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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011
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 INTERACTIVE 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
(Address of principal executive offices)
80112
(Zip Code)
Registrant's telephone number, including area code: (720) 875-5300
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes x   No 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 x    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 x
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 x
The number of outstanding shares of Liberty Interactive Corporation's common stock as of October 31, 2011 was:
 
 
 
Series A common stock
561,205,387

 
Series B common stock
28,989,160

 
 



LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
September 30,
2011
 
December 31,
2010
 
amounts in millions
Assets
 
 
 
Current assets:
 
 
 
    Cash and cash equivalents
$
896

 
1,353

    Trade and other receivables, net
648

 
885

    Inventory, net
1,205

 
1,069

    Other current assets
177

 
85

    Assets of discontinued operations - current (note 2)

 
3,163

        Total current assets
2,926

 
6,555

Investments in available-for-sale securities and other cost investments (note 6)
1,022

 
1,110

Investments in affiliates, accounted for using the equity method (note 7)
1,066

 
949

Property and equipment, at cost
1,926

 
1,777

Accumulated depreciation
(847
)
 
(739
)
 
1,079

 
1,038

Intangible assets not subject to amortization (note 9):
 
 
 
    Goodwill
5,987

 
5,983

    Trademarks
2,518

 
2,513

 
8,505

 
8,496

Intangible assets subject to amortization, net (note 9)
2,344

 
2,595

Other assets, at cost, net of accumulated amortization
83

 
87

Assets of discontinued operations (note 2)

 
5,770

    Total assets
$
17,025

 
26,600

 
(continued)
 

See accompanying notes to condensed consolidated financial statements.
I-1


LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
(unaudited)
 
September 30, 2011
 
December 31, 2010
 
amounts in millions
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
    Accounts payable
586

 
630

    Accrued liabilities
606

 
768

    Payable to Liberty Media
44

 
85

    Current portion of debt (note 10)
1,211

 
493

    Deferred income tax liabilities
854

 
152

    Other current liabilities
145

 
231

    Liabilities of discontinued operations - current (note 2)

 
2,380

        Total current liabilities
3,446

 
4,739

Long-term debt, including $2,426 million and $2,506 million measured at fair value (note 10)
4,838

 
5,970

Long-term financial instruments (note 8)
76

 
86

Deferred income tax liabilities
1,870

 
2,709

Other liabilities
199

 
244

Liabilities of discontinued operations (note 2)

 
1,410

    Total liabilities
10,429

 
15,158

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 at December 31, 2010; issued and outstanding zero shares at September 30, 2011 and 75,139,893 shares at December 31, 2010

 
1

Series B Liberty Capital common stock, $.01 par value. Authorized 75,000,000 shares at December 31, 2010; issued and outstanding zero shares at September 30, 2011 and 7,363,948 shares at December 31, 2010

 

Series A Liberty Starz common stock, $.01 par value. Authorized 4,000,000,000 shares at December 30, 2010; issued and outstanding zero shares at September 30, 2011 and 49,130,652 shares at December 31, 2010

 

Series B Liberty Starz common stock, $.01 par value. Authorized 150,000,000 shares at December 31, 2010; issued and outstanding zero shares at September 30, 2011 and 2,917,815 shares at December 31, 2010

 

Series A Liberty Interactive common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 567,014,116 shares at September 30, 2011 and 570,731,067 shares at December 31, 2010
6

 
6

Series B Liberty Interactive common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 28,989,923 shares at September 30, 2011 and 29,059,016 shares at December 31, 2010

 

    Additional paid-in capital
2,936

 
8,338

    Accumulated other comprehensive earnings, net of taxes
170

 
226

    Retained earnings
3,369

 
2,742

        Total stockholders' equity
6,481

 
11,313

Noncontrolling interests in equity of subsidiaries
115

 
129

    Total equity
6,596

 
11,442

Commitments and contingencies (note 12)


 


    Total liabilities and equity
17,025

 
26,600





See accompanying notes to condensed consolidated financial statements.
I-2




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations
(unaudited)

 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions,
except per share amounts
Revenue:
 
 
 
 
 
 
 
    Net retail sales
$
2,133

 
1,968

 
6,537

 
6,046

Operating costs and expenses:
 
 
 
 
 
 
 
    Cost of sales (exclusive of depreciation shown separately below)
1,364

 
1,254

 
4,139

 
3,832

    Operating
209

 
186

 
621

 
562

 Selling, general and administrative, including stock-based compensation (note 3)
185

 
167

 
604

 
519

    Depreciation and amortization
151

 
141

 
448

 
421

 
1,909

 
1,748

 
5,812

 
5,334

Operating income
224

 
220

 
725

 
712

    Other income (expense):
 
 
 
 
 
 
 
    Interest expense
(105
)
 
(166
)
 
(326
)
 
(502
)
    Share of earnings (losses) of affiliates, net (note 7)
62

 
36

 
119

 
93

 Realized and unrealized gains (losses) on financial instruments, net (note 8)
(91
)
 
(89
)
 
(61
)
 
(14
)
    Gains (losses) on dispositions, net

 
30

 

 
216

    Other, net
(9
)
 
5

 
12

 
(41
)
 
(143
)
 
(184
)
 
(256
)
 
(248
)
Earnings (loss) from continuing operations before income taxes
81

 
36

 
469

 
464

    Income tax (expense) benefit
(56
)
 
66

 
(186
)
 
(78
)
Earnings (loss) from continuing operations
25

 
102

 
283

 
386

    Earnings (loss) from discontinued operations, net of taxes
(32
)
 
92

 
378

 
248

Net earnings (loss)
(7
)
 
194

 
661

 
634

    Less net earnings (loss) attributable to the noncontrolling interests
12

 
15

 
34

 
29

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
(19
)
 
179

 
627

 
605

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders:
 
 
 
 
 
 
 
    Liberty Capital common stock
$
(90
)
 
26

 
211

 
(34
)
    Liberty Starz common stock
58

 
48

 
177

 
166

    Liberty Interactive common stock
13

 
105

 
239

 
473

 
$
(19
)
 
179

 
627

 
605

 
 
 
 
 
 
 
 
 
(Continued)
 

See accompanying notes to condensed consolidated financial statements.
I-3




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Operations (Continued)
(unaudited)
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Basic net earnings (losses) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 4):
amounts in millions,
except per share amounts
 
Series A and Series B Liberty Capital common stock
$

 
(0.21
)
 
0.12

 
(0.09
)
Series A and Series B Liberty Starz common stock
$

 

 

 

Series A and Series B Liberty Interactive common stock
$
0.02

 
0.18

 
0.40

 
0.61

Diluted net earnings (losses) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
$

 
(0.21
)
 
0.12

 
(0.09
)
Series A and Series B Liberty Starz common stock
$

 

 

 

Series A and Series B Liberty Interactive common stock
$
0.02

 
0.17

 
0.40

 
0.60

Basic net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
$
(1.11
)
 
0.30

 
2.60

 
(0.37
)
Series A and Series B Liberty Starz common stock
$
1.14

 
0.96

 
3.47

 
3.32

Series A and Series B Liberty Interactive common stock
$
0.02

 
0.18

 
0.40

 
0.79

Diluted net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
$
(1.11
)
 
0.29

 
2.54

 
(0.37
)
Series A and Series B Liberty Starz common stock
$
1.09

 
0.92

 
3.34

 
3.19

Series A and Series B Liberty Interactive common stock
$
0.02

 
0.17

 
0.40

 
0.78



See accompanying notes to condensed consolidated financial statements.
I-4




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Comprehensive Earnings (Loss)
(unaudited)
 
Three months
ended
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Net earnings (loss)
$
(7
)
 
194

 
661

 
634

Other comprehensive earnings (loss), net of taxes:
 
 
 
 
 
 
 
    Foreign currency translation adjustments
(65
)
 
74

 
5

 
(28
)
    Unrealized holding gains (losses) arising during the period

 
34

 

 
63

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

 

 

 
(113
)
 Share of other comprehensive earnings (losses) of equity affiliates
(4
)
 
8

 

 
7

Reattribution of other comprehensive (earnings) loss between tracking stock groups

 

 

 
(30
)
    Other

 
21

 

 
46

Other comprehensive earnings (loss) from discontinued operations
(8
)
 
3

 
(26
)
 
(11
)
        Other comprehensive earnings (loss)
(77
)
 
140

 
(21
)
 
(66
)
Comprehensive earnings (loss)
(84
)
 
334

 
640

 
568

Less comprehensive earnings (loss) attributable to the noncontrolling interests
16

 
20

 
38

 
40

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
(100
)
 
314

 
602

 
528

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders:
 
 
 
 
 
 
 
Liberty Capital common stock
$
(110
)
 
29

 
179

 
(45
)
Liberty Starz common stock
60

 
48

 
173

 
166

Liberty Interactive common stock
(50
)
 
237

 
250

 
407

 
$
(100
)
 
314

 
602

 
528


See accompanying notes to condensed consolidated financial statements.
I-5




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Cash Flows
(unaudited)
 
Nine months
ended
 
September 30,
 
2011
 
2010
 
amounts in millions
Cash flows from operating activities:
 
 
 
    Net earnings (loss)
$
661

 
634

    Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
        (Earnings) loss from discontinued operations
(378
)
 
(248
)
        Depreciation and amortization
448

 
421

        Stock-based compensation
32

 
49

        Cash payments for stock-based compensation
(2
)
 
(20
)
        Noncash interest expense
6

 
86

        Share of (earnings) losses of affiliates, net
(119
)
 
(93
)
        Cash receipts from returns on equity investments
15

 
14

        Realized and unrealized (gains) losses on financial instruments, net
61

 
14

        (Gains) losses on disposition of assets, net

 
(216
)
        Deferred income tax expense (benefit)
(61
)
 
(8
)
        Other noncash charges (credits), net
(10
)
 
23

        Changes in operating assets and liabilities
 
 
 
            Current and other assets
106

 
561

            Payables and other liabilities
(243
)
 
(147
)
                Net cash provided (used) by operating activities
516

 
1,070

Cash flows from investing activities:
 
 
 
    Cash proceeds from dispositions

 
459

    Proceeds (payments) from settlement of financial instruments, net

 
(31
)
    Capital expended for property and equipment
(192
)
 
(176
)
    Net sales (purchases) of short term investments
(89
)
 

    Other investing activities, net
(21
)
 
(45
)
        Net cash provided (used) by investing activities
(302
)
 
207

Cash flows from financing activities:
 
 
 
    Borrowings of debt
195

 
2,999

    Repayments of debt
(673
)
 
(4,518
)
    Repurchases of Liberty Interactive common stock
(87
)
 

    Other financing activities, net
(50
)
 
(88
)
        Net cash provided (used) by financing activities
(615
)
 
(1,607
)
Effect of foreign currency exchange rates on cash
(7
)
 
9

Net cash provided (used) by discontinued operations:
 
 
 
    Cash provided (used) by operating activities
304

 
301

    Cash provided (used) by investing activities
(104
)
 
145

    Cash provided (used) by financing activities
(264
)
 
(1,429
)
    Change in available cash held by discontinued operations
15

 
548

        Net cash provided (used) by discontinued operations
(49
)
 
(435
)
            Net increase (decrease) in cash and cash equivalents
(457
)
 
(756
)
            Cash and cash equivalents at beginning of period
1,353

 
1,955

            Cash and cash equivalents at end of period
$
896

 
1,199



See accompanying notes to condensed consolidated financial statements.
I-6




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement Of Equity
(unaudited)
Nine months ended September 30, 2011
 
Stockholders' Equity
 
 
 
 
 
 
 
Common stock
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liberty
Capital
 
Liberty
Starz
 
Liberty
Interactive
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive earnings
 
 
 
Noncontrolling interest in equity of subsidiaries
 
 
 
Preferred Stock
 
Series A
 
Series B
 
Series A
 
Series B
 
Series A
 
Series B
 
Additional paid-in capital
 
 
Retained Earnings
 
 
Total equity
 
amounts in millions
Balance at January 1, 2011
$

 
1

 

 

 

 
6

 

 
8,338

 
226

 
2,742

 
129

 
11,442

    Net earnings

 

 

 

 

 

 

 

 

 
627

 
34

 
661

    Other comprehensive earnings (loss)

 

 

 

 

 

 

 

 
(25
)
 

 
4

 
(21
)
    Stock compensation

 

 

 

 

 

 

 
60

 

 

 

 
60

Issuance of common stock upon exercise of stock options

 

 

 

 

 

 

 
15

 

 

 

 
15

Series A Liberty Interactive stock repurchases

 

 

 

 

 

 

 
(87
)
 

 

 

 
(87
)
    Series A Liberty Capital stock repurchases

 

 

 

 

 

 

 
(213
)
 

 

 

 
(213
)
    Distribution to noncontrolling interest

 

 

 

 

 

 

 
(11
)
 

 

 
(51
)
 
(62
)
Sale of noncontrolling interest, net of tax impacts

 

 

 

 

 

 

 
(105
)
 

 

 
(5
)
 
(110
)
Distribution to stockholders for split-off of Liberty Media Corporation

 
(1
)
 

 

 

 

 

 
(5,105
)
 
(31
)
 

 
4

 
(5,133
)
Transfer of tax attributes from Liberty Media

 

 

 

 

 

 

 
44

 

 

 

 
44

Balance at September 30, 2011
$

 

 

 

 

 
6

 

 
2,936

 
170

 
3,369

 
115

 
6,596


See accompanying notes to condensed consolidated financial statements.
I-7




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1)
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Liberty Interactive Corporation (formerly known as 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 industries in North America, Europe and Asia.
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Liberty's Annual Report on Form 10-K for the year ended December 31, 2010.
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 misstatements of the financial information provided by its equity affiliates that would have a material effect on Liberty's condensed consolidated financial statements.
(2)
Discontinued Operations
Prior to the Split-Off (as defined below), Liberty's equity was structured into three separate tracking stocks. A 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. Liberty had three tracking stocks, Liberty Interactive common stock, Liberty Starz common stock and Liberty Capital common stock, which were intended to track and reflect the economic performance of the separate businesses, assets and liabilities attributed to each group. These attributed businesses, assets and liabilities were not separate legal entities and therefore could not own assets, issue securities or enter into legally binding agreements. Holders of the tracking stocks did not have direct claim to the group's stock or assets and were not represented by separate boards of directors.
On September 23, 2011, Liberty completed the split-off of a wholly owned subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty CapStarz, Inc. and prior thereto known as Liberty Splitco, Inc.) (the "Split-Off"). At the time of the Split-Off, LMC owned all the assets, businesses and liabilities previously attributed to the Capital and Starz tracking stock groups. The Split-Off was effected by means of a redemption of all of the Liberty Capital common stock and Liberty Starz common stock of Liberty in exchange for the common stock of LMC. This transaction has been accounted for at historical cost due to the pro rata nature of the distribution.
Following the Split-Off, Liberty and LMC operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Split-Off, Liberty and LMC entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Split-Off and to provide for an orderly transition. These agreements include a Reorganization Agreement, a Services Agreement, a Facilities Sharing

I-8

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Agreement and a Tax Sharing Agreement.
The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and LMC and other agreements related to tax matters. Liberty is party to on-going discussions with the IRS under the Compliance Assurance Process audit program. The IRS has proposed adjustments that relate to tax attributes allocated to and income allocable to LMC in the Split-Off. Any potential outcome associated with these proposed adjustments is covered by the Tax Sharing Agreement and is not expected to have any impact on Liberty's financial position.
The condensed consolidated financial statements and accompanying notes of Liberty have been prepared to reflect LMC as discontinued operations. Accordingly, the assets and liabilities, revenue, costs and expenses, and cash flows of the businesses, assets and liabilities owned by LMC at the time of Split-Off (for periods prior to the Split-Off) have been excluded from the respective captions in the accompanying condensed consolidated balance sheets, statements of operations, comprehensive earnings and cash flows in such condensed consolidated financial statements.
Certain combined financial information for LMC, which is included in earnings (loss) from discontinued operations, is as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Revenue
$
497

 
570

 
2,008

 
1,554

Earnings (loss) before income taxes
$
(74
)
 
130

 
628

 
407

 
 
 
 
 
 
 
 

A summary of certain asset and liability amounts for LMC as of the respective dates are as follows:
 
September 23, 2011
 
December 31, 2010
Assets
amounts in millions
Cash and cash equivalents
$
2,075

 
1,826

Investments in available-for-sale securities and other cost investments including $1,115 and $1,219 million pledged as collateral for share borrowing arrangements
$
2,847

 
3,441

 
 
 
 
Liabilities
 
 
 
Financial instruments
$
1,125

 
1,230

Deferred income tax liabilities
$
428

 
214

Debt
$
791

 
855


I-9

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The per share impact from discontinued operations is as follows:
 
Three months ended
 
Nine months ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
Basic earnings (losses) from discontinued operations attributable to Liberty shareholders per common share (note 4):
 
Series A and Series B Liberty Capital common stock
$
(1.11
)
 
0.51

 
2.48

 
(0.28
)
Series A and Series B Liberty Starz common stock
$
1.14

 
0.96

 
3.47

 
3.32

Series A and Series B Liberty Interactive common stock
$

 

 

 
0.19

Diluted earnings (losses) from discontinued operations attributable to Liberty shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Capital common stock
$
(1.11
)
 
0.49

 
2.42

 
(0.28
)
Series A and Series B Liberty Starz common stock
$
1.09

 
0.92

 
3.34

 
3.19

Series A and Series B Liberty Interactive common stock
$

 

 

 
0.18

The businesses, assets and liabilities that were previously attributed to the Liberty Starz and Liberty Capital tracking stock groups were owned by LMC at the time of Split-Off and have been included in discontinued operations. Certain assets and liabilities not owned by Liberty Interactive at the time of Split-Off were attributed to the Liberty Interactive tracking stock in prior periods and certain assets and liabilities not owned by LMC at the time of Split-Off were attributed to the Liberty Capital tracking stock in prior periods. This results in Liberty Interactive common stock participating in the discontinued operations for the amount attributable to Liberty Interactive common stock for those items in periods prior to the Split-Off. Additionally, certain prior period EPS calculations for Liberty Capital common stock include continuing operations due to the attribution of certain debt and equity instruments in those periods to the Liberty Capital group that remained with Liberty after the Split-Off as a result of the change in attribution of those assets and liabilities prior to the Split-Off.
(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, 2011
$
2

September 30, 2010
$
12

Nine months ended:
 
September 30, 2011
$
32

September 30, 2010
$
49

In March 2011, Liberty granted, to QVC employees, 5.7 million options to purchase shares of Series A Liberty Interactive common stock. Such options had a weighted average grant-date fair value of $7.33 per share. Of these grants, 3.8 million options were granted to the CEO of QVC; of those 3.8 million options one half vest December 15, 2014 and the other half vest on December 15, 2015. The remainder of the options granted vest semi-annually over the 4 year vesting period.
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

I-10

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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 the Awards to purchase Liberty common stock granted to certain officers, employees and directors of the Company.
 
Liberty Interactive
 
Series A (000's)
 
WAEP
Outstanding at January 1, 2011
47,583

 
$
12.10

Granted
5,741

 
$
16.01

Exercised
(2,410
)
 
$
4.60

Forfeited/Cancelled/Exchanged
(5,395
)
 
$
20.84

Outstanding at September 30, 2011
45,519

 
$
11.96

Exercisable at September 30, 2011
15,372

 
$
13.32

The following table provides additional information about outstanding Awards to purchase Liberty common stock at September 30, 2011.
 
No. of
outstanding
Awards (000's)
 
WAEP of
outstanding
Awards
 
Weighted
average
remaining
life
 
Aggregate
intrinsic
value
(000's)
 
No. of
exercisable
Awards
(000's)
 
WAEP of
exercisable
Awards
 
Aggregate
intrinsic
value
(000's)
Series A Liberty Interactive
45,519

 
$
11.96

 
4.2 years
 
$
172,375

 
15,372

 
$
13.32

 
$
59,853

Series B Liberty Interactive
450

 
$
19.74

 
3.7 years
 
$

 
450

 
$
19.74

 
$

As of September 30, 2011, the total unrecognized compensation cost related to unvested Liberty equity Awards was approximately $116 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.5 years.


(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.
Series A and Series B Liberty Capital Common Stock
The basic and diluted EPS calculation is based on the following weighted average outstanding shares. As discussed in more detail in note 2, Liberty Capital common stock was redeemed for shares in a subsidiary in the third quarter. Therefore, the amounts presented below are through the Split-Off date.

I-11

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


 
Liberty Capital Common Stock
 
Three months ended
 
Nine months ended
 
Three months
ended
 
Nine months
ended
 
September 30, 2011
 
September 30, 2011
 
September 30,
2010
 
September 30,
2010
 
numbers of shares in millions
Basic EPS
81

 
81

 
86

 
92

Stock options

 
2

 
3

 

Diluted EPS
81

 
83

 
89

 
92

Series A and Series B Liberty Starz Common Stock
The basic and diluted EPS calculation is based on the following weighted average outstanding shares. As discussed in more detail in note 2, Liberty Starz common stock was redeemed for shares in a subsidiary in the third quarter. Therefore, the amounts presented below are through the Split-Off date.
 
Liberty Starz Common Stock
 
Three months ended
 
Nine months ended
 
Three months
ended
 
Nine months
ended
 
September 30, 2011
 
September 30, 2011
 
September 30,
2010
 
September 30,
2010
 
numbers of shares in millions
Basic EPS
51

 
51

 
50

 
50

Stock options
2

 
2

 
2

 
2

Diluted EPS
53

 
53

 
52

 
52

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, 2011 are 14 million potential common shares because their inclusion would be antidilutive.
 
Liberty Interactive Common Stock
 
Three months
ended
 
Nine months
ended
 
Three months
ended
 
Nine months
ended
 
September 30, 2011
 
September 30, 2011
 
September 30,
2010
 
September 30,
2010
 
numbers of shares in millions
Basic EPS
597

 
598

 
596

 
596

Stock options
7

 
7

 
8

 
7

Diluted EPS
604

 
605

 
604

 
603

(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.

I-12

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


The Company's assets and liabilities measured at fair value are as follows:
 
 
 
Fair Value Measurements at September 30, 2011
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
Short term marketable securities
$
89

 
89

 

 

Available-for-sale securities
$
1,019

 
1,019

 

 

Financial instruments
$
73

 

 
73

 

Debt
$
2,426

 

 
2,426

 

The majority of the Company's Level 2 financial assets and liabilities are debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. Accordingly, the financial instruments are reported in the foregoing table as Level 2 fair value.
(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"). In prior years, Liberty entered into economic hedges for certain of its non-strategic AFS securities (although such instruments were not accounted for as fair value hedges by the Company). Changes in the fair value of these economic hedges were 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 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.
Investments in AFS securities, the entirety of the balance are Non-strategic Securities, and other cost investments are summarized as follows:
 
September 30, 2011
 
December 31,
2010

 
amounts in millions
 
 
 
 
Time Warner Inc.
$
653

 
701

Time Warner Cable Inc.
343

 
361

Other
26

 
48

 
$
1,022

 
1,110



I-13

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Unrealized Holding Gains and Losses
Unrealized holding gains and losses related to investments in AFS securities are summarized below.
 
September 30, 2011
 
December 31, 2010
 
Equity
securities
 
Debt
securities
 
Equity
securities
 
Debt
securities
 
amounts in millions
Gross unrealized holding gains
$

 

 
32

 
66

Gross unrealized holding losses
$

 

 

 

(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, 2011 and the carrying amount at December 31, 2010:
 
September 30, 2011
 
December 31,
2010

 
Percentage
ownership
 
Market
value
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in millions
Expedia
25
%
 
$
1,782

 
$
795

 
710

Other
various

 
N/A

 
271

 
239

 
 

 
 

 
$
1,066

 
949

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

 
Three months
ended
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Expedia
$
56

 
43

 
104

 
85

Other
6

 
(7
)
 
15

 
8

 
$
62

 
36

 
119

 
93



I-14

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


Expedia
Summarized unaudited financial information for Expedia is as follows:
Expedia Consolidated Balance Sheets
 
September 30,
2011

 
December 31,
2010

 
amounts in millions
Current assets
$
2,598

 
1,702

Property and equipment, net
341

 
277

Goodwill
3,653

 
3,642

Intangible assets
779

 
798

Other assets
306

 
232

Total assets
$
7,677

 
6,651

Current liabilities
$
2,616

 
1,889

Deferred income taxes
258

 
248

Long-term debt
1,645

 
1,645

Other liabilities
120

 
132

Noncontrolling interest
140

 
64

Equity
2,898

 
2,673

Total liabilities and equity
$
7,677

 
6,651


Expedia Consolidated Statements of Operations
 
Nine months
ended
 
September 30,
 
2011
 
2010
 
amounts in millions
Revenue
$
2,987

 
2,540

Cost of revenue
(586
)
 
(517
)
Gross profit
2,401

 
2,023

Selling, general and administrative expenses
(1,745
)
 
(1,415
)
Amortization
(23
)
 
(25
)
Restructuring charges and other
(8
)
 

Operating income
625

 
583

Interest expense
(95
)
 
(68
)
Other income (expense), net
12

 
(9
)
Income tax (expense) benefit
(138
)
 
(152
)
Net earnings (loss)
404

 
354

Less net earnings (loss) attributable to noncontrolling interests
(2
)
 
(4
)
Net earnings (loss) attributable to Expedia, Inc. 
$
402

 
350




I-15

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(8)
Financial Instruments
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
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Non-strategic Securities
$
(240
)
 
56

 
(90
)
 
105

Exchangeable senior debentures
138

 
(188
)
 
(28
)
 
(172
)
Other
11

 
43

 
57

 
53

 
$
(91
)
 
(89
)
 
(61
)
 
(14
)

(9)
Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
 
QVC
 
 
E-commerce
 
Total
 
amounts in millions
Balance at January 1, 2011
$
5,363

 
 
620

 
5,983

Foreign currency translation adjustments
3

 
 

 
3

Other

 
 
1

 
1

Balance at September 30, 2011
$
5,366

 
 
621

 
5,987

Intangible Assets Subject to Amortization
Amortization expense for intangible assets with finite useful lives was $333 million and $316 million for the nine month periods ended September 30, 2011 and 2010, respectively. Based on its amortizable intangible assets as of September 30, 2011, Liberty expects that amortization expense will be as follows for the next five years (amounts in millions):
Remainder of 2011
$
117

2012
$
459

2013
$
430

2014
$
391

2015
$
348


I-16

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


(10)
Long-Term Debt
Debt is summarized as follows:
 
 
Outstanding principal September 30, 2011
 
Carrying value
 
 
September 30,
2011

 
December 31,
2010

 
 
 
 
 
 
 
Senior notes and debentures
 
 
 
 
 
 
5.7% Senior Notes due 2013
309

 
308

 
323

 
8.5% Senior Debentures due 2029
287

 
284

 
284

 
8.25% Senior Debentures due 2030
504

 
501

 
501

Exchangeable Senior Debentures
 
 
 
 
 
 
3.125% Exchangeable Senior Debentures due 2023
1,138

 
1,236

 
1,283

 
4% Exchangeable Senior Debentures due 2029
469

 
279

 
265

 
3.75% Exchangeable Senior Debentures due 2030
460

 
254

 
253

 
3.5% Exchangeable Senior Debentures due 2031
486

 
328

 
329

 
3.25% Exchangeable Senior Debentures due 2031
414

 
329

 
376

QVC 7.125% Senior Secured Notes due 2017
500

 
500

 
500

QVC 7.5% Senior Secured Notes due 2019
1,000

 
986

 
985

QVC 7.375% Senior Secured Notes due 2020
500

 
500

 
500

QVC Bank Credit Facilities
459

 
459

 
785

Other subsidiary debt
85

 
85

 
79

 
Total consolidated Liberty debt
$
6,611

 
6,049

 
6,463

 
Less current maturities
 

 
(1,211
)
 
(493
)
 
Total long-term debt
 

 
$
4,838

 
5,970

QVC Bank Credit Facilities
The QVC Bank Credit Facilities provide for a $2 billion revolving credit facility, with a $250 million sub-limit for standby letters of credit. Availability under the QVC Bank Credit Facilities at September 30, 2011 was $1.5 billion. The $459 million outstanding principal matures in September 2015.
QVC was in compliance with all of its debt covenants at September 30, 2011.
QVC Interest Rate Swap Arrangements
During the third quarter of 2009, QVC entered into seven 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 (0.35% at September 30, 2011). Additionally, during the six months ended June 30, 2011 QVC entered into four additional swap arrangements with an aggregate notional amount of $600 million requiring QVC to make variable payments at 3 month LIBOR (0.35% at September 30, 2011) and receive fixed payments at 0.91%. These swap arrangements do not qualify as cash flow hedges under GAAP. Accordingly, changes in the fair value of the swaps are reflected in realized and unrealized gains or losses on financial instruments in the accompanying condensed consolidated statements of operations.
Other Subsidiary Debt
Other subsidiary debt at September 30, 2011 is comprised of capitalized satellite transponder lease obligations and bank debt of certain subsidiaries.

I-17

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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, 2011 is as follows (amounts in millions):
 
 
Senior notes
$
326

Senior debentures
$
774

QVC senior secured notes
$
2,164

Due to the variable rate nature, Liberty believes that the carrying amount of its subsidiary debt not discussed above approximated fair value at September 30, 2011.

(11) Stockholders' Equity
As of September 30, 2011, Liberty reserved for issuance upon exercise of outstanding stock options approximately 45.5 million shares of Liberty Interactive Series A common stock and 0.5 million shares of Liberty Interactive Series B common stock.
In addition to the Series A and Series B Liberty Interactive common stock there are 4 billion shares of Series C common stock authorized for issuance. As of September 30, 2011, no shares of any Series C common stock were issued or outstanding.
As of September 30, 2011, put options with respect to 3 million shares of Series A Liberty Interactive common stock with a weighted average put price of $16.10 remained outstanding. Such put options expire in November 2011.
The Company accounts for the foregoing put options as financial instrument liabilities at fair value due to their settlement provisions. Accordingly, changes in the fair value of these liabilities are included in realized and unrealized gains (losses) on financial instruments in the accompanying condensed consolidated statements of operations.

(12)
Commitments and Contingencies
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.
(13)
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 industries. Liberty identifies its reportable segments as (A) those consolidated subsidiaries that represent 10% or more of its consolidated annual revenue, annual pre-tax earnings or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty's annual 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 unique website visitors, conversion rates and active customers, as appropriate.

I-18

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


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, 2011, Liberty has identified the following business as its reportable segment:
QVC—consolidated subsidiary that markets and sells a wide variety of consumer products in the United States and several foreign countries, primarily by means of its televised shopping programs and via the Internet through its domestic and international websites.
Additionally, for presentation purposes Liberty is providing financial information of the E-commerce businesses on an aggregated basis. The consolidated businesses do not contribute significantly to the overall operations of Liberty on an individual basis; however, Liberty believes that on an aggregated basis they provide relevant information for users of these financial statements. While these businesses may not meet the aggregation criteria under relevant accounting literature Liberty believes the information is relevant and helpful for a more complete understanding of the consolidated results.
E-commerce—the aggregation of certain consolidated subsidiaries that market and sell a wide variety of consumer products via the Internet. Categories of consumer products include perishable and personal gift offerings (Provide Commerce, Inc.), active lifestyle gear and clothing (Backcountry.com, Inc.), fitness and health goods (Bodybuilding.com, LLC) and celebration offerings from invitations to costumes (Celebrate Interactive Holdings, Inc.).
Liberty's operating 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 accounting policies.
Performance Measures
 
Nine months
ended
 
September 30,
 
2011
 
2010
 
Revenue
 
Adjusted
OIBDA
 
Revenue
 
Adjusted
OIBDA
 
amounts in millions
 
 
 
 
 
 
 
 
QVC
$
5,619

 
1,154

 
5,286

 
1,138

E-commerce
918

 
74

 
760

 
56

Corporate and other

 
(23
)
 

 
(12
)
    Consolidated
$
6,537

 
1,205

 
6,046

 
1,182




I-19

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)


 
Three months
ended
 
September 30,
 
2011
 
2010
 
Revenue
 
Adjusted
OIBDA
 
Revenue
 
Adjusted
OIBDA
 
amounts in millions
 
 
 
 
 
 
 
 
QVC
$
1,886

 
373

 
1,771

 
369

E-commerce
247

 
9

 
197

 
10

Corporate and other

 
(5
)
 

 
(6
)
    Consolidated
$
2,133

 
377

 
1,968

 
373

Other Information
 
September 30,
2011
 
 
Total
assets
 
Investments
in
affiliates
 
Capital
expenditures
 
amounts in millions
 
 
 
 
 
 
QVC
$
13,206

 

 
154

E-commerce
1,441

 
15

 
38

Corporate and other
2,378

 
1,051

 

    Consolidated
$
17,025

 
1,066

 
192


The following table provides a reconciliation of segment Adjusted OIBDA to earnings (loss) from continuing operations before income taxes:
 
Three months
ended
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Consolidated segment Adjusted OIBDA
$
377

 
373

 
1,205

 
1,182

  Stock-based compensation
(2
)
 
(12
)
 
(32
)
 
(49
)
  Depreciation and amortization
(151
)
 
(141
)
 
(448
)
 
(421
)
  Interest expense
(105
)
 
(166
)
 
(326
)
 
(502
)
  Share of earnings (loss) of affiliates, net
62

 
36

 
119

 
93

  Realized and unrealized gains (losses) on financial instruments, net
(91
)
 
(89
)
 
(61
)
 
(14
)
  Gains (losses) on dispositions, net

 
30

 

 
216

  Other, net
(9
)
 
5

 
12

 
(41
)
Earnings (loss) from continuing operations before income taxes
$
81

 
36

 
469

 
464


I-20



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 at QVC, Inc.; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; 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:
customer demand for our products and services and our ability to adapt to changes in demand;
competitor responses to our products and services, and the products and services of the entities in which we have interests;
uncertainties inherent in the development and integration of new business lines and business strategies;
uncertainties associated with product and service development and market acceptance, including the development and provision of additional connections to consumers as technologies progress and shift consumer shopping behaviors;
our future financial performance, including availability, terms and deployment of capital;
our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire;
the ability of suppliers and vendors to deliver products, equipment, software and services;
the outcome of any pending or threatened litigation;
availability of qualified personnel;
changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners, vendors and joint venturers;
general economic and business conditions and industry trends including the current economic downturn;
consumer spending levels, including the availability and amount of individual consumer debt;
changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand and IP television and their impact on home shopping networks;
increased digital TV penetration and the impact on channel positioning of our channels;
rapid technological changes;
capital spending for the acquisition and/or development of telecommunications networks and services;
the regulatory and competitive environment of the industries in which we, and the entities in which we have interests, operate;
threatened terrorist attacks and ongoing military action in the Middle East and other parts of the world; and
fluctuations in foreign currency exchange rates and political unrest in international markets.
For additional risk factors, please see Part II, Item 1A of this Quarterly Report on Form 10-Q. 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, 2010.

I-21



Overview
We own controlling and non-controlling interests in a broad range of video and on-line commerce companies. Our largest business, which is also our principal reportable segment, is QVC, Inc. QVC markets and sells a wide variety of consumer products in the United States and several foreign countries, primarily by means of its televised shopping programs and via the Internet through its domestic and international websites. Additionally, we own entire or majority interests in consolidated subsidiaries which operate on-line commerce businesses in a broad range of retail categories. The more significant of these include Backcountry.com, Inc., Bodybuilding.com, LLC, Celebrate Interactive Holdings, Inc. and Provide Commerce, Inc. Backcountry operates websites offering sports gear and clothing for outdoor and active individuals in a variety of categories. Bodybuilding manages websites related to sports nutrition, body building and fitness. Celebrate operates websites that offer costumes, accessories, décor and party supplies. Provide operates an e-commerce marketplace of websites for perishable goods, including flowers, fruits and desserts, as well as upscale personalized gifts.
Our "Corporate and Other" category includes our corporate ownership interests in other unconsolidated businesses and corporate expenses. We hold ownership interests in Expedia, Inc., HSN, Inc., Interval Leisure Group, Inc. and Tree.com, Inc. which we account for as equity method investments; and we continue to maintain investments and related financial instruments in public companies such as Time Warner Inc., Time Warner Cable Inc. and AOL, Inc., which are accounted for at their respective fair market values and are included in "Corporate and Other."
Discontinued Operations
Prior to the Split-Off (as defined below), Liberty's equity was structured into three separate tracking stocks. 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. Liberty had three tracking stocks, Liberty Interactive common stock, Liberty Starz common stock and Liberty Capital common stock, which were intended to track and reflect the economic performance of the separate businesses, assets and liabilities attributed to each group. These attributed businesses, assets and liabilities were not separate legal entities and therefore could not own assets, issue securities or enter into legally binding agreements. Holders of the tracking stocks did not have direct claim to the group's stock or assets and were not represented by separate boards of directors.
On September 23, 2011, Liberty completed the split-off of a wholly owned subsidiary, Liberty Media Corporation (LMC)(formerly known as Liberty CapStarz, Inc. and prior thereto known as Liberty Splitco, Inc.) (the "Split-Off"). At the time of the Split-Off, LMC owned all the assets, businesses and liabilities previously attributed to the Capital and Starz tracking stock groups. The Split-Off was effected by means of a redemption of all of the Liberty Capital common stock and Liberty Starz common stock of Liberty for all of the common stock of LMC. This transaction has been accounted for at historical cost due to the pro rata nature of the distribution.
Following the Split-Off, Liberty and LMC operate as separate, publicly traded companies and neither has any stock ownership, beneficial or otherwise, in the other. In connection with the Split-Off, Liberty and LMC entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after the Split-Off and to provide for an orderly transition.
The condensed consolidated financial statements of Liberty have been prepared to reflect LMC as discontinued operations. Accordingly, the assets and liabilities, revenue, costs and expenses, and cash flows of LMC (for periods prior to the Split-Off) have been excluded from the respective captions in the accompanying condensed consolidated balance sheets, statements of operations, comprehensive earnings and cash flows in such condensed financial statements.


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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 segment and our E-commerce businesses. The "corporate and other" category consists of those assets or businesses which we do not disclose separately. For a more detailed discussion and analysis of the financial results of the principal reporting segment, see "Results of Operations - Businesses" below.
Operating Results
 
Three months
ended
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Revenue
 
 
 
 
 
 
 
QVC
$
1,886

 
1,771

 
5,619

 
5,286

E-commerce
247

 
197

 
918

 
760

Corporate and other

 

 

 

Consolidated
$
2,133

 
1,968

 
6,537

 
6,046

 
 
 
 
 
 
 
 
Adjusted OIBDA
 
 
 
 
 
 
 
QVC
$
373

 
369

 
1,154

 
1,138

E-commerce
9

 
10

 
74

 
56

Corporate and other
(5
)
 
(6
)
 
(23
)
 
(12
)
Consolidated
$
377

 
373

 
1,205

 
1,182

 
 
 
 
 
 
 
 
Operating Income (Loss)
 
 
 
 
 
 
 
QVC
$
234

 
235

 
740

 
737

E-commerce
(2
)
 

 
25

 
12

Corporate and other
(8
)
 
(15
)
 
(40
)
 
(37
)
Consolidated
$
224

 
220

 
725

 
712

Revenue.    Our consolidated revenue increased 8.4% and 8.1% for the three and nine month periods ended September 30, 2011 and 2010, respectively as compared to the corresponding prior year period. The three months increase was primarily due to increased revenue at QVC ($115 million) and the E-commerce companies ($50 million). The nine month increase is due to greater sales at QVC ($333 million) and the E-commerce businesses ($158 million). See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.
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 13 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Earnings (loss) from continuing operations before income taxes.
Consolidated Adjusted OIBDA remained relatively flat period over period with increases of $4 million and $23 million for the three and nine month periods ended September 30, 2011 and 2010, respectively. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.
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

I-23



private equity plans and (3) amortization of restricted stock grants.
We recorded $32 million and $49 million of stock compensation expense for the nine months ended September 30, 2011 and 2010, respectively. The decrease in stock compensation expense in 2011 relates primarily to our liability classified awards due to a less significant increase in our stock prices in the current period as compared to the prior period offset slightly by additional grants in the current year which increased amortization of stock compensation. As of September 30, 2011, the total unrecognized compensation cost related to unvested Liberty equity awards was approximately $116 million. Such amount will be recognized in our consolidated statements of operations over a weighted average period of approximately 2.5 years.
Operating income.    Our consolidated operating income remained relatively flat period over period with increases of $4 million and $13 million for the three and nine month periods ended September 30, 2011 and 2010, respectively as compared to the corresponding prior year periods. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of certain of our subsidiaries.
Other Income and Expense
Components of Other Income (Expense) are presented in the table below.
 
Three months
ended
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Other income (expense):
 
 
 
 
 
 
 
    Interest expense
(105
)
 
(166
)
 
(326
)
 
(502
)
    Share of earnings (losses) of affiliates
62

 
36

 
119

 
93

Realized and unrealized gains (losses) on financial instruments, net
(91
)
 
(89
)
 
(61
)
 
(14
)
    Gains (losses) on dispositions, net

 
30

 

 
216

    Other, net
(9
)
 
5

 
12

 
(41
)
        Consolidated
$
(143
)
 
(184
)
 
(256
)
 
(248
)
Interest expense.    Interest expense decreased $61 million and $176 million for the three and nine month periods ended September 30, 2011 and 2010, respectively as compared to the corresponding prior year period. The overall decreases in interest expense related to a lower average debt balance throughout the quarter and year, as compared to the corresponding prior year periods.
Share of earnings (losses) of affiliates.    The following table presents our share of earnings (losses) of affiliates:
 
Three months
ended
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
 
 
 
 
 
 
 
 
Expedia
$
56

 
43

 
104

 
85

Other
6

 
(7
)
 
15

 
8

 
$
62

 
36

 
119

 
93


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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
 
Nine months
ended
 
September 30,
 
September 30,
 
2011
 
2010
 
2011
 
2010
 
amounts in millions
Non-strategic Securities
$