<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 000-16615
LIBERTY MEDIA LLC
(Exact name of Registrant as specified in its charter)
<Table>
STATE OF DELAWARE 20-5272297
(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 / / Accelerated filer / / Non-accelerated filer
/X/
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 Registrant meets the conditions set forth in General Instruction
H(1)(a) and (b) of Form 10-Q, and is therefore filing this form with the reduced
disclosure format.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
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 8)............................ 293 239
Other current assets...................................... 121 233
Assets of discontinued operations (note 5)................ 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 6).................................................. 22,237 21,622
Long-term financial instruments (note 8).................... 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 7)......................................... 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 LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(UNAUDITED)
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2007 2006
---------- -------------
AMOUNTS IN MILLIONS
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Accounts payable.......................................... $ 475 508
Accrued interest.......................................... 90 214
Other accrued liabilities................................. 913 1,035
Financial instruments (note 8)............................ 1,322 1,484
Current portion of debt (note 9).......................... 179 114
Other current liabilities................................. 78 113
Liabilities of discontinued operations (note 5)........... 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 9)......................... 10,325 8,909
Long-term financial instruments (note 8).................... 384 1,706
Deferred income tax liabilities............................. 9,814 9,671
Other liabilities........................................... 1,382 1,870
-------- -------
Total liabilities....................................... 25,005 25,725
-------- -------
Minority interests in equity of subsidiaries................ 139 290
Member's equity:
Member's equity........................................... 29,083 29,072
Note receivable from parent (note 11)..................... (1,017) (979)
Accumulated other comprehensive earnings, net............. 6,234 5,952
Accumulated deficit....................................... (11,821) (12,422)
-------- -------
Total member's equity................................... 22,479 21,623
-------- -------
Commitments and contingencies (note 12)
Total liabilities and member's equity................... $ 47,623 47,638
======== =======
</Table>
See accompanying notes to condensed consolidated financial statements.
I-2
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS
IN MILLIONS
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 3)................................... 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--third party................. 75 56
Interest income--parent (note 11)......................... 16 --
Share of earnings of affiliates, net...................... 9 8
Realized and unrealized gains (losses) on financial
instruments, net (note 8)............................... 344 (193)
Gains on dispositions of assets, net...................... 6 24
Other, net................................................ -- 4
------ -----
300 (249)
------ -----
Earnings (loss) from continuing operations before income
taxes and minority interests.......................... 549 (25)
Income tax benefit (expense)................................ (208) 100
Minority interests in earnings of subsidiaries.............. (4) (6)
------ -----
Earnings from continuing operations..................... 337 69
Earnings (loss) from discontinued operations, net of taxes
(note 5).................................................. 42 (6)
Cumulative effect of accounting change, net of taxes (note
3)........................................................ -- (89)
------ -----
Net earnings (loss)..................................... $ 379 (26)
====== =====
</Table>
See accompanying notes to condensed consolidated financial statements.
I-3
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS
(UNAUDITED)
<Table>
<Caption>
THREE
MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS
IN MILLIONS
Net earnings (loss)......................................... $379 (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...................................... $661 440
==== ===
</Table>
See accompanying notes to condensed consolidated financial statements.
I-4
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS
IN MILLIONS
(NOTE 4)
Cash flows from operating activities:
Net earnings (loss)....................................... $ 379 (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, net................................... (13) 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)................... 170 (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)
Net cash transfers to parent.............................. -- (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 subsidiary common stock.................... (22) --
Other financing activities, net........................... (31) 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 LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
CONDENSED CONSOLIDATED STATEMENT OF MEMBER'S EQUITY
(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007
<Table>
<Caption>
NOTE ACCUMULATED
RECEIVABLE OTHER TOTAL
MEMBER'S FROM COMPREHENSIVE ACCUMULATED MEMBER'S
EQUITY PARENT EARNINGS DEFICIT EQUITY
--------- ---------- ------------- ------------ ---------
AMOUNTS IN MILLIONS
Balance at January 1, 2007........................ $29,072 (979) 5,952 (12,422) 21,623
Net earnings.................................... -- -- -- 379 379
Other comprehensive earnings.................... -- -- 282 -- 282
Cumulative effects of accounting changes, net
(notes 9 and 10).............................. -- -- -- 222 222
Cash transfers to parent, net................... -- (22) -- -- (22)
Intercompany interest expense................... -- (16) -- -- (16)
Stock compensation.............................. 13 -- -- -- 13
Other........................................... (2) -- -- -- (2)
------- ------ ----- ------- ------
Balance at March 31, 2007......................... $29,083 (1,017) 6,234 (11,821) 22,479
======= ====== ===== ======= ======
</Table>
See accompanying notes to condensed consolidated financial statements.
I-6
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
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 LLC and its controlled subsidiaries (collectively,
"Liberty" or the "Company," unless the context otherwise requires). All
significant intercompany accounts and transactions have been eliminated in
consolidation. Liberty is a wholly-owned subsidiary of Liberty Media Corporation
("New Liberty").
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 adjustment 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) 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
I-7
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
fair value, establishes a framework for measuring fair value under GAAP and
expands disclosures about fair value measurements. Statement 157 applies to
other accounting pronouncements that require or permit fair value measurements.
The new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years. Liberty is currently evaluating the potential impact of the
adoption of Statement 157 on its financial statements.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115" ("Statement
159"). Statement 159 permits entities to choose to measure many financial
instruments, such as available-for-sale securities, and certain other items at
fair value and to recognize the changes in fair value of such instruments in the
entity's statement of operations. Currently under Statement of Financial
Accounting Standards No. 115, entities are required to recognize changes in fair
value of available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15, 2007. Liberty is currently
evaluating the potential impacts of Statement 159 on its financial statements
and has not made a determination as to which of its financial instruments, if
any, it will choose to apply the provisions of Statement 159.
(3) Stock-Based Compensation
Certain employees of the Company and employees of its subsidiaries hold
options, stock appreciation rights ("SARs") and options with tandem SARs
(collectively, "Awards") to purchase shares of New Liberty Capital Series A and
Series B common stock and New 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, New 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.
New Liberty 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, New Liberty calculated the
expected term of the Awards using the methodology included in SEC
I-8
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Staff Accounting Bulletin No. 107. In 2007, New Liberty 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 New
Liberty Interactive Awards and 17.5% for New Liberty Capital Awards and is based
on the historical volatility of New Liberty's stocks and the implied volatility
of publicly traded New Liberty options. New Liberty 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 New
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.
NEW LIBERTY AWARDS
During the three months ended March 31, 2007, New Liberty granted 395,953
options to purchase shares of New Liberty Capital Series A common stock and
1,993,205 options to purchase shares of New Liberty Interactive Series A common
stock to certain officers and employees of the Company and officers and
employees of certain subsidiaries. New Liberty used the Black-Scholes Model to
estimate the grant date fair value of such options. The New Liberty Capital
Series A options and the New 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 New
Liberty common stock granted to certain officers, employees and directors of the
Company.
<Table>
<Caption>
NEW NEW NEW NEW
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>
I-9
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides additional information about outstanding
options to purchase New 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>
(4) 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>
(5) 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.
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
I-10
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on April 4, 2007. Subsequent to the closing, Liberty owns approximately 9.2% of
the buyer's outstanding common stock.
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.
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>
(6) Investments in Available-for-Sale Securities and Other Cost Investments
Investments in available-for-sale securities and other cost investments are
summarized as follows:
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2007 2006
---------- -------------
AMOUNTS IN MILLIONS
News Corporation...................................... $12,106 11,158
Time Warner Inc.(1)................................... 3,376 3,728
IAC/InterActiveCorp................................... 2,610 2,572
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
------- ------
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.
I-11
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
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.
(7) 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
I-12
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets, Liberty expects that amortization expense will be as follows for the
next five years (amounts in millions):
<Table>
Remainder of 2007........................................... $348
2008........................................................ $433
2009........................................................ $390
2010........................................................ $358
2011........................................................ $351
</Table>
(8) Financial Instruments
The Company's financial instruments are summarized as follows:
<Table>
<Caption>
TYPE OF MARCH 31, DECEMBER 31,
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>
I-13
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Realized and unrealized gains (losses) on financial instruments are
comprised of changes in fair value of the following:
<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 9 regarding the accounting for the Company's senior exchangeable
debentures.
(9) 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
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
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...................................... 175 175 225
------- ------- -----
Total consolidated Liberty debt............................ $10,940 10,504 9,023
=======
Less current maturities.................................. (179) (114)
------- -----
Total long-term debt....................................... $10,325 8,909
======= =====
</Table>
I-14
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
I-15
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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.
(10) 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.
I-16
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
(11) Related Party Transactions
The Company has made interest-bearing cash advances to New Liberty. Such
advances aggregated $1,017 million as of March 31, 2007, including accrued
interest of $42 million. Interest which accrues daily at 3-month LIBOR (6.71% at
March 31, 2007), aggregated $16 million for the three months ended March 31,
2007.
On March 7, 2007, New Liberty commenced a tender offer, which was
subsequently amended on March 20, 2007, pursuant to which New Liberty sought to
purchase shares of its New Liberty Capital Series A common stock. The tender
offer expired on April 5, 2007, and New Liberty accepted for purchase 11,540,680
shares of New Liberty Capital Series A common stock for aggregate cash
consideration of $1,304 million. Liberty transferred such cash to New Liberty
subject to the aforementioned terms.
(12) 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
I-17
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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
I-18
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
liability for these types of indemnification guarantees as the sale agreements
typically do not specify a maximum amount and the amounts are dependent upon the
outcome of future contingent events, the nature and likelihood of which cannot
be determined at this time. Historically, Liberty has not made any significant
indemnification payments under such agreements and no amount has been accrued in
the accompanying condensed consolidated financial statements with respect to
these indemnification guarantees.
OPERATING LEASES
Liberty and its subsidiaries lease business offices, have entered into
satellite transponder lease agreements and use certain equipment under lease
arrangements.
LITIGATION
Liberty has contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible Liberty may incur losses upon conclusion of such matters, an
estimate of any loss or range of loss cannot be made. In the opinion of
management, it is expected that amounts, if any, which may be required to
satisfy such contingencies will not be material in relation to the accompanying
condensed consolidated financial statements.
INCOME TAXES
Since the date Liberty issued its exchangeable debentures, it has claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at 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
I-19
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Agreement, Liberty received a cash payment from AT&T in periods when Liberty
generated taxable losses and such taxable losses were utilized by AT&T to reduce
its consolidated income tax liability. To the extent such losses were not
utilized by AT&T, such amounts were available to reduce federal taxable income
generated by Liberty in future periods, similar to a net operating loss
carryforward, and were accounted for as a deferred federal income tax benefit.
Subsequent to Liberty's split off from AT&T, if adjustments are made to amounts
previously paid under the AT&T Tax Sharing Agreement, such adjustments are
reflected as adjustments to additional paid-in capital. During the period from
March 10, 1999 to December 31, 2002, Liberty received cash payments from AT&T
aggregating $670 million as payment for Liberty's taxable losses that AT&T
utilized to reduce its income tax liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with
Liberty's split off from AT&T, AT&T was required to pay Liberty an amount equal
to 35% of the amount of the net operating losses reflected in TCI's final
federal income tax return ("TCI NOLs") that had not been used as an 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
I-20
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
accrual for any future refunds, Liberty believes it is entitled to a refund when
AT&T is able to realize a benefit in the form of a credit for the AMT previously
paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by Liberty's losses. Liberty has
reviewed this claim and believes that its accrual as of December 31, 2005 is
adequate. Accordingly, no additional accrual has been made for AT&T's
March 2006 request.
Although for accounting purposes Liberty has accrued a portion of the
amounts claimed by AT&T to be owed by Liberty under the AT&T Tax Sharing
Agreement, Liberty believes there are valid defenses or set-off or similar
rights in its favor that may cause the total amount that it owes AT&T to be less
than the amounts accrued; and under certain interpretations of the AT&T Tax
Sharing Agreement, Liberty may be entitled to further reimbursements from AT&T.
(13) 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. Each of Liberty's
businesses is separately managed. Liberty identifies its reportable segments as
(A) those consolidated subsidiaries that represent 10% or more of its
consolidated revenue, earnings before income taxes or total assets and
(B) those equity method affiliates whose share of earnings represent 10% or more
of Liberty's 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 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.
I-21
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
- Starz Entertainment--consolidated subsidiary 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.
PERFORMANCE MEASURES
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------
2007 2006
------------------------- -------------------------
OPERATING OPERATING
CASH CASH
REVENUE FLOW (DEFICIT) REVENUE FLOW (DEFICIT)
-------- -------------- -------- --------------
AMOUNTS IN MILLIONS
QVC.................................. $1,684 374 1,555 355
Starz Entertainment.................. 265 73 259 41
Corporate and Other.................. 174 (25) 87 (1)
------ --- ----- ---
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
QVC.......................................... $19,065 114 79
Starz Entertainment.......................... 2,810 -- 2
Corporate and other.......................... 30,582 1,758 6
Assets of discontinued operations............ 283 -- --
------- ----- --
52,740 1,872 87
Intercompany eliminations.................... (5,117) -- --
------- ----- --
Consolidated Liberty......................... $47,623 1,872 87
======= ===== ==
</Table>
I-22
<Page>
LIBERTY MEDIA LLC AND SUBSIDIARIES
(A WHOLLY-OWNED SUBSIDIARY OF LIBERTY MEDIA CORPORATION)
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.................................................. 100 68
----- ----
Earnings (loss) from continuing operations before income
taxes and minority interests............................ $ 549 (25)
===== ====
</Table>
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<Page>
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
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-24
<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.
I-25
<Page>
2007 COMPLETED AND PENDING TRANSACTIONS
In addition to the sales of OPTV and AEG described in note 5 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.
RESULTS OF OPERATIONS
To assist you in understanding and analyzing our business in the same manner
we do, we have organized the following discussion of our results of operations
into two parts: Consolidated Operating Results and Operating Results by
Business.
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.
CONSOLIDATED OPERATING RESULTS
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31,
-------------------
2007 2006
-------- --------
AMOUNTS
IN MILLIONS
REVENUE
QVC....................................................... $1,684 1,555
Starz Entertainment....................................... 265 259
Corporate and other....................................... 174 87
------ -----
Consolidated Liberty.................................... $2,123 1,901
====== =====
OPERATING CASH FLOW (DEFICIT)
QVC....................................................... $ 374 355
Starz Entertainment....................................... 73 41
Corporate and other....................................... (25) (1)
------ -----
Consolidated Liberty.................................... $ 422 395
====== =====
OPERATING INCOME (LOSS)
QVC....................................................... $ 243 212
Starz Entertainment....................................... 60 33
Corporate and other....................................... (54) (21)
------ -----
Consolidated Liberty.................................... $ 249 224
====== =====
</Table>
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<Page>
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 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 Operating Results by Business 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 13 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 New Liberty
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,
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<Page>
compared with $30 million for the comparable period in 2006. As of March 31,
2007, the total compensation cost related to unvested New Liberty 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.
INTEREST EXPENSE. Consolidated interest expense was comparable for the
three months ended March 31, 2007 and 2006 as an increase in interest expense
attributable to increased borrowings on the QVC credit facilities was offset by
a decrease 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 9 to the accompanying condensed consolidated financial statements.
DIVIDEND AND INTEREST INCOME. Interest income increased in 2007 due to
higher invested cash balances. Interest and dividend income 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).
SHARE OF EARNINGS OF AFFILIATES. Our 2007 share of earnings (losses) of
affiliates are $9 million. In December 2006, we announced that we had entered
into an exchange agreement with News Corporation pursuant to which, if
completed, we would exchange our approximate 16% ownership interest in News
Corporation for a subsidiary of News Corporation, which would own News
Corporation's approximate 38% interest in The DIRECTV Group, Inc., three
regional sports television networks and approximately $588 million in cash.
Consummation of the exchange, which is subject to various closing conditions,
including regulatory approval and receipt of a favorable ruling from the IRS
that the exchange is tax free, is expected in 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.
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<Page>
NET EARNINGS. Our net earnings (loss) was $379 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.
OPERATING RESULTS BY BUSINESS
QVC. QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs
and 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")
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<Page>
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.
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.
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<Page>
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 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.
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.
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.
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<Page>
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.
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, 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.
I-32
<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.
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<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 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>
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
</Table>
- ------------------------
* Filed herewith
II-1
<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 LLC
Date: May 11, 2007 By: /s/ GREGORY B. MAFFEI
-------------------------------------------
Gregory B. Maffei
President and Chief Executive Officer
Date: May 11, 2007 By: /s/ DAVID J.A. FLOWERS
-------------------------------------------
David J.A. Flowers
Senior Vice President and Treasurer
(Principal Financial Officer)
Date: May 11, 2007 By: /s/ CHRISTOPHER W. SHEAN
-------------------------------------------
Christopher W. Shean
Senior Vice President and Controller
(Principal Accounting Officer)
</Table>
II-2
<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>
31.1 Rule 13a-14(a)/15d-14(a) Certification*
31.2 Rule 13a-14(a)/15d-14(a) Certification*
31.3 Rule 13a-14(a)/15d-14(a) Certification*
32 Section 1350 Certification*
</Table>
- ------------------------
* Filed herewith