
4% Senior Exchangeable Debentures due 2029............. $ 869 589 254
3.75% Senior Exchangeable Debentures due 2030.......... 810 502 234
3.5% Senior Exchangeable Debentures due 2031........... 502 486 238
3.25% Senior Exchangeable Debentures due 2031.......... 551 447 119
0.75% Senior Exchangeable Debentures due 2023.......... 1,750 2,039 1,637
Subsidiary debt.......................................... 107 107 158
------- ------- -----
Total attributed Capital Group debt.................. 4,589 4,170 2,640
------- ------- -----
Interactive Group
Senior notes and debentures
7.875% Senior Notes due 2009........................... 670 667 667
7.75% Senior Notes due 2009............................ 234 234 234
5.7% Senior Notes due 2013............................. 802 800 800
8.5% Senior Debentures due 2029........................ 500 495 495
8.25% Senior Debentures due 2030....................... 902 895 895
QVC bank credit facilities............................... 3,175 3,175 3,225
Other subsidiary debt.................................... 68 68 67
------- ------- -----
Total attributed Interactive Group debt.............. 6,351 6,334 6,383
------- ------- -----
Total consolidated Liberty debt.......................... $10,940 10,504 9,023
=======
Less current maturities................................ (179) (114)
------- -----
Total long-term debt....................................... $10,325 8,909
======= =====
</Table>
SENIOR EXCHANGEABLE DEBENTURES
Effective January 1, 2007, Liberty adopted Statement of Financial Accounting
Standards No. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS, AN
AMENDMENT OF FASB STATEMENTS NO. 133 AND 140" ("Statement 155"). Statement 155,
among other things, amends Statement of Financial Accounting Standards No. 133,
"ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("Statement
133"), and permits fair value remeasurement of hybrid financial instruments that
contain an embedded derivative that otherwise would require bifurcation. Under
Statement 133, Liberty reported the fair value of the call option feature
separate from the long-term debt. The long-term debt portion was reported as the
difference between the face amount of the debenture and the fair value of the
call option feature on the date of issuance and was accreted through interest
expense to its face amount over the expected term of the debenture. Pursuant to
the provisions of Statement 155, Liberty now accounts for its senior
exchangeable debentures at fair value rather than bifurcating such instruments
into a debt instrument and a derivative instrument. Changes in the fair value of
the exchangeable debentures are included in realized and unrealized gains
(losses) on financial instruments
I-16
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
in the accompanying condensed consolidated statements of operations and
aggregated $170 million for the three months ended March 31, 2007.
The impact--increase/(decrease)--on Liberty's balance sheet of the adoption
of Statement 155 is as follows (amounts in millions):
<Table>
Long-term financial instrument liabilities.................. $(1,280)
Long-term debt.............................................. $ 1,848
Deferred income tax liabilities............................. $ (216)
Accumulated deficit......................................... $ 352
</Table>
QVC BANK CREDIT FACILITIES
QVC is party to an unsecured $3.5 billion bank credit facility dated
March 3, 2006 (the "March 2006 Credit Agreement"). The March 2006 Credit
Agreement is comprised of an $800 million U.S. dollar term loan that was drawn
at closing, an $800 million U.S. dollar term loan that was drawn on
September 18, 2006, a $600 million multi-currency term loan that was drawn in
U.S. dollars on September 18, 2006, a $650 million U.S. dollar revolving loan
and a $650 million multi-currency revolving loan. The foregoing multi-currency
loans can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound
sterling or euros. All loans are due and payable on March 3, 2011.
QVC is party to a second credit agreement dated October 4, 2006, as amended
on March 20, 2007 (the "October 2006 Credit Agreement"), which provides for an
additional unsecured $1.75 billion credit facility, consisting of an
$800 million initial term loan made on October 13, 2006, and $950 million of
delayed draw term loans to be made from time to time upon the request of QVC.
The delayed draw term loans are available until December 31, 2007 and are
subject to reductions in the principal amount available. The loans are scheduled
to mature on October 4, 2011.
All loans under the March 2006 Credit Agreement and the October 2006 Credit
Agreement bear interest at a rate equal to (i) LIBOR for the interest period
selected by QVC plus a margin that varies based on QVC's leverage ratio or
(ii) the higher of the Federal Funds Rate plus 0.50% or the prime rate announced
by the respective Administrative Agent from time to time. QVC is required to pay
a commitment fee quarterly in arrears on the unused portion of the commitments.
The credit agreements contain restrictive covenants regarding, among other
matters, the maintenance of certain financial ratios and limitations on
indebtedness, liens, encumbrances, dispositions, guarantees and dividends. QVC
was in compliance with its debt covenants at March 31, 2007. QVC's ability to
borrow the unused portion of its credit agreements is dependent on its
continuing compliance with such covenants both before and after giving effect to
such additional borrowings.
QVC INTEREST RATE SWAP ARRANGEMENTS
During 2006, QVC entered into ten separate interest rate swap arrangements
with an aggregate notional amount of $2,200 million to manage the cash flow risk
associated with interest payments on its variable rate debt. The swap
arrangements provide for QVC to make fixed payments at rates ranging from
4.9575% to 5.2928% and to receive variable payments at 3 month LIBOR. All of the
swap arrangements expire in March 2011 contemporaneously with the maturity of
the March 2006 Credit Agreement. Liberty accounts for the swap arrangements as
cash flow hedges with the effective portions
I-17
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of changes in the fair value reflected in other comprehensive earnings in the
accompanying condensed consolidated balance sheet.
OTHER SUBSIDIARY DEBT
Other subsidiary debt at March 31, 2007, is comprised of capitalized
satellite transponder lease obligations and bank debt of Starz Media.
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt securities that are not reported at fair value in the accompanying
condensed consolidated balance sheet at March 31, 2007 is as follows (amounts in
millions):
<Table>
Fixed rate senior notes..................................... $1,727
Senior debentures........................................... $1,457
</Table>
Liberty believes that the carrying amount of its subsidiary debt
approximated fair value at March 31, 2007.
(12) Income Taxes
Effective January 1, 2007, Liberty adopted FASB Interpretation No. 48,
"ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT
NO. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in a company's financial statements and prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. In instances where the Company has taken or expects to take a tax
position in its tax return and the Company believes it is more likely than not
that such tax position will be upheld by the relevant taxing authority, the
Company may record a benefit for such tax position in its consolidated financial
statements.
The impact--increase/(decrease)--on Liberty's balance sheet of the adoption
of FIN 48 is as follows (amounts in millions):
<Table>
Tax liabilities (including interest and penalties).......... $(634)
Goodwill.................................................... $ (31)
Deferred tax liabilities.................................... $ 36
Accumulated deficit......................................... $(574)
Other assets................................................ $ 7
</Table>
As of January 1, 2007, the Company had recorded tax reserves of
$422 million related to unrecognized tax benefits for uncertain tax positions.
If such tax benefits were to be recognized for financial statement purposes,
$360 million would be reflected in the Company's tax expense and affect its
effective tax rate. Liberty's estimate of its unrecognized tax benefits related
to uncertain tax positions requires a high degree of judgment, which may be
subject to change in the future. However, based on information currently
available to it, Liberty does not believe it is reasonably possible that its
judgments will change significantly in the next 12 months.
I-18
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
When the tax law requires interest to be paid on an underpayment of income
taxes, the Company recognizes interest expense from the first period the
interest would begin accruing according to the relevant tax law. Such interest
expense is included in interest expense in the accompanying condensed
consolidated statements of operations. Any accrual of penalties related to
underpayment of income taxes on uncertain tax positions is included in other
income (expense) in the accompanying condensed consolidated statements of
operations. As of January 1, 2007, the Company had recorded $18 million of
accrued interest and penalties related to uncertain tax positions.
As of March 31, 2007, the Company's tax years 2001 through 2006 remain
subject to examination by the IRS for federal income tax purposes.
(13) Stockholders' Equity
As of March 31, 2007, there were 2.6 million and 1.5 million shares of
Liberty Capital Series A common stock and Series B common stock, respectively,
reserved for issuance under exercise privileges of outstanding stock options.
As of March 31, 2007, there were 22.9 million and 7.5 million shares of
Liberty Interactive Series A common stock and Series B common stock,
respectively, reserved for issuance under exercise privileges of outstanding
stock options.
In addition to the Liberty Capital Series A and Series B common stock and
the Liberty Interactive Series A and Series B common stock, there are
300 million and 1,500 million shares of Liberty Capital Series C and Liberty
Interactive Series C common stock, respectively, authorized for issuance. As of
March 31, 2007, no shares of either Series C common stock were issued or
outstanding.
During the three months ended March 31, 2007, the Company repurchased
1.5 million shares of Liberty Interactive Series A common stock in the open
market for aggregate cash consideration of $34.4 million. Such shares were
repurchased pursuant to a previously announced share repurchase program and have
been retired and returned to the status of authorized and available for
issuance.
Liberty commenced a tender offer on March 7, 2007 that it subsequently
amended on March 20, 2007. Pursuant to the tender offer, as amended, Liberty
sought to purchase up to 8,849,500 shares of Liberty Capital Series A common
stock at a price not greater than $113.00 or less than $105.00 per share. The
tender offer expired on April 5, 2007, and 11,858,343 shares of Liberty Capital
Series A common stock were properly tendered. Liberty exercised its right to
purchase an additional 2% of its outstanding Liberty Capital Series A common
stock and accepted for purchase 11,540,680 shares at a price of $113.00 per
share or aggregate cash consideration of $1,304 million.
(14) Commitments and Contingencies
FILM RIGHTS
Starz Entertainment, a wholly-owned subsidiary of Liberty, provides video
programming distributed by cable operators, direct-to-home satellite providers,
other distributors and via the Internet throughout the United States. Starz
Entertainment has entered into agreements with a number of motion picture
producers which obligate Starz Entertainment to pay fees ("Programming Fees")
for the rights to exhibit certain films that are released by these producers.
The unpaid balance of Programming Fees for films that were available for
exhibition by Starz Entertainment at March 31, 2007 is reflected as a liability
in the accompanying condensed consolidated balance sheet. The balance due as of
March 31, 2007 is payable as follows: $89 million in 2007, $13 million in 2008
and $17 million thereafter.
I-19
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Starz Entertainment has also contracted to pay Programming Fees for the
rights to exhibit films that have been released theatrically, but are not
available for exhibition by Starz Entertainment until some future date. These
amounts have not been accrued at March 31, 2007. Starz Entertainment's estimate
of amounts payable under these agreements is as follows: $384 million in 2007;
$284 million in 2008; $89 million in 2009; $82 million in 2010; $31 million in
2011; and $68 million thereafter.
In addition, Starz Entertainment is also obligated to pay Programming Fees
for all qualifying films that are released theatrically in the United States by
studios owned by The Walt Disney Company ("Disney") through 2009, all qualifying
films that are released theatrically in the United States by 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 Starz Entertainment for
exhibition 10 - 12 months after their theatrical release. The Programming Fees
to be paid by Starz Entertainment are based on the quantity and the domestic
theatrical exhibition receipts of qualifying films. As these films have not yet
been released in theatres, Starz Entertainment is unable to estimate the amounts
to be paid under these output agreements. However, such amounts are expected to
be significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, Starz Entertainment has agreed to pay Sony a
total of $190 million in four annual installments of $47.5 million beginning in
2011. This option expires December 31, 2007. If made, such payments to Sony
would be amortized ratably as programming expense over the extension period
beginning in 2011. An extension of this agreement would also result in the
payment by Starz Entertainment of Programming Fees for qualifying films released
by Sony during the extension period. If Disney elects to extend its contract,
Starz Entertainment would not be obligated to pay any amounts in excess of its
Programming Fees for qualifying films released by Disney during the extension
period. The Disney option expires December 31, 2007.
GUARANTEES
Liberty guarantees Starz Entertainment's obligations under certain of its
studio output agreements. At March 31, 2007, Liberty's guarantee for obligations
for films released by such date aggregated $650 million. While the guarantee
amount for films not yet released is not determinable, such amount is expected
to be significant. As noted above, Starz Entertainment has recognized the
liability for a portion of its obligations under the output agreements. As this
represents a commitment of Starz Entertainment, a consolidated subsidiary of
Liberty, Liberty has not recorded a separate liability for its guarantee of
these obligations.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its sale,
such as tax, environmental, litigation and employment matters. Liberty generally
indemnifies the purchaser in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by Liberty. These
types of indemnification guarantees typically extend for a number of years.
Liberty is unable to estimate the maximum potential liability for these types of
indemnification guarantees as the sale agreements typically do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying condensed consolidated financial statements with respect to these
indemnification guarantees.
I-20
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
OPERATING LEASES
Liberty and its subsidiaries lease business offices, have entered into
satellite transponder lease agreements and use certain equipment under lease
arrangements.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
INCOME TAXES
Since the date Liberty issued its exchangeable debentures, it has claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which it could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in Liberty claiming interest deductions significantly in
excess of the cash interest currently paid on its exchangeable debentures. In
this regard, Liberty has deducted $2,445 million in cumulative interest expense
associated with the exchangeable debentures since the Company's 2001 split-off
from AT&T. Of that amount, $768 million represents cash interest payments.
Interest deducted in prior years on its exchangeable debentures has contributed
to net operating losses ("NOLs") that may be carried to offset taxable income in
2006 and later years. These NOLs and current interest deductions on the
exchangeable debentures are being used to offset taxable income currently being
generated.
The IRS has issued Technical Advice Memorandums (the "TAMs") challenging the
current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge Liberty's tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to
Liberty's reported total tax expense as the resulting increase in current tax
expense would be offset by a decrease in deferred tax expense. However, Liberty
would be required to make current federal income tax payments and may be
required to make interest payments to the IRS. These payments could prove to be
significant.
OTHER
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T Corp. and was a
party to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement").
While Liberty was a subsidiary of AT&T, Liberty recorded its stand-alone tax
provision on a separate return basis. Under the AT&T Tax Sharing Agreement,
Liberty received a cash payment from AT&T in periods when Liberty generated
taxable losses and such taxable losses were utilized by AT&T to reduce its
consolidated income tax liability. To the extent such losses were not utilized
by AT&T, such amounts were available to reduce federal taxable income generated
by Liberty in future periods, similar to a net operating loss carryforward, and
were accounted for as a deferred federal income tax benefit. Subsequent to
Liberty's split off from AT&T, if adjustments are made to amounts previously
paid under the AT&T Tax Sharing Agreement, such adjustments are reflected as
adjustments to additional paid-in capital. During the period from March 10, 1999
to December 31, 2002, Liberty received cash payments from AT&T aggregating
I-21
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
$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, AT&T would be required to
pay Liberty 35% of the amount of the SRLY NOLs used. In the fourth quarter of
2004 and in connection with the completion of an IRS audit of TCI's tax return
for 1994, it was determined that Liberty was required to recognize additional
taxable income related to the recapitalization of one of its investments
resulting in a tax liability of approximately $30 million. As a result of the
tax assessment, Liberty also received a corresponding amount of additional tax
basis in the investment. However, Liberty was able to cause AT&T to use a
portion of the SRLY NOLs to offset this taxable income, the benefit of which
resulted in the elimination of the $30 million tax liability and an increase to
additional paid-in capital.
In the fourth quarter of 2004, AT&T requested a refund from Liberty of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by Liberty's losses. AT&T has asserted that Liberty's losses caused AT&T to pay
$70 million in alternative minimum tax ("AMT") that it would not have been
otherwise required to pay had Liberty's losses not been included in its return.
In 2004, Liberty estimated that it may ultimately pay AT&T up to $30 million of
the requested $70 million because Liberty believed AT&T received an AMT credit
of $40 million against income taxes resulting from the AMT previously paid.
Accordingly, Liberty accrued a $30 million liability with an offsetting
reduction of additional paid-in capital. The net effect of the completion of the
IRS tax audit noted above (including the benefit derived from AT&T for the
utilization of the SRLY NOLs) and Liberty's accrual of amounts due to AT&T was
an increase to deferred tax assets and an increase to other liabilities.
In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by Liberty's losses. In addition, the
information provided to Liberty in connection with AT&T's request showed that
AT&T had not yet claimed a credit for AMT previously paid. Accordingly, in the
fourth quarter of 2005, Liberty increased its accrual by approximately
$40 million (with a corresponding reduction of additional paid-in capital)
representing its estimate of the amount it may ultimately pay (excluding accrued
interest, if any) to AT&T as a result of this request. Although Liberty has not
reduced its accrual for any future refunds, Liberty believes it is entitled to a
refund when AT&T is able to realize a benefit in the form of a credit for the
AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by Liberty's losses. Liberty has
reviewed this claim and believes that its accrual as of December 31, 2005 is
adequate. Accordingly, no additional accrual has been made for AT&T's
March 2006 request.
Although for accounting purposes Liberty has accrued a portion of the
amounts claimed by AT&T to be owed by Liberty under the AT&T Tax Sharing
Agreement, Liberty believes there are valid defenses or set-off or similar
rights in its favor that may cause the total amount that it owes AT&T to
I-22
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
be less than the amounts accrued; and under certain interpretations of the AT&T
Tax Sharing Agreement, Liberty may be entitled to further reimbursements from
AT&T.
(15) Operating Segments
Liberty is a holding company which, through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the video and on-line
commerce, media, communications and entertainment industries. Upon the issuance
of its tracking stocks, Liberty divided its businesses into two groups: the
Interactive Group and the Capital Group. Each of the businesses in the tracking
stock groups is separately managed. Liberty identifies its reportable segments
as (A) those consolidated subsidiaries that represent 10% or more of its
consolidated revenue, earnings before income taxes or total assets and
(B) those equity method affiliates whose share of earnings represent 10% or more
of Liberty's consolidated earnings before income taxes. The segment presentation
for prior periods has been conformed to the current period segment presentation.
Liberty evaluates performance and makes decisions about allocating resources
to its operating segments based on financial measures such as revenue, operating
cash flow, gross margin, average sales price per unit, number of units shipped,
and revenue or sales per customer equivalent. In addition, Liberty reviews
non-financial measures such as subscriber growth and penetration, as
appropriate.
Liberty defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding
stock-based compensation). Liberty believes this measure is an important
indicator of the operational strength and performance of its businesses,
including each business's ability to service debt and fund capital expenditures.
In addition, this measure allows management to view operating results and
perform analytical comparisons and benchmarking between businesses and identify
strategies to improve performance. This measure of performance excludes
depreciation and amortization, stock-based compensation, separately reported
litigation settlements and restructuring and impairment charges that are
included in the measurement of operating income pursuant to GAAP. Accordingly,
operating cash flow should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow provided by operating activities
and other measures of financial performance prepared in accordance with GAAP.
Liberty generally accounts for intersegment sales and transfers as if the sales
or transfers were to third parties, that is, at current prices.
For the three months ended March 31, 2007, Liberty has identified the
following businesses as its reportable segments:
- QVC--consolidated subsidiary attributed to the Interactive Group that
markets and sells a wide variety of consumer products in the U.S. and
several foreign countries, primarily by means of televised shopping
programs on the QVC networks and via the Internet through its domestic and
international websites.
- Starz Entertainment--consolidated subsidiary attributed to the Capital
Group that provides video programming distributed by cable operators,
direct-to-home satellite providers, other distributors and via the
Internet throughout the United States.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different technologies, distribution channels and marketing
strategies. The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of significant
policies.
I-23
<Page>
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
PERFORMANCE MEASURES
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2007 2006
------------------------- -------------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW (DEFICIT) REVENUE FLOW (DEFICIT)
-------- -------------- -------- --------------
AMOUNTS IN MILLIONS
Interactive Group
QVC................................ $1,684 374 1,555 355
Corporate and Other................ 87 8 53 10
------ --- ----- ---
1,771 382 1,608 365
------ --- ----- ---
Capital Group
Starz Entertainment................ 265 73 259 41
Corporate and Other................ 87 (33) 34 (11)
------ --- ----- ---
352 40 293 30
------ --- ----- ---
Consolidated Liberty................. $2,123 422 1,901 395
====== === ===== ===
</Table>
OTHER INFORMATION
<Table>
<Caption>
MARCH 31, 2007
-------------------------------------
INVESTMENTS
TOTAL IN CAPITAL
ASSETS AFFILIATES EXPENDITURES
-------- ----------- ------------
AMOUNTS IN MILLIONS
Interactive Group
QVC........................................ $19,065 114 79
Corporate and Other........................ 5,699 1,258 3
Intragroup elimination..................... (5,117) -- --
------- ----- --
19,647 1,372 82
------- ----- --
Capital Group
Starz Entertainment........................ 2,810 -- 2
Corporate and Other........................ 25,034 500 3
Assets of discontinued operations.......... 283 -- --
------- ----- --
28,127 500 5
------- ----- --
Inter-Group eliminations..................... (151) -- --
------- ----- --
Consolidated Liberty......................... $47,623 1,872 87
======= ===== ==
</Table>
I-24
<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,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Consolidated segment operating cash flow.................... $ 422 395
Stock-based compensation.................................... (22) (30)
Depreciation and amortization............................... (151) (141)
Interest expense............................................ (150) (148)
Realized and unrealized gains (losses) on financial
instruments, net.......................................... 344 (193)
Gains on dispositions of assets, net........................ 6 24
Other, net.................................................. 84 68
----- ----
Earnings (loss) from continuing operations before income
taxes and minority interests............................ $ 533 (25)
===== ====
</Table>
I-25
<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 Starz Entertainment, anticipated
programming and marketing costs at Starz Entertainment, our projected sources
and uses of cash for the remainder of 2007, the estimated value of our
derivatives related to certain of our AFS investments, and the anticipated
non-material impact of certain contingent liabilities related to legal and tax
proceedings and other matters arising in the ordinary course of our business.
Where, in any forward-looking statement, we express an expectation or belief as
to future results or events, such expectation or belief is expressed in good
faith and believed to have a reasonable basis, but such statements necessarily
involve risks and uncertainties and there can be no assurance that the statement
of expectation or belief will result or be achieved or accomplished. The
following include some but not all of the factors that could cause actual
results or events to differ materially from those anticipated:
- consumer demand for our products and services and our ability to adapt to
changes in demand;
- competitor responses to our products and services, and the products and
services of the entities in which we have interests;
- uncertainties inherent in the development and integration of new business
lines and business strategies;
- uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new
television and telecommunications technologies;
- our future financial performance, including availability, terms and
deployment of capital;
- our ability to successfully integrate and recognize anticipated
efficiencies and benefits from the businesses we acquire;
- the ability of suppliers and vendors to deliver products, equipment,
software and services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
- general economic and business conditions and industry trends;
- consumer spending levels, including the availability and amount of
individual consumer debt;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband distribution and movie studio
industries;
- changes in distribution and viewing of television programming, including
the expanded deployment of personal video recorders, video on demand and
IP television and their impact on home shopping networks;
- increased digital TV penetration and the impact on channel positioning of
our networks;
I-26
<Page>
- rapid technological changes;
- capital spending for the acquisition and/or development of
telecommunications networks and services;
- threatened terrorists attacks and ongoing military action in the Middle
East and other parts of the world; and
- fluctuations in foreign currency exchange rates and political unrest in
international markets.
These forward-looking statements and such risks, uncertainties and other
factors speak only as of the date of this Quarterly Report, and we expressly
disclaim any obligation or undertaking to disseminate any updates or revisions
to any forward-looking statement contained herein, to reflect any change in its
expectations with regard thereto, or any other change in events, conditions or
circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read in
conjunction with our accompanying condensed consolidated financial statements
and the notes thereto and our Annual Report on Form 10-K for the year ended
December 31, 2006.
OVERVIEW
We own controlling and noncontrolling interests in a broad range of video
and on-line commerce, media, communications and entertainment companies. Our
more significant operating subsidiaries, which are also our reportable segments,
are QVC and Starz Entertainment. QVC markets and sells a wide variety of
consumer products in the United States and several foreign countries, primarily
by means of televised shopping programs on the QVC networks and via the Internet
through its domestic and international websites. Starz Entertainment provides
video programming distributed by cable operators, direct-to-home satellite
providers, other distributors and via the Internet throughout the United States.
Our "Corporate and Other" category includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
Provide Commerce, Inc., Starz Media, LLC, TruePosition, Inc., FUN
Technologies, Inc., and BuySeasons, Inc. Provide, which we acquired in
February 2006, operates an e-commerce marketplace of websites for perishable
goods, including flowers, gourmet foods, fruits and desserts. Starz Media, which
we acquired in the third quarter of 2006, is focused on developing, acquiring,
producing and distributing live-action, computer-generated and traditional
television animated productions for the home video, film, broadcast and
direct-to-consumer markets. TruePosition provides equipment and technology that
deliver location-based services to wireless users. FUN, in which we acquired a
controlling interest in March 2006, operates websites that offer casual gaming,
sports information and fantasy sports services. BuySeasons, which we acquired in
August 2006, operates BuyCostumes.com, an online retailer of costumes,
accessories, decor and party supplies.
In addition to the foregoing businesses, we hold an approximate 23%
ownership interest in Expedia, Inc., which we account for as an equity method
investment, and we continue to maintain significant investments and related
derivative positions in public companies such as News Corporation,
IAC/InterActiveCorp, Time Warner Inc. and Sprint Nextel Corporation, which are
accounted for at their respective fair market values and are included in
corporate and other.
TRACKING STOCKS
On May 9, 2006, we completed a restructuring pursuant to which we, among
other things, issued two new tracking stocks, Liberty Interactive common stock
and Liberty Capital common stock. Each
I-27
<Page>
tracking stock issued in the restructuring is intended to track and reflect the
economic performance of one of two newly designated groups, the Interactive
Group and the Capital Group, respectively.
Tracking stock is a type of common stock that the issuing company intends to
reflect or "track" the economic performance of a particular business or "group,"
rather than the economic performance of the company as a whole. While the
Interactive Group and the Capital Group have separate collections of businesses,
assets and liabilities attributed to them, neither group is a separate legal
entity and therefore cannot own assets, issue securities or enter into legally
binding agreements. Holders of tracking stocks have no direct claim to the
group's stock or assets and are not represented by separate boards of directors.
Instead, holders of tracking stock are stockholders of the parent corporation,
with a single board of directors and subject to all of the risks and liabilities
of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which we have
attributed to it. The assets and businesses we have attributed to the
Interactive Group are those engaged in video and on-line commerce, and include
our subsidaries QVC, Provide and BuySeasons and our interests in Expedia and
IAC/InterActiveCorp. The Interactive Group will also include such other
businesses that our board of directors may in the future determine to attribute
to the Interactive Group, including such other businesses as we may acquire for
the Interactive Group. In addition, we have attributed $3,108 million principal
amount (as of March 31, 2007) of our existing publicly-traded debt to the
Interactive Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of our businesses, assets and liabilities other than
those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group include our subsidiaries Starz
Entertainment, Starz Media, TruePosition and FUN, our equity affiliates GSN, LLC
and WildBlue Communications, Inc. and our interests in News Corporation, Time
Warner Inc. and Sprint Nextel Corporation. The Capital Group will also include
such other businesses that our board of directors may in the future determine to
attribute to the Capital Group, including such other businesses as we may
acquire for the Capital Group. In addition, we have attributed $4,482 million
principal amount (as of March 31, 2007) of our existing publicly-traded debt to
the Capital Group.
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for attributed
financial information for our tracking stock groups.
2007 COMPLETED AND PENDING TRANSACTIONS
In addition to the sales of OPTV and AEG described in note 7 to the
accompanying condensed consolidated financial statements, we have several other
completed and pending transactions. Among these are:
On April 16, 2007, we completed a transaction with CBS Corporation pursuant
to which we exchanged our 7.6 million shares of CBS Class B common stock for a
newly created subsidiary of CBS that held CBS' owned television station in Green
Bay, Wisconsin and approximately $170 million in cash.
In December 2006, we announced that we had entered into an exchange
agreement with News Corporation pursuant to which, if completed, we would
exchange our approximate 16% ownership interest in News Corporation for a
subsidiary of News Corporation which would own an approximate 38% interest in
The DIRECTV Group, Inc., three regional sports television networks and
approximately $588 million in cash. Consummation of the exchange, which is
subject to various closing conditions, including regulatory approval and receipt
of a favorable ruling from the IRS confirming that the exchange is tax-free, is
expected in mid-2007.
I-28
<Page>
RESULTS OF OPERATIONS
GENERAL. We provide in the tables below information regarding our
Consolidated Operating Results and Other Income and Expense, as well as
information regarding the contribution to those items of our reportable segments
categorized by the tracking stock group to which those segments are attributed.
The "corporate and other" category for each tracking stock group consists of
those assets within the category which are attributed to such tracking stock
group. For a more detailed discussion and analysis of the financial results of
the principal reporting segments of each tracking stock group, see "Interactive
Group" and "Capital Group" below.
2006 ACQUISITIONS. We completed several acquisitions in 2006 that impact
the comparability of our 2006 and 2007 results of operations. Such acquisitions
include: Provide in February 2006, FUN in March 2006 and BuySeasons and Starz
Media in August 2006.
I-29
<Page>
CONSOLIDATED OPERATING RESULTS
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
REVENUE
Interactive Group
QVC..................................................... $1,684 1,555
Corporate and Other..................................... 87 53
------ -----
1,771 1,608
------ -----
Capital Group
Starz Entertainment..................................... 265 259
Corporate and Other..................................... 87 34
------ -----
352 293
------ -----
Consolidated Liberty.................................. $2,123 1,901
====== =====
OPERATING CASH FLOW (DEFICIT)
Interactive Group
QVC..................................................... $ 374 355
Corporate and Other..................................... 8 10
------ -----
382 365
------ -----
Capital Group
Starz Entertainment..................................... 73 41
Corporate and Other..................................... (33) (11)
------ -----
40 30
------ -----
Consolidated Liberty.................................. $ 422 395
====== =====
OPERATING INCOME (LOSS)
Interactive Group
QVC..................................................... $ 243 212
Corporate and Other..................................... 1 6
------ -----
244 218
------ -----
Capital Group
Starz Entertainment..................................... 60 33
Corporate and Other..................................... (55) (27)
------ -----
5 6
------ -----
Consolidated Liberty.................................. $ 249 224
====== =====
</Table>
REVENUE. Our consolidated revenue increased $222 million or 11.7% for the
three months ended March 31, 2007, as compared to the corresponding prior year
period. This increase is due primarily to a $129 million or 8.3% increase for
QVC and $61 million generated by Starz Media, which we acquired in August 2006.
In addition, we recognized full-quarter revenue for Provide and FUN in 2007.
These increases were partially offset by a $24 million decrease for
TruePosition. In November 2006, TruePosition signed an amendment to its existing
services contract with Cingular Wireless that requires TruePosition to develop
and deliver additional software features. Because vendor specific objective
evidence related to the value of these additional features does not exist,
TruePosition is required to defer revenue recognition until all of the features
have been delivered. TruePosition estimates that
I-30
<Page>
these features will be delivered in the first quarter of 2008. Accordingly,
absent any further contractual changes, TruePosition will not recognize any
revenue under this contract until 2008. See Management's Discussion and Analysis
for the Interactive Group and for the Capital Group below for a more complete
discussion of QVC's and Starz Entertainment's results of operations.
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative expenses
(excluding stock-based compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures to evaluate our businesses and make decisions about allocating
resources among our businesses. We believe this measure is an important
indicator of the operational strength and performance of our businesses,
including each business's ability to service debt and fund capital expenditures.
In addition, this measure allows us to view operating results, perform
analytical comparisons and benchmarking between businesses and identify
strategies to improve performance. This measure of performance excludes such
costs as depreciation and amortization, stock-based compensation, separately
reported litigation settlements and impairments of long-lived assets that are
included in the measurement of operating income pursuant to generally accepted
accounting principles. Accordingly, Operating Cash Flow should be considered in
addition to, but not as a substitute for, operating income, net earnings, cash
flow provided by operating activities and other measures of financial
performance prepared in accordance with GAAP. See note 15 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 $27 million or 6.8% during the
three months ended March 31, 2007, as compared to the corresponding prior year
period. This increase is due primarily to a $32 million or 78.0% increase in
Starz Entertainment's operating cash flow and a $19 million or 5.4% increase in
QVC's operating cash flow. These increases were partially offset by an
$18 million decrease in operating cash flow for TruePosition due to the
reduction in revenue noted above.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights for shares of our common
stock that are granted to certain of our officers and employees, (2) phantom
stock appreciation rights ("PSARs") granted to officers and employees of certain
of our subsidiaries pursuant to private equity plans and (3) amortization of
restricted stock grants.
Effective January 1, 2006, we adopted Statement 123R. Statement 123R
requires that we amortize the grant date fair value of our stock option and SAR
Awards that qualify as equity awards as stock compensation expense over the
vesting period of such Awards. Statement 123R also requires that we record our
liability awards at fair value each reporting period and that the change in fair
value be reflected as stock compensation expense in our condensed consolidated
statements of operations.
In connection with our adoption of Statement 123R, we recorded an
$89 million transition adjustment, net of related income taxes. The transition
adjustment is reflected in the accompanying condensed consolidated statement of
operations as the cumulative effect of accounting change. We recorded
$22 million of stock compensation expense for the three months ended March 31,
2007, compared with $30 million for the comparable period in 2006. As of
March 31, 2007, the total compensation cost related to our unvested equity
awards was approximately $76 million. Such amount will be recognized in our
consolidated statements of operations over a weighted average period of
approximately 2.1 years.
OPERATING INCOME. Consolidated operating income increased $25 million or
11.2% for the three months ended March 31, 2007, as compared to the
corresponding prior year period. This increase is the net effect of an increase
in operating income for Starz Entertainment and QVC, partially offset by
operating losses generated by Starz Media and TruePosition.
I-31
<Page>
OTHER INCOME AND EXPENSE
Components of Other Income (Expense) are as follows:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Interest expense
Interactive Group......................................... $(114) (93)
Capital Group............................................. (36) (55)
----- ----
Consolidated Liberty.................................... $(150) (148)
===== ====
Dividend and interest income
Interactive Group......................................... $ 11 9
Capital Group............................................. 64 47
----- ----
Consolidated Liberty.................................... $ 75 56
===== ====
Share of earnings (losses) of affiliates
Interactive Group......................................... $ 15 4
Capital Group............................................. (6) 4
----- ----
Consolidated Liberty.................................... $ 9 8
===== ====
Realized and unrealized gains (losses) on financial
instruments, net
Interactive Group......................................... $ 2 20
Capital Group............................................. 342 (213)
----- ----
Consolidated Liberty.................................... $ 344 (193)
===== ====
Gains on dispositions, net
Interactive Group......................................... $ -- --
Capital Group............................................. 6 24
----- ----
Consolidated Liberty.................................... $ 6 24
===== ====
Other, net
Interactive Group......................................... $ -- 1
Capital Group............................................. -- 3
----- ----
Consolidated Liberty.................................... $ -- 4
===== ====
</Table>
INTEREST EXPENSE. Consolidated interest expense was comparable for the
three months ended March 31, 2007 and 2006. However, interest expense
attributable to the Interactive Group increased $21 million for the three-month
period due to increased borrowings on the QVC credit facilities. Interest
expense attributable to the Capital Group decreased $19 million in 2007 due to
our adoption of Statement 155 and the resulting change in accounting for our
senior exchangeable debentures. Our 2006 interest expense included $23 million
of accretion related to our exchangeable debentures. See note 11 to the
accompanying condensed consolidated financial statements.
DIVIDEND AND INTEREST INCOME. Interest income for the Capital Group
increased in 2007 due to higher invested cash balances. Interest and dividend
income attributable to the Capital Group for the three months ended March 31,
2007 was comprised of interest income earned on invested cash ($27 million),
dividends on News Corp. common stock ($29 million), dividends on other AFS
securities ($6 million), and other ($2 million).
I-32
<Page>
SHARE OF EARNINGS OF AFFILIATES. Our 2007 share of earnings (losses) of
affiliates are $15 million for the Interactive Group and ($6) million for the
Capital Group. In December 2006, we announced that we had entered into an
exchange agreement with News Corporation pursuant to which, if completed, we
would exchange our approximate 16% ownership interest in News Corporation for a
subsidiary of News Corporation, which would own News Corporation's approximate
38% interest in The DIRECTV Group, Inc., three regional sports television
networks and approximately $588 million in cash. Consummation of the exchange,
which is subject to various closing conditions, including regulatory approval
and receipt of a favorable ruling from the IRS that the exchange is tax free, is
expected in mid-2007. Upon consummation, if completed, we will account for our
interest in The DIRECTV Group using the equity method of accounting, which could
result in a significant increase in our share of earnings of affiliates in
future periods. In this regard, The DIRECTV Group reported net income for the
year ended December 31, 2006 of $1,420 million.
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of changes
in the fair value of the following:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Senior exchangeable debentures.............................. $170 --
Equity collars.............................................. 64 (157)
Borrowed shares............................................. 161 (37)
Exchangeable debenture call option obligations.............. -- (17)
Other derivatives........................................... (51) 18
---- ----
$344 (193)
==== ====
</Table>
INCOME TAXES. Our effective tax rate was 38.2% for three months ended
March 31, 2007. Such rate is greater than the U.S. federal income tax rate of
35% due primarily to state tax expense.
NET EARNINGS. Our net earnings (loss) was $369 million and ($26) million
for three months ended March 31, 2007 and 2006, respectively. Such change is due
to the aforementioned fluctuations in revenue and expenses. In addition, we
recognized $42 million and ($6) million of earnings (loss) from discontinued
operations in 2007 and 2006, respectively. The 2007 earnings from discontinued
operations include a pre-tax gain of $65 million from the disposition of OpenTV.
In 2006, we also recognized a transition adjustment of $89 million related to
the adoption of Statement 123R.
MATERIAL CHANGES IN FINANCIAL CONDITION
While the Interactive Group and the Capital Group are not separate legal
entities and the assets and liabilities attributed to each group remain assets
and liabilities of our consolidated company, we manage the liquidity and
financial resources of each group separately. Keeping in mind that assets
attributed to one group may be used to satisfy liabilities attributed to the
other group, the following discussion assumes that future liquidity needs of
each group will be funded by the financial resources attributed to each
respective group.
The following are potential sources of liquidity for each group to the
extent the identified asset or transaction has been attributed to such group:
available cash balances, cash generated by the operating activities of our
privately-owned subsidiaries (to the extent such cash exceeds the working
capital needs of the subsidiaries and is not otherwise restricted), proceeds
from asset sales, monetization of our
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public investment portfolio (including derivatives), debt and equity issuances,
and dividend and interest receipts.
INTERACTIVE GROUP. During the three months ended March 31, 2007, the
Interactive Group's primary uses of cash were debt repayments ($178 million),
capital expenditures ($82 million), tax payments to the Capital Group
($68 million) and the repurchase of outstanding Liberty Interactive common
stock. In connection with the issuance of our tracking stocks, our board of
directors authorized a share repurchase program pursuant to which we could
repurchase up to $1 billion of outstanding shares of Liberty Interactive common
stock in the open market or in privately negotiated transactions, from time to
time, subject to market conditions. In the fourth quarter of 2006, our board of
directors authorized us to repurchase up to an additional $1 billion of
outstanding shares of Liberty Interactive common stock. During the three months
ended March 31, 2007, we repurchased 1.5 million shares of Liberty Interactive
Series A common stock for aggregate cash consideration of $34.4 million pursuant
to this share repurchase program. We may alter or terminate the stock repurchase
program at any time.
The Interactive Group's uses of cash in 2007 were primarily funded with cash
from operations and borrowings under the QVC credit facilities. As of March 31,
2007, the Interactive Group had a cash balance of $885 million.
The projected uses of Interactive Group cash for the remainder of 2007
include approximately $310 million for interest payments on QVC debt and parent
debt attributed to the Interactive Group, $270 million for capital expenditures,
additional tax payments to the Capital Group and additional repurchases of
Liberty Interactive common stock. In addition, we may make additional
investments in existing or new businesses and attribute such investments to the
Interactive Group. However, we do not have any commitments to make new
investments at this time.
As of March 31, 2007, the aggregate commitments under QVC's credit
agreements were $5.25 billion, and outstanding borrowings were $3.175 billion.
QVC's ability to borrow the unused capacity is dependent on its continuing
compliance with the covenants contained in the agreements at the time of, and
after giving effect to, a requested borrowing.
CAPITAL GROUP. During the three months ended March 31, 2007, the Capital
Group's primary uses of cash were debt repayments ($151 million) and loans to
WildBlue Communications, an equity affiliate ($39 million). These investing
activities were funded with available cash on hand and proceeds from derivative
settlements and asset sales.
In connection with the issuance of our tracking stocks, our board of
directors authorized a share repurchase program pursuant to which we may
repurchase up to $1 billion of outstanding shares of Liberty Capital Stock in
the open market or in privately negotiated transactions, from time to time,
subject to market conditions.
In order to implement our share repurchase program for Liberty Capital
common stock, we commenced a tender offer on March 7, 2007 that we subsequently
amended on March 20, 2007. Pursuant to the tender offer, as amended, we sought
to purchase up to 8,849,500 shares of Liberty Capital Series A common stock at a
price not greater than $113.00 or less than $105.00 per share. The tender offer
expired on April 5, 2007, and 11,858,343 shares of Liberty Capital Series A
common stock were properly tendered. We exercised our right to purchase an
additional 2% of our outstanding Liberty Capital Series A common stock and
accepted for purchase 11,540,680 shares at a price of $113.00 per share or
aggregate cash consideration of $1,304 million. We funded the cash consideration
with available cash on hand.
The projected uses of Capital Group cash for the remainder of 2007 include
payments for the tender offer described in the preceding paragraph and
approximately $90 million for interest payments on debt attributed to the
Capital Group. In addition, we may make additional investments in existing
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or new businesses and attribute such investments to the Capital Group. However,
we do not have any commitments to make new investments at this time.
We expect that the Capital Group's investing and financing activities will
be funded with a combination of cash on hand, cash proceeds from the sale of
AEG, cash proceeds from our exchange transactions with CBS Corporation and News
Corporation, cash provided by operating activities, tax payments from the
Interactive Group, proceeds from collar expirations and dispositions of
non-strategic assets. At March 31, 2007, the Capital Group's sources of
liquidity include $2,384 million in cash and marketable debt securities and
$6,985 million of non-strategic AFS securities including related derivatives. To
the extent the Capital Group recognizes any taxable gains from the sale of
assets or the expiration of derivative instruments, we may incur current tax
expense and be required to make tax payments, thereby reducing any cash proceeds
attributable to the Capital Group.
Our derivatives related to certain of our AFS investments provide the
Capital Group with an additional source of liquidity. Based on the put price and
assuming we deliver owned or borrowed shares to settle each of the AFS
Derivatives and excluding any provision for income taxes, the Capital Group
would have attributed to it cash proceeds of approximately $245 million in 2007,
zero in 2008, $1,181 million in 2009, $1,677 million in 2010, $446 million in
2011 and $866 million in 2013 upon settlement of its AFS Derivatives.
Prior to the maturity of the equity collars, the terms of certain of these
instruments allow borrowings against the future put option proceeds at LIBOR or
LIBOR plus an applicable spread, as the case may be. As of March 31, 2007, such
borrowing capacity aggregated approximately $4,415 million. Such borrowings
would reduce the cash proceeds upon settlement noted in the preceding paragraph.
In the event we complete our exchange transaction with News Corporation as
currently contemplated, such borrowing capacity would be reduced by
$916 million.
Subsequent to March 31, 2007, we secured $750 million of bank financing with
an interest rate of LIBOR plus 5bp. We intend to invest such proceeds in a
portfolio of selected debt and mezzanine-level instruments of companies in the
telecommunications, media and technology sectors that we believe have favorable
risk/return profiles. Although no assurance can be given, we expect to make such
investments over the next 18-24 months.
See note 14 to the accompanying condensed consolidated financial statements
for a discussion of our commitments and contingencies.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "FAIR VALUE MEASUREMENTS,"which defines fair value,
establishes a framework for measuring fair value under GAAP and expands
disclosures about fair value measurements. Statement 157 applies to other
accounting pronouncements that require or permit fair value measurements. The
new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those fiscal
years. We are currently evaluating the potential impact of the adoption of
Statement 157 on our financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115". Statement 159
permits entities to choose to measure many financial instruments, such as
available-for-sale securities, and certain other items at fair value and to
recognize the changes in fair value of such instruments in the entity's
statement of operations. Currently under Statement of Financial Accounting
Standards No. 115, entities are required to recognize changes in fair value of
available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15,
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2007. We are currently evaluating the potential impacts of Statement 159 on our
financial statements and have not made a determination as to which of our
financial instruments, if any, we will choose to apply the provisions of
Statement 159.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of business due to our
ongoing investing and financing activities and our subsidiaries in different
foreign countries. Market risk refers to the risk of loss arising from adverse
changes in stock prices, interest rates and foreign currency exchange rates. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. We have established policies, procedures
and internal processes governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by maintaining what
we believe is an appropriate mix of fixed and variable rate debt. We believe
this best protects us from interest rate risk. We have achieved this mix by
(i) issuing fixed-rate debt that we believe has a low stated interest rate and
significant term to maturity and (ii) issuing variable rate debt with
appropriate maturities and interest rates. As of March 31, 2007, the face amount
of the Interactive Group's fixed rate debt (considering the effects of interest
rate swap agreements) was $5,372 million, which had a weighted average interest
rate of 6.4%. The Interactive Group's variable rate debt of $979 million had a
weighted average interest rate of 7.7% at March 31, 2007. As of March 31, 2007,
the face amount of the Capital Group's fixed rate debt was $4,486 million, which
had a weighted average interest rate of 2.5%.
Each of the Interactive Group and the Capital Group are exposed to changes
in stock prices primarily as a result of our significant holdings in publicly
traded securities. We continually monitor changes in stock markets, in general,
and changes in the stock prices of our holdings, specifically. We believe that
changes in stock prices can be expected to vary as a result of general market
conditions, technological changes, specific industry changes and other factors.
We use equity collars, written put and call options and other financial
instruments to manage market risk associated with certain investment positions.
These instruments are recorded at fair value based on option pricing models.
Among other factors, changes in the market prices of the securities
underlying our AFS Derivatives affect the fair market value of such AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying our equity collars that have been
attributed to the Capital Group would have on the fair market value of such
derivatives. Such changes 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
COLLARS OTHER TOTAL
-------- -------- --------
AMOUNTS IN MILLIONS
Fair value at March 31, 2007.......................... $ 789 174 963
5% increase in market prices.......................... $ 655 199 854
10% increase in market prices......................... $ 519 224 743
5% decrease in market prices.......................... $ 918 150 1,068
10% decrease in market prices......................... $1,045 125 1,170
</Table>
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At March 31, 2007, the fair value of our AFS securities attributed to the
Interactive Group was $2,610 million and the fair value of our AFS securities
attributed to the Capital Group was $19,593 million. Had the market price of
such securities been 10% lower at March 31, 2007, the aggregate value of such
securities would have been $261 million and $1,959 million lower, respectively,
resulting in a decrease to unrealized holding gains in other comprehensive
earnings (loss). The decrease attributable to the Capital Group would be
partially offset by an increase in the value of our AFS Derivatives as noted in
the table above.
From time to time and in connection with certain of our AFS Derivatives, we
borrow shares of the underlying securities from a counterparty and deliver these
borrowed shares in settlement of maturing derivative positions. In these
transactions, a similar number of shares that we have attributed to the Capital
Group have been posted as collateral with the counterparty. These share
borrowing arrangements can be terminated at any time at our option by delivering
shares to the counterparty. The counterparty can terminate these arrangements at
any time. The liability under these share borrowing arrangements is marked to
market each reporting period with changes in value recorded in unrealized gains
or losses in the Capital Group's attributed statement of operations. The shares
posted as collateral under these arrangements continue to be treated as AFS
securities and are marked to market each reporting period with changes in value
recorded as unrealized gains or losses in other comprehensive earnings.
The Interactive Group is exposed to foreign exchange rate fluctuations
related primarily to the monetary assets and liabilities and the financial
results of QVC's foreign subsidiaries. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated into U.S. dollars at period-end exchange rates and the statements of
operations are generally translated at the average exchange rate for the period.
Exchange rate fluctuations on translating foreign currency financial statements
into U.S. dollars that result in unrealized gains or losses are referred to as
translation adjustments. Cumulative translation adjustments are recorded in
other comprehensive earnings (loss) as a separate component of stockholders'
equity. Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses, which are reflected in income as unrealized (based on period-end
translations) or realized upon settlement of the transactions. Cash flows from
our operations in foreign countries are generally translated at the average rate
for the period. Accordingly, the Interactive Group may experience economic loss
and a negative impact on earnings and equity with respect to our holdings solely
as a result of foreign currency exchange rate fluctuations.
We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. We believe that
any losses incurred with regard to interest rate swaps would be offset by the
effects of interest rate movements on 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
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settlement of the derivative instrument. To protect ourselves against credit
risk associated with these counterparties we generally:
- execute our derivative instruments with several different counterparties,
and
- execute equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for our benefit, if
the respective counterparty's credit rating for its senior unsecured debt
were to reach certain levels, generally a rating that is below Standard &
Poor's rating of A- and/or Moody's rating of A3.
Due to the importance of these derivative instruments to our risk management
strategy, we actively monitor the creditworthiness of each of these
counterparties. Based on our analysis, we currently consider nonperformance by
any of our counterparties to be unlikely.
INTERACTIVE GROUP
The Interactive Group consists of our subsidiaries QVC, Provide and
BuySeasons, our interests in IAC/InterActiveCorp, Expedia and GSI
Commerce, Inc. and $3,108 million principal amount (as of March 31, 2007) of our
existing publicly-traded debt.
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Interactive Group. Although
our restructuring was not completed until May 9, 2006, the following discussion
is presented as though the restructuring had been completed on January 1, 2006.
The results of operations of Provide and BuySeasons are included in Corporate
and Other since their respective date of acquisition in the tables below.
Fluctuations in Corporate and Other from 2006 to 2007 are due primarily to the
acquisitions of Provide in February 2006 and BuySeasons in August 2006. This
discussion should be read in conjunction with (1) our condensed consolidated
financial statements and notes thereto included elsewhere in this Quarterly
Report on Form 10-Q and (2) the Attributed Financial Information for Tracking
Stock Groups filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
REVENUE
QVC....................................................... $1,684 1,555
Corporate and Other....................................... 87 53
------ -----
$1,771 1,608
====== =====
OPERATING CASH FLOW
QVC....................................................... $ 374 355
Corporate and Other....................................... 8 10
------ -----
$ 382 365
====== =====
OPERATING INCOME
QVC....................................................... $ 243 212
Corporate and Other....................................... 1 6
------ -----
$ 244 218
====== =====
</Table>
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QVC. QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs
and via the Internet. In the United States, the program is aired live through
its nationally televised shopping network--24 hours a day, 7 days a week
("QVC-US"). Internationally, QVC has electronic retailing program services based
in the United Kingdom ("QVC-UK"), Germany ("QVC-Germany") and Japan
("QVC-Japan"). QVC-UK broadcasts 24 hours a day with 17 hours of live
programming, and QVC-Germany and QVC-Japan each broadcast live 24 hours a day.
QVC's operating results are as follows:
<Table>
<Caption>
THREE MONTHS
ENDED MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Net revenue................................................. $ 1,684 1,555
Cost of sales............................................... (1,060) (971)
------- -----
Gross profit.............................................. 624 584
Operating expenses.......................................... (141) (131)
SG&A expenses (excluding stock-based compensation).......... (109) (98)
------- -----
Operating cash flow....................................... 374 355
Stock-based compensation--SG&A.............................. (11) (25)
Depreciation and amortization............................... (120) (118)
------- -----
Operating income.......................................... $ 243 212
======= =====
</Table>
Net revenue is generated in the following geographic areas:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
QVC-US...................................................... $1,174 1,088
QVC-UK...................................................... 152 134
QVC-Germany................................................. 215 195
QVC-Japan................................................... 143 138
------ -----
$1,684 1,555
====== =====
</Table>
QVC's consolidated net revenue increased 8.3% during the three months ended
March 31, 2007, as compared to the corresponding prior year period. The increase
in revenue is comprised of a $76 million increase due to a 4.6% increase in the
number of units shipped from 37.2 million to 38.9 million, a $22 million
increase due to a 1.1% increase in the average sales price per unit ("ASP") and
a $30 million increase due to favorable foreign currency rates as the U.S.
dollar weakened against the UK pound sterling and the euro. In addition, returns
as a percent of gross product revenue decreased from 19.3% for the three months
ended March 31, 2006 to 19.0% in 2007 due to a shift in the sales mix from
jewelry products to accessory products, which typically have lower return rates.
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The number of homes receiving QVC's services are as follows:
<Table>
<Caption>
HOMES (IN MILLIONS)
------------------------
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
QVC-US................................................ 91.2 90.7
QVC-UK................................................ 20.2 19.4
QVC-Germany........................................... 37.6 37.5
QVC-Japan............................................. 19.6 18.7
</Table>
The QVC service is already received by substantially all of the cable
television and direct broadcast satellite homes in the U.S. and Germany. In
addition, the rate of growth in households is expected to diminish in the UK and
Japan. As these markets continue to mature, QVC also expects its consolidated
rate of growth in revenue to diminish. Future sales growth will primarily depend
on continued additions of new customers from homes already receiving the QVC
service and continued growth in sales to existing customers. QVC's future sales
may also be affected by (i) the willingness of cable and satellite distributors
to continue carrying QVC's programming service, (ii) QVC's ability to maintain
favorable channel positioning, which may become more difficult as distributors
convert analog customers to digital, (iii) changes in television viewing habits
because of personal video recorders, video-on-demand and IP television and
(iv) general economic conditions.
As noted above, during the three months ended March 31, 2007, the changes in
revenue and expenses were also impacted by fluctuations in the exchange rates
for the UK pound sterling, the euro and the Japanese yen. In the event the U.S.
dollar strengthens against these foreign currencies in the future, QVC's
reported revenue and operating cash flow will be negatively impacted. The
percentage increase in revenue for each of QVC's geographic areas in U.S.
dollars and in local currency is as follows:
<Table>
<Caption>
PERCENTAGE INCREASE
IN NET REVENUE
-----------------------------
THREE MONTHS ENDED
MARCH 31, 2007
-----------------------------
U.S. DOLLARS LOCAL CURRENCY
------------ --------------
QVC-US.............................................. 7.9% 7.9%
QVC-UK.............................................. 13.4% 1.4%
QVC-Germany......................................... 10.3% 1.5%
QVC-Japan........................................... 3.6% 5.7%
</Table>
QVC's gross profit percentage decreased from 37.6% to 37.1% during the three
months ended March 31, 2007, as compared to the corresponding prior year period.
The decrease is due primarily to a higher inventory obsolescence provision in
2007 in all countries and lower product margins in Germany.
QVC's operating expenses are principally comprised of commissions, order
processing and customer service expenses, provision for doubtful accounts,
telecommunications expense and credit card processing fees. Operating expenses
increased 7.6% for the three months ended March 31, 2007, as compared to the
corresponding prior year period. This increase is primarily due to the increase
in sales volume. As a percentage of net revenue, operating expenses remained
consistent at 8.4% for the three months ended March 31, 2007 and 2006.
QVC's SG&A expenses include personnel, information technology, marketing and
advertising expenses. Such expenses increased 11.2% for the three months ended
March 31, 2007, as compared to the corresponding prior year period. Such
increase is due primarily to (i) a $6 million increase in
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personnel expenses due to merit increases and headcount increases and (ii) a
$5 million accrual for a legal settlement.
QVC's operating cash flow increased 5.4% for the three months ended
March 31, 2007, as compared to the corresponding prior year period. Such
percentage increase in operating cash flow was less than the percentage increase
in revenue primarily due to the decrease in gross profit percentage discussed
above, as well as the $5 million accrual for a legal settlement included in SG&A
expenses.
CAPITAL GROUP
The Capital Group is comprised of our subsidiaries and assets not attributed
to the Interactive Group, including controlling interests in Starz
Entertainment, Starz Media, TruePosition and FUN, as well as minority
investments in GSN, LLC, WildBlue Communications, News Corporation, Time
Warner Inc., Sprint Nextel Corporation and other public and private companies
and $4,482 million principal amount (as of March 31, 2007) of our existing
publicly-traded debt.
We acquired Starz Media from IDT Corporation in the third quarter of 2006.
Starz Media's operations include animated feature film production, proprietary
live action and animated series production, contracted 2D animation production
and DVD distribution.
The following discussion and analysis provides information concerning the
attributed results of operations and financial condition of the Capital Group.
Although our restructuring was not completed until May 9, 2006, the following
discussion is presented as though the restructuring had been completed on
January 1, 2006. This discussion should be read in conjunction with (1) our
condensed consolidated financial statements and notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and (2) the Attributed Financial
Information for Tracking Stock Groups filed as Exhibit 99.1 to this Quarterly
Report on Form 10-Q.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
<Table>
<Caption>
THREE
MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
REVENUE
Starz Entertainment....................................... $265 259
Corporate and Other....................................... 87 34
---- ---
$352 293
==== ===
OPERATING CASH FLOW (DEFICIT)
Starz Entertainment....................................... $ 73 41
Corporate and Other....................................... (33) (11)
---- ---
$ 40 30
==== ===
OPERATING INCOME (LOSS)
Starz Entertainment....................................... $ 60 33
Corporate and Other....................................... (55) (27)
---- ---
$ 5 6
==== ===
</Table>
REVENUE. The Capital Group's combined revenue increased $59 million or
20.1% for the three months ended March 31, 2007, as compared to the
corresponding prior year period. In addition to the
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increase for Starz Entertainment, Starz Media, which we acquired in
August 2006, generated $61 million and FUN increased $12 million. These
increases were partially offset by a $24 million decrease for TruePosition. In
November 2006, TruePosition signed an amendment to its existing services
contract with Cingular Wireless that requires TruePosition to develop and
deliver additional software features. Because vendor specific objective evidence
related to the value of these additional features does not exist, TruePosition
is required to defer revenue recognition until all of the features have been
delivered. TruePosition estimates that these features will be delivered in the
first quarter of 2008. Accordingly, absent any further contractual changes,
TruePosition will not recognize any revenue under this contract until 2008.
OPERATING CASH FLOW. The Capital Group's Operating Cash Flow increased
$10 million or 33.3% during the three months ended March 31, 2007, as compared
to the corresponding prior year period. This increase is due primarily to Starz
Entertainment partially offset by an $18 million decrease at TruePosition and an
operating cash flow deficit generated by Starz Media of $10 million.
OPERATING INCOME. The Capital Group's operating income decreased
$1 million for the three months ended March 31, 2007, as compared to the
corresponding prior year period. The improvement in operating income for Starz
Entertainment was more than offset by operating losses for TruePosition and
Starz Media.
STARZ ENTERTAINMENT. Historically, Starz Entertainment has provided premium
programming distributed by cable operators, direct-to-home satellite providers
and other distributors throughout the United States. In addition, Starz
Entertainment has launched Vongo, a subscription Internet service which is
comprised of Starz and other movie and entertainment content. Vongo also offers
content on a pay-per-view basis. Substantially all of Starz Entertainment's
revenue continues to be derived from the delivery of movies to subscribers under
affiliation agreements with television video programming distributors. Some of
Starz Entertainment's affiliation agreements provide for payments to Starz
Entertainment based on the number of subscribers that receive Starz
Entertainment's services. Starz Entertainment also has fixed-rate affiliation
agreements with certain of its customers. Pursuant to these agreements, the
customers generally pay an agreed-upon rate regardless of the number of
subscribers. The agreed-upon rate is contractually increased annually or
semi-annually as the case may be, and these agreements expire in 2007 through
2012. During the three months ended March 31, 2007, 70.3% of Starz
Entertainment's revenue was generated by its four largest customers, Comcast,
Echostar Communications, DirecTV and Time Warner, each of which individually
generated more than 10% Starz Entertainment's revenue for such period. Starz
Entertainment's affiliation agreement with DirecTV expired June 30, 2006. In
addition, the affiliation agreement with Time Warner, which originally expired
on December 31, 2006, has been extended through June 30, 2007. Starz
Entertainment is currently in negotiations with DirecTV and Time Warner
regarding new agreements. There can be no assurance that any new agreements with
DirecTV or Time Warner will have economic terms comparable to the old
agreements.
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Starz Entertainment's operating results are as follows:
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS IN
MILLIONS
Revenue..................................................... $265 259
Operating expenses.......................................... (167) (189)
SG&A expenses............................................... (25) (29)
---- ----
Operating cash flow....................................... 73 41
Stock-based compensation.................................... (7) --
Depreciation and amortization............................... (6) (8)
---- ----
Operating income.......................................... $ 60 33
==== ====
</Table>
Starz Entertainment's revenue increased $6 million or 2.3% for the three
months ended March 31, 2007, as compared to the corresponding prior year period.
The increase is due to a $16 million increase resulting from growth in the
average number of subscription units for Starz Entertainment's services
partially offset by a $10 million decrease due to a decrease in the effective
rate for Starz Entertainment's services.
Starz Entertainment's Starz movie service and its Encore movie service are
the primary drivers of Starz Entertainment's revenue. Starz average
subscriptions increased 9.1% for the three months ended March 31, 2007, and
Encore average subscriptions increased 6.4%. The effects of these increases in
subscription units are somewhat mitigated by Starz Entertainment's fixed-rate
affiliation agreements. In this regard, approximately 38% of Starz
Entertainment's revenue was earned under its fixed-rate affiliation agreements
during the three months ended March 31, 2007.
At March 31, 2007, cable, DTH satellite, and other distribution media
represented 66.5%, 32.0% and 1.5%, respectively, of Starz Entertainment's total
subscription units.
Starz Entertainment's operating expenses decreased 11.6% for the three
months ended March 31, 2007, due primarily to a reduction in programming costs,
which decreased from $179 million for the three months ended March 31, 2006 to
$157 million in 2007. The decrease in programming costs is due primarily to a
lower effective rate for the movie titles exhibited in 2007. Such decrease was
partially offset by an increase in programming costs due to a higher percentage
of first-run movie exhibitions (which have a relatively higher cost per title)
as compared to the number of library product exhibitions.
Starz Entertainment expects that its full-year programming costs in 2007
will be 6%-9% lower than the 2006 costs due to Starz Entertainment receiving
fewer first-run titles under certain of its output arrangements in 2007 and a
lower effective rate for certain titles. This estimate is subject to a number of
assumptions that could change depending on the number and timing of movie titles
actually becoming available to Starz Entertainment and their ultimate box office
performance. Accordingly, the actual amount of costs experienced by Starz
Entertainment may differ from the amounts noted above.
Starz Entertainment's SG&A expenses decreased 13.8% for the three months
ended March 31, 2007, as compared to the corresponding prior year period. The
three-month decrease is due primarily to lower sales and marketing expenses of
$3 million due to fewer national marketing campaigns and lower marketing support
payments in 2007. To a certain extent, the timing of such campaigns and support
payments are determined by Starz Entertainment's affiliates, and Starz
Entertainment currently expects its full year 2007 sales and marketing expenses
to approximate those of 2006.
I-43
<Page>
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, 2007 to
provide reasonable assurance that information required to be disclosed in its
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
There has been no change in the Company's internal controls over financial
reporting identified in connection with the evaluation described above that
occurred during the three months ended March 31, 2007 that has materially
affected, or is reasonably likely to materially affect, its internal controls
over financial reporting.
I-44
<Page>
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 1, 2007. Except
as described below, there have been no material developments in such legal
proceedings during the three months ended March 31, 2007.
KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND
ROBERT R. BENNETT. In March 2005, the United States District Court for the
District of Colorado entered a judgment in our favor and in favor of
Messrs. Malone and Bennett with respect to the plaintiff's claims for damages
arising from a failed attempt to acquire six regional cable television companies
in Germany. In April 2007, the United States Court of Appeals for the Tenth
Circuit affirmed the judgment entered by the trial court. We have not been
notified as to whether the plaintiff will appeal that decision.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(a) N/A
(b) N/A
(c) Purchases of Equity Securities by the Issuer
<Table>
<Caption>
LIBERTY INTERACTIVE SERIES A COMMON STOCK
-------------------------------------------------------------------------------------
(D) MAXIMUM NUMBER
(OR APPROXIMATE DOLLAR
(C) TOTAL NUMBER OF VALUE) OF SHARES THAT
(A) TOTAL NUMBER (B) AVERAGE SHARES PURCHASED AS PART MAY YET BE PURCHASED
OF SHARES PRICE PAID PER OF PUBLICLY ANNOUNCED UNDER THE PLANS OR
PERIOD PURCHASED SHARE PLANS OR PROGRAMS PROGRAMS
- ------ ---------------- -------------- ------------------------ ----------------------
January 2007............. 725,217 $22.60 725,217 $1,030.8 million
February 2007............ 504,100 $23.91 504,100 $1,018.7 million
March 2007............... 251,800 $23.62 251,800 $1,012.7 million
--------- ---------
Total.................... 1,481,117 1,481,117
========= =========
</Table>
Liberty's program to repurchase shares of Liberty Interactive common stock
was approved by its board of directors and disclosed in its 2006 Annual Proxy
dated April 7, 2006. In November 2006, Liberty's board of directors increased
the aggregate amount of Liberty Interactive common stock that can be repurchased
from $1 billion to $2 billion. Liberty may alter or terminate the program at any
time.
In addition to the shares listed in the table above, 399 shares of Liberty
Capital Series A common stock and 726 shares of Liberty Interactive Series A
common stock were surrendered in March 2007 by certain of our officers to pay
withholding for vested restricted stock.
II-1
<Page>
ITEM 6. EXHIBITS
(a) Exhibits
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
<Table>
10.1 Letter Agreement regarding personal use of Liberty's
aircraft, dated as of April 2, 2007, between Gregory B.
Maffei and Liberty.*
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
99.1 Attributed Financial Information for Tracking Stock Groups*
</Table>
- ------------------------
* Filed herewith
II-2
<Page>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<Table>
LIBERTY MEDIA CORPORATION
Date: May 8, 2007 By: /s/ GREGORY B. MAFFEI
-------------------------------------------
Gregory B. Maffei
President and Chief Executive Officer
Date: May 8, 2007 By: /s/ DAVID J.A. FLOWERS
-------------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: May 8, 2007 By: /s/ CHRISTOPHER W. SHEAN
-------------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)
</Table>
II-3
<Page>
EXHIBIT INDEX
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
<Table>
10.1 Letter Agreement regarding personal use of Liberty's
aircraft, dated as of April 2, 2007, between Gregory B.
Maffei and Liberty.*
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
99.1 Attributed Financial Information for Tracking Stock Groups*
</Table>
- ------------------------
* Filed herewith