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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q


ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                             to                            

Commission File Number 001-33982

LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)

State of Delaware
(State or other jurisdiction of
incorporation or organization)
  84-1288730
(I.R.S. Employer
Identification No.)

12300 Liberty Boulevard
Englewood, Colorado

 

80112
(Address of principal executive offices)   (Zip Code)

Registrant's telephone number, including area code: (720) 875-5400

        Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(do not check if smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes o    No ý

        The number of outstanding shares of Liberty Media Corporation's common stock as of October 30, 2009 was:

Series A Liberty Capital common stock 90,266,848 shares;
Series B Liberty Capital common stock 6,024,724 shares;
Series A Liberty Interactive common stock 566,965,732 shares;
Series B Liberty Interactive common stock 29,291,666 shares;
Series A Liberty Entertainment common stock 498,284,059 shares; and
Series B Liberty Entertainment common stock 23,658,487 shares.



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

 
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Assets

             

Current assets:

             
 

Cash and cash equivalents

  $ 4,316     3,135  
 

Trade and other receivables, net

    1,233     1,563  
 

Inventory, net

    1,106     1,032  
 

Program rights

    518     497  
 

Financial instruments (note 8)

    1,036     1,157  
 

Other current assets

    185     235  
           
   

Total current assets

    8,394     7,619  
           

Investments in available-for-sale securities and other cost investments, including $865 million and $392 million pledged as collateral for share borrowing arrangements (note 6)

    4,188     2,859  

Long-term financial instruments (note 8)

        1,328  

Investments in affiliates, accounted for using the equity method (note 7)

    14,978     14,490  

Property and equipment, at cost

   
2,094
   
2,027
 

Accumulated depreciation

    (831 )   (696 )
           

    1,263     1,331  
           

Intangible assets not subject to amortization (note 9):

             
 

Goodwill

    6,469     6,550  
 

Trademarks

    2,508     2,511  
 

Other

    158     158  
           

    9,135     9,219  
           

Intangible assets subject to amortization, net (note 9)

    3,240     3,489  

Other assets, at cost, net of accumulated amortization

    1,678     1,568  
           
   

Total assets

  $ 42,876     41,903  
           

(continued)

I-1



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets, continued

(unaudited)

 
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Liabilities and Equity

             

Current liabilities:

             
 

Accounts payable

  $ 620     550  
 

Accrued interest

    60     103  
 

Other accrued liabilities

    889     999  
 

Financial instruments (note 8)

    1,007     553  
 

Current portion of debt (note 10)

    3,015     868  
 

Accrued stock compensation

    232     196  
 

Current deferred income tax liabilities

    1,415     781  
 

Other current liabilities

    148     98  
           
   

Total current liabilities

    7,386     4,148  
           

Long-term debt, including $2,168 million and $1,691 million measured at fair value (note 10)

    9,069     11,359  

Long-term financial instruments (note 8)

    210     189  

Deferred income tax liabilities

    4,249     4,900  

Other liabilities

    1,678     1,550  
           
   

Total liabilities

    22,592     22,146  
           

Equity

             
 

Stockholders' equity (note 11):

             
   

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

         
   

Series A Liberty Capital common stock, $.01 par value. Authorized 2,000,000,000 shares; issued and outstanding 90,264,124 shares at September 30, 2009 and 90,042,840 shares at December 31, 2008

    1     1  
   

Series B Liberty Capital common stock, $.01 par value. Authorized 75,000,000 shares; issued and outstanding 6,024,724 shares at September 30, 2009 and 6,024,724 shares at December 31, 2008

         
   

Series A Liberty Entertainment common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 497,422,030 shares at September 30, 2009 and 493,256,228 shares at December 31, 2008

    5     5  
   

Series B Liberty Entertainment common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 23,697,487 shares at September 30, 2009 and 23,706,209 shares at December 31, 2008

         
   

Series A Liberty Interactive common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 566,950,997 shares at September 30, 2009 and 564,385,343 shares at December 31, 2008

    6     6  
   

Series B Liberty Interactive common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,291,666 shares at September 30, 2009 and 29,441,916 shares at December 31, 2008

         
   

Additional paid-in capital

    25,237     25,132  
   

Accumulated other comprehensive earnings, net of taxes

    322     70  
   

Accumulated deficit

    (5,406 )   (5,612 )
           
   

Total stockholders' equity

    20,165     19,602  
 

Noncontrolling interests in equity of subsidiaries

    119     155  
           
   

Total equity

    20,284     19,757  
           

Commitments and contingencies (note 13)

             
   

Total liabilities and equity

  $ 42,876     41,903  
           

See accompanying notes to condensed consolidated financial statements.

I-2



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions,
except per share amounts

 

Revenue:

                         
 

Net retail sales

  $ 1,827     1,798     5,594     5,702  
 

Communications and programming services

    540     580     1,600     1,514  
                   

    2,367     2,378     7,194     7,216  
                   

Operating costs and expenses:

                         
 

Cost of sales

    1,182     1,179     3,573     3,645  
 

Operating

    552     582     1,551     1,581  
 

Selling, general and administrative, including stock-based compensation (note 3)

    308     347     862     908  
 

Depreciation and amortization

    166     179     510     532  
 

Impairment of long-lived assets

        34         34  
                   

    2,208     2,321     6,496     6,700  
                   
   

Operating income

    159     57     698     516  

Other income (expense):

                         
 

Interest expense

    (194 )   (190 )   (509 )   (543 )
 

Dividend and interest income

    25     38     99     138  
 

Share of earnings of affiliates, net (note 7)

    138     141     243     351  
 

Realized and unrealized gains (losses) on financial instruments, net (note 8)

    (326 )   77     (407 )   (245 )
 

Gains (losses) on dispositions, net (notes 6 and 7)

    (14 )   (2 )   150     3,679  
 

Other than temporary declines in fair value of investments

        (444 )       (445 )
 

Other, net

    (13 )   (24 )   (25 )   (25 )
                   

    (384 )   (404 )   (449 )   2,910  
                   
   

Earnings (loss) before income taxes

    (225 )   (347 )   249     3,426  

Income tax benefit (expense)

    98     107     (17 )   1,937  
                   
   

Net earnings (loss)

    (127 )   (240 )   232     5,363  

Less net earnings attributable to the noncontrolling interests

    9     8     26     29  
                   

Net earnings (loss) attributable to Liberty Media Corporation shareholders

  $ (136 )   (248 )   206     5,334  
                   

Net earnings (loss) attributable to Liberty Media Corporation shareholders:

                         
 

Liberty Capital common stock

  $ (132 )   (112 )   (91 )   (247 )
 

Liberty Entertainment common stock

    2     147     232     245  
 

Liberty Interactive common stock

    (6 )   (283 )   65     (66 )
 

Old Liberty Capital common stock

                5,402  
                   

  $ (136 )   (248 )   206     5,334  
                   

(continued)

I-3



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions,
except per share amounts

 

Basic net earnings (loss) attributable to Liberty Media Corporation shareholders per common share (note 4):

                         
 

Series A and Series B Liberty Capital common stock

  $ (1.38 )   (1.03 )   (.95 )   (2.08 )
 

Series A and Series B Liberty Entertainment common stock

  $ .00     .28     .45     .47  
 

Series A and Series B Liberty Interactive common stock

  $ (.01 )   (.48 )   .11     (.11 )
 

Old Series A and Series B Liberty Capital common stock

  $             41.88  

Diluted net earnings (loss) attributable to Liberty Media Corporation shareholders per common share (note 4):

                         
 

Series A and Series B Liberty Capital common stock

  $ (1.38 )   (1.03 )   (.95 )   (2.08 )
 

Series A and Series B Liberty Entertainment common stock

  $ .00     .28     .45     .47  
 

Series A and Series B Liberty Interactive common stock

  $ (.01 )   (.48 )   .11     (.11 )
 

Old Series A and Series B Liberty Capital common stock

  $             41.55  

See accompanying notes to condensed consolidated financial statements.

I-4



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

(unaudited)

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Net earnings (loss)

  $ (127 )   (240 )   232     5,363  
                   

Other comprehensive earnings (loss), net of taxes:

                         
 

Foreign currency translation adjustments

    42     (115 )   23     (35 )
 

Unrealized holding gains (losses) arising during the period

    163     (42 )   184     (761 )
 

Recognition of previously unrealized losses (gains) on available-for-sale securities, net

    (2 )   273     (2 )   (2,000 )
 

Share of other comprehensive earnings (loss) of equity affiliates

    21     (4 )   11     (6 )
 

Other

    (3 )       34     (1 )
                   
   

Other comprehensive earnings (loss)

    221     112     250     (2,803 )
                   

Comprehensive earnings (loss)

    94     (128 )   482     2,560  
 

Less comprehensive earnings attributable to the noncontrolling interests

    17     8     24     34  
                   
 

Comprehensive earnings (loss) attributable to Liberty Media Corporation shareholders

  $ 77     (136 )   458     2,526  
                   

Comprehensive earnings (loss) attributable to Liberty Media Corporation shareholders:

                         
   

Liberty Capital common stock

  $ (112 )   (113 )   (57 )   (251 )
   

Liberty Entertainment common stock

    23     145     247     240  
   

Liberty Interactive common stock

    166     (168 )   268     (279 )
   

Old Liberty Capital common stock

                2,816  
                   

  $ 77     (136 )   458     2,526  
                   

See accompanying notes to condensed consolidated financial statements.

I-5



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Cash Flows

(unaudited)

 
  Nine months ended
September 30,
 
 
  2009   2008  
 
  amounts in millions
 

Cash flows from operating activities:

             
 

Net earnings

  $ 232     5,363  
 

Adjustments to reconcile net earnings to net cash provided by operating activities:

             
   

Depreciation and amortization

    510     532  
   

Impairment of long-lived assets

        34  
   

Stock-based compensation

    98     67  
   

Cash payments for stock-based compensation

    (11 )   (22 )
   

Noncash interest expense

    115     37  
   

Share of earnings of affiliates, net

    (243 )   (351 )
   

Cash receipts from returns on equity investments

    28      
   

Realized and unrealized losses on financial instruments, net

    407     245  
   

Gains on disposition of assets, net

    (150 )   (3,679 )
   

Other than temporary declines in fair value of investments

        445  
   

Deferred income tax benefit

    (212 )   (2,190 )
   

Other noncash charges, net

    79     77  
   

Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions:

             
       

Current and other assets

    124     (84 )
       

Payables and other current liabilities

    93     (149 )
           
         

Net cash provided by operating activities

    1,070     325  
           

Cash flows from investing activities:

             
 

Cash proceeds from dispositions

    353     24  
 

Proceeds from settlement of financial instruments

    1,095     12  
 

Cash received in exchange transactions

        465  
 

Cash paid for acquisitions, net of cash acquired

    (4 )   (77 )
 

Investments in and loans to cost and equity investees

    (818 )   (2,549 )
 

Repayment of loan by equity investee

    409      
 

Capital expended for property and equipment

    (152 )   (131 )
 

Net sales of short term investments

    58     79  
 

Reclass of cash to short-term marketable securities

        (523 )
 

Net decrease in restricted cash

    63     367  
 

Other investing activities, net

    (22 )   (60 )
           
     

Net cash provided (used) by investing activities

    982     (2,393 )
           

Cash flows from financing activities:

             
 

Borrowings of debt

    3,094     4,658  
 

Repayments of debt

    (4,061 )   (1,284 )
 

Repurchases of Liberty common stock

    (3 )   (482 )
 

Other financing activities, net

    112     (86 )
           
     

Net cash provided (used) by financing activities

    (858 )   2,806  
           

Effect of foreign currency exchange rates on cash

    (13 )   1  
           
     

Net increase in cash and cash equivalents

    1,181     739  
     

Cash and cash equivalents at beginning of period

    3,135     3,135  
           
     

Cash and cash equivalents at end of period

  $ 4,316     3,874  
           

See accompanying notes to condensed consolidated financial statements.

I-6


LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Nine months ended September 30, 2009

 
  Stockholders' Equity    
   
 
 
   
  Common stock    
   
   
   
   
 
 
   
   
   
  Liberty
Entertainment
  Liberty
Interactive
   
   
   
   
   
 
 
   
  Liberty Capital    
  Accumulated
other
comprehensive
earnings
   
  Noncontrolling
interest in
equity of
subsidiaries
   
 
 
  Preferred
stock
  Additional
paid-in
capital
  Accumulated
deficit
  Total
equity
 
 
  Series A   Series B   Series A   Series B   Series A   Series B  
 
  amounts in millions
 

Balance at January 1, 2009

  $     1         5         6         25,132     70     (5,612 )   155     19,757  
 

Net earnings

                                        206     26     232  
 

Other comprehensive earnings (loss)

                                    252         (2 )   250  
 

Stock compensation

                                54                 54  
 

Issuance of common stock upon exercise of stock options

                                54                 54  
 

Series A Liberty Capital stock repurchases

                                (3 )               (3 )
 

Distribution to noncontrolling interest

                                            (59 )   (59 )
 

Other

                                            (1 )   (1 )
                                                   

Balance at September 30, 2009

  $     1         5         6         25,237     322     (5,406 )   119     20,284  
                                                   

See accompanying notes to condensed consolidated financial statements.

I-7



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

September 30, 2009
(unaudited)

(1)   Basis of Presentation

        The accompanying condensed consolidated financial statements include the accounts of Liberty Media Corporation and its controlled subsidiaries (collectively, "Liberty" or the "Company" unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation.

        Liberty, through its ownership of interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce, media, communications and entertainment industries in North America, South America, Europe and Asia.

        Effective January 1, 2009, Liberty adopted new guidance which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, previously referred to as minority interest. Among other matters, (a) the noncontrolling interest is reported within equity in the balance sheet and (b) the amount of consolidated net income attributable to the parent and to the noncontrolling interest is presented in the statement of income. Also, SAB 51 Gains for subsidiaries are recorded in equity and SAB 51 Gains for equity affiliates are recorded in earnings. Liberty has applied the changes prospectively, except for the presentation and disclosure requirements, which have been applied retrospectively for all periods presented.

        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. Subsequent events have been evaluated for recognition and disclosure through the date of the filing of this Quarterly Report on From 10-Q. 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, 2008, as amended.

        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) fair value measurement, (ii) accounting for income taxes, (iii) assessments of other-than-temporary declines in fair value of its investments and (iv) estimates of retail-related adjustments and allowances to be its most significant estimates.

        Liberty holds investments that are accounted for using the equity method. Liberty does not control the decision making process or business management practices of these affiliates. Accordingly, Liberty relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that Liberty uses in the application of the equity method. In addition, Liberty relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible

I-8



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

misstatements of the financial information provided by its equity affiliates that would have a material effect on Liberty's condensed consolidated financial statements.

(2)   Tracking Stocks

        Prior to March 3, 2008, Liberty had two tracking stocks—Liberty Interactive common stock and Liberty Capital common stock, which were intended to track and reflect the economic performance of the Interactive Group and the Capital Group, respectively. On March 3, 2008, Liberty completed a reclassification (the "Reclassification") of its Liberty Capital common stock (herein referred to as "Old Liberty Capital common stock") whereby each share of Old Series A Liberty Capital common stock was reclassified into four shares of Series A Liberty Entertainment common stock and one share of new Series A Liberty Capital common stock, and each share of Old Series B Liberty Capital common stock was reclassified into four shares of Series B Liberty Entertainment common stock and one share of new Series B Liberty Capital common stock. The Liberty Entertainment common stock is intended to track and reflect the economic performance of the Entertainment Group. The Reclassification did not change the businesses, assets and liabilities attributed to the Interactive Group.

        Tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole. While the Interactive Group, the Entertainment Group and the Capital Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stocks have no direct claim to the group's stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.

        The term "Interactive Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which Liberty has attributed to that group. The assets and businesses Liberty has attributed to the Interactive Group are those engaged in video and on-line commerce, and include its subsidiaries QVC, Inc. ("QVC"), Provide Commerce, Inc. ("Provide"), Backcountry.com, Inc. ("Backcountry"), Bodybuilding.com, LLC ("Bodybuilding") and BuySeasons, Inc. ("BuySeasons") and its noncontrolling interest in Expedia, Inc. ("Expedia"), HSN, Inc. ("HSN"), Interval Leisure Group, Inc. ("Interval"), Ticketmaster Entertainment, Inc. ("Ticketmaster"), Tree.com, Inc. ("Lending Tree") and IAC/InterActiveCorp ("IAC"). In addition, Liberty has attributed $2,135 million principal amount (as of September 30, 2009) of its public debt to the Interactive Group. The Interactive Group will also include such other businesses, assets and liabilities that Liberty's board of directors may in the future determine to attribute to the Interactive Group, including such other businesses and assets as Liberty may acquire for the Interactive Group.

        Similarly, the term "Entertainment Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which Liberty has attributed to that group. The Entertainment Group focuses primarily on video programming, communications businesses and the direct-to-home satellite distribution business and includes Liberty's noncontrolling ownership interest in The DIRECTV Group, Inc. ("DIRECTV"), as well as an equity collar on 98.75 million of shares of DIRECTV common stock and $1,888 million of borrowings (as of September 30, 2009) against the put value of such equity collar. Liberty has also attributed to the Entertainment Group its subsidiaries, Starz Entertainment, LLC ("Starz Entertainment"), CDM Fantasy Sports Corp. ("FUN Sports"), three regional sports television networks ("Liberty Sports Group") and PicksPal, Inc. and equity interests in Game Show Network, LLC ("GSN") and WildBlue Communications, Inc. In addition, Liberty has

I-9



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


attributed $311 million of corporate cash to the Entertainment Group. The Entertainment Group will also include such other businesses, assets and liabilities that Liberty's board of directors may in the future determine to attribute to the Entertainment Group, including such other businesses as Liberty may acquire for the Entertainment Group.

        The term "Capital Group" also does not represent a separate legal entity, rather it represents all of Liberty's businesses, assets and liabilities other than those which have been attributed to the Interactive Group or the Entertainment Group. The assets and businesses attributed to the Capital Group include Liberty's subsidiaries: Starz Media, LLC ("Starz Media"), Atlanta National League Baseball Club, Inc. ("ANLBC"), Leisure Arts, Inc. ("Leisure Arts"), TruePosition, Inc. ("TruePosition") and WFRV and WJMN Television Station, Inc. ("WFRV TV Station"); and its interests in Sirius XM Radio Inc. ("Sirius"), Time Warner Inc., Time Warner Cable Inc. and Sprint Nextel Corporation. In addition, Liberty has attributed $2,923 million of cash, including subsidiary cash and $4,466 million principal amount (as of September 30, 2009) of its exchangeable senior debentures and other parent debt to the Capital Group. The Capital Group will also include such other businesses, assets and liabilities that Liberty's board of directors may in the future determine to attribute to the Capital Group, including such other businesses and assets as Liberty may acquire for the Capital Group.

        During the second quarter of 2009, each of the Entertainment Group and the Capital Group made intergroup loans to the Interactive Group in the amount of $250 million. See note 10.

        See Exhibit 99.1 to this Quarterly Report on Form 10-Q for unaudited attributed financial information for Liberty's tracking stock groups.

Split Off and Merger Transactions

        During the fourth quarter of 2008, the Board of Directors of Liberty approved a plan to redeem a portion of the outstanding shares of Liberty's Entertainment Group tracking stock for all of the outstanding shares of a newly formed subsidiary of Liberty, Liberty Entertainment, Inc. ("LEI"), (the "Redemption"). The Redemption and resulting separation of LEI from Liberty are referred to as the "Split Off."

        If the Redemption is completed, Liberty will redeem 90% of the outstanding shares of each series of Liberty Entertainment common stock for 100% of the outstanding shares of the same series of LEI, with cash in lieu of fractional shares, in each case, as of a date to be determined by the board of Liberty (the "Redemption"). Immediately following the Redemption, the holders of Liberty Entertainment common stock will own 100% of the outstanding equity of LEI. At the time of the Split Off, LEI will hold Liberty's interests in DIRECTV (and related collars and debt), Liberty Sports Group and GSN and approximately $80 million in cash. In addition, Liberty and LEI have entered into a revolving credit facility pursuant to which Liberty will provide LEI with up to $300 million principal amount of loans. The Split Off is conditioned on, among other matters, receipt of stockholder approval and receipt of a tax opinion from tax counsel and (x) the satisfaction or waiver of all conditions to the Merger Transaction described below or (y) the termination of the Merger Agreement described below. The Split Off and Merger Transaction are expected to occur in the fourth quarter of 2009.

        On May 3, 2009, Liberty and LEI entered into an Agreement and Plan of Merger (the "Merger Agreement") with DIRECTV and other parties named therein, pursuant to which, after Liberty completes the Split Off, LEI and DIRECTV will combine under a new parent company ("New DIRECTV") (the "Merger Transaction"). The holders of LEI Series A will be entitled to receive 1.11111 shares of New DIRECTV Class A common stock for each share of LEI Series A common stock held by them (as adjusted pursuant to the Merger Agreement). The Chairman of LEI and certain

I-10



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


related persons will receive 1.11111 shares of New DIRECTV Class B common stock for each share of LEI Series B common stock held by them (as adjusted pursuant to the Merger Agreement). All other holders of LEI Series B common stock will be entitled to receive 1.11111 shares of New DIRECTV Class A common stock for each share of LEI Series B common stock held by them (as adjusted pursuant to the Merger Agreement). The Merger Transaction is subject to certain closing conditions. The Split Off and Merger Transaction, if consummated, will be accounted for at fair value. If the Merger Agreement has been terminated, but the Split Off is completed, the Split Off will be accounted for at historical cost.

        Subsequent to the Split Off, the Entertainment Group will be renamed the Starz Group and will be comprised principally of Starz Entertainment and cash.

(3)   Stock-Based Compensation

        The Company has granted to certain of its directors, employees and employees of its subsidiaries options and stock appreciation rights ("SARs") to purchase shares of Liberty common stock (collectively, "Awards"). The Company measures 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 recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The company measures 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 remeasures the fair value of the Award at each reporting date.

        Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation (amounts in millions):

Three months ended:

       
 

September 30, 2009

  $ 35  
 

September 30, 2008

  $ 24  

Nine months ended:

       
 

September 30, 2009

  $ 98  
 

September 30, 2008

  $ 67  

        During the nine months ended September 30, 2009, Liberty granted, primarily to QVC employees, 7.0 million options to purchase shares of Series A Liberty Interactive common stock. Such options had a weighted average grant-date fair value of $.94 per share.

        In addition, in April 2009, Liberty completed an exchange offer pursuant to which eligible employees of QVC and BuySeasons were offered the opportunity to exchange all (but not less than all) of their outstanding stock options to purchase shares of Series A Liberty Interactive common stock ("LINTA") with an exercise price greater than $7.00 for new options to acquire shares of LINTA. Eligible option holders tendered an aggregate of 11,311,787 shares of LINTA. In exchange, Liberty granted the tendering option holders an aggregate of 2,828,022 options to purchase shares of LINTA with an exercise price of $3.41 per share and 2,828,022 options to purchase shares of LINTA with an exercise price of $6.00 per share. The difference between the fair value of the options granted in the exchange offer and the fair value of the options tendered, which aggregated $3 million, will be recognized as stock compensation expense over the vesting term of the options granted.

I-11



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

        During the nine months ended September 30, 2009, Liberty granted, primarily to one of its directors, 507,870 options to purchase shares of Series A Liberty Entertainment common stock. Such options had a weighted average grant-date fair value of $4.57 per share.

        The Company has calculated the grant-date fair value for all of its equity classified awards and any subsequent remeasurement of its liability classified awards using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Liberty's stocks and the implied volatility of publicly traded Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.

Liberty—Outstanding Awards

        The following table presents the number and weighted average exercise price ("WAEP") of options and SARs to purchase Liberty common stock granted to certain officers, employees and directors of the Company.

 
  Series A  
 
  Liberty
Capital
  WAEP   Liberty
Interactive
  WAEP   Liberty
Entertainment
  WAEP  
 
  numbers of options in thousands
 

Outstanding at January 1, 2009

    4,031   $ 10.83     31,361   $ 16.48     15,978   $ 19.77  

Granted

    2   $ 11.85     12,626   $ 4.60     508   $ 25.87  

Exercised

    (445 ) $ 13.63     (231 ) $ 3.19     (4,265 ) $ 19.53  

Forfeited/Cancelled/Exchanged

    (18 ) $ 20.75     (12,943 ) $ 16.67     (57 ) $ 34.75  
                                 

Outstanding at September 30, 2009

    3,570   $ 10.42     30,813   $ 11.62     12,164   $ 20.02  
                                 

Exercisable at September 30, 2009

    2,163   $ 12.77     13,719   $ 19.06     6,449   $ 20.75  
                                 

        The following table provides additional information about outstanding options to purchase Liberty common stock at September 30, 2009.

 
  No. of
outstanding
options
(000's)
  WAEP of
outstanding
options
  Weighted
average
remaining
life
  Aggregate
intrinsic
value
(000's)
  No. of
exercisable
options
(000's)
  WAEP of
exercisable
options
  Aggregate
intrinsic
value
(000's)
 

Series A Capital

    3,570   $ 10.42   4.4 years   $ 38,009     2,163   $ 12.77   $ 18,157  

Series B Capital

    1,408   $ 15.20   1.4 years   $ 8,830     1,408   $ 15.20   $ 8,830  

Series A Interactive

    30,813   $ 11.62   4.9 years   $ 117,751     13,719   $ 19.06   $ 11,256  

Series B Interactive

    7,491   $ 23.41   1.7 years   $     7,491   $ 23.41   $  

Series A Entertainment

    12,164   $ 20.02   4.8 years   $ 138,030     6,449   $ 20.75   $ 69,921  

Series B Entertainment

    5,993   $ 21.57   1.7 years   $ 57,151     5,993   $ 21.57   $ 57,151  

        As of September 30, 2009, the total unrecognized compensation cost related to unvested Liberty equity Awards was approximately $70 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2 years.

I-12



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(4)   Earnings (Loss) Per Common Share

        Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented.

Old Series A and Series B Liberty Capital Common Stock

        Old Liberty Capital basic EPS for the period from January 1, 2008 to the Reclassification, was computed by dividing the net earnings attributable to the Capital Group by the weighted average outstanding shares of Old Liberty Capital common stock for the period (129 million). Fully diluted EPS for the two months in 2008 includes 1 million common stock equivalents.

Series A and Series B Liberty Capital Common Stock

        The basic and diluted EPS calculation is based on the following weighted average outstanding shares. Excluded from diluted EPS for the nine months ended September 30, 2009 are less than 1 million potential common shares because their inclusion would be antidilutive.

 
  Liberty Capital Common Stock  
 
  Three months ended
September 30,
   
  Period from
March 4, 2008
to
September 30,
2008
 
 
  Nine months
ended
September 30,
2009
 
 
  2009   2008  
 
  numbers of shares in millions
 

Basic EPS

    96     109     96     119  

Stock options

                 
                   

Diluted EPS

    96     109     96     119  
                   

Series A and Series B Liberty Entertainment Common Stock

        The basic and diluted EPS calculation is based on the following weighted average outstanding shares. Excluded from diluted EPS for the nine months ended September 30, 2009 are less than 1 million potential common shares because their inclusion would be antidilutive.

 
  Liberty Entertainment Common Stock  
 
  Three months ended
September 30,
   
  Period from
March 4, 2008
to
September 30,
2008
 
 
  Nine months
ended
September 30,
2009
 
 
  2009   2008  
 
  numbers of shares in millions
 

Basic EPS

    518     517     517     517  

Stock options

    5         4      
                   

Diluted EPS

    523     517     521     517  
                   

I-13



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Series A and Series B Liberty Interactive Common Stock

        The basic and diluted EPS calculation is based on the following weighted average outstanding shares. Excluded from diluted EPS for the nine months ended September 30, 2009 are 21.4 million potential common shares because their inclusion would be antidilutive.

 
  Liberty Interactive Common Stock  
 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  numbers of shares in millions
 

Basic EPS

    594     594     594     594  

Stock options

            5      
                   

Diluted EPS

    594     594     599     594  
                   

(5)   Assets and Liabilities Measured at Fair Value

        For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.

        The Company's assets and liabilities measured at fair value are as follows:

 
  Fair Value Measurements at September 30, 2009 Using  
Description
  Total   Quoted prices
in active markets
for identical assets
(Level 1)
  Significant other
observable
inputs
(Level 2)
  Significant
unobservable
inputs
(Level 3)
 
 
   
  amounts in millions
 

Available-for-sale securities

  $ 4,150     3,786     364      

Financial instrument assets

  $ 1,036         1,036      

Financial instrument liabilities

  $ 1,217     865     352      

Debt

  $ 2,168         2,168      

        The Company uses the Black-Scholes Model to estimate fair value for the majority of its Level 2 financial instrument assets and liabilities using observable inputs such as exchange-traded equity prices, risk-free interest rates, dividend yields and volatilities obtained from pricing services. For the Company's debt instruments reported at fair value, the Company gets quoted market prices from pricing services or from evidence of observable inputs, some of which may be obtained using third-party brokers. However, the Company does not believe such instruments are traded on "active markets," as defined in GAAP. Accordingly, the debt instruments are reported in the foregoing table as Level 2 fair value.

        The Company incorporates a credit risk valuation adjustment in its fair value measurements to estimate the impact of both its own nonperformance risk and the nonperformance risk of its counterparties. The Company estimates credit risk associated with its and its counterparties nonperformance primarily by using observable credit default swap rates for terms similar to those of the remaining life of the instrument, adjusted for any master netting arrangements or other factors that

I-14



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


provide an estimate of nonperformance risk. These are Level 3 inputs. However, as the credit risk valuation adjustments were not significant, the Company continues to report its equity collars, interest rate swaps and put options as Level 2.

(6)   Investments in Available-for-Sale Securities and Other Cost Investments

        All marketable equity and debt securities held by the Company are classified as available-for-sale ("AFS") and are carried at fair value generally based on quoted market prices. GAAP permits entities to choose to measure many financial instruments, such as AFS 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 (the "fair value option"). Liberty has entered into economic hedges for certain of its non-strategic AFS securities (although such instruments are not accounted for as fair value hedges by the Company). Changes in the fair value of these economic hedges are reflected in Liberty's statement of operations as unrealized gains (losses). In order to better match the changes in fair value of the subject AFS securities and the changes in fair value of the corresponding economic hedges in the Company's financial statements, Liberty has elected the fair value option for those of its AFS securities which it considers to be non-strategic ("Non-strategic Securities"). Accordingly, changes in the fair value of Non-strategic Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying condensed consolidated statements of operations. The total value of the Non-strategic Securities aggregated $2,974 million as of September 30, 2009.

I-15



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

        Investments in AFS securities and other cost investments are summarized as follows:

 
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Capital Group

             
 

Time Warner Inc.(1)

  $ 985     1,033  
 

Time Warner Cable Inc.(2)

    370      
 

Sprint Nextel Corporation ("Sprint")(3)

    307     160  
 

Motorola, Inc.(4)

    446     328  
 

Viacom, Inc. 

    213     145  
 

CenturyTel, Inc./Embarq Corporation(5)

    196     157  
 

Other AFS equity securities(6)

    92     40  
 

Other AFS debt securities

    643     224  
 

Other cost investments and related receivables

    31     31  
           
   

Total attributed Capital Group

    3,283     2,118  
           

Interactive Group

             
 

IAC/InterActiveCorp

    717     638  
 

Other

    186     101  
           
   

Total attributed Interactive Group

    903     739  
           

Entertainment Group

             
 

Other

    2     2  
           
   

Total attributed Entertainment Group

    2     2  
           
 

Consolidated Liberty

  $ 4,188     2,859  
           

(1)
Includes $87 million and $91 million of shares pledged as collateral for share borrowing arrangements at September 30, 2009 and December 31, 2008, respectively.

(2)
Includes $33 million of shares pledged as collateral for share borrowing arrangements at September 30, 2009.

(3)
Includes $134 million and $17 million of shares pledged as collateral for share borrowing arrangements at September 30, 2009 and December 31, 2008, respectively.

(4)
Includes $446 million and $230 million of shares pledged as collateral for share borrowing arrangements at September 30, 2009 and December 31, 2008, respectively.

(5)
Includes $78 million and $16 million of shares pledged as collateral for share borrowing arrangements at September 30, 2009 and December 31, 2008, respectively.

(6)
Includes $87 million and $38 million of shares pledged as collateral for share borrowing arrangements at September 30, 2009 and December 31, 2008, respectively.

        During the nine months ended September 30, 2009, Liberty sold certain of its AFS securities for aggregate cash proceeds of $269 million. No gain or loss was recognized by Liberty on such sales.

I-16



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Unrealized Holdings Gains and Losses

        Unrealized holding gains and losses related to investments in AFS securities are summarized below.

 
  September 30, 2009   December 31, 2008  
 
  Equity
securities
  Debt
securities
  Equity
securities
  Debt
securities
 
 
  amounts in millions
 

Gross unrealized holding gains

  $ 245     53     9      

Gross unrealized holding losses

  $         (4 )    

(7)   Investments in Affiliates Accounted for Using the Equity Method

        Liberty has various investments accounted for using the equity method. The following table includes Liberty's carrying amount and percentage ownership of the more significant investments in affiliates at September 30, 2009 and the carrying amount at December 31, 2008:

 
  September 30, 2009   December 31, 2008  
 
  Percentage
ownership
  Carrying
amount
  Carrying
amount
 
 
   
  dollar amounts in millions
 

Entertainment Group

                   
 

DIRECTV

    57 % $ 13,382     13,085  
 

Other

    various     458     281  

Interactive Group

                   
 

Expedia

    24 %   606     559  
 

Other

    various     254     342  

Capital Group

                   
 

Sirius

    40 %   63      
 

Other

    various     215     223  
                 

        $ 14,978     14,490  
                 

        The following table presents Liberty's share of earnings (losses) of affiliates:

 
  Nine months ended
September 30,
 
 
  2009   2008  
 
  amounts in millions
 

Entertainment Group

             
 

DIRECTV

  $ 304     301  
 

Other

    12     13  

Interactive Group

             
 

Expedia

    47     58  
 

Other

    (94 )    

Capital Group

             
 

Sirius

    (14 )    
 

Other

    (12 )   (21 )
           

  $ 243     351  
           

I-17



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

DIRECTV

        On February 27, 2008, Liberty completed a transaction with News Corporation (the "News Corporation Exchange") in which Liberty exchanged all of its 512.6 million shares of News Corporation common stock valued at $10,143 million on the closing date for a subsidiary of News Corporation that held an approximate 41% interest in DIRECTV, three regional sports television networks that now comprise Liberty Sports Group and $463 million in cash. In addition, Liberty incurred $21 million of acquisition costs. Liberty recognized a pre-tax gain of $3,666 million in the first quarter of 2008 based on the difference between the fair value and the cost basis of the News Corporation shares exchanged.

        Liberty accounted for the News Corporation Exchange as a nonmonetary exchange. Accordingly, Liberty recorded the assets received at an amount equal to the fair value of the News Corporation common stock given up. Such amount was allocated to DIRECTV and Liberty Sports Group based on their relative fair values as follows (amounts in millions):

Cash

  $ 463  

DIRECTV

    10,765  

Liberty Sports Group

    448  

Deferred tax liability

    (1,512 )
       
 

Total

  $ 10,164  
       

        Liberty estimated the fair values of Liberty Sports Group and DIRECTV's assets using a combination of discounted cash flows and market prices for comparable assets.

        At the time of closing, the value attributed to Liberty's investment in DIRECTV exceeded Liberty's proportionate share of DIRECTV's equity by $8,022 million. Due to additional purchases of DIRECTV stock by Liberty and stock repurchases by DIRECTV, such excess basis has increased to $11,032 million as of September 30, 2009. Such amount has been allocated within memo accounts used for equity accounting purposes to DIRECTV's assets and liabilities. Amortization related to the intangible assets with identifiable useful lives within the memo accounts is included in Liberty's share of earnings of DIRECTV in the accompanying condensed consolidated statement of operations and aggregated $231 million and $153 million (net of related taxes) for the nine months ended September 30, 2009 and for the seven months ended September 30, 2008, respectively.

        On April 3, 2008, Liberty purchased 78.3 million additional shares of DIRECTV common stock in a private transaction for cash consideration of $1.98 billion. Liberty funded the purchase with borrowings against a newly executed equity collar on 110 million DIRECTV common shares. As of May 5, 2008, Liberty's ownership in DIRECTV was approximately 47.9%, and Liberty and DIRECTV entered into a standstill agreement. Pursuant to the standstill agreement, in the event Liberty's ownership interest goes above 47.9% due to stock repurchases by DIRECTV Liberty has agreed to vote its shares of DIRECTV which represent the excess ownership interest above 47.9% in the same proportion as all DIRECTV shareholders other than Liberty. Accordingly, although Liberty's economic ownership in DIRECTV is above 50%, Liberty continues to account for such investment using the equity method of accounting. Liberty records its share of DIRECTV's earnings based on its economic interest in DIRECTV.

I-18



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

        The market value of the Company's investment in DIRECTV was $15,134 million and $12,571 million at September 30, 2009 and December 31, 2008, respectively. Summarized unaudited financial information for DIRECTV is as follows:

 
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Current assets

  $ 5,476     4,044  

Satellites, net

    2,364     2,476  

Property and equipment, net

    4,153     4,171  

Goodwill

    3,811     3,753  

Intangible assets

    952     1,172  

Other assets

    871     923  
           
 

Total assets

  $ 17,627     16,539  
           

Current liabilities

 
$

4,269
   
3,585
 

Deferred income taxes

    723     524  

Long-term debt

    6,591     5,725  

Other liabilities

    1,625     1,749  

Redeemable noncontrolling interest

    325     325  

Equity

    4,094     4,631  
           
 

Total liabilities and equity

  $ 17,627     16,539  
           

 
  Nine months ended
September 30,
 
 
  2009   2008  
 
  amounts in millions
 

Revenue

  $ 15,584     14,379  

Costs of revenue

    (7,784 )   (7,122 )

Selling, general and administrative expenses

    (3,981 )   (3,466 )

Depreciation and amortization

    (2,008 )   (1,675 )
           
 

Operating income

    1,811     2,116  

Interest expense

   
(304

)
 
(248

)

Other income, net

    92     93  

Income tax expense

    (585 )   (712 )
           
 

Net income

    1,014     1,249  

Less income attributable to noncontrolling interest

    (40 )   (60 )
           

Net income attributable to The DIRECTV Group, Inc. 

  $ 974     1,189  
           

I-19



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Expedia

        The market value of the Company's investment in Expedia was $1,658 million and $570 million at September 30, 2009 and December 31, 2008, respectively. Summarized unaudited financial information for Expedia is as follows:

 
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Current assets

  $ 1,456     1,199  

Property and equipment

    232     248  

Goodwill

    3,579     3,539  

Intangible assets

    825     833  

Other assets

    55     75  
           
 

Total assets

  $ 6,147     5,894  
           

Current liabilities

 
$

2,177
   
1,566
 

Deferred income taxes

    212     190  

Long-term debt

    895     1,545  

Other liabilities

    227     212  

Equity

    2,636     2,381  
           
 

Total liabilities and equity

  $ 6,147     5,894  
           

 
  Nine months ended September 30,  
 
  2009   2008  
 
  amounts in millions
 

Revenue

  $ 2,258     2,316  

Cost of revenue

    (462 )   (500 )
           
 

Gross profit

    1,796     1,816  

Selling, general and administrative expenses

    (1,234 )   (1,304 )

Amortization

    (28 )   (52 )

Restructuring charges and other

    (103 )    
           
 

Operating income

    431     460  

Interest expense

   
(64

)
 
(49

)

Other expense, net

    (26 )   (8 )

Income tax expense

    (142 )   (164 )
           
 

Net earnings

    199     239  

Net (earnings) loss attributable to noncontrolling interests

    (2 )   3  
           

Net earnings attributable to Expedia, Inc. 

  $ 197     242  
           

I-20



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Spin Off Companies from IAC

        IAC completed the spin off of HSN, Interval, Ticketmaster and Lending Tree (the "IAC Spin Off Companies") on August 21, 2008. Liberty received an approximate 30% ownership interest in each of the IAC Spin Off Companies. Liberty allocated its carrying value in IAC prior to the spin off among IAC and the IAC Spin Off Companies based on their relative fair values at the time of the spin off. Liberty received no super voting shares in and has no special voting arrangements with respect to any of the IAC Spin Off Companies (other than with respect to the election of directors), and therefore, accounts for its interests using the equity method of accounting. Liberty has elected to record its share of earnings/losses for each of the IAC Spin Off Companies on a three month lag due to timeliness considerations. Liberty's share of losses of the IAC Spin Off Companies aggregated $89 million for the nine months ended September 30, 2009.

Sirius XM Radio Inc.

        During the first quarter of 2009, Liberty made investments/commitments in Sirius totaling approximately $579 million. Liberty's initial investment was the open market purchase of $46 million principal amount of Sirius bonds for $18 million. Such bonds are accounted for by Liberty as AFS debt securities and are marked to market each reporting period. On February 17, 2009, Liberty and Sirius entered into a senior secured loan agreement (the "Senior Loan") whereby Liberty loaned Sirius $250 million at an interest rate of 15% and made a commitment to loan an additional $30 million to fund qualifying expenditures by Sirius (the "Purchase Money Commitment"). In exchange for making the Senior Loan, Liberty received a $30 million origination fee. Liberty has accounted for the origination fee as a discount to the Senior Loan and is amortizing it to interest income over the term of the Senior Loan. On March 6, 2009, Liberty (i) purchased $100 million of a new senior loan facility of a subsidiary of Sirius ("Subsidiary Senior Loan"), (ii) purchased $61 million of bank debt of such subsidiary directly from the lending group and (iii) committed to make a loan of $150 million to such subsidiary in December 2009 ("Subsidiary Commitment"). In addition, Liberty received voting preferred stock of Sirius (the "Sirius Preferred Stock"), which has substantially the same rights and preferences as common shareholders of Sirius, for a cash payment of $12,500. The Sirius Preferred Stock is convertible into common stock equal to 40% of fully diluted equity.

        Liberty allocated the total consideration paid for the Subsidiary Senior Loan, the Subsidiary Commitment and the Sirius Preferred Stock to each of the instruments based on the relative fair values of such instruments.

        Since the amount of bank debt purchased from the lending group was a transaction with an outside third party and not with Sirius directly, this investment was not included in the allocation, but was recorded at the amount invested ($61 million).

        During the second quarter of 2009, Sirius issued $525 million of 11.25% Senior Secured Notes due 2013, of which Liberty purchased $100 million principal amount at a purchase price of 95.093% The $500 million in net proceeds of the offering were used to repay all amounts outstanding under the Subsidiary Senior Loan; to replace the $150 million Subsidiary Commitment, which was terminated upon the closing of the offering; and to refinance and repay other debt of Sirius. As such, amounts due to Liberty under the Subsidiary Senior Loan ($100 million original funding and $61 million third party purchase, with an aggregate principal amount of $153 million) were repaid in full resulting in a cash payment to Liberty of $156 million, including associated prepayment premiums. As Liberty's book basis in the debt was originally recorded at a discount, Liberty recognized a gain on the debt repayment of $42 million. In addition, Liberty retired the discounted funding obligation under the terminated

I-21



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


Subsidiary Commitment, which had a carrying value of $70 million, resulting in a total gain on the Sirius refinancing of $67 million after eliminating 40% of the gain related to Liberty's ownership in Sirius.

        During the second quarter of 2009, Liberty also purchased an additional $62 million face amount of other Sirius bonds at an average price of 70.05%.

        During the third quarter of 2009, Sirius completed another bond offering and used a portion of the proceeds to repay the Senior Loan. Liberty recognized a gain of $27 million upon receipt of such payment related to the unamortized discount on the Senior Loan. Also, in the third quarter, Liberty purchased an additional $84 million face amount of Sirius bonds for cash payments of $74 million and sold $13 million face amount of Sirius bonds for cash proceeds of $13.4 million.

        As of September 30, 2009, Liberty had invested aggregate cash of $611 million and had received scheduled debt repayments, cash from the Sirius refinancings and bond sales proceeds totaling $425 million, resulting in a net cash investment of $186 million. Such net cash investment has resulted in Liberty owning $279 million principal amount of Sirius public bonds and the Sirius Preferred Stock. In addition, the Purchase Money Commitment has been cancelled.

        Based on Liberty's voting rights and its conclusion that the Sirius Preferred Stock is in-substance common stock, Liberty accounts for its investment in the Sirius Preferred Stock using the equity method of accounting. Liberty has elected to record its share of earnings/losses for Sirius on a three-month lag due to timeliness considerations. As of September 30, 2009, the Sirius Preferred Stock had a market value of $1,656 million based on the value of the common stock into which it is convertible.

        Liberty's investment in Sirius has been attributed to the Capital Group.

(8)   Financial Instruments

        The Company's financial instruments are summarized as follows:

Type of financial instrument
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Assets

             
 

Equity collars(1)

  $ 1,036     2,392  
 

Other

        93  
           

    1,036     2,485  
 

Less current portion

    (1,036 )   (1,157 )
           

  $     1,328  
           

Liabilities

             
 

Borrowed shares

  $ 865     392  
 

Other

    352     350  
           

    1,217     742  
 

Less current portion

    (1,007 )   (553 )
           

  $ 210     189  
           

(1)
Represents the Company's Sprint equity collars at September 30, 2009. The Company has made borrowings against substantially all of the future cash proceeds to be received by the Company upon expiration of these equity collars. See note 10.

I-22



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

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:

 
  Nine months ended
September 30,
 
 
  2009   2008  
 
  amounts in millions
 

Non-strategic Securities

  $ 1,008     (1,889 )

Exchangeable senior debentures

    (771 )   866  

Equity collars

    (375 )   443  

Borrowed shares

    (314 )   585  

Other derivatives

    45     (250 )
           

  $ (407 )   (245 )
           

(9)   Intangible Assets

Goodwill

        Changes in the carrying amount of goodwill are as follows:

 
  QVC   Starz
Entertainment
  Other   Total  
 
  amounts in millions
 

Balance at January 1, 2009

  $ 5,363     132     1,055     6,550  
 

Dispositions

            (118 )   (118 )
 

Foreign currency translation adjustments

    29             29  
 

Other

    12         (4 )   8  
                   

Balance at September 30, 2009

  $ 5,404     132     933     6,469  
                   

Intangible Assets Subject to Amortization

        Amortization expense for intangible assets with finite useful lives was $369 million and $389 million for the nine months ended September 30, 2009 and 2008, respectively. Based on its amortizable intangible assets as of September 30, 2009, Liberty expects that amortization expense will be as follows for the next five years (amounts in millions):

Remainder of 2009

  $ 138  

2010

  $ 495  

2011

  $ 450  

2012

  $ 401  

2013

  $ 383  

I-23



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(10) Long-Term Debt

        Debt, excluding intergroup debt, is summarized as follows:

 
   
  Carrying value  
 
  Outstanding
principal
September 30,
2009
 
 
  September 30,
2009
  December 31,
2008
 
 
  amounts in millions
 

Capital Group

                   
 

Exchangeable senior debentures

                   
   

3.125% Exchangeable Senior Debentures due 2023

  $ 1,138     1,104     918  
   

4% Exchangeable Senior Debentures due 2029

    469     241     256  
   

3.75% Exchangeable Senior Debentures due 2030

    460     216     241  
   

3.5% Exchangeable Senior Debentures due 2031

    494     306     138  
 

Liberty bank facility

    750     750     750  
 

Liberty derivative loan

    1,155     1,155     625  
 

Subsidiary debt

    80     80     135  
               
     

Total attributed Capital Group debt

    4,546     3,852     3,063  
               

Interactive Group

                   
 

Senior notes and debentures

                   
   

7.875% Senior Notes due 2009

            104  
   

7.75% Senior Notes due 2009

            13  
   

5.7% Senior Notes due 2013

    803     801     801  
   

8.5% Senior Debentures due 2029

    287     284     284  
   

8.25% Senior Debentures due 2030

    504     501     501  
   

3.25% Exchangeable Senior Debentures due 2031

    541     301     138  
 

QVC 7.5% Senior Secured Notes due 2019

    1,000     983      
 

QVC bank credit facilities

    3,235     3,235     5,230  
 

Other subsidiary debt

    190     190     60  
               
     

Total attributed Interactive Group debt

    6,560     6,295     7,131  
               

Entertainment Group

                   
 

DIRECTV Collar Loan

    1,888     1,888     1,981  
 

Subsidiary debt

    49     49     52  
               
     

Total attributed Entertainment Group debt

    1,937     1,937     2,033  
               
   

Total consolidated Liberty debt

  $ 13,043     12,084     12,227  
                   
   

Less current maturities

          (3,015 )   (868 )
                 
   

Total long-term debt

        $ 9,069     11,359  
                 

Exchangeable Senior Debentures

        During the second quarter of 2009, Liberty used cash for the voluntary early retirement of $750 million face amount of its Exchangeable Senior Debentures attributable to Liberty Capital. Liberty paid $187.5 million (of which $37.5 million was existing cash collateral) to retire $400 million face amount of its 4% Exchangeable Senior Debentures due 2029 and $350 million face amount of its 33/4% Exchangeable Senior Debentures due 2030. Liberty also terminated swap arrangements that reference the 4% and 33/4% Exchangeable Senior Debentures with no additional payment. The total

I-24



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


cash used to retire the $750 million face amount of Exchangeable Senior Debentures and swaps referencing these Exchangeable Senior Debentures was $503 million, of which $315 million was paid to settle swap arrangements that were settled in November 2008. Liberty also purchased and retired $126 million principal amount of its 3.125% Exchangeable Senior Debentures for aggregate cash payments of $106 million.

Liberty Derivative Loan

        During the first quarter of 2009, Liberty made additional net borrowings of $1,638 million against the present value of its Sprint derivatives. Such debt is due when the derivatives expire in 2009 and 2010 and is expected to be retired by the offset of debt left against amounts to be received by Liberty upon expiration of the derivatives. In this regard, in the second quarter of 2009, Liberty repaid $333 million of the Sprint derivative loan with cash on hand. In addition, in the third quarter of 2009, Liberty repaid $775 million of the Sprint derivative loans. In the third quarter of 2009, certain Sprint derivatives expired, and Liberty received cash proceeds of $1,027 million.

QVC 7.5% Senior Secured Notes due 2019

        During the third quarter of 2009, QVC issued $1.0 billion principal amount of 7.5% Senior Secured Notes due 2019 (the "QVC Notes") at an issue price of 98.278%. QVC used the net proceeds from such offering to fund the purchase and cancellation of outstanding term loans under QVC's senior secured credit facilities that mature in 2014.

QVC Bank Credit Facilities

        Effective June 16, 2009, QVC amended each of its bank credit agreements (the "Amended Credit Agreements"). Concurrent with the execution of the Amended Credit Agreements, QVC retired $750 million of loans at par and cancelled another $19 million of unfunded commitments at no cost. As noted above, QVC purchased and cancelled outstanding term loans under its Amended Credit Agreements with proceeds from the issuance of the QVC Notes. The remaining $3.23 billion outstanding principal matures in six tranches between June 2010 and March 2014 as follows: $500 million due in 2010; $702 million due in 2011; $400 million due in 2012; $400 million due in 2013; and $1,233 million due in 2014.

        In connection with the execution of the Amended Credit Agreements, those lenders consenting to the amendments, which held loans in the aggregate principal amount of approximately $4.23 billion, received certain modified loan terms, including (i) adjusted interest rate margins of 350 to 550 basis points depending on the tranche maturity, (ii) reductions in QVC's maximum leverage ratio, (iii) additional restrictions on creating additional indebtedness and (iv) mandatory prepayment in the event of certain asset sales by QVC. Loans held by the non-consenting lenders, in the aggregate principal amount of approximately $252 million, will continue to receive an interest rate margin of up to 100 basis points with their loans maturing in 2011. All other terms of the Amended Credit Agreements will apply to these loans.

        Cash used to retire the $750 million of loans came from a combination of $250 million in cash from QVC and $250 million in the form of an intergroup loan from each of the Entertainment Group and the Capital Group to the Interactive Group. Such intergroup loans (i) are secured by various public stocks attributed to the Interactive Group, (ii) accrue interest quarterly at the rate of LIBOR plus 500 basis points and (iii) are due June 16, 2010.

        QVC was in compliance with all of its debt covenants at September 30, 2009.

I-25



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

QVC Interest Rate Swap Arrangements

        QVC is party to 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. Until December 2008, Liberty accounted 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. In December 2008, QVC elected interest terms under its credit facilities that do not effectively match the terms of the swap arrangements. As a result, the swaps no longer qualify as cash flow hedges under GAAP. Accordingly, changes in the fair value of the swaps are now reflected in realized and unrealized gains or losses on financial instruments in the accompanying condensed consolidated statements of operations.

        QVC is also party to two interest rate swap arrangements with an aggregate notional amount of $600 million. These swap arrangements, which expire in October 2010, provide for QVC to make fixed payments at 3.07% and to receive variable payments at 3 month LIBOR. These swap arrangements do not qualify as cash flow hedges under GAAP.

        During the third quarter of 2009, QVC entered into seven new forward interest rate swap arrangements with an aggregate notional amount of $1.75 billion. Such arrangements provide for payments beginning in March 2011 and extending to March 2013. QVC will make fixed payments at rates ranging from 2.98% to 3.67% and receive variable payments at 3 month LIBOR. These swap arrangements are not accounted for as cash flow hedges.

DIRECTV Collar Loan

        In April 2008, Liberty entered into an equity collar (the "DIRECTV Collar") with respect to 110 million shares of DIRECTV common stock and a related credit facility (the "Collar Loan") against the present value of the put value of such collar. At the time of closing, Liberty borrowed $1,977 million. The Collar Loan is due as the DIRECTV Collar terminates in six tranches from June 2009 through August 2012. Each tranche is repayable during a six-month period based upon a formula that factors in several variables including the market price of DIRECTV common stock. Interest accrues at an effective weighted average interest rate of 3.5% and is due and payable as each tranche matures. Borrowings are collateralized by the puts underlying the Collar Loan and 170 million shares of DIRECTV common stock owned by Liberty.

        In November 2008, Liberty chose to unwind 50% of the first tranche of the DIRECTV Collar. The first tranche expires in 2009 and originally had 22.5 million DIRECTV shares underlying it. As part of this transaction, Liberty repaid the portion of the Collar Loan ($228.4 million) associated with the shares that were unwound. Such repayment was funded with (1) proceeds from the collar unwind ($45.5 million), (2) funds borrowed from the remaining capacity of the Collar Loan ($181.1 million) and (3) cash on hand ($1.8 million). As a result of this transaction, the amount of the Collar Loan due in 2009 is approximately $258 million including accrued interest, of which $146 million was paid through September 30, 2009.

        The DIRECTV Collar contains a provision that allows the counterparty to terminate a portion of the DIRECTV Collar if the total number of shares of DIRECTV underlying the DIRECTV Collar exceeds 20% of the outstanding public float of DIRECTV common stock. In the event the counterparty chooses to terminate a portion of the DIRECTV Collar, the repayment of the corresponding debt would be accelerated. As of September 30, 2009, the number of shares of

I-26



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


DIRECTV common stock underlying the DIRECTV Collar represented approximately 24% of the outstanding public float of DIRECTV common stock. As of the date of filing of this Quarterly Report on Form 10-Q, the counterparty had not elected to terminate a portion of the collar.

Other Subsidiary Debt

        Other subsidiary debt at September 30, 2009 is comprised of capitalized satellite transponder lease obligations and bank debt of certain subsidiaries.

Fair Value of Debt

        Liberty estimates the fair value of its debt based on the quoted market prices for the same or similar issues or on the current rate offered to Liberty for debt of the same remaining maturities. The fair value of Liberty's publicly traded debt securities that are not reported at fair value in the accompanying condensed consolidated balance sheet at September 30, 2009 is as follows (amounts in millions):

Fixed rate senior notes

  $ 758  

Senior debentures

  $ 704  

        The fair value of the QVC Notes was approximately $1.0 billion as of September 30, 2009. Due to the low risk nature of the Collar Loan, Liberty believes that the carrying amount approximates fair value. Due to its variable rate nature, Liberty believes that the carrying amount of its subsidiary debt and other parent debt approximated fair value at September 30, 2009.

(11) Stockholders' Equity

        As of September 30, 2009, there were 3.6 million and 1.4 million shares of Series A and Series B Liberty Capital common stock, respectively, reserved for issuance under exercise privileges of outstanding stock options.

        As of September 30, 2009, there were 30.8 million and 7.5 million shares of Series A and Series B Liberty Interactive common stock, respectively, reserved for issuance under exercise privileges of outstanding stock options.

        As of September 30, 2009, there were 12.2 million and 6.0 million shares of Series A and Series B Liberty Entertainment common stock, respectively, reserved for issuance under exercise privileges of outstanding stock options.

        In addition to the Series A and Series B Liberty Capital common stock, the Series A and Series B Liberty Interactive common stock and the Series A and Series B Liberty Entertainment common stock, there are 2.0 billion, 4.0 billion and 4.0 billion shares of Series C Liberty Capital, Series C Liberty Interactive and Series C Liberty Entertainment common stock, respectively, authorized for issuance. As of September 30, 2009, no shares of any Series C common stock were issued or outstanding.

        During the nine months ended September 30, 2009, the Company settled put options on Series A Liberty Capital common stock for cash payments of $5 million. As of September 30, 2009, put options with respect to 12.6 million shares of LINTA with a weighted average put price of $16.97 remained outstanding. Such put options expire on or before September 30, 2010.

        The Company accounts for the foregoing put options as financial instrument liabilities due to their settlement provisions. Accordingly, the put options are recorded in financial instrument liabilities at fair value, and changes in the fair value are included in realized and unrealized gains (losses) on financial instruments in the accompanying condensed consolidated statements of operations.

I-27



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(12) Transactions with Related Parties

        During the nine months ended September 30, 2009 and the seven months ended September 30, 2008, subsidiaries of Liberty recognized aggregate revenue of $255 million and $183 million, respectively, from DIRECTV for distribution of their programming. In addition, subsidiaries of Liberty made aggregate payments of $27 million and $21 million to DIRECTV for carriage and marketing.

        In 2009, QVC executed a five-year affiliation agreement with DIRECTV. Pursuant to such agreement, QVC paid DIRECTV approximately $11 million for improved channel position.

(13) Commitments and Contingencies

Film Rights

        Starz Entertainment, a wholly-owned subsidiary of Liberty, provides premium video programming distributed by cable operators, direct-to-home satellite providers, telephone companies, other distributors and the Internet throughout the United States. Starz Entertainment has entered into agreements with a number of motion picture producers which obligate Starz Entertainment to pay fees ("Programming Fees") for the rights to exhibit certain films that are released by these producers. The unpaid balance of Programming Fees for films that were available for exhibition by Starz Entertainment at September 30, 2009 is reflected as a liability in the accompanying condensed consolidated balance sheet. The balance due as of September 30, 2009 is payable as follows: $116 million in 2009, $21 million in 2010 and $4 million thereafter.

        Starz Entertainment has also contracted to pay Programming Fees for 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 September 30, 2009. In addition, Starz Entertainment has agreed to pay Sony Pictures Entertainment ("Sony") a total of $190 million in four annual installments of $47.5 million beginning in 2011 for a contract extension. In December 2008, Starz Entertainment entered into a new agreement with Sony requiring $120 million in three equal annual installments beginning in 2015. Starz Entertainment's estimate of amounts payable under these agreements is as follows: $58 million in 2009; $480 million in 2010; $95 million in 2011; $94 million in 2012; $84 million in 2013 and $212 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 2012 and all qualifying films that are released theatrically in the United States by studios owned by Sony through 2016. 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 February 2009, Disney announced that it has agreed to enter into a long-term distribution arrangement with DreamWorks Studios. Under the terms of this arrangement, Disney will handle distribution and marketing for approximately six DreamWorks films each year. As a result of this arrangement, the number of qualifying films under Starz Entertainment's output agreement with Disney may be higher than it would have been otherwise.

Guarantees

        Liberty guarantees Starz Entertainment's obligations under certain of its studio output agreements. At September 30, 2009, Liberty's guarantees for obligations for films released by such date aggregated

I-28



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


$786 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 direct commitment of Starz Entertainment, a consolidated subsidiary of Liberty, Liberty has not recorded a separate indirect liability for its guarantee of these obligations.

        In connection with agreements for the sale of assets by Liberty or its subsidiaries, Liberty may retain 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 obligations may extend for a number of years. Liberty is unable to estimate the maximum potential liability for these types of indemnification obligations as the sale agreements may 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.

Sports Rights

        Liberty Sports Group has entered into agreements with various professional and collegiate sports teams and leagues to purchase the rights to broadcast games through 2020. At September 30, 2009, such commitments aggregated $1,419 million and are due as follows: $20 million in 2009; $134 million in 2010; $133 million in 2011; $122 million in 2012; $105 million in 2013 and $905 million thereafter.

Employment Contracts

        The Atlanta Braves and certain of their players and coaches have entered into long-term employment contracts whereby such individuals' compensation is guaranteed. Amounts due under guaranteed contracts as of September 30, 2009 aggregated $167 million, which is payable as follows: $3 million in 2009, $68 million in 2010, $56 million in 2011 and $40 million in 2012. In addition to the foregoing amounts, certain players and coaches may earn incentive compensation under the terms of their employment contracts.

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.

(14) Information About Liberty's Operating Segments

        Liberty, through its ownership interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce, media, communications and entertainment industries. Liberty has attributed each of its businesses to one of three groups: the Interactive Group, the Entertainment

I-29



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)


Group and the Capital Group. Each of the businesses in the tracking stock groups is separately managed. Liberty identifies its reportable segments as (A) those consolidated subsidiaries that represent 10% or more of its consolidated revenue, pre-tax earnings or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty's pre-tax earnings. 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, Adjusted OIBDA, gross margin, average sales price per unit, number of units shipped and revenue or sales per customer equivalent. In addition, Liberty reviews nonfinancial measures such as subscriber growth, penetration, website visitors, conversion rates and active customers, as appropriate.

        Liberty defines Adjusted OIBDA 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, Adjusted OIBDA 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 nine months ended September 30, 2009, Liberty has identified the following businesses as its reportable segments:

        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 Company's summary of significant policies.

I-30



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Performance Measures

 
  Nine months ended September 30,  
 
  2009   2008  
 
  Revenue   Adjusted
OIBDA
  Revenue   Adjusted
OIBDA
 
 
  amounts in millions
 

Interactive Group

                         
 

QVC

  $ 4,944     1,035     5,167     1,086  
 

Corporate and other

    650     63     535     37  
                   

    5,594     1,098     5,702     1,123  
                   

Entertainment Group

                         
 

Starz Entertainment

    893     306     826     220  
 

Corporate and other

    212     1     205     (3 )
                   

    1,105     307     1,031     217  
                   

Capital Group

                         
 

Starz Media

    248     (49 )   223     (125 )
 

Corporate and other

    247     (50 )   260     (66 )
                   

    495     (99 )   483     (191 )
                   
 

Consolidated Liberty

  $ 7,194     1,306     7,216     1,149  
                   

Equity Affiliates

                         
 

DIRECTV

  $ 15,584     3,819     14,379     3,791  
                   
 

Expedia

  $ 2,258     561     2,316     513  
                   

 

 
  Three months ended September 30,  
 
  2009   2008  
 
  Revenue   Adjusted
OIBDA
  Revenue   Adjusted
OIBDA
 
 
  amounts in millions
 

Interactive Group

                         
 

QVC

  $ 1,667     343     1,641     312  
 

Corporate and other

    160     2     157      
                   

    1,827     345     1,798     312  
                   

Entertainment Group

                         
 

Starz Entertainment

    301     93     278     78  
 

Corporate and other

    68     (7 )   84     (4 )
                   

    369     86     362     74  
                   

Capital Group

                         
 

Starz Media

    56     (71 )   104     (82 )
 

Corporate and other

    115         114     (10 )
                   

    171     (71 )   218     (92 )
                   
 

Consolidated Liberty

  $ 2,367     360     2,378     294  
                   

Equity Affiliates

                         
 

DIRECTV

  $ 5,465     1,348     4,981     1,252  
                   
 

Expedia

  $ 852     246     833     215  
                   

I-31



LIBERTY MEDIA CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

Other Information

 
  September 30, 2009  
 
  Total
assets
  Investments
in affiliates
  Capital
expenditures
 
 
  amounts in millions
 

Interactive Group

                   
 

QVC

  $ 14,640     2     112  
 

Corporate and other

    2,577     858     20  
               

    17,217     860     132  
               

Entertainment Group

                   
 

Starz Entertainment

    1,630         5  
 

Corporate and other

    14,684     13,840     5  
               

    16,314     13,840     10  
               

Capital Group

                   
 

Starz Media

    589         1  
 

Corporate and other

    8,959     278     9  
               

    9,548     278     10  
               

Inter-group eliminations

    (203 )        
               
 

Consolidated Liberty

  $ 42,876     14,978     152  
               

Equity Affiliates

                   
 

DIRECTV

  $ 17,627           1,548  
                 
 

Expedia

  $ 6,147           63  
                 

        The following table provides a reconciliation of segment Adjusted OIBDA to earnings (loss) before income taxes:

 
  Three months
ended
September 30,
  Nine months
ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Consolidated segment Adjusted OIBDA

  $ 360     294     1,306     1,149  

Stock-based compensation

    (35 )   (24 )   (98 )   (67 )

Depreciation and amortization

    (166 )   (179 )   (510 )   (532 )

Impairment of long-lived assets

        (34 )       (34 )

Interest expense

    (194 )   (190 )   (509 )   (543 )

Share of earnings of affiliates

    138     141     243     351  

Realized and unrealized gains (losses) on financial instruments, net

    (326 )   77     (407 )   (245 )

Gains (losses) on dispositions, net

    (14 )   (2 )   150     3,679  

Other than temporary declines in fair value of investments

        (444 )       (445 )

Other, net

    12     14     74     113  
                   
 

Earnings (loss) before income taxes

  $ (225 )   (347 )   249     3,426  
                   

I-32


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

        Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; new service offerings; revenue growth and subscriber trends at QVC, Inc. and Starz Entertainment, LLC; the recoverability of our goodwill and other long-lived assets; counterparty performance under our derivative arrangements; our projected sources and uses of cash; the estimated value of our derivative instruments; 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 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 there can be no assurance that the 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:

I-33


For additional risk factors, please see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008, as amended. 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 our 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, 2008, as amended.

Overview

        We own controlling and non-controlling 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 principal reportable segments, are QVC, Inc. and Starz Entertainment, LLC. 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 premium programming distributed by cable operators, direct-to-home satellite providers, telephone companies, other distributors and 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., Backcountry.com, Inc., Bodybuilding.com, LLC, Starz Media, LLC, CDM Fantasy Sports Corp., Atlanta National League Baseball Club, Inc., Liberty Sports Holdings, LLC, Leisure Arts, Inc., TruePosition, Inc., BuySeasons, Inc. and WFRV and WJMN Television Station, Inc. Provide operates an e-commerce marketplace of websites for perishable goods, including flowers and fruits and desserts, as well as upscale personalized gifts. Backcountry operates websites offering outdoor and backcountry sports gear and clothing. Bodybuilding manages websites related to sports nutrition, body building and fitness. Starz Media develops, acquires, produces and distributes live-action and animated films and television productions for the theatrical, home video, television and other ancillary markets in the United States and internationally. FUN Sports operates websites that offer fantasy sports services. ANLBC owns the Atlanta Braves, a major league baseball club, as well as certain of the Atlanta Braves' minor league clubs. Liberty Sports Group is comprised of three regional sports television networks—FSN' Rocky Mountain, FSN Northwest and FSN Pittsburgh. Leisure Arts publishes and markets needlework, craft, decorating, entertaining and other lifestyle interest "how-to" books through retail and online distribution. TruePosition provides equipment and technology that deliver location-based services to wireless users. BuySeasons operates websites that offer costumes, accessories, décor and party supplies. WFRV TV Station is a CBS broadcast affiliate that serves Green Bay, Wisconsin and Escanaba, Michigan.

        In addition to the foregoing businesses, we hold ownership interests in The DIRECTV Group, Inc., Expedia, Inc. and Sirius XM Radio Inc., which we account for as equity method

I-34



investments; and we continue to maintain investments and related financial instruments in public companies such as Time Warner, Time Warner Cable, IAC/InterActiveCorp and Sprint Nextel Corporation, which are accounted for at their respective fair market values and are included in corporate and other.

Tracking Stocks

        Prior to March 3, 2008, we had two tracking stocks outstanding, Liberty Interactive common stock and Liberty Capital common stock. On March 3, 2008, we completed a reclassification pursuant to which our Liberty Capital common stock was reclassified into two new tracking stocks, one retaining the designation Liberty Capital common stock and the other designated Liberty Entertainment common stock. The Liberty Entertainment common stock is intended to track and reflect the separate economic performance of the Entertainment Group, which has attributed to it a portion of the businesses, assets and liabilities that were previously attributed to the Capital Group.

        Tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole. While the Interactive Group, the Entertainment Group and the Capital Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stocks have no direct claim to the group's stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.

        The term "Interactive Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which we have attributed to it. The assets and businesses we have attributed to the Interactive Group are those engaged in video and on-line commerce, and include our subsidiaries QVC, Provide, Backcountry, Bodybuilding and BuySeasons and our interests in Expedia, HSN, Inc., Interval Leisure Group, Inc., Ticketmaster Entertainment, Inc., Tree.com, Inc. and IAC. In addition, we have attributed $2,135 million principal amount (as of September 30, 2009) of our public debt to the Interactive Group. The Interactive Group will also include such other businesses that our board of directors may in the future determine to attribute to the Interactive Group, including such other businesses as we may acquire for the Interactive Group.

        Similarly, the term "Entertainment Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities which we have attributed to it, including our subsidiaries Starz Entertainment, FUN Sports and Liberty Sports Group, our equity interests in DIRECTV, Game Show Network, LLC and WildBlue Communications, Inc. and approximately $311 million of corporate cash (as of September 30, 2009). In addition, we have attributed an equity collar on 98.75 million shares of DIRECTV common stock and $1,888 million of borrowings against the put value of such equity collar.

        During the fourth quarter of 2008, our board of directors approved a plan to redeem a portion of the outstanding shares of our Entertainment Group tracking stock for all of the outstanding shares of a newly formed subsidiary of our company, Liberty Entertainment, Inc. The Redemption and resulting separation of LEI from our company are referred to as the "Split Off."

        If the Redemption is completed, we will redeem 90% of the outstanding shares of each series of Liberty Entertainment common stock for 100% of the outstanding shares of the same series of LEI, with cash in lieu of fractional shares, in each case, as of a date to be determined by our board of directors. Immediately following the Redemption, the holders of Liberty Entertainment common stock will own 100% of the outstanding equity of LEI. At the time of the Split Off, LEI will hold our interests in DIRECTV (and related collars and debt), Liberty Sports Group and GSN and approximately $80 million in cash. In addition, we and LEI have entered into a revolving credit facility

I-35



pursuant to which we will provide LEI with up to $300 million principal amount of loans. The Split Off is conditioned on, among other matters, receipt of stockholder approval and receipt of a tax opinion from tax counsel and (x) the satisfaction or waiver of all conditions to the Merger Transaction described in note 2 or (y) the termination of the Merger Agreement described in note 2. The Split Off and Merger Transaction are expected to occur in the fourth quarter of 2009.

        Subsequent to the Split Off, our Entertainment Group will be renamed the Starz Group and will be comprised principally of Starz Entertainment and cash.

        The term "Capital Group" also does not represent a separate legal entity, rather it represents all of our businesses, assets and liabilities which we have attributed to it. The Capital Group has attributed to it all of our businesses, assets and liabilities not attributed to the Interactive Group or the Entertainment Group, including our subsidiaries Starz Media, ANLBC, Leisure Arts, TruePosition and WFRV TV Station, and minority equity investments in Sirius XM Radio Inc., Time Warner Inc. and Sprint Nextel Corporation. In addition, we have attributed $2,923 million of cash, including subsidiary cash, and $4,466 million principal amount (as of September 30, 2009) of our exchangeable senior debentures and other parent debt to the Capital Group. The Capital Group will also include such other businesses that our board of directors may in the future determine to attribute to the Capital Group, including such other businesses as we may acquire for the Capital Group.

        See Exhibit 99.1 to this Quarterly Report on Form 10-Q for unaudited attributed financial information for our tracking stock groups.

I-36


Results of Operations—Consolidated

        General.    We provide in the tables below information regarding our Consolidated Operating Results and Other Income and Expense, as well as information regarding the contribution to those items from our reportable segments categorized by tracking stock group. The "corporate and other" category for each tracking stock group consists of those assets or businesses which do not qualify as a separate reportable segment. For a more detailed discussion and analysis of the financial results of the principal reporting segments of each tracking stock group, see "Results of Operations—Tracking Stock Groups" below.

Consolidated Operating Results

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Revenue

                         
 

Interactive Group

                         
   

QVC

  $ 1,667     1,641     4,944     5,167  
   

Corporate and other

    160     157     650     535  
                   

    1,827     1,798     5,594     5,702  
                   
 

Entertainment Group

                         
   

Starz Entertainment

    301     278     893     826  
   

Corporate and other

    68     84     212     205  
                   

    369     362     1,105     1,031  
                   
 

Capital Group

                         
   

Starz Media

    56     104     248     223  
   

Corporate and other

    115     114     247     260  
                   

    171     218     495     483  
                   
     

Consolidated Liberty

  $ 2,367     2,378     7,194     7,216  
                   

Adjusted OIBDA

                         
 

Interactive Group

                         
   

QVC

  $ 343     312     1,035     1,086  
   

Corporate and other

    2         63     37  
                   

    345     312     1,098     1,123  
                   
 

Entertainment Group

                         
   

Starz Entertainment

    93     78     306     220  
   

Corporate and other

    (7 )   (4 )   1     (3 )
                   

    86     74     307     217  
                   
 

Capital Group

                         
   

Starz Media

    (71 )   (82 )   (49 )   (125 )
   

Corporate and other

        (10 )   (50 )   (66 )
                   

    (71 )   (92 )   (99 )   (191 )
                   
     

Consolidated Liberty

  $ 360     294     1,306     1,149  
                   

Operating Income (Loss)

                         
 

Interactive Group

                         
   

QVC

  $ 209     175     630     678  
   

Corporate and other

    (15 )   (14 )   14     2  
                   

    194     161     644     680  
                   
 

Entertainment Group

                         
   

Starz Entertainment

    78     63     265     176  
   

Corporate and other

    (19 )   (16 )   (45 )   (32 )
                   

    59     47     220     144  
                   
 

Capital Group

                         
   

Starz Media

    (73 )   (86 )   (56 )   (135 )
   

Corporate and other

    (21 )   (65 )   (110 )   (173 )
                   

    (94 )   (151 )   (166 )   (308 )
                   
     

Consolidated Liberty

  $ 159     57     698     516  
                   

I-37


        Revenue.    Our consolidated revenue decreased less than 1% for each of the three and nine month periods ended September 30, 2009, as compared to the corresponding prior year period. The three month decrease is due primarily to decreases for Starz Media ($48 million) and our sale of FUN Technologies ($14 million), partially offset by a $26 million increase for QVC and a $23 million increase for Starz Entertainment. See Management's Discussion and Analysis for each of our tracking stock groups below for a more complete discussion of the results of operations of certain of our subsidiaries.

        The nine month decrease is due primarily to a $223 million decrease for QVC and a $27 million decrease for the sale of FUN Technologies, partially offset by increases for our e-commerce businesses ($115 million), Starz Entertainment ($67 million) and Liberty Sports Group ($36 million). The increase for Liberty Sports Group is the result of having a full nine months of revenue in 2009, as compared with seven months in 2008.

        Adjusted OIBDA.    We define Adjusted OIBDA as revenue less cost of sales, operating expenses and selling, general and administrative ("SG&A") expenses (excluding stock compensation). Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses, including each business's ability to service debt and fund capital expenditures. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation and amortization, stock-based compensation, separately reported litigation settlements and restructuring and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA 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. See note 14 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Earnings Before Income Taxes.

        Consolidated Adjusted OIBDA increased $66 million or 22.4% and $157 million or 13.7% for the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. The three month increase is due primarily to increases for QVC ($31 million), Starz Entertainment ($15 million), Starz Media ($11 million) and TruePosition ($10 million). Starz Media's Adjusted OIBDA improved in 2009 primarily due to the timing of theatrical and home video revenue and related expenses associated with films released by Starz Animation and Overture Films. Theatrical print costs and advertising expenses related to the release of a film are recognized at the time the advertisements are run and generally exceed the theatrical revenue earned from the film. In addition, amortization of film production costs begins when revenue recognition begins. Although there can be no assurance, the expectation when films are approved for production or acquisition is that the ultimate revenue to be earned from theatrical release, home video, video on demand and pay-per-view and television distribution, which revenue may be earned over several years, will exceed the costs associated with the film.

        The nine month increase in Adjusted OIBDA is due primarily to increases for Starz Entertainment ($86 million), Starz Media ($76 million), TruePosition ($25 million) and our e-commerce businesses ($20 million), partially offset by a $51 million decrease for QVC.

        Stock-based compensation.    Stock-based compensation includes compensation related to (1) options and stock appreciation rights ("SARs") for shares of our common stock that are granted to certain of our officers and employees, (2) phantom stock appreciation rights ("PSARs") granted to officers and employees of certain of our subsidiaries pursuant to private equity plans and (3) amortization of restricted stock grants.

I-38


        We recorded $98 million and $67 million of stock compensation expense for the nine months ended September 30, 2009 and 2008, respectively. The increase in stock compensation expense in 2009 primarily relates to our liability awards and is due to an increase in our stock prices. As of September 30, 2009, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $70 million. Such amount will be recognized in our consolidated statements of operations over a weighted average period of approximately 2 years.

        Operating income.    Our consolidated operating income increased $102 million and $182 million for the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. The nine month increase is primarily the net result of the increases for Starz Entertainment, Starz Media, TruePosition and our e-commerce companies, partially offset by the decrease for QVC and an increase in our corporate stock compensation. In addition, in 2008 we recognized a $34 million impairment charge related to WFRV TV Station.

I-39


        Components of Other Income (Expense) are presented in the table below. The attribution of these items to our tracking stock groups assumes the Reclassification had occurred as of January 1, 2008.

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Interest expense

                         
 

Interactive Group

  $ (147 )   (122 )   (353 )   (365 )
 

Entertainment Group

    (18 )   (25 )   (54 )   (54 )
 

Capital Group

    (29 )   (43 )   (102 )   (124 )
                   
   

Consolidated Liberty

  $ (194 )   (190 )   (509 )   (543 )
                   

Dividend and interest income

                         
 

Interactive Group

  $ 1     5     7     18  
 

Entertainment Group

    1     5     2     14  
 

Capital Group

    23     28     90     106  
                   
   

Consolidated Liberty

  $ 25     38     99     138  
                   

Share of earnings (losses) of affiliates

                         
 

Interactive Group

  $ 36     23     (47 )   58  
 

Entertainment Group

    124     116     316     314  
 

Capital Group

    (22 )   2     (26 )   (21 )
                   
   

Consolidated Liberty

  $ 138     141     243     351  
                   

Realized and unrealized gains (losses) on financial instruments, net

                         
   

Interactive Group

  $ (67 )   (43 )   (114 )   (81 )
   

Entertainment Group

    (161 )   106     (235 )   24  
   

Capital Group

    (98 )   14     (58 )   (188 )
                   
     

Consolidated Liberty

  $ (326 )   77     (407 )   (245 )
                   

Gains (losses) on dispositions, net

                         
 

Interactive Group

  $ 3              
 

Entertainment Group

        (2 )   54     3,664  
 

Capital Group

    (17 )       96     15  
                   
   

Consolidated Liberty

  $ (14 )   (2 )   150     3,679  
                   

Other than temporary declines in fair value of investments

                         
 

Interactive Group

  $     (440 )       (440 )
 

Entertainment Group

        (4 )       (4 )
 

Capital Group

                (1 )
                   
   

Consolidated Liberty

  $     (444 )       (445 )
                   

Other, net

                         
 

Interactive Group

  $ (22 )   (23 )   5     (22 )
 

Entertainment Group

    (6 )       (43 )    
 

Capital Group

    15     (1 )   13     (3 )
                   
   

Consolidated Liberty

  $ (13 )   (24 )   (25 )   (25 )
                   

I-40


        Interest expense.    Consolidated interest expense increased 2.1% and decreased 6.3% for the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. Such fluctuations are due primarily to decreases related to the 2009 and 2008 retirement of certain of our exchangeable senior debentures attributed to the Capital Group and certain of our senior notes and debentures attributed to the Interactive Group. These decreases were offset by increases related to higher interest rates on the QVC debt and interest expense related to borrowings against our derivative positions.

        Dividend and interest income.    Interest income decreased in 2009 due to lower interest rates on invested cash.

        Share of earnings (losses) of affiliates.    The following table presents our share of earnings (losses) of affiliates:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Entertainment Group

                         
 

DIRECTV

  $ 125     111     304     301  
 

Other

    (1 )   5     12     13  

Interactive Group

                         
 

Expedia

    28     23     47     58  
 

Other

    8         (94 )    

Capital Group

                         
 

Sirius

    (18 )       (14 )    
 

Other

    (4 )   2     (12 )   (21 )
                   

  $ 138     141     243     351  
                   

        As previously described, we acquired a 41% ownership interest in DIRECTV upon consummation of the News Corporation Exchange in February 2008. We subsequently purchased additional shares of DIRECTV for approximately $1.98 billion. Such purchase, coupled with DIRECTV's stock repurchases, has increased our ownership percentage to 57% as of September 30, 2009. Due to a voting arrangement with DIRECTV that limits our ability to control DIRECTV, we continue to account for our investment using the equity method. Our share of earnings of DIRECTV for the nine months ended September 30, 2009 and for the seven months ended September 30, 2008 includes $231 million and $153 million, respectively, of amortization (net of related taxes) of identifiable intangibles included in our excess basis as described in note 7 to the accompanying condensed consolidated financial

I-41



statements. Summarized results of operations information for DIRECTV derived from its historical financial statements is as follows:

 
  Three months ended September 30,   Nine months ended September 30,  
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Revenue

  $ 5,465     4,981     15,584     14,379  

Costs of revenue

    (2,764 )   (2,508 )   (7,784 )   (7,122 )

SG&A expenses

    (1,353 )   (1,221 )   (3,981 )   (3,466 )

Depreciation and amortization

    (663 )   (594 )   (2,008 )   (1,675 )
                   
 

Operating income

    685     658     1,811     2,116  

Interest expense

    (101 )   (103 )   (304 )   (248 )

Other income, net

    19     38     92     93  

Income tax expense

    (219 )   (195 )   (585 )   (712 )
                   
 

Net income

    384     398     1,014     1,249  

Less net income attributable to noncontrolling interest

    (18 )   (35 )   (40 )   (60 )
                   

Net income attributable to DIRECTV

  $ 366     363     974     1,189  
                   

        DIRECTV achieved growth in revenue in 2009 due primarily to a larger subscriber base in 2009, partially offset by lower premium movie channel revenue. In addition, average revenue per subscriber for DIRECTV-U.S. increased less than 2% in 2009, as compared to 2008. The revenue growth was offset by higher subscriber acquisition, upgrade and retention costs, as well as higher programming costs, which resulted in lower operating income. For a more detailed discussion of DIRECTV's results of operations, please see their Quarterly Report on Form 10-Q for the nine months ended September 30, 2009 as filed with the Securities and Exchange Commission (the "SEC"). We have had no part in the preparation of DIRECTV's filings with the SEC and are not incorporating by reference any such filing in this Quarterly Report on Form 10-Q.

        Our "other" share of losses attributed to the Interactive Group for the nine months ended September 30, 2009 include $42 million for Ticketmaster and $43 million for HSN. As we record our share of losses for these affiliates on a three month lag, the losses reflected in our first quarter 2009 results include our share of goodwill impairment charges recorded by Ticketmaster and HSN in the fourth quarter of 2008 that are in excess of other than temporary impairment charges that we recorded on these investments in the fourth quarter of 2008.

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        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:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Non-strategic Securities

  $ 363     (607 )   1,008     (1,889 )

Exchangeable senior debentures

    (438 )   478     (771 )   866  

Equity collars(1)

    (147 )   220     (375 )   443  

Borrowed shares(1)

    (143 )   84     (314 )   585  

Other derivatives

    39     (98 )   45     (250 )
                   

  $ (326 )   77     (407 )   (245 )
                   

(1)
Changes in fair value are due primarily to changes in the market prices of the underlying marketable securities.

        Gains (losses) on dispositions.    Gains on dispositions in 2009 include $52 million attributed to the Entertainment Group related to our contribution of FUN Technologies to GSN and $94 million attributed to the Capital Group related to the repayment of notes receivable by Sirius. Gains on dispositions in 2008 include $3,666 million related to the News Corporation Exchange.

        Other than temporary declines in fair value of investments.    In the third quarter of 2008, we recognized a $440 million other-than-temporary decline in value of our investment in IAC. No such charges were recognized in 2009.

        Income taxes.    Our effective tax rate for the nine months ended September 30, 2009 is 6.8% and is less than the U.S. federal income tax rate of 35% due to (i) a benefit related to our excess tax basis over book basis for FUN Technologies, which we contributed to GSN in the second quarter of 2009 and (ii) non-taxable gains on put options on our common stock. In 2008, we had pre-tax income of $3,426 million and an income tax benefit of $1,937 million. The News Corporation Exchange completed in 2008 qualifies as an IRC Section 355 transaction, and therefore does not trigger federal or state income tax obligations. In addition, upon consummation of this exchange transaction, deferred tax liabilities previously recorded for the difference between our book and tax bases in our News Corporation investment in the amount of $1,791 million were reversed with an offset to income tax benefit.

        Net earnings.    Our net earnings were $232 million and $5,363 million for the nine months ended September 30, 2009 and 2008, respectively, and were the result of the above-described fluctuations in our revenue and expenses.

Material Changes in Financial Condition

        While the Interactive Group, the Entertainment Group and the Capital Group are not separate legal entities and the assets and liabilities attributed to each group remain assets and liabilities of our consolidated company, we manage the liquidity and financial resources of each group separately. Keeping in mind that assets of one group may be used to satisfy liabilities of one of the other groups, the following discussion assumes, consistent with management expectations, that future liquidity needs of each group will be funded by the financial resources attributed to each respective group.

        As of September 30, 2009, substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and A1/P1 rated commercial paper.

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        The following are potential sources of liquidity for each group to the extent the identified asset or transaction has been attributed to such group: available cash balances, cash generated by the operating activities of our privately-owned subsidiaries (to the extent such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted), proceeds from asset sales, monetization of our public investment portfolio (including derivatives), debt and equity issuances, and dividend and interest receipts.

        Standard & Poor's Ratings Services and Moody's Investors Services have each notified us that upon completion of our proposed Split Off of LEI, they expect to lower their rating on our corporate credit. In the event we need to obtain external debt financing, such downgrades could hurt our ability to obtain financing and could increase the cost of any financing we are able to obtain.

        Interactive Group.    During the nine months ended September 30, 2009, the Interactive Group's primary uses of cash were $2,128 million of debt repayments and $132 million of capital expenditures. These uses of cash were funded primarily with $983 million from the issuance of QVC bonds, $500 million of intergroup borrowings, $699 million of cash provided by operating activities, which is net of $168 million of intercompany tax payments to the Capital Group, and $80 million of cash proceeds from the sale of shares of IAC. As of September 30, 2009, the Interactive Group had a cash balance of $816 million.

        The projected uses of Interactive Group cash for the remainder of 2009 include approximately $105 million for interest payments on QVC debt and parent debt attributed to the Interactive Group, $75 million for capital expenditures, additional tax payments to the Capital Group and payments to settle outstanding put options on Liberty Interactive Group common stock. In addition, we may make additional repurchases of Liberty Interactive common stock and additional investments in existing or new businesses and attribute such investments to the Interactive Group. However, we do not have any commitments to make new investments at this time.

        We expect that the Interactive Group will fund its 2009 cash needs with cash on hand, cash provided by operating activities and proceeds from the sale of available-for-sale securities. In addition, at September 30, 2009, unused capacity under the QVC Amended Credit Agreements aggregated $263 million.

        During the third quarter of 2009, QVC issued $1.0 billion principal amount of 7.5% Senior Secured Notes due 2019 at an issue price of 98.278%. QVC used the net proceeds from such offering to fund the purchase and cancellation of outstanding term loans under QVC's senior secured credit facilities that mature in 2014.

        Effective June 16, 2009, QVC amended each of its bank credit agreements. Concurrent with the execution of the Amended Credit Agreements, QVC retired $750 million of loans at par and cancelled another $19 million of unfunded commitments at no cost. As noted above, QVC purchased and cancelled outstanding term loans under its Amended Credit Agreements with proceeds from the issuance of the QVC Notes. The remaining $3.23 billion outstanding principal to mature in six tranches between June 2010 and March 2014 as follows: $500 million due in 2010; $702 million due in 2011; $400 million due in 2012; $400 million due in 2013; and $1,233 million due in 2014.

        In connection with the execution of the Amended Credit Agreements, those lenders consenting to the amendments, which held loans in the aggregate principal amount of approximately $4.23 billion, received certain modified loan terms, including (i) adjusted interest rate margins of 350 to 550 basis points depending on the tranche maturity, (ii) reductions in QVC's maximum leverage ratio, (iii) additional restrictions on creating additional indebtedness and (iv) mandatory prepayment in the event of certain asset sales by QVC. Loans held by the non-consenting lenders, in the aggregate principal amount of approximately $252 million, will continue to receive an interest rate margin of up

I-44



to 100 basis points with their loans maturing in 2011. All other terms of the Amended Credit Agreements will apply to these loans.

        Cash used to retire the $750 million of loans came from a combination of $250 million in cash from QVC and $250 million in the form of an intergroup loan from each of the Entertainment Group and the Capital Group to the Interactive Group. Such intergroup loans (i) are secured by various public stocks attributed to the Interactive Group, (ii) accrue interest quarterly at the rate of LIBOR plus 500 basis points and (iii) are due June 16, 2010. Subsequent to September 30, 2009, the Interactive Group repaid $50 million of the intergroup loans to each of the Entertainment Group and the Capital Group.

        QVC was in compliance with its debt covenants as of September 30, 2009.

        Entertainment Group.    As of September 30, 2009, the Entertainment Group had a cash balance of $577 million. During the second quarter of 2009, the Entertainment Group used cash on hand to make a $250 million intergroup loan to the Interactive Group; and during the third quarter, the Entertainment Group made payments against the Collar Loan of $146 million.

        In April 2008, we entered into an equity collar with respect to 110 million shares of DIRECTV common stock and a related credit facility against the present value of the put value of such collar. At the time of closing, we borrowed $1,977 million and used such proceeds to purchase 78.3 million shares of DIRECTV common stock. The Collar Loan is due as the DIRECTV Collar terminates in six tranches from June 2009 through August 2012. Each tranche is repayable during a six-month period based upon a formula that factors in several variables including the market price of DIRECTV common stock. Interest accrues at an effective weighted average interest rate of 3.5% and is due and payable as each tranche matures. Borrowings are collateralized by the puts underlying the Collar Loan and 170 million shares of DIRECTV common stock owned by us.

        In November 2008, we chose to unwind 50% of the first tranche of the DIRECTV Collar. The first tranche expires in 2009 and originally had 22.5 million DIRECTV shares underlying it. As part of this transaction, we repaid the portion of the Collar Loan ($228.4 million) associated with the shares that were unwound. Such repayment was funded with (1) proceeds from the collar unwind ($45.5 million), (2) funds borrowed from the remaining capacity of the Collar Loan ($181.1 million) and (3) cash on hand ($1.8 million). As a result of this transaction, the amount of the Collar Loan due in 2009 is approximately $258 million including accrued interest.

        The DIRECTV Collar contains a provision that allows the counterparty to terminate a portion of the DIRECTV Collar if the total number of shares of DIRECTV underlying the DIRECTV Collar exceeds 20% of the outstanding public float of DIRECTV common stock. In the event the counterparty chooses to terminate a portion of the DIRECTV Collar, the repayment of the corresponding debt would be accelerated. We expect that we would fund any such required repayment with available cash, proceeds from the sale of DIRECTV shares that we own, or a combination of the foregoing. As of September 30, 2009, the number of shares of DIRECTV common stock underlying the DIRECTV Collar represented approximately 24% of the outstanding public float of DIRECTV common stock. As of the date of filing of this Quarterly Report on Form 10-Q, the counterparty had not elected to terminate a portion of the collar.

        The projected uses of Entertainment Group cash in 2009 include $112 million to repay the first tranche of the Collar Loan and additional tax payments to the Capital Group. In addition, we may make additional investments in existing or new businesses and attribute such investments to the Entertainment Group. However, we do not have any significant commitments to make new investments at this time. We expect that we will be able to use a combination of cash on hand and cash from operations to fund Entertainment Group cash needs in 2009.

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        In addition, the second tranche of the Collar Loan in the amount of $366 million is scheduled to mature in the first half of 2010. If the Entertainment Group does not have sufficient cash to fund such maturity, we may obtain the necessary funds through sales of DIRECTV shares, borrowings against unencumbered DIRECTV shares, inter-group loans or a combination of the foregoing.

        If the Split Off and Merger Transaction are completed as currently contemplated, the DIRECTV Collar and Collar Loan would be included in the assets and liabilities of LEI. In addition, LEI would reimburse Liberty for any repayments of the Collar Loan made by Liberty following the execution of the Merger Agreement and prior to the Split Off and Merger Transaction. Upon completion of the Split Off and Merger Transaction, our Entertainment Group would be renamed the Starz Group and would be comprised principally of our interest in Starz Entertainment and cash.

        Capital Group.    During the second quarter of 2009, we used cash for the voluntary early retirement of $750 million face amount of our Exchangeable Senior Debentures attributable to Liberty Capital. We paid $187.5 million (of which $37.5 million was existing cash collateral) to retire $400 million face amount of our 4% Exchangeable Senior Debentures due 2029 and $350 million face amount of our 33/4% Exchangeable Senior Debentures due 2030. We also terminated swap arrangements that reference the 4% and 33/4% Exchangeable Senior Debentures with no additional payment. The total cash used to retire the $750 million face amount of Exchangeable Senior Debentures and swaps referencing these Exchangeable Senior Debentures was $503 million, of which $315 million was paid to settle swap arrangements that were settled in November 2008. We also purchased and retired $126 million principal amount of our 3.125% Exchangeable Senior Debentures for aggregate cash payments of $106 million. Other uses of cash by the Capital Group were $186 million net cash to purchase debt and equity instruments of Sirius (as more fully described in note 7 to the accompanying condensed consolidated financial statements) and the $250 million intergroup loan to the Interactive Group.

        In addition, we had net borrowings during 2009 of $530 million against certain of our derivative positions attributed to the Capital Group, bringing our total borrowings against such derivatives to $1,155 million as of September 30, 2009. We expect that as these derivatives terminate in 2010, the proceeds due to us upon termination will be substantially offset by our borrowings.

        In April 2007, we borrowed $750 million of bank financing with an interest rate of LIBOR plus an applicable margin. We are investing such proceeds in a portfolio of selected debt instruments of companies in the telecommunications, media and technology sectors that we believe have favorable risk/return profiles. Due to the investment restrictions contained in the agreements related to these borrowings, the remaining cash balance of $471 million as of September 30, 2009 is included in other assets in our condensed consolidated balance sheet.

        The projected uses of Capital Group cash for the fourth quarter of 2009 include approximately $30 million for interest payments. We may also make additional investments in existing or new businesses and attribute such investments to the Capital Group. In addition, we expect to generate taxable income and make related federal tax payments.

        We expect that the Capital Group's investing and financing activities will be funded with a combination of cash on hand, tax payments from the Interactive Group and the Entertainment Group and dispositions of non-strategic assets. At September 30, 2009, the Capital Group's sources of liquidity include $2,923 million in cash and $1,744 million of non-strategic AFS securities including related derivatives. To the extent the Capital Group recognizes any taxable gains from the sale of assets or the expiration of derivative instruments, we may incur current tax expense and be required to make tax payments, thereby reducing any cash proceeds attributable to the Capital Group.

        See note 13 to the accompanying condensed consolidated financial statements for a discussion of our commitments and contingencies.

I-46


Results of Operations—Tracking Stock Groups

Interactive Group

        The Interactive Group consists of our subsidiaries QVC, Provide, Backcountry, Bodybuilding and BuySeasons, our interests in IAC/InterActiveCorp, Expedia, HSN, Interval, Ticketmaster, Tree.com and GSI Commerce, Inc. and $2,135 million principal amount (as of September 30, 2009) of our publicly-traded debt.

        The following discussion and analysis provides information concerning the results of operations of the Interactive Group. This discussion should be read in conjunction with (1) our condensed consolidated financial statements and notes thereto included elsewhere in this Quarterly Report on Form 10-Q and (2) the Unaudited Attributed Financial Information for Tracking Stock Groups filed as Exhibit 99.1 to this Quarterly Report on Form 10-Q.

Results of Operations

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Revenue

                         
 

QVC

  $ 1,667     1,641     4,944     5,167  
 

E-commerce businesses

    160     157     650     535  
 

Corporate and other

                 
                   

  $ 1,827     1,798     5,594     5,702  
                   

Adjusted OIBDA

                         
 

QVC

  $ 343     312     1,035     1,086  
 

E-commerce businesses

    5     3     72     52  
 

Corporate and other

    (3 )   (3 )   (9 )   (15 )
                   

  $ 345     312     1,098     1,123  
                   

Operating Income (Loss)

                         
 

QVC

  $ 209     175     630     678  
 

E-commerce businesses

    (8 )   (7 )   33     20  
 

Corporate and other

    (7 )   (7 )   (19 )   (18 )
                   

  $ 194     161     644     680  
                   

        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, QVC's live programming is aired through its nationally televised shopping network 24 hours a day ("QVC-US"). Internationally, QVC's program services are 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.

I-47


        QVC's operating results are as follows:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

Net revenue

  $ 1,667     1,641     4,944     5,167  

Cost of sales

    (1,074 )   (1,070 )   (3,170 )   (3,298 )
                   
 

Gross profit

    593     571     1,774     1,869  

Operating expenses

    (162 )   (164 )   (480 )   (503 )

SG&A expenses (excluding stock-based compensation)

    (88 )   (95 )   (259 )   (280 )
                   
 

Adjusted OIBDA

    343     312     1,035     1,086  

Stock-based compensation

    (4 )   (2 )   (11 )   (12 )

Depreciation and amortization

    (130 )   (135 )   (394 )   (396 )
                   
 

Operating income

  $ 209     175     630     678  
                   

        Net revenue is generated in the following geographical areas:

 
  Three months ended
September 30,
  Nine months ended
September 30,
 
 
  2009   2008   2009   2008  
 
  amounts in millions
 

QVC-US

  $ 1,098     1,073     3,308     3,430  

QVC-UK

    148     159     394     494  

QVC-Germany

    216     228     635     701  

QVC-Japan

    205     181     607     542  
                   

  $ 1,667     1,641     4,944     5,167  
                   

        QVC's net revenue increased 1.6% and decreased 4.3% for the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. The three month increase is comprised of $16 million due to an increase in shipping and handling revenue, $15 million due to lower estimated product returns and $5 million due to a 1.6% increase in the average sales price per unit ("ASP"). These increases were partially offset by a $10 million decrease due to a marginal decrease in the number of units sold from 36.8 million units to 36.6 million units and unfavorable foreign currency rates. Returns as a percent of gross product revenue decreased from 20.8% to 19.9% and reflect a shift in the mix from jewelry and apparel to home products and accessories, which typically have lower return rates.

        The nine month decrease in revenue is comprised of $289 million due to a 5.4% decrease in the number of units sold and $113 million due to unfavorable foreign currency rates. These decreases were partially offset by a net increase of $179 million due primarily to $102 million related to a decrease in estimated product returns and $73 million due to a 2.3% increase in the ASP. Returns as a percent of gross product revenue decreased from 20.3% to 19.1% for the nine month period and reflect a shift in the mix from jewelry and apparel to home products and accessories.

        During the three and nine months ended September 30, 2009, the changes in revenue and expenses were impacted by changes in the exchange rates for the UK pound sterling, the euro and the Japanese yen. In the event the U.S. dollar strengthens against these foreign currencies in the future,

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QVC's revenue and operating cash flow will be negatively impacted. The percentage increase (decrease) in revenue for each of QVC's geographic areas in dollars and in local currency is as follows:

 
  Percentage increase (decrease) in net revenue  
 
  Three months ended
September 30, 2009
  Nine months ended
September 30, 2009
 
 
  U.S. dollars   Local currency   U.S. dollars   Local currency  

QVC-US

    2.3 %   2.3 %   (3.6 )%   (3.6 )%

QVC-UK

    (6.9 )%   6.1 %   (20.2 )%   0.5 %

QVC-Germany

    (5.3 )%   (0.9 )%   (9.4 )%   1.0 %

QVC-Japan

    13.3 %   (1.0 )%   12.0 %   0.5 %

        QVC-US net revenue increased 2.3% in the three months ended September 30, 2009 compared to a year-over-year decline in the first quarter and second quarter 2009 of 10.5% and 2.0%, respectively. The growth in net revenue in the current period is due primarily to a decrease in return rates and an increase in shipping and handling revenue due to the full implementation and increased customer usage of prepaid return labels. QVC-UK showed greater year-over-year growth in net revenue in local currency in the third quarter of 2009 at 6.1% compared to a year-over-year decline in the first quarter 2009 and 1.3% growth in the second quarter. Such third quarter increase is due primarily to increased sales of apparel and beauty products. This third quarter growth has moved the nine months ended September 30, 2009 results to a positive position. QVC-Germany's net revenue in local currency decreased during the three months ended September 30, 2009 due primarily to a decrease in units sold of 9.5% being only partially offset by an 8.5% increase in ASP. The decrease in net revenue for the three months ended September 30, 2009 is due primarily to weakness in the sales of jewelry, apparel and home products. QVC-Germany continues efforts to grow the beauty business. Accessories, which include beauty products, increased approximately 10 basis points to 28% for the three and nine months ended September 2009. QVC-Japan reported a decrease in net revenue in local currency in the third quarter 2009, as compared to the third quarter of 2008, while showing growth of 0.5% for the nine months ended September 30, 2009. For the three months ended September 30, 2009, QVC-Japan experienced growth in the accessories, apparel, health and beauty product categories which was more than offset by declines in the jewelry and home product categories. For the nine months ended September 30, 2009, QVC-Japan experienced growth in the accessories, apparel and jewelry product categories and declines in sales of home, health and beauty products.

        The QVC service is already received by substantially all of the cable television and direct broadcast satellite homes in the U.S., UK and Germany. In addition, the rate of growth in households is expected to diminish in Japan. Therefore, future sales growth will primarily depend on additions of new customers from homes already receiving the QVC service and 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.

        QVC's gross profit percentage increased from 34.8% to 35.6% for the three months ended September 30, 2009 and decreased from 36.2% to 35.9% during the nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. The three month increase is due primarily to favorable warehouse distribution and freight costs. The nine month decrease is due primarily to lower initial product margins in the jewelry, home and apparel product categories, partially offset by favorable warehouse distribution and freight costs.

        QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees, telecommunications expense and production

I-49



costs. Operating expenses decreased 1.2% and 4.6% for the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. Such decreases were primarily due to a decrease in customer service expenses related to staff efficiencies. As a percentage of net revenue, operating expenses were fairly consistent in 2009 and 2008.

        QVC's SG&A expenses include personnel, information technology, provision for doubtful accounts, credit card income and marketing and advertising expenses. Such expenses decreased 7.4% and 7.5% during the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period. The three month decrease is due primarily to a reduction in franchise and sales tax expense and lower marketing expenses offset by an increase in the bad debt provision. The reduction in franchise and sales tax expenses is due primarily to favorable audit settlements. The higher bad debt expense relates to an increase in write-offs and reserves related to QVC's installment receivables and private label credit card. Such increases in bad debt are due to an increase in customer use of the installment payment plan offered by QVC and to the recessionary economic conditions.

        The nine month decrease is due to lower personnel expenses, increased credit card income, lower franchise tax expense and decreased marketing expenditures. Personnel expenses decreased due primarily to a reduction in workforce administered in the fourth quarter of 2008. These decreases were partially offset by an increase in the bad debt provision for the reasons mentioned above.

        E-commerce businesses.    Our e-commerce businesses are comprised of Provide, Backcountry, Bodybuilding and BuySeasons. Revenue for this group is generally lower in the third quarter of the year, as compared to the other three quarters, due to the lack of holidays, which drive a significant portion of the e-commerce businesses' revenue. Revenue increased $3 million or 1.9% and $115 million or 21.5% for the three and nine months ended September 30, 2009, respectively, as compared to the corresponding prior year period, as each company reported an increase in revenue for the nine-month period. Approximately $8 million and $54 million of the increases in revenue for the respective periods are due to small acquisitions made by our e-commerce businesses in 2008. In addition, the e-commerce businesses generated organic revenue growth (decline) of (3.7)% and 11.9% for