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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 June 30, 2013
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 (or for such shorter period that the registrant was required to file such reports) 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 July 31, 2013 was:
 
Series A
 
Series B
Liberty Interactive common stock
491,514,108

 
28,901,353

Liberty Ventures common stock
35,349,856

 
1,442,689


 





LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
 
June 30,
2013
 
December 31,
2012
 
amounts in millions
Assets
 
 
 
Current assets:
 
 
 
    Cash and cash equivalents
$
1,448

 
2,660

Trade and other receivables, net of allowance for doubtful accounts of $80 million and $79 million
909

 
1,201

Inventory, net
1,129

 
1,106

Short term marketable securities (note 5)
508

 
186

Other current assets
115

 
105

        Total current assets
4,109

 
5,258

Investments in available-for-sale securities and other cost investments (note 6)
1,365

 
1,819

Investments in affiliates, accounted for using the equity method (note 7)
883

 
851

Property and equipment, at cost
2,142

 
2,170

Accumulated depreciation
(967
)
 
(935
)
 
1,175

 
1,235

Intangible assets not subject to amortization (note 8):
 
 
 
    Goodwill
9,521

 
9,556

    Trademarks
4,354

 
4,324

 
13,875

 
13,880

Intangible assets subject to amortization, net (note 8)
2,779

 
3,117

Other assets, at cost, net of accumulated amortization
99

 
95

    Total assets
$
24,285

 
26,255

 
(continued)
 

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



LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
(unaudited)
 
June 30,
2013
 
December 31, 2012
 
amounts in millions,
 
except share amounts
Liabilities and Equity
 
 
 
Current liabilities:
 
 
 
    Accounts payable
$
559

 
719

    Accrued liabilities
798

 
918

    Current portion of debt (note 9)
1,029

 
1,638

    Deferred income tax liabilities
841

 
912

    Other current liabilities
206

 
302

        Total current liabilities
3,433

 
4,489

Long-term debt, including $1,879 million and $2,930 million measured at fair value (note 9)
5,959

 
6,246

Deferred income tax liabilities
2,989

 
3,209

Other liabilities
239

 
260

    Total liabilities
12,620

 
14,204

Equity
 

 
 

Stockholders' equity (note 10):
 

 
 

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

 

Series A Liberty Interactive common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 493,579,562 shares at June 30, 2013 and 516,009,627 shares at December 31, 2012
5

 
5

Series B Liberty Interactive common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 28,901,353 shares at June 30, 2013 and 28,942,403 shares at December 31, 2012

 

Series A Liberty Ventures common stock, $.01 par value. Authorized 200,000,000 shares; issued and outstanding 35,347,144 shares at June 30, 2013 and 35,355,434 shares at December 31, 2012

 

Series B Liberty Ventures common stock, $.01 par value. Authorized 7,500,000 shares; issued and outstanding 1,442,689 shares at June 30, 2013 and 1,446,916 shares at December 31, 2012

 

    Additional paid-in capital
1,752

 
2,225

    Accumulated other comprehensive earnings (loss), net of taxes
55

 
148

    Retained earnings
5,331

 
5,184

        Total stockholders' equity
7,143

 
7,562

Noncontrolling interests in equity of subsidiaries
4,522

 
4,489

    Total equity
11,665

 
12,051

Commitments and contingencies (note 11)


 


    Total liabilities and equity
$
24,285

 
26,255





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




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

 
Three months ended
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Revenue:
 
 
 
 
 
 
 
Net retail sales
$
2,400

 
2,365

 
4,834

 
4,679

Other revenue
247

 

 
477

 

Total revenue
2,647

 
2,365

 
5,311

 
4,679

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation shown separately below)
1,521

 
1,488

 
3,074

 
2,954

Operating, including stock-based compensation (note 3)
243

 
199

 
487

 
407

Selling, general and administrative, including stock-based compensation (note 3)
362

 
241

 
728

 
480

Depreciation and amortization
237

 
147

 
467

 
290

 
2,363

 
2,075

 
4,756

 
4,131

Operating income
284

 
290

 
555

 
548

Other income (expense):
 
 
 
 
 
 
 
    Interest expense
(90
)
 
(107
)
 
(201
)
 
(213
)
    Share of earnings (losses) of affiliates, net (note 7)
7

 
35

 
(4
)
 
46

Realized and unrealized gains (losses) on financial instruments, net (note 5)
9

 
(160
)
 
(64
)
 
(178
)
Gains (losses) on transactions, net
(2
)
 
288

 
(2
)
 
288

Other, net
(15
)
 
30

 
(53
)
 
33

 
(91
)
 
86

 
(324
)
 
(24
)
Earnings (loss) before income taxes
193

 
376

 
231

 
524

    Income tax (expense) benefit
(43
)
 
(127
)
 
(28
)
 
(170
)
Net earnings (loss)
150

 
249

 
203

 
354

    Less net earnings (loss) attributable to the noncontrolling interests
30

 
15

 
56

 
29

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
120

 
234

 
147

 
325

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders:
 
 
 
 
 
 
 
    Liberty Interactive Corporation common stock
NA

 
234

 
NA

 
325

    Liberty Interactive common stock
$
109

 
NA

 
204

 
NA

    Liberty Ventures common stock
11

 
NA

 
(57
)
 
NA

 
$
120

 
234

 
147

 
325

 
 
 
 
 
 
 
 
 
(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
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions,
except per share amounts
 
Basic net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 4):
 
 
 
 
 
 
 
Series A and Series B Liberty Interactive Corporation common stock
NA

 
0.42

 
NA

 
0.58

Series A and Series B Liberty Interactive common stock
$
0.21

 
NA

 
0.39

 
NA

Series A and Series B Liberty Ventures common stock
$
0.30

 
NA

 
(1.54
)
 
NA

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

 
0.42

 
NA

 
0.57

Series A and Series B Liberty Interactive common stock
$
0.21

 
NA

 
0.38

 
NA

Series A and Series B Liberty Ventures common stock
$
0.30

 
NA

 
(1.54
)
 
NA



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
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Net earnings (loss)
$
150

 
249

 
203

 
354

Other comprehensive earnings (loss), net of taxes:
 
 
 
 
 
 
 
    Foreign currency translation adjustments
(16
)
 
(49
)
 
(113
)
 
(36
)
    Unrealized holding gains (losses) arising during the period
(1
)
 

 
(1
)
 

 Share of other comprehensive earnings (losses) of equity affiliates

 
(3
)
 

 
(1
)
        Other comprehensive earnings (loss)
(17
)
 
(52
)
 
(114
)
 
(37
)
Comprehensive earnings (loss)
133

 
197

 
89

 
317

Less comprehensive earnings (loss) attributable to the noncontrolling interests
24

 
19

 
35

 
23

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
109

 
178

 
54

 
294

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders:
 
 
 
 
 
 
 
Liberty Interactive Corporation common stock
NA

 
178

 
NA

 
294

Liberty Interactive common stock
$
101

 
NA

 
111

 
NA

Liberty Ventures common stock
8

 
NA

 
(57
)
 
NA

 
$
109

 
178

 
54

 
294


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




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements Of Cash Flows
(unaudited)
 
Six months ended June 30,
 
2013
 
2012
 
amounts in millions
Cash flows from operating activities:
 
 
 
    Net earnings (loss)
$
203

 
354

    Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
        Depreciation and amortization
467

 
290

        Stock-based compensation
86

 
35

        Cash payments for stock-based compensation
(5
)
 
(2
)
        Share of (earnings) losses of affiliates, net
4

 
(46
)
        Cash receipts from returns on equity investments
15

 
13

        Realized and unrealized (gains) losses on financial instruments, net
64

 
178

        (Gains) losses on transactions, net
2

 
(288
)
        Deferred income tax expense (benefit)
(267
)
 
26

        Other, net
14

 
(25
)
        Changes in operating assets and liabilities
 
 
 
            Current and other assets
248

 
357

            Payables and other liabilities
(385
)
 
(162
)
                Net cash provided (used) by operating activities
446

 
730

Cash flows from investing activities:
 
 
 
Cash proceeds from dispositions of investments
1,136

 
348

    Investments in and loans to cost and equity investees
(51
)
 
(108
)
    Capital expended for property and equipment
(136
)
 
(151
)
Purchases of short term and other marketable securities
(1,116
)
 

    Sales of short term and other marketable securities
444

 
46

    Other investing activities, net
(42
)
 
(40
)
        Net cash provided (used) by investing activities
235

 
95

Cash flows from financing activities:
 
 
 
    Borrowings of debt
3,094

 
666

    Repayments of debt
(4,397
)
 
(873
)
Shares repurchased by subsidiary
(42
)
 

Shares issued by subsidiary
19

 

    Repurchases of Liberty Interactive common stock
(499
)
 
(637
)
    Other financing activities, net
(39
)
 
(26
)
        Net cash provided (used) by financing activities
(1,864
)
 
(870
)
Effect of foreign currency exchange rates on cash
(29
)
 
(12
)
            Net increase (decrease) in cash and cash equivalents
(1,212
)
 
(57
)
            Cash and cash equivalents at beginning of period
2,660

 
847

            Cash and cash equivalents at end of period
$
1,448

 
790



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




LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statement Of Equity
(unaudited)
Six months ended June 30, 2013
 
Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liberty
Interactive
 
Liberty
Ventures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive earnings
 
 
 
Noncontrolling interest in equity of subsidiaries
 
 
 
Preferred Stock
 
Series A
 
Series B
 
Series A
 
Series B
 
Additional paid-in capital
 
 
Retained Earnings
 
 
Total equity
 
amounts in millions
Balance at January 1, 2013
$

 
5

 

 

 

 
2,225

 
148

 
5,184

 
4,489

 
12,051

    Net earnings (loss)

 

 

 

 

 

 

 
147

 
56

 
203

    Other comprehensive earnings (loss)

 

 

 

 

 

 
(93
)
 

 
(21
)
 
(114
)
    Stock-based compensation

 

 

 

 

 
40

 

 

 
29

 
69

Issuance of common stock upon exercise of stock options

 

 

 

 

 
3

 

 

 

 
3

Series A Liberty Interactive stock repurchases

 

 

 

 

 
(499
)
 

 

 

 
(499
)
Shares repurchased by subsidiary

 

 

 

 

 
(16
)
 

 

 
(26
)
 
(42
)
Shares issued by subsidiary

 

 

 

 

 
(2
)
 

 

 
21

 
19

    Distribution to noncontrolling interest

 

 

 

 

 

 

 

 
(25
)
 
(25
)
    Other

 

 

 

 

 
1

 

 

 
(1
)
 

Balance at June 30, 2013
$

 
5

 

 

 

 
1,752

 
55

 
5,331

 
4,522

 
11,665


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 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 (a) condensed consolidated balance sheet as of December 31, 2012, which has been derived from audited financial statements, and (b) the 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. Certain amounts included in the accompanying financial statements for 2012 have been reclassified and adjusted to conform to the 2013 financial statement presentation. During the current period, due to the increased level of activity, we changed the presentation of Net sales (purchases) of short term investments and other marketable securities to present gross amounts in the consolidated statement of cash flows, in order to conform to GAAP requirements. 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, 2012.
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.
In September 2011, Liberty completed the split-off (the “Split-Off”) of its former wholly-owned subsidiary (then named Liberty Media Corporation), which at the time of the Split-Off held all of the businesses, assets and liabilities attributed to Liberty's then Capital and Starz tracking stock groups. In January 2013, this entity (now named Starz) spun-off (the “Spin-Off”) its former wholly-owned subsidiary, Liberty Media Corporation ("LMC"). Following the Split-Off and Spin-Off, Liberty, LMC and Starz each operate as separate publicly traded companies, none of which has any stock ownership, beneficial or otherwise, in the other.

In connection with the Split-Off, Liberty entered a Reorganization Agreement, a Services Agreement, a Facilities Sharing Agreement and a Tax Sharing Agreement with the split-off entity (now known as Starz). All of these agreements, with the exception of the Tax Sharing Agreement, were assigned by Starz to LMC in connection with the Spin-Off. The Reorganization Agreement provides for, among other things, provisions governing the relationship between Liberty


I- 8



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


and LMC following the Split-Off, including certain cross-indemnities. Pursuant to the Services Agreement, LMC provides Liberty with certain general and administrative services including legal, tax, accounting, treasury and investor relations support. Liberty reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Liberty's allocable portion of costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Liberty. Under the Facilities Sharing Agreement, LMC shares office space and related amenities at its corporate headquarters with Liberty. Under these various agreements, approximately $4 million and $8 million of allocated expenses were reimbursable by Liberty to LMC for the three and six months ended June 30, 2013, respectively, and approximately $2 million and $5 million for the three and six months ended June 30, 2012, respectively. The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and Starz and other agreements related to tax matters. With respect to the Split-Off, the IRS has examined the transaction, and during 2012, the IRS and Liberty Interactive entered into a Closing Agreement which provides that the Split-Off qualified for tax-free treatment to Liberty and Starz.   In April 2013, the IRS completed its review of the Spin-Off and notified the parties that it agreed with the nontaxable characterization of the transaction.

On December 11, 2012, we acquired approximately 4.8 million additional shares of common stock of TripAdvisor, Inc. ("TripAdvisor") (an additional 4% equity ownership interest), for $300 million, along with the right to control the vote of the shares of TripAdvisor's common stock and class B common stock we own. Following the transaction, we own approximately 22% of the equity and 57% of the total votes of all classes of TripAdvisor common stock. As this transaction resulted in Liberty gaining control of TripAdvisor, we applied the applicable purchase accounting guidance. The fair value of our ownership interest previously held and the fair value of the noncontrolling interest (Level 1) was determined based on the trading price of TripAdvisor common shares on the last trading day prior to our transaction. Additionally, the noncontrolling interest includes the fair value of TripAdvisor's fully vested options (Level 2) outstanding at the date of acquisition. Following the transaction date, TripAdvisor is a consolidated subsidiary with a 78% noncontrolling interest accounted for in equity and the condensed consolidated statements of operations. Other than a $30 million re-classification from the "Intangibles subject to amortization" line item to the "Trademarks" line item, there have been no significant changes to our purchase price allocation since December 31, 2012. The initial purchase price allocation is subject to change upon receipt of the final valuation analysis for TripAdvisor. The primary balances still subject to analysis are goodwill, tradenames and other intangibles subject to amortization.

(2)   Tracking Stocks

On August 9, 2012, Liberty completed the approved recapitalization of its common stock through the creation of the Liberty Interactive common stock and Liberty Ventures common stock as tracking stocks. In the recapitalization, each holder of Liberty Interactive Corporation common stock remained a holder of the same amount and series of Liberty Interactive common stock and received 0.05 of a share of the corresponding series of Liberty Ventures common stock, by means of a dividend, with cash issued in lieu of fractional shares of Liberty Ventures common stock.
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 has two tracking stocks—Liberty Interactive common stock and Liberty Ventures common stock, which are intended to track and reflect the economic performance of the Interactive Group and Ventures Group, respectively. While the Interactive Group and the Ventures 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 "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The Ventures Group is primarily comprised of TripAdvisor, a


I- 9



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


consolidated subsidiary, and interests in Expedia, Inc., Interval Leisure Group, Inc., Tree.com, Inc., investments in Time Warner Inc. and Time Warner Cable Inc., as well as cash in the amount of approximately $857 million (at June 30, 2013). The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities.
The term "Interactive Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The Interactive Group is primarily focused on video and e-commerce operating businesses and has attributed to it the remainder of Liberty's businesses and assets, including operating subsidiaries QVC, Inc. ("QVC"), Provide Commerce, Inc., Backcountry.com, Inc., Bodybuilding.com, LLC, Celebrate Interactive Holdings, LLC and CommerceHub as well as interests in HSN, Inc., and cash of approximately $591 million (at June 30, 2013), which includes subsidiary cash. The Interactive Group has attributed to it liabilities that reside with QVC and the other entities listed as well as our outstanding senior notes and certain deferred tax liabilities.
See Exhibit 99.1 to this Quarterly Report on Form 10-Q for unaudited attributed financial information for Liberty's tracking stock groups.
(3) Stock-Based Compensation
The Company has granted to certain of its directors, employees and employees of its subsidiaries stock appreciation rights ("SARs"), restricted stock grants and options to purchase shares of Liberty common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock grants) 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 a liability classified Award (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 the accompanying condensed consolidated statements of operations are the following amounts of stock-based compensation, a portion of which relates to TripAdvisor as discussed below:
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
(amounts in millions)
Operating expense
$
5

 

 
13



Selling, general and administrative expense
39

 
18

 
73

 
35

 
$
44

 
18

 
86

 
35

During the six months ended June 30, 2013, Liberty granted, primarily to QVC employees, 4.2 million options to purchase shares of Series A Liberty Interactive common stock. Such options had a weighted average grant-date fair value of $8.16 per share and vest semi-annually over the four 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 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 stock 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.


I- 10



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


Liberty—Outstanding Awards
The following tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase Liberty Interactive and Liberty Ventures common stock granted to certain officers, employees and directors of the Company.
 
Liberty Interactive
 
Series A (000's)
 
WAEP
 
Series B (000's)
 
WAEP
Outstanding at January 1, 2013
33,839

 
$
16.92

 
432

 
$
17.92

Granted
4,188

 
$
21.08

 

 
$

Exercised
(2,365
)
 
$
10.44

 

 
$

Forfeited/Cancelled
(450
)
 
$
14.58

 

 
$

Outstanding at June 30, 2013
35,212

 
$
17.88

 
432

 
$
17.92

Exercisable at June 30, 2013
14,263

 
$
16.18

 
432

 
$
17.92


 
Liberty Ventures
 
Series A (000's)
 
WAEP
 
Series B (000's)
 
WAEP
Outstanding at January 1, 2013
1,155

 
$
56.26

 
22

 
$
46.69

Granted

 
$

 

 
$

Exercised
(84
)
 
$
48.58

 

 
$

Forfeited/Cancelled
(1
)
 
$
43.48

 

 
$

Outstanding at June 30, 2013
1,070

 
$
56.87

 
22

 
$
46.69

Exercisable at June 30, 2013
450

 
$
54.69

 
22

 
$
46.69

The following table provides additional information about outstanding Awards to purchase Liberty Interactive and Liberty Ventures common stock at June 30, 2013.
 
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
 
Weighted
average
remaining
life
 
Aggregate
intrinsic
value
(000's)
Series A Liberty Interactive
35,212

 
$
17.88

 
5.3 years
 
$
181,134

 
14,263

 
$
16.18

 
4.1 years
 
$
97,735

Series B Liberty Interactive
432

 
$
17.92

 
1.9 years
 
$
1,819

 
432

 
$
17.92

 
1.9 years
 
$
1,819

Series A Liberty Ventures
1,070

 
$
56.87

 
5.5 years
 
$
30,130

 
450

 
$
54.69

 
4.4 years
 
$
13,687

Series B Liberty Ventures
22

 
$
46.69

 
1.9 years
 
$
827

 
22

 
$
46.69

 
1.9 years
 
$
827

As of June 30, 2013, the total unrecognized compensation cost related to unvested Liberty outstanding equity Awards was approximately $143 million, including compensation associated with the option exchange that occured in December 2012. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.1 years.


I- 11



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


TripAdvisor - Stock-based Compensation
During six months ended June 30, 2013, TripAdvisor issued 1.6 million of primarily service based stock options under their 2011 Incentive Plan with a weighted average estimated grant-date fair value per option of $23.15. As of June 30, 2013, TripAdvisor has 9.0 million options outstanding of which 3.8 million are exercisable. TripAdvisor stock-based compensation for the three and six months ended June 30, 2013 was approximately $14 million and $30 million, respectively. As of June 30, 2013, the total unrecognized compensation cost related to unvested TripAdvisor stock options was approximately $90 million and will be recognized over a weighted average period of approximately 2.9 years.
Additionally, during the six months ended June 30, 2013, TripAdvisor granted 994,000 service based RSUs under their 2011 Incentive Plan for which the fair value was measured based on the quoted price of TripAdvisor common stock at the date of grant. As of June 30, 2013, the total unrecognized compensation cost related to 1 million unvested TripAdvisor RSUs was approximately $41 million and will be recognized over a weighted average period of approximately 3.5 years.
Other
Certain of the Company's other subsidiaries have stock based compensation plans under which employees and non-employees are granted options or similar stock based awards. Awards made under these plans vest and become exercisable over various terms. The awards and compensation recorded, if any, under these plans is not significant to Liberty.
(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 Interactive Corporation Common Stock
The basic and diluted EPS calculation for Liberty Interactive Corporation prior to the recapitalization is based on the following number of weighted average shares outstanding. Excluded from diluted EPS, for the three and six months ended June 30, 2012, prior to the recapitalization, are 7 million potential common shares because their inclusion would be antidilutive. As discussed in more detail in note 2, Liberty Interactive Corporation common stock was recapitalized through the creation of the Liberty Interactive common stock and Liberty Ventures common stock as tracking stocks during the third quarter of 2012. Therefore, there is no Liberty Interactive Corporation common stock outstanding at June 30, 2013.
 
Liberty Interactive Corporation Common Stock
 
Three months ended
June 30, 2012
 
Six months ended
June 30, 2012
 
number of shares in millions
Basic EPS
553

 
563

  Potentially dilutive shares
9

 
9

Diluted EPS
562

 
572



I- 12



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


Series A and Series B Liberty Interactive Common Stock
Liberty completed a recapitalization on August 9, 2012, whereby each holder of then-existing Liberty Interactive Corporation common stock became a holder of the same number of shares of Liberty Interactive common stock. Excluded from diluted EPS, for the three and six months ended June 30, 2013, are less than a million potential common shares because their inclusion would be antidilutive.
 
Liberty Interactive Common Stock
 
Three months ended
June 30, 2013
 
Six months ended
June 30, 2013
 
number of shares in millions
Basic EPS
523

 
529

  Potentially dilutive shares
8

 
7

Diluted EPS
531

 
536

Series A and Series B Liberty Ventures Common Stock
Liberty completed a recapitalization on August 9, 2012, whereby each holder of then-existing Liberty Interactive Corporation common stock received 0.05 of a share of the corresponding series of Liberty Ventures common stock, by means of a dividend, with cash paid in lieu of fractional shares of Liberty Ventures common stock. Excluded from diluted EPS, for the three and six months ended June 30, 2013, are less than a million potential common shares because their inclusion would be antidilutive.
 
Liberty Ventures Common Stock
 
Three months ended
June 30, 2013
 
Six months ended
June 30, 2013
 
number of shares in millions
Basic EPS
37

 
37

  Potentially dilutive shares

 

Diluted EPS
37

 
37

(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- 13



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 June 30, 2013
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
Cash equivalents
$
1,087

 
1,053

 
34

 

Short term marketable securities
$
508

 

 
508

 

Available-for-sale securities
$
1,361

 
869

 
492

 

Debt
$
1,879

 

 
1,879

 

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.
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
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Fair Value Option Securities
$
112

 
41

 
336

 
181

Exchangeable senior debentures
(106
)
 
(35
)
 
(416
)
 
(217
)
Other derivatives (a)
3

 
(166
)
 
16

 
(142
)
 
$
9

 
(160
)
 
(64
)
 
(178
)

(a)
In the first quarter of 2012, we entered into a forward contract to sell 12 million Expedia, Inc. shares at approximately $34 per share. The derivative contract was in a liability position in the prior year as the stock price of Expedia, Inc. shares had increased since the inception of the derivative contract and resulted in a recognition of unrealized losses on the contract in the prior year.
(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 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 statements 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 considered to be non-strategic ("Fair Value Option Securities"). Accordingly, changes in the fair value of Fair Value Option 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.


I- 14



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


Investments in AFS securities, the majority of which are considered Fair Value Option Securities, and other cost investments are summarized as follows:
 
June 30,
2013
 
December 31, 2012
 
amounts in millions
Interactive Group
 
 
 
    Other cost investments
$
4

 
4

        Total attributed Interactive Group
4

 
4

Ventures Group
 
 
 
    Time Warner Inc. (1)
254

 
1,042

    Time Warner Cable Inc.
615

 
531

    AOL Inc. (1)

 
59

    TripAdvisor AFS securities
220

 
99

    Other AFS investments
272

 
84

     Total attributed Ventures Group
1,361

 
1,815

Consolidated Liberty
$
1,365

 
1,819


(1) Liberty sold 17.4 million shares of Time Warner Inc. and 2 million shares of AOL Inc. for proceeds of $1,099 million during the six months ended June 30, 2013 in connection with the redemption of the 3.125% Exchangeable Senior Debentures, as discussed in note 9.
(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, fair value, and percentage ownership of the more significant investments in affiliates at June 30, 2013 and the carrying amount at December 31, 2012:
 
June 30, 2013
 
December 31, 2012
 
Percentage
ownership
 
Fair value (Level 1)
 
Carrying
amount
 
Carrying
amount
 
 
 
dollars in millions
Interactive Group
 
 
 
 
 
 
 
    HSN, Inc.
37
%
 
$
1,075

 
$
270

 
242

    Other
various

 
NA

 
52

 
62

        Total Interactive Group
 
 
 
 
322

 
304

Ventures Group
 
 
 
 
 
 
 
    Expedia, Inc. (1)
17
%
 
1,388

 
438

 
431

    Other
various

 
NA

 
123

 
116

        Total Ventures Group
 
 
 
 
561

 
547

Consolidated Liberty
 

 
 

 
$
883

 
851

(1)
Liberty's 22% owned consolidated subsidiary TripAdvisor, Inc. earned revenue of approximately $54 million and $115 million for the three and six months ended June 30, 2013, respectively, and $56 million and $107 million for the three and six months ended June 30, 2012, respectively, from Expedia, Inc. (TripAdvisor's former parent).


I- 15



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


The following table presents Liberty's share of earnings (losses) of affiliates:
 
Three months ended June 30,
 
Six months ended June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Interactive Group
 
 
 
 
 
 
 
    HSN, Inc.
$
11

 
9

 
31

 
24

    Other
(7
)
 
(2
)
 
(11
)
 
(4
)
        Total Interactive Group
4

 
7

 
20

 
20

Ventures Group
 
 
 
 
 
 
 
    Expedia, Inc.
10

 
26

 
(10
)
 
24

    TripAdvisor, Inc. (1)
NA

 
12

 
NA

 
23

    Other
(7
)
 
(10
)
 
(14
)
 
(21
)
        Total Ventures Group
3

 
28

 
(24
)
 
26

Consolidated Liberty
$
7

 
35

 
(4
)
 
46

(1)
On December 11, 2012, we acquired approximately 4.8 million additional shares of common stock of TripAdvisor (an additional 4% equity ownership interest), for $300 million, and obtained voting control of TripAdvisor. Following the date of this transaction, TripAdvisor is accounted for as a consolidated subsidiary. See note 1 for additional details of this transaction.
Expedia
Summarized unaudited financial information for Expedia is as follows:
Expedia Consolidated Balance Sheets
 
June 30,
2013
 
December 31, 2012
 
amounts in millions
Current assets
$
3,264

 
2,615

Property and equipment, net
441

 
409

Goodwill
3,643

 
3,016

Intangible assets, net
1,145

 
821

Other assets
251

 
224

Total assets
$
8,744

 
7,085

Current liabilities
$
4,211

 
2,982

Deferred income taxes
461

 
324

Long-term debt
1,249

 
1,249

Other liabilities
127

 
128

Redeemable noncontrolling interests
358

 
13

Noncontrolling interest
110

 
109

Equity
2,228

 
2,280

Total liabilities and equity
$
8,744

 
7,085






I- 16



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


Expedia Consolidated Statements of Operations
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Revenue
$
1,205

 
1,040

 
2,217

 
$
1,856

Cost of revenue
(262
)
 
(230
)
 
(513
)
 
(430
)
Gross profit
943

 
810

 
1,704

 
1,426

Selling, general and administrative expenses
(824
)
 
(644
)
 
(1,550
)
 
(1,208
)
Amortization
(18
)
 
(9
)
 
(31
)
 
(12
)
Restructuring charges and other
(6
)
 
(3
)
 
(134
)
 
(3
)
Operating income (loss)
95

 
154

 
(11
)
 
203

Interest expense
(21
)
 
(22
)
 
(43
)
 
(43
)
Other income (expense), net
14

 
3

 
23

 
2

Income tax (expense) benefit
(25
)
 
(29
)
 
(13
)
 
(34
)
Income (loss) from continuing operations
63

 
106

 
(44
)
 
128

Earnings (loss) from discontinued operations

 

 

 
(24
)
Net earnings (loss)
63

 
106

 
(44
)
 
104

Less net earnings (loss) attributable to noncontrolling interests
8

 
(1
)
 
11

 
(2
)
Net earnings (loss) attributable to Expedia, Inc. shareholders
$
71

 
105

 
(33
)
 
$
102

(8) Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
 
QVC
 
E-commerce
 
TripAdvisor
 
Total
 
amounts in millions
Balance at January 1, 2013
$
5,349

 
558

 
3,649

 
9,556

Foreign currency translation adjustments
(64
)
 

 
(3
)
 
(67
)
Acquisitions (1)

 
(9
)
 
41

 
32

Balance at June 30, 2013
$
5,285

 
549

 
3,687

 
9,521

(1)
The $41 million increase to TripAdvisor goodwill during the period is primarily attributable to certain acquisitions made by TripAdvisor during the six months ended June 30, 2013 and to a lesser extent certain purchase price allocation adjustments recorded in connection with our acquisition of a controlling interest in TripAdvisor during December 2012.







I- 17



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


Intangible Assets Subject to Amortization
Amortization expense for intangible assets with finite useful lives was $196 million and $388 million for the three and six months ended June 30, 2013, respectively, and $109 million and $217 million for the three and six months ended June 30, 2012, respectively. Based on its amortizable intangible assets as of June 30, 2013, Liberty expects that amortization expense will be as follows for the next five years (amounts in millions):
Remainder of 2013
$
390

2014
$
706

2015
$
611

2016
$
490

2017
$
348
























I- 18



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


(9) Long-Term Debt
Debt is summarized as follows:
 
 
Outstanding principal at June 30, 2013
 
Carrying value
 
 
June 30, 2013
 
December 31, 2012
 
 
amounts in millions
Interactive Group
 
 
 
 
 
 
5.7% Senior Notes due May 2013
$

 

 
240

 
8.5% Senior Debentures due 2029
287

 
285

 
285

 
8.25% Senior Debentures due 2030
505

 
501

 
501

 
QVC 7.125% Senior Secured Notes due 2017

 

 
500

 
QVC 7.5% Senior Secured Notes due 2019
769

 
760

 
988

 
QVC 7.375% Senior Secured Notes due 2020
500

 
500

 
500

 
QVC 5.125% Senior Secured Notes due 2022
500

 
500

 
500

 
QVC 4.375% Senior Secured Notes due 2023
750

 
750

 

 
QVC 5.95% Senior Secured Notes due 2043
300

 
300

 

 
QVC Bank Credit Facilities
990

 
990

 
903

 
Other subsidiary debt
138

 
138

 
125

     Total Interactive Group
4,739

 
4,724

 
4,542

Ventures Group
 
 
 
 
 
 
3.125% Exchangeable Senior Debentures due 2023

 

 
1,639

 
4% Exchangeable Senior Debentures due 2029
469

 
318

 
311

 
3.75% Exchangeable Senior Debentures due 2030
460

 
313

 
297

 
3.5% Exchangeable Senior Debentures due 2031
367

 
310

 
292

 
3.25% Exchangeable Senior Debentures due 2031

 

 
391

 
0.75% Exchangeable Senior Debentures due 2043
850

 
938

 

 
TripAdvisor Debt Facilities
385

 
385

 
412

     Total Ventures Group debt
2,531

 
2,264

 
3,342

 
 
 
 
 
 
 
Total consolidated Liberty debt
$
7,270

 
6,988

 
7,884

 
Less current maturities
 

 
(1,029
)
 
(1,638
)
 
Total long-term debt
 
 
$
5,959

 
6,246

QVC Bank Credit Facilities
On March 1, 2013, QVC entered into an amended and restated syndicated senior secured credit agreement which served to refinance QVC's existing bank credit facility (the “Amended and Restated Credit Agreement”). The Amended and Restated Credit Agreement is a multi-currency facility providing for a $2 billion revolving credit facility, with a $250 million sub-limit for standby letters of credit and $1 billion of uncommitted incremental revolving loan commitments or incremental term loans. The loans are scheduled to mature on March 1, 2018. The covenants contained in the Amended and Restated Credit Agreement are substantially similar to those contained in QVC's previously existing bank credit facility. Borrowings under the Amended and Restated Credit Agreement bear interest at either the alternate base rate or LIBOR (based on an interest period selected by QVC of one week, one month, two months, three months or six months, or to the extent available from all lenders, nine months or twelve months) at QVC's election in each case


I- 19



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


plus a margin. Borrowings that are alternate base rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% and 1.00% depending on QVC's ratio of consolidated total debt to consolidated Adjusted OIBDA (the “consolidated leverage ratio”). Borrowings that are LIBOR loans will bear interest at a per annum rate equal to the applicable LIBOR plus a margin that varies between 1.25% and 2.00% depending on QVC's consolidated leverage ratio. Each loan may be prepaid at any time and from time to time without penalty other than customary breakage costs. Any amounts prepaid on the revolving facility may be reborrowed. The Amended and Restated Credit Agreement is secured by the stock of QVC. Availability under the QVC Amended and Restated Credit Agreement at June 30, 2013 was $1,010 million. QVC was in compliance with all debt covenants related to the Amended and Restated Credit Agreement at June 30, 2013.
QVC Senior Secured Notes
On March 4, 2013, QVC announced the commencement of cash tender offers (the “Offers”) for any and all of its outstanding $500 million in aggregate principal amount of 7.125% senior secured notes due 2017 (the “7.125% Senior Notes”) and up to $250 million in aggregate principal amount of its 7.5% senior secured notes due 2019 (the “7.5% Senior Notes”). The Offer for the 7.125% Senior Notes expired on March 15, 2013, and the Offer for the 7.5% Senior Notes expired on April 1, 2013. Approximately $124 million of the 7.125% Senior Notes were tendered pursuant to the Offers, whereby holders of the 7.125% Senior Notes received consideration of $1,039.40 for each $1,000 principal amount of tendered 7.125% Senior Notes purchased pursuant to the Offers. QVC called the remaining $376 million principal of its 7.125% Senior Notes at $1,035.63 for each $1,000 principal amount of 7.125% Senior Notes on April 17, 2013. Approximately $231 million of the 7.5% Senior Notes were tendered pursuant to the Offers. The total consideration for the 7.5% Senior Notes was $1,120 for each $1,000 principal amount of tendered 7.5% Senior Notes.
On March 18, 2013, QVC completed the offering of $750 million principal amount of new 4.375% senior secured notes due 2023 and $300 million principal amount of new 5.95% senior secured notes due 2043 (collectively, the “Notes”). The Notes are secured by a first-priority lien on QVC's capital stock, pari passu with the Amended and Restated Credit Agreement and QVC's existing notes. The net proceeds from the offering of the Notes were used to fund the Offers, repay outstanding amounts on QVC's existing bank credit facility and, via dividend from QVC, retire Liberty's 5.7% Senior Notes due May 2013, and for general corporate purposes.
As a result of these refinancing transactions, QVC recorded extinguishment losses of $16 million and $57 million for the three and six months ended June 30, 2013, respectively, which is recorded in other, net in the Company's statements of operations.
QVC was in compliance with all of its debt covenants related to its outstanding senior notes at June 30, 2013.
QVC Interest Rate Swap Arrangements
In March 2013, QVC's notional interest rate swaps of $3.1 billion expired. These swap arrangements did not qualify as cash flow hedges under GAAP. Accordingly, changes in the fair value of the swaps were reflected in realized and unrealized gains or losses on financial instruments in the accompanying condensed consolidated statements of operations.
Exchangeable Senior Debentures
During the six months ended June 30, 2013, Liberty retired all outstanding 3.25% Exchangeable Senior Debentures due 2031. Liberty paid approximately $414 million to retire the outstanding principal balance.     
On April 9, 2013, Liberty's wholly owned subsidiary, Liberty Interactive LLC, called for the redemption of all the outstanding 3.125% Exchangeable Senior Debentures due 2023 ("3.125% Exchangeable Senior Debentures") on May 9, 2013 (the "redemption date"). In accordance with the redemption provisions of the 3.125% Exchangeable Senior Debentures and the related indenture, the 3.125% Exchangeable Senior Debentures were redeemed at a redemption price of approximately $1,667 for each $1,000 principal amount outstanding, which was equal to the sum of (i) the


I- 20



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


adjusted principal amount of such debenture in effect on the redemption date, (ii) any accrued and unpaid interest on such debenture to the redemption date and (iii) subject to certain conditions, any final period distribution on such debenture. Interest on the debentures ceased accruing on and after the redemption date. Liberty had the option to satisfy the value of the exchange in cash, Time Warner Inc., Time Warner Cable Inc. and AOL, Inc. common stock, or a combination thereof. All of the outstanding 3.125% Exchangeable Senior Debentures were redeemed prior to June 30, 2013, using cash provided by the Debentures (defined below) and cash provided by the sale of shares of Time Warner Inc. and AOL, Inc. common stock.
Also on April 9, 2013, Liberty Interactive LLC, a wholly owned subsidiary Liberty, completed the offer and sale of $850 million aggregate original principal amount of Liberty Interactive LLC's 0.75% Exchangeable Senior Debentures due 2043 (the “Debentures”) in a private placement transaction. The Debentures mature on March 30, 2043. Interest on the Debentures will accrue from April 9, 2013 at an annual rate of 0.75% of the original principal amount of $1,000 per Debenture, payable quarterly in arrears on March 30, June 30, September 30 and December 30 of each year, commencing June 30, 2013. Each $1,000 original principal amount of Debentures is initially exchangeable for a basket of 6.3040 shares of common stock of Time Warner Cable Inc. and 5.1635 shares of common stock of Time Warner Inc., which may change over time to include other publicly traded common equity securities that may be distributed on or in respect of those shares of Time Warner Cable Inc. and Time Warner Inc. (or into which any of those securities may be converted or exchanged). This basket of shares for which each Debenture in the original principal amount of $1,000 may be exchanged is referred to as the Reference Shares attributable to such Debenture, and to each issuer of Reference Shares as a Reference Company. Each Debenture is exchangeable at the option of the holder at any time, upon which they will be entitled to receive the Reference Shares attributable to such Debenture or, at the election of Liberty Interactive LLC, cash or a combination of Reference Shares and cash having a value equal to such Reference Shares. Upon exchange, holders will not be entitled to any cash payment representing accrued interest or outstanding additional distributions. Liberty has elected to account for this instrument using the fair value option. Accordingly, changes in the fair value of this instrument are recognized as realized and unrealized gains (losses) in the statements of operations.
Other Subsidiary Debt
Other subsidiary debt at June 30, 2013 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 (Level 2). 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 June 30, 2013 is as follows (amounts in millions):
Senior debentures
$
835

QVC senior secured notes
$
2,854

Due to the variable rate nature, Liberty believes that the carrying amount of its other debt, not discussed above, approximated fair value at June 30, 2013.


I- 21



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



(10) Stockholders' Equity
As of June 30, 2013, Liberty reserved for issuance upon exercise of outstanding stock options approximately 35.2 million shares of Series A Liberty Interactive common stock, 432,000 shares of Series B Liberty Interactive common stock, 1.1 million shares of Series A Liberty Ventures common stock and 22,000 shares of Series B Liberty Ventures common stock.
In addition to the Series A and Series B Liberty Interactive and Liberty Ventures common stock there are 4 billion shares of Series C Liberty Interactive and 200 million shares of Series C Liberty Ventures common stock authorized for issuance. As of June 30, 2013, no shares of any Series C Liberty Interactive and Liberty Ventures common stock were issued or outstanding.
(11) 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.
(12) 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 Adjusted OIBDA 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.
Liberty defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses excluding all 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 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 six months ended June 30, 2013, Liberty has identified the following consolidated subsidiaries as its reportable segments:
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 and mobile applications.


I- 22



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


TripAdvisor, Inc. - a consolidated subsidiary that is an online travel research company that empowers users to plan and maximize their travel experience.
Additionally, for presentation purposes, Liberty is providing financial information of the E-commerce businesses on an aggregated basis. The consolidated E-commerce 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), celebration offerings from invitations to costumes (Celebrate Interactive Holdings LLC) and a drop-ship solutions company (CommerceHub).
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 in the annual report on Form 10-K.
Performance Measures
 
Six months ended June 30,
 
2013
 
2012
 
Revenue
 
Adjusted
OIBDA
 
Revenue
 
Adjusted
OIBDA
 
amounts in millions
Interactive Group
 
 
 
 
 
 
 
QVC
$
3,935

 
838

 
3,906

 
828

E-commerce
899

 
65

 
773

 
57

Corporate and other

 
(11
)
 

 
(11
)
Total Interactive Group
4,834

 
892

 
4,679

 
874

Ventures Group
 
 
 
 
 
 
 
TripAdvisor, Inc.
477

 
222

 

 

Corporate and other

 
(6
)
 

 
(1
)
Total Ventures Group
477

 
216

 

 
(1
)
Consolidated Liberty
$
5,311

 
1,108

 
4,679

 
873




I- 23



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


 
Three months ended June 30,
 
2013
 
2012
 
Revenue
 
Adjusted
OIBDA
 
Revenue
 
Adjusted
OIBDA
 
amounts in millions
Interactive Group
 
 
 
 
 
 
 
QVC
$
1,961

 
434

 
1,974

 
438

E-commerce
439

 
26

 
391

 
23

Corporate and other

 
(5
)
 

 
(6
)
Total Interactive Group
2,400

 
455

 
2,365

 
455

Ventures Group
 
 
 
 
 
 
 
TripAdvisor, Inc.
247

 
113

 

 

Corporate and other

 
(3
)
 

 

Total Ventures Group
247

 
110

 

 

Consolidated Liberty
$
2,647

 
565

 
2,365

 
455


Other Information
 
June 30, 2013
 
Total
assets
 
Investments
in
affiliates
 
Capital
expenditures
 
amounts in millions
Interactive Group
 
 
 
 
 
QVC
$
12,674

 
52

 
75

E-commerce
1,464

 

 
36

Corporate and other
221

 
270

 

Total Interactive Group
14,359

 
322

 
111

Ventures Group
 
 
 
 
 
TripAdvisor
7,404

 

 
25

Corporate and other
2,673

 
561

 

Total Ventures Group
10,077

 
561

 
25

Inter-group eliminations
(151
)
 

 

Consolidated Liberty
$
24,285

 
883

 
136








I- 24



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


The following table provides a reconciliation of segment Adjusted OIBDA to earnings (loss) from continuing operations before income taxes:
 
Three months ended
June 30, 2013
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Consolidated segment Adjusted OIBDA
$
565

 
455

 
1,108

 
873

  Stock-based compensation
(44
)
 
(18
)
 
(86
)
 
(35
)
  Depreciation and amortization
(237
)
 
(147
)
 
(467
)
 
(290
)
  Interest expense
(90
)
 
(107
)
 
(201
)
 
(213
)
  Share of earnings (loss) of affiliates, net
7

 
35

 
(4
)
 
46

  Realized and unrealized gains (losses) on financial instruments, net
9

 
(160
)
 
(64
)
 
(178
)
  Gains (losses) on dispositions, net
(2
)
 
288

 
(2
)
 
288

  Other, net
(15
)
 
30

 
(53
)
 
33

Earnings (loss) before income taxes
$
193

 
376

 
231

 
524



I- 25



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. ("QVC"); 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;
the levels of online traffic to our businesses' websites and our ability to convert visitors into customers or contributors;
uncertainties inherent in the development and integration of new business lines and business strategies;
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, distributors, suppliers and vendors;
general economic and business conditions and industry trends;
consumer spending levels, including the availability and amount of individual consumer debt;
advertising spending levels;
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 programs;
increased digital TV penetration and the impact on channel positioning of our networks;
rapid technological changes;
if we fail to protect the security of personal information about our customers we could be subject to costly government enforcement actions or private litigation and our reputation could suffer;
the regulatory and competitive environment of the industries in which we 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 I, Item 1 of the Annual Report on Form 10-K for the year ended December 31, 2012. These forward-looking statements and such risks, uncertainties and other factors speak only as of


I- 26



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, 2012.
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"). 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 and mobile applications. We also own a controlling interest in TripAdvisor, Inc. ("TripAdvisor"), a separate reportable segment, which is an online travel company that empowers users to plan and maximize their travel experience by aggregating reviews and opinions of members about destinations, accommodations, restaurants and activities throughout the world. 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. ("Backcountry"), Bodybuilding.com, LLC ("Bodybuilding"), Celebrate Interactive Holdings, LLC ("Celebrate"), Provide Commerce, Inc. ("Provide") and CommerceHub. 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, party supplies and invitations. Provide operates an e-commerce marketplace of websites for perishable goods, including flowers, fruits and desserts, as well as upscale personalized gifts. CommerceHub operates a a drop-ship solution which allows different software systems from both sides of the transaction to more easily access the data necessary to fulfill orders.
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."
On August 9, 2012, Liberty completed the approved recapitalization of its common stock through the creation of the Liberty Interactive common stock and Liberty Ventures common stock as tracking stocks. In the recapitalization, each holder of Liberty Interactive Corporation common stock remained a holder of the same amount and series of Liberty Interactive common stock and received 0.05 of a share of the corresponding series of Liberty Ventures common stock, by means of a dividend, with cash issued in lieu of fractional shares of Liberty Ventures common stock.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The Ventures Group is comprised primarily of our consolidated subsidiary TripAdvisor and interests in Expedia, Inc., Interval Leisure Group, Inc., Tree.com, Inc., investments in Time Warner Inc., Time Warner Cable Inc. and AOL, Inc., as well as cash in the amount of approximately $857 million (at June 30, 2013). The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities.
The term "Interactive Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The Interactive Group is primarily focused on our video and e-commerce operating businesses and has attributed to it the remainder of our businesses and assets, including our operating subsidiaries QVC, Provide, Backcountry, Bodybuilding, Celebrate and CommerceHub as well as our interest in HSN, Inc. and cash of approximately $591 million (at June 30, 2013), including subsidiary cash. The Interactive Group has attributed to it liabilities that reside with QVC and the other entities listed as well as our outstanding senior notes and certain deferred tax liabilities.



I- 27



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 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 segments, see "Results of Operations—Businesses" below.
Operating Results
 
Three months ended
June 30,
 
Six months ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
amounts in millions
Revenue
 
 
 
 
 
 
 
Interactive Group
 
 
 
 
 
 
 
QVC
$
1,961

 
1,974

 
3,935

 
3,906

E-commerce
439

 
391

 
899

 
773

Total Interactive Group
2,400

 
2,365

 
4,834

 
4,679

Ventures Group
 
 
 
 
 
 
 
TripAdvisor
247

 

 
477

 

Corporate and other

 

 

 

Total Ventures Group
247

 

 
477

 

Consolidated Liberty
$
2,647

 
2,365

 
5,311

 
4,679

 
 
 
 
 
 
 
 
Adjusted OIBDA
 
 
 
 
 
 
 
Interactive Group
 
 
 
 
 
 
 
QVC
$
434

 
438

 
838

 
828<