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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2016

OR

 

 

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)

 


incorporation or organization)


Identification No.)

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    No 

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     No 

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 

Accelerated filer 

Non-accelerated filer 

(do not check if
smaller reporting company)

Smaller reporting company 

 

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

The number of outstanding shares of Liberty Interactive Corporation's common stock as of April 30, 2016 was:

 

 

 

 

 

 

 

 

 

Series A

 

Series B

 

 

 

 

 

 

 

QVC Group

 

451,545,725

 

29,361,638

 

Liberty Ventures

 

135,061,972

 

7,103,609

 

 

 

 

 

 

 

 

 

 


 

Table of Contents

 

 

 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited) 

    

I-3

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

 

I-5

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements Of Comprehensive Earnings (Loss) (unaudited) 

 

I-7

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

 

I-8

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES Condensed Consolidated Statement Of Equity (unaudited) 

 

I-9

 

 

 

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

 

I-10

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

 

I-26

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 

 

I-37

Item 4. Controls and Procedures. 

 

I-38

 

 

 

PART II—OTHER INFORMATION 

 

II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

II-1

Item 6. Exhibits 

 

II-2

 

 

 

SIGNATURES 

 

II-3

EXHIBIT INDEX 

 

II-4

 

 

 

I-2


 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

2,743

 

2,449

 

Trade and other receivables, net of allowance for doubtful accounts of $89 million and $87 million, respectively

 

 

1,094

 

1,443

 

Inventory, net

 

 

1,084

 

1,000

 

Short term marketable securities (note 6)

 

 

601

 

910

 

Other current assets

 

 

87

 

73

 

Total current assets

 

 

5,609

 

5,875

 

Investments in available-for-sale securities and other cost investments (note 7)

 

 

1,482

 

1,353

 

Investments in affiliates, accounted for using the equity method (note 8)

 

 

1,651

 

1,641

 

Property and equipment, at cost

 

 

2,236

 

2,124

 

Accumulated depreciation

 

 

(1,035)

 

(984)

 

 

 

 

1,201

 

1,140

 

Intangible assets not subject to amortization (note 9):

 

 

 

 

 

 

Goodwill

 

 

6,198

 

6,112

 

Trademarks

 

 

3,322

 

3,373

 

 

 

 

9,520

 

9,485

 

Intangible assets subject to amortization, net (note 9)

 

 

1,457

 

1,647

 

Other assets, at cost, net of accumulated amortization

 

 

38

 

39

 

Total assets

 

$

20,958

 

21,180

 

 

(continued)

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2016

 

2015

 

 

 

amounts in millions,

 

 

 

except share amounts

 

Liabilities and Equity

    

 

    

    

    

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

667

 

762

 

Accrued liabilities

 

 

623

 

784

 

Current portion of debt, including $2,577 million and $1,193 million measured at fair value (note 10)

 

 

2,605

 

1,226

 

Other current liabilities

 

 

295

 

328

 

Total current liabilities

 

 

4,190

 

3,100

 

Long-term debt, including zero and $1,287 million measured at fair value (note 10)

 

 

6,271

 

7,481

 

Deferred income tax liabilities

 

 

3,454

 

3,502

 

Other liabilities

 

 

295

 

222

 

Total liabilities

 

 

14,210

 

14,305

 

Equity

 

 

 

 

 

 

Stockholders' equity (note 11):

 

 

 

 

 

 

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

 

 

 —

 

 —

 

Series A QVC Group common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 452,916,772 shares at March 31, 2016 and 461,379,963 shares at December 31, 2015

 

 

5

 

5

 

Series B QVC Group common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,367,060 shares at March 31, 2016 and 29,218,527 shares at December 31, 2015

 

 

 —

 

 —

 

Series A Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares; issued and outstanding 135,039,558 shares at March 31, 2016 and 134,961,466 shares at December 31, 2015

 

 

1

 

1

 

Series B Liberty Ventures common stock, $.01 par value. Authorized 15,000,000 shares; issued and outstanding 7,103,609 shares at March 31, 2016 and 7,092,111 shares at December 31, 2015

 

 

 —

 

 —

 

Additional paid-in capital

 

 

160

 

370

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(189)

 

(215)

 

Retained earnings

 

 

6,689

 

6,626

 

Total stockholders' equity

 

 

6,666

 

6,787

 

Noncontrolling interests in equity of subsidiaries

 

 

82

 

88

 

Total equity

 

 

6,748

 

6,875

 

Commitments and contingencies (note 12)

 

 

 

 

 

 

Total liabilities and equity

 

$

20,958

 

21,180

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2016

    

2015

 

 

 

amounts in millions

 

Total revenue, net

 

$

2,510

 

2,214

 

Operating costs and expenses:

 

 

 

 

 

 

Cost of sales (exclusive of depreciation shown separately below)

 

 

1,626

 

1,415

 

Operating

 

 

170

 

160

 

Selling, general and administrative, including stock-based compensation (note 4)

 

 

308

 

235

 

Depreciation and amortization

 

 

217

 

168

 

 

 

 

2,321

 

1,978

 

Operating income

 

 

189

 

236

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(93)

 

(95)

 

Share of earnings (losses) of affiliates, net (note 8)

 

 

(21)

 

3

 

Realized and unrealized gains (losses) on financial instruments, net (note 6)

 

 

(7)

 

(4)

 

Other, net

 

 

34

 

15

 

 

 

 

(87)

 

(81)

 

Earnings (loss) before income taxes

 

 

102

 

155

 

Income tax (expense) benefit

 

 

(31)

 

(3)

 

Net earnings (loss)

 

 

71

 

152

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

8

 

9

 

Net earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

63

 

143

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

QVC Group common stock

 

$

90

 

151

 

Liberty Ventures common stock

 

 

(27)

 

(8)

 

 

 

$

63

 

143

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

I-5


 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

 

2016

    

2015

 

Basic net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 5):

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.19

 

0.32

 

Series A and Series B Liberty Ventures common stock

 

$

(0.19)

 

(0.06)

 

Diluted net earnings (losses) attributable to Liberty Interactive Corporation shareholders per common share (note 5):

 

 

 

 

 

 

Series A and Series B QVC Group common stock

 

$

0.18

 

0.31

 

Series A and Series B Liberty Ventures common stock

 

$

(0.19)

 

(0.06)

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

 

 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2016

    

2015

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

71

 

152

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

34

 

(102)

 

Share of other comprehensive earnings (losses) of equity affiliates

 

 

(1)

 

(14)

 

Other comprehensive earnings (loss)

 

 

33

 

(116)

 

Comprehensive earnings (loss)

 

 

104

 

36

 

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

 

15

 

9

 

Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders

 

$

89

 

27

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

QVC Group common stock

 

$

110

 

35

 

Liberty Ventures common stock

 

 

(21)

 

(8)

 

 

 

$

89

 

27

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

I-7


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements Of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2016

    

2015

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

71

 

152

 

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

 

 

 

 

 

 

Depreciation and amortization

 

 

217

 

168

 

Stock-based compensation

 

 

31

 

15

 

Cash payments for stock-based compensation

 

 

(10)

 

(2)

 

Excess tax benefit from stock-based compensation

 

 

(5)

 

(13)

 

Share of (earnings) losses of affiliates, net

 

 

21

 

(3)

 

Cash receipts from returns on equity investments

 

 

15

 

13

 

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

 

 

7

 

4

 

Deferred income tax expense (benefit)

 

 

(6)

 

(54)

 

Other, net

 

 

(27)

 

(8)

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

281

 

258

 

Payables and other liabilities

 

 

(300)

 

(310)

 

Net cash provided (used) by operating activities

 

 

295

 

220

 

Cash flows from investing activities:

 

 

 

 

 

 

Cash paid for acquisitions, net of cash acquired

 

 

 —

 

(20)

 

Cash proceeds from dispositions of investments

 

 

9

 

 —

 

Investments in and loans to cost and equity investees

 

 

(22)

 

(45)

 

Cash receipts from returns of equity investments

 

 

 —

 

200

 

Capital expended for property and equipment

 

 

(51)

 

(44)

 

Purchases of short term and other marketable securities

 

 

(116)

 

(287)

 

Sales of short term and other marketable securities

 

 

425

 

313

 

Other investing activities, net

 

 

(12)

 

(44)

 

Net cash provided (used) by investing activities

 

 

233

 

73

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

623

 

531

 

Repayments of debt

 

 

(598)

 

(642)

 

Repurchases of QVC Group common stock

 

 

(238)

 

(123)

 

Minimum withholding taxes on net settlements of stock-based compensation

 

 

(8)

 

(11)

 

Excess tax benefit from stock-based compensation

 

 

5

 

13

 

Other financing activities, net

 

 

(5)

 

(7)

 

Net cash provided (used) by financing activities

 

 

(221)

 

(239)

 

Effect of foreign currency exchange rates on cash

 

 

(13)

 

(10)

 

Net increase (decrease) in cash and cash equivalents

 

 

294

 

44

 

Cash and cash equivalents at beginning of period

 

 

2,449

 

2,306

 

Cash and cash equivalents at end of period

 

$

2,743

 

2,350

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-8


 

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Three months ended March 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

 

 

Common stock

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

QVC

 

Liberty

 

Additional

 

other

 

 

 

Noncontrolling

 

 

 

 

 

Preferred

 

Group

 

Ventures

 

paid-in

 

comprehensive

 

Retained

 

interest in equity

 

Total

 

 

  

stock

  

Series A

  

Series B

  

Series A

  

Series B

  

capital

  

earnings (loss)

  

earnings

  

of subsidiaries

  

equity

 

 

 

amounts in millions

 

Balance at January 1, 2016

 

$

 —

 

5

 

 —

 

1

 

 —

 

370

 

(215)

 

6,626

 

88

 

6,875

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

63

 

8

 

71

 

Other comprehensive earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

26

 

 —

 

7

 

33

 

Stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

22

 

 —

 

 —

 

 —

 

22

 

Series A QVC Group common stock repurchases

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(238)

 

 —

 

 —

 

 —

 

(238)

 

Stock issued upon exercise of stock options

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

10

 

 —

 

 —

 

 —

 

10

 

Minimum withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(8)

 

 —

 

 —

 

 —

 

(8)

 

Excess tax benefit from stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

5

 

 —

 

 —

 

 —

 

5

 

Distribution to noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(21)

 

(21)

 

Other

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(1)

 

 —

 

 —

 

 —

 

(1)

 

Balance at March 31, 2016

 

$

 —

 

5

 

 —

 

1

 

 —

 

160

 

(189)

 

6,689

 

82

 

6,748

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

I-9


 

Table of Contents

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, 2015, 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. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. 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, 2015.

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.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. The Company has not yet selected a transition method nor has it determined the effect of the standards on its ongoing financial reporting.

In February 2015, the FASB issued new accounting guidance which amends the consolidation guidance in Accounting Standards Codification Topic 810, Consolidation.  The new guidance requires an entity to reconsider and re-document the basis for previous consolidation conclusions.  This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015.  The Company adopted this guidance during the first quarter of 2016.  The adoption of this guidance did not change the conclusions reached for any previous consolidation analyses.

In July 2015, the FASB issued new accounting guidance that changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The new principle is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out (LIFO) or the retail inventory method. The new standard is effective for the Company for fiscal years and interim periods beginning after

I-10


 

Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

December 15, 2016. The Company has determined there is no significant effect of the standard on its ongoing financial reporting.

In September 2015, the FASB issued new accounting guidance which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts that would have been recorded in previous periods if the accounting had been completed at the acquisition date. The Company adopted this guidance in the first quarter of 2016. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements and related disclosures.

 

In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments.  The new guidance requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

 

In February 2016, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard, to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15, 2018, with early adoption permitted. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

 

In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early application permitted. The Company has not yet determined the effect of the standard on its ongoing financial reporting.

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.

Liberty has entered into certain agreements with Liberty Media Corporation ("LMC"), a separate publicly traded company, neither of which has any stock ownership, beneficial or otherwise, in the other, in order to govern relationships between the companies. These agreements include a Reorganization Agreement, Services Agreement, Facilities Sharing Agreement and Tax Sharing Agreement.

The Reorganization Agreement provides for, among other things, provisions governing the relationship between Liberty and LMC, 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 $3 million was reimbursable to LMC for both

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Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

the three months ended March 31, 2016 and 2015. Additionally, 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.

 

(2)   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 has two tracking stocks—QVC Group common stock and Liberty Ventures common stock, which are intended to track and reflect the economic performance of the QVC Group and the Ventures Group, respectively.

While the QVC 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 stock 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 "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The QVC Group is primarily comprised of our merchandise-focused televised-shopping programs, Internet and mobile application businesses and has attributed to it our wholly-owned subsidiaries, QVC, Inc. (“QVC”) and zulily (defined below) (as of October 1, 2015), and our approximate 38% interest in HSN, Inc., along with cash and certain liabilities that reside with QVC and zulily as well as certain liabilities related to our corporate indebtedness (see note 10) and certain deferred tax liabilities. As of March 31, 2016, the QVC Group has cash and cash equivalents of approximately $440 million, which includes subsidiary cash.

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 our subsidiaries Bodybuilding.com, LLC ("Bodybuilding"), Commerce Technologies, Inc. (d/b/a “CommerceHub”), Evite, Inc. ("Evite") and Backcountry.com, Inc. (“Backcountry”) (see note 3 for discussion of a disposed business) (collectively, the “Digital Commerce” businesses) and interests in Expedia, Inc., FTD Companies, Inc. (“FTD”), Interval Leisure Group, Inc. and LendingTree, Inc., available-for-sale securities in Time Warner Inc. and Time Warner Cable Inc., as well as cash and cash equivalents of approximately $2,303 million at March 31, 2016. The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures (see note 10) 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. 

In May 2015, Liberty announced its entry into an agreement with Liberty Broadband Corporation ("Liberty Broadband"), a separate publicly traded company, whereby Liberty will invest up to $2.4 billion in Liberty Broadband in connection with (and contingent upon) the closing of the proposed merger of Charter Communications, Inc. ("Charter") and Time Warner Cable Inc. ("TWC"). The proceeds of this investment will be used by Liberty Broadband to fund, in part, its agreement to acquire $4.3 billion of Charter stock. Liberty Broadband's acquisition will be made in support of (and contingent upon) the closing of the Charter-TWC merger. In connection with these transactions, it is expected that Charter will undergo a corporate reorganization, resulting in New Charter, a current subsidiary of Charter, becoming the publicly traded parent company. Liberty's investment in Liberty Broadband will be funded using cash and short term investments and will be attributed to the Ventures Group.

Liberty, along with third party investors, all of whom will invest on the same terms as Liberty, have agreed to purchase newly issued shares of Liberty Broadband Series C common stock (the "Series C Shares") at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the parts basis at the time the investment agreements were executed. In the aggregate, Liberty Broadband has entered into investment agreements with respect to $4.4 billion of its Series C Shares. Liberty's investment in Liberty Broadband is subject to customary closing conditions and funding will only occur upon the completion of the Charter-TWC merger. Liberty Broadband has received

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Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

stockholder approval for the issuance of the Series C Shares in accordance with the rules and requirements of the Nasdaq Stock Market. Further, Liberty Broadband has the right, and may determine, to incur debt financing (subject to certain conditions) to fund a portion of the purchase price for its investment in New Charter, in which case Liberty Broadband may reduce the aggregate subscription for Series C Shares by up to 25%, with such reduction applied pro rata to all investors, including Liberty.

Liberty and Liberty Broadband have also entered into an agreement with Charter which provides that Liberty and Liberty Broadband will exchange, in a tax-free transaction, the shares of TWC common stock held by each company for shares of New Charter Class A common stock (subject to certain limitations). In addition, Liberty has also agreed to grant Liberty Broadband a proxy over the shares of New Charter stock it receives in the exchange, along with a right of first refusal with respect to the underlying New Charter stock.

As the outcome of the transaction with Liberty Broadband and the Charter-TWC merger are uncertain due to pending regulatory approvals, Liberty has not reflected any financial impacts in the condensed consolidated financial statements related to the respective agreements as of March 31, 2016.

On October 1, 2015, Liberty acquired all of the outstanding shares of zulily, inc. (“zulily”) (now known as zulily, llc) for consideration of approximately $2.3 billion, comprised of $9.375 of cash and 0.3098 newly issued shares of Series A QVC Group common stock for each zulily share, with cash paid in lieu of any fractional shares.  Funding for the $1.2 billion cash portion of the consideration came from cash on hand at zulily and a distribution from QVC funded by a drawdown under its revolving credit facility (see note 10).  zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each day.  zulily is attributed to the QVC Group and we believe that its business is complementary to QVC’s. Subsequent to December 31, 2015, the preliminary purchase price allocation was adjusted, resulting in decreases of $50 million to trademarks, $40 million to intangible assets subject to amortization and $33 million to deferred tax liabilities and a corresponding increase of $57 million to goodwill. If these adjustments had been recorded as of the acquisition date, amortization expense would have been approximately $3 million lower for the period ended December 31, 2015. There have been no other significant changes to our purchase price allocation since December 31, 2015. The initial purchase price allocation is subject to change upon receipt of the final valuation analysis for zulily. The primary balances still subject to analysis are certain intangible assets, liabilities and tax balances.  

On November 12, 2015, Liberty announced that its board of directors authorized management to pursue a plan to spin-off to holders of its Liberty Ventures common stock shares of newly formed companies to be called CommerceHub, Inc. and Liberty Expedia Holdings, Inc. (“Expedia Holdings”).  CommerceHub, Inc. is expected to be comprised of Liberty’s Commerce Technologies, Inc. (d/b/a CommerceHub) business.  Expedia Holdings is expected to be comprised of, among other things, Liberty’s entire interest in Expedia, Inc., Liberty’s subsidiary Bodybuilding and $350 million of debt. The applicable record dates, distribution dates and distribution ratios for the spin-offs will be announced at a later date. Each of the spin-offs is intended to be tax-free to stockholders of Liberty Ventures and will be subject to various conditions including the receipt of an opinion of tax counsel.  Subject to the satisfaction of the applicable conditions, the completion of each of the spin-offs is expected to occur in the second quarter of 2016.

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

(3) Disposals

On June 30, 2015, Liberty sold Backcountry for aggregate consideration, including assumption of debt, amounts held in escrow, and a noncontrolling interest, of approximately $350 million.  Backcountry is included in the Corporate and other segment through June 30, 2015 and is not presented as a discontinued operation as the sale did not represent a

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Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

strategic shift that has a major effect on Liberty’s operations and financial results.  Included in revenue in the accompanying condensed consolidated statements of operations is $122 million for the three months ended March 31, 2015, related to Backcountry.  Included in net earnings (loss) in the accompanying condensed consolidated statements of operations are earnings of less than one million dollars for the three months ended March 31, 2015, related to Backcountry. 

 

(4)   Stock-Based Compensation

The Company has granted to certain of its directors, employees and employees of its subsidiaries, restricted stock, restricted stock units 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) 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 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 $31 million and $15 million of stock-based compensation during the three months ended March 31, 2016 and 2015, respectively.

 

During the three months ended March 31, 2016, Liberty granted 2.8 million options to QVC employees to purchase shares of Series A QVC Group common stock.  Such options had a weighted average grant-date fair value of $7.89 per share and vest semi-annually over 4 years.

During the three months ended March 31, 2016, Liberty granted 347 thousand options to zulily employees to purchase shares of Series A QVC Group common stock.  Such options had a weighted average grant-date fair value of $7.89 per share and vest between three to five years.

Also during the three months ended March 31, 2016, Liberty granted to Liberty employees 11 thousand and 3 thousand options to purchase shares of Series A QVC Group common stock and Series A Liberty Ventures common stock, respectively.  Such options had a weighted average grant-date fair value of $7.79 and $12.11 per share, respectively, and each grant vests semi-annually over four years.

In connection with our CEO’s employment agreement, during the three months ended March 31, 2016, Liberty also granted 730 thousand and 209 thousand options of Series B QVC Group common stock and Series B Liberty Ventures common stock, respectively, and 53 thousand and 16 thousand performance-based restricted stock units of Series B QVC Group common stock and Series B Liberty Ventures common stock, respectively.  Such options had a grant-date fair value of $7.47 per share and $12.48 per share, respectively. The restricted stock units had a fair value of $25.11 per share and $38.79 per share, respectively, at the time they were granted. The options vest on December 31, 2016 and the restricted stock units cliff vest in one year, subject to satisfaction of certain performance objectives.  Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. As the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The value of the grant is remeasured at each reporting 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 and certain performance-based Awards using the Black-Scholes-Merton 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.

 

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Table of Contents

LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

Liberty—Outstanding Awards

The following tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase QVC Group and Liberty Ventures common stock granted to certain officers, employees and directors of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2016

 

31,482

 

$

19.57

 

 

 

 

 

 

 

Granted

 

3,127

 

$

26.27

 

 

 

 

 

 

 

Exercised

 

(1,994)

 

$

12.85

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(165)

 

$

38.28

 

 

 

 

 

 

 

Outstanding at March 31, 2016

 

32,450

 

$

20.53

 

5.0

years

 

$

185

 

Exercisable at March 31, 2016

 

18,422

 

$

17.46

 

3.7

years

 

$

151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QVC Group

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series B

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2016

 

778

 

$

29.79

 

 

 

 

 

 

 

Granted

 

730

 

$

25.11

 

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(19)

 

 

29.41

 

 

 

 

 

 

 

Outstanding at March 31, 2016

 

1,489

 

$

27.50

 

6.4

years

 

$

 —

 

Exercisable at March 31, 2016

 

112

 

$

29.41

 

6.0

years

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2016

 

3,684

 

$

23.29

 

 

 

 

 

 

 

Granted

 

3

 

$

37.53

 

 

 

 

 

 

 

Exercised

 

(118)

 

$

19.53

 

 

 

 

 

 

 

Forfeited/Cancelled

 

 —

 

$

 —

 

 

 

 

 

 

 

Outstanding at March 31, 2016

 

3,569

 

$

23.42

 

3.9

years

 

$

58

 

Exercisable at March 31, 2016

 

2,833

 

$

19.44

 

3.1

years

 

$

56

 

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liberty Ventures

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series B

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2016

 

1,542

 

$

38.04

 

 

 

 

 

 

 

Granted

 

209

 

$

38.79

 

 

 

 

 

 

 

Exercised

 

 —

 

$

 —

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(20)

 

$

42.33

 

 

 

 

 

 

 

Outstanding at March 31, 2016

 

1,731

 

$

38.08

 

5.9

years

 

$

2

 

Exercisable at March 31, 2016

 

116

 

$

42.33

 

6.0

years

 

$

 —

 

 

As of March 31, 2016, the total unrecognized compensation cost related to unvested Awards was approximately $135 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.4 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.

 

 

(5)   Earnings (Loss) Per Common Share

Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.

Series A and Series B QVC Group Common Stock

Excluded from diluted EPS, for the three months ended March 31, 2016 and 2015, are 12 million and 4 million potential common shares, respectively, because their inclusion would be antidilutive.

 

 

 

 

 

 

 

 

 

 

QVC Group Common Stock

 

 

    

Three months ended 

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

number of shares in millions

 

Basic EPS

 

485

 

473

 

Potentially dilutive shares

 

6

 

7

 

Diluted EPS

 

491

 

480

 

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

Series A and Series B Liberty Ventures Common Stock

 

Excluded from diluted EPS, for all periods presented, are less than a million potential common shares because their inclusion would be antidilutive.

 

 

 

 

 

 

 

 

 

 

Liberty Ventures Common Stock

 

 

    

Three months ended 

 

 

 

March 31,

 

 

 

2016

 

2015

 

 

 

number of shares in millions

 

Basic EPS

 

142

 

141

 

Potentially dilutive shares

 

1

 

2

 

Diluted EPS

 

143

 

143

 

 

 

(6)   Assets and Liabilities Measured at Fair Value

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

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value Measurements at

 

Fair Value Measurements at

 

 

 

March 31, 2016

 

December 31, 2015

 

 

    

 

 

    

Quoted

    

 

    

 

    

Quoted

    

 

 

 

 

 

 

 

prices

 

 

 

 

 

prices

 

 

 

 

 

 

 

 

in active

 

Significant

 

 

 

in active

 

Significant

 

 

 

 

 

 

markets for

 

other

 

 

 

markets for

 

other

 

 

 

 

 

 

identical

 

observable

 

 

 

identical

 

observable

 

 

 

 

 

 

assets

 

inputs

 

 

 

assets

 

inputs

 

Description

 

Total

 

(Level 1)

 

(Level 2)

 

Total

 

(Level 1)

 

(Level 2)

 

 

 

amounts in millions

 

Cash equivalents

 

$

2,531

 

2,531

 

 —

 

2,225

 

2,225

 

 —

 

Short term marketable securities

 

$

601

 

136

 

465

 

910

 

331

 

579

 

Available-for-sale securities

 

$

1,421

 

1,414

 

7

 

1,294

 

1,287

 

7

 

Debt

 

$

2,577

 

 —

 

2,577

 

2,480

 

 —

 

2,480

 

 

The majority of the Company's Level 2 financial assets and liabilities are primarily debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. The fair values for such instruments are derived from a typical model using observable market data as the significant inputs. 

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 

 

 

 

March 31,

 

 

    

2016

    

2015

 

 

 

amounts in millions

 

Fair Value Option Securities

 

$

136

 

(17)

 

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

Exchangeable senior debentures

 

 

(142)

 

13

 

Other financial instruments

 

 

(1)

 

 —

 

 

 

$

(7)

 

(4)

 

 

 

 

(7)   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 has historically 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.

Investments in AFS securities, the majority of which are considered Fair Value Option Securities, and other cost investments are summarized as follows:

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2016

 

2015

 

 

 

amounts in millions

 

QVC Group

 

 

 

 

 

 

Other investments

 

$

4

 

4

 

Total attributed QVC Group

 

 

4

 

4

 

Ventures Group

 

 

 

 

 

 

Time Warner Inc.

 

 

309

 

284

 

Time Warner Cable Inc.

 

 

1,096

 

994

 

Other investments

 

 

73

 

71

 

Total attributed Ventures Group

 

 

1,478

 

1,349

 

Consolidated Liberty

 

$

1,482

 

1,353

 

 

 

 

 

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

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LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements

 

(unaudited)

 

 

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 March 31, 2016 and the carrying amount at December 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,

 

 

 

March 31, 2016

 

2015

 

 

    

Percentage

    

Fair value

    

Carrying

    

Carrying

 

 

 

ownership

 

(Level 1)

 

amount

 

amount

 

 

 

 

 

dollar amounts in millions

 

QVC Group

 

 

 

 

 

 

 

 

 

 

 

HSN, Inc.

 

38

%  

$

1,047

 

$

180

 

165

 

Other

 

various

 

 

NA

 

 

43

 

43

 

Total QVC Group

 

 

 

 

 

 

 

223

 

208

 

Ventures Group

 

 

 

 

 

 

 

 

 

 

 

Expedia, Inc.

 

16

%  

$

2,545

 

 

894

 

927

 

FTD Companies, Inc.