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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2006
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 000-51990
LIBERTY MEDIA CORPORATION
(Exact name of Registrant as specified in its charter)
STATE OF DELAWARE 84-1288730
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12300 LIBERTY BOULEVARD 80112
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (720) 875-5400
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF
EACH CLASS
NAME OF
EXCHANGE
ON WHICH
REGISTERED
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- Liberty
Capital
Series A
Common
Stock, par
value $.01
per
share......
Nasdaq
National
Market
Liberty
Capital
Series B
Common
Stock, par
value $.01
per
share......
Nasdaq
National
Market
Liberty
Interactive
Series A
Common
Stock, par
value $.01
per
share..
Nasdaq
National
Market
Liberty
Interactive
Series B
Common
Stock, par
value $.01
per
share..
Nasdaq
National
Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes /X/ No / /
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes / / No /X/
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the Registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
the Act). Large accelerated filer /X/ Accelerated filer / / Non-accelerated
filer / /
Indicate by check mark whether the Registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes / / No /X/
The aggregate market value of the voting stock held by nonaffiliates of
Liberty Media Corporation computed by reference to the last sales price of such
stock, as of the closing of trading on June 30, 2006, was approximately
$22.5 billion.
The number of shares outstanding of Liberty Media Corporation's common stock
as of January 31, 2007 was:
Liberty Capital Series A Common Stock--134,503,546;
Liberty Capital Series B Common Stock--6,014,680;
Liberty Interactive Series A Common Stock--622,365,227; and
Liberty Interactive Series B Common Stock--29,971,039 shares.
Documents Incorporated by Reference
The Registrant's definitive proxy statement for its 2007 Annual Meeting of
Shareholders is hereby
incorporated by reference into Part III of this Annual Report on Form 10-K
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LIBERTY MEDIA CORPORATION
2006 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I PAGE
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Item 1. Business.................................................... I-1
Item 1A. Risk Factors................................................ I-19
Item 1B. Unresolved Staff Comments................................... I-30
Item 2. Properties.................................................. I-30
Item 3. Legal Proceedings........................................... I-31
Item 4. Submission of Matters to a Vote of Security Holders......... I-31
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities......... II-1
Item 6. Selected Financial Data..................................... II-3
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. II-4
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... II-29
Item 8. Financial Statements and Supplementary Data................. II-32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. II-32
Item 9A. Controls and Procedures..................................... II-32
Item 9B. Other Information........................................... II-33
PART III
Item 10. Directors, Executive Officers and Corporate Governance...... III-1
Item 11. Executive Compensation...................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters................ III-1
Item 13. Certain Relationships and Related Transactions, and Director
Independence.............................................. III-1
Item 14. Principal Accounting Fees and Services...................... III-1
PART IV
Item 15. Exhibits and Financial Statement Schedules.................. IV-1
PART I.
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
Liberty Media Corporation is a holding company which, through its ownership
of interests in subsidiaries and other companies, is primarily engaged in the
video and on-line commerce, media, communications and entertainment industries.
Through our subsidiaries, we operate in North America, Europe and Asia. Our
principal businesses and assets include QVC, Inc. and Starz, LLC and interests
in IAC/InterActiveCorp, Expedia, Inc. and News Corporation.
RECENT DEVELOPMENTS
On May 9, 2006, we completed a restructuring pursuant to which we were
organized as a new holding company, and we became the new publicly traded parent
company of Liberty Media LLC, which was formerly known as Liberty Media
Corporation, and which we refer to as "Old Liberty". As a result of the
restructuring, all of the Old Liberty outstanding common stock was exchanged for
our two new tracking stocks, Liberty Interactive common stock and Liberty
Capital common stock. Each tracking stock issued in the restructuring is
intended to track and reflect the economic performance of one of two newly
designated groups, the Interactive Group and the Capital Group, respectively. We
are the successor reporting company to Old Liberty.
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. While
the Interactive Group and the Capital Group have separate collections of
businesses, assets and liabilities attributed to them, neither group is a
separate legal entity and therefore cannot own assets, issue securities or enter
into legally binding agreements. Holders of tracking stocks have no direct claim
to the group's stock or assets and are not represented by separate boards of
directors. Instead, holders of tracking stock are stockholders of the parent
corporation, with a single board of directors and subject to all of the risks
and liabilities of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which we have
attributed to that group. The assets and businesses we have attributed to the
Interactive Group are those engaged in video and on-line commerce, and include
our subsidiaries QVC, Inc., Provide Commerce, Inc. and BuySeasons, Inc., and our
interests in Expedia, Inc. and IAC/InterActiveCorp. The Interactive Group will
also include such other businesses, assets and liabilities that our board of
directors may in the future determine to attribute to the Interactive Group,
including such other businesses and assets as we may acquire for the Interactive
Group. In addition, we have attributed $3,108 million principal amount (as of
December 31, 2006) of our existing publicly-traded debt to the Interactive
Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of our businesses, assets and liabilities other than
those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group include our subsidiaries: Starz
Entertainment, LLC (formerly known as Starz Entertainment Group LLC), Starz
Media, LLC (formerly known as IDT Entertainment, Inc.), TruePosition, Inc., FUN
Technologies, Inc. and On Command Corporation; our equity affiliates: GSN, LLC
and WildBlue Communications, Inc.; and our interests in News Corporation, Time
Warner Inc. and Sprint Nextel Corporation. The Capital Group will also include
such other businesses, assets and liabilities that our board of directors may in
the future determine to attribute to the Capital Group, including such other
businesses and assets as we may acquire for the Capital Group. In addition, we
have attributed $4,580 million principal amount (as of December 31, 2006) of our
existing publicly traded debt to the Capital Group.
I-1
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed
financial information for our tracking stock groups.
In connection with our restructuring and the issuance of our tracking
stocks, our board of directors authorized the repurchase of up to $1 billion of
outstanding Liberty Interactive common stock and up to $1 billion of Liberty
Capital common stock in the open market or in privately negotiated transactions,
subject to market conditions. Our board subsequently increased the aggregate
amount of Liberty Interactive common stock that can be repurchased to
$2 billion. During the period from the restructuring to December 31, 2006, we
repurchased 51.6 million shares of Liberty Interactive Series A common stock for
aggregate cash consideration of $954 million pursuant to our stock repurchase
program.
In the fourth quarter of 2006, QVC, Inc., our wholly owned subsidiary,
increased its borrowing capacity from $3.5 billion to $5.25 billion by entering
into a new $1.75 billion unsecured credit agreement. Such agreement has
substantially the same terms as QVC's previously existing credit agreement and
matures in October 2011. We used funds borrowed under QVC's credit facilities to
retire our Senior Notes that matured in September 2006.
In December 2006, we announced that we had entered into an exchange
agreement with News Corporation pursuant to which, if completed, we would
exchange our approximate 16.2% ownership interest in News Corporation for a
subsidiary of News Corporation, which would own News Corporation's approximate
38.5% interest in The DirecTV Group, Inc., three regional sports television
networks and approximately $550 million in cash. Consummation of the exchange,
which is subject to various closing conditions, including approval by News
Corporation's shareholders, regulatory approval and receipt of a favorable
ruling from the IRS confirming that the exchange is tax-free, is expected in
mid-2007.
* * * * *
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding our business,
product and marketing strategies, new service offerings, our tax sharing
arrangement with AT&T Corp. and estimated amounts payable under that
arrangement, revenue growth and subscriber trends at QVC, Inc. and Starz
Entertainment, LLC, anticipated programming and marketing costs at Starz
Entertainment, our projected sources and uses of cash, the estimated value of
our derivative instruments, and the anticipated non-material impact of certain
contingent liabilities related to legal and tax proceedings and other matters
arising in the ordinary course of business. In particular, statements under
Item 1. "Business," Item 1A. "Risk-Factors," Item 2. "Properties," Item 3.
"Legal Proceedings," Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative
Disclosures About Market Risk" contain forward-looking statements. Where, in any
forward-looking statement, we express an expectation or belief as to future
results or events, such expectation or belief is expressed in good faith and
believed to have a reasonable basis, but there can be no assurance that the
expectation or belief will result or be achieved or accomplished. The following
include some but not all of the factors that could cause actual results or
events to differ materially from those anticipated:
- customer demand for our products and services and our ability to adapt to
changes in demand;
- competitor responses to our products and services, and the products and
services of the entities in which we have interests;
- uncertainties inherent in the development and integration of new business
lines and business strategies;
I-2
- uncertainties associated with product and service development and market
acceptance, including the development and provision of programming for new
television and telecommunications technologies;
- our future financial performance, including availability, terms and
deployment of capital;
- our ability to successfully integrate and recognize anticipated
efficiencies and benefits from the businesses we acquire;
- the ability of suppliers and vendors to deliver products, equipment,
software and services;
- the outcome of any pending or threatened litigation;
- availability of qualified personnel;
- changes in, or failure or inability to comply with, government
regulations, including, without limitation, regulations of the Federal
Communications Commission, and adverse outcomes from regulatory
proceedings;
- changes in the nature of key strategic relationships with partners and
joint venturers;
- general economic and business conditions and industry trends;
- consumer spending levels, including the availability and amount of
individual consumer debt;
- the regulatory and competitive environment of the industries in which we,
and the entities in which we have interests, operate;
- continued consolidation of the broadband distribution and movie studio
industries;
- changes in distribution and viewing of television programming, including
the expanded deployment of personal video recorders, video on demand and
IP television and their impact on home shopping networks;
- increased digital TV penetration and the impact on channel positioning of
our networks;
- rapid technological changes;
- capital spending for the acquisition and/or development of
telecommunications networks and services;
- 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.
These forward-looking statements and such risks, uncertainties and other factors
speak only as of the date of this Annual 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. When considering such
forward-looking statements, you should keep in mind the factors described in
Item 1A, "Risk Factors" and other cautionary statements contained in this Annual
Report. Such risk factors and statements describe circumstances which could
cause actual results to differ materially from those contained in any
forward-looking statement.
This Annual Report includes information concerning public companies in which
we have minority interests that file reports and other information with the SEC
in accordance with the Securities Exchange Act of 1934. Information contained in
this Annual Report concerning those companies has been derived from the reports
and other information filed by them with the SEC. If you would like further
information about these companies, the reports and other information they file
with the SEC
I-3
can be accessed on the Internet website maintained by the SEC at www.sec.gov.
Those reports and other information are not incorporated by reference in this
Annual Report.
(b) FINANCIAL INFORMATION ABOUT OPERATING SEGMENTS
Through our ownership of interests in subsidiaries and other companies, we
are primarily engaged in the video and on-line commerce, media, communications
and entertainment industries. Each of these businesses is separately managed.
We identify our reportable segments as (A) those consolidated subsidiaries
that represent 10% or more of our consolidated revenue, earnings before income
taxes or total assets and (B) those equity method affiliates whose share of
earnings represent 10% or more of our pre-tax earnings. Financial information
related to our operating segments can be found in note 18 to our consolidated
financial statements found in Part II of this report.
(c) NARRATIVE DESCRIPTION OF BUSINESS
The following table identifies our more significant subsidiaries and
minority investments within each of the Capital Group and the Interactive Group.
CAPITAL GROUP
CONSOLIDATED SUBSIDIARIES
Starz, LLC
Starz Entertainment, LLC
Starz Media, LLC
TruePosition, Inc.
FUN Technologies, Inc. (TSX:FUN; AIM:FUN)
On Command Corporation (1)
EQUITY AND COST METHOD INVESTMENTS
GSN, LLC
WildBlue Communications, Inc.
News Corporation (NYSE:NWS; NYSE:NWSa)
Time Warner Inc. (NYSE:TWX) (2)
Sprint Nextel Corporation (NYSE:S) (2)
INTERACTIVE GROUP
CONSOLIDATED SUBSIDIARIES
QVC, Inc.
Provide Commerce, Inc.
BuySeasons, Inc.
EQUITY AND COST METHOD INVESTMENTS
Expedia, Inc. (Nasdaq:EXPE)
IAC/InterActiveCorp (Nasdaq:IACI)
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(1) In December 2006, we announced that we had entered into a definitive
agreement to sell Ascent Entertainment Group, Inc., the parent company of On
Command, to Lodgenet Entertainment Corporation for $332 million in cash and
2.05 million shares of Lodgenet common stock valued at approximately
$50 million. The transaction, which is subject to regulatory approval and
other customary closing conditions, is expected to close in mid-2007. We are
accounting for Ascent Entertainment Group as assets held for sale and have
presented its results of operations in earnings (loss) from discontinued
operations in our consolidated statements of operations.
I-4
(2) Represents an available-for-sale security in which we have less than a 5%
ownership interest and that we consider a non-strategic financial asset in
our portfolio.
CAPITAL GROUP
The Capital Group is focused primarily on video programming and
communications technology and services involving cable, satellite, the Internet
and other distribution media. We expect to grow the businesses attributed to the
Capital Group by creating new opportunities for our existing businesses and by
acquiring companies that leverage and complement those businesses. Over time, we
expect to convert many of our non-strategic assets into operating assets or into
cash that we would use to pursue such opportunities. We may also explore other
financial transactions and investments with attractive risk and return
characteristics.
STARZ ENTERTAINMENT, LLC
Starz Entertainment, LLC ("Starz Entertainment"), a wholly-owned subsidiary,
provides premium movie networks and programming distributed by cable,
direct-to-home satellite, telephony, the Internet and other distribution media
providers in the United States. Starz Entertainment's primary service offerings
are (1) Starz, which is primarily a first-run movie service that generally
includes Starz plus five multiplex channels branded with the Starz name, each of
which exhibits movies targeted to a specific audience and (2) Encore, which airs
first-run movies and classic contemporary movies and generally includes six
additional thematic multiplex channels branded with the Encore name, each of
which exhibits movies based upon individual themes. Starz is generally purchased
by subscribers as an a-la-carte premium service for which subscribers pay a
separate monthly charge. Distributors may also package Starz with other premium
services. Encore is generally purchased by subscribers as part of a digital
package, which includes a variety of general entertainment digital networks.
Distributors may also sell Encore on an a-la-carte basis or packaged with Starz.
Starz Entertainment's services also include MoviePlex, a "theme by day" channel
featuring a different thematic multiplex channel each day, on a weekly rotation;
IndiePlex, featuring art house and independent films; RetroPlex, featuring
"classic" movies; Starz On Demand; Encore on Demand; Movieplex on Demand and a
high definition feed of the Starz channel on StarzHD. In addition, Starz
Entertainment distributes via the Internet Vongo, a subscription package
comprising Starz plus approximately 1,000 movies and 1,500 other video
selections on an on-demand basis, as well as other selected pay-per-view movies.
As of December 31, 2006, Starz Entertainment had 15.5 million Starz
subscriptions and 27.3 million Encore subscriptions.
Programming networks distribute their services through a number of
distribution technologies, including cable television, direct-to-home satellite,
broadcast television and the Internet. Programming services may be delivered to
subscribers as part of a video distributor's analog or digital package of
programming services for a fixed monthly fee, or may be delivered individually
as a "premium" programming service for a separate monthly charge. Premium
services may be scheduled or "on-demand." Additionally, single programs or
movies may be delivered on a pay-per-view basis for a per program fee. Whether a
programming service is basic, premium or pay-per-view, the programmer generally
enters into separate multi-year affiliation agreements with those distributors
that agree to carry the service. Programmers may also provide their pay-per-view
and subscription on-demand services directly to consumers via the Internet.
Basic programming services derive their revenue principally from the sale of
advertising time on their networks and from per subscriber license fees received
from distributors. Their continued ability to generate both advertising revenue
and subscriber license fees is dependent on these services' ability to maintain
and renew their affiliation agreements. Premium and pay-per-view services do not
sell advertising and primarily generate their revenue from subscriber fees.
The majority of Starz Entertainment's revenue is derived from the delivery
of movies to subscribers under long-term affiliation agreements with cable
systems and direct broadcast satellite
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systems, including Comcast Cable, DirecTV, EchoStar, Time Warner, Charter
Communications, Cox Communications, Cablevision Systems, Insight Communications,
Mediacom Communications and the National Cable Television Cooperative. Some of
Starz Entertainment's affiliation agreements provide for payments based on the
number of subscribers that receive Starz Entertainment's services. Starz
Entertainment also has affiliation agreements with certain of its customers
pursuant to which those customers pay an agreed-upon rate regardless of the
number of subscribers. These affiliation agreements generally provide for
contractual rate increases or rate increases tied to the annual increase in the
Consumer Price Index. Starz Entertainment's agreement with Comcast requires
Comcast to carry the Encore and Thematic Multiplex channels through
September 2009 and Starz through December 2012. Starz Entertainment's
affiliation agreement with EchoStar expires in June 2009. The affiliation
agreement with DirecTV has expired, and Starz Entertainment is currently in
negotiations regarding a multi-year distribution agreement for Starz
Entertainment's service offerings. In addition, the affiliation agreement with
Time Warner, which originally expired on December 31, 2006, has been extended
through May 31, 2007 with provisions for further extensions through June 30,
2007. Starz Entertainment's other affiliation agreements expire between now and
December 2009. For the year ended December 31, 2006, Starz Entertainment earned
67.8% of its total revenue from Comcast, DirecTV, EchoStar and Time Warner,
collectively.
The costs of acquiring rights to programming, including Internet protocol
rights, are Starz Entertainment's principal expenses. In order to exhibit
theatrical motion pictures, Starz Entertainment enters into agreements to
acquire rights from major motion picture producers including Hollywood Pictures,
Touchstone Pictures, Miramax Films, Disney, Revolution Studios, Sony's Columbia
Pictures, Screen Gems and Sony Pictures Classics. Starz Entertainment also has
exclusive rights to air first-run output from an independent studio. These
output agreements expire between 2007 and 2011, with extensions, at the option
of two studios, potentially extending the expiration dates of those agreements
to 2013 and 2014.
Starz Entertainment uplinks its programming to five non-preemptible,
protected transponders on three domestic satellites. "Protected" status means
that, in the event of a transponder failure, Starz Entertainment's signal will
be transferred to a spare transponder or, if none is available, to a preemptible
transponder located on the same satellite or, in certain cases, to a transponder
on another satellite owned by the same service provider if one is available at
the time of the failure. "Non-preemptible" status means that, in the event of a
transponder failure, Starz Entertainment's transponders cannot be preempted in
favor of a user of a "protected" failure. Starz Entertainment leases its
transponders under long-term lease agreements. At December 31, 2006, Starz
Entertainment's transponder leases had termination dates ranging from 2018 to
2021. Starz Entertainment transmits to these transponders from its uplink center
in Englewood, Colorado.
STARZ MEDIA, LLC
In 2006, we acquired IDT Entertainment from IDT Corp. and renamed it Starz
Media. Starz Media's operations include home video distribution, live-action
television and film production, and theatrical and non-theatrical animation.
Starz Media's home video distribution business is operated through its Starz
Home Entertainment subsidiary utilizing the Anchor Bay and Manga brands. Anchor
Bay and Manga acquire and license content for home video distribution and have a
combined library of over 3,850 titles including THOMAS THE TANK ENGINE, 3RD ROCK
FROM THE SUN, GREATEST AMERICAN HERO, and others. These titles are distributed
through national retailers, including Wal-Mart, Target and Best Buy. Generally,
these retailers have the right to return unsold products.
The live-action and animation television film production business comprises
three business units: Starz Productions, Starz Animation and Film Roman. Starz
Productions develops and produces proprietary live-action and animated content
for television and direct-to-video/DVD distribution. The live-action operations
focus on horror, science fiction, supernatural and thriller films and include
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MASTERS OF HORROR, a film series shown on Showtime, and MASTERS OF SCI FI, a
film series to be shown on ABC. Animated series include ME, ELOISE, THE HAPPY
ELF, and WOW! WOW! WUBZY being shown on Nick Jr.
Through studios based in the United States and Canada, Starz Animation and
Film Roman develop and produce 2D and 3D animated content for distribution
theatrically, on television and direct-to-video/DVD. Animation production is
focused on proprietary content and is also performed for third parties. In the
third quarter of 2006, Starz Animation released its first full-length animated
film, EVERYONE'S HERO, in theaters. Starz Animation has two additional animated
films currently in production that are expected to be released theatrically in
2008. Film Roman's third-party projects include THE SIMPSONS and KING OF THE
HILL, which are owned and distributed by Fox TV.
Domestically, Starz Media utilizes Twentieth Century Fox ("Fox") to
distribute and market its theatrical animated filmed products, while
internationally it uses foreign sales agents to contract with foreign
distributors. Fox is paid a distribution fee for its services. The domestic box
office receipts are divided between the theatrical distributors and Starz Media
based upon negotiated contractual arrangements on a film by film basis. The
foreign sales agent will negotiate with distributors on a territory by territory
basis with some contracts requiring minimum guarantees. The international
theatrical sales for EVERYONE'S HERO were not significant due to the genre of
the movie.
In the U.S., Starz Media incurs significant marketing, advertising and print
costs before and during the theatrical release of a film in an effort to
generate awareness of the film, to increase the consumer's intent to view the
film, and to generate significant consumer interest in subsequent home video and
other ancillary markets. These costs are expensed as incurred. Therefore, Starz
Media will incur losses prior to theatrical release of a film. The foreign
distributors are normally responsible for the marketing and advertising of films
in each of their respective territories.
Starz Entertainment and Starz Media are both wholly-owned subsidiaries of
our newly formed subsidiary, Starz, LLC. We believe that the acquisition of
Starz Media will provide opportunities to exploit all the key domestic and
international video distribution vehicles: theatrical, premium television, home
video, syndication and Internet. Starz, LLC will have the opportunity to test
new programming ideas on a single platform and then migrate the successful ones
to other distribution outlets.
TRUEPOSITION, INC.
TruePosition, Inc. develops and markets technology for locating wireless
phones and other wireless devices enabling wireless carriers, application
providers and other enterprises to provide E-911 services domestically and other
location-based services to mobile users worldwide. "E-911" or "Enhanced 911"
refers to a Federal Communications Commission mandate requiring wireless
carriers to implement wireless location capability. Cingular Wireless began
deploying TruePosition's technology in late 2002, and T-Mobile USA began
deploying such technology in 2003. As of December 31, 2006, both wireless
carriers are actively deploying TruePosition's technology and using the
technology for E-911. In addition, as of December 31, 2006 four smaller wireless
carriers have deployed or started to deploy TruePosition's technology. Although
many of the following services have not yet been developed, and may not be
developed successfully or at all, TruePosition's wireless location technology
could also be used to implement a number of commercial location-based services
including (1) comfort and security related applications, including child, pet
and elderly tracking; (2) convenience/information services such as "concierge"
and "personal navigation" to identify and provide directions to the nearest
restaurant, ATM, or gas station or allow travelers to obtain other information
specific to their location; (3) corporate applications, such as fleet or asset
tracking to enable enterprises to better manage mobile assets to optimize
service or cut costs; (4) entertainment/community services such as "friend
finder" or "m-dating" to allow mobile users to create a localized community of
people with similar interests and receive notification when another group member
is close-by; (5) mobile commerce services to help
I-7
users shop or purchase goods or services from the retailer closest to their
current location; and (6) safety related applications to help public or private
safety organizations find or track mobile users in need of assistance or help
locate stolen property.
TruePosition earns revenue from the sale of hardware and licensing of
software required to generate location records for wireless phones and other
wireless devices on a cellular network and from the design, installation,
testing and commissioning of such hardware and software. In addition,
TruePosition earns software maintenance revenue through the provision of ongoing
technical and software support. TruePosition has not earned revenue from other
location-based services to date. Substantially all of TruePosition's reported
revenue in 2004, 2005 and 2006 was derived from Cingular Wireless. Recognition
of revenue earned from T-Mobile is deferred in accordance with the software
recognition rules under generally accepted accounting principles pending
delivery of specified elements, which to date have not been delivered.
The TruePosition-Registered Trademark- Finder-TM- system is a passive
network overlay system designed to enable mobile wireless service providers to
determine the location of all network wireless devices, including cellular and
PCS telephones. Using patented time difference of arrival (TDOA) and angle of
arrival (AOA) technology, the TruePosition Finder-TM- system calculates the
latitude and longitude of a designated wireless telephone or other transmitter
and forwards this information in real time to application software. TruePosition
offerings cover multiple major wireless technologies including Time Division
Multiple Access (TDMA), Analog Mobile Phone Service (AMPS) and Global System
Mobile (GSM).
We own approximately 89% of the common equity of TruePosition and 100% of
the TruePosition preferred stock, which preferred stock has a liquidation
preference of $427 million at December 31, 2006.
FUN TECHNOLOGIES INC.
FUN Technologies Inc's. primary business is the provision of online and
interactive casual games and sports content. FUN provides its services through
two divisions: FUN Games and FUN Sports. The FUN Games division operates a skill
games business through which it operates and licenses various formats of skill
games including (i) pay-for-play, person-to-person and tournament-based
interactive skill games, (ii) free games, (iii) downloadable games and
(iv) subscription games. The FUN Sports division operates fantasy sports
services offering editorial content, sports data, games and leagues to consumers
and corporate distributors.
FUN Games offers a wide range of free and cash-based skill games via its own
Internet sites and its distribution partners. Cash-based skill games are games
in which participants must pay an entry stake to compete against each other for
a prize, and in which the winner is determined based on skill rather than on
chance. FUN provides private-label gaming systems and services to large
interactive entertainment groups, including America Online, EA Sports, Pogo and
MSN. FUN Games earns revenue from fees collected for online tournaments and
games managed as well as game download and subscription fees.
FUN Sports develops, operates and licenses fantasy league-hosting software,
content, real-time sports statistics and interactive games delivered via
broadband. The FUN Sports division has private-label distribution agreements
with America Online, the National Basketball Association and Nascar.com, among
others. Through the Company's own websites, including www.fanball.com and
www.CDMSports.com, FUN Sports provides fantasy sports contests, content,
strategy and insight. It also owns Fanball.com radio and produces print
publications called "Just Cheat Sheets", "Fantasy Racing" and "Fantasy Football
Weekly".
The FUN Sports division also provides real-time sports information services
for sports enthusiasts through its destination site www.DonBest.com. DonBest
provides subscription services for live odds,
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major line move alerts, injury reports, statistical reports, and offers
customized information delivery services and publishes this information real
time to its subscribers. DonBest does not participate in any gambling activities
such as accepting or making wagers.
We own approximately 53% of the outstanding common shares of FUN.
ON COMMAND CORPORATION
On Command Corporation, a wholly-owned subsidiary, is a provider of in-room
video entertainment and information services to hotels, motels and resorts
(which we collectively refer to as hotels) primarily in the United States. On
Command had an installed base of approximately 832,000 rooms at December 31,
2006.
The hotels providing On Command's services collect fees from their guests
for the use of On Command's services and are provided a commission equal to a
negotiated percentage of the net revenue earned by On Command for such usage.
The amount of revenue realized by On Command is affected by a variety of
factors, including among others, hotel occupancy rates, the "buy rate" or
percentage of occupied rooms that buy movies or services, the quality of On
Command's pay-per-view movie offerings, business and leisure travel patterns and
changes in the number of rooms served. With the exception of December, which is
generally On Command's lowest month for revenue, On Command typically does not
experience significant variations in its monthly revenue that can be attributed
solely to seasonal factors.
On Command primarily provides its services under long-term contracts to
hotel corporations, hotel management companies, and individually owned and
franchised hotel properties. On Command's services are offered predominantly in
the large deluxe, luxury, and upscale hotel categories serving business
travelers. At December 31, 2006, contracts covering approximately 34.3% of On
Command's installed rooms have expired, or are scheduled to expire, if not
otherwise renewed, during the two-year period ending December 31, 2008.
Marriott, Hyatt and Hilton accounted for approximately 34.9%, 9.3% and 8.6%
respectively, of On Command's room revenue for the year ended December 31, 2006.
These revenue percentages represent all chain affiliations including owned,
managed and franchised hotels.
As noted above, in December 2006, we announced that we had entered into a
definitive agreement to sell Ascent Entertainment Group, Inc., the parent
company of On Command, to Lodgenet Entertainment Corporation for $332 million in
cash and 2.05 million shares of Lodgenet common stock valued at approximately
$50 million. The transaction, which is subject to regulatory approval and other
customary closing conditions, is expected to close in mid-2007.
GSN, LLC
GSN, LLC owns and operates GSN. With approximately 61 million Nielsen
subscribers as of December 31, 2006, GSN is a basic cable network dedicated to
game-related programming and interactive game playing. GSN offers 24-hour
programming featuring game shows, casino games, reality series, documentaries
and other game-related shows. GSN features a full prime-time schedule of
interactive programming, which allows viewers a chance to play along with GSN's
televised games via GSN.com. GSN programming also includes 12 hours per week of
participation television branded as PLAYMANIA. PLAYMANIA contains live
interactive game content where home viewers become contestants, playing a
multitude of interactive word games, number games and puzzles.
GSN's revenue is primarily derived from the delivery of its programming to
subscribers under long-term affiliation agreements with cable systems, direct
broadcast satellite systems and Telco video providers and from the sale of
advertising on its network. GSN's affiliation agreements provide for payments
based on the number of subscribers that receive GSN's services and expire
between now and
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2011. GSN is currently out of contract with DirecTV, a distributor that accounts
for approximately 25% of GSN's current subscriber base, and is in negotiations
for the renewal of such contract. For the year ended December 31, 2006, GSN
earned approximately 11% of its total revenue from each of Comcast and DirecTV.
We and Sony Pictures Entertainment, a division of Sony Corporation of
America, which is a subsidiary of Sony Corporation, each own 50% of GSN, LLC.
GSN's day-to-day operations are managed by a management committee of its board
of managers. Pursuant to GSN's operating agreement, we and Sony each have the
right to designate half of the members of the management committee. Also
pursuant to the operating agreement, we and Sony have agreed that direct
transfers of our interests in GSN and certain indirect transfers that result in
a change of control of the transferring party are subject to a right of first
refusal in favor of the non-transferring member.
WILDBLUE COMMUNICATIONS, INC.
WildBlue Communications, Inc. delivers two-way broadband Internet access via
satellite to homes and small businesses in rural markets underserved by
terrestrial broadband alternatives. WildBlue provides coverage across the
continental United States using a 26-inch dish and satellite modem. WildBlue has
a prepaid license for Ka-band capacity on a geostationary satellite located at
111.1 degrees West Longitude. The expected life of the satellite is
approximately 15 years. In the event the satellite fails at any time through
July 2007, WildBlue is entitled to reimbursement of the cash prepayments made
for the license. In December 2006, WildBlue successfully launched a second
satellite which is owned by WildBlue and is expected to be placed into
commercial service late in the first quarter of 2007.
WildBlue launched its service in mid-2005 and generates revenue by charging
subscription fees for its Internet access services as well as fees for equipment
sales and related installation charges. At December 31, 2006, WildBlue had over
120,000 subscribers.
We own an approximate 32% equity interest in WildBlue.
NEWS CORPORATION
News Corporation is a diversified international media and entertainment
company with operations in eight industry segments, including filmed
entertainment, television, cable network programming, direct broadcast satellite
television, magazines and inserts, newspapers, book publishing and other. News
Corporation's activities are conducted principally in the United States,
continental Europe, the United Kingdom, Asia, Australia and the Pacific Basin.
News Corporation is a holding company that conducts all of its activities
through subsidiaries and affiliates. Its principal subsidiaries and affiliates
are Fox Entertainment Group, Inc., Twentieth Century Fox Film Corporation, Fox
Television Holdings, Inc., Fox Broadcasting Company, Fox Sports Networks, Inc.,
NDS Group plc, News America Marketing In-Store Services, Inc., News American
Marketing FSI, Inc., News International Limited, News Limited, HarperCollins
Publishers, Inc., HarperCollins Publishers Limited, STAR Group Limited, BSkyB
and The DIRECTV Group. We own shares representing an approximate 16.2% equity
interest and an approximate 19% voting interest in News Corporation
As discussed above, we have entered into an exchange agreement with News
Corporation pursuant to which, if completed, we would exchange our ownership
interest in News Corporation for a subsidiary of News Corporation which would
own News Corporation's interests in The DirecTV Group, Inc., three regional
sports television networks and approximately $550 million in cash. Consummation
of the exchange, which is subject to various closing conditions, including
approval by News Corporation's shareholders, regulatory approval and receipt of
a favorable ruling from the IRS confirming that the exchange is tax-free, is
expected in mid-2007.
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INTERACTIVE GROUP
Anchored by QVC, the Interactive Group is focused on video and online
commerce. Our strategy is to continue QVC's organic growth in its existing
markets while exploring opportunities for expansion in additional international
markets. We will also seek to leverage the strength of QVC as a video and
web-based retailer by acquiring complementary businesses. In this regard, we
acquired Provide Commerce and BuySeasons in 2006.
QVC, INC.
QVC, Inc., a wholly-owned subsidiary, markets and sells a wide variety of
consumer products in the U.S. and several foreign countries primarily by means
of merchandise-focused televised shopping programs on the QVC television
networks and via the Internet through its domestic and international websites.
QVC programming is divided into segments that are televised live with a host who
presents the merchandise, sometimes with the assistance of a guest representing
the product vendor, and conveys information relating to the product to QVC's
viewers. QVC's websites offer a complement to televised shopping by allowing
consumers to purchase a wide assortment of goods that were previously offered on
the QVC networks, as well as other items that are available from QVC only via
its websites. For the year ended December 31, 2006, approximately 20% of QVC's
domestic revenue and approximately 18% of QVC's total revenue was generated from
sales of merchandise ordered through its various websites.
QVC offers a variety of merchandise at competitive prices. QVC purchases, or
obtains on consignment, products from domestic and foreign manufacturers and
wholesalers, often on favorable terms based upon the volume of the transactions.
QVC classifies its merchandise into three groups: home, apparel/accessories and
jewelry. For the year ended December 31, 2006, home, apparel/ accessories and
jewelry accounted for approximately 44%, 35% and 21%, respectively, of QVC's net
revenue generated by its United States operations. QVC offers products in each
of these merchandise groups that are exclusive to QVC, as well as popular brand
name and other products also available from other retailers. QVC's exclusive
products are often endorsed by celebrities, designers and other well known
personalities. QVC does not depend on any single supplier or designer for a
significant portion of its inventory.
QVC distributes its television programs, via satellite or optical fiber, to
multichannel video program distributors for retransmission to subscribers in the
United States, the United Kingdom, Germany, Japan and neighboring countries that
receive QVC's broadcast signals. In the U.S., QVC uplinks its programming from
its uplink facility in Pennsylvania to a protected, non-preemptible transponder
on a domestic satellite. QVC's international business units each obtain
uplinking services from third parties and transmit their programming to
non-preemptible transponders on five international satellites. QVC's transponder
service agreement for its domestic transponder expires in 2019. QVC's
transponder service agreements for its international transponders expire in 2008
through 2013.
QVC enters into long-term affiliation agreements with satellite and cable
television operators who downlink QVC's programming and distribute the
programming to their customers. QVC's affiliation agreements with these
distributors have termination dates ranging from 2007 to 2016. QVC's ability to
continue to sell products to its customers is dependent on its ability to
maintain and renew these affiliation agreements in the future.
In return for carrying the QVC signals, each programming distributor in the
United States, the United Kingdom and Germany receives an allocated portion,
based upon market share, of up to 5% of the net sales of merchandise sold via
the television programs to customers located in the programming distributor's
service areas. In Japan, some programming distributors receive an agreed-upon
monthly fee per subscriber regardless of the net sales, while others earn a
variable percentage of net sales. In
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addition to sales-based commissions or per-subscriber fees, QVC also makes
payments to distributors in the United States for carriage and to secure
favorable positioning on channel 35 or below on the distributor's channel
line-up. QVC believes that a portion of its sales are attributable to purchases
resulting from channel "browsing" and that a channel position near broadcast
networks and more popular cable networks increases the likelihood of such
purchases. As a result of the ongoing conversion of analog cable customers to
digital, channel positioning has become more critical due to the increased
channel options on the digital line-up.
QVC's shopping program is telecast live 24 hours a day to approximately
91 million homes in the United States. QVC Shopping Channel reaches
approximately 19 million households in the United Kingdom and the Republic of
Ireland and is broadcast 24 hours a day with 17 hours of live programming. QVC's
shopping network in Germany, reaches approximately 38 million households
throughout Germany and Austria and is broadcast live 24 hours a day. QVC Japan,
QVC's joint venture with Mitsui & Co., LTD, reaches approximately 19 million
households and is broadcast live 24 hours a day.
QVC strives to maintain promptness and efficiency in order taking and
fulfillment. QVC has four domestic phone centers that can direct calls from one
call center to another as volume mandates, which reduces a caller's hold time,
helping to ensure that orders will not be lost as a result of hang-ups. QVC also
has one phone center in each of the United Kingdom and Japan and two call
centers in Germany. QVC also utilizes computerized voice response units, which
handle approximately 34% of all orders taken. QVC has seven distribution centers
worldwide and is able to ship approximately 92% of its orders within 48 hours.
QVC's business is seasonal due to a higher volume of sales in the fourth
calendar quarter related to year-end holiday shopping. In recent years, QVC has
earned 22%-23% of its revenue in each of the first three quarters of the year
and 32%-33% of its revenue in the fourth quarter of the year.
PROVIDE COMMERCE, INC.
Provide Commerce, Inc., a wholly-owned subsidiary that we acquired in
February 2006, operates an e-commerce marketplace of websites that offers
high-quality perishable products direct from suppliers to consumers. Provide
Commerce combines an online storefront, proprietary supply chain management
technology, established supplier relationships and integrated logistical
relationships with Federal Express Corporation and United Parcel Service, Inc.
to create a market platform that bypasses traditional supply chains of
wholesalers, distributors and retailers. Provide Commerce derives its revenue
primarily from the sale of flowers and plants on its proflowers.com website and
from the sale of gourmet foods from its branded websites: Cherry Moon Farms, for
fresh premium fruits; Uptown Prime, for premium meats and seafood; Secret Spoon,
for fresh sweets and confections; and Shari's Berries, for chocolate-dipped
berries and related gifting products. Provide Commerce also enters into
arrangements with businesses desiring to offer high-quality, time-sensitive or
perishable products to customers on a co-branded or private label basis,
designing and hosting dedicated websites on behalf of such clients.
Provide Commerce initially launched its marketplace to sell and deliver
flowers. Provide Commerce later expanded its offerings to include premium meats
and seafood, fresh premium fruits and confections. The sale of flowers continues
to be Provide Commerce's most significant product comprising approximately 94%
of its sales. The sale of flowers is seasonal with over 65% of sales coming from
purchases for Valentine's Day and Mother's Day in the first and second quarters
of the year. Provide Commerce depends on three suppliers for approximately 55%
of its floral products. The loss of any of these suppliers could adversely
impact Provide Commerce.
Provide Commerce believes that one of the keys to its success is the ability
to deliver products on time and fresher than its competitors thereby providing a
better value for its customers. Provide
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Commerce maintains a customer service center located at its corporate
headquarters to respond to customer phone calls and emails 24 hours a day, seven
days a week. Due to the retail nature of its business, no single customer
accounted for more than 10% of Provide Commerce's revenue in 2006.
BUYSEASONS, INC.
BuySeasons, Inc., a wholly-owned subsidiary that we acquired in
August 2006, operates BuyCostumes.com, an on-line retailer of costumes,
accessories, decor and party supplies. BuyCostumes.com provides a single
destination for children and adults looking for solutions for celebration and
costuming events. BuySeasons earns revenue from the sale of its costumes and
accessories to retail customers who order via the BuyCostumes.com website.
Additionally, BuySeasons earns revenue from its BuySeasons Direct business which
offers drop-ship fulfillment of its products for other retailers. While over 90%
of BuySeason's products are also available from other on-line and traditional
brick-and-mortar retailers, BuySeasons believes that no other single retailer
offers the range of products within its niche that BuySeasons offers. BuySeasons
also has exclusive arrangements to purchase products that are only available
from BuySeasons. BuySeasons works with manufacturers to design costumes and
accessories for which BuySeasons has exclusive rights for a predetermined period
of time. BuySeasons purchases its products from various suppliers, both domestic
and international. BuySeasons depends on two suppliers for approximately 30% of
its costumes and accessories. The loss of either of these suppliers could
adversely impact BuySeasons.
BuySeasons believes that the key to its success is a combination of a large
assortment of on-line products, value pricing and a high level of customer
service. BuySeason's business is highly seasonal with nearly 75% of its revenue
earned in September and October due to the Halloween holiday. BuySeasons
maintains a customer service center at its corporate headquarters. Customer
service representatives are available 24 hours a day, seven days a week during
its busy season to respond to customer questions. BuySeasons also leases
warehouse space to store inventory and ship orders to customers. The customer
service center and warehouse staffing is scalable, and BuySeasons employs
contract labor to react to higher volume during the peak Halloween season.
EXPEDIA, INC.
Expedia, Inc. is among the world's leading travel services companies, making
travel products and services available to leisure and corporate travelers in the
United States and abroad through a diversified portfolio of brands, including
Expedia, Hotels.com, Hotwire, Expedia Corporate Travel, Classic Custom Vacations
and a range of other domestic and international brands and businesses. Expedia's
various brands and businesses target the needs of different consumers, including
those who are focused exclusively on price and those who are focused on the
breadth of product selection and quality of services. Expedia has created an
easily accessible global travel marketplace, allowing customers to research,
plan and book travel products and services from travel suppliers and allows
these travel suppliers to efficiently reach and provide their products and
services to Expedia customers. Through its diversified portfolio of domestic and
international brands and businesses, Expedia makes available, on a stand-alone
and package basis, travel products and services provided by numerous airlines,
lodging properties, car rental companies, cruise lines and destination service
providers, such as attractions and tours. Using a portfolio approach for
Expedia's brands and businesses allows it to target a broad range of customers
looking for different value propositions. Expedia reaches many customers in
several countries and multiple continents through its various brands and
businesses, typically customizing international points of sale to reflect local
language, currency, customs, traveler behavior and preferences and local hotel
markets, all of which may vary from country to country.
Expedia generates revenue by reserving travel services as the merchant of
record and reselling these services to customers at a profit. Expedia also
generates revenue by passing reservations booked by its customers to the
relevant services for a fee or commission.
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We indirectly own an approximate 21% equity interest and a 53% voting
interest in Expedia. We have entered into governance arrangements pursuant to
which Mr. Barry Diller, Chairman of the Board and Senior Executive Officer of
Expedia, is currently entitled to vote our shares of Expedia, subject to certain
limitations. Through our governance arrangements we have the right to appoint
and have appointed two of the ten members of Expedia's board of directors.
IAC/INTERACTIVECORP
IAC/InterActiveCorp is a multi-brand interactive commerce company
transacting business worldwide via the Internet, television and the telephone.
IAC's portfolio of companies collectively enables direct-to-consumer
transactions across many areas, including home shopping, event ticketing,
personals, travel, teleservices and local services.
IAC consists of the following sectors:
- Retailing, which includes HSN, Cornerstone Brands, Inc., Shoebuy.com and
international home shopping channels;
- Services, which includes Ticketmaster, Lending Tree and its affiliated
brands and businesses, and service outsourcers;
- Media and Advertising, which includes Ask.com and Citysearch; and
- Membership and Subscriptions, which includes match.com, Entertainment
Publications, which promotes merchants through consumer savings, and
Interval International, which offers services to time share vacation
owners.
IAC's businesses largely act as intermediaries between suppliers and
consumers. IAC aggregates supply from a variety of sources and captures consumer
demand across a variety of channels.
We indirectly own an approximate 24% equity interest and a 57% voting
interest in IAC. We have entered into governance arrangements pursuant to which
Mr. Barry Diller, Chairman of the Board and CEO of IAC, is currently entitled to
vote our shares of IAC, subject to certain limitations. Through our governance
arrangements we have the right to appoint and have appointed two of thirteen
members of IAC's board of directors.
REGULATORY MATTERS
PROGRAMMING AND INTERACTIVE TELEVISION SERVICES
In the United States, the FCC regulates the providers of satellite
communications services and facilities for the transmission of programming
services, the cable television systems that carry such services, and, to some
extent, the availability of the programming services themselves through its
regulation of program licensing. Cable television systems in the United States
are also regulated by municipalities or other state and local government
authorities. Cable television systems are currently subject to federal rate
regulation on the provision of basic service, except where subject to effective
competition under FCC rules, and continued rate regulation or other franchise
conditions could place downward pressure on the fees cable television companies
are willing or able to pay for programming services in which we have interests.
Regulatory carriage requirements also could adversely affect the number of
channels available to carry the programming services in which we have an
interest.
REGULATION OF PROGRAM LICENSING. The Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Cable Act) directed the FCC to promulgate
regulations regarding the sale and acquisition of cable programming between
multi-channel video programming distributors (including cable operators) and
satellite-delivered programming services in which a cable operator has an
attributable interest. The legislation and the implementing regulations adopted
by the FCC preclude
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virtually all exclusive programming contracts between cable operators and
satellite programmers affiliated with any cable operator (unless the FCC first
determines the contract serves the public interest) and generally prohibit a
cable operator that has an attributable interest in a satellite programmer from
improperly influencing the terms and conditions of sale to unaffiliated
multi-channel video programming distributors. Further, the 1992 Cable Act
requires that such affiliated programmers make their programming services
available to cable operators and competing multi-channel video programming
distributors such as multi-channel multi-point distribution systems, which we
refer to as MMDS, and direct broadcast satellite distributors on terms and
conditions that do not unfairly discriminate among distributors. The
Telecommunications Act of 1996 extended these rules to programming services in
which telephone companies and other common carriers have attributable ownership
interests. The FCC revised its program licensing rules by implementing a damages
remedy in situations where the defendant knowingly violates the regulations and
by establishing a timeline for the resolution of complaints, among other things.
Although we no longer own Liberty Cablevision of Puerto Rico Ltd. ("LCPR"), FCC
rules continue to attribute an ownership interest in LCPR to us, thereby
subjecting us and satellite-delivered programming services in which we have an
interest to the program access rules. The prohibition on exclusive programming
contracts is scheduled to sunset in 2007, but the FCC likely will initiate a
rulemaking proceeding regarding extension of such prohibition of exclusive
contracts.
REGULATION OF CARRIAGE OF PROGRAMMING. Under the 1992 Cable Act, the FCC
has adopted regulations prohibiting cable operators from requiring a financial
interest in a programming service as a condition to carriage of such service,
coercing exclusive rights in a programming service or favoring affiliated
programmers so as to restrain unreasonably the ability of unaffiliated
programmers to compete.
REGULATION OF OWNERSHIP. The 1992 Cable Act required the FCC, among other
things, (1) to prescribe rules and regulations establishing reasonable limits on
the number of channels on a cable system that will be allowed to carry
programming in which the owner of such cable system has an attributable interest
and (2) to consider the necessity and appropriateness of imposing limitations on
the degree to which multi-channel video programming distributors (including
cable operators) may engage in the creation or production of video programming.
In 1993, the FCC adopted regulations limiting carriage by a cable operator of
national programming services in which that operator holds an attributable
interest to 40% of the first 75 activated channels on each of the cable
operator's systems. The rules provided for the use of two additional channels or
a 45% limit, whichever is greater, provided that the additional channels carried
minority-controlled programming services. The regulations also grandfathered
existing carriage arrangements that exceeded the channel limits, but required
new channel capacity to be devoted to unaffiliated programming services until
the system achieved compliance with the regulations. These channel occupancy
limits applied only up to 75 activated channels on the cable system, and the
rules did not apply to local or regional programming services. However, in 2001,
the United States Court of Appeals for the District of Columbia Circuit found
that the FCC had failed to justify adequately the channel occupancy limit,
vacated the FCC's decision and remanded the rule to the FCC for further
consideration. In response to the Court's decision, the FCC issued further
notices of proposed rulemaking in 2001 and in 2005 to consider channel occupancy
limitations. Even if these rules were readopted by the FCC, they would have
little impact on programming companies in which we have interests based upon our
current attributable ownership interests in cable systems.
In its 2001 decision, the Court of Appeals also vacated the FCC's rule
imposing a thirty percent limit on the number of subscribers served by systems
nationwide in which a multiple system operator can have an attributable
ownership interest. The FCC presently is conducting a rulemaking regarding this
ownership limitation and its ownership attribution standards.
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The FCC's rules also generally had prohibited common ownership of a cable
system and broadcast television station with overlapping service areas. In 2002,
the United States Court of Appeals for the District of Columbia Circuit held
that the FCC's decision to retain the cable/broadcast cross-ownership rule was
arbitrary and capricious and vacated the rule. The FCC did not seek Supreme
Court review of this decision or initiate a new rulemaking proceeding. The FCC
rules continue to prohibit common ownership of a cable system and MMDS with
overlapping service areas.
REGULATION OF CARRIAGE OF BROADCAST STATIONS. The 1992 Cable Act granted
broadcasters a choice of must carry rights or retransmission consent rights. The
rules adopted by the FCC generally provided for mandatory carriage by cable
systems of all local full-power commercial television broadcast signals
selecting must carry rights and, depending on a cable system's channel capacity,
non-commercial television broadcast signals. Such statutorily mandated carriage
of broadcast stations coupled with the provisions of the Cable Communications
Policy Act of 1984, which require cable television systems with 36 or more
"activated" channels to reserve a percentage of such channels for commercial use
by unaffiliated third parties and permit franchise authorities to require the
cable operator to provide channel capacity, equipment and facilities for public,
educational and government access channels, could adversely affect some or
substantially all of the programming companies in which we have interests by
limiting the carriage of such services in cable systems with limited channel
capacity. In 2001, the FCC adopted rules relating to the cable carriage of
digital television signals. Among other things, the rules clarify that a
digital-only television station can assert a right to analog or digital carriage
on a cable system. The FCC initiated a further proceeding to determine whether
television stations may assert rights to carriage of both analog and digital
signals during the transition to digital television and to carriage of all
digital signals. In 2005, the FCC denied mandatory dual carriage of a television
station's analog and digital signals during the digital television transition
and also denied mandatory carriage of all of a television station's digital
signals, other than its "primary" signal. Television station owners continue to
seek reconsideration of the FCC's decision and may seek judicial review or
legislative change of the FCC's decision.
CLOSED CAPTIONING AND VIDEO DESCRIPTION REGULATION. The Telecommunications
Act of 1996 also required the FCC to establish rules and an implementation
schedule to ensure that video programming is fully accessible to the hearing
impaired through closed captioning. The rules adopted by the FCC require
substantial closed captioning over an eight to ten year phase-in period, which
began in 2000, with only limited exemptions. As a result, the programming
companies in which we have interests may incur costs for closed captioning.
A-LA-CARTE PROCEEDING. In 2004, the FCC's Media Bureau conducted a notice
of inquiry proceeding regarding the feasibility of selling video programming
services "a-la-carte," i.e. on an individual or small tier basis. The Media
Bureau released a report in 2004, which concluded that a-la-carte sales of video
programming services would not result in lower video programming costs for most
consumers and that they would adversely affect video programming networks. On
February 9, 2006, the Media Bureau released a new report which stated that the
2004 report was flawed and which concluded that a-la-carte sales could be in the
best interests of consumers. Although the FCC cannot mandate a-la-carte sales,
its endorsement of the concept could encourage Congress to consider proposals to
mandate a-la-carte sales or otherwise seek to impose greater regulatory controls
on how cable programming is sold. The programming companies that distribute
their services in tiers or packages of programming services would experience
decreased distribution if a-la-carte carriage were mandated.
COPYRIGHT REGULATION. The programming companies in which we have interests
must obtain any necessary music performance rights from the rights holders.
These rights generally are controlled by the music performance rights
organizations of the American Society of Composers, Authors and Publishers
(ASCAP), Broadcast Music, Inc. (BMI) and the Society of European Stage Authors
and Composers
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(SESAC), each with rights to the music of various artists. The programming
companies in which we have interests generally have obtained the necessary
rights through separate agreements with ASCAP, BMI and SESAC, which have
negotiated agreements with some programmers that include new rate structures and
may require retroactive rate increases. Certain of the programming companies
also have obtained licenses for music performance rights outside the United
States through various licensing agencies located in the foreign countries in
which their services are distributed.
SATELLITES AND UPLINK. In general, authorization from the FCC must be
obtained for the construction and operation of a communications satellite. The
FCC authorizes utilization of satellite orbital slots assigned to the United
States by the World Administrative Radio Conference. Such slots are finite in
number, thus limiting the number of carriers that can provide satellite
transponders and the number of transponders available for transmission of
programming services. At present, however, there are numerous competing
satellite service providers that make transponders available for video services
to the cable industry. The FCC also regulates the earth stations uplinking to
and/or downlinking from such satellites.
INTERNET SERVICES
The Internet businesses in which we have interests are subject, both
directly and indirectly, to various laws and governmental regulations. Certain
of our subsidiaries engaged in the provision of goods and services over the
Internet must comply with federal and state laws and regulations applicable to
online communications and commerce. For example, the Children's Online Privacy
Protection Act prohibits web sites from collecting personally identifiable
information online from children under age 13 without parental consent and
imposes a number of operational requirements. Certain email activities are
subject to the Controlling the Assault of Non-Solicited Pornography and
Marketing Act of 2003, commonly known as the CAN-SPAM Act. The CAN-SPAM Act
regulates the sending of unsolicited commercial email by requiring the email
sender, among other things, to comply with specific disclosure requirements and
to provide an "opt-out" mechanism for recipients. Both of these laws include
statutory penalties for non-compliance. Various states also have adopted laws
regulating certain aspects of Internet communications. Goods sold over the
Internet also must comply with traditional regulatory requirements, such as the
Federal Trade Commission requirements regarding truthful and accurate claims.
With regard to state and local taxes, legislation enacted by Congress in 2004
extended the moratorium on such taxes on Internet access and commerce until
November 1, 2007.
Congress and individual states may consider additional online privacy
legislation. Other Internet-related laws and regulations enacted in the future
may cover issues such as defamatory speech, copyright infringement, pricing and
characteristics and quality of products and services. The future adoption of
such laws or regulations may slow the growth of commercial online services and
the Internet, which could in turn cause a decline in the demand for the services
and products of the Internet companies in which we have interests and increase
such companies' costs of doing business or otherwise have an adverse effect on
their businesses, operating results and financial conditions. Moreover, the
applicability to commercial online services and the Internet of existing laws
governing issues such as property ownership, libel, personal privacy and
taxation is uncertain and could expose these companies to substantial liability.
OTHER REGULATION
We also have significant ownership interests on a cost basis in other
entities, such as News Corporation and Sprint Nextel Corporation, which are
extensively regulated. For example, the broadcast stations owned and the direct
broadcast satellite service controlled by News Corp. are subject to a variety of
FCC regulations. Sprint Nextel is subject not only to federal regulation but
also to regulation in varying degrees, depending on the jurisdiction, by state
and local regulatory authorities.
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PROPOSED CHANGES IN REGULATION
The regulation of programming services, cable television systems and
satellite licensees is subject to the political process and has been in constant
flux over the past decade. Further material changes in the law and regulatory
requirements must be anticipated and there can be no assurance that our business
will not be adversely affected by future legislation, new regulation or
deregulation.
COMPETITION
Our businesses that engage in video and on-line commerce compete with
traditional offline and online retailers ranging from large department stores to
specialty shops, other electronic retailers, direct marketing retailers, such as
mail order and catalog companies, and discount retailers. In addition, QVC and
IAC's subsidiary, Home Shopping Network, compete for access to customers and
audience share with other conventional forms of entertainment and content.
Provide Commerce competes with online floral providers such as 1-800-FLOWERS and
Hallmark Flowers and floral wire services such as FTD and Teleflora. We believe
that the principal competitive factors in the markets in which our electronic
commerce businesses compete are high-quality products, freshness, brand
recognition, selection, convenience, price, website performance, customer
service and accuracy of order shipment.
Our businesses that distribute programming for cable and satellite
television compete with other programmers for distribution on a limited number
of channels. Increasing concentration in the multichannel video distribution
industry could adversely affect the programming companies in which we have
interests by reducing the number of distributors to whom they sell their
programming, subjecting more of their programming sales to volume discounts and
increasing the distributors' bargaining power in negotiating new affiliation
agreements. Once distribution is obtained, the programming services of our
programming businesses compete for viewers and advertisers with other cable and
off-air broadcast television programming services as well as with other
entertainment media, including home video, pay-per-view services, online
activities, movies and other forms of news, information and entertainment. Our
programming businesses also compete for creative talent and programming content.
In addition, Starz Entertainment relies on third parties for substantially all
of its programming content whereas Starz Entertainment's competitors produce
some of their own programming content. We believe that the principal competitive
factors for our programming businesses are prices charged for programming, the
quantity, quality and variety of the programming offered and the effectiveness
of marketing efforts.
Our businesses that offer services through the Internet compete with
businesses that offer their own services directly through the Internet as well
as with online and offline providers of similar services including providers of
ticketing services, lending services, travel agencies, operators of destination
search sites and search-centric portals, search technology providers, online
advertising networks, site aggregation companies, media, telecommunications and
cable companies, Internet service providers and niche competitors that focus on
a specific category or geography. Expedia also competes with hoteliers and
airlines as well as travel planning service providers, including aggregator
sites that offer inventory from multiple suppliers, such as airline sites,
Orbitz, Travelocity and Priceline, and with American Express and Navigant
International, providers of corporate travel services. We believe that the
principal competitive factors in the markets in which our businesses that offer
services through the Internet engage are selection, price, availability of
inventory, convenience, brand recognition, accessibility, customer service,
reliability, website performance, and ease of use.
Starz Media faces competition from companies within the entertainment
business and from alternative forms of leisure entertainment. Starz Media's
animated films compete directly with other animation producer/motion picture
studio teams including Pixar, Disney, DreamWorks, and Blue Sky/ Twentieth
Century Fox, among others. Because of the importance of the domestic theatrical
market in determining revenue from other sources, the primary competition for
Starz Media's planned theatrical films and its other filmed products comes from
both animated and live-action films that are targeted at
I-18
similar audiences and released into the domestic theatrical market at
approximately the same time as Starz Media's films. In addition to competing for
box office receipts, Starz Media competes with other film studios over optimal
release dates and the number of motion picture screens on which movies are
exhibited. In addition, it competes with other films released into the
international theatrical market and the worldwide home video/DVD and television
markets. Starz Media also competes with other movie studios for the services of
creative and technical personnel, particularly in the fields of animation and
technical direction.
The Anchor Bay and Manga distribution operations compete with the
distribution divisions of major theatrical production companies, as well as with
several other independent home video/DVD distribution companies, including
GoodTimes Entertainment, Lyrick Studios, Sony Wonder and VIZ Entertainment.
EMPLOYEES
As of December 31, 2006, we had 65 corporate employees, and our consolidated
subsidiaries had an aggregate of approximately 14,700 employees. We believe that
our employee relations are good.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
For financial information related to the geographic areas in which we do
business, see note 18 to our consolidated financial statements found in Part II
of this report.
(e) AVAILABLE INFORMATION
All of our filings with the Securities and Exchange Commission (the "SEC"),
including our Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to
such filings are available on our Internet website free of charge generally
within 24 hours after we file such material with the SEC. Our website address is
www.libertymedia.com.
Our corporate governance guidelines, code of ethics, compensation committee
charter, nominating and corporate governance committee charter, and audit
committee charter are available on our website. In addition, we will provide a
copy of any of these documents, free of charge, to any shareholder who calls or
submits a request in writing to Investor Relations, Liberty Media Corporation,
12300 Liberty Boulevard, Englewood, Colorado 80112, Tel. No. (877) 772-1518.
The information contained on our website is not incorporated by reference
herein.
ITEM 1A. RISK FACTORS
THE RISKS DESCRIBED BELOW AND ELSEWHERE IN THIS ANNUAL REPORT ARE NOT THE
ONLY ONES THAT RELATE TO OUR BUSINESSES OR OUR CAPITALIZATION. THE RISKS
DESCRIBED BELOW ARE CONSIDERED TO BE THE MOST MATERIAL. HOWEVER, THERE MAY BE
OTHER UNKNOWN OR UNPREDICTABLE ECONOMIC, BUSINESS, COMPETITIVE, REGULATORY OR
OTHER FACTORS THAT ALSO COULD HAVE MATERIAL ADVERSE EFFECTS ON OUR BUSINESSES.
PAST FINANCIAL PERFORMANCE MAY NOT BE A RELIABLE INDICATOR OF FUTURE PERFORMANCE
AND HISTORICAL TRENDS SHOULD NOT BE USED TO ANTICIPATE RESULTS OR TRENDS IN
FUTURE PERIODS. IF ANY OF THE EVENTS DESCRIBED BELOW WERE TO OCCUR, OUR
BUSINESSES, PROSPECTS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND/OR CASH
FLOWS COULD BE MATERIALLY ADVERSELY AFFECTED.
RISKS FACTORS RELATING TO THE OWNERSHIP OF OUR COMMON STOCK
The risks described below apply to the ownership of tracking stock in
general, and our common stock in particular.
OUR BOARD OF DIRECTORS CAN CAUSE A SEPARATION OF EITHER GROUP FROM OUR
COMPANY BY REDEEMING STOCK OF THAT GROUP FOR STOCK OF A "QUALIFYING" SUBSIDIARY,
IN WHICH CASE OUR STOCKHOLDERS MAY SUFFER A LOSS IN VALUE. Our board of
directors may, without stockholder approval, redeem all or a portion of the
shares of
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Liberty Interactive common stock or Liberty Capital common stock for shares of
one or more of our "qualifying" subsidiaries that own only assets and
liabilities attributed to the Interactive Group or the Capital Group, as the
case may be, provided that our board of directors has determined that the
redemption is expected to qualify for nonrecognition of gain or loss (in whole
or in part) for U.S. federal income tax purposes to the holders of the common
stock being redeemed. Such a redemption would result in the subsidiary or
subsidiaries becoming independent of us. If our board of directors chooses to
redeem shares of common stock of a group:
- the value of the subsidiary shares received in the redemption could be or
become less than the value of the common stock redeemed; and/or
- the market value of any remaining shares of Liberty Interactive common
stock or Liberty Capital common stock may decrease from their market value
immediately before the redemption.
The value of the subsidiary shares and/or the market value of the remaining
shares of Liberty Interactive common stock and/or Liberty Capital common stock
may decrease in part because the subsidiary and/or our remaining businesses may
no longer benefit from the advantages of doing business under common ownership.
HOLDERS OF LIBERTY INTERACTIVE COMMON STOCK AND LIBERTY CAPITAL COMMON STOCK
ARE COMMON STOCKHOLDERS OF OUR COMPANY AND ARE, THEREFORE, SUBJECT TO RISKS
ASSOCIATED WITH AN INVESTMENT IN OUR COMPANY AS A WHOLE, EVEN IF A HOLDER OWNS
SHARES OF ONLY THE COMMON STOCK OF ONE OF OUR GROUPS. We retain legal title to
all of our assets and our capitalization does not limit our legal
responsibility, or that of our subsidiaries, for the liabilities attributed to
either the Interactive Group or the Capital Group. Holders of Liberty
Interactive common stock and Liberty Capital common stock do not have any legal
rights related to specific assets attributed to either of the Interactive Group
or the Capital Group and, in any liquidation, holders of Liberty Interactive
common stock and holders of Liberty Capital common stock are entitled to receive
a pro rata share of our available net assets based on the number of liquidation
units that are attributed to each group.
WE COULD BE REQUIRED TO USE ASSETS ATTRIBUTED TO ONE GROUP TO PAY
LIABILITIES ATTRIBUTED TO ANOTHER GROUP. The assets attributed to one group are
potentially subject to the liabilities, including tax liabilities, attributed to
the other group, even if those liabilities arise from lawsuits, contracts or
indebtedness that are attributed to such other group. While our current
management and allocation policies provide that transfers of assets between
groups will result in the creation of an inter-group loan or an inter-group
interest, no provision of our amended charter prevents us from satisfying
liabilities of one group with assets of the other group, and our creditors are
not in any way limited by our tracking stock capitalization from proceeding
against any assets they could have proceeded against if we did not have a
tracking stock capitalization.
THE MARKET PRICE OF LIBERTY INTERACTIVE COMMON STOCK AND LIBERTY CAPITAL
COMMON STOCK MAY NOT REFLECT THE PERFORMANCE OF THE INTERACTIVE GROUP AND THE
CAPITAL GROUP, RESPECTIVELY, AS WE INTEND. We cannot assure you that the market
price of the common stock of a group does, in fact, reflect the performance of
the group of businesses, assets and liabilities attributed to that group.
Holders of Liberty Interactive common stock and Liberty Capital common stock are
common stockholders of our company as a whole and, as such, are subject to all
risks associated with an investment in our company and all of our businesses,
assets and liabilities. As a result, the market price of each series of stock of
a group may simply reflect the performance of our company as a whole or may more
independently reflect the performance of some or all of the group of assets
attributed to such group. In addition, investors may discount the value of the
stock of a group because it is part of a common enterprise rather than a
stand-alone entity.
THE MARKET PRICE OF THE LIBERTY INTERACTIVE COMMON STOCK AND THE LIBERTY
CAPITAL COMMON STOCK MAY BE VOLATILE, COULD FLUCTUATE SUBSTANTIALLY AND COULD BE
AFFECTED BY FACTORS THAT DO NOT AFFECT TRADITIONAL
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COMMON STOCK. To the extent the market price of the Liberty Interactive common
stock or the Liberty Capital common stock track the performance of more focused
groups of businesses, assets and liabilities than those of our company as a
whole, the market prices of these stocks may be more volatile than the market
prices of our common stock would have been had we never implemented our tracking
stock structure. The market prices of the Liberty Interactive common stock and
the Liberty Capital common stock may be materially affected by, among other
things:
- actual or anticipated fluctuations in either group's operating results or
in the operating results of particular companies attributable to either
group;
- potential acquisition activity by us or the companies in which we invest;
- issuances of debt or equity securities to raise capital by us or the
companies in which we invest and the manner in which that debt or the
proceeds of an equity issuance are attributed to each of the groups;
- changes in financial estimates by securities analysts regarding the
Liberty Interactive common stock or the Liberty Capital common stock or
the companies attributable to either group;
- the complex nature and the potential difficulties investors may have in
understanding the terms of the Liberty Interactive common stock and the
Liberty Capital common stock, as well as concerns regarding the possible
effect of certain of those terms on an investment in the stock relating to
either group; or
- general market conditions.
THE MARKET VALUE OF BOTH THE LIBERTY INTERACTIVE COMMON STOCK AND THE
LIBERTY CAPITAL COMMON STOCK COULD BE ADVERSELY AFFECTED BY EVENTS INVOLVING THE
ASSETS AND BUSINESSES ATTRIBUTED TO ONLY ONE OF SUCH GROUPS. Events relating to
one of our groups, such as earnings announcements or announcements of new
products or services, acquisitions or dispositions that the market does not view
favorably, may adversely affect the market value of the common stock of both of
our groups. Because we are the issuer of both the Liberty Interactive common
stock and the Liberty Capital common stock, an adverse market reaction to events
relating to the assets and businesses attributed to one of our groups may, by
association, cause an adverse reaction to the common stock of the other group.
This could occur even if the triggering event is not material to us as a whole.
In addition, the incurrence of significant indebtedness by us or any of our
subsidiaries on behalf of one group, including indebtedness incurred or assumed
in connection with acquisitions of or investments in businesses, would continue
to affect our credit rating, and that of our subsidiaries, and therefore could
increase the borrowing costs of businesses attributable to the other group or
the borrowing costs of our company as a whole.
WE MAY NOT PAY DIVIDENDS EQUALLY OR AT ALL ON LIBERTY INTERACTIVE COMMON
STOCK OR LIBERTY CAPITAL COMMON STOCK. We do not presently intend to pay cash
dividends on either the Liberty Interactive common stock or the Liberty Capital
common stock for the foreseeable future. However, we have the right to pay
dividends on the shares of common stock of each group in equal or unequal
amounts. In addition, any dividends or distributions on, or repurchases of,
shares relating to either group will reduce our assets legally available to be
paid as dividends on the shares relating to the other group.
OUR TRACKING STOCK CAPITAL STRUCTURE COULD CREATE CONFLICTS OF INTEREST, AND
OUR BOARD OF DIRECTORS MAY MAKE DECISIONS THAT COULD ADVERSELY AFFECT ONLY SOME
HOLDERS OF OUR COMMON STOCK. Our tracking stock capital structure could give
rise to occasions when the interests of holders of stock of one group might
diverge or appear to diverge from the interests of holders of stock of the other
group. In addition, given the nature of their businesses, there may be inherent
conflicts of interests between the Interactive Group and the Capital Group. Our
officers and directors owe fiduciary duties to all of our stockholders. The
fiduciary duties owed by such officers and directors are to our company as a
whole,
I-21
and decisions deemed to be in the best interest of our company may not be in the
best interest of a particular group when considered independently. Examples
include:
- decisions as to the terms of any business relationships that may be
created between the Interactive Group and the Capital Group or the terms
of any transfer of assets between the groups;
- decisions as to the allocation of consideration between the holders of the
Liberty Interactive common stock and the Liberty Capital common stock, or
between the stocks relating to either group, to be received in connection
with a merger involving our company;
- decisions as to the allocation of corporate opportunities between the two
groups, especially where the opportunities might meet the strategic
business objectives of both groups;
- decisions as to operational, financial and tax matters that could be
considered detrimental to one group but beneficial to the other;
- decisions as to the conversion of shares of Liberty Interactive common
stock into shares of Liberty Capital common stock;
- decisions regarding the creation of, and, if created, the subsequent
increase or decrease of any inter-group interest that one group may own in
the other;
- decisions as to the internal or external financing attributable to
businesses or assets attributed to either group;
- decisions as to the dispositions of assets of either group; and
- decisions as to the payment of dividends on the stock relating to either
group.
In addition, if directors own disproportionate interests (in percentage or
value terms) in the Liberty Interactive common stock or the Liberty Capital
common stock, that disparity could create or appear to create conflicts of
interest when they are faced with decisions that could have different
implications for the holders of the Liberty Interactive common stock and the
Liberty Capital common stock.
OTHER THAN PURSUANT TO CERTAIN GENERAL MANAGEMENT AND ALLOCATION POLICIES,
WE HAVE NOT ADOPTED ANY SPECIFIC PROCEDURES FOR CONSIDERATION OF MATTERS
INVOLVING A DIVERGENCE OF INTERESTS AMONG HOLDERS OF SHARES OF STOCK RELATING TO
THE TWO DIFFERENT GROUPS, OR AMONG HOLDERS OF DIFFERENT SERIES OF STOCK RELATING
TO A SPECIFIC GROUP. Our board of directors has adopted certain general
management and allocation policies to serve as guidelines in making decisions
regarding the relationships between the Interactive Group and the Capital Group
with respect to matters such as tax liabilities and benefits, inter-group loans,
attribution of assets to either group, financing alternatives, corporate
opportunities and similar items. These procedures are general and do not provide
specific guidance for addressing matters involving a divergence of interests
among holders of shares of stock relating to the two different groups, or among
holders of different series of stock relating to a specific group. Rather than
develop additional specific procedures in advance, our board of directors
intends to exercise its judgment from time to time, depending on the
circumstances, as to how best to:
- obtain information regarding the divergence (or potential divergence) of
interests;
- determine under what circumstances to seek the assistance of outside
advisers;
- determine whether a committee of our board of directors should be
appointed to address a specific matter and the appropriate members of that
committee; and
- assess what is in its best interests and the best interests of all of our
stockholders.
I-22
HOLDERS OF SHARES OF STOCK RELATING TO A PARTICULAR GROUP MAY NOT HAVE ANY
REMEDIES IF ANY ACTION BY OUR DIRECTORS OR OFFICERS HAS AN ADVERSE EFFECT ON
ONLY THAT STOCK, OR ON A PARTICULAR SERIES OF THAT STOCK. Principles of Delaware
law and the provisions of our amended charter may protect decisions of our board
of directors that have a disparate impact upon holders of shares of stock
relating to a particular group, or upon holders of any series of stock relating
to a particular group. Under Delaware law, our board of directors has a duty to
act with due care and in the best interests of all of our stockholders,
regardless of the stock, or series, they hold. Principles of Delaware law
established in cases involving differing treatment of multiple classes or series
of stock provide that a board of directors owes an equal duty to all common
stockholders and does not have separate or additional duties to any subset of
stockholders. Recent judicial opinions in Delaware involving tracking stocks
have established that decisions by directors or officers involving differing
treatment of holders of tracking stocks may be judged under the business
judgment rule. The business judgment rule generally provides that a director or
officer of our company may be deemed to have satisfied his or her fiduciary
duties to our company if that person acts in a manner he or she believes in good
faith to be in the best interests of our company as a whole, and not of any
single group of our stockholders. As a result, in some circumstances, our
directors or officers may be required to make a decision that is viewed as
adverse to the holders of shares relating to a particular group or to the
holders of a particular series of that stock. Therefore, under the principles of
Delaware law referred to above and the business judgment rule, you may not be
able to challenge decisions that you believe have a disparate impact upon the
stockholders of the two groups if our board of directors is disinterested,
adequately informed with respect to its decisions and acts in good faith, on
behalf of all its stockholders.
OUR BOARD OF DIRECTORS MAY CHANGE THE MANAGEMENT AND ALLOCATION POLICIES TO
THE DETRIMENT OF EITHER GROUP WITHOUT STOCKHOLDER APPROVAL. Our board of
directors has adopted certain management and allocation policies to serve as
guidelines in making decisions regarding the relationships between the
Interactive Group and the Capital Group with respect to matters such as tax
liabilities and benefits, inter-group loans, attribution of assets to either
group, financing alternatives, corporate opportunities and similar items. Our
board of directors may at any time change, or make exceptions to these policies.
Because these policies relate to matters concerning the day to day management of
our company as opposed to significant corporate actions, such as a merger
involving our company or a sale of substantially all of our assets, no
stockholder approval is required with respect to their adoption or amendment. A
decision to change, or make exceptions to, these policies or adopt additional
policies could disadvantage one group while advantaging the other group.
STOCKHOLDERS WILL NOT VOTE ON HOW TO ATTRIBUTE CONSIDERATION RECEIVED IN
CONNECTION WITH A MERGER INVOLVING OUR COMPANY AMONG HOLDERS OF LIBERTY
INTERACTIVE COMMON STOCK AND LIBERTY CAPITAL COMMON STOCK. Our amended charter
does not contain any provisions governing how consideration received in
connection with a merger or consolidation involving our company is to be
attributed to the holders of Liberty Interactive common stock and holders of
Liberty Capital common stock or to the holders of different series of stock, and
neither the holders of Liberty Interactive common stock nor the holders of
Liberty Capital common stock will have a separate class vote in the event of
such a merger or consolidation. Consistent with applicable principles of
Delaware law, our board of directors will seek to divide the type and amount of
consideration received in a merger or consolidation involving our company
between holders of Liberty Interactive common stock and Liberty Capital common
stock in a fair manner. As the different ways the board of directors may divide
the consideration between holders of stock relating to the different groups, and
among holders of different series of stock, might have materially different
results, the consideration to be received by holders of Liberty Interactive
common stock and Liberty Capital common stock in any such merger or
consolidation may be materially less valuable than the consideration they would
have received if they had a separate class vote on such merger or consolidation.
I-23
WE MAY DISPOSE OF ASSETS OF EITHER THE INTERACTIVE GROUP OR THE CAPITAL
GROUP WITHOUT YOUR APPROVAL. Delaware law requires stockholder approval only for
a sale or other disposition of all or substantially all of the assets of our
company taken as a whole, and our amended charter does not require a separate
class vote in the case of a sale of a significant amount of assets of either
group. As long as the assets attributed to either the Interactive Group or the
Capital Group represent less than substantially all of our assets, we may
approve sales and other dispositions of any amount of the assets of that group
without any stockholder approval. Based on the current composition of the
groups, we believe that a sale of all or substantially all of the assets of
either group, on a stand alone basis, would not be considered a sale of
substantially all of the assets of our company requiring stockholder approval.
If we dispose of all or substantially all of the assets of either group
(which means, for this purpose, assets representing 80% of the fair market value
of the total assets of the disposing group, as determined by our board of
directors), we will be required, if the disposition is not an exempt disposition
under the terms of our amended charter, to choose one or more of the following
three alternatives:
- declare and pay a dividend on the disposing group's common stock;
- redeem shares of the disposing group's common stock according to ratios
set out in our amended charter; and/or
- convert all of the disposing group's outstanding common stock into common
stock of the other group.
In this type of a transaction, holders of the disposing group's common stock may
receive less value than the value that a third-party buyer might pay for all or
substantially all of the assets of the disposing group. In addition, there is no
requirement that any such transaction be tax-free to the holders of the
disposing group's common stock.
Our board of directors will decide, in its sole discretion, how to proceed
and is not required to select the option that would result in the highest value
to holders of either group of our common stock.
HOLDERS OF LIBERTY INTERACTIVE COMMON STOCK OR LIBERTY CAPITAL COMMON STOCK
MAY RECEIVE LESS CONSIDERATION UPON A SALE OF THE ASSETS ATTRIBUTED TO THAT
GROUP THAN IF THAT GROUP WERE A SEPARATE COMPANY. If the Interactive Group or
the Capital Group were a separate, independent company and its shares were
acquired by another person, certain costs of that sale, including corporate
level taxes, might not be payable in connection with that acquisition. As a
result, stockholders of a separate, independent company might receive a greater
amount of proceeds than the holders of Liberty Interactive common stock or
Liberty Capital common stock would receive upon a sale of all or substantially
all of the assets of the group to which their shares relate. In addition, we
cannot assure you that in the event of such a sale the per share consideration
to be paid to holders of Liberty Interactive common stock or Liberty Capital
common stock, as the case may be, will be equal to or more than the per share
value of that share of stock prior to or after the announcement of a sale of all
or substantially all of the assets of the applicable group.
FOLLOWING MAY 9, 2007, THE FIRST ANNIVERSARY OF THE IMPLEMENTATION OF OUR
TRACKING STOCK STRUCTURE (ABSENT AN EARLIER TRIGGERING EVENT), OUR BOARD OF
DIRECTORS MAY IN ITS SOLE DISCRETION ELECT TO CONVERT LIBERTY INTERACTIVE COMMON
STOCK INTO LIBERTY CAPITAL COMMON STOCK, THEREBY CHANGING THE NATURE OF YOUR
INVESTMENT AND POSSIBLY DILUTING YOUR ECONOMIC INTEREST IN OUR COMPANY, WHICH
COULD RESULT IN A LOSS IN VALUE TO YOU. Our amended charter permits our board
of directors, in its sole discretion, after May 9, 2007 (absent an earlier
triggering event), to convert each share of Liberty Interactive Series A,
Series B and Series C common stock into a number of shares of the corresponding
series of Liberty Capital common stock at a ratio based on the relative trading
prices of the Liberty Interactive Series A common stock (or another series of
Liberty Interactive common stock subject to certain limitations) and the Liberty
Capital Series A common stock (or another series of Liberty Capital common stock
I-24
subject to certain limitations) over a specified 60-trading day period. We
cannot predict the impact on the market value of our stock of (1) our board of
directors' ability to effect any such conversion or (2) the exercise of this
conversion right by us. In addition, our board of directors may effect such a
conversion at a time when the market value of its stock could cause the
stockholders of one group to be disadvantaged.
HOLDERS OF LIBERTY INTERACTIVE COMMON STOCK AND HOLDERS OF LIBERTY CAPITAL
COMMON STOCK VOTE TOGETHER AND HAVE LIMITED SEPARATE VOTING RIGHTS. Holders of
Liberty Interactive common stock and Liberty Capital common stock vote together
as a single class, except in certain limited circumstances prescribed by our
amended charter and under Delaware law. Each share of Series B common stock of
each group has ten votes per share, and each share of Series A common stock of
each group has one vote per share. Holders of Series C common stock of either
group have no voting rights, other than those required under Delaware law. When
holders of Liberty Interactive common stock and Liberty Capital common stock
vote together as a single class, holders having a majority of the votes are in a
position to control the outcome of the vote even if the matter involves a
conflict of interest among our stockholders or has a greater impact on one group
than the other.
OUR CAPITAL STRUCTURE AS WELL AS THE FACT THAT THE INTERACTIVE GROUP AND THE
CAPITAL GROUP ARE NOT INDEPENDENT COMPANIES MAY INHIBIT OR PREVENT ACQUISITION
BIDS FOR THE INTERACTIVE GROUP OR THE CAPITAL GROUP. If the Interactive Group
and the Capital Group were separate independent companies, any person interested
in acquiring either the Interactive Group or the Capital Group without
negotiating with management could seek control of that group by obtaining
control of its outstanding voting stock, by means of a tender offer, or by means
of a proxy contest. Although we intend Liberty Interactive common stock and
Liberty Capital common stock to reflect the separate economic performance of the
Interactive Group and the Capital Group, respectively, those groups are not
separate entities and a person interested in acquiring only one group without
negotiation with our management could obtain control of that group only by
obtaining control of a majority in voting power of all of the outstanding shares
of common stock of our company. The existence of shares of common stock, and
different series of shares, relating to different groups could present
complexities and in certain circumstances pose obstacles, financial and
otherwise, to an acquiring person that are not present in companies which do not
have capital structures similar to ours.
CHANGES IN THE TAX LAW OR IN THE INTERPRETATION OF CURRENT TAX LAW MAY
RESULT IN THE CESSATION OF THE ISSUANCE OF SHARES OF LIBERTY INTERACTIVE COMMON
STOCK AND/OR LIBERTY CAPITAL COMMON STOCK OR THE CONVERSION OF LIBERTY
INTERACTIVE COMMON STOCK INTO LIBERTY CAPITAL COMMON STOCK. If, due to a change
in tax law or a change in the interpretation of current tax law, there are
adverse tax consequences resulting from the issuance of Liberty Interactive
common stock and/or Liberty Capital common stock, it is possible that we would
not issue additional shares of Liberty Interactive common stock and/or Liberty
Capital common stock even if we would otherwise choose to do so. This
possibility could affect the value of Liberty Interactive common stock and
Liberty Capital common stock then outstanding. In addition, we may elect to
convert Liberty Interactive common stock into Liberty Capital common stock,
thereby diluting the interests of holders of Liberty Capital common stock and
changing the nature of your investment, which could result in a loss in value.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE US, EVEN IF DOING SO MAY BE
BENEFICIAL TO OUR STOCKHOLDERS. Certain provisions of our amended charter and
bylaws may discourage, delay or prevent a change in control of our company that
a stockholder may consider favorable. These provisions include:
- authorizing a capital structure with multiple series of common stock, a
Series B common stock of each group that entitles the holders to ten votes
per share, a Series A common stock of each group that entitles the holder
to one vote per share, and a Series C common stock of each group that
except as otherwise required by applicable law, entitles the holder to no
voting rights;
I-25
- authorizing the issuance of "blank check" preferred stock that could be
issued by our board of directors to increase the number of outstanding
shares and thwart a takeover attempt;
- classifying our board of directors with staggered three-year terms, which
may lengthen the time required to gain control of our board of directors;
- limiting who may call special meetings of stockholders;
- prohibiting stockholder action by written consent, thereby requiring all
stockholder actions to be taken at a meeting of the stockholders; and
- establishing advance notice requirements for nominations of candidates for
election to the board of directors or for proposing matters that can be
acted upon by stockholders at stockholder meetings.
Our chairman, John C. Malone, has the power to direct the vote of
approximately 30% of our outstanding voting power and approximately 90% of our
outstanding Series B shares.
RISK FACTORS RELATING TO OUR COMPANY, THE INTERACTIVE GROUP AND THE CAPITAL
GROUP
The risks described below apply to our company and to the businesses, assets
and liabilities attributable to both the Interactive Group and the Capital
Group.
WE DO NOT HAVE THE RIGHT TO MANAGE OUR BUSINESS AFFILIATES, WHICH MEANS WE
ARE NOT ABLE TO CAUSE THOSE AFFILIATES TO OPERATE IN A MANNER THAT IS FAVORABLE
TO US. We do not have the right to manage the businesses or affairs of any of
our business affiliates (generally those companies in which we have less than a
majority stake) attributed to either the Interactive Group or the Capital Group.
Rather, our rights may take the form of representation on the board of directors
or a partners' or similar committee that supervises management or possession of
veto rights over significant or extraordinary actions. The scope of our veto
rights vary from agreement to agreement. Although our board representation and
veto rights may enable us to exercise influence over the management or policies
of a business affiliate, enable us to prevent the sale of material assets by a
business affiliate in which we own less than a majority voting interest or
prevent us from paying dividends or making distributions to its stockholders or
partners, they will not enable us to cause these actions to be taken.
IF WE FAIL TO MEET REQUIRED CAPITAL CALLS TO A BUSINESS AFFILIATE, WE COULD
BE FORCED TO SELL OUR INTEREST IN THAT COMPANY, OUR INTEREST IN THAT COMPANY
COULD BE DILUTED OR WE COULD FORFEIT IMPORTANT RIGHTS. We are a party to
stockholder and partnership agreements relating to our equity interest in
business affiliates that provide for possible capital calls on stockholders and
partners. Our failure to meet a capital call, or other commitment to provide
capital or loans to a particular business affiliate, may have adverse
consequences to us and the group to which that business affiliate is attributed.
These consequences may include, among others, the dilution of our equity
interest in that company, the forfeiture of our right to vote or exercise other
rights, the right of the other stockholders or partners to force us to sell our
interest at less than fair value, the forced dissolution of the company to which
we have made the commitment or, in some instances, a breach of contract action
for damages against us. Our ability to meet capital calls or other capital or
loan commitments is subject to our ability to access cash. See "--A SUBSTANTIAL
PORTION OF THE CONSOLIDATED DEBT ATTRIBUTED TO EACH GROUP IS HELD ABOVE THE
OPERATING SUBSIDIARY LEVEL, AND WE COULD BE UNABLE IN THE FUTURE TO OBTAIN CASH
IN AMOUNTS SUFFICIENT TO SERVICE THAT DEBT AND OUR OTHER FINANCIAL OBLIGATIONS"
below.
THE LIQUIDITY AND VALUE OF OUR INTERESTS IN OUR BUSINESS AFFILIATES MAY BE
AFFECTED BY MARKET CONDITIONS BEYOND OUR CONTROL THAT COULD CAUSE US TO TAKE
SIGNIFICANT IMPAIRMENT CHARGES DUE TO OTHER THAN TEMPORARY DECLINES IN THE
MARKET VALUE OF OUR AVAILABLE FOR SALE SECURITIES. Included among the assets
attributable to each group are equity interests in one or more publicly-traded
companies which are accounted for as available for sale securities. The value of
these interests may be affected by economic and market
I-26
conditions that are beyond our control. We are required by U.S. generally
accepted accounting principles to determine, from time to time, whether a
decline in the market value of any of those investments below our cost for that
investment is other than temporary. If we determine that the decline is other
than temporary, we are required to write down its cost to a new cost basis, with
the amount of the write-down accounted for as a realized loss in the
determination of net income for the period in which the write-down occurs. We
have at times realized significant losses due to other than temporary declines
in the fair value of certain of our available for sale securities, and our
company and either group may be required to realize further losses of this
nature in future periods. A number of factors are used in determining the fair
value of an investment and whether any decline in an investment is other than
temporary. As the assessment of fair value and any resulting impairment losses
requires a high degree of judgment and includes significant estimates and
assumptions, the actual amount we may eventually realize for an investment could
differ materially from our assessment of the value of that investment made in an
earlier period. In addition, our ability to liquidate these interests without
adversely affecting their value may be limited.
A SUBSTANTIAL PORTION OF THE CONSOLIDATED DEBT ATTRIBUTED TO EACH GROUP IS
HELD ABOVE THE OPERATING SUBSIDIARY LEVEL, AND WE COULD BE UNABLE IN THE FUTURE
TO OBTAIN CASH IN AMOUNTS SUFFICIENT TO SERVICE THAT DEBT AND OUR OTHER
FINANCIAL OBLIGATIONS. As of December 31, 2006, Liberty Media LLC, which is a
wholly owned subsidiary of our company, had $7.7 billion principal amount of
debt outstanding. Our ability to meet the financial obligations of Liberty Media
LLC and our other financial obligations will depend upon our ability to access
cash. Our sources of cash include our available cash balances, net cash from
operating activities, dividends and interest from our investments, availability
under credit facilities, monetization of our public investment portfolio and
proceeds from asset sales. There are no assurances that we will maintain the
amounts of cash, cash equivalents or marketable securities that we maintained
over the past few years.
The ability of our operating subsidiaries to pay dividends or to make other
payments or advances to us or Liberty Media LLC depends on their individual
operating results and any statutory, regulatory or contractual restrictions to
which they may be or may become subject. Some of our subsidiaries are subject to
loan agreements that restrict sales of assets and prohibit or limit the payment
of dividends or the making of distributions, loans or advances to stockholders
and partners.
Neither we nor Liberty Media LLC will generally receive cash, in the form of
dividends, loans, advances or otherwise, from our business affiliates. In this
regard, we will not have sufficient voting control over most of our business
affiliates to cause those companies to pay dividends or make other payments or
advances to their partners or stockholders, including our company or Liberty
Media LLC.
BOTH THE INTERACTIVE GROUP AND THE CAPITAL GROUP DEPEND ON A LIMITED NUMBER
OF POTENTIAL CUSTOMERS FOR CARRIAGE OF THEIR PROGRAMMING. The cable television
and direct-to-home satellite industries have been undergoing a period of
consolidation. As a result, the number of potential buyers of the programming
services attributable to these groups is decreasing. In this more concentrated
market, there can be no assurance that the owned and affiliated program
suppliers attributed to either group will be able to obtain or maintain carriage
of their programming services by distributors on commercially reasonable terms
or at all.
RAPID TECHNOLOGICAL ADVANCES COULD RENDER THE PRODUCTS AND SERVICES OFFERED
BY BOTH GROUP'S SUBSIDIARIES AND BUSINESS AFFILIATES OBSOLETE OR
NON-COMPETITIVE. The subsidiaries and business affiliates attributed to each
group must stay abreast of rapidly evolving technological developments and
offerings to remain competitive and increase the utility of their services.
These subsidiaries and business affiliates must be able to incorporate new
technologies into their products in order to address the needs of their
customers. There can be no assurance that they will be able to compete with
advancing technology, and any failure to do so may adversely affect the group to
which they are attributed.
I-27
CERTAIN OF OUR SUBSIDIARIES AND BUSINESS AFFILIATES DEPEND ON THEIR
RELATIONSHIPS WITH THIRD PARTY DISTRIBUTION CHANNELS, SUPPLIERS AND ADVERTISERS
AND ANY ADVERSE CHANGES IN THESE RELATIONSHIPS COULD ADVERSELY AFFECT OUR
RESULTS OF OPERATIONS AND THOSE ATTRIBUTED TO EITHER GROUP. An important
component of the success of our subsidiaries and business affiliates is their
ability to maintain their existing, as well as build new, relationships with
third party distribution channels, suppliers and advertisers, among other
parties. Adverse changes in existing relationships or the inability to enter
into new arrangements with these parties on favorable terms, if at all, could
have a significant adverse effect on our results of operations and those
attributed to either group.
ADVERSE EVENTS OR TRENDS IN THE INDUSTRIES IN WHICH THE SUBSIDIARIES AND
BUSINESS AFFILIATES ATTRIBUTED TO EITHER GROUP OPERATE COULD HARM THAT
GROUP. In general, the subsidiaries and business affiliates in both groups are
sensitive to trends and events that are outside their control. For example,
adverse trends or events, such as general economic downturns, decreases in
consumer spending and natural or other disasters, among other adverse events and
trends, could have a significantly negative impact on both groups.
THE SUBSIDIARIES AND BUSINESS AFFILIATES ATTRIBUTABLE TO EACH GROUP ARE
SUBJECT TO RISKS OF ADVERSE GOVERNMENT REGULATION. Programming services, cable
television systems, the Internet, telephony services and satellite carriers are
subject to varying degrees of regulation in the United States by the Federal
Communications Commission and other entities and in foreign countries by similar
entities. Such regulation and legislation are subject to the political process
and have been in constant flux over the past decade. The application of various
sales and use tax provisions under state, local and foreign law to certain of
the Interactive Group's subsidiaries' and business affiliates' products and
services sold via the Internet, television and telephone is subject to
interpretation by the applicable taxing authorities, and no assurance can be
given that such authorities will not take a contrary position to that taken by
those subsidiaries and business affiliates, which could have a material adverse
effect on their business. In addition, there have been numerous attempts at the
federal, state and local levels to impose additional taxes on online commerce
transactions. Moreover, substantially every foreign country in which our
subsidiaries or business affiliates have, or may in the future make, an
investment regulates, in varying degrees, the distribution, content and
ownership of programming services and foreign investment in programming
companies and wireline and wireless cable communications, satellite and
telephony services and the Internet. Further material changes in the law and
regulatory requirements must be anticipated, and there can be no assurance that
the business and the business of the affiliates attributed to each group will
not be adversely affected by future legislation, new regulation or deregulation.
THE SUCCESS OF CERTAIN OF THE GROUPS' SUBSIDIARIES AND BUSINESS AFFILIATES
WHOSE BUSINESSES INVOLVE THE INTERNET DEPENDS ON MAINTAINING THE INTEGRITY OF
THEIR SYSTEMS AND INFRASTRUCTURE. A fundamental requirement for online commerce
and communications is the secure transmission of confidential information, such
as credit card numbers or other personal information, over public networks. If
the security measures of any of our subsidiaries or business affiliates engaged
in online commerce were to be compromised, it could have a detrimental effect on
their reputation and adversely affect their ability to attract customers.
Computer viruses transmitted over the Internet have significantly increased
in recent years, thereby increasing the possibility of disabling attacks on and
damage to websites of our subsidiaries and business affiliates whose businesses
are dependent on the Internet. In addition, certain of the subsidiaries and
business affiliates attributed to each group rely on third-party computer
systems and service providers to facilitate and process a portion of their
transactions. Any interruptions, outages or delays in these services, or a
deterioration in their performance, could impair the ability of these
subsidiaries and business affiliates to process transactions for their customers
and the quality of service they can offer to them.
I-28
THE SUCCESS OF CERTAIN OF THE SUBSIDIARIES AND BUSINESS AFFILIATES
ATTRIBUTED TO EACH GROUP IS DEPENDENT UPON AUDIENCE ACCEPTANCE OF ITS PROGRAMS
AND PROGRAMMING SERVICES WHICH IS DIFFICULT TO PREDICT. Entertainment content
production and premium subscription television program services are inherently
risky businesses because the revenue derived from the production and
distribution of a cable program and the exhibition of theatrical feature films
and other programming depend primarily upon their acceptance by the public,
which is difficult to predict. The commercial success of a cable program or
premium subscription television service depends upon the quality and acceptance
of other competing programs and films released into the marketplace at or near
the same time, the availability of alternative forms of entertainment and
leisure time activities, general economic conditions and other tangible and
intangible factors, many of which are difficult to predict. Audience sizes for
cable programming and premium subscription television program services are
important factors when cable television and DTH satellite providers negotiate
affiliation agreements and, in the case of cable programming, when advertising
rates are negotiated. Consequently, low public acceptance of cable programs and
premium subscription television program services will have an adverse effect on
the results of operations of the Interactive Group and the Capital Group.
INCREASED PROGRAMMING AND CONTENT COSTS MAY ADVERSELY AFFECT
PROFITS. Subsidiaries and business affiliates attributable to each group
produce programming and incur costs for all types of creative talent including
actors, writers and producers. These subsidiaries and business affiliates also
acquire programming, such as movies and television series, from television
production companies and movie studios. An increase in the costs of programming
may lead to decreased profitability.
RISK FACTORS RELATING TO QVC
The risks described below are unique to QVC, which constitutes the primary
business attributed to the Interactive Group.
QVC CONDUCTS ITS MERCHANDISING BUSINESSES UNDER HIGHLY COMPETITIVE
CONDITIONS. Although QVC is the nation's largest home shopping network, it has
numerous and varied competitors at the national and local levels, including
conventional and specialty department stores, other specialty stores, mass
merchants, value retailers, discounters, and Internet and mail-order retailers.
Competition is characterized by many factors, including assortment, advertising,
price, quality, service, location, reputation and credit availability. If QVC
does not compete effectively with regard to these factors, its results of
operations could be materially and adversely affected.
QVC'S SALES AND OPERATING RESULTS DEPEND ON ITS ABILITY TO PREDICT OR
RESPOND TO CONSUMER PREFERENCES. QVC's sales and operating results depend in
part on its ability to predict or respond to changes in consumer preferences and
fashion trends in a timely manner. QVC develops new retail concepts and
continuously adjusts its product mix in an effort to satisfy customer demands.
Any sustained failure to identify and respond to emerging trends in lifestyle
and consumer preferences could have a material adverse affect on QVC's business.
Consumer spending may be affected by many factors outside of QVC's control,
including competition from store-based retailers, mail-order and Internet
companies, consumer confidence and preferences, and general economic conditions.
QVC'S SUCCESS DEPENDS IN LARGE PART ON ITS ABILITY TO RECRUIT AND RETAIN KEY
EMPLOYEES CAPABLE OF EXECUTING ITS UNIQUE BUSINESS MODEL. QVC has a business
model that requires it to recruit and retain key employees with the skills
necessary for a unique business that demands knowledge of the general retail
industry, television production, direct to consumer marketing and fulfillment
and the Internet. We can not assure you that if QVC experiences turnover of its
key employees, they will be able to recruit and retain acceptable replacements
because the market for such employees is very competitive and limited.
I-29
QVC HAS OPERATIONS OUTSIDE OF THE UNITED STATES THAT ARE SUBJECT TO NUMEROUS
OPERATIONAL AND FINANCIAL RISKS. QVC has operations in countries other than the
United States and are subject to the following risks inherent in international
operations:
- fluctuations in currency exchange rates;
- longer payment cycles for sales in foreign countries that may increase the
uncertainty associated with recoverable accounts;
- recessionary conditions and economic instability affecting overseas
markets;
- potentially adverse tax consequences;
- export and import restrictions, tariffs and other trade barriers;
- increases in taxes and governmental royalties and fees;
- involuntary renegotiation of contracts with foreign governments;
- changes in foreign and domestic laws and policies that govern operations
of foreign-based companies;
- difficulties in staffing and managing international operations; and
- political unrest that may result in disruptions of services that are
critical to their international businesses.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES.
We own our corporate headquarters in Englewood, Colorado. All of our other
real or personal property is owned or leased by our subsidiaries and business
affiliates.
QVC owns its corporate headquarters and operations center in West Chester,
Pennsylvania. It also owns call centers in San Antonio, Texas, Port St. Lucie,
Florida, Chesapeake, Virginia and Bochum, Germany, as well as a call center and
warehouse in Knowsley, United Kingdom. QVC owns a distribution center in
Hucklehoven, Germany and distribution centers in Lancaster, Pennsylvania,
Suffolk, Virginia and Rocky Mount, North Carolina. To supplement the facilities
it owns, QVC also leases various facilities in the United States, the United
Kingdom, Germany and Japan for retail outlet stores, office space, warehouse
space and call center locations.
Starz Entertainment owns its corporate headquarters in Englewood, Colorado.
In addition, Starz Entertainment leases office space for its business affairs
and sales staff at five locations around the United States.
Starz Media leases space for its executive offices, distribution and sales
operations, and production studio facilities in Burbank, California, Troy,
Michigan, Beverly Hills, California and New York, New York. Starz Media also
leases space for its international production and distribution operations in
Toronto, Ontario, Vancouver, British Columbia, London, England and Melbourne,
Australia.
On Command leases its corporate headquarters in Denver, Colorado. It also
leases 120,000 square feet of light manufacturing and storage space in Denver,
Colorado and 42,000 square feet of office space in San Jose, California. On
Command also has a number of small leased facilities in the United States,
Canada and Mexico.
I-30
Our other subsidiaries and business affiliates own or lease the fixed assets
necessary for the operation of their respective businesses, including office
space, transponder space, headends, cable television and telecommunications
distribution equipment, telecommunications switches and customer equipment
(including converter boxes). Our management believes that our current facilities
are suitable and adequate for our business operations for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS.
KLESCH & COMPANY LIMITED V. LIBERTY MEDIA CORPORATION, JOHN C. MALONE AND
ROBERT R. BENNETT. On September 4, 2001, we entered into agreements with
Deutsche Telekom AG pursuant to which we would purchase its entire interest in
six of nine regional cable television companies in Germany. In February 2002, we
failed to receive regulatory approval for our proposed acquisition. On July 27,
2001, Klesch & Company Limited initiated a lawsuit against us, our chairman,
John C. Malone, and our former chief executive officer, Robert R. Bennett, in
the United States District Court for the District of Colorado alleging, among
other things, breach of fiduciary duty, fraud and breach of contract in
connection with actions alleged to have been taken by us with respect to what
then was a proposed transaction with Deutsche Telekom. Klesch sought damages in
an unspecified amount in that action, which was the subject of a jury trial that
began on August 30, 2004. On September 28, 2004, the jury returned a verdict in
our favor on all of the legal claims asserted by the plaintiff. The jury also
rejected the plaintiff's claims that Messrs. Malone and Bennett had committed
fraud in their dealings with the plaintiff. On March 30, 2005, the court entered
a judgment in accordance with the jury's verdict, and in addition ruled in our
favor on various equitable claims asserted by the plaintiffs. The plaintiff has
appealed the judgment to the United States Court of Appeals for the Tenth
Circuit. Both sides have submitted briefs, and oral arguments were held on
November 15, 2006. To date, we have not received notice of any decision by the
Court.
DR. LEO KIRCH, INDIVIDUALLY AND AS ASSIGNEE, KGL POOL GMBH, AND
INTERNATIONAL TELEVISION TRADING CORP. V. LIBERTY MEDIA CORPORATION, JOHN
MALONE, DEUTSCHE BANK, AG, AND DR. ROLF-ERNST BREUER. Dr. Kirch was the primary
owner of KirchGroup, a German cable television and media conglomerate. On
September 4, 2001, we entered into agreements with Deutsche Telekom AG pursuant
to which we would purchase its entire interest in six of nine regional cable
television companies in Germany. In February 2002, we failed to receive
regulatory approval for our proposed acquisition and the transactions with
Deutsche Telekom were never consummated. On January 14, 2004, Dr. Kirch, KGL
Pool GBH, and International Television Trading Corp. added our company, and our
chairman, John C. Malone, to a lawsuit they had initiated against Deutsche Bank
and Dr. Breuer on February 3, 2003. In that lawsuit, which was filed in the
United States District Court for the Southern District of New York, the
plaintiffs' claims against us included, among other things, interference with
contract, and interference with prospective economic advantage arising from an
alleged conspiracy among our company, Dr. Malone, Deutsche Bank and Dr. Breuer
pursuant to which we allegedly were involved in effecting transactions that led
to the collapse of the KirchGroup's control of the German cable market in an
effort to facilitate our agreements with Deutsche Telekom. Dr. Kirch, KGL Pool
and International Television sought damages in an unspecified amount. We and
Dr. Malone filed a motion to dismiss the lawsuit for failure to state a claim
upon which relief can be granted. That motion, as well as the other defendants'
motion to dismiss on the same grounds, was granted by the court on
September 24, 2004. The plaintiffs appealed the court's dismissal of the case to
the United States Court of Appeals for the Second Circuit. On appeal, the case
was remanded to the trial court for a determination on the issue of whether the
case should be dismissed on grounds of FORUM NON CONVENIENS. On November 8,
2006, the trial court ruled on this issue and dismissed the suit on such
grounds. To date, we have not received notice of any further actions taken by
the plaintiffs with respect to the claims made in this proceeding.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
I-31
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
We issued our tracking stocks, Liberty Capital Series A and Series B common
stock (LCAPA and LCAPB) and Liberty Interactive Series A and Series B common
stock (LINTA and LINTB), on May 10, 2006. Holders of our predecessor's common
stock received .25 of a share of LINTA and .05 of a share of LCAPA in exchange
for each share of Series A common stock held and .25 of a share of LINTB and .05
of a share of LCAPB in exchange for each share of Series B common stock held.
Each series of our tracking stock trades on the Nasdaq National Market. Prior to
May 10, 2006, our two series of common stock, Series A and Series B, traded on
the New York Stock Exchange under the symbols L and LMC.B, respectively. The
following table sets forth the range of high and low sales prices of shares of
our common stock for the years ended December 31, 2006 and 2005.
SERIES A SERIES B (L) (LMC.B) ------------------- -
------------------ HIGH LOW HIGH LOW -------- -----
--- -------- -------- 2005 First
quarter.............................................
$10.93 9.97 11.60 10.30 Second
quarter............................................
$10.64 10.01 11.06 10.20 Third quarter through July
20, 2005*...................... $10.28 9.89 10.75
10.00 July 21 through September 30,
2005*....................... $ 8.90 7.98 10.15 8.12
Fourth
quarter............................................
$ 8.18 7.59 8.56 7.55 2006 First
quarter.............................................
$ 8.44 7.73 8.50 7.80 Second quarter through May 9,
2006........................ $ 8.76 8.20 8.90 8.20
LIBERTY CAPITAL -----------------------------------
------ SERIES A SERIES B (LCAPA) (LCAPB) ----------
--------- ------------------- HIGH LOW HIGH LOW ---
----- -------- -------- -------- 2006 Second
quarter--May 10, 2006 through June 30, 2006........
$83.95 77.00 87.99 79.26 Third
quarter.............................................
$87.02 80.01 87.25 80.73 Fourth
quarter............................................
$98.80 83.32 99.46 84.34
LIBERTY INTERACTIVE -------------------------------
---------- SERIES A SERIES B (LINTA) (LINTB) ------
------------- ------------------- HIGH LOW HIGH LOW
-------- -------- -------- -------- 2006 Second
quarter--May 10, 2006 through June 30, 2006........
$20.25 16.28 20.09 15.98 Third
quarter.............................................
$20.60 15.84 20.50 16.00 Fourth
quarter............................................
$23.29 19.85 23.13 19.61
- ------------------------
* Our spin off of DHC was completed on July 21, 2005.
II-1
HOLDERS
As of January 31, 2007, there were approximately 68,000 and less than 1,000
beneficial holders of our Liberty Capital Series A and Series B common stock,
respectively, and approximately 74,000 and less than 1,000 beneficial holders of
our Liberty Interactive Series A and Series B common stock, respectively.
DIVIDENDS
We have not paid any cash dividends on our common stock, and we have no
present intention of so doing. Payment of cash dividends, if any, in the future
will be determined by our Board of Directors in light of our earnings, financial
condition and other relevant considerations.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
Information required by this item is incorporated by reference to our
definitive proxy statement for our 2007 Annual Meeting of shareholders.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER
LIBERTY INTERACTIVE
SERIES A COMMON STOCK
----------------------
----------------------
----------------------
-------------------
(D) MAXIMUM NUMBER (OR
APPROXIMATE DOLLAR (C)
TOTAL NUMBER OF VALUE)
OF SHARES THAT (A)
TOTAL NUMBER (B)
AVERAGE SHARES
PURCHASED AS PART MAY
YET BE PURCHASED OF
SHARES PRICE PAID PER
OF PUBLICLY ANNOUNCED
UNDER THE PLANS OR
PERIOD PURCHASED SHARE
PLANS OR PROGRAMS
PROGRAMS(1) - ------ -
--------------- ------
-------- -------------
----------- ----------
------------ October
2006.............
5,129,246 $ 21.22
5,129,246 $ 160.5
million November
2006............
3,443,499 $ 22.51
3,443,499 $ 1,082.9
million December
2006............
1,578,700 $ 22.66
1,578,700 $ 1,047.2
million ---------- ---
-------
Total..................
10,151,445 10,151,445
========== ==========
- ------------------------
(1) Our program to repurchase shares of Liberty Interactive common stock was
approved by our board of directors and disclosed in our 2006 Annual Proxy
dated April 7, 2006. In November 2006, our board of directors increased the
aggregate amount of Liberty Interactive common stock that can be repurchased
from $1 billion to $2 billion. We may alter or terminate the program at any
time.
II-2
ITEM 6. SELECTED FINANCIAL DATA.
The following tables present selected historical information relating to our
financial condition and results of operations for the past five years. The
following data should be read in conjunction with our consolidated financial
statements.
DECEMBER 31, -------------------------------
--------------------- 2006 2005 2004 2003(2)
2002 -------- -------- -------- -------- ---
----- (AMOUNTS IN MILLIONS) SUMMARY BALANCE
SHEET DATA(1): Investments in available-for-
sale securities and other cost
investments...........................
$21,622 18,489 21,834 19,544 14,156
Investment in
affiliates........................... $
1,842 1,908 784 745 3,420 Assets of
discontinued operations.................. $
512 516 6,258 9,741 8,985 Total
assets.......................................
$47,638 41,965 50,181 54,225 40,324 Long-
term
debt(3).................................. $
8,909 6,370 8,566 9,417 3,646 Stockholders'
equity...............................
$21,633 19,120 24,586 28,842 24,682
YEARS ENDED DECEMBER 31, ----------------------------
------------------------ 2006 2005 2004 2003(2) 2002
-------- -------- -------- -------- -------- (AMOUNTS
IN MILLIONS, EXCEPT PER SHARE AMOUNTS) SUMMARY
STATEMENT OF OPERATIONS DATA(1):
Revenue...............................................
$8,613 7,646 6,743 2,934 1,010 Operating income
(loss)(4)............................ $1,021 944 788
(841) 189 Realized and unrealized gains (losses) on
financial instruments,
net.................................... $ (279) 257
(1,284) (661) 2,127 Gains (losses) on dispositions,
net................... $ 607 (361) 1,411 1,128 (526)
Nontemporary declines in fair value of
investments.... $ (4) (449) (129) (22) (5,793)
Earnings (loss) from continuing
operations(4)......... $ 709 (43) 105 (1,144) (2,783)
Basic and diluted earnings (loss) from continuing
operations per common share(5): Liberty common
stock................................ $ .07 (.02) .04
(.42) (1.07) Liberty Capital common
stock........................ $ .24 -- -- -- --
Liberty Interactive common stock....................
$ .73 -- -- -- --
- ------------------------
(1) In the fourth quarter of 2006, we executed agreements to sell our interests
in OpenTV Corp. ("OPTV") and Ascent Entertainment Group ("AEG"), which is
the parent company of On Command Corporation, in separate transactions to
unrelated third parties. Our consolidated financial statements and selected
financial information have been prepared to reflect OPTV and AEG as
discontinued operations. Accordingly, the assets and liabilities, and
revenue, costs and expenses of OPTV and AEG have been excluded from the
respective captions in our consolidated financial statements and selected
financial information and have been reported under the heading of
discontinued operations. See note 5 to our consolidated financial statements
for additional information regarding OPTV and AEG.
(2) On September 17, 2003, we completed our acquisition of Comcast Corporation's
approximate 56% ownership in QVC, Inc. for approximately $7.9 billion,
comprised of cash, floating rate senior notes and shares of our Series A
common stock. When combined with our previous ownership of approximately 42%
of QVC, we owned 98% of QVC upon consummation of the transaction, which is
deemed to have occurred on September 1, 2003, and we have consolidated QVC's
financial position and results of operations since that date.
II-3
(3) Excludes the call option portion of our exchangeable debentures. See note 9
to our consolidated financial statements.
(4) Our 2003 operating loss and loss from continuing operations include a
$1,352 million goodwill impairment charge related to our wholly-owned
subsidiary, Starz Entertainment, LLC (formerly known as Starz Entertainment
Group LLC).
(5) Basic and diluted earnings per share have been calculated for Liberty
Capital and Liberty Interactive common stock for the period from May 10,
2006 to December 31, 2006. EPS has been calculated for Liberty common stock
for all periods prior to May 10, 2006.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
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 consolidated financial statements and the
notes thereto.
OVERVIEW
We are a holding company that owns controlling and non-controlling interests
in a broad range of video and on-line commerce, media, communications and
entertainment companies. Our more significant operating subsidiaries are
QVC, Inc. and Starz Entertainment, LLC. QVC markets and sells a wide variety of
consumer products in the United States and several foreign countries, primarily
by means of televised shopping programs on the QVC networks and via the Internet
through its domestic and international websites. Starz Entertainment provides
premium programming distributed by cable operators, direct-to-home satellite
providers, other distributors and via the Internet throughout the United States.
In 2006, we began implementing a strategy to convert passive investments
into operating businesses. We exchanged our cost investment in IDT Corporation
for IDT's subsidiary IDT Entertainment, and we signed an agreement with News
Corporation to exchange our investment in News Corporation for a News
Corporation subsidiary which would own News Corporations' 38.5% interest in The
DirecTV Group, three regional sports television networks and cash. In addition,
we acquired controlling interests in Provide Commerce, Inc., FUN
Technologies, Inc. and BuySeasons, Inc.
Our "Corporate and Other" segment includes our other consolidated
subsidiaries and corporate expenses. Our other consolidated subsidiaries include
Provide Commerce, Inc., Starz Media, LLC, FUN Technologies, Inc.,
TruePosition, Inc. and BuySeasons, Inc. Provide, which we acquired in
February 2006, operates an e-commerce marketplace of websites for perishable
goods, including flowers, gourmet foods, fruits and desserts. Starz Media, which
we acquired in the third quarter of 2006, is focused on developing, acquiring,
producing and distributing live-action, computer-generated and traditional
television animated productions for the home video, film, broadcast and
direct-to-consumer markets. FUN, in which we acquired a 55% common stock
interest in March 2006, operates websites that offer casual gaming, sports
information and fantasy sports services. TruePosition provides equipment and
technology that deliver location-based services to wireless users. BuySeasons,
which we acquired in August 2006, operates BuyCostumes.com, an on-line retailer
of costumes, accessories, decor and party supplies.
In addition to the foregoing businesses, we hold an approximate 21% interest
in Expedia, Inc., which we account for as an equity method investment, and we
continue to maintain significant investments and related derivative positions in
public companies such as News Corporation, IAC/ InterActiveCorp, Time
Warner Inc. and Sprint Nextel Corporation, which are accounted for at their
respective fair market value and are included in corporate and other.
II-4
TRACKING STOCKS
On May 9, 2006, we completed a restructuring pursuant to which we were
organized as a new holding company, and we became the new publicly traded parent
company of Liberty Media LLC, which was formerly known as Liberty Media
Corporation, and which we refer to as "Old Liberty". As a result of the
restructuring, all of the Old Liberty outstanding common stock was exchanged for
our two new tracking stocks, Liberty Interactive common stock and Liberty
Capital common stock. Each tracking stock issued in the restructuring is
intended to track and reflect the economic performance of one of two newly
designated groups, the Interactive Group and the Capital Group, respectively.
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. While
the Interactive Group and the Capital Group have separate collections of
businesses, assets and liabilities attributed to them, neither group is a
separate legal entity and therefore cannot own assets, issue securities or enter
into legally binding agreements. Holders of tracking stocks have no direct claim
to the group's stock or assets and are not represented by separate boards of
directors. Instead, holders of tracking stock are stockholders of the parent
corporation, with a single board of directors and subject to all of the risks
and liabilities of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which we have
attributed to it. The assets and businesses we have attributed to the
Interactive Group are those engaged in video and on-line commerce, and include
our subsidiaries QVC, Provide and BuySeasons and our interests in Expedia and
IAC/InterActiveCorp. The Interactive Group will also include such other
businesses that our board of directors may in the future determine to attribute
to the Interactive Group, including such other businesses as we may acquire for
the Interactive Group. In addition, we have attributed $3,108 million principal
amount (as of December 31, 2006) of our existing publicly-traded debt to the
Interactive Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of our businesses, assets and liabilities other than
those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group include our subsidiaries Starz
Entertainment, Starz Media, FUN and TruePosition, our equity affiliates GSN, LLC
and WildBlue Communications, Inc. and our interests in News Corporation, Time
Warner Inc. and Sprint Nextel Corporation. The Capital Group will also include
such other businesses that our board of directors may in the future determine to
attribute to the Capital Group, including such other businesses as we may
acquire for the Capital Group. In addition, we have attributed $4,580 million
principal amount (as of December 31, 2006) of our existing publicly-traded debt
to the Capital Group.
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed
financial information for our tracking stock groups.
DISCONTINUED OPERATIONS
In the fourth quarter of 2006, we committed to two separate transactions
pursuant to which we intend to sell our interests in OpenTV Corp and Ascent
Entertainment Group ("AEG") to unrelated third parties. The agreement to sell
OpenTV was executed in October 2006 and provided for us to sell all of our
controlling interest in OpenTV for approximately $132 million in cash. Pursuant
to an agreement with OpenTV, we would pay OpenTV up to approximately
$20 million of the sales proceeds on the first anniversary of the closing,
subject to the satisfaction of certain conditions. The transaction was completed
on January 16, 2007. The agreement to sell AEG, of which the primary asset is
100% of the common stock of On Command Corporation, was executed in
December 2006 and provides that if the transaction is completed, we would sell
our interest in AEG for $332 million in cash and 2.05 million shares of common
stock of the buyer valued at approximately $50 million. The transaction,
II-5
which is subject to regulatory approval and customary closing conditions, is
expected to close in mid-2007.
OpenTV and AEG each meet the criteria of Statement of Financial Accounting
Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS, for classification as assets held for sale as of December 31, 2006 and
were included in the Capital Group.
On July 21, 2005, we completed the spin off of our wholly-owned subsidiary,
Discovery Holding Company ("DHC"), to our shareholders. At the time of the spin
off, DHC's assets were comprised of our 100% ownership interest in Ascent Media
Group, our 50% ownership interest in Discovery Communications, Inc. and
$200 million in cash. The spin off is intended to qualify as a tax-free spin
off. We recognized no gain or loss in connection with the spin off due to the
pro rata nature of the distribution.
On June 7, 2004, we completed the spin off of our wholly-owned subsidiary,
Liberty Media International, Inc. ("LMI"), to our shareholders. Substantially
all of the assets and businesses of LMI were attributed to our International
Group segment. The spin off is intended to qualify as a tax-free spin off. For
accounting purposes, the spin off is deemed to have occurred on June 1, 2004,
and we recognized no gain or loss in connection with the spin off due to the pro
rata nature of the distribution.
During the fourth quarter of 2004, the executive committee of our board of
directors approved a plan to dispose of our approximate 56% ownership interest
in Maxide Acquisition, Inc. (d/b/a DMX Music, "DMX"). On February 14, 2005, DMX
commenced proceedings under Chapter 11 of the United States Bankruptcy Code. On
May 16, 2005, The Bankruptcy Court approved the sale of substantially all of the
operating assets of DMX to an independent third party. As a result of the DMX
bankruptcy filing, we deconsolidated DMX effective December 31, 2004.
Our consolidated financial statements and accompanying notes have been
prepared to reflect OpenTV, AEG, DHC, LMI and DMX as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of these subsidiaries have been excluded from the respective captions in
the accompanying consolidated balance sheets, statements of operations,
statements of comprehensive earnings (loss) and statements of cash flows and
have been reported under the heading of discontinued operations in such
consolidated financial statements.
STRATEGIES AND CHALLENGES OF BUSINESS UNITS
QVC has identified improved domestic growth and continued international
growth as key areas of focus in 2007. QVC's steps to achieving these goals will
include (1) continued domestic and international efforts to increase the number
of customers who have access to and use its service, (2) continued expansion of
brand selection and available domestic products and (3) continued development
and enhancement of the QVC websites to drive Internet commerce. The key
challenges to achieving these goals in both the U.S. and international markets
are (1) increased competition from other home shopping and Internet retailers,
(2) advancements in technology, such as video on demand and personal video
recorders, which may alter TV viewing habits, (3) maintaining favorable channel
positioning as digital TV penetration increases and (4) successful management
transition.
Starz Entertainment views (1) negotiating new affiliation agreements with
key distributors and (2) increasing subscribers to its on-demand and more
traditional cable and satellite delivered services, as well as its Internet
delivered services, as key initiatives in 2007. Starz Entertainment faces
several key obstacles in its attempt to meet these goals, including: (1) cable
operators' promotion of bundled service offerings rather than premium video
services; (2) the impact on viewer habits of new technologies such as video on
demand and personal video recorders; (3) continued consolidation in the
II-6
broadband and satellite distribution industries; and (4) an increasing number of
alternative movie and programming sources.
RESULTS OF OPERATIONS
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 of our reportable segments
categorized by the tracking stock group to which those segments are attributed.
The "corporate and other" category for each tracking stock group consists of
those assets within the category which are attributed to such tracking stock
group. For a more detailed discussion and analysis of the financial results of
the principal reporting segments of each tracking stock group, see "Interactive
Group" and "Capital Group" below.
II-7
CONSOLIDATED OPERATING RESULTS
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) REVENUE Interactive Group
QVC.....................................................
$7,074 6,501 5,687 Corporate and
Other..................................... 252 -- -- --
---- ----- ----- 7,326 6,501 5,687 ------ ----- -----
Capital Group Starz
Entertainment.....................................
1,033 1,004 963 Corporate and
Other..................................... 254 141 93 -
----- ----- ----- 1,287 1,145 1,056 ------ ----- -----
Consolidated Liberty..................................
$8,613 7,646 6,743 ====== ===== ===== OPERATING CASH
FLOW (DEFICIT) Interactive Group
QVC.....................................................
$1,656 1,422 1,230 Corporate and
Other..................................... 24 (5) (6) -
----- ----- ----- 1,680 1,417 1,224 ------ ----- -----
Capital Group Starz
Entertainment..................................... 186
171 239 Corporate and
Other..................................... (83) (47)
(72) ------ ----- ----- 103 124 167 ------ ----- -----
Consolidated Liberty..................................
$1,783 1,541 1,391 ====== ===== ===== OPERATING INCOME
(LOSS) Interactive Group
QVC.....................................................
$1,130 921 760 Corporate and
Other..................................... -- (5) (12)
------ ----- ----- 1,130 916 748 ------ ----- -----
Capital Group Starz
Entertainment..................................... 163
105 148 Corporate and
Other..................................... (272) (77)
(108) ------ ----- ----- (109) 28 40 ------ ----- -----
Consolidated Liberty..................................
$1,021 944 788 ====== ===== =====
REVENUE. Our consolidated revenue increased 12.6% in 2006 and 13.4% in
2005, as compared to the corresponding prior year. The 2006 increase is due
primarily to an 8.8% or $573 million increase at QVC and our 2006 acquisitions
of Provide ($220 million), Starz Media ($86 million), FUN ($42 million) and
BuySeasons ($32 million). The 2005 increase was driven primarily by growth of
14.3% at QVC and growth of 4.3% at Starz Entertainment. In addition,
TruePosition's revenue increased $77 million as it continued to increase
delivery and acceptance of its equipment in Cingular Wireless's markets. See
Management's Discussion and Analysis for the Interactive Group and the Capital
Group below for a more complete discussion of QVC's and Starz Entertainment's
results of operations.
II-8
In November 2006, TruePosition signed an amendment to its existing services
contract with Cingular Wireless that requires TruePosition to develop and
deliver additional software features. Because vendor specific objective evidence
related to the value of these additional features does not exist, TruePosition
is required to defer revenue recognition until all of the features have been
delivered. TruePosition estimates that these features will be delivered in the
first quarter of 2008. Accordingly, TruePosition will not recognize any revenue
under this contract until 2008. TruePosition recognized approximately
$105 million of revenue under this contract in 2006 prior to signing the
amendment.
OPERATING CASH FLOW. We define Operating Cash Flow as revenue less cost of
sales, operating expenses and selling, general and administrative ("SG&A")
expenses (excluding stock compensation). Our chief operating decision maker and
management team use this measure of performance in conjunction with other
measures to evaluate our businesses and make decisions about allocating
resources among our businesses. We believe this is an important indicator of the
operational strength and performance of our businesses, including each
business's ability to service debt and fund capital expenditures. In addition,
this measure allows us to view operating results, perform analytical comparisons
and benchmarking between businesses and identify strategies to improve
performance. This measure of performance excludes such costs as depreciation and
amortization, stock compensation, litigation settlements and impairments of
long-lived assets that are included in the measurement of operating income
pursuant to generally accepted accounting principles ("GAAP"). Accordingly,
Operating Cash Flow should be considered in addition to, but not as a substitute
for, operating income, net income, cash flow provided by operating activities
and other measures of financial performance prepared in accordance with GAAP.
See note 18 to the accompanying consolidated financial statements for a
reconciliation of Operating Cash Flow to Earnings (Loss) From Continuing
Operations Before Income Taxes and Minority Interest.
Consolidated Operating Cash Flow increased $242 million or 15.7% and
$150 million or 10.8% in 2006 and 2005, respectively, as compared to the
corresponding prior year. The 2006 increase is due to a $234 million or 16.5%
increase at QVC and a $15 million or 8.8% increase at Starz Entertainment.
Operating cash flow for Provide of $24 million and BuySeasons of $6 million were
offset by operating cash flow deficits for Starz Media of $24 million and FUN of
$11 million. The 2005 increase is due to a $192 million increase for QVC and a
$30 million improvement for TruePosition, partially offset by a $68 million
decrease for Starz Entertainment.
STOCK-BASED COMPENSATION. Stock-based compensation includes compensation
related to (1) options and stock appreciation rights ("SARs") for shares of our
common stock that are granted to certain of our officers and employees,
(2) phantom stock appreciation rights ("PSARs") granted to officers and
employees of certain of our subsidiaries pursuant to private equity plans and
(3) amortization of restricted stock grants.
Effective January 1, 2006, we adopted Statement of Financial Accounting
Standards No. 123R (revised 2004), "SHARE-BASED PAYMENT" ("Statement 123R").
Statement 123R requires that we amortize the grant date fair value of our stock
option and SAR awards that qualify as equity awards as stock compensation
expense over the vesting period of such awards. Statement 123R also requires
that we record our liability awards at fair value each reporting period and that
the change in fair value be reflected as stock compensation expense in our
consolidated statement of operations. Prior to adoption of Statement 123R, the
amount of expense associated with stock-based compensation was generally based
on the vesting of the related stock options and stock appreciation rights and
the market price of the underlying common stock, as well as the vesting of PSARs
and the equity value of the related subsidiary. The expense reflected in our
consolidated financial statements was based on the market price of the
underlying common stock as of the date of the financial statements.
In connection with our adoption of Statement 123R, we recorded an
$89 million transition adjustment, net of related income taxes of $31 million,
which primarily reflects the fair value of the
II-9
liability portion of QVC's stock option awards at January 1, 2006. The
transition adjustment is reflected in the accompanying consolidated statement of
operations as the cumulative effect of accounting change. In addition, we
recorded $67 million of stock compensation expense for the year ended
December 31, 2006, compared with $52 million for the comparable period in 2005.
The 2006 stock compensation expense is net of a $24 million credit related to
the terminations of QVC's stock option plan as described in note 13 to the
accompanying consolidated financial statements. As of December 31, 2006, the
total unrecognized compensation cost related to unvested Liberty equity awards
was approximately $59 million. Such amount will be recognized in our
consolidated statements of operations over a weighted average period of
approximately 2 years.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased in
2006 due to our acquisitions and capital expenditures partially offset by a
decrease at Starz Entertainment due to certain intangibles becoming fully
amortized. As the businesses we acquired in 2006 are not capital intensive, we
do not expect them to have a significant impact on our depreciation in the
future. Depreciation and amortization decreased slightly in 2005 due to certain
assets becoming fully amortized, partially offset by an increase in depreciable
assets due to capital expenditures.
IMPAIRMENT OF LONG-LIVED ASSETS. We acquired our interest in FUN in
March 2006. Subsequent to our acquisition, the market value of FUN's stock has
declined significantly due to the performance of certain of FUN's subsidiaries
and uncertainty surrounding government legislation of Internet gambling which we
believe the market perceives as potentially impacting FUN's skill gaming
business. In connection with our annual evaluation of the recoverability of
FUN's goodwill, we received a third-party valuation, which indicated that the
carrying value of FUN's goodwill exceeded its market value. Accordingly, we
recognized a $111 million impairment charge related to goodwill and a
$2 million impairment charge related to trademarks.
OPERATING INCOME (LOSS). We generated consolidated operating income of
$1,021 million, $944 million and $788 million in 2006, 2005 and 2004,
respectively. The 2006 increase is due to increases for QVC ($209 million) and
Starz Entertainment ($58 million), partially offset by losses generated by FUN
($140 million, including the above-described impairment charges) and Starz Media
($29 million) as well as an increase in corporate stock compensation expense of
$34 million due to the adoption of Statement 123R. Our operating income in 2005
is attributable to QVC ($921 million) and Starz Entertainment ($105 million)
partially offset by operating losses of our other consolidated subsidiaries and
corporate expenses.
II-10
OTHER INCOME AND EXPENSE
Components of Other Income (Expense) are as follows:
YEARS ENDED DECEMBER 31, ------------------------
------ 2006 2005 2004 -------- -------- --------
(AMOUNTS IN MILLIONS) Interest expense
Interactive
Group.........................................
$(417) (374) (385) Capital
Group.............................................
(263) (252) (234) ----- ---- ------ Consolidated
Liberty....................................
$(680) (626) (619) ===== ==== ====== Dividend and
interest income Interactive
Group......................................... $
40 35 20 Capital
Group.............................................
174 108 110 ----- ---- ------ Consolidated
Liberty.................................... $ 214
143 130 ===== ==== ====== Share of earnings of
affiliates Interactive
Group......................................... $
47 9 (3) Capital
Group.............................................
44 4 18 ----- ---- ------ Consolidated
Liberty.................................... $ 91
13 15 ===== ==== ====== Realized and unrealized
gains (losses) on financial instruments, net
Interactive
Group......................................... $
20 (17) (17) Capital
Group.............................................
(299) 274 (1,267) ----- ---- ------ Consolidated
Liberty....................................
$(279) 257 (1,284) ===== ==== ====== Gains
(losses) on dispositions, net Interactive
Group......................................... $
-- 40 7 Capital
Group.............................................
607 (401) 1,404 ----- ---- ------ Consolidated
Liberty.................................... $ 607
(361) 1,411 ===== ==== ====== Nontemporary
declines in fair value of investments Interactive
Group......................................... $
-- -- -- Capital
Group.............................................
(4) (449) (129) ----- ---- ------ Consolidated
Liberty.................................... $ (4)
(449) (129) ===== ==== ====== Other, net
Interactive
Group......................................... $
23 (38) 4 Capital
Group.............................................
(5) (1) (30) ----- ---- ------ Consolidated
Liberty.................................... $ 18
(39) (26) ===== ==== ======
INTEREST EXPENSE. Consolidated interest expense increased 8.6% and 1.1% for
the years ended December 31, 2006 and 2005, respectively, as compared to the
corresponding prior year. Interest expense attributable to the Interactive Group
increased 11.5% in 2006 due to increased borrowings by QVC, which were used to
retire certain of our publicly-traded debt and for repurchases of Liberty
Interactive common stock. The increase in 2005 is due to lower outstanding debt
balances, more than offset by higher interest rates on our variable rate debt.
DIVIDEND AND INTEREST INCOME. Interest income for the Capital Group
increased in 2006 due to higher invested cash balances. Interest and dividend
income for the year ended December 31, 2006 was comprised of interest income
earned on invested cash ($84 million), dividends on News Corporation common
stock ($57 million), dividends on other available-for-sale ("AFS") securities
($20 million) and
II-11
other ($13 million). If our exchange transaction with News Corporation described
below is completed as currently contemplated, we expect that our dividend income
from News Corporation in 2007 will be approximately 50% of the 2006 amount and
zero in subsequent years.
SHARE OF EARNINGS OF AFFILIATES. Our 2006 share of earnings of affiliates
are attributable to Expedia ($50 million) and other investees ($41 million). In
December 2006, we announced that we had entered into an exchange agreement with
News Corporation pursuant to which, if completed, we would exchange our
approximate 16.2% ownership interest in News Corporation for a subsidiary of
News Corporation, which would own News Corporation's approximate 38.5% interest
in The DirecTV Group, Inc., three regional sports television networks and
approximately $550 million in cash. Consummation of the exchange, which is
subject to various closing conditions, including approval by News Corporation's
shareholders, regulatory approval and receipt of a favorable ruling from the IRS
that the exchange is tax free, is expected in mid- 2007. Upon consummation, if
completed, we will account for our interest in The DirecTV Group using the
equity method of accounting, which could result in a significant increase in our
share of earnings of affiliates in future periods. In this regard, The DirecTV
Group announced that its net income for the year ended December 31, 2006 was
$1,420 million.
REALIZED AND UNREALIZED GAINS (LOSSES) ON FINANCIAL INSTRUMENTS. Realized
and unrealized gains (losses) on financial instruments are comprised of changes
in the fair value of the following:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) Exchangeable debenture call option
obligations.............. $(353) 172 (129) Equity
collars..............................................
(59) 311 (941) Borrowed
shares.............................................
(32) (205) (227) Put
options.................................................
-- (66) 2 Other
derivatives...........................................
165 45 11 ----- ---- ------ $(279) 257 (1,284) =====
==== ======
GAINS (LOSSES) ON DISPOSITIONS. Aggregate gains (losses) from dispositions
are comprised of the following.
YEARS ENDED DECEMBER 31, ---------------------------
--- TRANSACTION 2006 2005 2004 - ----------- -------
- -------- -------- (AMOUNTS IN MILLIONS) CAPITAL
GROUP Sale of investment in Court
TV.............................. $303 -- -- Sale of
investment in Freescale.............................
256 -- -- Sale of investment in Telewest Global,
Inc.................. -- (266) -- Sale of investment
in Cablevision S.A....................... -- (188) -
- Sale of News Corporation non-voting
shares.................. -- -- 844 Exchange
transaction with Comcast...........................
-- -- 387 Other,
net..................................................
48 53 173 ---- ---- ----- 607 (401) 1,404 ---- ----
----- INTERACTIVE GROUP Other,
net..................................................
-- 40 7 ---- ---- ----- $607 (361) 1,411 ==== ====
=====
II-12
In the above transactions, the gains or losses were calculated based upon
the difference between the carrying value of the assets relinquished, as
determined on an average cost basis, compared to the fair value of the assets
received. See notes 6, 11 and 15 to the accompanying consolidated financial
statements for a discussion of the foregoing transactions.
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS. During 2006, 2005 and
2004, we determined that certain of our cost investments experienced
other-than-temporary declines in value. As a result, the cost bases of such
investments were adjusted to their respective fair values based primarily on
quoted market prices at the date each adjustment was deemed necessary. These
adjustments are reflected as nontemporary declines in fair value of investments
in our consolidated statements of operations. The impairment recorded in 2005
includes $352 million related to our investment in News Corporation voting
shares.
INCOME TAXES. Our effective tax rate was 26.2% in 2006, 74.6% in 2005 and
60.2% in 2004. Our 2006 rate is less than the U.S. federal income tax rate of
35% due, in part, to a deferred tax benefit we recognized when we decided to
effect a restructuring transaction which was effective on April 1, 2006, and
which enabled us to include TruePosition in our Federal consolidated tax group
on a prospective basis. As a result of this decision and considering our overall
tax position, we reversed $89 million of valuation allowance recorded against
TruePosition's net deferred tax assets into our statement of operations as a
deferred tax benefit in 2006. This valuation allowance did not relate to net
operating loss carryforwards or some other future tax deduction of TruePosition,
but rather related to temporary differences caused by revenue and cost amounts
that were recognized for tax purposes in prior periods, but have been deferred
for financial reporting purposes until future periods. In addition, we recorded
deferred tax benefits of $105 million for changes in our estimated foreign tax
rate based on our projections of our ability to use foreign tax credits in the
future and $25 million for changes in our estimated state tax rate used to
calculate our deferred tax liabilities. These benefits were partially offset by
current tax expense of $43 million on the gain on sale of Court TV for which we
had higher book basis than tax basis and $39 million for impairment of goodwill
that is not deductible for tax purposes. In addition, we recorded state
($34 million) and foreign ($20 million) tax expense.
Our effective tax rate in 2005 was greater than the U.S. federal income tax
rate of 35% primarily due to a tax benefit of $147 million that we recorded as a
result of a change in our estimated effective state and foreign tax rates. In
the third quarter of 2005, we assessed our weighted average state tax rate in
connection with our spin off of Discovery Holding Company. As a result of this
assessment, we decreased our state tax rate used in calculating the amount of
our deferred tax liabilities and recognized a deferred income tax benefit of
$131 million. Also in 2005, we reduced our estimated foreign tax rate related to
QVC and recognized a tax benefit of $16 million. These tax benefits were
partially offset by our foreign tax expense and an increase in our valuation
allowance for deferred tax assets of subsidiaries that we do not consolidate for
tax purposes. Our effective tax rate in 2004 differed from the U.S. federal
income tax rate of 35% primarily due to foreign and state taxes.
Historically, we have not made federal income tax payments due to our
ability to use prior year net operating and capital losses carryforwards to
offset current year taxable income. However, based on current projections, we
believe that we will use our available net operating and capital losses in 2007,
and that we will start making federal income tax payments to the extent that we
continue to generate taxable income in the future. These payments could prove to
be significant.
NET EARNINGS (LOSS). Our net earnings (loss) was $840 million, ($33)
million and $46 million for the years ended December 31, 2006, 2005 and 2004,
respectively, and was the result of the above-described fluctuations in our
revenue and expenses. In addition, we recognized earnings (loss) from
discontinued operations of $220 million, $10 million and ($59) million for the
years ended December 31, 2006, 2005 and 2004, respectively. Included in our 2006
earnings from discontinued operations are tax benefits of
II-13
$236 million related to our excess outside tax basis in OPTV and AEG over our
basis for financial reporting.
LIQUIDITY AND CAPITAL RESOURCES
While the Interactive Group and the Capital Group are not separate legal
entities and the assets and liabilities attributed to each group remain assets
and liabilities of our consolidated company, we manage the liquidity and
financial resources of each group separately. Keeping in mind that assets of one
group may be used to satisfy liabilities of the other group, the following
discussion assumes, consistent with management expectations, that future
liquidity needs of each group will be funded by the financial resources
attributed to each respective group.
The following are potential sources of liquidity for each group to the
extent the identified asset or transaction has been attributed to such group:
available cash balances, cash generated by the operating activities of our
privately-owned subsidiaries (to the extent such cash exceeds the working
capital needs of the subsidiaries and is not otherwise restricted), proceeds
from asset sales, monetization of our public investment portfolio (including
derivatives), debt and equity issuances, and dividend and interest receipts.
INTERACTIVE GROUP. During the year ended December 31, 2006, the Interactive
Group's primary uses of cash were the retirement of $1,369 million principal
amount of senior notes that matured in September 2006, funding the acquisition
of Provide ($465 million), repurchases of QVC common stock ($331 million),
capital expenditures ($259 million), tax payments to the Capital Group
($173 million), stock compensation payments ($111 million) and the repurchase of
outstanding Liberty Interactive common stock. Our board of directors has
authorized a share repurchase program pursuant to which we may repurchase up to
$2 billion of outstanding shares of Liberty Interactive common stock in the open
market or in privately negotiated transactions, from time to time, subject to
market conditions. During the period from May 10, 2006 to December 31, 2006, we
repurchased 51.6 million shares of Liberty Interactive Series A common stock for
aggregate cash consideration of $954 million pursuant to this share repurchase
program. We may alter or terminate the stock repurchase program at any time.
The Interactive Group's uses of cash in 2006 were primarily funded with cash
from operations and borrowings under QVC's credit facilities. As of
December 31, 2006, the Interactive Group had a cash balance of $946 million.
The projected uses of Interactive Group cash for 2007 include approximately
$430 million for interest payments on QVC debt and parent debt attributed to the
Interactive Group, $350 million for capital expenditures, additional tax
payments to the Capital Group and additional repurchases of Liberty Interactive
common stock. In addition, we may make additional investments in existing or new
businesses and attribute such investments to the Interactive Group. However, we
do not have any commitments to make new investments at this time.
Effective March 3, 2006, QVC refinanced its existing bank credit facility
with a new $3.5 billion bank credit facility, which was subsequently amended on
October 4, 2006 (the "March 2006 Credit Agreement"). The March 2006 Credit
Agreement is comprised of an $800 million U.S. dollar term loan that was drawn
at closing, an $800 million U.S. dollar term loan that was drawn on
September 18, 2006, a $600 million multi-currency term loan that was drawn in
U.S. dollars on September 18, 2006, a $650 million U.S. dollar revolving loan
and a $650 million multi-currency revolving loan. The foregoing multi-currency
loans can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound
sterling or euros. All loans are due and payable on March 3, 2011, and accrue
interest at a rate equal to (i) LIBOR for the interest period selected by QVC
plus a margin that varies based on QVC's leverage ratio or (ii) the higher of
the Federal Funds Rate plus 0.50% or the prime rate announced by JP Morgan Chase
Bank, N.A. from time to time. QVC is required to pay a commitment fee quarterly
in arrears on the unused portion of the commitments.
II-14
On October 4, 2006, QVC entered into a new credit agreement (the
"October 2006 Credit Agreement"), which provides for an additional unsecured
$1.75 billion credit facility, consisting of an $800 million initial term loan
made on October 13, 2006 and $950 million of delayed draw term loans to be made
after closing from time to time upon the request of QVC. The delayed draw term
loans are available until September 30, 2007 and are subject to reductions in
the principal amount available starting on March 31, 2007. The loans will bear
interest at a rate equal to (i) LIBOR for the interest period selected by QVC
plus a margin that varies based on QVC's leverage ratio or (ii) the higher of
the Federal Funds Rate plus 0.50% or the prime rate announced by Wachovia Bank,
N.A. from time to time. The loans are scheduled to mature on October 4, 2011.
Aggregate commitments under the March 2006 Credit Agreement and the
October 2006 Credit Agreement are $5.25 billion, and outstanding borrowings
aggregated $3.225 billion at December 31, 2006. QVC's ability to borrow the
unused capacity is dependent on its continuing compliance with the covenants
contained in the agreements at the time of, and after giving effect to, a
requested borrowing.
CAPITAL GROUP. During the year ended December 31, 2006, the Capital Group's
primary uses of cash were the acquisition of Starz Media ($290 million) and FUN
($200 million), loans to WildBlue Communications, an equity affiliate
($187 million), and net cash transfers of $293 million to the Interactive Group
prior to the Restructuring. These investing activities were funded with
available cash on hand and proceeds from derivative settlements and asset sales.
The projected uses of Capital Group cash for 2007 include approximately
$130 million for interest payments on debt attributed to the Capital Group. In
addition, we may make additional investments in existing or new businesses and
attribute such investments to the Capital Group. However, we do not have any
commitments to make new investments at this time.
In connection with the issuance of our tracking stocks, our board of
directors authorized a share repurchase program pursuant to which we may
repurchase up to $1 billion of outstanding shares of Liberty Capital common
stock in the open market or in privately negotiated transactions, from time to
time, subject to market conditions. We may alter or terminate the stock
repurchase program at any time. As of December 31, 2006, we have not repurchased
any shares of Liberty Capital common stock pursuant to this repurchase program.
We expect that the Capital Group's investing and financing activities will
be funded with a combination of cash on hand, cash proceeds from sales of
OpenTV, AEG and our exchange transaction with News Corporation, cash provided by
operating activities, tax payments from the Interactive Group, proceeds from
collar expirations and dispositions of non-strategic assets. At December 31,
2006, the Capital Group's sources of liquidity include $2,288 million in cash
and marketable debt securities and $7,386 million of non-strategic AFS
securities including related derivatives. To the extent the Capital Group
recognizes any taxable gains from the sale of assets or the expiration of
derivative instruments, we may incur current tax expense and be required to make
tax payments, thereby reducing any cash proceeds attributable to the Capital
Group.
Our derivatives ("AFS Derivatives") related to certain of our AFS
investments provide the Capital Group with an additional source of liquidity.
Based on the put price and assuming we deliver owned or borrowed shares to
settle each of the AFS Derivatives as they mature and excluding any provision
for income taxes, the Capital Group would have attributed to it cash proceeds of
approximately $322 million in 2007, zero in 2008, $1,180 million in 2009,
$1,680 million in 2010, $446 million in 2011 and $866 million in 2013 upon
settlement of its AFS Derivatives.
Prior to the maturity of the equity collars, the terms of certain of the
equity collars allow borrowings against the future put option proceeds at LIBOR
or LIBOR plus an applicable spread, as the case may be. As of December 31, 2006,
such borrowing capacity aggregated approximately $4,494 million. Such borrowings
would reduce the cash proceeds upon settlement noted in the
II-15
preceding paragraph. In the event we complete our exchange transaction with News
Corporation as currently contemplated, such borrowing capacity would be reduced
by $916 million.
OFF-BALANCE SHEET ARRANGEMENTS AND AGGREGATE CONTRACTUAL OBLIGATIONS
CAPITAL GROUP
The following contingencies and obligations have been attributed to the
Capital Group:
Starz Entertainment has entered into agreements with a number of motion
picture producers which obligate Starz Entertainment to pay fees ("Programming
Fees") for the rights to exhibit certain films that are released by these
producers. The unpaid balance under agreements for film rights related to films
that were available for exhibition by Starz Entertainment at December 31, 2006
is reflected as a liability in the accompanying consolidated balance sheet. The
balance due as of December 31, 2006 is payable as follows: $110 million in 2007;
$9 million in 2008; and $8 million thereafter.
Starz Entertainment has also contracted to pay Programming Fees for the
rights to exhibit films that have been released theatrically, but are not
available for exhibition by Starz Entertainment until some future date. These
amounts have not been accrued at December 31, 2006. Starz Entertainment's
estimate of amounts payable under these agreements is as follows: $538 million
in 2007; $148 million in 2008; $93 million in 2009; $87 million in 2010;
$31 million in 2011 and $67 million thereafter.
In addition, Starz Entertainment is obligated to pay Programming Fees for
all qualifying films that are released theatrically in the United States by
studios owned by The Walt Disney Company through 2009, all qualifying films that
are released theatrically in the United States by studios owned by Sony Pictures
Entertainment through 2010 and all qualifying films produced for theatrical
release in the United States by Revolution Studios through 2006. Films are
generally available to Starz Entertainment for exhibition 10 - 12 months after
their theatrical release. The Programming Fees to be paid by Starz Entertainment
are based on the quantity and domestic theatrical exhibition receipts of
qualifying films. As these films have not yet been released in theatres, Starz
Entertainment is unable to estimate the amounts to be paid under these output
agreements. However, such amounts are expected to be significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, Starz Entertainment has agreed to pay Sony a
total of $190 million in four annual installments of $47.5 million beginning in
2011. This option expires December 31, 2007. If made, Starz Entertainment's
payments to Sony would be amortized ratably over the extension period beginning
in 2011. An extension of this agreement would also result in the payment by
Starz Entertainment of Programming Fees for qualifying films released by Sony
during the extension period. If Disney elects to extend its contract, Starz
Entertainment is not obligated to pay any amounts in excess of its Programming
Fees for qualifying films released by Disney during the extension period.
Liberty guarantees Starz Entertainment's film licensing obligations under
certain of its studio output agreements. At December 31, 2006, Liberty's
guarantees for studio output obligations for films released by such date
aggregated $695 million. While the guarantee amount for films not yet released
is not determinable, such amount is expected to be significant. As noted above,
Starz Entertainment has recognized the liability for a portion of its
obligations under the output agreements. As this represents a commitment of
Starz Entertainment, a consolidated subsidiary of ours, we have not recorded a
separate liability for our guarantees of these obligations.
Since the date we issued our exchangeable debentures, we have claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which we could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in us claiming interest deductions significantly in excess
of the cash interest
II-16
currently paid on our exchangeable debentures. In this regard, we have deducted
$2,218 million in cumulative interest expense associated with the exchangeable
debentures since our 2001 split off from AT&T Corp. Of that amount,
$629 million represents cash interest payments. Interest deducted in prior years
on our exchangeable debentures has contributed to net operating losses ("NOLs")
that may be carried to offset taxable income in 2006 and later years. These NOLs
and current interest deductions on our exchangeable debentures are being used to
offset taxable income currently being generated.
The IRS has issued Technical Advice Memorandums ("TAMs") challenging the
current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge our tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to our
reported total tax expense as the resulting increase in current tax expense
would be offset by a decrease in our deferred tax expense. However, we would be
required to make current federal income tax payments and may be required to make
interest payments to the IRS. These payments could prove to be significant.
Pursuant to a tax sharing agreement (the "AT&T Tax Sharing Agreement")
between us and AT&T when we were a subsidiary of AT&T, we received a cash
payment from AT&T in periods when we generated taxable losses and such taxable
losses were utilized by AT&T to reduce its consolidated income tax liability. To
the extent such losses were not utilized by AT&T, such amounts were available to
reduce federal taxable income generated by us in future periods, similar to a
net operating loss carryforward. While we were a subsidiary of AT&T, we recorded
our stand-alone tax provision on a separate return basis. Subsequent to our spin
off from AT&T, if adjustments are made to amounts previously paid under the AT&T
Tax Sharing Agreement, such adjustments are reflected as adjustments to
additional paid-in capital. During the period from March 10, 1999 to
December 31, 2002, we received cash payments from AT&T aggregating $670 million
as payment for our taxable losses that AT&T utilized to reduce its income tax
liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with our
split off from AT&T, AT&T was required to pay us an amount equal to 35% of the
amount of the net operating loss carryforward ("TCI NOLs") reflected in TCI's
final federal income tax return that had not been used as an offset to our
obligations under the AT&T Tax Sharing Agreement and that had been, or were
reasonably expected to be, utilized by AT&T. In connection with our split off
from AT&T, we received an $803 million payment for the TCI NOLs and recorded
such payment as an increase to additional paid-in capital. We were not paid for
certain of the TCI NOLs ("SRLY NOLs") due to limitations and uncertainty
regarding AT&T's ability to use them to offset taxable income in the future. In
the event AT&T was ultimately able to use any of the SRLY NOLs, they would be
required to pay us 35% of the amount of the SRLY NOLs used. In the fourth
quarter of 2004 and in connection with the completion of an IRS audit of TCI's
tax return for 1994, it was determined that we were required to recognize
additional taxable income related to the recapitalization of one of our
investments resulting in a tax liability of approximately $30 million. As a
result of the tax assessment, we also received a corresponding amount of
additional tax basis in the investment. However, we were able to cause AT&T to
use a portion of the SRLY NOLs to offset this taxable income, the benefit of
which resulted in the elimination of the $30 million tax liability and an
increase to additional paid-in capital.
In the fourth quarter of 2004, AT&T requested a refund from us of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by our losses. AT&T has asserted that our losses caused AT&T to pay $70 million
in alternative minimum tax ("AMT") that it would not have been otherwise
required to pay had our losses not been included in its return. In 2004, we
estimated that we may ultimately pay AT&T up to $30 million of the requested
$70 million because we believed AT&T received an AMT credit of $40 million
against income taxes resulting from the AMT previously paid. Accordingly, we
accrued a $30 million liability with an offsetting reduction of additional
paid-in capital. The net effect of the
II-17
completion of the IRS tax audit noted above (including the benefit derived from
AT&T for the utilization of the SRLY NOLs) and our accrual of amounts due to
AT&T was an increase to our deferred tax assets and an increase to our other
liabilities.
In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by our losses. In addition, the information
provided to us in connection with AT&T's request showed that AT&T had not yet
claimed a credit for AMT previously paid. Accordingly, in the fourth quarter of
2005, we increased our accrual by approximately $40 million (with a
corresponding reduction of additional paid-in capital) representing our estimate
of the amount we may ultimately pay (excluding accrued interest, if any) to AT&T
as a result of this request. Although we have not reduced our accrual for any
future refunds, we believe we are entitled to a refund when AT&T is able to
realize a benefit in the form of a credit for the AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by our losses. We have reviewed this
claim and we believe that our accrual as of December 31, 2005 is adequate.
Accordingly, no additional accrual was made for AT&T's March 2006 request.
Although for accounting purposes we have accrued a portion of the amounts
claimed by AT&T to be owed by us under the AT&T Tax Sharing Agreement, we
believe there are valid defenses or set-off or similar rights in our favor that
may cause the total amount that we owe AT&T to be less than the amounts accrued;
and under certain interpretations of the AT&T Tax Sharing Agreement, we may be
entitled to further reimbursements from AT&T.
CAPITAL GROUP AND INTERACTIVE GROUP
In connection with agreements for the sale of certain assets, we typically
retain liabilities that relate to events occurring prior to the sale, such as
tax, environmental, litigation and employment matters. We generally indemnify
the purchaser in the event that a third party asserts a claim against the
purchaser that relates to a liability retained by us. These types of
indemnification guarantees typically extend for a number of years. We are unable
to estimate the maximum potential liability for these types of indemnification
guarantees as the sale agreements typically do not specify a maximum amount and
the amounts are dependent upon the outcome of future contingent events, the
nature and likelihood of which cannot be determined at this time. Historically,
we have not made any significant indemnification payments under such agreements
and no amount has been accrued in the accompanying consolidated financial
statements with respect to these indemnification guarantees.
We have contingent liabilities related to legal and tax proceedings and
other matters arising in the ordinary course of business. Although it is
reasonably possible we 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
consolidated financial statements.
II-18
Information concerning the amount and timing of required payments, both
accrued and off-balance sheet, under our contractual obligations at
December 31, 2006 is summarized below:
PAYMENTS DUE BY PERIOD -----------------
--------------------------------------
LESS THAN AFTER TOTAL 1 YEAR 1-3 YEARS
4-5 YEARS 5 YEARS -------- --------- ---
------ --------- -------- (AMOUNTS IN
MILLIONS) ATTRIBUTED CAPITAL GROUP
CONTRACTUAL OBLIGATIONS Long-term
debt(1)................................
$ 4,738 103 1,812 66 2,757 Interest
payments(2).............................
2,520 128 235 218 1,939 Long-term
derivative instruments.................
1,901 1,484 -- 155 262 Operating lease
obligations...................... 61 10
18 12 21 Programming
Fees(3)..............................
1,091 648 258 118 67 Purchase orders and
other obligations............ 21 21 -- -
- -- ------- ----- ----- ----- -----
Total Capital
Group............................ 10,332
2,394 2,323 569 5,046 ------- ----- ----
- ----- ----- ATTRIBUTED INTERACTIVE
GROUP CONTRACTUAL OBLIGATIONS Long-term
debt(1)................................
6,400 11 925 3,243 2,221 Interest
payments(2).............................
3,987 427 825 570 2,165 Long-term
derivative instruments.................
9 -- -- 9 -- Operating lease
obligations...................... 72 18
27 17 10 Purchase orders and other
obligations............ 1,013 1,013 -- -
- -- ------- ----- ----- ----- -----
Total Interactive
Group........................ 11,481
1,469 1,777 3,839 4,396 ------- ----- --
--- ----- ----- CONSOLIDATED CONTRACTUAL
OBLIGATIONS Long-term
debt(1)................................
11,138 114 2,737 3,309 4,978 Interest
payments(2).............................
6,507 555 1,060 788 4,104 Long-term
derivative instruments.................
1,910 1,484 -- 164 262 Operating lease
obligations...................... 133 28
45 29 31 Programming
Fees(3)..............................
1,091 648 258 118 67 Purchase orders and
other obligations............ 1,034
1,034 -- -- -- ------- ----- ----- -----
----- Total
consolidated.............................
$21,813 3,863 4,100 4,408 9,442 =======
===== ===== ===== =====
- ------------------------
(1) Includes all debt instruments, including the call option feature related to
our exchangeable debentures. Amounts are stated at the face amount at
maturity and may differ from the amounts stated in our consolidated balance
sheet to the extent debt instruments (i) were issued at a discount or
premium or (ii) have elements which are reported at fair value in our
consolidated balance sheet. Also includes capital lease obligations. Amounts
do not assume additional borrowings or refinancings of existing debt.
(2) Amounts (i) are based on our outstanding debt at December 31, 2006,
(ii) assume the interest rates on our floating rate debt remain constant at
the December 31, 2006 rates and (iii) assume that our existing debt is
repaid at maturity.
(3) Does not include Programming Fees for films not yet released theatrically,
as such amounts cannot be estimated.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS, AN
AMENDMENT OF FASB STATEMENTS NO. 133 AND 140." Statement 155, among other
things, amends Statement of Financial Accounting Standards No. 133, "ACCOUNTING
FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES," and permits fair value
II-19
remeasurement of hybrid financial instruments that contain an embedded
derivative that otherwise would require bifurcation. Statement 155 is effective
after the beginning of an entity's first fiscal year that begins after
September 15, 2006. We intend to adopt the provisions of Statement 155 effective
January 1, 2007 and to account for our senior exchangeable debentures at fair
value rather than bifurcating such debentures into a debt instrument and a
derivative instrument as required by Statement 133. If we had adopted Statement
155 as of December 31, 2006, we would have recorded an increase to long-term
debt of $1.9 billion, a decrease to long-term derivative instruments of
$1.3 billion and an increase to accumulated deficit of $600 million.
In June 2006, the FASB issued FASB Interpretation No. 48, "ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109." FIN
48 clarifies the accounting for uncertainty in income taxes recognized in a
company's financial statements, and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 is
effective for fiscal years beginning after December 15, 2006. While we have not
completed our evaluation of the impact of FIN 48 on our financial statements, we
believe that the application of FIN 48 will result in the derecognition of
certain tax liabilities currently reflected in our consolidated balance sheet
with a corresponding decrease to our accumulated deficit. We are unable to
quantify the amount of these adjustments at this time.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "FAIR VALUE MEASUREMENTS", which defines fair value,
establishes a framework for measuring fair value under GAAP and expands
disclosures about fair value measurements. Statement 157 applies to other
accounting pronouncements that require or permit fair value measurements. The
new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those fiscal
years. We are currently evaluating the potential impact of the adoption of
Statement 157 on our consolidated balance sheet, statements of operations and
comprehensive earnings (loss), and statements of cash flows.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115." Statement 159
permits entities to choose to measure many financial instruments, such as
available-for-sale securities, and certain other items at fair value and to
recognize the changes in fair value of such instruments in the entity's
statement of operations. Currently under Statement of Financial Accounting
Standards No. 115, entities are required to recognize changes in fair value of
available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15, 2007. We are currently
evaluating the potential impacts of Statement 159 on our financial statements
and have not made a determination as to which of our financial instruments, if
any, we will choose to apply the provisions of Statement 159.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our financial statements in conformity with GAAP requires
us 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. Listed below are the
accounting estimates that we believe are critical to our financial statements
due to the degree of uncertainty regarding the estimates or assumptions involved
and the magnitude of the asset, liability, revenue or expense being reported.
All of these accounting estimates and assumptions, as well as the resulting
impact to our financial statements, have been discussed with our audit
committee.
CARRYING VALUE OF INVESTMENTS. Our cost and equity method investments
comprise a significant portion of our total assets at each of December 31, 2006
and 2005. We account for these investments
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pursuant to Statement of Financial Accounting Standards No. 115, Statement of
Financial Accounting Standards No. 142, Accounting Principles Board Opinion
No. 18, EITF Topic 03-1 and SAB No. 59. These accounting principles require us
to periodically evaluate our investments to determine if decreases in fair value
below our cost bases are other than temporary or "nontemporary." If a decline in
fair value is determined to be nontemporary, we are required to reflect such
decline in our statement of operations. Nontemporary declines in fair value of
our cost investments are recognized on a separate line in our statement of
operations, and nontemporary declines in fair value of our equity method
investments are included in share of losses of affiliates in our statement of
operations.
The primary factors we consider in our determination of whether declines in
fair value are nontemporary are the length of time that the fair value of the
investment is below our carrying value; and the financial condition, operating
performance and near term prospects of the investee. In addition, we consider
the reason for the decline in fair value, be it general market conditions,
industry specific or investee specific; analysts' ratings and estimates of
12 month share price targets for the investee; changes in stock price or
valuation subsequent to the balance sheet date; and our intent and ability to
hold the investment for a period of time sufficient to allow for a recovery in
fair value. Fair value of our publicly traded investments is based on the market
prices of the investments at the balance sheet date. We estimate the fair value
of our other cost and equity investments using a variety of methodologies,
including cash flow multiples, discounted cash flow, per subscriber values, or
values of comparable public or private businesses. Impairments are calculated as
the difference between our carrying value and our estimate of fair value. As our
assessment of the fair value of our investments and any resulting impairment
losses and the timing of when to recognize such charges requires a high degree
of judgment and includes significant estimates and assumptions, actual results
could differ materially from our estimates and assumptions.
Our evaluation of the fair value of our investments and any resulting
impairment charges are made as of the most recent balance sheet date. Changes in
fair value subsequent to the balance sheet date due to the factors described
above are possible. Subsequent decreases in fair value will be recognized in our
statement of operations in the period in which they occur to the extent such
decreases are deemed to be nontemporary. Subsequent increases in fair value will
be recognized in our statement of operations only upon our ultimate disposition
of the investment.
At December 31, 2006, we had unrealized holding losses of $1 million related
to certain of our AFS equity securities.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS. We use various derivative
instruments, including equity collars, written put and call options, interest
rate swaps and foreign exchange contracts, to manage fair value and cash flow
risk associated with many of our investments, some of our debt and transactions
denominated in foreign currencies. We account for these derivative instruments
pursuant to Statement 133 and Statement of Financial Accounting Standards
No. 149, "AMENDMENT OF STATEMENT NO. 133 ON DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES." Statement 133 and Statement 149 require that all derivative
instruments be recorded on the balance sheet at fair value. Changes in the fair
value of our derivatives are included in realized and unrealized gains (losses)
on derivative instruments in our statement of operations.
We use the Black-Scholes model to estimate the fair value of our derivative
instruments that we use to manage market risk related to certain of our AFS
securities. The Black-Scholes model incorporates a number of variables in
determining such fair values, including expected volatility of the underlying
security and an appropriate discount rate. We obtain volatility rates from
independent sources based on the expected volatility of the underlying security
over the term of the derivative instrument. The volatility assumption is
evaluated annually to determine if it should be adjusted, or more often if there
are indications that it should be adjusted. We obtain a discount rate at the
inception of the derivative instrument and update such rate each reporting
period based on our
II-21
estimate of the discount rate at which we could currently settle the derivative
instrument. At December 31, 2006, the expected volatilities used to value our
AFS Derivatives generally ranged from 19% to 26% and the discount rates ranged
from 5.1% to 5.4%. Considerable management judgment is required in estimating
the Black-Scholes variables. Actual results upon settlement or unwinding of our
derivative instruments may differ from these estimates.
Changes in our assumptions regarding (1) the discount rate and (2) the
volatility rates of the underlying securities that are used in the Black-Scholes
model would have the most significant impact on the valuation of our AFS
Derivatives. The table below summarizes changes in these assumptions and the
resulting impacts on our estimate of fair value.
ESTIMATED AGGREGATE FAIR VALUE OF
AFS DOLLAR VALUE ASSUMPTION
DERIVATIVES CHANGE - ---------- --
----------------- ------------
(AMOUNTS IN MILLIONS) As recorded
at December 31,
2006............................ $
983 -- 25% increase in discount
rate...............................
$ 830 (153) 25% decrease in
discount
rate...............................
$1,136 153 25% increase in
expected
volatilities.......................
$ 925 (58) 25% decrease in
expected
volatilities.......................
$1,060 77
CARRYING VALUE OF LONG-LIVED ASSETS. Our property and equipment, intangible
assets and goodwill (collectively, our "long-lived assets") also comprise a
significant portion of our total assets at December 31, 2006 and 2005. We
account for our long-lived assets pursuant to Statement of Financial Accounting
Standards No. 142 and Statement of Financial Accounting Standards No. 144. These
accounting standards require that we periodically, or upon the occurrence of
certain triggering events, assess the recoverability of our long-lived assets.
If the carrying value of our long-lived assets exceeds their estimated fair
value, we are required to write the carrying value down to fair value. Any such
writedown is included in impairment of long-lived assets in our consolidated
statement of operations. A high degree of judgment is required to estimate the
fair value of our long-lived assets. We may use quoted market prices, prices for
similar assets, present value techniques and other valuation techniques to
prepare these estimates. In addition, we may obtain independent third-party
appraisals in certain circumstances. We may need to make estimates of future
cash flows and discount rates as well as other assumptions in order to implement
these valuation techniques. Accordingly, any value ultimately derived from our
long-lived assets may differ from our estimate of fair value. As each of our
operating segments has long-lived assets, this critical accounting policy
affects the financial position and results of operations of each segment.
RETAIL RELATED ADJUSTMENTS AND ALLOWANCES. QVC records adjustments and
allowances for sales returns, inventory obsolescence and uncollectible
receivables. Each of these adjustments is estimated based on historical
experience. Sales returns are calculated as a percent of sales and are netted
against revenue in our statement of operations. For the years ended
December 31, 2006 and 2005, sales returns represented 18.5% and 18.0% of QVC's
gross product revenue, respectively. The inventory obsolescence is calculated as
a percent of QVC's inventory at the end of a reporting period, and is included
in cost of goods sold in our statement of operations. At December 31, 2006,
QVC's inventory is $915 million and the obsolescence adjustment is $95 million.
QVC's allowance for doubtful accounts is calculated as a percent of accounts
receivable at the end of a reporting period, and the change in such allowance is
recorded as bad debt expense in our statement of operations. At December 31,
2006, QVC's trade accounts receivable are $973 million, net of the allowance for
doubtful accounts of $60 million. Each of these adjustments requires management
judgment and may not reflect actual results.
II-22
INCOME TAXES. We are required to estimate the amount of tax payable or
refundable for the current year and the deferred income tax liabilities and
assets for the future tax consequences of events that have been reflected in our
financial statements or tax returns for each taxing jurisdiction in which we
operate. This process requires our management to make judgments regarding the
timing and probability of the ultimate tax impact of the various agreements and
transactions that we enter into. Based on these judgments we may record tax
reserves or adjustments to valuation allowances on deferred tax assets to
reflect the expected realizability of future tax benefits. Actual income taxes
could vary from these estimates due to future changes in income tax law,
significant changes in the jurisdictions in which we operate, our inability to
generate sufficient future taxable income or unpredicted results from the final
determination of each year's liability by taxing authorities. These changes
could have a significant impact on our financial position.
INTERACTIVE GROUP
On May 9, 2006, our stockholders approved our corporate restructuring which,
among other things, resulted in the creation of two tracking stocks, one of
which is intended to reflect the separate performance of the Interactive Group.
The Interactive Group consists of our subsidiaries QVC, Provide and BuySeasons,
our interests in IAC/InterActiveCorp and Expedia and $3,108 million principal
amount (as of December 31, 2006) of our existing publicly-traded debt.
The following discussion and analysis provides information concerning the
results of operations and financial condition of the Interactive Group, which is
principally comprised of QVC. Although our restructuring was not completed until
May 9, 2006, the following discussion is presented as though the restructuring
had been completed on January 1, 2004. The results of operations of Provide and
BuySeasons are included in Corporate and Other since their respective date of
acquisition in the tables below. Fluctuations in Corporate and Other from 2005
to 2006 are due primarily to the acquisitions of Provide and BuySeasons in 2006.
This discussion should be read in conjunction with (1) our consolidated
financial statements and notes thereto included elsewhere in this Annual Report
on Form 10-K and (2) the Unaudited Attributed Financial Information for Tracking
Stock Groups filed as Exhibit 99.1 to this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) REVENUE
QVC.........................................................
$7,074 6,501 5,687 Corporate and
Other......................................... 252 -- -- --
---- ----- ----- $7,326 6,501 5,687 ------ ----- -----
OPERATING CASH FLOW (DEFICIT)
QVC.........................................................
$1,656 1,422 1,230 Corporate and
Other......................................... 24 (5) (6) -
----- ----- ----- $1,680 1,417 1,224 ------ ----- -----
OPERATING INCOME (LOSS)
QVC.........................................................
$1,130 921 760 Corporate and
Other......................................... -- (5) (12)
------ ----- ----- $1,130 916 748 ====== ===== =====
II-23
QVC. QVC is a retailer of a wide range of consumer products, which are
marketed and sold primarily by merchandise-focused televised shopping programs
and via the Internet. In the United States, QVC's programs are aired through its
nationally televised shopping network 24 hours a day ("QVC-US").
Internationally, QVC's program services are based in the United Kingdom
("QVC-UK"), Germany ("QVC-Germany") and Japan ("QVC-Japan"). QVC-UK broadcasts
24 hours a day with 17 hours of live programming, and QVC-Germany and QVC-Japan
each broadcast live 24 hours a day.
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) Net
revenue.................................................
$7,074 6,501 5,687 Cost of
sales...............................................
(4,426) (4,112) (3,594) ------ ------ ------ Gross
profit..............................................
2,648 2,389 2,093 Operating
expenses..........................................
(579) (570) (497) SG&A expenses (excluding stock-based
compensation).......... (413) (397) (366) ------ ------
------ Operating cash
flow....................................... 1,656 1,422
1,230 Stock-based
compensation.................................... (50)
(52) (33) Depreciation and
amortization............................... (476) (449)
(437) ------ ------ ------ Operating
income.......................................... $1,130
921 760 ====== ====== ======
Net revenue is generated in the following geographical areas:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) QVC-
US......................................................
$4,983 4,640 4,141 QVC-
UK......................................................
612 554 487 QVC-
Germany.................................................
848 781 643 QVC-
Japan...................................................
631 526 416 ------ ----- ----- $7,074 6,501 5,687
====== ===== =====
QVC's net revenue increased 8.8% and 14.3% for the years ended December 31,
2006 and 2005, respectively, as compared to the corresponding prior year, as
average sales per customer increased in both years. The 2006 increase in revenue
is comprised of a $582 million increase due to an increase in the number of
units shipped from 154.4 million to 165.7 million and an $88 million increase
due to a 2.0% increase in the average sales price per unit ("ASP"). The revenue
increases were partially offset by a $11 million decrease due to unfavorable
foreign currency rates and an $86 million decrease due primarily to an increase
in estimated product returns. Returns as a percent of gross product revenue
increased from 18.0% in 2005 to 18.5% in 2006 due to a continued shift in the
mix from home products to apparel and accessories products, which typically have
higher return rates.
The 2005 increase in revenue is comprised of a $779 million increase due to
an increase in the number of units shipped from 138.0 million to 154.4 million
and a $204 million increase due to a 3.7% increase in the ASP. The revenue
increases were partially offset by a $145 million decrease due primarily to an
increase in product returns and a $24 million decrease due to unfavorable
foreign currency exchange rates. Returns as a percent of gross product revenue
increased from 17.6% in 2004 to 18.0% in 2005 due to a shift in the sales mix
from home products to jewelry, apparel and accessories products.
II-24
The number of homes receiving QVC's services are as follows:
HOMES (IN MILLIONS) ------------------------------
DECEMBER 31, ------------------------------ 2006 2005
2004 -------- -------- -------- QVC-
US......................................................
90.7 90.0 88.4 QVC-
UK......................................................
19.4 17.8 15.6 QVC-
Germany.................................................
37.9 37.4 35.7 QVC-
Japan...................................................
18.7 16.7 14.7
The QVC service is already received by substantially all of the cable
television and direct broadcast satellite homes in the U.S. and Germany. In
addition, the rate of growth in households is expected to diminish in the UK and
Japan. As these markets continue to mature, QVC also expects its consolidated
rate of growth in revenue to diminish. Future sales growth will primarily depend
on continued additions of new customers from homes already receiving the QVC
service and continued growth in sales to existing customers. QVC's future sales
may also be affected by (i) the willingness of cable and satellite distributors
to continue carrying QVC's programming service, (ii) QVC's ability to maintain
favorable channel positioning, which may become more difficult as distributors
convert analog customers to digital, (iii) changes in television viewing habits
because of personal video recorders, video-on-demand and IP television and
(iv) general economic conditions.
As noted above, during the years ended December 31, 2006 and 2005, the
changes in revenue and expenses were also impacted by changes in the exchange
rates for the UK pound sterling, the euro and the Japanese yen. In the event the
U.S. dollar strengthens against these foreign currencies in the future, QVC's
revenue and operating cash flow will be negatively impacted. The percentage
increase in revenue for each of QVC's geographic areas in dollars and in local
currency is as follows:
PERCENTAGE INCREASE IN NET REVENUE -----
----------------------------------------
---------------- YEAR ENDED YEAR ENDED
DECEMBER 31, 2006 DECEMBER 31, 2005 ----
------------------------- --------------
--------------- U.S. DOLLARS LOCAL
CURRENCY U.S. DOLLARS LOCAL CURRENCY ---
--------- -------------- ------------ --
------------ QVC-
US.......................................
7.4% 7.4% 12.1% 12.1% QVC-
UK.......................................
10.5% 8.4% 13.8% 15.1% QVC-
Germany..................................
8.6% 7.1% 21.5% 21.9% QVC-
Japan....................................
20.0% 26.1% 26.4% 29.4%
QVC's gross profit percentage was 37.4%, 36.7% and 36.8% for the years ended
December 31, 2006, 2005 and 2004, respectively. The increase in the gross profit
percentage in 2006 was due to higher initial margins due to a shift in the sales
mix from home products to higher margin apparel and accessories products and to
a lower inventory obsolescence provision. The slight gross profit percentage
decrease in 2005 was due primarily to a higher inventory obsolescence provision.
QVC's operating expenses are comprised of commissions and license fees,
order processing and customer service expense, credit card processing fees,
telecommunications expense and provision for doubtful accounts. Operating
expenses increased 1.6% and 14.7% for the years ended December 31, 2006 and
2005, respectively, as compared to the corresponding prior year period. The 2005
increase is primarily due to the increase in sales volume. Operating expenses
increased at a lower rate than sales in 2006 due primarily to commissions and
bad debt expense. As a percentage of net revenue, operating expenses were 8.2%,
8.8% and 8.7% for 2006, 2005 and 2004, respectively. Commissions, as a percent
of net revenue, were fairly consistent in 2004 and 2005 and decreased in 2006,
as compared to 2005. The decrease in 2006 is due to a greater percentage of
Internet sales for which lower commissions are required to be paid. In addition,
commissions decreased as a percentage of revenue in QVC-Japan where certain
distributors are paid the greater of (i) a fixed fee per subscriber and (ii) a
specified
II-25
percentage of sales. In 2006, more distributors started to receive payments
based on sales volume rather than a fixed fee per subscriber. QVC's bad debt
provision decreased as a percent of net revenue in 2006 due to lower write-offs
on QVC's private label credit card. As a percent of net revenue, order
processing and customer service expenses remained constant in 2006, but
decreased in each segment in 2005 as compared to 2004. The 2005 decrease is the
result of reduced personnel expense due to increased Internet sales, and
operator efficiencies in call handling and staffing. QVC's telecommunications
expenses as a percent of revenue remained consistent in 2006, but decreased in
2005 due to new contracts with certain of its service providers. Credit card
processing fees remained consistent as a percent of net revenue for each of the
years ended December 31, 2006, 2005 and 2004.
QVC's SG&A expenses include personnel, information technology, marketing and
advertising expenses. Such expenses increased 4.0% and 8.5% during the years
ended December 31, 2006 and 2005, respectively, as compared to the corresponding
prior year. Due to the fixed cost and discretionary nature of many of these
expenses, SG&A expenses increased at a lower rate than revenue in 2006. In
addition, QVC settled certain franchise tax audit issues and reversed
$15 million of reserves recorded in prior years. The majority of the 2005
increase reflects a $23 million increase in personnel costs due to the addition
of employees to support the increased sales of QVC's foreign operations. In
addition, statutory sales and use tax increased $6 million in 2005.
QVC's depreciation and amortization expense increased for the years ended
December 31, 2006 and 2005. Such increases are due to fixed asset and software
additions.
CAPITAL GROUP
The other tracking stock created in our restructuring is intended to reflect
the separate performance of the Capital Group. The Capital Group is comprised of
our subsidiaries and assets not attributed to the Interactive Group, including
controlling interests in Starz Entertainment, Starz Media, FUN and TruePosition,
as well as minority investments in News Corporation, Time Warner Inc., Sprint
Nextel Corporation and other public and private companies and $4,580 million
principal amount (as of December 31, 2006) of our existing publicly-traded debt.
We acquired the U.S. and U.K. operations of Starz Media from IDT Corporation
("IDT") in August 2006, and the Canadian and Australian operations in
September 2006. The aggregate consideration was valued for accounting purposes
at $525 million and was comprised of 14.9 million shares of IDT Class B common
stock, 7,500 shares of IDT Telecom, Inc., a subsidiary of IDT, and $290 million
in cash. Starz Media's operations include animated feature film production,
proprietary live action and animated series production, contracted 2D animation
production and DVD distribution.
The following discussion and analysis provides information concerning the
attributed results of operations and financial condition of the Capital Group.
Although our restructuring was not completed until May 9, 2006, the following
discussion is presented as though the restructuring had been completed on
January 1, 2004. This discussion should be read in conjunction with (1) our
consolidated financial statements and notes thereto included elsewhere in this
Annual Report on Form 10-K and (2) the Unaudited Attributed Financial
Information for Tracking Stock Groups filed as Exhibit 99.1 to this Annual
Report on Form 10-K.
II-26
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ----------------------------
-- 2006 2005 2004 -------- -------- -------- (AMOUNTS
IN MILLIONS) REVENUE Starz
Entertainment.........................................
$1,033 1,004 963 Corporate and
Other......................................... 254
141 93 ------ ----- ----- $1,287 1,145 1,056 ======
===== ===== OPERATING CASH FLOW (DEFICIT) Starz
Entertainment.........................................
$ 186 171 239 Corporate and
Other......................................... (83)
(47) (72) ------ ----- ----- $ 103 124 167 ======
===== ===== OPERATING INCOME (LOSS) Starz
Entertainment.........................................
$ 163 105 148 Corporate and
Other......................................... (272)
(77) (108) ------ ----- ----- $ (109) 28 40 ======
===== =====
REVENUE. The Capital Group's combined revenue increased $142 million or
12.4% and $89 million or 8.4% for the years ended December 31, 2006 and 2005,
respectively, as compared to the corresponding prior year. The 2006 increase is
due to Starz Entertainment, as well as our acquisitions of Starz Media and FUN,
which contributed $86 million and $42 million of revenue, respectively. The 2005
revenue increase was driven primarily by a $77 million increase for TruePosition
and a $41 million increase for Starz Entertainment. TruePosition's revenue
increased as it continued to increase delivery and acceptance of its equipment
in Cingular Wireless's markets.
In November 2006, TruePosition signed an amendment to its existing services
contract with Cingular Wireless that requires TruePosition to develop and
deliver additional software features. Because vendor specific objective evidence
related to the value of these additional features does not exist, TruePosition
is required to defer revenue recognition until all of the features have been
delivered. TruePosition estimates that these features will be delivered in the
first quarter of 2008. Accordingly, TruePosition will not recognize any revenue
under this contract until 2008. TruePosition recognized approximately
$105 million of revenue under this contract in 2006 prior to signing the
amendment.
OPERATING CASH FLOW. The Capital Group's Operating Cash Flow decreased
$21 million or 16.9% and $43 million or 25.7% in 2006 and 2005, respectively, as
compared to the corresponding prior year. The decrease in 2006 is due primarily
to an operating cash flow deficit generated by Starz Media, as advertising costs
for the animated film EVERYONE'S HERO exceeded the revenue it earned. The
increase in operating cash flow for Starz Entertainment was partially offset by
an operating cash flow deficit of $11 million for FUN. The 2005 decrease is due
primarily to a $68 million decrease for Starz Entertainment, partially offset by
a $30 million improvement for TruePosition.
IMPAIRMENT OF LONG-LIVED ASSETS. We acquired our interest in FUN in
March 2006. Subsequent to our acquisition, the market value of FUN's stock has
declined significantly due to the performance of certain of FUN's subsidiaries
and uncertainty surrounding government legislation of Internet gambling which we
believe the market perceives as potentially impacting FUN's skill gaming
business. In connection with our annual evaluation of the recoverability of
FUN's goodwill, we received a third-party valuation, which indicated that the
carrying value of FUN's goodwill exceeded its market value. Accordingly, we
recognized a $111 million impairment charge related to goodwill and a
$2 million impairment charge related to trademarks.
II-27
OPERATING INCOME (LOSS). The improvement in operating income for Starz
Entertainment in 2006 was more than offset by operating losses for Starz Media
and FUN, as well as an increase in corporate stock compensation expense. The
2005 decrease in operating income for Starz Entertainment was partially offset
by lower amortization of corporate intangibles and lower corporate stock
compensation expense.
STARZ ENTERTAINMENT. Historically, Starz Entertainment has provided premium
programming distributed by cable operators, direct-to-home satellite providers
and other distributors throughout the United States. In addition, Starz
Entertainment has launched Vongo, a subscription Internet service which is
comprised of Starz and other movie and entertainment content. Vongo also offers
content on a pay-per-view basis. Through 2006, virtually all of Starz
Entertainment's revenue continues to be derived from the delivery of movies to
subscribers under affiliation agreements with television video programming
distributors. Some of Starz Entertainment's affiliation agreements provide for
payments to Starz Entertainment based on the number of subscribers that receive
Starz Entertainment's services. Starz Entertainment also has fixed-rate
affiliation agreements with certain of its customers. Pursuant to these
agreements, the customers pay an agreed-upon rate regardless of the number of
subscribers. The agreed-upon rate is contractually increased annually or
semi-annually as the case may be, and these agreements, expire in 2007 through
2012. During the year ended December 31, 2006, 67.8% of Starz Entertainment's
revenue was generated by its four largest customers, Comcast, Echostar
Communications, DirecTV and Time Warner. Starz Entertainment's affiliation
agreement with DirecTV expired on June 30, 2006. In addition, the affiliation
agreement with Time Warner, which originally expired on December 31, 2006, has
been extended through May 31, 2007 with provisions for further extensions
through June 30, 2007. Starz Entertainment is currently in negotiations with
DirecTV and Time Warner regarding new agreements. There can be no assurance that
any new agreements with DirecTV or Time Warner will have economic terms
comparable to the old agreements.
Starz Entertainment's operating results are as follows:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS)
Revenue.....................................................
$1,033 1,004 963 Operating
expenses.......................................... (741)
(706) (603) SG&A
expenses...............................................
(106) (127) (121) ------ ----- ---- Operating cash
flow....................................... 186 171 239
Stock-based
compensation.................................... 3 (17)
(28) Depreciation and
amortization............................... (26) (49) (63)
------ ----- ---- Operating
income.......................................... $ 163 105
148 ====== ===== ====
Starz Entertainment's revenue increased 2.9% and 4.3% for the years ended
December 31, 2006 and 2005, respectively, as compared to the corresponding prior
year. The 2006 increase is due to a $56 million increase resulting from an
increase in the average number of subscription units for Starz Entertainment's
services partially offset by a $27 million decrease due to a decrease in the
effective rate for Starz Entertainment services. The 2005 increase in revenue is
due to an $85 million increase resulting from a rise in the average number of
subscription units for Starz Entertainment's services partially offset by a
$52 million decrease due to a reduction in the effective rate for Starz
Entertainment's services.
Starz Entertainment's Starz movie service and its Encore and Thematic
Multiplex channels ("EMP") movie service are the primary drivers of Starz
Entertainment's revenue. Starz average subscriptions increased 5.7% and 6.7% in
2006 and 2005, respectively; and EMP average subscriptions increased 6.6% and
8.0% in 2006 and 2005, respectively. The effects on revenue of these increases
in
II-28
subscriptions units are somewhat mitigated by the fixed-rate affiliation
agreements that Starz Entertainment has entered into in recent years.
At December 31, 2006, cable, direct broadcast satellite, and other
distribution represented 66.6%, 31.6% and 1.8%, respectively, of Starz
Entertainment's total subscription units.
Starz Entertainment's operating expenses increased $35 million or 5.0% and
$103 million or 17.1% for the years ended December 31, 2006 and 2005,
respectively, as compared to the corresponding prior year. Such increases are
due primarily to increases in programming costs, which increased from
$564 million in 2004 to $668 million in 2005 and to $703 million in 2006. The
2006 programming increase is due primarily to $63 million of additional
amortization of deposits previously made under certain of its output
arrangements. Such amortization was partially offset by a lower cost per title
for movies under certain license agreements and a decrease in programming costs
due to a lower percentage of first-run movie exhibitions (which have a
relatively higher cost per title) as compared to the number of library product
exhibitions. The 2005 increase in programming costs is due to (1) a $55 million
increase resulting from a higher percentage of first-run movie exhibitions as
compared to the number of library product exhibitions in 2005 and (2) a
$49 million increase due to a higher cost per title for movie titles under
certain of Starz Entertainment's license agreements.
Starz Entertainment expects that its programming costs in 2007 will be 6%-9%
lower than the 2006 costs due to Starz Entertainment receiving fewer first-run
titles under certain of its output arrangements in 2007. This estimate is
subject to a number of assumptions that could change depending on the number and
timing of movie titles actually becoming available to Starz Entertainment and
their ultimate box office performance. Accordingly, the actual amount of costs
experienced by Starz Entertainment may differ from the amounts noted above.
Starz Entertainment's SG&A expenses decreased $21 million or 16.5% and
increased $6 million or 5.0% during 2006 and 2005, respectively, as compared to
the corresponding prior year. The 2006 decrease is due primarily to lower sales
and marketing expenses of $18 million due to the elimination of certain
marketing support commitments under the Comcast affiliation agreement and less
marketing with other affiliates, partially offset by marketing expenses related
to the commercial launch of Vongo. The 2005 increase in SG&A expenses is due to
(1) $11 million of consulting and marketing expenses incurred in connection with
Starz Entertainment's 2005 development and 2006 launch of Vongo, and (2) a
$12 million credit recorded by Starz Entertainment in 2004 related to the
recovery of certain accounts receivable from Adelphia Communications and other
customers. These increases were offset by a $16 million decrease in sales and
marketing as Starz Entertainment participated in fewer national marketing
campaigns and obtained reduced marketing commitments under a new affiliation
agreement with Comcast in 2005.
Starz Entertainment has outstanding phantom stock appreciation rights held
by its former chief executive officer. Compensation relating to the phantom
stock appreciation rights has been recorded based upon the estimated fair value
of Starz Entertainment. The amount of expense associated with the phantom stock
appreciation rights is generally based on the vesting of such rights and the
change in the fair value of Starz Entertainment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk in the normal course of business due to our
ongoing investing and financial activities and our subsidiaries in different
foreign countries. Market risk refers to the risk of loss arising from adverse
changes in stock prices, interest rates and foreign currency exchange rates. The
risk of loss can be assessed from the perspective of adverse changes in fair
values, cash flows and future earnings. We have established policies, procedures
and internal processes governing our management of market risks and the use of
financial instruments to manage our exposure to such risks.
II-29
We are exposed to changes in interest rates primarily as a result of our
borrowing and investment activities, which include investments in fixed and
floating rate debt instruments and borrowings used to maintain liquidity and to
fund business operations. The nature and amount of our long-term and short-term
debt are expected to vary as a result of future requirements, market conditions
and other factors. We manage our exposure to interest rates by entering into
interest rate swap arrangements and by maintaining what we believe is an
appropriate mix of fixed and variable rate debt. We believe this best protects
us from interest rate risk. We have achieved this mix by (i) issuing fixed rate
debt that we believe has a low stated interest rate and significant term to
maturity and (ii) issuing variable rate debt with appropriate maturities and
interest rates. As of December 31, 2006, the face amount of the Interactive
Group's fixed rate debt (considering the effects of interest rate swap
agreements) was $5,374 million, which had a weighted average interest rate of
6.5%. The Interactive Group's variable rate debt of $1,026 million had a
weighted average interest rate of 6.1% at December 31, 2006. As of December 31,
2006, the face amount of the Capital Group's fixed rate debt was
$4,584 million, which had a weighted average interest rate of 2.6%.
Each of the Interactive Group and the Capital Group is exposed to changes in
stock prices primarily as a result of our significant holdings in publicly
traded securities. We continually monitor changes in stock markets, in general,
and changes in the stock prices of our holdings, specifically. We believe that
changes in stock prices can be expected to vary as a result of general market
conditions, technological changes, specific industry changes and other factors.
We use equity collars, written put and call options and other financial
instruments to manage market risk associated with certain investment positions.
These instruments are recorded at fair value based on option pricing models.
Equity collars provide us with a put option that gives us the right to require
the counterparty to purchase a specified number of shares of the underlying
security at a specified price at a specified date in the future. Equity collars
also provide the counterparty with a call option that gives the counterparty the
right to purchase the same securities at a specified price at a specified date
in the future. The put option and the call option generally have equal fair
values at the time of origination resulting in no cash receipts or payments.
Among other factors, changes in the market prices of the securities
underlying our AFS Derivatives affect the fair market value of such AFS
Derivatives. The following table illustrates the impact that changes in the
market price of the securities underlying our equity collars that have been
attributed to the Capital Group would have on the fair market value of such
derivatives. Such changes in fair market value would be included in realized and
unrealized gains (losses) on financial instruments in our consolidated statement
of operations.
ESTIMATED AGGREGATE FAIR VALUE ------
------------------------------ EQUITY
COLLARS OTHER TOTAL -------------- --
------ -------- (AMOUNTS IN MILLIONS)
Fair value at December 31,
2006............................. $
802 181 983 5% increase in market
prices................................
$ 663 208 871 10% increase in market
prices...............................
$ 521 235 756 5% decrease in market
prices................................
$ 937 154 1,091 10% decrease in
market
prices...............................
$1,069 127 1,196
At December 31, 2006, the fair value of our AFS securities attributed to the
Interactive Group was $2,572 million and the fair value of our AFS securities
attributed to the Capital Group was $19,024 million. Had the market price of
such securities been 10% lower at December 31, 2006, the aggregate value of such
securities would have been $257 million and $1,902 million lower, respectively,
resulting in a decrease to unrealized holding gains in other comprehensive
earnings. The decrease attributable to the Capital Group would be partially
offset by an increase in the value of our AFS Derivatives as noted in the table
above.
II-30
From time to time and in connection with certain of our AFS Derivatives, we
borrow shares of the underlying securities from a counterparty and deliver these
borrowed shares in settlement of maturing derivative positions. In these
transactions, a similar number of shares that we have attributed to the Capital
Group have been posted as collateral with the counterparty. These share
borrowing arrangements can be terminated at any time at our option by delivering
shares to the counterparty. The counterparty can terminate these arrangements at
any time. The liability under these share borrowing arrangements is marked to
market each reporting period with changes in value recorded in unrealized gains
or losses in the Capital Group's attributed statement of operations. The shares
posted as collateral under these arrangements continue to be treated as AFS
securities and are marked to market each reporting period with changes in value
recorded as unrealized holding gains or losses in other comprehensive earnings.
The Interactive Group is exposed to foreign exchange rate fluctuations
related primarily to the monetary assets and liabilities and the financial
results of QVC's foreign subsidiaries. Assets and liabilities of foreign
subsidiaries for which the functional currency is the local currency are
translated into U.S. dollars at period-end exchange rates, and the statements of
operations are generally translated at the average exchange rate for the period.
Exchange rate fluctuations on translating foreign currency financial statements
into U.S. dollars that result in unrealized gains or losses are referred to as
translation adjustments. Cumulative translation adjustments are recorded in
other comprehensive earnings (loss) as a separate component of stockholders'
equity. Transactions denominated in currencies other than the functional
currency are recorded based on exchange rates at the time such transactions
arise. Subsequent changes in exchange rates result in transaction gains and
losses, which are reflected in income as unrealized (based on period-end
translations) or realized upon settlement of the transactions. Cash flows from
our operations in foreign countries are translated at the average rate for the
period. Accordingly, the Interactive Group may experience economic loss and a
negative impact on earnings and equity with respect to our holdings solely as a
result of foreign currency exchange rate fluctuations.
From time to time we enter into debt swaps and swap arrangements with
respect to our or third-party public and private indebtedness. Under these
arrangements, we initially post collateral with the counterparty equal to a
contractual percentage of the value of the referenced securities. We earn
interest income based upon the face amount and stated interest rate of the
referenced securities, and we pay interest expense at market rates on the amount
funded by the counterparty. In the event the fair value of the underlying debt
securities declines more than a pre-determined amount, we are required to post
cash collateral for the decline, and we record an unrealized loss on financial
instruments. The cash collateral is further adjusted up or down for subsequent
changes in fair value of the underlying debt security. At December 31, 2006, the
aggregate notional amount of debt securities referenced under our debt swap
arrangements, which related to $830 million principal amount of certain of our
publicly traded debt, was $592 million. As of such date, we had posted cash
collateral equal to $109 million. In the event the fair value of the referenced
debt securities were to fall to zero, we would be required to post additional
cash collateral of $483 million. The posting of such collateral and the related
settlement of the agreements would reduce the principal amount of our
outstanding debt by $830 million.
We periodically assess the effectiveness of our derivative financial
instruments. With regard to interest rate swaps, we monitor the fair value of
interest rate swaps as well as the effective interest rate the interest rate
swap yields, in comparison to historical interest rate trends. We believe that
any losses incurred with regard to interest rate swaps would be offset by the
effects of interest rate movements on the underlying debt facilities. With
regard to equity collars, we monitor historical market trends relative to values
currently present in the market. We believe that any unrealized losses incurred
with regard to equity collars and swaps would be offset by the effects of fair
value changes on the underlying assets.
II-31
These measures allow our management to evaluate the success of our use of
derivative instruments and to determine when to enter into or exit from
derivative instruments.
Our derivative instruments are executed with counterparties who are well
known major financial institutions with high credit ratings. While we believe
these derivative instruments effectively manage the risks highlighted above,
they are subject to counterparty credit risk. Counterparty credit risk is the
risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To protect
ourselves against credit risk associated with these counterparties we generally:
- execute our derivative instruments with several different counterparties,
and
- execute equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for our benefit, if
the respective counterparty's credit rating for its senior unsecured debt
were to reach certain levels, generally a rating that is below Standard &
Poor's rating of A- and/or Moody's rating of A3.
Due to the importance of these derivative instruments to our risk management
strategy, we actively monitor the creditworthiness of each of these
counterparties. Based on our analysis, we currently consider nonperformance by
any of our counterparties to be unlikely.
Our counterparty credit risk by financial institution is summarized below:
AGGREGATE FAIR VALUE OF DERIVATIVE INSTRUMENTS AT
COUNTERPARTY DECEMBER 31, 2006 - ------------ -------------
------------ (AMOUNTS IN MILLIONS) Counterparty
A.............................................. $ 504
Counterparty
B.............................................. 494
Other.......................................................
581 ------ $1,579 ======
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of Liberty Media Corporation are filed
under this Item, beginning on Page II-36. The financial statement schedules
required by Regulation S-X are filed under Item 15 of this Annual Report on
Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company carried
out an evaluation, under the supervision and with the participation of
management, including its chief executive officer, principal accounting officer
and principal financial officer (the "Executives"), of the effectiveness of its
disclosure controls and procedures as of the end of the period covered by this
report. Based on that evaluation, the Executives concluded that the Company's
disclosure controls and procedures were effective as of December 31, 2006 to
provide reasonable assurance that information required to be disclosed in its
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms.
II-32
See page II-34 for MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING.
See page II-35 for REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
for our accountant's attestation regarding our internal control over financial
reporting.
There has been no change in the Company's internal control over financial
reporting that occurred during the three months ended December 31, 2006 that has
materially affected, or is reasonably likely to materially affect, its internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
II-33
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Liberty Media Corporation's management is responsible for establishing and
maintaining adequate internal control over the Company's financial reporting.
The Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of the consolidated financial statements and related
disclosures in accordance with generally accepted accounting principles. The
Company's internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions of the Company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of the consolidated financial statements and related
disclosures in accordance with generally accepted accounting principles;
(3) provide reasonable assurance that receipts and expenditures of the Company
are being made only in accordance with authorizations of management and
directors of the Company; and (4) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the Company's assets that could have a material effect on the consolidated
financial statements and related disclosures.
Because of inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies and procedures may deteriorate.
The Company assessed the design and effectiveness of internal control over
financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in INTERNAL CONTROL-
INTEGRATED FRAMEWORK.
Based upon our assessment using the criteria contained in COSO, management
has concluded that, as of December 31, 2006, Liberty Media Corporation's
internal control over financial reporting is effectively designed and operating
effectively.
Liberty Media Corporation's independent registered public accountants
audited the consolidated financial statements and related disclosures in the
Annual Report on Form 10-K and have issued an audit report on management's
assessment of the Company's internal control over financial reporting. This
report appears on page II-35 of this Annual Report on Form 10-K.
II-34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting appearing on
page II-34, that Liberty Media Corporation and subsidiaries maintained effective
internal control over financial reporting as of December 31, 2006, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Management of Liberty Media Corporation is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company's internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, management's assessment that Liberty Media Corporation and
subsidiaries maintained effective internal control over financial reporting as
of December 31, 2006, is fairly stated, in all material respects, based on
criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).Also, in
our opinion, Liberty Media Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control--Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Liberty Media Corporation and subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of operations, comprehensive earnings
(loss), stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 2006, and our report dated February 28,
2007 expressed an unqualified opinion on those consolidated financial
statements.
KPMG LLP
Denver, Colorado
February 28, 2007
II-35
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We have audited the accompanying consolidated balance sheets of Liberty
Media Corporation and subsidiaries as of December 31, 2006 and 2005, and the
related consolidated statements of operations, comprehensive earnings (loss),
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2006. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Liberty
Media Corporation and subsidiaries as of December 31, 2006 and 2005, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed in note 3 to the accompanying consolidated financial
statements, effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123(R), SHARE BASED PAYMENT.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Liberty Media
Corporation's internal control over financial reporting as of December 31, 2006,
based on the criteria established in INTERNAL CONTROL--INTEGRATED FRAMEWORK
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated February 28, 2007 expressed an unqualified opinion
on management's assessment of, and the effective operation of, internal control
over financial reporting.
KPMG LLP
Denver, Colorado
February 28, 2007
II-36
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2006 AND 2005
2006 2005* -------- -------- (AMOUNTS IN MILLIONS) Assets
Current assets: Cash and cash
equivalents................................. $ 3,099
1,896 Trade and other receivables,
net.......................... 1,276 1,059 Inventory,
net............................................ 831 719
Program
rights............................................ 531
599 Financial instruments (note
7)............................ 239 661 Other current
assets...................................... 241 127
Assets of discontinued operations (note
5)................ 512 516 ------- ------- Total current
assets.................................... 6,729 5,577 --
----- ------- Investments in available-for-sale
securities and other cost investments, including $1,482
million and $1,581 million pledged as collateral for
share borrowing arrangements (note
6)..................................................
21,622 18,489 Long-term financial instruments (note
7).................... 1,340 1,123 Investments in
affiliates, accounted for using the equity method (note
8)........................................... 1,842 1,908
Property and equipment, at
cost............................. 1,531 1,196 Accumulated
depreciation.................................... (385)
(250) ------- ------- 1,146 946 ------- -------
Intangible assets not subject to amortization (note 3):
Goodwill..................................................
7,588 6,809
Trademarks................................................
2,471 2,385 ------- ------- 10,059 9,194 ------- -------
Intangible assets subject to amortization, net (note
3)..... 3,910 3,975 Other assets, at cost, net of
accumulated amortization...... 990 753 ------- -------
Total assets............................................
$47,638 41,965 ======= =======
(continued)
II-37
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 31, 2006 AND 2005
2006 2005* -------- -------- (AMOUNTS IN MILLIONS)
Liabilities and Stockholders' Equity Current
liabilities: Accounts
payable.......................................... $
508 492 Accrued
interest..........................................
214 153 Other accrued
liabilities................................. 1,035
978 Financial instruments (note
7)............................ 1,484 1,939 Current
portion of debt (note 9)..........................
114 1,379 Other current
liabilities................................. 113 289
Liabilities of discontinued operations (note
5)........... 101 114 ------- ------- Total current
liabilities............................... 3,569
5,344 ------- ------- Long-term debt (note
9)..................................... 8,909 6,370
Long-term financial instruments (note
7).................... 1,706 1,087 Deferred income
tax liabilities (note 10)................... 9,784
8,696 Other
liabilities...........................................
1,747 1,058 ------- ------- Total
liabilities.........................................
25,715 22,555 ------- ------- Minority interests in
equity of subsidiaries................ 290 290
Stockholders' equity (note 11): Preferred stock, $.01
par value. Authorized 50,000,000 shares; no shares
issued................................ -- -- Liberty
Capital Series A common stock, $.01 par value.
Authorized 400,000,000 shares; issued and outstanding
134,503,165 shares at December 31,
2006................. 1 -- Liberty Capital Series B
common stock, $.01 par value. Authorized 25,000,000
shares; issued and outstanding 6,014,680 shares at
December 31, 2006................... -- -- Liberty
Interactive Series A common stock, $.01 par value.
Authorized 2,000,000,000 shares; issued and
outstanding 623,061,760 shares at December 31,
2006................. 6 -- Liberty Interactive Series
B common stock, $.01 par value. Authorized
125,000,000 shares; issued and outstanding 29,971,039
shares at December 31, 2006.................. -- --
Series A common stock $.01 par value. Issued and
outstanding 2,681,745,985 shares at December 31,
2005... -- 27 Series B common stock $.01 par value.
Issued 131,062,825 shares at December 31,
2005............................. -- 1 Additional
paid-in capital................................
28,112 29,074 Accumulated other comprehensive
earnings, net of taxes ("AOCE") (note
15)...................................... 5,943 3,412
AOCE of discontinued
operations........................... 9 9 Accumulated
deficit.......................................
(12,438) (13,278) ------- ------- 21,633 19,245
Series B common stock held in treasury, at cost
(10,000,000 shares at December 31,
2005)................ -- (125) ------- ------- Total
stockholders' equity............................
21,633 19,120 ------- ------- Commitments and
contingencies (note 17) Total liabilities and
stockholders' equity.............. $47,638 41,965
======= =======
- ------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-38
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005* 2004* -------- -------- -------- (AMOUNTS IN
MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenue: Net retail
sales.......................................... $7,326
6,501 5,687 Communications and programming
services................... 1,287 1,145 1,056 ------ ----
-- ------ 8,613 7,646 6,743 ------ ------ ------
Operating costs and expenses: Cost of
sales............................................. 4,565
4,112 3,594
Operating.................................................
1,526 1,397 1,160 Selling, general and administrative,
including stock-based compensation (note
3)................................... 806 648 696
Litigation
settlement..................................... -- --
(42)
Depreciation..............................................
119 92 91
Amortization..............................................
463 453 456 Impairment of long-lived assets (note
3).................. 113 -- -- ------ ------ ------ 7,592
6,702 5,955 ------ ------ ------ Operating
income........................................ 1,021 944
788 Other income (expense): Interest
expense.......................................... (680)
(626) (619) Dividend and interest
income.............................. 214 143 130 Share of
earnings of affiliates, net...................... 91 13
15 Realized and unrealized gains (losses) on financial
instruments, net (note 7)...............................
(279) 257 (1,284) Gains (losses) on dispositions, net
(notes 6, 11 and
15).....................................................
607 (361) 1,411 Nontemporary declines in fair value of
investments (note
6)......................................................
(4) (449) (129) Other,
net................................................ 18
(39) (26) ------ ------ ------ (33) (1,062) (502) ------
------ ------ Earnings (loss) from continuing operations
before income taxes and minority
interest............................ 988 (118) 286 Income
tax benefit (expense) (note 10)......................
(252) 126 (159) Minority interests in earnings of
subsidiaries.............. (27) (51) (22) ------ ------ -
----- Earnings (loss) from continuing
operations.............. 709 (43) 105 Earnings (loss)
from discontinued operations, net of taxes (note
5).................................................. 220
10 (59) Cumulative effect of accounting change, net of
taxes (note
3)........................................................
(89) -- -- ------ ------ ------ Net earnings
(loss)..................................... $ 840 (33) 46
====== ====== ====== Net earnings (loss): Liberty Series
A and Series B common stock................ $ 94 (33) 46
Liberty Capital common
stock.............................. 260 -- -- Liberty
Interactive common stock.......................... 486 --
-- ------ ------ ------ $ 840 (33) 46 ====== ======
====== Basic and diluted earnings (loss) from continuing
operations per common share (note 3): Liberty Series A
and Series B common stock................ $ .07 (.02) .04
Liberty Capital common
stock.............................. $ .24 -- -- Liberty
Interactive common stock.......................... $ .73
-- -- Basic and diluted net earnings (loss) per common
share (note 3): Liberty Series A and Series B common
stock................ $ .03 (.01) .02 Liberty Capital
common stock.............................. $ 1.86 -- --
Liberty Interactive common
stock.......................... $ .73 -- --
- ------------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-39
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS (LOSS)
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005* 2004* -------- -------- -------- (AMOUNTS IN
MILLIONS) Net earnings
(loss)......................................... $ 840
(33) 46 ------ ------ ----- Other comprehensive
earnings (loss), net of taxes (note 15): Foreign
currency translation adjustments.................. 111
(5) 20 Recognition of previously unrealized foreign
currency translation
losses...................................... -- 312 --
Unrealized holding gains (losses) arising during the
period..................................................
2,605 (1,121) 1,490 Recognition of previously
unrealized losses (gains) on available-for-sale
securities, net...................... (185) 217 (486)
Reclass unrealized gain on available-for-sale security
to equity method
investment................................ -- (197) --
Other comprehensive earnings (loss) from discontinued
operations (note
5)..................................... -- (7) (54) ---
--- ------ ----- Other comprehensive earnings
(loss)....................... 2,531 (801) 970 ------ --
---- ----- Comprehensive earnings
(loss)............................... $3,371 (834)
1,016 ====== ====== ===== Comprehensive earnings
(loss): Liberty Series A and Series B common
stock................ $ 755 (834) 1,016 Liberty Capital
common stock.............................. 1,787 -- --
Liberty Interactive common
stock.......................... 829 -- -- ------ ------
----- $3,371 (834) 1,016 ====== ====== =====
- ------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-40
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
2006 2005* 2004* -------- -------- -------- (AMOUNTS IN
MILLIONS) (SEE NOTE 4) Cash flows from operating
activities: Net earnings
(loss)....................................... $ 840
(33) 46 Adjustments to reconcile net earnings (loss) to
net cash provided by operating activities: Loss
(earnings) from discontinued operations............
(220) (10) 59 Cumulative effect of accounting
change.................. 89 -- -- Depreciation and
amortization........................... 582 545 547
Impairment of long-lived
assets......................... 113 -- -- Stock-based
compensation................................ 67 52 98
Payments of stock-based
compensation.................... (115) (103) (10)
Noncash interest
expense................................ 108 101 96
Share of earnings of affiliates,
net.................... (91) (13) (15) Realized and
unrealized losses (gains) on financial instruments,
net....................................... 279 (257)
1,284 Losses (gains) on disposition of assets,
net............ (607) 361 (1,411) Nontemporary decline
in fair value of investments....... 4 449 129 Minority
interests in earnings of subsidiaries.......... 27 51
22 Deferred income tax
benefit............................. (465) (389) (194)
Other noncash charges,
net.............................. 44 41 20 Changes in
operating assets and liabilities, net of the effect of
acquisitions and dispositions: Current
assets........................................ (310)
(175) (532) Payables and other current
liabilities................ 660 446 647 ------- ------
------ Net cash provided by operating
activities........... 1,005 1,066 786 ------- ------ --
---- Cash flows from investing activities: Cash
proceeds from dispositions.........................
1,322 49 479 Premium proceeds from origination of
derivatives........ 59 473 193 Net proceeds from
settlement of derivatives............. 101 461 322
Investments in and loans to cost and equity
investees... (235) (24) (960) Cash paid for
acquisitions, net of cash acquired........ (876) (1)
(91) Capital
expenditures.................................... (278)
(168) (128) Net sales (purchases) of short term
investments......... 287 (85) 263 Repurchases of
subsidiary common stock.................. (331) (95)
(171) Other investing activities,
net......................... 66 (7) 103 ------- ------
------ Net cash provided by investing
activities............. 115 603 10 ------- ------ -----
- Cash flows from financing activities: Borrowings of
debt...................................... 3,229 861 --
Repayments of
debt...................................... (2,191)
(1,801) (1,006) Repurchases of Liberty common
stock..................... (954) -- (547) Other
financing activities, net......................... (20)
89 28 ------- ------ ------ Net cash provided (used) by
financing activities...... 64 (851) (1,525) ------- ---
--- ------ Effect of foreign currency exchange rates on
cash........... 18 (45) 3 ------- ------ ------ Net
cash provided to discontinued operations: Cash provided
by operating activities..................... 62 75 260
Cash used by investing
activities......................... (67) (110) (289)
Cash provided by financing
activities..................... 6 11 1,005 Change in
available cash held by discontinued
operations..............................................
-- (177) (1,839) ------- ------ ------ Net cash
provided by (to) discontinued operations....... 1 (201)
(863) ------- ------ ------ Net increase (decrease) in
cash and cash
equivalents..........................................
1,203 572 (1,589) Cash and cash equivalents at
beginning of year........ 1,896 1,324 2,913 ------- ---
--- ------ Cash and cash equivalents at end of
year.............. $ 3,099 1,896 1,324 ======= ======
======
- ------------------------------
* See note 5.
See accompanying notes to consolidated financial statements.
II-41
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
COMMON STOCK -----------------------------------------
LIBERTY CAPITAL PREFERRED ------------------- STOCK
SERIES A SERIES B SERIES A SERIES B --------- --------
-------- -------- -------- (AMOUNTS IN MILLIONS)
Balance at January 1,
2004................................ $ -- 27 2 -- --
Net
earnings............................................ --
-- -- -- -- Other comprehensive earnings
(loss)..................... -- -- -- -- -- Issuance of
Series A common stock for acquisitions...... -- -- -- -
- -- Issuance of Series A common stock in exchange for
Series B common stock (note
11).............................. -- 1 (1) -- --
Acquisition of Series A common stock (note
11).......... -- (1) -- -- -- Amortization of deferred
compensation................... -- -- -- -- --
Distribution to stockholders for spin off of Liberty
Media International ("LMI") (note 5)..................
-- -- -- -- -- Stock compensation for Liberty options
held by LMI
employees.............................................
-- -- -- -- -- Stock compensation for LMI options held
by Liberty
employees.............................................
-- -- -- -- --
Other...................................................
-- -- -- -- -- --------- --- --- --- --- Balance at
December 31, 2004.............................. -- 27 1
-- -- Net
loss................................................ --
-- -- -- -- Other comprehensive
loss................................ -- -- -- -- --
Issuance of Series A common stock for investment in
available-for-sale security...........................
-- -- -- -- -- Amortization of deferred
compensation................... -- -- -- -- --
Distribution to stockholders for spin off of Discovery
Holding Company ("DHC") (note 5)......................
-- -- -- -- -- Losses in connection with issuances of
stock by subsidiaries and affiliates, net of
taxes............. -- -- -- -- -- Issuance of common
stock upon exercise of stock
options...............................................
-- -- -- -- -- AT&T tax sharing agreement adjustments
(note 17)........ -- -- -- -- -- Adjustment of spin off
of LMI........................... -- -- -- -- --
Other...................................................
-- -- -- -- -- --------- --- --- --- --- Balance at
December 31, 2005.............................. -- 27 1
-- -- Net
earnings............................................ --
-- -- -- -- Other comprehensive
earnings............................ -- -- -- -- --
Retirement of treasury
stock............................ -- -- -- -- --
Distribution of Liberty Capital and Liberty Interactive
common stock to stockholders (notes 1 and 2)..........
-- (27) (1) 1 -- Issuance of common stock upon exercise
of stock
options...............................................
-- -- -- -- -- Stock
compensation...................................... -- -
- -- -- -- Issuance of Liberty Interactive Series A
common stock for
acquisition....................................... -- -
- -- -- -- Liberty Interactive Series A stock
repurchases.......... -- -- -- -- --
Other...................................................
-- -- -- -- -- --------- --- --- --- --- Balance at
December 31, 2006.............................. $ -- --
-- 1 -- ========= === === === ===
COMMON STOCK ------------------- LIBERTY AOCE
INTERACTIVE ADDITIONAL FROM ------------------- PAID-IN
DISCONTINUED SERIES A SERIES B CAPITAL AOCE OPERATIONS
-------- -------- ---------- -------- ------------
(AMOUNTS IN MILLIONS) Balance at January 1,
2004................................ -- -- 38,903 3,233
(32) Net
earnings............................................ --
-- -- -- -- Other comprehensive earnings
(loss)..................... -- -- -- 1,024 (54)
Issuance of Series A common stock for
acquisitions...... -- -- 152 -- -- Issuance of Series A
common stock in exchange for Series B common stock
(note 11).............................. -- -- 125 -- --
Acquisition of Series A common stock (note
11).......... -- -- (1,016) -- -- Amortization of
deferred compensation................... -- -- 31 -- --
Distribution to stockholders for spin off of Liberty
Media International ("LMI") (note 5)..................
-- -- (4,512) (51) 107 Stock compensation for Liberty
options held by LMI
employees.............................................
-- -- (4) -- -- Stock compensation for LMI options held
by Liberty
employees.............................................
-- -- 17 -- --
Other...................................................
-- -- 5 -- -- --- --- ------ ----- ---- Balance at
December 31, 2004.............................. -- --
33,701 4,206 21 Net
loss................................................ --
-- -- -- -- Other comprehensive
loss................................ -- -- -- (794) (7)
Issuance of Series A common stock for investment in
available-for-sale security...........................
-- -- 14 -- -- Amortization of deferred
compensation................... -- -- 38 -- --
Distribution to stockholders for spin off of Discovery
Holding Company ("DHC") (note 5)......................
-- -- (4,609) -- (5) Losses in connection with
issuances of stock by subsidiaries and affiliates, net
of taxes............. -- -- (22) -- -- Issuance of
common stock upon exercise of stock
options...............................................
-- -- 10 -- -- AT&T tax sharing agreement adjustments
(note 17)........ -- -- (40) -- -- Adjustment of spin
off of LMI........................... -- -- (28) -- --
Other...................................................
-- -- 10 -- -- --- --- ------ ----- ---- Balance at
December 31, 2005.............................. -- --
29,074 3,412 9 Net
earnings............................................ --
-- -- -- -- Other comprehensive
earnings............................ -- -- -- 2,531 --
Retirement of treasury
stock............................ -- -- (125) -- --
Distribution of Liberty Capital and Liberty Interactive
common stock to stockholders (notes 1 and 2)..........
7 -- 20 -- -- Issuance of common stock upon exercise of
stock
options...............................................
-- -- 4 -- -- Stock
compensation...................................... -- -
- 62 -- -- Issuance of Liberty Interactive Series A
common stock for
acquisition....................................... -- -
- 36 -- -- Liberty Interactive Series A stock
repurchases.......... (1) -- (953) -- --
Other...................................................
-- -- (6) -- -- --- --- ------ ----- ---- Balance at
December 31, 2006.............................. 6 --
28,112 5,943 9 === === ====== ===== ====
TOTAL ACCUMULATED TREASURY STOCKHOLDERS' DEFICIT STOCK
EQUITY ------------- --------- ------------- (AMOUNTS
IN MILLIONS) Balance at January 1,
2004................................ (13,291) -- 28,842
Net
earnings............................................ 46
-- 46 Other comprehensive earnings
(loss)..................... -- -- 970 Issuance of
Series A common stock for acquisitions...... -- -- 152
Issuance of Series A common stock in exchange for
Series B common stock (note
11).............................. -- (125) --
Acquisition of Series A common stock (note
11).......... -- -- (1,017) Amortization of deferred
compensation................... -- -- 31 Distribution
to stockholders for spin off of Liberty Media
International ("LMI") (note 5).................. -- --
(4,456) Stock compensation for Liberty options held by
LMI
employees.............................................
-- -- (4) Stock compensation for LMI options held by
Liberty
employees.............................................
-- -- 17
Other...................................................
-- -- 5 ------- ---- ------ Balance at December 31,
2004.............................. (13,245) (125)
24,586 Net
loss................................................
(33) -- (33) Other comprehensive
loss................................ -- -- (801)
Issuance of Series A common stock for investment in
available-for-sale security...........................
-- -- 14 Amortization of deferred
compensation................... -- -- 38 Distribution
to stockholders for spin off of Discovery Holding
Company ("DHC") (note 5)...................... -- --
(4,614) Losses in connection with issuances of stock by
subsidiaries and affiliates, net of taxes.............
-- -- (22) Issuance of common stock upon exercise of
stock
options...............................................
-- -- 10 AT&T tax sharing agreement adjustments (note
17)........ -- -- (40) Adjustment of spin off of
LMI........................... -- -- (28)
Other...................................................
-- -- 10 ------- ---- ------ Balance at December 31,
2005.............................. (13,278) (125)
19,120 Net
earnings............................................
840 -- 840 Other comprehensive
earnings............................ -- -- 2,531
Retirement of treasury
stock............................ -- 125 --
Distribution of Liberty Capital and Liberty Interactive
common stock to stockholders (notes 1 and 2)..........
-- -- -- Issuance of common stock upon exercise of
stock
options...............................................
-- -- 4 Stock
compensation...................................... -- -
- 62 Issuance of Liberty Interactive Series A common
stock for
acquisition....................................... -- -
- 36 Liberty Interactive Series A stock
repurchases.......... -- -- (954)
Other...................................................
-- -- (6) ------- ---- ------ Balance at December 31,
2006.............................. (12,438) -- 21,633
======= ==== ======
See accompanying notes to consolidated financial statements.
II-42
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2006, 2005 AND 2004
(1) BASIS OF PRESENTATION
On May 9, 2006, Liberty Media Corporation (formerly known as Liberty Media
Holding Corporation, "Liberty" or the "Company") completed the previously
announced restructuring (the "Restructuring") pursuant to which the Company was
organized as a new holding company. In the Restructuring, Liberty became the new
publicly traded parent company of Liberty Media LLC (formerly known as Liberty
Media Corporation, "Old Liberty"). In the Restructuring, each holder of Old
Liberty's common stock received for each share of Old Liberty's Series A common
stock held immediately prior to the Restructuring, 0.25 of a share of the
Company's Liberty Interactive Series A common stock and 0.05 of a share of the
Company's Liberty Capital Series A common stock, and for each share of Old
Liberty's Series B common stock held immediately prior to the Restructuring,
0.25 of a share of the Company's Liberty Interactive Series B common stock and
0.05 of a share of the Company's Liberty Capital Series B common stock, in each
case, with cash in lieu of any fractional shares. Liberty is the successor
reporting company to Old Liberty.
The accompanying consolidated financial statements include the accounts of
Liberty and its controlled subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
Liberty is a holding company which, through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the video and on-line
commerce, media, communications and entertainment industries in North America,
Europe and Asia.
(2) TRACKING STOCKS
On May 9, 2006, the stockholders of Old Liberty approved five related
proposals which allowed Old Liberty to restructure its company and
capitalization. As a result of the Restructuring, all of the Old Liberty
outstanding common stock was exchanged for two new tracking stocks, Liberty
Interactive common stock and Liberty Capital common stock, issued by Liberty, a
newly formed holding company. Each tracking stock issued in the Restructuring is
intended to track and reflect the economic performance of one of two newly
designated groups, the Interactive Group and the Capital Group, respectively.
Tracking stock is a type of common stock that the issuing company intends to
reflect or "track" the economic performance of a particular business or "group,"
rather than the economic performance of the company as a whole. While the
Interactive Group and the Capital Group have separate collections of businesses,
assets and liabilities attributed to them, neither group is a separate legal
entity and therefore cannot own assets, issue securities or enter into legally
binding agreements. Holders of tracking stocks have no direct claim to the
group's stock or assets and are not represented by separate boards of directors.
Instead, holders of tracking stock are stockholders of the parent corporation,
with a single board of directors and subject to all of the risks and liabilities
of the parent corporation.
The term "Interactive Group" does not represent a separate legal entity,
rather it represents those businesses, assets and liabilities which Liberty has
attributed to that group. The assets and businesses Liberty has attributed to
the Interactive Group are those engaged in video and on-line commerce, and
include its interests in QVC, Inc. ("QVC"), Provide Commerce, Inc. ("Provide"),
BuySeasons, Inc. ("BuySeasons"), Expedia, Inc. and IAC/InterActiveCorp. The
Interactive Group will also include such other businesses, assets and
liabilities that Liberty's board of directors may in the future determine to
attribute to the Interactive Group, including such other businesses and assets
as Liberty may acquire
II-43
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
for the Interactive Group. In addition, Liberty has attributed $3,108 million
principal amount (as of December 31, 2006) of its existing publicly-traded debt
to the Interactive Group.
The term "Capital Group" also does not represent a separate legal entity,
rather it represents all of Liberty's businesses, assets and liabilities other
than those which have been attributed to the Interactive Group. The assets and
businesses attributed to the Capital Group include Liberty's subsidiaries: Starz
Entertainment, LLC (formerly known as Starz Entertainment Group LLC) ("Starz
Entertainment"), Starz Media, LLC (formerly known as IDT Entertainment, Inc.)
("Starz Media"), TruePosition, Inc. ("TruePosition") and FUN Technologies, Inc.
("FUN"); its equity affiliates: GSN, LLC and WildBlue Communications, Inc.; and
its interests in News Corporation, Time Warner Inc. and Sprint Nextel
Corporation. The Capital Group will also include such other businesses, assets
and liabilities that Liberty's board of directors may in the future determine to
attribute to the Capital Group, including such other businesses and assets as
Liberty may acquire for the Capital Group. In addition, Liberty has attributed
$4,580 million principal amount (as of December 31, 2006) of its existing
publicly traded debt to the Capital Group.
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed
financial information for Liberty's tracking stock groups.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash equivalents consist of investments which are readily convertible into
cash and have maturities of three months or less at the time of acquisition.
RECEIVABLES
Receivables are reflected net of an allowance for doubtful accounts. Such
allowance aggregated $72 million and $66 million at December 31, 2006 and 2005,
respectively. A summary of activity in the allowance for doubtful accounts is as
follows:
ADDITIONS BALANCE ------------------------
- BALANCE BEGINNING CHARGED DEDUCTIONS-
END OF OF YEAR TO EXPENSE ACQUISITIONS
WRITE-OFFS YEAR --------- ---------- -----
------- ----------- -------- (AMOUNTS IN
MILLIONS)
2006.......................................
$66 27 14 (35) 72 === ==== ==== ==== ====
2005.......................................
$63 37 -- (34) 66 === ==== ==== ==== ====
2004.......................................
$78 19 -- (34) 63 === ==== ==== ==== ====
INVENTORY
Inventory, consisting primarily of products held for sale, is stated at the
lower of cost or market. Cost is determined by the average cost method, which
approximates the first-in, first-out method.
II-44
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
PROGRAM RIGHTS
Program rights are amortized on a film-by-film basis over the anticipated
number of exhibitions. Program rights payable are initially recorded at the
estimated cost of the programs when the film is available for airing.
INVESTMENT IN FILMS AND TELEVISION PROGRAMS
Investment in films and television programs generally includes the cost of
proprietary films and television programs that have been released, completed and
not released, in production, and in development or pre-production. Capitalized
costs include the acquisition of story rights, the development of stories,
production labor, postproduction costs and allocable overhead and interest
costs. Investment in films and television programs is stated at the lower of
unamortized cost or estimated fair value on an individual film basis. Investment
in films and television programs is amortized using the individual-film-forecast
method, whereby the costs are charged to expense and participation and residual
costs are accrued based on the proportion that current revenue from the films
bear to an estimate of total revenue anticipated from all markets (ultimate
revenue). Ultimate revenue estimates may not exceed ten years following the date
of initial release or from the date of delivery of the first episode for
episodic television series.
Estimates of ultimate revenue involve uncertainty and it is therefore
possible that reductions in the carrying value of investment in films and
television programs may be required as a consequence of changes in management's
future revenue estimates.
Investment in films and television programs in development or pre-production
is periodically reviewed to determine whether they will ultimately be used in
the production of a film. Costs of films in development or pre-production are
charged to expense if the project is abandoned, or if the film has not been set
for production within three years from the time of the first capitalized
transaction.
The investment in films and television programs is reviewed for impairment
on a title-by-title basis when an event or change in circumstances indicates
that a film should be assessed. If the estimated fair value of a film is less
than its unamortized cost, then the excess of unamortized costs over the
estimated fair value is charged to expense.
INVESTMENTS
All marketable equity and debt securities held by the Company are classified
as available-for-sale ("AFS") and are carried at fair value. Unrealized holding
gains and losses on AFS securities are carried net of taxes as a component of
accumulated other comprehensive earnings in stockholders' equity. Realized gains
and losses are determined on an average cost basis. Other investments in which
the Company's ownership interest is less than 20% and are not considered
marketable securities are carried at cost.
For those investments in affiliates in which the Company has the ability to
exercise significant influence, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, is adjusted to
recognize the Company's share of net earnings or losses of the affiliates as
they occur rather than as dividends or other distributions are received. Losses
are limited to the extent of the Company's investment in, advances to and
commitments for the investee. The Company's share of net earnings or loss of
affiliates also includes any other-than-temporary declines in fair value
recognized during the period.
II-45
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Changes in the Company's proportionate share of the underlying equity of a
subsidiary or equity method investee, which result from the issuance of
additional equity securities by such subsidiary or equity investee, are
recognized as increases or decreases in stockholders' equity.
The Company continually reviews its investments to determine whether a
decline in fair value below the cost basis is other than temporary
("nontemporary"). The primary factors the Company considers in its determination
are the length of time that the fair value of the investment is below the
Company's carrying value; and the financial condition, operating performance and
near term prospects of the investee. In addition, the Company considers the
reason for the decline in fair value, be it general market conditions, industry
specific or investee specific; analysts' ratings and estimates of 12 month share
price targets for the investee; changes in stock price or valuation subsequent
to the balance sheet date; and the Company's intent and ability to hold the
investment for a period of time sufficient to allow for a recovery in fair
value. If the decline in fair value is deemed to be nontemporary, the cost basis
of the security is written down to fair value. In situations where the fair
value of an investment is not evident due to a lack of a public market price or
other factors, the Company uses its best estimates and assumptions to arrive at
the estimated fair value of such investment. The Company's assessment of the
foregoing factors involves a high degree of judgment and accordingly, actual
results may differ materially from the Company's estimates and judgments.
Writedowns for cost investments and AFS securities are included in the
consolidated statements of operations as nontemporary declines in fair values of
investments. Writedowns for equity method investments are included in share of
earnings (losses) of affiliates.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company uses various derivative instruments including equity collars,
written put and call options, bond swaps and interest rate swaps to manage fair
value and cash flow risk associated with many of its investments and some of its
variable rate debt. Liberty's derivative instruments are executed with
counterparties who are well known major financial institutions. While Liberty
believes these derivative instruments effectively manage the risks highlighted
above, they are subject to counterparty credit risk. Counterparty credit risk is
the risk that the counterparty is unable to perform under the terms of the
derivative instrument upon settlement of the derivative instrument. To protect
itself against credit risk associated with these counterparties the Company
generally:
- executes its derivative instruments with several different counterparties,
and
- executes equity derivative instrument agreements which contain a provision
that requires the counterparty to post the "in the money" portion of the
derivative instrument into a cash collateral account for the Company's
benefit, if the respective counterparty's credit rating for its senior
unsecured debt were to reach certain levels, generally a rating that is
below Standard & Poor's rating of A- and/or Moody's rating of A3.
Due to the importance of these derivative instruments to its risk management
strategy, Liberty actively monitors the creditworthiness of each of its
counterparties. Based on its analysis, the Company currently considers
nonperformance by any of its counterparties to be unlikely.
Liberty accounts for its derivatives pursuant to Statement of Financial
Accounting Standards No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES" ("Statement 133") and related amendments and interpretations. All
derivatives, whether designated in hedging relationships or not, are recorded on
the balance sheet at fair value. If the derivative is designated as a fair value
hedge, the
II-46
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
changes in the fair value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative is designated
as a cash flow hedge, the effective portions of changes in the fair value of the
derivative are recorded in other comprehensive earnings and are recognized in
the statement of operations when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings. If the derivative is not designated as a hedge, changes in the fair
value of the derivative are recognized in earnings. During 2006, the Company
entered into several interest rate swap agreements to mitigate the cash flow
risk associated with interest payments related to certain of its variable rate
debt. These interest rate swap arrangements have been designated as cash flow
hedges. The Company assesses the effectiveness of its interest rate swaps using
the hypothetical derivative method. Hedge ineffectiveness had no impact on
earnings for the year ended December 31, 2006. None of the Company's other
derivatives have been designated as hedges.
The fair value of the Company's equity collars and other similar derivative
instruments is estimated using third party estimates or the Black-Scholes model.
The Black-Scholes model incorporates a number of variables in determining such
fair values, including expected volatility of the underlying security and an
appropriate discount rate. The Company obtains volatility rates from independent
sources based on the expected volatility of the underlying security over the
term of the derivative instrument. The volatility assumption is evaluated
annually to determine if it should be adjusted, or more often if there are
indications that it should be adjusted. A discount rate is obtained at the
inception of the derivative instrument and updated each reporting period based
on the Company's estimate of the discount rate at which it could currently
settle the derivative instrument. Considerable management judgment is required
in estimating the Black-Scholes variables. Actual results upon settlement or
unwinding of derivative instruments may differ materially from these estimates.
PROPERTY AND EQUIPMENT
Property and equipment, including significant improvements, is stated at
cost. Depreciation is computed using the straight-line method using estimated
useful lives of 3 to 20 years for support equipment and 10 to 40 years for
buildings and improvements.
INTANGIBLE ASSETS
The Company accounts for its intangible assets pursuant to Statement of
Financial Accounting Standards No. 142, "GOODWILL AND OTHER INTANGIBLE ASSETS"
("Statement 142"). Statement 142 requires that goodwill and other intangible
assets with indefinite useful lives (collectively, "indefinite lived intangible
assets") not be amortized, but instead be tested for impairment at least
annually. Equity method goodwill is also not amortized, but continues to be
considered for impairment under Accounting Principles Board Opinion No. 18.
Statement 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 144, "ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS" ("Statement 144").
Statement 142 requires the Company to perform an annual assessment of
whether there is an indication that goodwill is impaired. To accomplish this,
the Company identifies its reporting units and determines the carrying value of
each reporting unit by assigning the assets and liabilities, including the
existing goodwill and intangible assets, to those reporting units. Statement 142
requires the Company to consider equity method affiliates as separate reporting
units. As a result, a portion of the Company's
II-47
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
enterprise-level goodwill balance is allocated to various reporting units which
include a single equity method investment as its only asset. This allocation is
performed for goodwill impairment testing purposes only and does not change the
reported carrying value of the investment. However, to the extent that all or a
portion of an equity method investment which is part of a reporting unit
containing allocated goodwill is disposed of in the future, the allocated
portion of goodwill will be relieved and included in the calculation of the gain
or loss on disposal.
The Company determines the fair value of its reporting units using
independent appraisals, public trading prices and other means. The Company then
compares the fair value of each reporting unit to the reporting unit's carrying
amount. To the extent a reporting unit's carrying amount exceeds its fair value,
the Company compares the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of its assets
(recognized and unrecognized) and liabilities in a manner similar to a purchase
price allocation, to its carrying amount, and records an impairment charge to
the extent the carrying amount exceeds the implied fair value.
GOODWILL
Changes in the carrying amount of goodwill are as follows:
STARZ QVC ENTERTAINMENT OTHER TOTAL -------- ----------
--- -------- -------- (AMOUNTS IN MILLIONS) Balance at
January 1, 2005................................ $5,264
1,383 156 6,803 Foreign currency translation
adjustments................ 23 -- -- 23
Other...................................................
(14) -- (3) (17) ------ ----- ---- ----- Balance at
December 31, 2005.............................. 5,273
1,383 153 6,809
Acquisitions(1).........................................
5 -- 878 883
Disposition(2)..........................................
-- -- (124) (124)
Impairment(3)...........................................
-- -- (111) (111) Foreign currency translation
adjustments................ 60 -- -- 60
Other(4)................................................
78 (12) 5 71 ------ ----- ---- ----- Balance at
December 31, 2006.............................. $5,416
1,371 801 7,588 ====== ===== ==== =====
- ------------------------
(1) During the year ended December 31, 2006, Liberty and its subsidiaries
completed several acquisitions, including the acquisition of controlling
interests in Provide, FUN, BuySeasons and IDT Entertainment, Inc., for
aggregate cash consideration of $876 million, net of cash acquired, the
issuance of Liberty common stock and the assumption of debt. In connection
with these acquisitions, Liberty recorded goodwill of $883 million which
represents the difference between the consideration paid and the estimated
fair value of the assets acquired. Such goodwill is subject to adjustment
pending completion of the Company's purchase price allocation process,
including finalization of third-party valuations.
(2) During the second quarter of 2006, the Company sold its 50% interest in
Courtroom Television Network, LLC ("Court TV"). In connection with such
sale, the Company relieved $124 million of enterprise-level goodwill that
had been allocated to the Court TV investment.
(3) Liberty acquired its interest in FUN in March 2006. Subsequent to its
acquisition, the market value of FUN's stock has declined significantly due
to the performance of certain of FUN's subsidiaries
II-48
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
and uncertainty surrounding government legislation of Internet gambling
which Liberty believes the market perceives as potentially impacting FUN's
skill gaming business. In connection with its annual evaluation of the
recoverability of FUN's goodwill, Liberty received a third-party valuation,
which indicated that the carrying value of FUN's goodwill exceeded its
market value. Accordingly, Liberty recognized a $111 million impairment
charge related to goodwill.
(4) Other activity for QVC represents Liberty's acquisition of shares of QVC
common stock held by employees and officers of QVC. Amounts recorded as
goodwill represent the difference between the price paid for such minority
interest and the carrying amount of the minority interest less amounts
allocated to other intangible assets.
INTANGIBLE ASSETS SUBJECT TO AMORTIZATION
Intangible assets subject to amortization are comprised of the following:
DECEMBER 31, 2006 DECEMBER 31, 2005 ------
---------------------------- -------------
--------------------- GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING
ACCUMULATED CARRYING AMOUNT AMORTIZATION
AMOUNT AMOUNT AMORTIZATION AMOUNT --------
------------ -------- -------- -----------
- -------- (AMOUNTS IN MILLIONS)
Distribution
rights........................ $2,699
(981) 1,718 2,628 (788) 1,840 Customer
relationships..................... 2,545
(581) 1,964 2,356 (393) 1,963
Other......................................
699 (471) 228 543 (371) 172 ------ ------
----- ----- ------ -----
Total......................................
$5,943 (2,033) 3,910 5,527 (1,552) 3,975
====== ====== ===== ===== ====== =====
Amortization of intangible assets with finite useful lives was
$463 million, $453 million and $456 million for the years ended December 31,
2006, 2005 and 2004, respectively. Based on its amortizable intangible assets as
of December 31, 2006, Liberty expects that amortization expense will be as
follows for the next five years (amounts in millions):
2007....................................................... $462
2008....................................................... $430
2009....................................................... $389
2010....................................................... $363
2011....................................................... $352
IMPAIRMENT OF LONG-LIVED ASSETS
Statement 144 requires that the Company periodically review the carrying
amounts of its property and equipment and its intangible assets (other than
goodwill) to determine whether current events or circumstances indicate that
such carrying amounts may not be recoverable. If the carrying amount of the
asset is greater than the expected undiscounted cash flows to be generated by
such asset, an impairment adjustment is to be recognized. Such adjustment is
measured by the amount that the carrying value of such assets exceeds their fair
value. The Company generally measures fair value by considering sale prices for
similar assets or by discounting estimated future cash flows using an
appropriate discount rate. Considerable management judgment is necessary to
estimate the fair value of assets. Accordingly, actual results could vary
significantly from such estimates. Assets to be disposed of are carried at the
lower of their financial statement carrying amount or fair value less costs to
sell.
II-49
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
MINORITY INTERESTS
Recognition of minority interests' share of losses of subsidiaries is
generally limited to the amount of such minority interests' allocable portion of
the common equity of those subsidiaries. Further, the minority interests' share
of losses is not recognized if the minority holders of common equity of
subsidiaries have the right to cause the Company to repurchase such holders'
common equity.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the United States ("U.S.") dollar.
The functional currency of the Company's foreign operations generally is the
applicable local currency for each foreign subsidiary. Assets and liabilities of
foreign subsidiaries are translated at the spot rate in effect at the applicable
reporting date, and the consolidated statements of operations are translated at
the average exchange rates in effect during the applicable period. The resulting
unrealized cumulative translation adjustment, net of applicable income taxes, is
recorded as a component of accumulated other comprehensive earnings in
stockholders' equity.
Transactions denominated in currencies other than the functional currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in the accompanying consolidated statements of operations
and comprehensive earnings as unrealized (based on the applicable period-end
exchange rate) or realized upon settlement of the transactions.
REVENUE RECOGNITION
Revenue is recognized as follows:
- Revenue from retail sales is recognized at the time of shipment to
customers. An allowance for returned merchandise is provided as a
percentage of sales based on historical experience. The total reduction in
sales due to returns for the years ended December 31, 2006, 2005 and 2004
aggregated $1,554 million, $1,375 million and $1,165 million,
respectively.
- Programming revenue is recognized in the period during which programming
is provided, pursuant to affiliation agreements.
- Revenue from sales and licensing of software and related service and
maintenance is recognized pursuant to Statement of Position No. 97-2,
"SOFTWARE REVENUE RECOGNITION." For multiple element contracts with vendor
specific objective evidence, the Company recognizes revenue for each
specific element when the earnings process is complete. If vendor specific
objective evidence does not exist, revenue is deferred and recognized on a
straight-line basis over the remaining term of the maintenance period
after all other elements have been delivered.
- Revenue relating to proprietary films is recognized in accordance with
Statement of Position (SOP) 00-02, ACCOUNTING BY PRODUCERS OR DISTRIBUTORS
OF FILMS. Revenue from the theatrical release of feature films is
recognized at the time of exhibition based on the Company's participation
in box office receipts. Revenue from television licensing is recognized
when the film or program is complete in accordance with the terms of the
arrangement, the license period has begun and is available for telecast or
exploitation.
II-50
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
COST OF SALES
Cost of sales primarily includes actual product cost, provision for obsolete
inventory, buying allowances received from suppliers, shipping and handling
costs and warehouse costs.
ADVERTISING COSTS
Advertising costs generally are expensed as incurred. Advertising expense
aggregated $112 million, $45 million and $47 million for the years ended
December 31, 2006, 2005 and 2004, respectively. Co-operative marketing costs are
recognized as advertising expense to the extent an identifiable benefit is
received and fair value of the benefit can be reasonably measured. Otherwise,
such costs are recorded as a reduction of revenue.
STOCK-BASED COMPENSATION
FASB STATEMENT 123R
As more fully described in note 13, the Company has granted to its employees
and employees of its subsidiaries options, stock appreciation rights ("SARs")
and options with tandem SARs to purchase shares of Liberty common stock
(collectively, "Awards"). In addition, QVC had granted combination stock
options/SARs ("QVC Awards") to certain of its employees. In December 2004, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 123 (revised 2004), "SHARE-BASED PAYMENT" ("Statement
123R"). Statement 123R, which is a revision of Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("Statement 123")
and supersedes Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES" ("APB Opinion No. 25"), establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments
for goods or services, primarily focusing on transactions in which an entity
obtains employee services. Statement 123R generally requires companies to
measure the cost of employee services received in exchange for an award of
equity instruments (such as stock options and restricted stock) based on the
grant-date fair value of the award, and to recognize that cost over the period
during which the employee is required to provide service (usually the vesting
period of the award). Statement 123R also requires companies to measure the cost
of employee services received in exchange for an award of liability instruments
(such as stock appreciation rights that will be settled in cash) based on the
current fair value of the award, and to remeasure the fair value of the award at
each reporting date.
The provisions of Statement 123R allow companies to adopt the standard using
the modified prospective method or to restate all periods for which Statement
123 was effective. Liberty has adopted Statement 123R using the modified
prospective method.
The Company adopted Statement 123R effective January 1, 2006. In connection
with such adoption, the Company recorded an $89 million transition adjustment,
which is net of related income taxes of $31 million. Under Statement 123R, the
QVC Awards were required to be bifurcated into a liability award and an equity
award. Previously, under APB Opinion No. 25, no liability was recorded. The
transition adjustment primarily represents the fair value of the liability
portion of the QVC Awards at January 1, 2006. The transition adjustment is
reflected in the accompanying consolidated statement of operations as the
cumulative effect of accounting change. Also, in connection with the adoption of
Statement 123R, the Company has eliminated its unearned compensation balance as
of January 1, 2004
II-51
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
of $98 million against additional paid-in capital. Compensation expense related
to restricted shares granted to certain officers and employees of the Company
continues to be recorded as such stock vests.
Included in selling, general and administrative expenses in the accompanying
consolidated statements of operations are the following amounts of stock-based
compensation (amounts in millions):
Years ended:
December 31, 2006........................................... $67
December 31, 2005........................................... $52
December 31, 2004........................................... $98
As of December 31, 2006, the total unrecognized compensation cost related to
unvested Liberty equity awards was approximately $59 million. Such amount will
be recognized in the Company's consolidated statements of operations over a
weighted average period of approximately 2 years.
PRO FORMA DISCLOSURE
Prior to adoption of Statement 123R, the Company accounted for compensation
expense related to its Awards pursuant to the recognition and measurement
provisions of APB Opinion No. 25. All of the Company's Awards were accounted for
as variable plan awards, and compensation was recognized based upon the
percentage of the options that were vested and the intrinsic value of the
options at the balance sheet date. The Company accounted for QVC Awards using
fixed-plan accounting. The following table illustrates the effect on earnings
from continuing operations and earnings per share for the years ended
December 31, 2005 and 2004 as if the Company had applied the fair value
recognition provisions of Statement 123 to its options. Compensation expense for
SARs and options with tandem SARs was the same under APB Opinion No. 25 and
Statement 123. Accordingly, no pro forma adjustment for such Awards is included
in the following table.
YEARS ENDED DECEMBER 31, ------------------- 2005 2004
-------- -------- (AMOUNTS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS) Earnings (loss) from continuing
operations.................. $ (43) 105 Add stock
compensation as determined under the intrinsic value
method, net of taxes.............................. 2 2
Deduct stock compensation as determined under the fair
value method, net of
taxes.............................. (42) (41) ----- --
- Pro forma earnings (loss) from continuing
operations........ $ (83) 66 ===== === Basic and
diluted earnings (loss) from continuing operations per
share: As
reported...............................................
$(.02) .04 Pro
forma.................................................
$(.03) .02
IMPACT OF SPIN OFF TRANSACTIONS
In connection with the spin off of Liberty subsidiaries Liberty Media
International ("LMI") and Discovery Holding Company ("DHC") in 2004 and 2005,
respectively, certain employees of Liberty
II-52
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
received LMI and DHC options. Liberty records compensation expense related to
these awards based on the grant date fair value over the remaining vesting
period.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying value amounts and income tax bases of assets and liabilities and the
expected benefits of utilizing net operating loss and tax credit carryforwards.
The deferred tax assets and liabilities are calculated using enacted tax rates
in effect for each taxing jurisdiction in which the company operates for the
year in which those temporary differences are expected to be recovered or
settled. Net deferred tax assets are then reduced by a valuation allowance if
the Company believes it more-likely-than-not such net deferred tax assets will
not be realized. The effect on deferred tax assets and liabilities of an enacted
change in tax rates is recognized in income in the period that includes the
enactment date.
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.
LIBERTY SERIES A AND SERIES B COMMON STOCK
The basic EPS calculation is based on 2,803 million weighted average
outstanding shares of Liberty common stock for the period from January 1, 2006
to May 10, 2006, and 2,795 million and 2,856 million weighted average shares
outstanding for the years ended December 31, 2005 and 2004, respectively. The
diluted EPS calculation for the period from January 1, 2006 to May 10, 2006 and
for the year ended December 31, 2004 includes 5 million and 14 million dilutive
securities, respectively. However, due to the relative insignificance of these
dilutive securities, their inclusion does not impact the EPS amount as reported
in the accompanying consolidated statements of operations.
The cumulative effect of accounting change per common share for the period
from January 1, 2006 to May 10, 2006 was a loss of $0.03.
Earnings (loss) from discontinued operations per common share is as follows:
January 1, 2006 to May 10, 2006............................. $ --
Year ended December 31, 2005................................ $ --
Year ended December 31, 2004................................ $(.02)
LIBERTY CAPITAL COMMON STOCK
Liberty Capital EPS for the period from the Restructuring to December 31,
2006 was computed by dividing the net earnings attributable to the Capital Group
by the weighted average outstanding shares of Liberty Capital common stock for
the period (140 million). Due to the relative insignificance of the dilutive
securities for such period, their inclusion does not impact the EPS amount.
Excluded from
II-53
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
diluted EPS for the period from the Restructuring to December 31, 2006 are
approximately 3 million potential common shares because their inclusion would be
anti-dilutive.
Earnings from discontinued operations per common share for the period from
the Restructuring to December 31, 2006 is $1.62.
LIBERTY INTERACTIVE COMMON STOCK
Liberty Interactive EPS for the period from the Restructuring to
December 31, 2006 was computed by dividing the net earnings attributable to the
Interactive Group by the weighted average outstanding shares of Liberty
Interactive common stock for the period (670 million). Due to the relative
insignificance of the dilutive securities for such period, their inclusion does
not impact the EPS amount. Excluded from diluted EPS for the period from the
Restructuring to December 31, 2006 are approximately 13 million potential common
shares because their inclusion would be anti-dilutive.
RECLASSIFICATIONS
Certain prior period amounts have been reclassified for comparability with
the 2006 presentation.
ESTIMATES
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. Liberty considers (i) the estimate of the fair value of its
long-lived assets (including goodwill) and any resulting impairment charges,
(ii) its accounting for income taxes, (iii) the fair value of its derivative
instruments, (iv) its assessment of nontemporary declines in value of its
investments and (v) its 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 consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 2006, the FASB issued Statement of Financial Accounting
Standards No. 155, "ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS, AN
AMENDMENT OF FASB STATEMENTS NO. 133 AND 140" ("Statement 155"). Statement 155,
among other things, amends Statement 133 and permits fair value remeasurement of
hybrid financial instruments that contain an embedded derivative that otherwise
would require bifurcation. Statement 155 is effective after the beginning of an
entity's first fiscal year that begins after September 15, 2006. The Company
intends to adopt the provisions of Statement 155 effective January 1, 2007 and
account for its senior exchangeable debentures at fair value rather than
bifurcating such debentures into a debt instrument and a derivative instrument
as
II-54
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
required by Statement 133. If the Company had adopted Statement 155 as of
December 31, 2006, it would have recorded an increase to long-term debt of
$1.9 billion, a decrease to long-term derivative instruments of $1.3 billion and
an increase to accumulated deficit of $600 million.
In June 2006, the FASB issued FASB Interpretation No. 48, "ACCOUNTING FOR
UNCERTAINTY IN INCOME TAXES, AN INTERPRETATION OF FASB STATEMENT NO. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in a company's financial statements, and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 is
effective for fiscal years beginning after December 15, 2006. While the Company
has not completed its evaluation of the impact of FIN 48 on its financial
statements, it believes that the application of FIN 48 will result in the
derecognition of certain tax liabilities currently reflected in the Company's
consolidated balance sheet with a corresponding decrease to the Company's
accumulated deficit. The Company is unable to quantify the amount of these
adjustments at this time.
In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, "FAIR VALUE MEASUREMENTS"("Statement 157"), which defines
fair value, establishes a framework for measuring fair value under GAAP and
expands disclosures about fair value measurements. Statement 157 applies to
other accounting pronouncements that require or permit fair value measurements.
The new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those fiscal
years. Liberty is currently evaluating the potential impact of the adoption of
Statement 157 on its consolidated balance sheet, statements of operations and
comprehensive earnings (loss), and statements of cash flows.
In February 2007, the FASB issued Statement of Financial Accounting
Standards No. 159, "THE FAIR VALUE OPTION FOR FINANCIAL ASSETS AND FINANCIAL
LIABILITIES, INCLUDING AN AMENDMENT OF FASB STATEMENT NO. 115" ("Statement
159"). Statement 159 permits entities to choose to measure many financial
instruments, such as available-for-sale securities, and certain other items at
fair value and to recognize the changes in fair value of such instruments in the
entity's statement of operations. Currently under Statement of Financial
Accounting Standards No. 115, entities are required to recognize changes in fair
value of available-for-sale securities in the balance sheet in accumulated other
comprehensive earnings. Statement 159 is effective as of the beginning of an
entity's fiscal year that begins after November 15, 2007. Liberty is currently
evaluating the potential impacts of Statement 159 on its financial statements
and has not made a determination as to which of its financial instruments, if
any, it will choose to apply the provisions of Statement 159.
II-55
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(4) SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -----------------------
------- 2006 2005 2004 -------- -------- -------
- (AMOUNTS IN MILLIONS) Cash paid for
acquisitions: Fair value of assets
acquired............................. $1,494 1
79 Net liabilities
assumed................................... (227)
-- -- Deferred tax
liabilities..................................
(48) -- -- Minority
interest.........................................
(72) -- 12 Exchange of cost
investment............................... (235)
-- -- Common stock
issued.......................................
(36) -- -- ------ --- --- Cash paid for
acquisitions, net of cash acquired........ $ 876
1 91 ====== === === Cash paid for
interest...................................... $
510 477 515 ====== === === Cash paid for income
taxes.................................. $ 152
161 49 ====== === ===
(5) DISCONTINUED OPERATIONS
SALE OF OPENTV CORP.
In October 2006, Liberty entered into an agreement with an unaffiliated
third party to sell Liberty's controlling interest in OpenTV Corp. ("OPTV") for
cash consideration of $132 million. As part of an agreement with OPTV, Liberty
would pay up to $20 million of the cash proceeds to OPTV on the first
anniversary of the closing, subject to the satisfaction of certain conditions.
The sale was consummated on January 16, 2007. OPTV was attributed to the Capital
Group.
SALE OF ASCENT ENTERTAINMENT GROUP, INC.
In December 2006, Liberty entered into an agreement with an unaffiliated
third party to sell Liberty's 100% ownership interest in Ascent Entertainment
Group, Inc. ("AEG") for $332 million in cash and 2.05 million shares of common
stock of the buyer valued at approximately $50 million. AEG's primary operating
subsidiary is On Command Corporation. Consummation of the transaction is subject
to customary closing conditions, including regulatory approval, and is expected
to occur in mid-2007. Subsequent to the closing, if consummated, Liberty would
own approximately 9.9% of the buyer's outstanding common stock. AEG was
attributed to the Capital Group.
SPIN OFF OF DISCOVERY HOLDING COMPANY
On July 21, 2005 (the "DHC Spin Off Date"), Liberty completed the spin off
(the "DHC Spin Off") of DHC to its shareholders. The DHC Spin Off was effected
as a dividend by Liberty to holders of its Series A and Series B common stock of
shares of DHC Series A and Series B common stock, respectively. Holders of
Liberty common stock on July 15, 2005 received 0.10 of a share of DHC Series A
common stock for each share of Liberty Series A common stock owned and 0.10 of a
share of DHC Series B common stock for each share of Liberty Series B common
stock owned. The DHC Spin Off did not involve the payment of any consideration
by the holders of Liberty common stock and is intended to qualify as a tax-free
transaction. At the time of the DHC Spin Off, DHC's assets were
II-56
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
comprised of Liberty's 100% ownership interest in Ascent Media Group, LLC,
Liberty's 50% ownership interest in Discovery Communications, Inc. and
$200 million in cash.
Following the DHC Spin Off, DHC and Liberty operate independently, and
neither has any stock ownership, beneficial or otherwise, in the other. In
connection with the DHC Spin Off, DHC and Liberty entered into certain
agreements in order to govern certain of the ongoing relationships between
Liberty and DHC after the DHC Spin Off and to provide for an orderly transition.
These agreements include a Reorganization Agreement, a Facilities and Services
Agreement, a Tax Sharing Agreement and a Short-Term Credit Facility.
The DHC Reorganization Agreement provides for, among other things, the
principal corporate transactions required to effect the DHC Spin Off and cross
indemnities. Pursuant to the DHC Facilities and Services Agreement, Liberty
provides DHC with office space and certain general and administrative services
including legal, tax, accounting, treasury, engineering and investor relations
support. DHC reimburses Liberty for direct, out-of-pocket expenses incurred by
Liberty in providing these services and for DHC's allocable portion of
facilities costs and costs associated with any shared services or personnel.
Under the DHC Tax Sharing Agreement, Liberty generally is responsible for
U.S. federal, state and local and foreign income taxes owing with respect to
consolidated returns which include both Liberty and DHC. DHC is responsible for
all other taxes with respect to returns which include DHC, but do not include
Liberty whether accruing before, on or after the DHC Spin Off. The DHC Tax
Sharing Agreement requires that DHC will not take, or fail to take, any action
where such action, or failure to act, would be inconsistent with or prohibit the
DHC Spin Off from qualifying as a tax-free transaction. Moreover, DHC has
indemnified Liberty for any loss resulting from such action or failure to act,
if such action or failure to act precludes the DHC Spin Off from qualifying as a
tax-free transaction.
SPIN OFF OF LIBERTY MEDIA INTERNATIONAL, INC.
On June 7, 2004 (the "LMI Spin Off Date"), Liberty completed the spin off
(the "LMI Spin Off") of its wholly-owned subsidiary, Liberty Media
International, Inc., to its shareholders. Substantially all of the assets and
businesses of LMI were attributed to Liberty's former International Group
segment. In connection with the LMI Spin Off, holders of Liberty common stock on
June 1, 2004 received 0.05 of a share of LMI Series A common stock for each
share of Liberty Series A common stock owned and 0.05 of a share of LMI
Series B common stock for each share of Liberty Series B common stock owned. The
LMI Spin Off is intended to qualify as a tax-free spin off. For accounting
purposes, the LMI Spin Off is deemed to have occurred on June 1, 2004, and no
gain or loss was recognized by Liberty in connection with the LMI Spin Off due
to the pro rata nature of the distribution.
Following the LMI Spin Off, LMI and Liberty operate independently. In
connection with the LMI Spin Off, LMI and Liberty entered into certain
agreements in order to govern certain of the ongoing relationships between
Liberty and LMI after the LMI Spin Off and to provide for an orderly transition.
These agreements include a Reorganization Agreement and a Tax Sharing Agreement.
The LMI Reorganization Agreement provided for, among other things, the
principal corporate transactions required to effect the LMI Spin Off and cross
indemnities.
Under the LMI Tax Sharing Agreement, Liberty generally is responsible for
U.S. federal, state and local and foreign income taxes owing with respect to
consolidated returns which include both Liberty
II-57
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
and LMI. LMI is responsible for all other taxes with respect to returns which
include LMI, but do not include Liberty whether accruing before, on or after the
LMI Spin Off. The LMI Tax Sharing Agreement requires that LMI will not take, or
fail to take, any action where such action, or failure to act, would be
inconsistent with or prohibit the LMI Spin Off from qualifying as a tax-free
transaction. Moreover, LMI has indemnified Liberty for any loss resulting from
such action or failure to act, if such action or failure to act precludes the
LMI Spin Off from qualifying as a tax-free transaction.
In the third quarter of 2005, Liberty filed its 2004 tax return and adjusted
the amount of net operating loss and capital loss carryforwards allocated to
LMI. Such adjustment resulted in an increase to Liberty's deferred income tax
liabilities and a reduction of additional paid-in capital of $28 million.
DMX MUSIC
During the fourth quarter of 2004, the executive committee of the board of
directors of Liberty approved a plan to dispose of Liberty's approximate 56%
ownership interest in Maxide Acquisition, Inc. (d/b/a DMX Music, "DMX"). On
February 14, 2005, DMX commenced proceedings under Chapter 11 of the United
States Bankruptcy Code. DMX entered into an arrangement, subject to the approval
by the Bankruptcy Court, to sell substantially all of its operating assets to an
independent third party. On May 16, 2005, the Bankruptcy Court entered a written
order approving the transaction, and the sale transaction was completed. As a
result of the DMX Bankruptcy filing, Liberty deconsolidated DMX effective
December 31, 2004. In connection with its decision to dispose of its ownership
interest, Liberty recognized a $23 million impairment loss to write down the
carrying value of the net assets of DMX to their estimated fair value based upon
the aforementioned arrangement to sell the assets. Such loss has been included
in loss from discontinued operations in the accompanying consolidated financial
statements for the year ended December 31, 2004.
The consolidated financial statements and accompanying notes of Liberty have
been prepared reflecting OPTV, AEG, DHC, LMI and DMX as discontinued operations.
Accordingly, the assets and liabilities, revenue, costs and expenses, and cash
flows of these subsidiaries have been excluded from the respective captions in
the accompanying consolidated balance sheets, statements of operations,
statements of comprehensive earnings (loss) and statements of cash flows and
have been reported separately in such consolidated financial statements.
Certain combined statement of operations information for OPTV, AEG, DHC, LMI
and DMX, which is included in earnings (loss) from discontinued operations, is
as follows:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS)
Revenue.....................................................
$335 704 2,081 Loss before income taxes and minority
interests............. $(30) (1) (159)
Liberty's tax basis in the common stock of each of OPTV and AEG as of
December 31, 2006 exceeds their respective carrying amounts reported for
financial reporting purposes. As of December 31, 2006, Liberty has recognized a
deferred tax asset of $236 million for this excess tax basis with an offsetting
deferred tax benefit, which is included in earnings from discontinued operations
in the accompanying consolidated statement of operations. In 2004, Liberty
recognized a similar deferred tax benefit of $38 million related to its tax
basis in DMX and reported such benefit in its income tax
II-58
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
benefit for continuing operations for the year ended December 31, 2004. Liberty
has revised its 2004 presentation to report the deferred tax benefit for DMX as
a component of loss from discontinued operations.
(6) INVESTMENTS IN AVAILABLE-FOR-SALE SECURITIES AND OTHER COST INVESTMENTS
Investments in AFS securities, which are recorded at their respective fair
market values, and other cost investments are summarized as follows:
DECEMBER 31, ------------------- 2006 2005 --------
-------- (AMOUNTS IN MILLIONS) Capital Group News
Corporation..........................................
$11,158 8,171 Time Warner Inc. ("Time Warner")
(1)....................... 3,728 2,985 Sprint Nextel
Corporation ("Sprint")(2)................... 1,651
2,162 Motorola, Inc. ("Motorola")
(3)............................ 1,522 1,672 Other
AFS equity securities(4)............................
830 964 Other AFS debt
securities(5).............................. 135 372
Other cost investments and related
receivables............ 34 79 ------- ------ Total
attributed Capital Group..........................
19,058 16,405 ------- ------ Interactive Group
IAC/InterActiveCorp
("IAC")............................... 2,572 1,960
Other AFS
securities...................................... --
124 ------- ------ Total attributed Interactive
Group...................... 2,572 2,084 ------- ----
-- Consolidated
Liberty........................................
21,630 18,489 Less short-term
investments............................... (8) -- --
----- ------ $21,622 18,489 ======= ======
- ------------------------
(1) Includes $198 million and $158 million of shares pledged as collateral for
share borrowing arrangements at December 31, 2006 and 2005, respectively.
(2) Includes $170 million and $94 million of shares pledged as collateral for
share borrowing arrangements at December 31, 2006 and 2005, respectively.
(3) Includes $1,068 million and $1,173 million of shares pledged as collateral
for share borrowing arrangements at December 31, 2006 and 2005,
respectively.
(4) Includes $46 million and $156 million of shares pledged as collateral for
share borrowing arrangements at December 31, 2006 and 2005, respectively.
(5) At December 31, 2006, other AFS debt securities include $127 million of
investments in third-party marketable debt securities held by Liberty parent
and $8 million of such securities held by subsidiaries of Liberty. At
December 31, 2005, such investments aggregated $372 million and zero,
respectively.
II-59
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
NEWS CORPORATION
In December 2006, Liberty announced that it had entered into an exchange
agreement with News Corporation pursuant to which, if completed, Liberty would
exchange its approximate 16.2% ownership interest in News Corporation for a
subsidiary of News Corporation, which would own News Corporation's approximate
38.5% interest in The DirecTV Group, Inc., three regional sports television
networks and approximately $550 million in cash. Consummation of the exchange,
which is subject to various closing conditions, including approval by News
Corporation's shareholders, regulatory approval and receipt of a favorable
ruling from the IRS confirming that the exchange is tax-free, is expected in mid
2007.
In November 2004, Liberty entered into total return equity swaps with a
financial institution with respect to 92 million shares of News Corporation
voting stock ("NWS"). Pursuant to the terms of the swap, the financial
institution acquired the 92 million shares of NWS for Liberty's benefit for a
weighted average strike price of $17.48. In December 2004, Liberty elected to
terminate the swaps. In connection with such termination, Liberty delivered
86.9 million shares of News Corporation non-voting stock ("NWSA") with a fair
market value of $1,608 million in exchange for the 92 million shares of NWS with
a fair market value of $1,749 million. Accordingly, Liberty recognized a pre-tax
gain on the swap transaction of $141 million, which is included in realized and
unrealized gains on financial instruments and a pre-tax gain on the exchange of
NWSA for NWS of $710 million, which is included in gains on dispositions. At
December 31, 2006, Liberty has an approximate 16.2% economic interest and an
approximate 19.1% voting interest in News Corporation.
IAC/INTERACTIVECORP
Effective August 9, 2005, IAC completed the spin-off of its subsidiary,
Expedia, Inc. ("Expedia"). Shareholders of IAC, including Liberty, received one
share of Expedia for each share of IAC owned. Subsequent to the spin-off of
Expedia, Liberty owned approximately 20% of the outstanding Expedia common stock
representing a 52% voting interest. However, under existing governance
arrangements, the Chairman of Expedia is currently entitled to vote Liberty's
shares of Expedia, subject to certain limitations. As Liberty has appointed two
out of ten members of Expedia's board of directors, it accounts for this
investment using the equity method of accounting. Liberty allocated its pre-spin
off carrying value in IAC between IAC and Expedia based on the relative trading
prices of IAC and Expedia. Unrealized holding gains included in the carrying
value allocated to Expedia were reversed as part of this allocation.
At December 31, 2006, Liberty owns approximately 24% of IAC common stock
representing an approximate 57% voting interest. However, under existing
governance arrangements, the Chairman of IAC is currently entitled to vote
Liberty's shares, and due to the fact that Liberty has rights to appoint only
two of thirteen members to the IAC board of directors, Liberty's ability to
exert significant influence over IAC is limited at this time. Accordingly,
Liberty accounts for this investment as an AFS security.
NONTEMPORARY DECLINES IN FAIR VALUE OF INVESTMENTS
During the years ended December 31, 2006, 2005 and 2004, Liberty determined
that certain of its AFS securities (including News Corporation in 2005) and cost
investments experienced nontemporary declines in value. The primary factors
considered by Liberty in determining the timing of the recognition for the
majority of these impairments was the length of time the investments traded
below
II-60
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Liberty's cost bases and the lack of near-term prospects for recovery in the
stock prices. As a result, the carrying amounts of such investments were
adjusted to their respective fair values based primarily on quoted market prices
at the balance sheet date. These adjustments are reflected as nontemporary
declines in fair value of investments in the consolidated statements of
operations. The amount of nontemporary decline recognized for Liberty's News
Corporation voting shares in 2005 was $352 million.
UNREALIZED HOLDINGS GAINS AND LOSSES
Unrealized holding gains and losses related to investments in AFS securities
are summarized below.
DECEMBER 31, 2006
DECEMBER 31, 2005 -----
------------------ ----
-----------------------
EQUITY DEBT EQUITY DEBT
SECURITIES SECURITIES
SECURITIES SECURITIES -
--------- ---------- --
-------- --------------
(AMOUNTS IN MILLIONS)
Gross unrealized
holding
gains...................
$9,335 -- 5,459 17
Gross unrealized
holding
losses..................
$ (1) -- (27) --
The aggregate fair value of securities with unrealized holding losses at
December 31, 2006 was $6 million. None of these securities had unrealized losses
for more than 12 continuous months.
(7) FINANCIAL INSTRUMENTS
The Company's financial instruments are summarized as follows:
DECEMBER 31, ------------------- TYPE OF DERIVATIVE 2006
2005 - ------------------ -------- -------- (AMOUNTS IN
MILLIONS) ASSETS Equity
collars............................................
$1,218 1,568 Put spread
collars........................................ -- 133
Other.....................................................
361 83 ------ ------ 1,579 1,784 Less current
portion...................................... (239) (661)
------ ------ $1,340 1,123 ====== ====== LIABILITIES
Borrowed
shares........................................... $1,482
1,581 Exchangeable debenture call option
obligations............ 1,280 927 Put
options............................................... --
342 Equity
collars............................................ 416
160
Other.....................................................
12 16 ------ ------ 3,190 3,026 Less current
portion...................................... (1,484)
(1,939) ------ ------ $1,706 1,087 ====== ======
II-61
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
EQUITY COLLARS AND PUT OPTIONS
The Company has entered into equity collars, written put and call options
and other financial instruments to manage market risk associated with its
investments in certain marketable securities. These instruments are recorded at
fair value based on option pricing models. Equity collars provide the Company
with a put option that gives the Company the right to require the counterparty
to purchase a specified number of shares of the underlying security at a
specified price at a specified date in the future. Equity collars also provide
the counterparty with a call option that gives the counterparty the right to
purchase the same securities at a specified price at a specified date in the
future. The put option and the call option generally have equal fair values at
the time of origination resulting in no cash receipts or payments.
BORROWED SHARES
From time to time and in connection with certain of its derivative
instruments, Liberty borrows shares of the underlying securities from a
counterparty and delivers these borrowed shares in settlement of maturing
derivative positions. In these transactions, a similar number of shares that are
owned by Liberty have been posted as collateral with the counterparty. These
share borrowing arrangements can be terminated at any time at Liberty's option
by delivering shares to the counterparty. The counterparty can terminate these
arrangements at any time. The liability under these share borrowing arrangements
is marked to market each reporting period with changes in value recorded in
unrealized gains or losses in the consolidated statement of operations. The
shares posted as collateral under these arrangements continue to be treated as
AFS securities and are marked to market each reporting period with changes in
value recorded as unrealized gains or losses in other comprehensive earnings.
EXCHANGEABLE DEBENTURE CALL OPTION OBLIGATIONS
Liberty has issued senior exchangeable debentures which are exchangeable for
the value of a specified number of shares of Sprint and Embarq Corporation
common stock, Motorola common stock, Viacom Class B and CBS Corporation Class B
common stock or Time Warner common stock, as applicable. (See note 9 for a more
complete description of the exchangeable debentures.)
Under Statement 133, the call option feature of the exchangeable debentures
is reported separately from the long-term debt portion in Liberty's consolidated
balance sheets at fair value. Changes in the fair value of the call option
obligations are recognized as unrealized gains (losses) on derivative
instruments in Liberty's consolidated statements of operations.
II-62
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
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:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) Exchangeable debenture call option
obligations.............. $(353) 172 (129) Equity
collars..............................................
(59) 311 (941) Borrowed
shares.............................................
(32) (205) (227) Put
options.................................................
-- (66) 2 Other
derivatives...........................................
165 45 11 ----- ---- ------ $(279) 257 (1,284) =====
==== ======
(8) INVESTMENTS IN AFFILIATES ACCOUNTED FOR USING THE EQUITY METHOD
Liberty has various investments accounted for using the equity method. The
following table includes Liberty's carrying amount and percentage ownership of
the more significant investments in affiliates at December 31, 2006 and the
carrying amount at December 31, 2005:
DECEMBER 31, DECEMBER 31, 2006 2005 -----------------------
- ------------ PERCENTAGE CARRYING CARRYING OWNERSHIP
AMOUNT AMOUNT ---------- -------- ------------ (DOLLAR
AMOUNTS IN MILLIONS)
Expedia.....................................................
21% $1,254 1,213
GSN.........................................................
50% 253 255 Court
TV.................................................... N/A
-- 297
Other.......................................................
various 335 143 ------ ----- $1,842 1,908 ====== =====
EXPEDIA
IAC completed the spin off of Expedia on August 9, 2005. Accordingly, the
Company recorded its share of earnings of Expedia for the five months ended
December 31, 2005. The fair value of the
II-63
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Company's investment in Expedia was $1,452 million and $1,659 million at
December 31, 2006 and 2005, respectively. Summarized unaudited financial
information for Expedia is as follows:
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, ------------------- 2006 2005 -------- -------
- (AMOUNTS IN MILLIONS) Current
assets.............................................. $1,183
590 Property and
equipment...................................... 137 91
Goodwill....................................................
5,861 5,860 Intangible
assets........................................... 1,029
1,177 Other
assets................................................ 59
39 ------ ----- Total
assets.............................................. $8,269
7,757 ====== ===== Current
liabilities......................................... $1,400
1,438 Deferred income
taxes....................................... 369 369 Other
liabilities........................................... 534
144 Minority
interest........................................... 62 72
Stockholders'
equity........................................ 5,904 5,734
------ ----- Total liabilities and
equity.............................. $8,269 7,757 ======
=====
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------- 2006 2005 ----
---- -------- (AMOUNTS IN MILLIONS)
Revenue.....................................................
$2,238 2,119 Cost of
revenue............................................. (503)
(480) ------ ------ Gross
profit.............................................. 1,735
1,639 Selling, general and administrative
expenses................ (1,273) (1,116)
Amortization................................................
(111) (126) ------ ------ Operating
income.......................................... 351 397
Interest
income............................................. 32 51
Other income
(expense)...................................... 1 (33)
Income tax
expense.......................................... (139)
(186) ------ ------ Net
earnings.............................................. $
245 229 ====== ======
II-64
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(9) LONG-TERM DEBT
Debt is summarized as follows:
OUTSTANDING CARRYING VALUE PRINCIPAL DECEMBER
31, DECEMBER 31, ------------------- 2006 2006
2005 ------------ -------- -------- (AMOUNTS
IN MILLIONS) Capital Group Senior exchangeable
debentures 4% Senior Exchangeable Debentures
due 2029.............. $ 869 254 251 3.75%
Senior Exchangeable Debentures due
2030........... 810 234 231 3.5% Senior
Exchangeable Debentures due 2031............
600 238 235 3.25% Senior Exchangeable
Debentures due 2031........... 551 119 117
0.75% Senior Exchangeable Debentures due
2023........... 1,750 1,637 1,552 Subsidiary
debt...........................................
158 158 37 ------- ------ ------ Total
attributed Capital
Group.......................... 4,738 2,640
2,423 ------- ------ ------ Interactive Group
Senior notes and debentures 3.5% Senior Notes
due 2006.............................. -- --
121 Floating Rate Senior Notes due
2006..................... -- -- 1,247 7.875%
Senior Notes due
2009............................ 670 667 666
7.75% Senior Notes due
2009............................. 234 234 235
5.7% Senior Notes due
2013.............................. 802 800 800
8.5% Senior Debentures due
2029......................... 500 495 495
8.25% Senior Debentures due
2030........................ 902 895 895 QVC
bank credit
facilities................................
3,225 3,225 800 Other subsidiary
debt..................................... 67
67 67 ------- ------ ------ Total attributed
Interactive Group...................... 6,400
6,383 5,326 ------- ------ ------ Total
consolidated
Liberty.............................. $11,138
9,023 7,749 ======= Less current
maturities.................................
(114) (1,379) ------ ------ Total long-term
debt....................................
$8,909 6,370 ====== ======
SENIOR NOTES AND DEBENTURES
Interest on the Senior Notes and Senior Debentures is payable semi-annually
based on the date of issuance.
The Senior Notes and Senior Debentures are stated net of an aggregate
unamortized discount of $17 million at each of December 31, 2006 and 2005. Such
discount is being amortized to interest expense in the accompanying consolidated
statements of operations.
SENIOR EXCHANGEABLE DEBENTURES
Each $1,000 debenture of Liberty's 4% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 11.4743 shares of Sprint
common stock and .5737 shares of Embarq
II-65
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Corporation ("Embarq"), which Sprint spun off to its shareholders in May 2006.
Liberty may, at its election, pay the exchange value in cash, Sprint and Embarq
common stock or a combination thereof. Liberty, at its option, may redeem the
debentures, in whole or in part, for cash generally equal to the face amount of
the debentures plus accrued interest.
Each $1,000 debenture of Liberty's 3.75% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 8.3882 shares of Sprint
common stock and .4194 shares of Embarq common stock. Liberty may, at its
election, pay the exchange value in cash, Sprint and Embarq common stock or a
combination thereof. Liberty, at its option, may redeem the debentures, in whole
or in part, for cash equal to the face amount of the debentures plus accrued
interest.
Each $1,000 debenture of Liberty's 3.5% Senior Exchangeable Debentures (the
"Motorola Exchangeables") is exchangeable at the holder's option for the value
of 36.8189 shares of Motorola common stock and, prior to the cash distribution
described below, 4.0654 shares of Freescale Semiconductor, Inc. ("Freescale"),
which Motorola spun off to its shareholders in December 2004. Such exchange
value is payable, at Liberty's option, in cash, Motorola stock or a combination
thereof. Liberty, at its option, may redeem the debentures, in whole or in part,
for cash generally equal to the adjusted principal amount of the debentures plus
accrued interest. As a result of the cash distribution described below, the
adjusted principal amount of each $1,000 debenture is $837.38. Effective
December 1, 2006, a consortium of private equity firms purchased all of the
common stock of Freescale, including the Freescale common stock owned by
Liberty. Pursuant to the terms of the indenture covering the Motorola
Exchangeables, Liberty announced that it would make a cash distribution of
$162.62 per $1,000 bond to holders of such bonds. Such distribution was made in
January 2007, and Liberty reduced its outstanding debt by $97.6 million.
Each $1,000 debenture of Liberty's 3.25% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 9.2833 shares of Viacom
Class B common stock and 9.2833 shares of CBS Corporation ("CBS") Class B common
stock, which Viacom spun off to its shareholders in December 2005. Such exchange
value is payable at Liberty's option in cash, Viacom and CBS stock or a
combination thereof. Liberty, at its option, may redeem the debentures, in whole
or in part, for cash equal to the face amount of the debentures plus accrued
interest.
Each $1,000 debenture of Liberty's 0.75% Senior Exchangeable Debentures is
exchangeable at the holder's option for the value of 57.4079 shares of Time
Warner common stock. Liberty may, at its election, pay the exchange value in
cash, Time Warner common stock, shares of Liberty common stock or a combination
thereof. On or after April 5, 2008, Liberty, at its option, may redeem the
debentures, in whole or in part, for shares of Time Warner common stock, cash or
any combination thereof equal to the face amount of the debentures plus accrued
interest. On March 30, 2008, March 30, 2013 or March 30, 2018, each holder may
cause Liberty to purchase its exchangeable debentures, and Liberty, at its
election, may pay the purchase price in shares of Time Warner common stock,
cash, Liberty common stock, or any combination thereof.
Interest on the Company's exchangeable debentures is payable semi-annually
based on the date of issuance. At maturity, all of the Company's exchangeable
debentures are payable in cash.
In accordance with Statement 133, the call option feature of the
exchangeable debentures is reported at fair value and separately from the
long-term debt in the consolidated balance sheet. The reported amount of the
long-term debt portion of the exchangeable debentures is calculated as the
difference between the face amount of the debentures and the fair value of the
call option feature on
II-66
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
the date of issuance. The long-term debt is accreted to its face amount over the
expected term of the debenture using the effective interest method. Accordingly,
at December 31, 2006, the difference between the principal amount and the
carrying value of the long-term debt portion is the unamortized fair value of
the call option feature that was recorded at the date of issuance of the
respective debentures. Accretion related to the Company's exchangeable
debentures aggregated $95 million, $89 million and $83 million during the years
ended December 31, 2006, 2005 and 2004, respectively, and is included in
interest expense in the accompanying consolidated statements of operations.
QVC BANK CREDIT FACILITIES
Effective May 20, 2005, QVC entered into an unsecured $2 billion bank credit
facility. In March 2006, such facility was refinanced with a new unsecured
$3.5 billion bank credit facility, which was subsequently amended on October 4,
2006 (the "March 2006 Credit Agreement"). The March 2006 Credit Agreement is
comprised of an $800 million U.S. dollar term loan that was drawn at closing, an
$800 million U.S. dollar term loan that was drawn on September 18, 2006, a
$600 million multi-currency term loan that was drawn in U.S. dollars on
September 18, 2006, a $650 million U.S. dollar revolving loan and a
$650 million multi-currency revolving loan. The foregoing multi-currency loans
can be made, at QVC's option, in U.S. dollars, Japanese yen, U.K. pound sterling
or euros. All loans are due and payable on March 3, 2011, and accrue interest at
a rate equal to (i) LIBOR for the interest period selected by QVC plus a margin
that varies based on QVC's leverage ratio or (ii) the higher of the Federal
Funds Rate plus 0.50% or the prime rate announced by JP Morgan Chase Bank, N.A.
from time to time. The weighted average interest rate for all borrowings under
the March 2006 Credit Agreement at December 31, 2006 was 6.11%. QVC is required
to pay a commitment fee quarterly in arrears on the unused portion of the
commitments.
On October 4, 2006, QVC entered into a new credit agreement (the
"October 2006 Credit Agreement"), which provides for an additional unsecured
$1.75 billion credit facility, consisting of an $800 million initial term loan
made on October 13, 2006 and $950 million of delayed draw term loans to be made
from time to time upon the request of QVC. The delayed draw term loans are
available until September 30, 2007 and are subject to reductions in the
principal amount available starting on March 31, 2007. The loans bear interest
at a rate equal to (i) LIBOR for the interest period selected by QVC plus a
margin that varies based on QVC's leverage ratio or (ii) the higher of the
Federal Funds Rate plus 0.50% or the prime rate announced by Wachovia Bank, N.A.
from time to time. The weighted average interest rate for all borrowings under
the October 2006 Credit Agreement at December 31, 2006 was 6.10%. QVC is
required to pay a commitment fee quarterly in arrears on the unused portion of
the commitments. The loans are scheduled to mature on October 4, 2011.
The March 2006 Credit Agreement and the October 2006 Credit Agreement
contain restrictive covenants, which require among other things, the maintenance
of certain financial ratios and include limitations on indebtedness, liens,
encumbrances, dispositions, guarantees and dividends. QVC was in compliance with
its debt covenants at December 31, 2006. QVC's ability to borrow the unused
portion of its credit agreements is dependent on its continuing compliance with
such covenants both before and after giving effect to such additional borrowing.
II-67
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
QVC INTEREST RATE SWAP ARRANGEMENTS
During 2006, QVC entered into seven separate interest rate swap arrangements
with an aggregate notional amount of $1,400 million to manage the cash flow risk
associated with interest payments on its variable rate debt. The swap
arrangements provide for QVC to make fixed payments at a rate of 4.9575% and to
receive variable payments at 3 month LIBOR. QVC also entered into three separate
interest rate swap arrangements with an aggregate notional amount of
$800 million. These swap arrangements provide for QVC to make fixed payments at
a rate of 5.2928% and to receive variable payments at 3 month LIBOR. All of the
swap arrangements expire in March 2011 contemporaneously with the maturity of
the March 2006 Credit Agreement. Liberty accounts for the swap arrangements as
cash flow hedges with the effective portions of changes in the fair value
reflected in other comprehensive earnings in the accompanying consolidated
balance sheet.
OTHER SUBSIDIARY DEBT
Other subsidiary debt at December 31, 2006 is comprised of capitalized
satellite transponder lease obligations and Starz Media bank debt.
FIVE YEAR MATURITIES
The U.S. dollar equivalent of the annual principal maturities of Liberty's
debt for each of the next five years is as follows (amounts in millions):
2007....................................................... $ 114
2008....................................................... $1,768
2009....................................................... $ 969
2010....................................................... $ 69
2011....................................................... $3,240
FAIR VALUE OF DEBT
Liberty estimates the fair value of its debt based on the quoted market
prices for the same or similar issues or on the current rate offered to Liberty
for debt of the same remaining maturities. The fair value of Liberty's publicly
traded debt is as follows:
DECEMBER 31, ------------------- 2006 2005 -------- -----
--- (AMOUNTS IN MILLIONS) Fixed rate senior
notes..................................... $1,678 1,838
Senior
debentures...........................................
$1,422 1,347 Senior exchangeable debentures, including
call option
obligation................................................
$4,361 3,858
Liberty believes that the carrying amount of its subsidiary debt, which is
primarily variable rate debt, approximated fair value at December 31, 2006.
II-68
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(10) INCOME TAXES
Income tax benefit (expense) consists of:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) Current:
Federal...................................................
$(513) (100) (178) State and
local........................................... (92)
(75) (61)
Foreign...................................................
(112) (88) (114) ----- ---- ---- (717) (263) (353) -----
---- ---- Deferred:
Federal...................................................
362 219 123 State and
local........................................... 99 172
63
Foreign...................................................
4 (2) 8 ----- ---- ---- 465 389 194 ----- ---- ----
Income tax benefit
(expense)................................ $(252) 126
(159) ===== ==== ====
Income tax benefit (expense) differs from the amounts computed by applying
the U.S. federal income tax rate of 35% as a result of the following:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) Computed expected tax benefit
(expense)..................... $(336) 59 (92) Change in
estimated foreign and state tax rates............. 130
147 2 State and local income taxes, net of federal income
taxes... (34) 7 (4) Foreign taxes, net of foreign tax
credits................... (20) (31) (47) Change in
valuation allowance affecting tax expense......... 76
(40) (3) Impairment of goodwill not deductible for tax
purposes...... (39) -- -- Disposition of nondeductible
goodwill in sales
transaction...............................................
(43) -- -- Minority
interest........................................... (10)
(10) (6) Dividends received
deduction................................ 12 12 --
Disqualifying disposition of incentive stock options not
deductible for book
purposes.............................. 14 -- -- Other,
net.................................................. (2)
(18) (9) ----- --- ---- Income tax benefit
(expense)................................ $(252) 126
(159) ===== === ====
II-69
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
The tax effects of temporary differences that give rise to significant
portions of the deferred income tax assets and deferred income tax liabilities
are presented below:
DECEMBER 31, ------------------- 2006 2005 -------- -----
--- (AMOUNTS IN MILLIONS) Deferred tax assets: Net
operating and capital loss carryforwards.............. $
470 513 Accrued stock
compensation................................ 79 90 Other
future deductible amounts........................... 485
399 ------ ----- Deferred tax
assets..................................... 1,034 1,002
Valuation allowance.....................................
(93) (155) ------ ----- Net deferred tax
assets................................. 941 847 ------ --
--- Deferred tax liabilities:
Investments...............................................
6,885 6,048 Intangible
assets......................................... 2,362
2,523 Discount on exchangeable
debentures....................... 981 1,006
Other.....................................................
369 89 ------ ----- Deferred tax
liabilities................................ 10,597 9,666
------ ----- Net deferred tax
liabilities................................ $9,656 8,819
====== =====
The Company's deferred tax assets and liabilities are reported in the
accompanying consolidated balance sheets as follows:
DECEMBER 31, ------------------- 2006 2005
-------- -------- (AMOUNTS IN MILLIONS)
Current deferred tax
asset.................................. $
(128) (46) Current deferred tax
liabilities............................ --
169 Long-term deferred tax
liabilities..........................
9,784 8,696 ------ ----- Net deferred tax
liabilities................................
$9,656 8,819 ====== =====
The Company's valuation allowance decreased $76 million in 2006 related to
the recognition of a tax benefit and increased $14 million due to acquisitions.
At December 31, 2006, Liberty had net operating and capital loss
carryforwards for income tax purposes aggregating approximately $893 million
which, if not utilized to reduce taxable income in future periods, will expire
as follows: 2009: $351 million; 2011: $169 million and beyond 2011:
$373 million. Of the foregoing net operating and capital loss carryforward
amount, approximately $288 million is subject to certain limitations and may not
be currently utilized. The remaining $605 million is currently available to be
utilized to offset future taxable income of Liberty's consolidated tax group.
II-70
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Since the date Liberty issued its exchangeable debentures, it has claimed
interest deductions on such exchangeable debentures for federal income tax
purposes based on the "comparable yield" at which it could have issued a
fixed-rate debenture with similar terms and conditions. In all instances, this
policy has resulted in Liberty claiming interest deductions significantly in
excess of the cash interest currently paid on its exchangeable debentures. In
this regard, Liberty has deducted $2,218 million in cumulative interest expense
associated with the exchangeable debentures since the Company's 2001 split off
from AT&T Corp. ("AT&T"). Of that amount, $629 million represents cash interest
payments. Interest deducted in prior years on its exchangeable debentures has
contributed to net operating losses ("NOLs") that may be carried to offset
taxable income in 2006 and later years. These NOLs and current interest
deductions on its exchangeable debentures are being used to offset taxable
income currently being generated.
The IRS has issued Technical Advice Memorandums ("TAMs") challenging the
current deductibility of interest expense claimed on exchangeable debentures
issued by other companies. The TAMs conclude that such interest expense must be
capitalized as basis to the shares referenced in the exchangeable debentures. If
the IRS were to similarly challenge Liberty's tax treatment of these interest
deductions, and ultimately win such challenge, there would be no impact to
Liberty's reported total tax expense as the resulting increase in current tax
expense would be offset by a decrease in its deferred tax expense. However,
Liberty would be required to make current federal income tax payments and may be
required to make interest payments to the IRS. These payments could prove to be
significant.
(11) STOCKHOLDERS' EQUITY
PREFERRED STOCK
Liberty's preferred stock is issuable, from time to time, with such
designations, preferences and relative participating, optional or other rights,
qualifications, limitations or restrictions thereof, as shall be stated and
expressed in a resolution or resolutions providing for the issue of such
preferred stock adopted by Liberty's Board of Directors. As of December 31,
2006, no shares of preferred stock were issued.
COMMON STOCK
Liberty's Capital Series A common stock and Interactive Series A common
stock each has one vote per share, and its Capital Series B common stock and
Interactive Series B common stock each has ten votes per share. Each share of
the Series B common stock is exchangeable at the option of the holder for one
share of Series A common stock of the same group.
As of December 31, 2006, there were 2.3 million and 1.5 million shares of
Liberty Capital Series A common stock and Series B common stock, respectively,
reserved for issuance under exercise privileges of outstanding stock options.
As of December 31, 2006, there were 21.5 million and 7.5 million shares of
Liberty Interactive Series A common stock and Series B common stock,
respectively, reserved for issuance under exercise privileges of outstanding
stock options.
In addition to the Liberty Capital Series A and Series B common stock and
the Liberty Interactive Series A and Series B common stock, there are
300 million and 1,500 million shares of Liberty Capital Series C and Liberty
Interactive Series C common stock, respectively, authorized for issuance. As of
December 31, 2006, no shares of either Series C common stock were issued or
outstanding.
II-71
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Prior to the Restructuring, the Company retired the 10,000,000 shares of
Liberty Series B common stock held in treasury and returned them to the status
of authorized and available for issuance.
PURCHASES OF COMMON STOCK
During the period from May 10, 2006 to December 31, 2006, the Company
repurchased 51.6 million shares of Liberty Interactive Series A common stock in
the open market for aggregate cash consideration of $954 million. Such shares
were repurchased pursuant to a previously announced share repurchase program and
have been retired and returned to the status of authorized and available for
issuance.
During the period from May 10, 2006 to December 31 2006, the Company sold
put options on Liberty Capital Series A common stock and Liberty Interactive
Series A common stock for aggregate cash proceeds of approximately $7 million.
All such put options expired out of the money prior to December 31, 2006. The
Company accounted for these put options pursuant to Statement of Financial
Accounting Standards No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY." Accordingly, the put options
were recorded in derivative instrument liabilities at fair value and changes in
the fair value are included in realized and unrealized gains (losses) on
financial instruments in the accompanying consolidated statement of operations.
During 2005, Liberty sold put options with respect to shares of its
Series A common stock for net cash proceeds of $2 million. All such puts expired
out of the money in 2006.
During the year ended December 31, 2004, the Company acquired approximately
96.0 million shares of its Series B common stock from the estate and family of
the late founder of Liberty's former parent in exchange for approximately
105.4 million shares of Liberty Series A common stock.
On July 28, 2004, Liberty completed a transaction with Comcast pursuant to
which Liberty repurchased 120.3 million shares of its Series A common stock
(valued at $1,017 million) held by Comcast in exchange for 100% of the stock of
Encore ICCP, Inc. ("Encore ICCP"), a wholly owned subsidiary of Liberty. At the
time of the exchange, Encore ICCP held Liberty's 10% ownership interest in E!
Entertainment Television, Liberty's 100% ownership interest in International
Channel Networks, all of Liberty's rights, benefits and obligations under a TCI
Music contribution agreement, and $547 million in cash. The transaction also
resolved all litigation pending between Comcast and Liberty regarding the TCI
Music contribution agreement, to which Comcast succeeded as part of its
acquisition of AT&T Broadband in November of 2002. In connection with this
transaction, Liberty recognized a pre-tax gain on disposition of assets of
$387 million.
During 2004, Liberty entered into zero-strike call spreads ("Z-Call") with
respect to six million shares of its Series A common stock. Liberty net cash
settled all of its Z-calls during the first quarter of 2005 for net cash
proceeds of $63 million, which primarily represented the return of collateral
posted by Liberty in 2004. Liberty accounts for the Z-Calls pursuant to
Statement No. 150. Changes in the fair value of the Z-Calls are included in
realized and unrealized gains (losses) on derivative instruments in the
accompanying consolidated statement of operations.
II-72
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(12) TRANSACTIONS WITH OFFICERS AND DIRECTORS
CHAIRMAN'S EMPLOYMENT AGREEMENT
The Chairman's employment agreement provides for, among other things,
deferral of a portion (not in excess of 40%) of the monthly compensation payable
to him for all employment years commencing on or after January 1, 1993. The
deferred amounts will be payable in monthly installments over a 20-year period
commencing on the termination of the Chairman's employment, together with
interest thereon at the rate of 8% per annum compounded annually from the date
of deferral to the date of payment. The aggregate liability under this
arrangement at December 31, 2006 is $2.0 million, and is included in other
liabilities in the accompanying consolidated balance sheet.
The Chairman's employment agreement also provides that in the event of
termination of his employment with Liberty, he will be entitled to receive 240
consecutive monthly payments equal to $15,000 increased at the rate of 12% per
annum compounded annually from January 1, 1988 to the date payment commences
($115,350 per month as of December 31, 2006). Such payments would commence on
the first day of the month succeeding the termination of employment. In the
event of the Chairman's death, his beneficiaries would be entitled to receive
the foregoing monthly payments. The aggregate liability under this arrangement
at December 31, 2006 is $27.7 million, and is included in other liabilities in
the accompanying consolidated balance sheet.
The Company's Chairman deferred a portion of his monthly compensation under
his previous employment agreement with Tele-Communications, Inc. ("TCI"). The
Company assumed the obligation to pay that deferred compensation in connection
with the TCI/AT&T Merger in 1999. The deferred obligation (together with
interest at the rate of 13% per annum compounded annually), which aggregated
$15.7 million at December 31, 2006 and is included in other liabilities in the
accompanying consolidated balance sheets, is payable on a monthly basis,
following the occurrence of specified events, under the terms of the previous
employment agreement. The rate at which interest accrues on the deferred
obligation was established in 1983 pursuant to the previous employment
agreement.
OTHER
In September 2000, certain officers of Liberty purchased a 6% common stock
interest in a subsidiary for $1.3 million. Such subsidiary owned an indirect
interest in an entity that held certain of Liberty's investments in satellite
and technology related assets. Liberty and the officers entered into a
shareholders agreement in which the officers could require Liberty to purchase,
after five years, all or part of their common stock interest in exchange for
Liberty Series A stock at the then fair market value. In addition, Liberty had
the right to purchase, in exchange for Liberty Series A common stock, the common
stock interests held by the officers at fair market value at any time. During
2001, two of the officers resigned their positions with the Company, and the
Company purchased their respective interests in the subsidiary for the original
purchase price plus 6% interest. In December 2005, Liberty redeemed all of the
remaining shares of common stock of the subsidiary from the officers for
aggregate cash proceeds of $80.
(13) STOCK OPTIONS AND STOCK APPRECIATION RIGHTS
LIBERTY--INCENTIVE PLANS
Pursuant to the Liberty Media Corporation 2000 Incentive Plan, as amended
from time to time (the "Liberty Incentive Plan"), the Company has granted to
certain of its employees stock options,
II-73
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
SARs and stock options with tandem SARs (collectively, "Awards") to purchase
shares of Liberty Capital and Liberty Interactive Series A and Series B common
stock. The Liberty Incentive Plan provides for Awards to be made in respect of a
maximum of 48 million shares of common stock of Liberty. Liberty issues new
shares upon exercise of equity awards.
On December 17, 2002, shareholders of the Company approved the Liberty Media
Corporation 2002 Nonemployee Director Incentive Plan, as amended from time to
time (the "NDIP"). Under the NDIP, the Liberty Board of Directors (the "Liberty
Board") has the full power and authority to grant eligible nonemployee directors
stock options, SARs, stock options with tandem SARs, and restricted stock.
LIBERTY--GRANTS
Awards granted pursuant to the Liberty Incentive Plan and the NDIP during
2004 through the Restructuring in 2006 are provided in the table below. The
exercise prices in the table represent the exercise price on the date of grant
and have not been adjusted for the effects of the LMI Spin Off, the DHC Spin Off
or the Restructuring, as applicable.
WEIGHTED WEIGHTED AVERAGE
NUMBER OF AVERAGE GRANT GRANT
GRANT AWARDS EXERCISE VESTING
DATE FAIR YEAR GRANT GROUP
TYPE GRANTED PRICE PERIOD
TERM VALUE ----- ------------
------------------ -------- -
-------- -------- -------- --
------ --------- SERIES A
AWARDS 2004
Employees.....................
SARs 4,011,450 $ 8.45 5 years
10 years $4.36 2004 Non-
employee directors........
SARs 66,000 $11.00 1 year 10
years $5.84 2005
Employees.....................
Options 9,076,750 $ 8.26 4
years 7 years $2.34 2005 Non-
employee directors........
SARs 55,000 $10.36 1 year 10
years $4.50 2006
Employees.....................
Options 2,473,275 $ 8.24 4
years 7 years $2.28 2006 Non-
employee directors........
Options 150,000 $ 8.70 1 year
10 years $2.74 SERIES B
AWARDS 2005
Employees.....................
Options 1,800,000 $ 9.21 3
years 10 years $4.67
Subsequent to the Restructuring, Liberty granted 10,018,000 options to
purchase Liberty Interactive Series A stock to officers and employees of certain
of its subsidiaries. Such options had an estimated weighted average grant-date
fair value of $4.94 per share.
The estimated fair values of the options noted above are based on the
Black-Scholes model. The key assumptions used in the model for purposes of these
calculations generally include the following: (a) a discount rate equal to the
Treasury rate for bonds with the same expected term as the Award; (b) a 21%
volatility factor; (c) the expected term of the Award; (d) the closing price of
the respective common stock on the date of grant; and (e) an expected dividend
rate of zero.
II-74
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
LIBERTY--OUTSTANDING AWARDS
The following tables present the number and weighted average exercise price
("WAEP") of certain options, SARs and options with tandem SARs to purchase
Liberty common stock granted to certain officers, employees and directors of the
Company.
LIBERTY LIBERTY SERIES A SERIES B COMMON COMMON STOCK
WAEP STOCK WAEP --------- -------- --------- --------
(NUMBERS OF OPTIONS IN THOUSANDS) Outstanding at January
1, 2006............................. 51,729 $ 9.23
29,965 $10.92
Granted..................................................
2,623 $ 8.28 --
Exercised................................................
(6,659) $ 0.73 --
Forfeited................................................
(117) $18.69 -- Converted to Liberty Capital and Liberty
Interactive..... (47,576) $10.34 (29,965) $10.92 -------
------- Outstanding at December 31,
2006........................... -- -- ======= =======
LIBERTY CAPITAL LIBERTY
INTERACTIVE --------------------
----------------------- --------
--------------------------------
--- SERIES A SERIES B SERIES A
SERIES B COMMON COMMON COMMON
COMMON STOCK WAEP STOCK WAEP
STOCK WAEP STOCK WAEP ---------
-------- --------- -------- ----
----- -------- --------- -------
- (NUMBERS OF OPTIONS IN
THOUSANDS) Outstanding at
January 1, 2006..... -- -- -- --
Converted from Liberty Series A
and Series B...................
2,378 $ 94.62 1,498 $101.37
11,889 $21.48 7,491 $23.41
Granted..........................
-- -- 10,018 $18.04 --
Exercised........................
(39) $ 57.40 -- (187) $13.06 --
Forfeited........................
(21) $268.28 -- (217) $34.32 --
----- ----- ------ -----
Outstanding at December 31,
2006... 2,318 $ 93.24 1,498
$101.37 21,503 $19.71 7,491
$23.41 ===== ===== ====== =====
Exercisable at December 31,
2006... 1,620 $100.33 1,438
$102.03 8,393 $22.59 7,191
$23.56 ===== ===== ====== =====
The following table provides additional information about outstanding
options to purchase Liberty common stock at December 31, 2006.
NO. OF WEIGHTED
AGGREGATE NO. OF
AGGREGATE
OUTSTANDING WAEP OF
AVERAGE INTRINSIC
EXERCISABLE WAEP OF
INTRINSIC OPTIONS
OUTSTANDING
REMAINING VALUE
OPTIONS EXERCISABLE
VALUE (000'S)
OPTIONS LIFE (000'S)
(000'S) OPTIONS
(000'S) -----------
----------- --------
- --------- --------
--- ----------- ----
----- Capital Series
A...... 2,318 $
93.24 5.0 years
$25,671 1,620
$100.33 $10,883
Capital Series
B...... 1,498
$101.37 4.4 years $
1,171 1,438 $102.03
$ 390 Interactive
Series
A...................
21,503 $ 19.71 5.7
years $60,413 8,393
$ 22.59 $11,942
Interactive Series
B...................
7,491 $ 23.41 4.4
years $ 950 7,191 $
23.56 $ 317
LIBERTY--EXERCISES
The aggregate intrinsic value of all options exercised during the years
ended December 31, 2006, 2005 and 2004 was $52 million, $109 million and
$16 million, respectively.
II-75
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
LIBERTY--RESTRICTED STOCK
The following table presents the number and weighted average grant-date fair
value ("WAFV") of unvested restricted shares of Liberty common stock held by
certain officers and employees of the Company as of December 31, 2006 (numbers
of shares in thousands).
NUMBER OF SHARES WAFV --------- ----
---- Liberty Capital Series
A....................................
175 $90.17 Liberty Interactive
Series
A................................
747 $22.55
The aggregate fair value of all restricted shares of Liberty common stock
that vested during the years ended December 31, 2006, 2005 and 2004 was
$30 million, $35 million and less than $1 million, respectively.
QVC AWARDS
QVC had a qualified and nonqualified combination stock option/stock
appreciation rights plan (collectively, the "Tandem Plan") for employees,
officers, directors and other persons designated by the Stock Option Committee
of QVC's board of directors. Under the Tandem Plan, the option price was
generally equal to the fair market value, as determined by an independent
appraisal, of a share of the underlying common stock of QVC at the date of the
grant. If the eligible participant elected the SAR feature of the Tandem Plan,
the participant received 75% of the excess of the fair market value of a share
of QVC common stock over the exercise price of the option to which it was
attached at the exercise date. QVC applied fixed plan accounting in accordance
with APB Opinion No. 25. Under the Tandem Plan, option/SAR terms were ten years
from the date of grant, with options/SARs generally becoming exercisable over
four years from the date of grant. During the years ended December 31, 2006,
2005 and 2004, QVC received cash proceeds from the exercise of options
aggregating $48 million, $46 million and $39 million, respectively. In 2005 and
2004, QVC also repurchased shares of common stock issued upon exercise of stock
options in prior years. Cash payments aggregated $71 million and $168 million,
respectively, for these repurchases.
On August 14, 2006, QVC terminated the Tandem Plan and offered to exchange
Liberty Interactive Share Units, as defined below, for all outstanding unvested
QVC Awards as of September 30, 2006 (the "Exchange Offer"). At the time of the
Exchange Offer, there were 150,234 outstanding options to purchase QVC common
stock. Of those outstanding options, 70,168 were vested and exercisable and
80,066 were unvested. Each holder of unvested QVC options who accepted the
Exchange Offer received Liberty Interactive Share Units in an amount equal to
the in-the-money value of the exchanged QVC options divided by the closing
market price of Liberty Interactive Series A common stock on the trading day
preceding commencement of the Exchange Offer. Liberty Interactive Share Units
vest on the same vesting schedule as the unvested QVC Awards and represent the
right to receive a cash payment equal to the value of Liberty Interactive common
stock on the vesting date. All unvested QVC Awards were exchanged for
approximately 2,348,000 Liberty Interactive Share Units. Liberty accounted for
the Exchange Offer as a settlement of the outstanding unvested QVC Awards. The
difference between the fair value of the Liberty Interactive Share Units and the
fair value of unvested QVC Awards has been reflected as a reduction to
stock-based compensation in the accompanying consolidated statement of
operations.
II-76
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
Also on August 14, 2006, a subsidiary of Liberty offered to purchase for
cash all outstanding shares of QVC common stock owned by officers and employees
of QVC and all vested QVC Awards (the "Tender Offer"). Officers and employees of
QVC owned 54,973 shares or 1.09% of QVC common stock at the time of the Tender
Offer. The Exchange Offer and the Tender Offer both expired on September 30,
2006. All vested QVC Awards and 49,575 outstanding shares of QVC common stock
were tendered as of September 30, 2006 resulting in cash payments aggregating
approximately $258 million. The remaining 5,398 shares of QVC common stock were
redeemed subsequent to September 30, 2006 for additional aggregate cash payments
of approximately $17 million. Liberty accounted for the cash paid for
outstanding shares of QVC common stock as the acquisition of a minority
interest. The difference between the cash paid and the carrying value of the
minority interest was allocated to intangible assets using a purchase accounting
model. The cash paid for vested options was less than the carrying value of the
related liability. Such difference has been reflected as a reduction to
stock-based compensation in the accompanying consolidated statement of
operations. The aggregate credit to stock-based compensation for the Exchange
Offer and the Tender Offer was $24 million. Subsequent to the completion of the
foregoing transactions, Liberty owns 100% of the equity of QVC.
STARZ ENTERTAINMENT
Starz Entertainment has outstanding Phantom Stock Appreciation Rights
("PSARS") held by its former chief executive officer. Such PSARs are fully
vested and expire on October 17, 2011, and Starz Entertainment has accrued
$130 million as of December 31, 2006 related to the PSARs. Such amount is
payable in cash, Liberty common stock or a combination thereof. In
December 2005, Starz Entertainment terminated a second PSAR plan for certain of
its other executive officers and made cash payments aggregating $7 million upon
termination.
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.
(14) EMPLOYEE BENEFIT PLANS
Liberty is the sponsor of the Liberty Media 401(k) Savings Plan (the
"Liberty 401(k) Plan"), which provides its employees and the employees of
certain of its subsidiaries an opportunity for ownership in the Company and
creates a retirement fund. The Liberty 401(k) Plan provides for employees to
make contributions to a trust for investment in Liberty common stock, as well as
several mutual funds. The Company and its subsidiaries make matching
contributions to the Liberty 401(k) Plan based on a percentage of the amount
contributed by employees. In addition, certain of the Company's subsidiaries
have similar employee benefit plans. Employer cash contributions to all plans
aggregated $30 million, $22 million and $22 million for the years ended
December 31, 2006, 2005 and 2004, respectively.
II-77
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(15) OTHER COMPREHENSIVE EARNINGS (LOSS)
Accumulated other comprehensive earnings (loss) included in Liberty's
consolidated balance sheets and consolidated statements of stockholders' equity
reflect the aggregate of foreign currency translation adjustments and unrealized
holding gains and losses on AFS securities.
The change in the components of accumulated other comprehensive earnings
(loss), net of taxes, is summarized as follows:
ACCUMULATED FOREIGN UNREALIZED OTHER CURRENCY
HOLDING COMPREHENSIVE TRANSLATION GAINS
(LOSSES) EARNINGS (LOSS), ADJUSTMENTS ON
SECURITIES NET OF TAXES ----------- -----------
--- ---------------- (AMOUNTS IN MILLIONS)
Balance at January 1,
2004.............................. $(286) 3,519
3,233 Other comprehensive
earnings.......................... 20 1,004
1,024 Contribution to
LMI................................... -- (51)
(51) Other
activity........................................
9 (9) -- ----- ------ ----- Balance at December
31, 2004............................ (257)
4,463 4,206 Other comprehensive earnings
(loss)................... 307 (1,101) (794) ---
-- ------ ----- Balance at December 31,
2005............................ 50 3,362 3,412
Other comprehensive
earnings.......................... 111 2,420
2,531 ----- ------ ----- Balance at December
31, 2006............................ $ 161
5,782 5,943 ===== ====== =====
Included in Liberty's accumulated other comprehensive earnings (loss) at
December 31, 2004 was $123 million, net of income taxes, of foreign currency
translation losses related to Cablevision, S.A. ("Cablevision"), a former equity
method investment of Liberty, and $186 million, net of income taxes, of foreign
currency translation losses related to Telewest Global, Inc. ("Telewest"),
another former equity method investment of Liberty. In the first quarter of
2005, Liberty disposed of its interests in Cablevision and Telewest.
Accordingly, Liberty recognized in its statement of operations $488 million of
foreign currency translation losses (before income tax benefits) related to
Cablevision and Telewest that were previously included in accumulated other
comprehensive earnings (loss).
II-78
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
The components of other comprehensive earnings (loss) are reflected in
Liberty's consolidated statements of comprehensive earnings (loss) net of taxes.
The following table summarizes the tax effects related to each component of
other comprehensive earnings (loss).
TAX NET-OF- BEFORE-TAX (EXPENSE) TAX AMOUNT BENEFIT
AMOUNT ---------- --------- -------- (AMOUNTS IN
MILLIONS) Year ended December 31, 2006: Foreign currency
translation adjustments.................... $ 179 (68)
111 Unrealized holding gains on securities arising during
period....................................................
4,202 (1,597) 2,605 Reclassification adjustment for
holding gains realized in net
loss..................................................
(298) 113 (185) ------- ------ ------ Other comprehensive
earnings.............................. $ 4,083 (1,552)
2,531 ======= ====== ====== Year ended December 31, 2005:
Foreign currency translation
adjustments.................... $ (8) 3 (5)
Reclassification adjustment for currency losses realized
in net
earnings..............................................
503 (191) 312 Unrealized holding losses on securities
arising during
period....................................................
(1,808) 687 (1,121) Reclassification adjustment for
holding gains realized in net
earnings..............................................
350 (133) 217 Reclass unrealized gain on AFS
security..................... (318) 121 (197) ------- ---
--- ------ Other comprehensive
loss.................................. $(1,281) 487 (794)
======= ====== ====== Year ended December 31, 2004:
Foreign currency translation
adjustments.................... $ 33 (13) 20 Unrealized
holding losses on securities arising during
period....................................................
2,443 (953) 1,490 Reclassification adjustment for holding
gains realized in net
earnings..............................................
(797) 311 (486) ------- ------ ------ Other comprehensive
earnings.............................. $ 1,679 (655)
1,024 ======= ====== ======
(16) TRANSACTIONS WITH RELATED PARTIES
Starz Entertainment pays Revolution Studios ("Revolution"), an equity
affiliate, fees for the rights to exhibit films produced by Revolution. Payments
aggregated $69 million, $84 million and $99 million in 2006, 2005 and 2004,
respectively.
(17) COMMITMENTS AND CONTINGENCIES
FILM RIGHTS
Starz Entertainment, a wholly-owned subsidiary of Liberty, provides premium
video programming distributed by cable operators, direct-to-home satellite
providers and other distributors throughout the United States. Starz
Entertainment has entered into agreements with a number of motion picture
producers which obligate Starz Entertainment to pay fees ("Programming Fees")
for the rights to exhibit certain films that are released by these producers.
The unpaid balance of Programming Fees for films that were available for
exhibition by Starz Entertainment at December 31, 2006 is reflected as a
liability in the accompanying consolidated balance sheet. The balance due as of
December 31, 2006 is payable as follows: $110 million in 2007; $9 million in
2008; and $8 million thereafter.
Starz Entertainment has also contracted to pay Programming Fees for films
that have been released theatrically, but are not available for exhibition by
Starz Entertainment until some future date.
II-79
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
These amounts have not been accrued at December 31, 2006. Starz Entertainment's
estimate of amounts payable under these agreements is as follows: $538 million
in 2007; $148 million in 2008; $93 million in 2009; $87 million in 2010;
$31 million in 2011 and $67 million thereafter.
In addition, Starz Entertainment is also obligated to pay Programming Fees
for all qualifying films that are released theatrically in the United States by
studios owned by The Walt Disney Company ("Disney") through 2009, all qualifying
films that are released theatrically in the United States by studios owned by
Sony Pictures Entertainment ("Sony") through 2010 and all qualifying films
produced for theatrical release in the United States by Revolution through 2006.
Films are generally available to Starz Entertainment for exhibition
10-12 months after their theatrical release. The Programming Fees to be paid by
Starz Entertainment are based on the quantity and the domestic theatrical
exhibition receipts of qualifying films. As these films have not yet been
released in theatres, Starz Entertainment is unable to estimate the amounts to
be paid under these output agreements. However, such amounts are expected to be
significant.
In addition to the foregoing contractual film obligations, each of Disney
and Sony has the right to extend its contract for an additional three years. If
Sony elects to extend its contract, Starz Entertainment has agreed to pay Sony a
total of $190 million in four annual installments of $47.5 million beginning in
2011. This option expires December 31, 2007. If made, Starz Entertainment's
payments to Sony would be amortized ratably as programming expense over the
extension period beginning in 2011. An extension of this agreement would also
result in the payment by Starz Entertainment of Programming Fees for qualifying
films released by Sony during the extension period. If Disney elects to extend
its contract, Starz Entertainment is not obligated to pay any amounts in excess
of its Programming Fees for qualifying films released by Disney during the
extension period. The Disney option expires December 31, 2007.
GUARANTEES
Liberty guarantees Starz Entertainment's obligations under certain of its
studio output agreements. At December 31, 2006, Liberty's guarantees for
obligations for films released by such date aggregated $695 million. While the
guarantee amount for films not yet released is not determinable, such amount is
expected to be significant. As noted above, Starz Entertainment has recognized
the liability for a portion of its obligations under the output agreements. As
this represents a commitment of Starz Entertainment, a consolidated subsidiary
of Liberty, Liberty has not recorded a separate liability for its guarantee of
these obligations.
In connection with agreements for the sale of certain assets, Liberty
typically retains liabilities that relate to events occurring prior to its sale,
such as tax, environmental, litigation and employment matters. Liberty generally
indemnifies the purchaser in the event that a third party asserts a claim
against the purchaser that relates to a liability retained by Liberty. These
types of indemnification guarantees typically extend for a number of years.
Liberty is unable to estimate the maximum potential liability for these types of
indemnification guarantees as the sale agreements typically do not specify a
maximum amount and the amounts are dependent upon the outcome of future
contingent events, the nature and likelihood of which cannot be determined at
this time. Historically, Liberty has not made any significant indemnification
payments under such agreements and no amount has been accrued in the
accompanying consolidated financial statements with respect to these
indemnification guarantees.
II-80
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
OPERATING LEASES
Liberty leases business offices, has entered into satellite transponder
lease agreements and uses certain equipment under lease arrangements. Rental
expense under such arrangements amounted to $32 million, $33 million and
$39 million for the years ended December 31, 2006, 2005 and 2004, respectively.
A summary of future minimum lease payments under noncancelable operating
leases as of December 31, 2006 follows (amounts in millions):
Years ending December 31:
2007....................................................... $28
2008....................................................... $24
2009....................................................... $21
2010....................................................... $16
2011....................................................... $13
Thereafter................................................. $31
It is expected that in the normal course of business, leases that expire
generally will be renewed or replaced by leases on other properties; thus, it is
anticipated that future lease commitments will not be less than the amount shown
for 2006.
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
consolidated financial statements.
OTHER
During the period from March 9, 1999 to August 10, 2001, Liberty was
included in the consolidated federal income tax return of AT&T and was a party
to a tax sharing agreement with AT&T (the "AT&T Tax Sharing Agreement"). While
Liberty was a subsidiary of AT&T, Liberty recorded its stand-alone tax provision
on a separate return basis. Under the AT&T Tax Sharing Agreement, Liberty
received a cash payment from AT&T in periods when Liberty generated taxable
losses and such taxable losses were utilized by AT&T to reduce its consolidated
income tax liability. To the extent such losses were not utilized by AT&T, such
amounts were available to reduce federal taxable income generated by Liberty in
future periods, similar to a net operating loss carryforward, and were accounted
for as a deferred federal income tax benefit. Subsequent to Liberty's split off
from AT&T, if adjustments are made to amounts previously paid under the AT&T Tax
Sharing Agreement, such adjustments are reflected as adjustments to additional
paid-in capital. During the period from March 10, 1999 to December 31, 2002,
Liberty received cash payments from AT&T aggregating $670 million as payment for
Liberty's taxable losses that AT&T utilized to reduce its income tax liability.
Also, pursuant to the AT&T Tax Sharing Agreement and in connection with
Liberty's split off from AT&T, AT&T was required to pay Liberty an amount equal
to 35% of the amount of the net operating losses reflected in TCI's final
federal income tax return ("TCI NOLs") that had not been used as an
II-81
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
offset to Liberty's obligations under the AT&T Tax Sharing Agreement and that
had been, or were reasonably expected to be, utilized by AT&T. In connection
with the split off, Liberty received an $803 million payment for TCI's NOLs and
recorded such payment as an increase to additional paid-in capital. Liberty was
not paid for certain of TCI's NOLs ("SRLY NOLs") due to limitations and
uncertainty regarding AT&T's ability to use them to offset taxable income in the
future. In the event AT&T was ultimately able to use any of the SRLY NOLs, they
would be required to pay Liberty 35% of the amount of the SRLY NOLs used. In the
fourth quarter of 2004 and in connection with the completion of an IRS audit of
TCI's tax return for 1994, it was determined that Liberty was required to
recognize additional taxable income related to the recapitalization of one of
its investments resulting in a tax liability of approximately $30 million. As a
result of the tax assessment, Liberty also received a corresponding amount of
additional tax basis in the investment. However, Liberty was able to cause AT&T
to use a portion of the SRLY NOLs to offset this taxable income, the benefit of
which resulted in the elimination of the $30 million tax liability and an
increase to additional paid-in capital.
In the fourth quarter of 2004, AT&T requested a refund from Liberty of
$70 million, plus accrued interest, relating to losses that it generated in 2002
and 2003 and was able to carry back to offset taxable income previously offset
by Liberty's losses. AT&T has asserted that Liberty's losses caused AT&T to pay
$70 million in alternative minimum tax ("AMT") that it would not have been
otherwise required to pay had Liberty's losses not been included in its return.
In 2004, Liberty estimated that it may ultimately pay AT&T up to $30 million of
the requested $70 million because Liberty believed AT&T received an AMT credit
of $40 million against income taxes resulting from the AMT previously paid.
Accordingly, Liberty accrued a $30 million liability with an offsetting
reduction of additional paid-in capital. The net effect of the completion of the
IRS tax audit noted above (including the benefit derived from AT&T for the
utilization of the SRLY NOLs) and Liberty's accrual of amounts due to AT&T was
an increase to deferred tax assets and an increase to other liabilities.
In the fourth quarter of 2005, AT&T requested an additional $21 million
relating to additional losses it generated and was able to carry back to offset
taxable income previously offset by Liberty's losses. In addition, the
information provided to Liberty in connection with AT&T's request showed that
AT&T had not yet claimed a credit for AMT previously paid. Accordingly, in the
fourth quarter of 2005, Liberty increased its accrual by approximately
$40 million (with a corresponding reduction of additional paid-in capital)
representing its estimate of the amount it may ultimately pay (excluding accrued
interest, if any) to AT&T as a result of this request. Although Liberty has not
reduced its accrual for any future refunds, Liberty believes it is entitled to a
refund when AT&T is able to realize a benefit in the form of a credit for the
AMT previously paid.
In March 2006, AT&T requested an additional $21 million relating to
additional losses and IRS audit adjustments that it claims it is able to use to
offset taxable income previously offset by Liberty's losses. Liberty has
reviewed this claim and believes that its accrual as of December 31, 2005 is
adequate. Accordingly, no additional accrual was made for AT&T's March 2006
request.
Although for accounting purposes Liberty has accrued a portion of the
amounts claimed by AT&T to be owed by Liberty under the AT&T Tax Sharing
Agreement, Liberty believes there are valid defenses or set-off or similar
rights in its favor that may cause the total amount that it owes AT&T to be less
than the amounts accrued; and under certain interpretations of the AT&T Tax
Sharing Agreement, Liberty may be entitled to further reimbursements from AT&T.
II-82
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(18) INFORMATION ABOUT LIBERTY'S OPERATING SEGMENTS
Liberty is a holding company, which through its ownership of interests in
subsidiaries and other companies, is primarily engaged in the video and on-line
commerce, media, communications and entertainment industries. Upon completion of
the Restructuring and the issuance of its tracking stocks, Liberty attributed
its businesses to one of two groups: the Interactive Group and the Capital
Group. Each of the businesses in the tracking stock groups is separately
managed. Liberty identifies its reportable segments as (A) those consolidated
subsidiaries that represent 10% or more of its consolidated revenue, earnings
before income taxes or total assets and (B) those equity method affiliates whose
share of earnings represent 10% or more of Liberty's pre-tax earnings. The
segment presentation for prior periods has been conformed to the current period
segment presentation.
Liberty evaluates performance and makes decisions about allocating resources
to its operating segments based on financial measures such as revenue, operating
cash flow, gross margin, average sales price per unit, number of units shipped
and revenue or sales per customer equivalent. In addition, Liberty reviews
non-financial measures such as subscriber growth and penetration, as
appropriate.
Liberty defines operating cash flow as revenue less cost of sales, operating
expenses, and selling, general and administrative expenses (excluding
stock-based compensation). Liberty believes this 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, litigation settlements and restructuring
and impairment charges that are included in the measurement of operating income
pursuant to GAAP. Accordingly, operating cash flow should be considered in
addition to, but not as a substitute for, operating income, net income, cash
flow provided by operating activities and other measures of financial
performance prepared in accordance with GAAP. Liberty generally accounts for
intersegment sales and transfers as if the sales or transfers were to third
parties, that is, at current prices.
For the year ended December 31, 2006, Liberty has identified the following
consolidated subsidiaries as its reportable segments:
- QVC--consolidated subsidiary included in the Interactive Group that
markets and sells a wide variety of consumer products in the United States
and several foreign countries, primarily by means of televised shopping
programs on the QVC networks and via the Internet through its domestic and
international websites.
- Starz Entertainment--consolidated subsidiary included in the Capital Group
that provides premium programming distributed by cable operators,
direct-to-home satellite providers, other distributors and via the
Internet throughout the United States.
Liberty's reportable segments are strategic business units that offer
different products and services. They are managed separately because each
segment requires different technologies, distribution channels and marketing
strategies. The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the summary of significant
policies.
II-83
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
PERFORMANCE MEASURES
YEARS ENDED DECEMBER 31, -----------
------------------------------------
------------------- 2006 2005 2004 -
------------------- ----------------
---- -------------------- OPERATING
OPERATING OPERATING REVENUE CASH
FLOW REVENUE CASH FLOW REVENUE CASH
FLOW -------- --------- -------- ---
------ -------- --------- (AMOUNTS
IN MILLIONS) Interactive Group
QVC..................................
$7,074 1,656 6,501 1,422 5,687 1,230
Corporate and
other.................. 252 24 --
(5) -- (6) ------ ----- ----- -----
----- ----- 7,326 1,680 6,501 1,417
5,687 1,224 ------ ----- ----- -----
----- ----- Capital Group Starz
Entertainment..................
1,033 186 1,004 171 963 239
Corporate and
other.................. 254 (83) 141
(47) 93 (72) ------ ----- ----- ----
- ----- ----- 1,287 103 1,145 124
1,056 167 ------ ----- ----- ----- -
---- ----- Consolidated
Liberty................. $8,613
1,783 7,646 1,541 6,743 1,391 ======
===== ===== ===== ===== =====
BALANCE SHEET INFORMATION
DECEMBER 31, -------------------------------------
-------------- 2006 2005 ------------------------
------------------------ TOTAL INVESTMENTS TOTAL
INVESTMENTS ASSETS IN AFFILIATES ASSETS IN
AFFILIATES -------- ------------- -------- -------
------ (AMOUNTS IN MILLIONS) Interactive Group
QVC................................................
$19,100 104 15,615 2 Corporate and
other................................ 5,661 1,254
4,585 1,227 Intragroup
elimination............................. (4,941) -
- (1,849) -- ------- ----- ------ ----- 19,820
1,358 18,351 1,229 ------- ----- ------ -----
Capital Group Starz
Entertainment................................
2,825 -- 2,966 45 Corporate and
other................................ 24,512 484
20,268 634 Assets of discontinued
operations.................. 512 -- 516 -- -------
----- ------ ----- 27,849 484 23,750 679 ------- -
---- ------ ----- Intergroup
eliminations............................ (31) --
(136) -- ------- ----- ------ ----- Consolidated
Liberty............................... $47,638
1,842 41,965 1,908 ======= ===== ====== =====
II-84
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
The following table provides a reconciliation of segment operating cash flow
to earnings (loss) from continuing operations before income taxes and minority
interest:
YEARS ENDED DECEMBER 31, ---------------------------
--- 2006 2005 2004 -------- -------- --------
(AMOUNTS IN MILLIONS) Consolidated segment operating
cash flow.................... $1,783 1,541 1,391
Stock-based
compensation....................................
(67) (52) (98) Litigation
settlement....................................... --
-- 42 Depreciation and
amortization............................... (582)
(545) (547) Impairment of long-lived
assets............................. (113) -- --
Interest
expense............................................
(680) (626) (619) Realized and unrealized gains
(losses) on derivative instruments,
net.......................................... (279)
257 (1,284) Gains (losses) on dispositions,
net......................... 607 (361) 1,411
Nontemporary declines in fair value of
investments.......... (4) (449) (129) Other,
net..................................................
323 117 119 ------ ----- ------ Earnings (loss) from
continuing operations before income taxes and
minority interest............................... $
988 (118) 286 ====== ===== ======
REVENUE BY GEOGRAPHIC AREA
Revenue by geographic area based on the location of customers is as follows:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) United
States...............................................
$6,504 5,784 5,194
Germany.....................................................
848 781 643 Other foreign
countries..................................... 1,261 1,081
906 ------ ----- ----- Consolidated
Liberty........................................ $8,613
7,646 6,743 ====== ===== =====
LONG-LIVED ASSETS BY GEOGRAPHIC AREA
DECEMBER 31, ------------------- 2006 2005 -------- -------
- (AMOUNTS IN MILLIONS) United
States............................................... $ 678
586
Germany.....................................................
119 204 Other foreign
countries..................................... 349 156 ----
-- --- Consolidated
Liberty........................................ $1,146 946
====== ===
II-85
LIBERTY MEDIA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2006, 2005 AND 2004
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER --------
-------- -------- -------- (AMOUNTS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS) 2006:
Revenue...................................................
$1,901 2,025 2,016 2,671 ====== ===== ===== =====
Operating
income.......................................... $ 224
257 236 304 ====== ===== ===== ===== Earnings from
continuing operations....................... $ 69 482 63
95 ====== ===== ===== ===== Net earnings (loss): Series A
and Series B common stock...................... $ (26)
120 -- -- ====== ===== ===== ===== Capital Group common
stock.............................. $ -- 269 (51) 42
====== ===== ===== ===== Interactive Group common
stock.......................... $ -- 89 114 283 ======
===== ===== ===== Basic and diluted earnings (loss) from
continuing operations per common share: Series A and
Series B common stock...................... $ .02 .04 --
-- ====== ===== ===== ===== Liberty Capital common
stock............................ $ -- 1.94 (.36) (1.34)
====== ===== ===== ===== Liberty Interactive common
stock........................ $ -- .13 .17 .43 ======
===== ===== ===== Basic and diluted net earnings (loss)
per common share: Series A and Series B common
stock...................... $ (.01) .04 -- -- ======
===== ===== ===== Liberty Capital common
stock............................ $ -- 1.92 (.36) .30
====== ===== ===== ===== Liberty Interactive common
stock........................ $ -- .13 .17 .43 ======
===== ===== ===== 2005:
Revenue...................................................
$1,742 1,760 1,772 2,372 ====== ===== ===== =====
Operating
income.......................................... $ 215
197 189 343 ====== ===== ===== ===== Earnings (loss) from
continuing operations................ $ 245 (123) (86)
(79) ====== ===== ===== ===== Net earnings
(loss)....................................... $ 254 (107)
(94) (86) ====== ===== ===== ===== Basic and diluted
earnings (loss) from continuing operations per common
shares.............................. $ .09 (.05) (.03)
(.03) ====== ===== ===== ===== Basic and diluted net
earnings (loss) per common share.... $ .09 (.04) (.03)
(.03) ====== ===== ===== =====
II-86
PART III.
The following required information is incorporated by reference to our
definitive proxy statement for our 2007 Annual Meeting of Shareholders presently
scheduled to be held in the second quarter of 2007:
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
We will file our definitive proxy statement for our 2007 Annual Meeting of
shareholders with the Securities and Exchange Commission on or before April 30,
2007.
III-1
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) FINANCIAL STATEMENTS
PAGE NO. Included in Part II of this
Report: --------- Liberty Media
Corporation: Report of Independent
Registered Public Accounting Firm... II-
36 Consolidated Balance Sheets, December
31, 2006 and 2005... II-37 Consolidated
Statements of Operations, Years ended
December 31, 2006, 2005 and
2004........................ II-39
Consolidated Statements of Comprehensive
Earnings (Loss), Years ended December
31, 2006, 2005 and 2004............ II-
40 Consolidated Statements of Cash
Flows, Years Ended December 31, 2006,
2005 and 2004........................
II-41 Consolidated Statements of
Stockholders' Equity, Years ended
December 31, 2006, 2005 and
2004.................. II-42 Notes to
Consolidated Financial Statements,
December 31, 2006, 2005 and
2004.....................................
II-43
(a) (2) FINANCIAL STATEMENT SCHEDULES
(i) All schedules have been omitted because they are not applicable, not
material or the required information is set forth in the financial
statements or notes thereto.
(a) (3) EXHIBITS
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3--Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of Liberty Media
Corporation ("Liberty"), dated May 9, 2006 (incorporated by
reference to Exhibit 1 to the Registration Statement on
Form 8-A of Liberty (File No. 000-51990) as filed on May 9,
2006 (the "Form 8-A")).
3.2 Bylaws of Liberty, as adopted May 9, 2006 (incorporated by
reference to Exhibit 2 of the Form 8-A).
4--Instruments Defining the Rights of Securities Holders, including
Indentures:
4.1 Specimen certificate for shares of the Registrant's Liberty
Interactive Series A common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.1 to Liberty's
Current Report on Form 8-K (File No. 000-51990), filed on
May 9, 2006 (the "May 2006 8-K")).
4.2 Specimen certificate for shares of the Registrant's Liberty
Interactive Series B common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.2 to the May 2006
8-K).
4.3 Specimen certificate for shares of the Registrant's Liberty
Capital Series A common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.3 to the May 2006
8-K).
4.4 Specimen certificate for shares of the Registrant's Liberty
Capital Series B common stock, par value $.01 per share
(incorporated by reference to Exhibit 4.4 to the May 2006
8-K).
IV-1
10--Material Contracts:
10.1 Inter-Group Agreement dated as of March 9, 1999, between
AT&T Corp. and Liberty Media LLC ("Old Liberty"), Liberty
Media Group LLC and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.2 to the Registration Statement on Form S-4 of
Old Liberty (File No. 333-86491) as filed on September 3,
1999, the "Old Liberty S-4 Registration Statement").
10.2 Ninth Supplement to Inter-Group Agreement dated as of
June 14, 2001, between and among AT&T Corp., on the one
hand, and Old Liberty, Liberty Media Group LLC, AGI LLC,
Liberty SP, Inc., LMC Interactive, Inc. and Liberty
AGI, Inc., on the other hand (incorporated by reference to
Exhibit 10.25 to the Registration Statement on Form S-1 of
Old Liberty (File No. 333-66034) as filed on July 27, 2001).
10.3 Intercompany Agreement dated as of March 9, 1999, between
Old Liberty and AT&T Corp. (incorporated by reference to
Exhibit 10.3 to the Old Liberty S-4 Registration Statement).
10.4 Tax Sharing Agreement dated as of March 9, 1999, by and
among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI
Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity
listed on the signature pages thereof (incorporated by
reference to Exhibit 10.4 to the Old Liberty S-4
Registration Statement).
10.5 First Amendment to Tax Sharing Agreement dated as of
May 28, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.5 to the Old Liberty S-4 Registration Statement).
10.6 Second Amendment to Tax Sharing Agreement dated as of
September 24, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.6 to the Registration Statement on Form S-1 of
Old Liberty (File No. 333-93917) as filed on December 30,
1999 (the "Old Liberty S-1 Registration Statement")).
10.7 Third Amendment to Tax Sharing Agreement dated as of
October 20, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.7 to the Old Liberty S-l Registration Statement).
10.8 Fourth Amendment to Tax Sharing Agreement dated as of
October 28, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.8 to the Old Liberty S-l Registration Statement).
10.9 Fifth Amendment to Tax Sharing Agreement dated as of
December 6, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.9 to the Old Liberty S-l Registration Statement).
10.10 Sixth Amendment to Tax Sharing Agreement dated as of
December 10, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty
IV-2
Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof
(incorporated by reference to Exhibit 10.10 to the Old
Liberty S-l Registration Statement).
10.11 Seventh Amendment to Tax Sharing Agreement dated as of
December 30, 1999, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.11 to the Old Liberty S-l Registration
Statement).
10.12 Eighth Amendment to Tax Sharing Agreement dated as of
July 25, 2000, by and among AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Registration Statement on Form S-1 of
Old Liberty (File No. 333-55998) as filed on February 21,
2001).
10.13 Instrument dated January 14, 2000, adding The Associated
Group, Inc. as a party to the Tax Sharing Agreement dated as
of March 9, 1999, as amended, among The Associated
Group, Inc., AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC,
Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the
signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Old Liberty S-1 Registration
Statement).
10.14 Restated and Amended Employment Agreement dated November 1,
1992, between Tele-Communications, Inc. and John C. Malone
(assumed by Old Liberty as of March 9, 1999), and the
amendment thereto dated June 30, 1999 and effective as of
March 9, 1999, between Old Liberty and John C. Malone
(collectively, the "Malone Employment Agreement")
(incorporated by reference to Exhibit 10.6 to the Old
Liberty S-4 Registration Statement).
10.15 Second Amendment to Malone Employment Agreement effective
January 1, 2003 (incorporated by reference to Exhibit 10.15
to Old Liberty's Annual Report on Form 10-K for the year
ended December 31, 2003 (File No. 001-16615) as filed on
March 15, 2004 (the "Old Liberty 2003 10-K")).
10.16 Liberty Media Corporation 2000 Incentive Plan (As Amended
and Restated Effective February 22, 2007) (the "2000
Incentive Plan").*
10.17 Liberty Media Corporation 2007 Incentive Plan (the "2007
Incentive Plan").*
10.18 Form of Non-Qualified Stock Option Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan [for certain
designated award recipients] (incorporated by reference to
Exhibit 10.2 to the Quarterly Report on Form 10-Q of Old
Liberty for the quarter ended March 31, 2006 (File
No. 001-16615) as filed on May 8, 2006 (the "Old Liberty
10-Q")).
10.19 Form of Non-Qualified Stock Option Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan [for all other
award recipients] (incorporated by reference to
Exhibit 10.3 of the Old Liberty 10-Q).
10.20 Form of Restricted Stock Award Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan [for certain
designated award recipients] (incorporated by reference to
Exhibit 10.4 to the Old Liberty 10-Q).
10.21 Form of Stock Appreciation Rights Agreement under the 2000
Incentive Plan and the 2007 Incentive Plan (incorporated by
reference to Exhibit 10.18 to the Annual Report on
Form 10-K of Old Liberty for the year ended December 31,
2004 (File No. 001-16615) as filed on March 15, 2005 (the
"Old Liberty 2005 10-K")).
IV-3
10.22 Liberty Media Corporation 2002 Nonemployee Director
Incentive Plan (As Amended and Restated Effective May 9,
2006) (the "Director Plan") (incorporated by reference to
Exhibit 10.2 to the May 2006 8-K).
10.23 Form of Stock Appreciation Rights Agreement under the
Director Plan (incorporated by reference to Exhibit 10.21 to
the Old Liberty 2005 10-K).
10.24 Liberty Media Corporation 2006 Deferred Compensation Plan
(incorporated by reference to Exhibit 99.1 to Liberty's
Current Report on Form 8-K (File No. 000-51990) as filed on
January 5, 2007).
10.25 Letter Agreement, dated as of May 8, 2003, between Robert R.
Bennett and Old Liberty regarding Mr. Bennett's personal use
of Liberty's aircraft (incorporated by reference to
Exhibit 10.19 to the Old Liberty 2003 10-K).
10.26 Time Sharing Agreement regarding personal use of Liberty's
aircraft, dated as of March 29, 2005, between Robert R.
Bennett and Old Liberty (incorporated by reference to
Exhibit 10.1 to the Quarterly Report on Form 10-Q of Old
Liberty for the period ended March 31, 2005 (File
No. 001-16615) as filed on May 9, 2005 (the "Liberty First
Quarter 2005 10-Q").
10.27 Letter Agreement regarding personal use of Liberty's
aircraft, dated as of May 4, 2005, between Robert R. Bennett
and Old Liberty (incorporated by reference to Exhibit 10.2
to the Liberty First Quarter 2005 10-Q).
10.28 Employment Agreement, dated as of December 28, 2005, between
Old Liberty and Mr. Bennett (incorporated by reference to
Exhibit 99.1 to Old Liberty's Current Report on Form 8-K
(File No. 001-16615) as filed on December 30, 2005 (the "Old
Liberty December 2005 8-K")).
10.29 Amended and Restated Deferred Compensation Agreement, dated
as of December 28, 2005, between Old Liberty and
Mr. Bennett (incorporated by reference to Exhibit 99.2 to
the Old Liberty December 2005 8-K).
10.30 Amended and Restated Deferred Compensation Agreement, dated
as of December 28, 2005, between Mr. Bennett and Old Liberty
(incorporated by reference to Exhibit 99.3 to the Old
Liberty December 2005 8-K).
10.31 Deferred Compensation Agreement, dated as of July 1, 2005,
between Mr. Bennett and Old Liberty (incorporated by
reference to Exhibit 99.4 to the Old Liberty December 2005
8-K).
10.32 Call Agreement, dated as of February 9, 1998 (the "Call
Agreement"), between Liberty (as successor of Old Liberty
which was the assignee of Tele-Communications, Inc.) and the
Malone Group (incorporated by reference to Exhibit 7(n) to
Mr. Malone's Amendment No. 8 to Schedule 13D filed in
respect of Tele-Communications, Inc. on February 19, 1998
(File No. 005-44063)).
10.33 Letter, dated as of March 5, 1999, from
Tele-Communications, Inc. and Old Liberty addressed to
Mr. Malone and Leslie Malone relating to the Call Agreement
(incorporated by reference to Exhibit 7(f) to Mr. Malone's
Schedule 13D filed in respect of AT&T on March 30, 1999
(File No. 005-32542)).
10.34 $3,500,000,000 Credit Agreement, dated as of March 3, 2006,
among QVC, Inc., as Borrower; the Lenders party hereto; JP
Morgan Chase Bank, N.A., as Administrative Agent; and
Wachovia Capital Markets, LLC, as Syndication Agent (the
"March 2006 Credit Agreement") (incorporated by reference to
Exhibit 10.1 to the Old Liberty 10-Q).
10.35 Amendment dated October 4, 2006 to the March 2006 Credit
Agreement (incorporated by reference to Exhibit 99.2 to
Liberty's Current Report on Form 8-K (File No. 000-51990) as
filed
IV-4
on October 10, 2006 (the "October 2006 8-K")).
10.36 $1,750,000,000 Credit Agreement, dated as of October 4, 2006
among QVC, Wachovia Bank, N.A., as Administrative Agent,
Bank of America N.A. and J.P. Morgan Securities Inc., as
Syndication Agents, and the lenders party thereto from time
to time (incorporated by reference to Exhibit 99.1 to the
October 2006 8-K).
10.37 Form of Indemnification Agreement between Liberty and its
executive officers/directors.*
10.38 Share Exchange Agreement, dated as of December 22, 2006, by
and between News Corporation and Liberty (the "News
Agreement").*
10.39 Tax Matters Agreement, dated as of December 22, 2006, by and
between News Corporation and Liberty (which is Exhibit A-I
to the News Agreement).*
21 Subsidiaries of Liberty Media Corporation.*
23 Consent of KPMG LLP.*
31.1 Rule 13a-14(a)/15d--14(a) Certification.*
31.2 Rule 13a-14(a)/15d--14(a) Certification.*
31.3 Rule 13a-14(a)/15d--14(a) Certification.*
32 Section 1350 Certification.*
99.1 Unaudited Attributed Financial Information for Tracking
Stock Groups.*
- ------------------------
* Filed herewith.
IV-5
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LIBERTY MEDIA CORPORATION
By: /s/ GREGORY B. MAFFEI
------------------------------------------------
Gregory B. Maffei
DATED: MARCH 1, 2007 CHIEF EXECUTIVE OFFICER AND PRESIDENT
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
SIGNATURE
TITLE DATE
- --------
----------
----------
----------
------- --
----------
----------
----------
------ ---
----------
/s/ JOHN
C. MALONE
----------
----------
----------
------
Chairman
of the
Board and
Director
March 1,
2007 John
C. Malone
/s/
GREGORY B.
MAFFEI ---
----------
----------
----------
---
Director,
Chief
Executive
Officer
and March
1, 2007
Gregory B.
Maffei
President
/s/ ROBERT
R. BENNETT
----------
----------
----------
------
Director
March 1,
2007
Robert R.
Bennett
/s/ DONNE
F. FISHER
----------
----------
----------
------
Director
March 1,
2007 Donne
F. Fisher
/s/ PAUL
A. GOULD -
----------
----------
----------
-----
Director
March 1,
2007 Paul
A. Gould
/s/ DAVID
E. RAPLEY
----------
----------
----------
------
Director
March 1,
2007 David
E. Rapley
/s/ M.
LAVOY
ROBISON --
----------
----------
----------
----
Director
March 1,
2007 M.
LaVoy
Robison
/s/ LARRY
E. ROMRELL
----------
----------
----------
------
Director
March 1,
2007 Larry
E. Romrell
/s/ DAVID
J.A.
FLOWERS --
----------
----------
----------
----
Senior
Vice
President
and
Treasurer
March 1,
2007 David
J.A.
Flowers
(Principal
Financial
Officer)
/s/
CHRISTOPHER
W. SHEAN -
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----------
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Senior
Vice
President
and
Controller
March 1,
2007
Christopher
W. Shean
(Principal
Accounting
Officer)
IV-6
EXHIBIT INDEX
Listed below are the exhibits which are filed as a part of this Report
(according to the number assigned to them in Item 601 of Regulation S-K):
3--Articles of Incorporation and Bylaws:
3.1 Restated Certificate of Incorporation of Liberty Media Corporation
("Liberty"), dated May 9, 2006 (incorporated by reference to Exhibit 1 to
the Registration Statement on Form 8-A of Liberty (File No. 000-51990) as
filed on May 9, 2006 (the "Form 8-A")).
3.2 Bylaws of Liberty, as adopted May 9, 2006 (incorporated by reference
to Exhibit 2 of the Form 8-A).
4--Instruments Defining the Rights of Securities Holders, including Indentures:
4.1 Specimen certificate for shares of the Registrant's Liberty
Interactive Series A common stock, par value $.01 per share (incorporated
by reference to Exhibit 4.1 to Liberty's Current Report on Form 8-K (File
No. 000-51990), filed on May 9, 2006 (the "May 2006 8-K")).
4.2 Specimen certificate for shares of the Registrant's Liberty
Interactive Series B common stock, par value $.01 per share (incorporated
by reference to Exhibit 4.2 to the May 2006 8-K).
4.3 Specimen certificate for shares of the Registrant's Liberty Capital
Series A common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.3 to the May 2006 8-K).
4.4 Specimen certificate for shares of the Registrant's Liberty Capital
Series B common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.4 to the May 2006 8-K).
10--Material Contracts:
10.1 Inter-Group Agreement dated as of March 9, 1999, between AT&T Corp.
and Liberty Media LLC ("Old Liberty"), Liberty Media Group LLC and each
Covered Entity listed on the signature pages thereof (incorporated by
reference to Exhibit 10.2 to the Registration Statement on Form S-4 of
Old Liberty (File No. 333-86491) as filed on September 3, 1999, the "Old
Liberty S-4 Registration Statement").
10.2 Ninth Supplement to Inter-Group Agreement dated as of June 14, 2001,
between and among AT&T Corp., on the one hand, and Old Liberty, Liberty
Media Group LLC, AGI LLC, Liberty SP, Inc., LMC Interactive, Inc. and
Liberty AGI, Inc., on the other hand (incorporated by reference to
Exhibit 10.25 to the Registration Statement on Form S-1 of Old Liberty
(File No. 333-66034) as filed on July 27, 2001).
10.3 Intercompany Agreement dated as of March 9, 1999, between Old Liberty
and AT&T Corp. (incorporated by reference to Exhibit 10.3 to the Old
Liberty S-4 Registration Statement).
10.4 Tax Sharing Agreement dated as of March 9, 1999, by and among AT&T
Corp., Old Liberty, Tele-Communications, Inc., Liberty Ventures Group
LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and
each Covered Entity listed on the signature pages thereof (incorporated
by reference to Exhibit 10.4 to the Old Liberty S-4 Registration
Statement).
10.5 First Amendment to Tax Sharing Agreement dated as of May 28, 1999, by
and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.5 to the Old Liberty S-4
Registration Statement).
10.6 Second Amendment to Tax Sharing Agreement dated as of September 24,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.6 to the Registration
Statement on Form S-1 of Old Liberty (File No. 333-93917) as filed on
December 30, 1999 (the "Old Liberty S-1 Registration Statement")).
10.7 Third Amendment to Tax Sharing Agreement dated as of October 20, 1999,
by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.7 to the Old Liberty S-l
Registration Statement).
10.8 Fourth Amendment to Tax Sharing Agreement dated as of October 28,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.8 to the Old Liberty S-l
Registration Statement).
10.9 Fifth Amendment to Tax Sharing Agreement dated as of December 6, 1999,
by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.9 to the Old Liberty S-l
Registration Statement).
10.10 Sixth Amendment to Tax Sharing Agreement dated as of December 10,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.10 to the Old Liberty
S-l Registration Statement).
10.11 Seventh Amendment to Tax Sharing Agreement dated as of December 30,
1999, by and among AT&T Corp., Old Liberty, Tele-Communications, Inc.,
Liberty Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI
CT Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.11 to the Old Liberty
S-l Registration Statement).
10.12 Eighth Amendment to Tax Sharing Agreement dated as of July 25, 2000,
by and among AT&T Corp., Old Liberty, Tele-Communications, Inc., Liberty
Ventures Group LLC, Liberty Media Group LLC, TCI Starz, Inc., TCI CT
Holdings, Inc. and each Covered Entity listed on the signature pages
thereof (incorporated by reference to Exhibit 10.12 to the Registration
Statement on Form S-1 of Old Liberty (File No. 333-55998) as filed on
February 21, 2001).
10.13 Instrument dated January 14, 2000, adding The Associated Group, Inc.
as a party to the Tax Sharing Agreement dated as of March 9, 1999, as
amended, among The Associated Group, Inc., AT&T Corp., Old Liberty,
Tele-Communications, Inc., Liberty Ventures Group LLC, Liberty Media
Group LLC, TCI Starz, Inc., TCI CT Holdings, Inc. and each Covered Entity
listed on the signature pages thereof (incorporated by reference to
Exhibit 10.12 to the Old Liberty S-1 Registration Statement).
10.14 Restated and Amended Employment Agreement dated November 1, 1992,
between Tele-Communications, Inc. and John C. Malone (assumed by Old
Liberty as of March 9, 1999), and the amendment thereto dated June 30,
1999 and effective as of March 9, 1999, between Old Liberty and John C.
Malone (collectively, the "Malone Employment Agreement") (incorporated by
reference to Exhibit 10.6 to the Old Liberty S-4 Registration Statement).
10.15 Second Amendment to Malone Employment Agreement effective January 1,
2003 (incorporated by reference to Exhibit 10.15 to Old Liberty's Annual
Report on Form 10-K for the year ended December 31, 2003 (File
No. 001-16615) as filed on March 15, 2004 (the "Old Liberty 2003 10-K")).
10.16 Liberty Media Corporation 2000 Incentive Plan (As Amended and Restated
Effective February 22, 2007) (the "2000 Incentive Plan").*
10.17 Liberty Media Corporation 2007 Incentive Plan (the "2007 Incentive
Plan").*
10.18 Form of Non-Qualified Stock Option Agreement under the 2000 Incentive
Plan and the 2007 Incentive Plan [for certain designated award
recipients] (incorporated by reference to Exhibit 10.2 to the Quarterly
Report on Form 10-Q of Old Liberty for the quarter ended March 31, 2006
(File No. 001-16615) as filed on May 8, 2006 (the "Old Liberty 10-Q")).
10.19 Form of Non-Qualified Stock Option Agreement under the 2000 Incentive
Plan and the 2007 Incentive Plan [for all other award recipients]
(incorporated by reference to Exhibit 10.3 of the Old Liberty 10-Q).
10.20 Form of Restricted Stock Award Agreement under the 2000 Incentive Plan
and the 2007 Incentive Plan [for certain designated award recipients]
(incorporated by reference to Exhibit 10.4 to the Old Liberty 10-Q).
10.21 Form of Stock Appreciation Rights Agreement under the 2000 Incentive
Plan and the 2007 Incentive Plan (incorporated by reference to
Exhibit 10.18 to the Annual Report on Form 10-K of Old Liberty for the
year ended December 31, 2004 (File No. 001-16615) as filed on March 15,
2005 (the "Old Liberty 2005 10-K")).
10.22 Liberty Media Corporation 2002 Nonemployee Director Incentive Plan (As
Amended and Restated Effective May 9, 2006) (the "Director Plan")
(incorporated by reference to Exhibit 10.2 to the May 2006 8-K).
10.23 Form of Stock Appreciation Rights Agreement under the Director Plan
(incorporated by reference to Exhibit 10.21 to the Old Liberty 2005
10-K).
10.24 Liberty Media Corporation 2006 Deferred Compensation Plan
(incorporated by reference to Exhibit 99.1 to Liberty's Current Report on
Form 8-K (File No. 000-51990) as filed on January 5, 2007).
10.25 Letter Agreement, dated as of May 8, 2003, between Robert R. Bennett
and Old Liberty regarding Mr. Bennett's personal use of Liberty's
aircraft (incorporated by reference to Exhibit 10.19 to the Old Liberty
2003 10-K).
10.26 Time Sharing Agreement regarding personal use of Liberty's aircraft,
dated as of March 29, 2005, between Robert R. Bennett and Old Liberty
(incorporated by reference to Exhibit 10.1 to the Quarterly Report on
Form 10-Q of Old Liberty for the period ended March 31, 2005 (File
No. 001-16615) as filed on May 9, 2005 (the "Liberty First Quarter 2005
10-Q").
10.27 Letter Agreement regarding personal use of Liberty's aircraft, dated
as of May 4, 2005, between Robert R. Bennett and Old Liberty
(incorporated by reference to Exhibit 10.2 to the Liberty First Quarter
2005 10-Q).
10.28 Employment Agreement, dated as of December 28, 2005, between Old
Liberty and Mr. Bennett (incorporated by reference to Exhibit 99.1 to Old
Liberty's Current Report on Form 8-K (File No. 001-16615) as filed on
December 30, 2005 (the "Old Liberty December 2005 8-K")).
10.29 Amended and Restated Deferred Compensation Agreement, dated as of
December 28, 2005, between Old Liberty and Mr. Bennett (incorporated by
reference to Exhibit 99.2 to the Old Liberty December 2005 8-K).
10.30 Amended and Restated Deferred Compensation Agreement, dated as of
December 28, 2005, between Mr. Bennett and Old Liberty (incorporated by
reference to Exhibit 99.3 to the Old Liberty December 2005 8-K).
10.31 Deferred Compensation Agreement, dated as of July 1, 2005, between
Mr. Bennett and Old Liberty (incorporated by reference to Exhibit 99.4 to
the Old Liberty December 2005 8-K).
10.32 Call Agreement, dated as of February 9, 1998 (the "Call Agreement"),
between Liberty (as successor of Old Liberty which was the assignee of
Tele-Communications, Inc.) and the Malone Group (incorporated by
reference to Exhibit 7(n) to Mr. Malone's Amendment No. 8 to
Schedule 13D filed in respect of Tele-Communications, Inc. on
February 19, 1998 (File No. 005-44063)).
10.33 Letter, dated as of March 5, 1999, from Tele-Communications, Inc. and
Old Liberty addressed to Mr. Malone and Leslie Malone relating to the
Call Agreement (incorporated by reference to Exhibit 7(f) to
Mr. Malone's Schedule 13D filed in respect of AT&T on March 30, 1999
(File No. 005-32542)).
10.34 $3,500,000,000 Credit Agreement, dated as of March 3, 2006, among
QVC, Inc., as Borrower; the Lenders party hereto; JP Morgan Chase Bank,
N.A., as Administrative Agent; and Wachovia Capital Markets, LLC, as
Syndication Agent (the "March 2006 Credit Agreement") (incorporated by
reference to Exhibit 10.1 to the Old Liberty 10-Q).
10.35 Amendment dated October 4, 2006 to the March 2006 Credit Agreement
(incorporated by reference to Exhibit 99.2 to Liberty's Current Report on
Form 8-K (File No. 000-51990) as filed on October 10, 2006 (the
"October 2006 8-K")).
10.36 $1,750,000,000 Credit Agreement, dated as of October 4, 2006 among
QVC, Wachovia Bank, N.A., as Administrative Agent, Bank of America N.A.
and J.P. Morgan Securities Inc., as Syndication Agents, and the lenders
party thereto from time to time (incorporated by reference to
Exhibit 99.1 to the October 2006 8-K).
10.37 Form of Indemnification Agreement between Liberty and its executive
officers/directors.*
10.38 Share Exchange Agreement, dated as of December 22, 2006, by and
between News Corporation and Liberty (the "News Agreement").*
10.39 Tax Matters Agreement, dated as of December 22, 2006, by and between
News Corporation and Liberty (which is Exhibit A-I to the News
Agreement).*
21--Subsidiaries of Liberty Media Corporation.*
23--Consent of KPMG LLP.*
31.1 Rule 13a-14(a)/15d--14(a) Certification.*
31.2 Rule 13a-14(a)/15d--14(a) Certification.*
31.3 Rule 13a-14(a)/15d--14(a) Certification.*
32 Section 1350 Certification.*
99.1 Unaudited Attributed Financial Information for Tracking Stock Groups.*
- ------------------------
* Filed herewith.
EXHIBIT 10.16
LIBERTY MEDIA CORPORATION
2000 INCENTIVE PLAN
(AS AMENDED AND RESTATED EFFECTIVE FEBRUARY 22, 2007)
ARTICLE I
PURPOSE AND ASSUMPTION OF PLAN
1.1 PURPOSE. The purpose of the Plan is to promote the success of the
Company by providing a method whereby (i) eligible employees of the Company and
its Subsidiaries and (ii) independent contractors providing services to the
Company and its Subsidiaries may be awarded additional remuneration for services
rendered and encouraged to invest in capital stock of the Company, thereby
increasing their proprietary interest in the Company's businesses, encouraging
them to remain in the employ of the Company or its Subsidiaries, and increasing
their personal interest in the continued success and progress of the Company and
its Subsidiaries. The Plan is also intended to aid in (i) attracting Persons of
exceptional ability to become officers and employees of the Company and its
Subsidiaries and (ii) inducing independent contractors to agree to provide
services to the Company and its Subsidiaries.
1.2 ASSUMPTION OF PLAN; AMENDMENT AND RESTATEMENT OF PLAN. The Plan was
originally adopted as the Amended and Restated AT&T Corp. Liberty Media Group
2000 Incentive Plan, by the board of directors of AT&T Corp., the former parent
corporation of Liberty Media LLC ("Old Liberty"), which prior to the Merger (as
defined below) was a Delaware corporation named Liberty Media Corporation and
was the parent corporation of the Company. Effective August 10, 2001, the board
of directors of Old Liberty approved an amendment and restatement of the Plan,
and Old Liberty assumed and adopted the Plan in connection with its split off
from AT&T Corp. The Plan was later amended and restated effective September 11,
2002 and April 19, 2004 by the board of directors of Old Liberty. The Plan was
further amended and restated as of May 9, 2006 by the Board of the Company in
connection with the merger of a wholly owned subsidiary of the Company with and
into Old Liberty ("Merger"). Effective May 9, 2006, the Company became the
parent corporation of Old Liberty and assumed and adopted the Plan. The Plan is
hereby further amended and restated as of February 22, 2007 by the Board of the
Company to make certain clarifying changes to Section 4.2 hereof.
ARTICLE II
DEFINITIONS
2.1 CERTAIN DEFINED TERMS. Capitalized terms not defined elsewhere in the
Plan shall have the following meanings (whether used in the singular or plural):
"Affiliate" of the Company means any corporation, partnership or other
business association that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with
the Company.
"Agreement" means a stock option agreement, stock appreciation rights
agreement, restricted shares agreement, stock units agreement, cash award
agreement or an agreement evidencing more than one type of Award, specified
in Section 11.5, as any such Agreement may be supplemented or amended from
time to time.
"Approved Transaction" means any transaction in which the Board (or,
if approval of the Board is not required as a matter of law, the
stockholders of the Company) shall approve (i) any consolidation or merger
of the Company, or binding share exchange, pursuant to which shares of
Common Stock of the Company would be changed or converted into or exchanged
for cash, securities, or other property, other than any such transaction in
which the common stockholders of the Company immediately prior to such
transaction have the same proportionate ownership of the Common Stock of,
and voting power with respect to, the surviving corporation immediately
after such transaction, (ii) any merger, consolidation or binding share
exchange to which the Company is a party as a result of which the Persons
who are common stockholders of the Company immediately prior thereto have
less than a majority of the combined voting power of the outstanding
capital stock of the Company ordinarily (and apart from the rights accruing
under special circumstances) having the right to vote in the election of
directors immediately following such merger, consolidation or binding share
exchange, (iii) the adoption of any plan or proposal for the liquidation or
dissolution of the Company, or (iv) any sale, lease, exchange or other
transfer (in one transaction or a series of related transactions) of all,
or substantially all, of the assets of the Company.
"Award" means a grant of Options, SARs, Restricted Shares, Stock
Units, Performance Awards, Cash Awards and/or cash amounts under the Plan.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire
Board cease for any reason to constitute a majority thereof unless the
election, or the nomination for election, of each new director was approved
by a vote of at least two-thirds of the directors then still in office who
were directors at the beginning of the period.
"Cash Award" means an Award made pursuant to Section 10.1 of the Plan
to a Holder that is paid solely on account of the attainment of one or more
Performance Objectives that have been preestablished by the Committee.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute or statutes thereto. Reference to any
specific Code section shall include any successor section.
"Committee" means the committee of the Board appointed pursuant to
Section 3.1 to administer the Plan.
2
"Common Stock" means each or any (as the context may require) series
of the Company's common stock.
"Company" means Liberty Media Corporation, a Delaware corporation
(which was originally incorporated under the name Liberty Media Holding
Corporation).
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity
(other than the Company, any Subsidiary of the Company or any employee
benefit plan sponsored by the Company or any Subsidiary of the Company)
shall purchase any Common Stock of the Company (or securities convertible
into Common Stock of the Company) for cash, securities or any other
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) any person (as such term is so
defined), corporation or other entity (other than the Company, any
Subsidiary of the Company, any employee benefit plan sponsored by the
Company or any Subsidiary of the Company or any Exempt Person (as defined
below)) shall become the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing 20% or more of the combined voting power of the
then outstanding securities of the Company ordinarily (and apart from the
rights accruing under special circumstances) having the right to vote in
the election of directors (calculated as provided in Rule 13d-3(d) under
the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related
transactions) approved by the Board. For purposes of this definition,
"Exempt Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of April 19, 2004, and (b) the
respective family members, estates and heirs of each of the Persons
referred to in clause (a) above and any trust or other investment vehicle
for the primary benefit of any of such Persons or their respective family
members or heirs. As used with respect to any Person, the term "family
member" means the spouse, siblings and lineal descendants of such Person.
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.
"Dividend Equivalents" means, with respect to Restricted Shares to be
issued at the end of the Restriction Period, to the extent specified by the
Committee only, an amount equal to all dividends and other distributions
(or the economic equivalent thereof) which are payable to stockholders of
record during the Restriction Period on a like number and kind of shares of
Common Stock.
"Domestic Relations Order" means a domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act, or
the rules thereunder.
3
"Effective Date" means December 6, 2000, the date on which the Plan
originally became effective.
"Equity Security" shall have the meaning ascribed to such term in
Section 3(a)(11) of the Exchange Act, and an equity security of an issuer
shall have the meaning ascribed thereto in Rule 16a-1 promulgated under the
Exchange Act, or any successor Rule.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference
to any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of any series of Common Stock on any
day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of such series of
Common Stock on such day (or, if such day is not a trading day, on the next
preceding trading day) as reported on the consolidated transaction
reporting system for the principal national securities exchange on which
shares of such series of Common Stock are listed on such day or if such
shares are not then listed on a national securities exchange, then as
reported on Nasdaq or, if such shares are not then listed or quoted on
Nasdaq, then as quoted by the National Quotation Bureau Incorporated. If
for any day the Fair Market Value of a share of the applicable series of
Common Stock is not determinable by any of the foregoing means, then the
Fair Market Value for such day shall be determined in good faith by the
Committee on the basis of such quotations and other considerations as the
Committee deems appropriate.
"Free Standing SAR" has the meaning ascribed thereto in Section 7.1.
"Holder" means a Person who has received an Award under the Plan.
"Nasdaq" means The Nasdaq Stock Market.
"Nonqualified Stock Option" means a stock option granted under Article
VI.
"Option" means a Nonqualified Stock Option.
"Performance Award" means an Award made pursuant to Article X of the
Plan to a Holder that is subject to the attainment of one or more
Performance Objectives.
"Performance Objective" means a standard established by the Committee
to determine in whole or in part whether a Performance Award shall be
earned.
"Person" means an individual, corporation, limited liability company,
partnership, trust, incorporated or unincorporated association, joint
venture or other entity of any kind.
"Plan" means this Liberty Media Corporation 2000 Incentive Plan (As
Amended and Restated Effective February 22, 2007).
4
"Restricted Shares" means shares of any series of Common Stock or the
right to receive shares of any specified series of Common Stock, as the
case may be, awarded pursuant to Article VIII.
"Restriction Period" means a period of time beginning on the date of
each Award of Restricted Shares and ending on the Vesting Date with respect
to such Award.
"Retained Distribution" has the meaning ascribed thereto in Section
8.3.
"SARs" means stock appreciation rights, awarded pursuant to Article
VII, with respect to shares of any specified series of Common Stock.
"Stock Unit Awards" has the meaning ascribed thereto in Section 9.1.
"Subsidiary" of a Person means any present or future subsidiary (as
defined in Section 424(f) of the Code) of such Person or any business
entity in which such Person owns, directly or indirectly, 50% or more of
the voting, capital or profits interests. An entity shall be deemed a
subsidiary of a Person for purposes of this definition only for such
periods as the requisite ownership or control relationship is maintained.
"Tandem SARs" has the meaning ascribed thereto in Section 7.1.
"Vesting Date," with respect to any Restricted Shares awarded
hereunder, means the date on which such Restricted Shares cease to be
subject to a risk of forfeiture, as designated in or determined in
accordance with the Agreement with respect to such Award of Restricted
Shares pursuant to Article VIII. If more than one Vesting Date is
designated for an Award of Restricted Shares, reference in the Plan to a
Vesting Date in respect of such Award shall be deemed to refer to each part
of such Award and the Vesting Date for such part.
ARTICLE III
ADMINISTRATION
3.1 COMMITTEE. The Plan shall be administered by the Compensation Committee
of the Board unless a different committee is appointed by the Board. The
Committee shall be comprised of not less than two Persons. The Board may from
time to time appoint members of the Committee in substitution for or in addition
to members previously appointed, may fill vacancies in the Committee and may
remove members of the Committee. The Committee shall select one of its members
as its chairman and shall hold its meetings at such times and places as it shall
deem advisable. A majority of its members shall constitute a quorum and all
determinations shall be made by a majority of such quorum. Any determination
reduced to writing and signed by all of the members shall be as fully effective
as if it had been made by a majority vote at a meeting duly called and held.
5
3.2 POWERS. The Committee shall have full power and authority to grant to
eligible Persons Options under Article VI of the Plan, SARs under Article VII of
the Plan, Restricted Shares under Article VIII of the Plan, Stock Units under
Article IX of the Plan, Cash Awards under Article X of the Plan and/or
Performance Awards under Article X of the Plan, to determine the terms and
conditions (which need not be identical) of all Awards so granted, to interpret
the provisions of the Plan and any Agreements relating to Awards granted under
the Plan and to supervise the administration of the Plan. The Committee in
making an Award may provide for the granting or issuance of additional,
replacement or alternative Awards upon the occurrence of specified events,
including the exercise of the original Award. The Committee shall have sole
authority in the selection of Persons to whom Awards may be granted under the
Plan and in the determination of the timing, pricing and amount of any such
Award, subject only to the express provisions of the Plan. In making
determinations hereunder, the Committee may take into account the nature of the
services rendered by the respective employees and independent contractors, their
present and potential contributions to the success of the Company and its
Subsidiaries, and such other factors as the Committee in its discretion deems
relevant.
3.3 INTERPRETATION. The Committee is authorized, subject to the provisions
of the Plan, to establish, amend and rescind such rules and regulations as it
deems necessary or advisable for the proper administration of the Plan and to
take such other action in connection with or in relation to the Plan as it deems
necessary or advisable. Each action and determination made or taken pursuant to
the Plan by the Committee, including any interpretation or construction of the
Plan, shall be final and conclusive for all purposes and upon all Persons. No
member of the Committee shall be liable for any action or determination made or
taken by him or the Committee in good faith with respect to the Plan.
ARTICLE IV
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to the provisions of this Article IV, the
maximum number of shares of Common Stock with respect to which Awards may be
granted during the term of the Plan shall be 48 million shares. Shares of Common
Stock will be made available from the authorized but unissued shares of the
Company or from shares reacquired by the Company, including shares purchased in
the open market. The shares of Common Stock subject to (i) any Award granted
under the Plan that shall expire, terminate or be annulled for any reason
without having been exercised (or considered to have been exercised as provided
in Section 7.2), (ii) any Award of any SARs granted under the Plan that shall be
exercised for cash, and (iii) any Award of Restricted Shares or Stock Units that
shall be forfeited prior to becoming vested (provided that the Holder received
no benefits of ownership of such Restricted Shares or Stock Units other than
voting rights and the accumulation of Retained Distributions and unpaid Dividend
Equivalents that are likewise forfeited) shall again be available for purposes
of the Plan. Except for Awards described in Section 11.1, no Person may be
granted in any calendar year Awards covering more than 7.5 million shares of
Common Stock (as such amount may be adjusted from time to time as provided in
Section 4.2). No Person shall receive payment for Cash Awards during any
calendar year aggregating in excess of $10,000,000.
6
4.2 ADJUSTMENTS. If the Company subdivides its outstanding shares of any
series of Common Stock into a greater number of shares of such series of Common
Stock (by stock dividend, stock split, reclassification, or otherwise) or
combines its outstanding shares of any series of Common Stock into a smaller
number of shares of such series of Common Stock (by reverse stock split,
reclassification, or otherwise) or if the Committee determines that any stock
dividend, extraordinary cash dividend, reclassification, recapitalization,
reorganization, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase such series of Common Stock or other similar
corporate event (including mergers or consolidations other than those which
constitute Approved Transactions, adjustments with respect to which shall be
governed by Section 11.1(b)) affects any series of Common Stock so that an
adjustment is required to preserve the benefits or potential benefits intended
to be made available under the Plan, then the Committee, in its sole discretion
and in such manner as the Committee deems equitable and appropriate, shall make
such adjustments to any or all of (i) the number and kind of shares of stock
which thereafter may be awarded, optioned or otherwise made subject to the
benefits contemplated by the Plan, (ii) the number and kind of shares of stock
subject to outstanding Awards, and (iii) the purchase or exercise price and the
relevant appreciation base with respect to any of the foregoing, PROVIDED,
HOWEVER, that the number of shares subject to any Award shall always be a whole
number. Notwithstanding the foregoing, if all shares of any series of Common
Stock are redeemed, then each outstanding Award shall be adjusted to substitute
for the shares of such series of Common Stock subject thereto the kind and
amount of cash, securities or other assets issued or paid in the redemption of
the equivalent number of shares of such series of Common Stock and otherwise the
terms of such Award, including, in the case of Options or similar rights, the
aggregate exercise price, and, in the case of Free Standing SARs, the aggregate
base price, shall remain constant before and after the substitution (unless
otherwise determined by the Committee and provided in the applicable Agreement).
The Committee may, if deemed appropriate, provide for a cash payment to any
Holder of an Award in connection with any adjustment made pursuant to this
Section 4.2.
ARTICLE V
ELIGIBILITY
5.1 GENERAL. The Persons who shall be eligible to participate in the Plan
and to receive Awards under the Plan shall, subject to Section 5.2, be such
Persons who are employees (including officers and directors) of or independent
contractors providing services to the Company or its Subsidiaries as the
Committee shall select. Awards may be made to employees or independent
contractors who hold or have held Awards under the Plan or any similar or other
awards under any other plan of the Company or any of its Affiliates.
5.2 INELIGIBILITY. No member of the Committee, while serving as such, shall
be eligible to receive an Award.
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ARTICLE VI
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the limitations of the Plan, the Committee
shall designate from time to time those eligible Persons to be granted Options,
the time when each Option shall be granted to such eligible Persons, the series
and number of shares of Common Stock subject to such Option, and, subject to
Section 6.2, the purchase price of the shares of Common Stock subject to such
Option.
6.2 OPTION PRICE. The price at which shares may be purchased upon exercise
of an Option shall be fixed by the Committee and may be no less than the Fair
Market Value of the shares of the applicable series of Common Stock subject to
the Option as of the date the Option is granted.
6.3 TERM OF OPTIONS. Subject to the provisions of the Plan with respect to
death, retirement and termination of employment, the term of each Option shall
be for such period as the Committee shall determine as set forth in the
applicable Agreement.
6.4 EXERCISE OF OPTIONS. An Option granted under the Plan shall become (and
remain) exercisable during the term of the Option to the extent provided in the
applicable Agreement and the Plan and, unless the Agreement otherwise provides,
may be exercised to the extent exercisable, in whole or in part, at any time and
from time to time during such term; PROVIDED, HOWEVER, that subsequent to the
grant of an Option, the Committee, at any time before complete termination of
such Option, may accelerate the time or times at which such Option may be
exercised in whole or in part (without reducing the term of such Option).
6.5 MANNER OF EXERCISE.
(a) FORM OF PAYMENT. An Option shall be exercised by written notice to
the Company upon such terms and conditions as the Agreement may provide and
in accordance with such other procedures for the exercise of Options as the
Committee may establish from time to time. The method or methods of payment
of the purchase price for the shares to be purchased upon exercise of an
Option and of any amounts required by Section 11.9 shall be determined by
the Committee and may consist of (i) cash, (ii) check, (iii) promissory
note (subject to applicable law), (iv) whole shares of any series of Common
Stock, (v) the withholding of shares of the applicable series of Common
Stock issuable upon such exercise of the Option, (vi) the delivery,
together with a properly executed exercise notice, of irrevocable
instructions to a broker to deliver promptly to the Company the amount of
sale or loan proceeds required to pay the purchase price, or (vii) any
combination of the foregoing methods of payment, or such other
consideration and method of payment as may be permitted for the issuance of
shares under the Delaware General Corporation Law. The permitted method or
methods of payment of the amounts payable upon exercise of an Option, if
other than in cash, shall be set forth in the applicable Agreement and may
be subject to such conditions as the Committee deems appropriate.
8
(b) VALUE OF SHARES. Unless otherwise determined by the Committee and
provided in the applicable Agreement, shares of any series of Common Stock
delivered in payment of all or any part of the amounts payable in
connection with the exercise of an Option, and shares of any series of
Common Stock withheld for such payment, shall be valued for such purpose at
their Fair Market Value as of the exercise date.
(c) ISSUANCE OF SHARES. The Company shall effect the transfer of the
shares of Common Stock purchased under the Option as soon as practicable
after the exercise thereof and payment in full of the purchase price
therefor and of any amounts required by Section 11.9, and within a
reasonable time thereafter, such transfer shall be evidenced on the books
of the Company. Unless otherwise determined by the Committee and provided
in the applicable Agreement, (i) no Holder or other Person exercising an
Option shall have any of the rights of a stockholder of the Company with
respect to shares of Common Stock subject to an Option granted under the
Plan until due exercise and full payment has been made, and (ii) no
adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such due exercise and full payment.
6.6 NONTRANSFERABILITY. Unless otherwise determined by the Committee and
provided in the applicable Agreement, Options shall not be transferable other
than by will or the laws of descent and distribution or pursuant to a Domestic
Relations Order, and, except as otherwise required pursuant to a Domestic
Relations Order, Options may be exercised during the lifetime of the Holder
thereof only by such Holder (or his or her court-appointed legal
representative).
ARTICLE VII
SARs
7.1 GRANT OF SARs. Subject to the limitations of the Plan, SARs may be
granted by the Committee to such eligible Persons in such numbers, with respect
to any specified series of Common Stock, and at such times during the term of
the Plan as the Committee shall determine. A SAR may be granted to a Holder of
an Option (hereinafter called a "related Option") with respect to all or a
portion of the shares of Common Stock subject to the related Option (a "Tandem
SAR") or may be granted separately to an eligible employee (a "Free Standing
SAR"). Subject to the limitations of the Plan, SARs shall be exercisable in
whole or in part upon notice to the Company upon such terms and conditions as
are provided in the Agreement.
7.2 TANDEM SARs. A Tandem SAR may be granted either concurrently with the
grant of the related Option or at any time thereafter prior to the complete
exercise, termination, expiration or cancellation of such related Option. Tandem
SARs shall be exercisable only at the time and to the extent that the related
Option is exercisable (and may be subject to such additional limitations on
exercisability as the Agreement may provide) and in no event after the complete
termination or full exercise of the related Option. Upon the exercise or
termination of the related Option, the Tandem SARs with respect thereto shall be
canceled automatically to the extent of the number of shares of Common Stock
with respect to which the related Option was so exercised or terminated. Subject
to the limitations of the Plan, upon the exercise of a Tandem
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SAR and unless otherwise determined by the Committee and provided in the
applicable Agreement, (i) the Holder thereof shall be entitled to receive from
the Company, for each share of the applicable series of Common Stock with
respect to which the Tandem SAR is being exercised, consideration (in the form
determined as provided in Section 7.4) equal in value to the excess of the Fair
Market Value of a share of the applicable series of Common Stock with respect to
which the Tandem SAR was granted on the date of exercise over the related Option
purchase price per share, and (ii) the related Option with respect thereto shall
be canceled automatically to the extent of the number of shares of Common Stock
with respect to which the Tandem SAR was so exercised.
7.3 FREE STANDING SARs. Free Standing SARs shall be exercisable at the
time, to the extent and upon the terms and conditions set forth in the
applicable Agreement. The base price of a Free Standing SAR may be no less than
the Fair Market Value of the applicable series of Common Stock with respect to
which the Free Standing SAR was granted as of the date the Free Standing SAR is
granted. Subject to the limitations of the Plan, upon the exercise of a Free
Standing SAR and unless otherwise determined by the Committee and provided in
the applicable Agreement, the Holder thereof shall be entitled to receive from
the Company, for each share of the applicable series of Common Stock with
respect to which the Free Standing SAR is being exercised, consideration (in the
form determined as provided in Section 7.4) equal in value to the excess of the
Fair Market Value of a share of the applicable series of Common Stock with
respect to which the Free Standing SAR was granted on the date of exercise over
the base price per share of such Free Standing SAR.
7.4 CONSIDERATION. The consideration to be received upon the exercise of a
SAR by the Holder shall be paid in cash, shares of the applicable series of
Common Stock with respect to which the SAR was granted (valued at Fair Market
Value on the date of exercise of such SAR), a combination of cash and such
shares of the applicable series of Common Stock or such other consideration, in
each case, as provided in the Agreement. No fractional shares of Common Stock
shall be issuable upon exercise of a SAR, and unless otherwise provided in the
applicable Agreement, the Holder will receive cash in lieu of fractional shares.
Unless the Committee shall otherwise determine, to the extent a Free Standing
SAR is exercisable, it will be exercised automatically for cash on its
expiration date.
7.5 LIMITATIONS. The applicable Agreement may provide for a limit on the
amount payable to a Holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the Holder
in whole or in part for cash during any specified period, for a limit on the
time periods during which a Holder may exercise SARs, and for such other limits
on the rights of the Holder and such other terms and conditions of the SAR,
including a condition that the SAR may be exercised only in accordance with
rules and regulations adopted from time to time, as the Committee may determine.
Unless otherwise so provided in the applicable Agreement, any such limit
relating to a Tandem SAR shall not restrict the exercisability of the related
Option. Such rules and regulations may govern the right to exercise SARs granted
prior to the adoption or amendment of such rules and regulations as well as SARs
granted thereafter.
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7.6 EXERCISE. For purposes of this Article VII, the date of exercise of a
SAR shall mean the date on which the Company shall have received notice from the
Holder of the SAR of the exercise of such SAR (unless otherwise determined by
the Committee and provided in the applicable Agreement).
7.7 NONTRANSFERABILITY. Unless otherwise determined by the Committee and
provided in the applicable Agreement, (i) SARs shall not be transferable other
than by will or the laws of descent and distribution or pursuant to a Domestic
Relations Order, and (ii) except as otherwise required pursuant to a Domestic
Relations Order, SARs may be exercised during the lifetime of the Holder thereof
only by such Holder (or his or her court-appointed legal representative).
ARTICLE VIII
RESTRICTED SHARES
8.1 GRANT. Subject to the limitations of the Plan, the Committee shall
designate those eligible Persons to be granted Awards of Restricted Shares,
shall determine the time when each such Award shall be granted, shall determine
whether shares of Common Stock covered by Awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period and whether
Dividend Equivalents will be paid during the Restriction Period in the event
shares of the applicable series of Common Stock are to be issued at the end of
the Restriction Period, and shall designate (or set forth the basis for
determining) the Vesting Date or Vesting Dates for each Award of Restricted
Shares, and may prescribe other restrictions, terms and conditions applicable to
the vesting of such Restricted Shares in addition to those provided in the Plan.
The Committee shall determine the price, if any, to be paid by the Holder for
the Restricted Shares; PROVIDED, HOWEVER, that the issuance of Restricted Shares
shall be made for at least the minimum consideration necessary to permit such
Restricted Shares to be deemed fully paid and nonassessable. All determinations
made by the Committee pursuant to this Section 8.1 shall be specified in the
Agreement.
8.2 ISSUANCE OF RESTRICTED SHARES AT BEGINNING OF THE RESTRICTION PERIOD.
If shares of the applicable series of Common Stock are issued at the beginning
of the Restriction Period, the stock certificate or certificates representing
such Restricted Shares shall be registered in the name of the Holder to whom
such Restricted Shares shall have been awarded. During the Restriction Period,
certificates representing the Restricted Shares and any securities constituting
Retained Distributions shall bear a restrictive legend to the effect that
ownership of the Restricted Shares (and such Retained Distributions), and the
enjoyment of all rights appurtenant thereto, are subject to the restrictions,
terms and conditions provided in the Plan and the applicable Agreement. Such
certificates shall remain in the custody of the Company or its designee, and the
Holder shall deposit with the custodian stock powers or other instruments of
assignment, each endorsed in blank, so as to permit retransfer to the Company of
all or any portion of the Restricted Shares and any securities constituting
Retained Distributions that shall be forfeited or otherwise not become vested in
accordance with the Plan and the applicable Agreement.
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8.3 RESTRICTIONS. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of the
applicable series of Common Stock for all corporate purposes. The Holder will
have the right to vote such Restricted Shares, to receive and retain such
dividends and distributions, as the Committee may designate, paid or distributed
on such Restricted Shares, and to exercise all other rights, powers and
privileges of a Holder of shares of the applicable series of Common Stock with
respect to such Restricted Shares; EXCEPT, THAT, unless otherwise determined by
the Committee and provided in the applicable Agreement, (i) the Holder will not
be entitled to delivery of the stock certificate or certificates representing
such Restricted Shares until the Restriction Period shall have expired and
unless all other vesting requirements with respect thereto shall have been
fulfilled or waived; (ii) the Company or its designee will retain custody of the
stock certificate or certificates representing the Restricted Shares during the
Restriction Period as provided in Section 8.2; (iii) other than such dividends
and distributions as the Committee may designate, the Company or its designee
will retain custody of all distributions ("Retained Distributions") made or
declared with respect to the Restricted Shares (and such Retained Distributions
will be subject to the same restrictions, terms and vesting, and other
conditions as are applicable to the Restricted Shares) until such time, if ever,
as the Restricted Shares with respect to which such Retained Distributions shall
have been made, paid or declared shall have become vested, and such Retained
Distributions shall not bear interest or be segregated in a separate account;
(iv) the Holder may not sell, assign, transfer, pledge, exchange, encumber or
dispose of the Restricted Shares or any Retained Distributions or his interest
in any of them during the Restriction Period; and (v) a breach of any
restrictions, terms or conditions provided in the Plan or established by the
Committee with respect to any Restricted Shares or Retained Distributions will
cause a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
8.4 ISSUANCE OF STOCK AT END OF THE RESTRICTION PERIOD. Restricted Shares
issued at the end of the Restriction Period shall not constitute issued and
outstanding shares of the applicable series of Common Stock, and the Holder
shall not have any of the rights of a stockholder with respect to the shares of
Common Stock covered by such an Award of Restricted Shares, in each case until
such shares shall have been transferred to the Holder at the end of the
Restriction Period. If and to the extent that shares of Common Stock are to be
issued at the end of the Restriction Period, the Holder shall be entitled to
receive Dividend Equivalents with respect to the shares of Common Stock covered
thereby either (i) during the Restriction Period or (ii) in accordance with the
rules applicable to Retained Distributions, as the Committee may specify in the
Agreement.
8.5 CASH PAYMENTS. In connection with any Award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested. Such cash amounts shall be payable in accordance with such additional
restrictions, terms and conditions as shall be prescribed by the Committee in
the Agreement and shall be in addition to any other salary, incentive, bonus or
other compensation payments which such Holder shall be otherwise entitled or
eligible to receive from the Company.
8.6 COMPLETION OF RESTRICTION PERIOD. On the Vesting Date with respect to
each Award of Restricted Shares and the satisfaction of any other applicable
restrictions, terms and
12
conditions, (i) all or the applicable portion of such Restricted Shares shall
become vested, (ii) any Retained Distributions and any unpaid Dividend
Equivalents with respect to such Restricted Shares shall become vested to the
extent that the Restricted Shares related thereto shall have become vested, and
(iii) any cash amount to be received by the Holder with respect to such
Restricted Shares shall become payable, all in accordance with the terms of the
applicable Agreement. Any such Restricted Shares, Retained Distributions and any
unpaid Dividend Equivalents that shall not become vested shall be forfeited to
the Company, and the Holder shall not thereafter have any rights (including
dividend and voting rights) with respect to such Restricted Shares, Retained
Distributions and any unpaid Dividend Equivalents that shall have been so
forfeited. The Committee may, in its discretion, provide that the delivery of
any Restricted Shares, Retained Distributions and unpaid Dividend Equivalents
that shall have become vested, and payment of any related cash amounts that
shall have become payable under this Article VIII, shall be deferred until such
date or dates as the recipient may elect. Any election of a recipient pursuant
to the preceding sentence shall be filed in writing with the Committee in
accordance with such rules and regulations, including any deadline for the
making of such an election, as the Committee may provide, and shall be made in
compliance with Section 409A of the Code.
ARTICLE IX
STOCK UNITS
9.1 GRANT. In addition to granting Awards of Options, SARs and Restricted
Shares, the Committee shall, subject to the limitations of the Plan, have
authority to grant to eligible Persons Awards of Stock Units which may be in the
form of shares of any specified series of Common Stock or units, the value of
which is based, in whole or in part, on the Fair Market Value of the shares of
any specified series of Common Stock. Subject to the provisions of the Plan,
including any rules established pursuant to Section 9.2, Awards of Stock Units
shall be subject to such terms, restrictions, conditions, vesting requirements
and payment rules as the Committee may determine in its discretion, which need
not be identical for each Award. The determinations made by the Committee
pursuant to this Section 9.1 shall be specified in the applicable Agreement.
9.2 RULES. The Committee may, in its discretion, establish any or all of
the following rules for application to an Award of Stock Units:
(a) Any shares of Common Stock which are part of an Award of Stock
Units may not be assigned, sold, transferred, pledged or otherwise
encumbered prior to the date on which the shares are issued or, if later,
the date provided by the Committee at the time of the Award.
(b) Such Awards may provide for the payment of cash consideration by
the Person to whom such Award is granted or provide that the Award, and any
shares of Common Stock to be issued in connection therewith, if applicable,
shall be delivered without the payment of cash consideration; PROVIDED,
HOWEVER, that the issuance of any shares of Common Stock in connection with
an Award of Stock Units shall be for at least
13
the minimum consideration necessary to permit such shares to be deemed
fully paid and nonassessable.
(c) Awards of Stock Units may provide for deferred payment schedules,
vesting over a specified period of employment, the payment (on a current or
deferred basis) of dividend equivalent amounts with respect to the number
of shares of Common Stock covered by the Award, and elections by the
employee to defer payment of the Award or the lifting of restrictions on
the Award, if any, provided that any such deferrals shall comply with the
requirements of Section 409A of the Code.
(d) In such circumstances as the Committee may deem advisable, the
Committee may waive or otherwise remove, in whole or in part, any
restrictions or limitations to which a Stock Unit Award was made subject at
the time of grant.
ARTICLE X
CASH AWARDS AND PERFORMANCE AWARDS
10.1 CASH AWARDS. In addition to granting Options, SARs, Restricted Shares
and Stock Units, the Committee shall, subject to the limitations of the Plan,
have authority to grant to eligible Persons Cash Awards. Each Cash Award shall
be subject to such terms and conditions, restrictions and contingencies, if any,
as the Committee shall determine. Restrictions and contingencies limiting the
right to receive a cash payment pursuant to a Cash Award shall be based upon the
achievement of single or multiple Performance Objectives over a performance
period established by the Committee. The determinations made by the Committee
pursuant to this Section 10.1 shall be specified in the applicable Agreement.
10.2 DESIGNATION AS A PERFORMANCE AWARD. The Committee shall have the right
to designate any Award of Options, SARs, Restricted Shares or Stock Units as a
Performance Award. All Cash Awards shall be designated as Performance Awards.
10.3 PERFORMANCE OBJECTIVES. The grant or vesting of a Performance Award
shall be subject to the achievement of Performance Objectives over a performance
period established by the Committee based upon one or more of the following
business criteria that apply to the Holder, one or more business units,
divisions or Subsidiaries of the Company or the applicable sector of the
Company, or the Company as a whole, and if so desired by the Committee, by
comparison with a peer group of companies: increased revenue; net income
measures (including income after capital costs and income before or after
taxes); stock price measures (including growth measures and total stockholder
return); price per share of Common Stock; market share; earnings per share
(actual or targeted growth); earnings before interest, taxes, depreciation and
amortization (EBITDA); economic value added (or an equivalent metric); market
value added; debt to equity ratio; cash flow measures (including cash flow
return on capital, cash flow return on tangible capital, net cash flow and net
cash flow before financing activities); return measures (including return on
equity, return on average assets, return on capital, risk-adjusted return on
capital, return on investors' capital and return on average equity); operating
measures (including operating income, funds from operations, cash from
operations, after-tax operating income, sales
14
volumes, production volumes and production efficiency); expense measures
(including overhead cost and general and administrative expense); margins;
stockholder value; total stockholder return; proceeds from dispositions; total
market value and corporate values measures (including ethics compliance,
environmental and safety). Unless otherwise stated, such a Performance Objective
need not be based upon an increase or positive result under a particular
business criterion and could include, for example, maintaining the status quo or
limiting economic losses (measured, in each case, by reference to specific
business criteria). The Committee shall have the authority to determine whether
the Performance Objectives and other terms and conditions of the Award are
satisfied, and the Committee's determination as to the achievement of
Performance Objectives relating to a Performance Award shall be made in writing.
10.4 SECTION 162(m) OF THE CODE. Notwithstanding the foregoing provisions,
if the Committee intends for a Performance Award to be granted and administered
in a manner designed to preserve the deductibility of the compensation resulting
from such Award in accordance with Section 162(m) of the Code, then the
Performance Objectives for such particular Performance Award relative to the
particular period of service to which the Performance Objectives relate shall be
established by the Committee in writing (i) no later than 90 days after the
beginning of such period and (ii) prior to the completion of 25% of such period.
10.5 WAIVER OF PERFORMANCE OBJECTIVES. The Committee shall have no
discretion to modify or waive the Performance Objectives or conditions to the
grant or vesting of a Performance Award unless such Award is not intended to
qualify as qualified performance-based compensation under Section 162(m) of the
Code and the relevant Agreement provides for such discretion.
ARTICLE XI
GENERAL PROVISIONS
11.1 ACCELERATION OF AWARDS.
(a) DEATH OR DISABILITY. If a Holder's employment shall terminate by
reason of death or Disability, notwithstanding any contrary waiting period,
installment period, vesting schedule or Restriction Period in any Agreement
or in the Plan, unless the applicable Agreement provides otherwise: (i) in
the case of an Option or SAR, each outstanding Option or SAR granted under
the Plan shall immediately become exercisable in full in respect of the
aggregate number of shares covered thereby; (ii) in the case of Restricted
Shares, the Restriction Period applicable to each such Award of Restricted
Shares shall be deemed to have expired and all such Restricted Shares, any
related Retained Distributions and any unpaid Dividend Equivalents shall
become vested and any related cash amounts payable pursuant to the
applicable Agreement shall be adjusted in such manner as may be provided in
the Agreement; and (iii) in the case of Stock Units, each such Award of
Stock Units shall become vested in full.
(b) APPROVED TRANSACTIONS; BOARD CHANGE; CONTROL PURCHASE. In the
event of any Approved Transaction, Board Change or Control Purchase,
notwithstanding any
15
contrary waiting period, installment period, vesting schedule or
Restriction Period in any Agreement or in the Plan, unless the applicable
Agreement provides otherwise: (i) in the case of an Option or SAR, each
such outstanding Option or SAR granted under the Plan shall become
exercisable in full in respect of the aggregate number of shares covered
thereby; (ii) in the case of Restricted Shares, the Restriction Period
applicable to each such Award of Restricted Shares shall be deemed to have
expired and all such Restricted Shares, any related Retained Distributions
and any unpaid Dividend Equivalents shall become vested and any related
cash amounts payable pursuant to the applicable Agreement shall be adjusted
in such manner as may be provided in the Agreement; and (iii) in the case
of Stock Units, each such Award of Stock Units shall become vested in full,
in each case effective upon the Board Change or Control Purchase or
immediately prior to consummation of the Approved Transaction. The effect,
if any, on a Cash Award of an Approved Transaction, Board Change or Control
Purchase shall be prescribed in the applicable Agreement. Notwithstanding
the foregoing, unless otherwise provided in the applicable Agreement, the
Committee may, in its discretion, determine that any or all outstanding
Awards of any or all types granted pursuant to the Plan will not vest or
become exercisable on an accelerated basis in connection with an Approved
Transaction if effective provision has been made for the taking of such
action which, in the opinion of the Committee, is equitable and appropriate
to substitute a new Award for such Award or to assume such Award and to
make such new or assumed Award, as nearly as may be practicable, equivalent
to the old Award (before giving effect to any acceleration of the vesting
or exercisability thereof), taking into account, to the extent applicable,
the kind and amount of securities, cash or other assets into or for which
the applicable series of Common Stock may be changed, converted or
exchanged in connection with the Approved Transaction.
11.2 TERMINATION OF EMPLOYMENT.
(a) GENERAL. If a Holder's employment shall terminate prior to an
Option or SAR becoming exercisable or being exercised (or deemed exercised,
as provided in Section 7.2) in full, or during the Restriction Period with
respect to any Restricted Shares or prior to the vesting or complete
exercise of any Stock Units, then such Option or SAR shall thereafter
become or be exercisable, such Stock Units to the extent vested shall
thereafter be exercisable, and the Holder's rights to any unvested
Restricted Shares, Retained Distributions, unpaid Dividend Equivalents and
related cash amounts and any such unvested Stock Units shall thereafter
vest, in each case solely to the extent provided in the applicable
Agreement; PROVIDED, HOWEVER, that, unless otherwise determined by the
Committee and provided in the applicable Agreement, (i) no Option or SAR
may be exercised after the scheduled expiration date thereof; (ii) if the
Holder's employment terminates by reason of death or Disability, the Option
or SAR shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such
Option or SAR); and (iii) any termination of the Holder's employment for
cause will be treated in accordance with the provisions of Section 11.2(b).
The effect on a Cash Award of the termination of a Holder's employment for
any reason, other than for cause, shall be prescribed in the applicable
Agreement.
16
(b) TERMINATION FOR CAUSE. If a Holder's employment with the Company
or a Subsidiary of the Company shall be terminated by the Company or such
Subsidiary for "cause" during the Restriction Period with respect to any
Restricted Shares or prior to any Option or SAR becoming exercisable or
being exercised in full or prior to the vesting or complete exercise of any
Stock Unit or the payment in full of any Cash Award (for these purposes,
"cause" shall have the meaning ascribed thereto in any employment agreement
to which such Holder is a party or, in the absence thereof, shall include
insubordination, dishonesty, incompetence, moral turpitude, other
misconduct of any kind and the refusal to perform his duties and
responsibilities for any reason other than illness or incapacity; PROVIDED,
HOWEVER, that if such termination occurs within 12 months after an Approved
Transaction or Control Purchase or Board Change, termination for "cause"
shall mean only a felony conviction for fraud, misappropriation, or
embezzlement), then, unless otherwise determined by the Committee and
provided in the applicable Agreement, (i) all Options and SARs and all
unvested or unexercised Stock Units and all unpaid Cash Awards held by such
Holder shall immediately terminate, and (ii) such Holder's rights to all
Restricted Shares, Retained Distributions, any unpaid Dividend Equivalents
and any related cash amounts shall be forfeited immediately.
(c) MISCELLANEOUS. The Committee may determine whether any given leave
of absence constitutes a termination of employment; PROVIDED, HOWEVER, that
for purposes of the Plan, (i) a leave of absence, duly authorized in
writing by the Company for military service or sickness, or for any other
purpose approved by the Company if the period of such leave does not exceed
90 days, and (ii) a leave of absence in excess of 90 days, duly authorized
in writing by the Company provided the employee's right to reemployment is
guaranteed either by statute or contract, shall not be deemed a termination
of employment. Unless otherwise determined by the Committee and provided in
the applicable Agreement, Awards made under the Plan shall not be affected
by any change of employment so long as the Holder continues to be an
employee of the Company.
11.3 RIGHT OF COMPANY TO TERMINATE EMPLOYMENT. Nothing contained in the
Plan or in any Award, and no action of the Company or the Committee with respect
thereto, shall confer or be construed to confer on any Holder any right to
continue in the employ of the Company or any of its Subsidiaries or interfere in
any way with the right of the Company or any Subsidiary of the Company to
terminate the employment of the Holder at any time, with or without cause,
subject, however, to the provisions of any employment agreement between the
Holder and the Company or any Subsidiary of the Company.
11.4 NONALIENATION OF BENEFITS. Except as set forth herein, no right or
benefit under the Plan shall be subject to anticipation, alienation, sale,
assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge,
and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void. No right or
benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the Person entitled to such benefits.
11.5 WRITTEN AGREEMENT. Each Award of Options shall be evidenced by a stock
option agreement; each Award of SARs shall be evidenced by a stock appreciation
rights agreement;
17
each Award of Restricted Shares shall be evidenced by a restricted shares
agreement; each Award of Stock Units shall be evidenced by a stock units
agreement; and each Performance Award shall be evidenced by a performance award
agreement (including a cash award agreement evidencing a Cash Award), each in
such form and containing such terms and provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve;
PROVIDED, HOWEVER, that if more than one type of Award is made to the same
Holder, such Awards may be evidenced by a single Agreement with such Holder.
Each grantee of an Option, SAR, Restricted Shares, Stock Units or Performance
Award (including a Cash Award) shall be notified promptly of such grant, and a
written Agreement shall be promptly executed and delivered by the Company. Any
such written Agreement may contain (but shall not be required to contain) such
provisions as the Committee deems appropriate (i) to insure that the penalty
provisions of Section 4999 of the Code will not apply to any stock or cash
received by the Holder from the Company or (ii) to provide cash payments to the
Holder to mitigate the impact of such penalty provisions upon the Holder. Any
such Agreement may be supplemented or amended from time to time as approved by
the Committee as contemplated by Section 11.7(b).
11.6 DESIGNATION OF BENEFICIARIES. Each Person who shall be granted an
Award under the Plan may designate a beneficiary or beneficiaries and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Committee on a form to be prescribed by
it, provided that no such designation shall be effective unless so filed prior
to the death of such Person.
11.7 TERMINATION AND AMENDMENT.
(a) GENERAL. Unless the Plan shall theretofore have been terminated as
hereinafter provided, no Awards may be made under the Plan on or after the
tenth anniversary of the Effective Date. The Plan may be terminated at any
time prior to the tenth anniversary of the Effective Date and may, from
time to time, be suspended or discontinued or modified or amended if such
action is deemed advisable by the Committee.
(b) MODIFICATION. No termination, modification or amendment of the
Plan may, without the consent of the Person to whom any Award shall
theretofore have been granted, adversely affect the rights of such Person
with respect to such Award. No modification, extension, renewal or other
change in any Award granted under the Plan shall be made after the grant of
such Award, unless the same is consistent with the provisions of the Plan.
With the consent of the Holder and subject to the terms and conditions of
the Plan (including Section 11.7(a)), the Committee may amend outstanding
Agreements with any Holder, including any amendment which would (i)
accelerate the time or times at which the Award may be exercised and/or
(ii) extend the scheduled expiration date of the Award. Without limiting
the generality of the foregoing, the Committee may, but solely with the
Holder's consent unless otherwise provided in the Agreement, agree to
cancel any Award under the Plan and grant a new Award in substitution
therefor, provided that the Award so substituted shall satisfy all of the
requirements of the Plan as of the date such new Award is made. Nothing
contained in the foregoing provisions of this Section 11.7(b) shall be
construed to prevent the
18
Committee from providing in any Agreement that the rights of the Holder
with respect to the Award evidenced thereby shall be subject to such rules
and regulations as the Committee may, subject to the express provisions of
the Plan, adopt from time to time or impair the enforceability of any such
provision.
11.8 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with
respect to Awards shall be subject to all applicable laws, rules and regulations
and such approvals by any governmental agencies as may be required, including
the effectiveness of any registration statement required under the Securities
Act of 1933, and the rules and regulations of any securities exchange or
association on which the Common Stock may be listed or quoted. For so long as
any series of Common Stock are registered under the Exchange Act, the Company
shall use its reasonable efforts to comply with any legal requirements (i) to
maintain a registration statement in effect under the Securities Act of 1933
with respect to all shares of the applicable series of Common Stock that may be
issued to Holders under the Plan and (ii) to file in a timely manner all reports
required to be filed by it under the Exchange Act.
11.9 WITHHOLDING. The Company's obligation to deliver shares of Common
Stock or pay cash in respect of any Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding tax due at the time of an Award, upon the exercise of any
Option or SAR or upon the vesting of, or expiration of restrictions with respect
to, Restricted Shares or Stock Units or the satisfaction of the Performance
Objectives applicable to a Performance Award, as appropriate, may, in the
discretion of the Committee, be paid in shares of the applicable series of
Common Stock already owned by the Holder or through the withholding of shares
otherwise issuable to such Holder, upon such terms and conditions (including the
conditions referenced in Section 6.5) as the Committee shall determine. If the
Holder shall fail to pay, or make arrangements satisfactory to the Committee for
the payment to the Company of, all such federal, state and local taxes required
to be withheld by the Company, then the Company shall, to the extent permitted
by law, have the right to deduct from any payment of any kind otherwise due to
such Holder an amount equal to any federal, state or local taxes of any kind
required to be withheld by the Company with respect to such Award.
11.10 NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable, including the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
11.11 EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance
of an Award, unless otherwise provided in the applicable Agreement, each Holder
shall be deemed to have agreed that such Award is special incentive compensation
that will not be taken into account, in any manner, as salary, compensation or
bonus in determining the amount of any payment under any pension, retirement or
other employee benefit plan, program or policy of the Company or any Subsidiary
of the Company. In addition, each beneficiary of a deceased Holder shall be
deemed to have agreed that such Award will not affect the amount of any life
insurance coverage, if any, provided by the Company on the life of the Holder
which is payable to such
19
beneficiary under any life insurance plan covering employees of the Company or
any Subsidiary of the Company.
11.12 UNFUNDED PLAN. Neither the Company nor any Subsidiary of the Company
shall be required to segregate any cash or any shares of Common Stock which may
at any time be represented by Awards, and the Plan shall constitute an
"unfunded" plan of the Company. Except as provided in Article VIII with respect
to Awards of Restricted Shares and except as expressly set forth in an
Agreement, no employee shall have voting or other rights with respect to the
shares of Common Stock covered by an Award prior to the delivery of such shares.
Neither the Company nor any Subsidiary of the Company shall, by any provisions
of the Plan, be deemed to be a trustee of any shares of Common Stock or any
other property, and the liabilities of the Company and any Subsidiary of the
Company to any employee pursuant to the Plan shall be those of a debtor pursuant
to such contract obligations as are created by or pursuant to the Plan, and the
rights of any employee, former employee or beneficiary under the Plan shall be
limited to those of a general creditor of the Company or the applicable
Subsidiary of the Company, as the case may be. In its sole discretion, the Board
may authorize the creation of trusts or other arrangements to meet the
obligations of the Company under the Plan, PROVIDED, HOWEVER, that the existence
of such trusts or other arrangements is consistent with the unfunded status of
the Plan.
11.13 GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
11.14 ACCOUNTS. The delivery of any shares of Common Stock and the payment
of any amount in respect of an Award shall be for the account of the Company or
the applicable Subsidiary of the Company, as the case may be, and any such
delivery or payment shall not be made until the recipient shall have paid or
made satisfactory arrangements for the payment of any applicable withholding
taxes as provided in Section 11.9.
11.15 LEGENDS. Each certificate evidencing shares of Common Stock subject
to an Award shall bear such legends as the Committee deems necessary or
appropriate to reflect or refer to any terms, conditions or restrictions of the
Award applicable to such shares, including any to the effect that the shares
represented thereby may not be disposed of unless the Company has received an
opinion of counsel, acceptable to the Company, that such disposition will not
violate any federal or state securities laws.
11.16 COMPANY'S RIGHTS. The grant of Awards pursuant to the Plan shall not
affect in any way the right or power of the Company to make reclassifications,
reorganizations or other changes of or to its capital or business structure or
to merge, consolidate, liquidate, sell or otherwise dispose of all or any part
of its business or assets.
11.17 SECTION 409A. Notwithstanding anything in this Plan to the contrary,
if any Plan provision or Award under the Plan would result in the imposition of
an additional tax under Code Section 409A and related regulations and United
States Department of the Treasury pronouncements ("Section 409A"), that Plan
provision or Award will be reformed to avoid
20
imposition of the applicable tax and no action taken to comply with Section 409A
shall be deemed to adversely affect the Holder's rights to an Award.
21
EXHIBIT 10.17
LIBERTY MEDIA CORPORATION
2007 INCENTIVE PLAN
ARTICLE I
PURPOSE OF PLAN; EFFECTIVE DATE
1.1 PURPOSE. The purpose of the Plan is to promote the success of the
Company by providing a method whereby (i) eligible employees of the Company and
its Subsidiaries and (ii) independent contractors providing services to the
Company and its Subsidiaries may be awarded additional remuneration for services
rendered and encouraged to invest in capital stock of the Company, thereby
increasing their proprietary interest in the Company's businesses, encouraging
them to remain in the employ of the Company or its Subsidiaries, and increasing
their personal interest in the continued success and progress of the Company and
its Subsidiaries. The Plan is also intended to aid in (i) attracting Persons of
exceptional ability to become officers and employees of the Company and its
Subsidiaries and (ii) inducing independent contractors to agree to provide
services to the Company and its Subsidiaries.
1.2 EFFECTIVE DATE. The Plan shall be effective as of February 22, 2007
(the "Effective Date"); PROVIDED, HOWEVER, that the Plan is subject to the
receipt of the approval of the stockholders of the Company, and any grants of
Awards made prior to the date on which such requisite approval is obtained shall
be subject to and contingent upon the receipt of such approval.
ARTICLE II
DEFINITIONS
2.1 CERTAIN DEFINED TERMS. Capitalized terms not defined elsewhere in the
Plan shall have the following meanings (whether used in the singular or plural):
"Affiliate" of the Company means any corporation, partnership or other
business association that, directly or indirectly, through one or more
intermediaries, controls, is controlled by, or is under common control with
the Company.
"Agreement" means a stock option agreement, stock appreciation rights
agreement, restricted shares agreement, stock units agreement, cash award
agreement or an agreement evidencing more than one type of Award, specified
in Section 11.5, as any such Agreement may be supplemented or amended from
time to time.
"Approved Transaction" means any transaction in which the Board (or,
if approval of the Board is not required as a matter of law, the
stockholders of the Company) shall approve (i) any consolidation or merger
of the Company, or binding share exchange, pursuant to which shares of
Common Stock of the Company would be changed or converted into or exchanged
for cash, securities, or other property, other than any such transaction in
which the common stockholders of the Company immediately
prior to such transaction have the same proportionate ownership of the
Common Stock of, and voting power with respect to, the surviving
corporation immediately after such transaction, (ii) any merger,
consolidation or binding share exchange to which the Company is a party as
a result of which the Persons who are common stockholders of the Company
immediately prior thereto have less than a majority of the combined voting
power of the outstanding capital stock of the Company ordinarily (and apart
from the rights accruing under special circumstances) having the right to
vote in the election of directors immediately following such merger,
consolidation or binding share exchange, (iii) the adoption of any plan or
proposal for the liquidation or dissolution of the Company, or (iv) any
sale, lease, exchange or other transfer (in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Company.
"Award" means a grant of Options, SARs, Restricted Shares, Stock
Units, Performance Awards, Cash Awards and/or cash amounts under the Plan.
"Board" means the Board of Directors of the Company.
"Board Change" means, during any period of two consecutive years,
individuals who at the beginning of such period constituted the entire
Board cease for any reason to constitute a majority thereof unless the
election, or the nomination for election, of each new director was approved
by a vote of at least two-thirds of the directors then still in office who
were directors at the beginning of the period.
"Cash Award" means an Award made pursuant to Section 10.1 of the Plan
to a Holder that is paid solely on account of the attainment of one or more
Performance Objectives that have been preestablished by the Committee.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute or statutes thereto. Reference to any
specific Code section shall include any successor section.
"Committee" means the committee of the Board appointed pursuant to
Section 3.1 to administer the Plan.
"Common Stock" means each or any (as the context may require) series
of the Company's common stock.
"Company" means Liberty Media Corporation, a Delaware corporation
(which was originally incorporated under the name Liberty Media Holding
Corporation).
"Control Purchase" means any transaction (or series of related
transactions) in which (i) any person (as such term is defined in Sections
13(d)(3) and 14(d)(2) of the Exchange Act), corporation or other entity
(other than the Company, any Subsidiary of the Company or any employee
benefit plan sponsored by the Company or any Subsidiary of the Company)
shall purchase any Common Stock of the Company (or securities convertible
into Common Stock of the Company) for cash, securities or any other
2
consideration pursuant to a tender offer or exchange offer, without the
prior consent of the Board, or (ii) any person (as such term is so
defined), corporation or other entity (other than the Company, any
Subsidiary of the Company, any employee benefit plan sponsored by the
Company or any Subsidiary of the Company or any Exempt Person (as defined
below)) shall become the "beneficial owner" (as such term is defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing 20% or more of the combined voting power of the
then outstanding securities of the Company ordinarily (and apart from the
rights accruing under special circumstances) having the right to vote in
the election of directors (calculated as provided in Rule 13d-3(d) under
the Exchange Act in the case of rights to acquire the Company's
securities), other than in a transaction (or series of related
transactions) approved by the Board. For purposes of this definition,
"Exempt Person" means each of (a) the Chairman of the Board, the President
and each of the directors of the Company as of the Effective Date, and (b)
the respective family members, estates and heirs of each of the Persons
referred to in clause (a) above and any trust or other investment vehicle
for the primary benefit of any of such Persons or their respective family
members or heirs. As used with respect to any Person, the term "family
member" means the spouse, siblings and lineal descendants of such Person.
"Disability" means the inability to engage in any substantial gainful
activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or which has lasted or
can be expected to last for a continuous period of not less than 12 months.
"Dividend Equivalents" means, with respect to Restricted Shares to be
issued at the end of the Restriction Period, to the extent specified by the
Committee only, an amount equal to all dividends and other distributions
(or the economic equivalent thereof) which are payable to stockholders of
record during the Restriction Period on a like number and kind of shares of
Common Stock.
"Domestic Relations Order" means a domestic relations order as defined
by the Code or Title I of the Employee Retirement Income Security Act, or
the rules thereunder.
"Equity Security" shall have the meaning ascribed to such term in
Section 3(a)(11) of the Exchange Act, and an equity security of an issuer
shall have the meaning ascribed thereto in Rule 16a-1 promulgated under the
Exchange Act, or any successor Rule.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor statute or statutes thereto. Reference
to any specific Exchange Act section shall include any successor section.
"Fair Market Value" of a share of any series of Common Stock on any
day means the last sale price (or, if no last sale price is reported, the
average of the high bid and low asked prices) for a share of such series of
Common Stock on such day (or, if such day is not a trading day, on the next
preceding trading day) as reported on the consolidated
3
transaction reporting system for the principal national securities exchange
on which shares of such series of Common Stock are listed on such day or if
such shares are not then listed on a national securities exchange, then as
reported on Nasdaq or, if such shares are not then listed or quoted on
Nasdaq, then as quoted by the National Quotation Bureau Incorporated. If
for any day the Fair Market Value of a share of the applicable series of
Common Stock is not determinable by any of the foregoing means, then the
Fair Market Value for such day shall be determined in good faith by the
Committee on the basis of such quotations and other considerations as the
Committee deems appropriate.
"Free Standing SAR" has the meaning ascribed thereto in Section 7.1.
"Holder" means a Person who has received an Award under the Plan.
"Nasdaq" means The Nasdaq Stock Market.
"Nonqualified Stock Option" means a stock option granted under Article
VI.
"Option" means a Nonqualified Stock Option.
"Performance Award" means an Award made pursuant to Article X of the
Plan to a Holder that is subject to the attainment of one or more
Performance Objectives.
"Performance Objective" means a standard established by the Committee
to determine in whole or in part whether a Performance Award shall be
earned.
"Person" means an individual, corporation, limited liability company,
partnership, trust, incorporated or unincorporated association, joint
venture or other entity of any kind.
"Plan" means this Liberty Media Corporation 2007 Incentive Plan.
"Restricted Shares" means shares of any series of Common Stock or the
right to receive shares of any specified series of Common Stock, as the
case may be, awarded pursuant to Article VIII.
"Restriction Period" means a period of time beginning on the date of
each Award of Restricted Shares and ending on the Vesting Date with respect
to such Award.
"Retained Distribution" has the meaning ascribed thereto in Section
8.3.
"SARs" means stock appreciation rights, awarded pursuant to Article
VII, with respect to shares of any specified series of Common Stock.
"Stock Unit Awards" has the meaning ascribed thereto in Section 9.1.
"Subsidiary" of a Person means any present or future subsidiary (as
defined in Section 424(f) of the Code) of such Person or any business
entity in which such Person
4
owns, directly or indirectly, 50% or more of the voting, capital or
profits interests. An entity shall be deemed a subsidiary of a Person for
purposes of this definition only for such periods as the requisite
ownership or control relationship is maintained.
"Tandem SARs" has the meaning ascribed thereto in Section 7.1.
"Vesting Date," with respect to any Restricted Shares awarded
hereunder, means the date on which such Restricted Shares cease to be
subject to a risk of forfeiture, as designated in or determined in
accordance with the Agreement with respect to such Award of Restricted
Shares pursuant to Article VIII. If more than one Vesting Date is
designated for an Award of Restricted Shares, reference in the Plan to a
Vesting Date in respect of such Award shall be deemed to refer to each part
of such Award and the Vesting Date for such part.
ARTICLE III
ADMINISTRATION
3.1 COMMITTEE. The Plan shall be administered by the Compensation Committee
of the Board unless a different committee is appointed by the Board. The
Committee shall be comprised of not less than two Persons. The Board may from
time to time appoint members of the Committee in substitution for or in addition
to members previously appointed, may fill vacancies in the Committee and may
remove members of the Committee. The Committee shall select one of its members
as its chairman and shall hold its meetings at such times and places as it shall
deem advisable. A majority of its members shall constitute a quorum and all
determinations shall be made by a majority of such quorum. Any determination
reduced to writing and signed by all of the members shall be as fully effective
as if it had been made by a majority vote at a meeting duly called and held.
3.2 POWERS. The Committee shall have full power and authority to grant to
eligible Persons Options under Article VI of the Plan, SARs under Article VII of
the Plan, Restricted Shares under Article VIII of the Plan, Stock Units under
Article IX of the Plan, Cash Awards under Article X of the Plan and/or
Performance Awards under Article X of the Plan, to determine the terms and
conditions (which need not be identical) of all Awards so granted, to interpret
the provisions of the Plan and any Agreements relating to Awards granted under
the Plan and to supervise the administration of the Plan. The Committee in
making an Award may provide for the granting or issuance of additional,
replacement or alternative Awards upon the occurrence of specified events,
including the exercise of the original Award. The Committee shall have sole
authority in the selection of Persons to whom Awards may be granted under the
Plan and in the determination of the timing, pricing and amount of any such
Award, subject only to the express provisions of the Plan. In making
determinations hereunder, the Committee may take into account the nature of the
services rendered by the respective employees and independent contractors, their
present and potential contributions to the success of the Company and its
Subsidiaries, and such other factors as the Committee in its discretion deems
relevant.
5
3.3 INTERPRETATION. The Committee is authorized, subject to the provisions
of the Plan, to establish, amend and rescind such rules and regulations as it
deems necessary or advisable for the proper administration of the Plan and to
take such other action in connection with or in relation to the Plan as it deems
necessary or advisable. Each action and determination made or taken pursuant to
the Plan by the Committee, including any interpretation or construction of the
Plan, shall be final and conclusive for all purposes and upon all Persons. No
member of the Committee shall be liable for any action or determination made or
taken by him or the Committee in good faith with respect to the Plan.
ARTICLE IV
SHARES SUBJECT TO THE PLAN
4.1 NUMBER OF SHARES. Subject to the provisions of this Article IV, the
maximum number of shares of Common Stock with respect to which Awards may be
granted during the term of the Plan shall be 30 million shares. Shares of Common
Stock will be made available from the authorized but unissued shares of the
Company or from shares reacquired by the Company, including shares purchased in
the open market. The shares of Common Stock subject to (i) any Award granted
under the Plan that shall expire, terminate or be annulled for any reason
without having been exercised (or considered to have been exercised as provided
in Section 7.2), (ii) any Award of any SARs granted under the Plan that shall be
exercised for cash, and (iii) any Award of Restricted Shares or Stock Units that
shall be forfeited prior to becoming vested (provided that the Holder received
no benefits of ownership of such Restricted Shares or Stock Units other than
voting rights and the accumulation of Retained Distributions and unpaid Dividend
Equivalents that are likewise forfeited) shall again be available for purposes
of the Plan. Except for Awards described in Section 11.1, no Person may be
granted in any calendar year Awards covering more than 7.5 million shares of
Common Stock (as such amount may be adjusted from time to time as provided in
Section 4.2). No Person shall receive payment for Cash Awards during any
calendar year aggregating in excess of $10,000,000.
4.2 ADJUSTMENTS. If the Company subdivides its outstanding shares of any
series of Common Stock into a greater number of shares of such series of Common
Stock (by stock dividend, stock split, reclassification, or otherwise) or
combines its outstanding shares of any series of Common Stock into a smaller
number of shares of such series of Common Stock (by reverse stock split,
reclassification, or otherwise) or if the Committee determines that any stock
dividend, extraordinary cash dividend, reclassification, recapitalization,
reorganization, split-up, spin-off, combination, exchange of shares, warrants or
rights offering to purchase such series of Common Stock or other similar
corporate event (including mergers or consolidations other than those which
constitute Approved Transactions, adjustments with respect to which shall be
governed by Section 11.1(b)) affects any series of Common Stock so that an
adjustment is required to preserve the benefits or potential benefits intended
to be made available under the Plan, then the Committee, in its sole discretion
and in such manner as the Committee deems equitable and appropriate, shall make
such adjustments to any or all of (i) the number and kind of shares of stock
which thereafter may be awarded, optioned or otherwise made subject to the
benefits contemplated by the Plan, (ii) the number and kind of shares of stock
subject to outstanding Awards, and (iii) the purchase or exercise price and the
relevant appreciation base
6
with respect to any of the foregoing, PROVIDED, HOWEVER, that the number of
shares subject to any Award shall always be a whole number. Notwithstanding the
foregoing, if all shares of any series of Common Stock are redeemed, then each
outstanding Award shall be adjusted to substitute for the shares of such series
of Common Stock subject thereto the kind and amount of cash, securities or other
assets issued or paid in the redemption of the equivalent number of shares of
such series of Common Stock and otherwise the terms of such Award, including, in
the case of Options or similar rights, the aggregate exercise price, and, in the
case of Free Standing SARs, the aggregate base price, shall remain constant
before and after the substitution (unless otherwise determined by the Committee
and provided in the applicable Agreement). The Committee may, if deemed
appropriate, provide for a cash payment to any Holder of an Award in connection
with any adjustment made pursuant to this Section 4.2.
ARTICLE V
ELIGIBILITY
5.1 GENERAL. The Persons who shall be eligible to participate in the Plan
and to receive Awards under the Plan shall, subject to Section 5.2, be such
Persons who are employees (including officers and directors) of or independent
contractors providing services to the Company or its Subsidiaries as the
Committee shall select. Awards may be made to employees or independent
contractors who hold or have held Awards under the Plan or any similar or other
awards under any other plan of the Company or any of its Affiliates.
5.2 INELIGIBILITY. No member of the Committee, while serving as such, shall
be eligible to receive an Award.
ARTICLE VI
STOCK OPTIONS
6.1 GRANT OF OPTIONS. Subject to the limitations of the Plan, the Committee
shall designate from time to time those eligible Persons to be granted Options,
the time when each Option shall be granted to such eligible Persons, the series
and number of shares of Common Stock subject to such Option, and, subject to
Section 6.2, the purchase price of the shares of Common Stock subject to such
Option.
6.2 OPTION PRICE. The price at which shares may be purchased upon exercise
of an Option shall be fixed by the Committee and may be no less than the Fair
Market Value of the shares of the applicable series of Common Stock subject to
the Option as of the date the Option is granted.
6.3 TERM OF OPTIONS. Subject to the provisions of the Plan with respect to
death, retirement and termination of employment, the term of each Option shall
be for such period as the Committee shall determine as set forth in the
applicable Agreement.
7
6.4 EXERCISE OF OPTIONS. An Option granted under the Plan shall become (and
remain) exercisable during the term of the Option to the extent provided in the
applicable Agreement and the Plan and, unless the Agreement otherwise provides,
may be exercised to the extent exercisable, in whole or in part, at any time and
from time to time during such term; PROVIDED, HOWEVER, that subsequent to the
grant of an Option, the Committee, at any time before complete termination of
such Option, may accelerate the time or times at which such Option may be
exercised in whole or in part (without reducing the term of such Option).
6.5 MANNER OF EXERCISE.
(a) FORM OF PAYMENT. An Option shall be exercised by written notice to
the Company upon such terms and conditions as the Agreement may provide and
in accordance with such other procedures for the exercise of Options as the
Committee may establish from time to time. The method or methods of payment
of the purchase price for the shares to be purchased upon exercise of an
Option and of any amounts required by Section 11.9 shall be determined by
the Committee and may consist of (i) cash, (ii) check, (iii) promissory
note (subject to applicable law), (iv) whole shares of any series of Common
Stock, (v) the withholding of shares of the applicable series of Common
Stock issuable upon such exercise of the Option, (vi) the delivery,
together with a properly executed exercise notice, of irrevocable
instructions to a broker to deliver promptly to the Company the amount of
sale or loan proceeds required to pay the purchase price, or (vii) any
combination of the foregoing methods of payment, or such other
consideration and method of payment as may be permitted for the issuance of
shares under the Delaware General Corporation Law. The permitted method or
methods of payment of the amounts payable upon exercise of an Option, if
other than in cash, shall be set forth in the applicable Agreement and may
be subject to such conditions as the Committee deems appropriate.
(b) VALUE OF SHARES. Unless otherwise determined by the Committee and
provided in the applicable Agreement, shares of any series of Common Stock
delivered in payment of all or any part of the amounts payable in
connection with the exercise of an Option, and shares of any series of
Common Stock withheld for such payment, shall be valued for such purpose at
their Fair Market Value as of the exercise date.
(c) ISSUANCE OF SHARES. The Company shall effect the transfer of the
shares of Common Stock purchased under the Option as soon as practicable
after the exercise thereof and payment in full of the purchase price
therefor and of any amounts required by Section 11.9, and within a
reasonable time thereafter, such transfer shall be evidenced on the books
of the Company. Unless otherwise determined by the Committee and provided
in the applicable Agreement, (i) no Holder or other Person exercising an
Option shall have any of the rights of a stockholder of the Company with
respect to shares of Common Stock subject to an Option granted under the
Plan until due exercise and full payment has been made, and (ii) no
adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date of such due exercise and full payment.
8
6.6 NONTRANSFERABILITY. Unless otherwise determined by the Committee and
provided in the applicable Agreement, Options shall not be transferable other
than by will or the laws of descent and distribution or pursuant to a Domestic
Relations Order, and, except as otherwise required pursuant to a Domestic
Relations Order, Options may be exercised during the lifetime of the Holder
thereof only by such Holder (or his or her court-appointed legal
representative).
ARTICLE VII
SARs
7.1 GRANT OF SARs. Subject to the limitations of the Plan, SARs may be
granted by the Committee to such eligible Persons in such numbers, with respect
to any specified series of Common Stock, and at such times during the term of
the Plan as the Committee shall determine. A SAR may be granted to a Holder of
an Option (hereinafter called a "related Option") with respect to all or a
portion of the shares of Common Stock subject to the related Option (a "Tandem
SAR") or may be granted separately to an eligible employee (a "Free Standing
SAR"). Subject to the limitations of the Plan, SARs shall be exercisable in
whole or in part upon notice to the Company upon such terms and conditions as
are provided in the Agreement.
7.2 TANDEM SARs. A Tandem SAR may be granted either concurrently with the
grant of the related Option or at any time thereafter prior to the complete
exercise, termination, expiration or cancellation of such related Option. Tandem
SARs shall be exercisable only at the time and to the extent that the related
Option is exercisable (and may be subject to such additional limitations on
exercisability as the Agreement may provide) and in no event after the complete
termination or full exercise of the related Option. Upon the exercise or
termination of the related Option, the Tandem SARs with respect thereto shall be
canceled automatically to the extent of the number of shares of Common Stock
with respect to which the related Option was so exercised or terminated. Subject
to the limitations of the Plan, upon the exercise of a Tandem SAR and unless
otherwise determined by the Committee and provided in the applicable Agreement,
(i) the Holder thereof shall be entitled to receive from the Company, for each
share of the applicable series of Common Stock with respect to which the Tandem
SAR is being exercised, consideration (in the form determined as provided in
Section 7.4) equal in value to the excess of the Fair Market Value of a share of
the applicable series of Common Stock with respect to which the Tandem SAR was
granted on the date of exercise over the related Option purchase price per
share, and (ii) the related Option with respect thereto shall be canceled
automatically to the extent of the number of shares of Common Stock with respect
to which the Tandem SAR was so exercised.
7.3 FREE STANDING SARs. Free Standing SARs shall be exercisable at the time, to
the extent and upon the terms and conditions set forth in the applicable
Agreement. The base price of a Free Standing SAR may be no less than the Fair
Market Value of the applicable series of Common Stock with respect to which the
Free Standing SAR was granted as of the date the Free Standing SAR is granted.
Subject to the limitations of the Plan, upon the exercise of a Free Standing SAR
and unless otherwise determined by the Committee and provided in the applicable
Agreement, the Holder thereof shall be entitled to receive from the Company, for
each share of the applicable series of Common Stock with respect to which the
Free Standing SAR is being
9
exercised, consideration (in the form determined as provided in Section 7.4)
equal in value to the excess of the Fair Market Value of a share of the
applicable series of Common Stock with respect to which the Free Standing SAR
was granted on the date of exercise over the base price per share of such
Free Standing SAR.
7.4 CONSIDERATION. The consideration to be received upon the exercise of a
SAR by the Holder shall be paid in cash, shares of the applicable series of
Common Stock with respect to which the SAR was granted (valued at Fair Market
Value on the date of exercise of such SAR), a combination of cash and such
shares of the applicable series of Common Stock or such other consideration, in
each case, as provided in the Agreement. No fractional shares of Common Stock
shall be issuable upon exercise of a SAR, and unless otherwise provided in the
applicable Agreement, the Holder will receive cash in lieu of fractional shares.
Unless the Committee shall otherwise determine, to the extent a Free Standing
SAR is exercisable, it will be exercised automatically for cash on its
expiration date.
7.5 LIMITATIONS. The applicable Agreement may provide for a limit on the
amount payable to a Holder upon exercise of SARs at any time or in the
aggregate, for a limit on the number of SARs that may be exercised by the Holder
in whole or in part for cash during any specified period, for a limit on the
time periods during which a Holder may exercise SARs, and for such other limits
on the rights of the Holder and such other terms and conditions of the SAR,
including a condition that the SAR may be exercised only in accordance with
rules and regulations adopted from time to time, as the Committee may determine.
Unless otherwise so provided in the applicable Agreement, any such limit
relating to a Tandem SAR shall not restrict the exercisability of the related
Option. Such rules and regulations may govern the right to exercise SARs granted
prior to the adoption or amendment of such rules and regulations as well as SARs
granted thereafter.
7.6 EXERCISE. For purposes of this Article VII, the date of exercise of a
SAR shall mean the date on which the Company shall have received notice from the
Holder of the SAR of the exercise of such SAR (unless otherwise determined by
the Committee and provided in the applicable Agreement).
7.7 NONTRANSFERABILITY. Unless otherwise determined by the Committee and
provided in the applicable Agreement, (i) SARs shall not be transferable other
than by will or the laws of descent and distribution or pursuant to a Domestic
Relations Order, and (ii) except as otherwise required pursuant to a Domestic
Relations Order, SARs may be exercised during the lifetime of the Holder thereof
only by such Holder (or his or her court-appointed legal representative).
10
ARTICLE VIII
RESTRICTED SHARES
8.1 GRANT. Subject to the limitations of the Plan, the Committee shall
designate those eligible Persons to be granted Awards of Restricted Shares,
shall determine the time when each such Award shall be granted, shall determine
whether shares of Common Stock covered by Awards of Restricted Shares will be
issued at the beginning or the end of the Restriction Period and whether
Dividend Equivalents will be paid during the Restriction Period in the event
shares of the applicable series of Common Stock are to be issued at the end of
the Restriction Period, and shall designate (or set forth the basis for
determining) the Vesting Date or Vesting Dates for each Award of Restricted
Shares, and may prescribe other restrictions, terms and conditions applicable to
the vesting of such Restricted Shares in addition to those provided in the Plan.
The Committee shall determine the price, if any, to be paid by the Holder for
the Restricted Shares; PROVIDED, HOWEVER, that the issuance of Restricted Shares
shall be made for at least the minimum consideration necessary to permit such
Restricted Shares to be deemed fully paid and nonassessable. All determinations
made by the Committee pursuant to this Section 8.1 shall be specified in the
Agreement.
8.2 ISSUANCE OF RESTRICTED SHARES AT BEGINNING OF THE RESTRICTION PERIOD.
If shares of the applicable series of Common Stock are issued at the beginning
of the Restriction Period, the stock certificate or certificates representing
such Restricted Shares shall be registered in the name of the Holder to whom
such Restricted Shares shall have been awarded. During the Restriction Period,
certificates representing the Restricted Shares and any securities constituting
Retained Distributions shall bear a restrictive legend to the effect that
ownership of the Restricted Shares (and such Retained Distributions), and the
enjoyment of all rights appurtenant thereto, are subject to the restrictions,
terms and conditions provided in the Plan and the applicable Agreement. Such
certificates shall remain in the custody of the Company or its designee, and the
Holder shall deposit with the custodian stock powers or other instruments of
assignment, each endorsed in blank, so as to permit retransfer to the Company of
all or any portion of the Restricted Shares and any securities constituting
Retained Distributions that shall be forfeited or otherwise not become vested in
accordance with the Plan and the applicable Agreement.
8.3 RESTRICTIONS. Restricted Shares issued at the beginning of the
Restriction Period shall constitute issued and outstanding shares of the
applicable series of Common Stock for all corporate purposes. The Holder will
have the right to vote such Restricted Shares, to receive and retain such
dividends and distributions, as the Committee may designate, paid or distributed
on such Restricted Shares, and to exercise all other rights, powers and
privileges of a Holder of shares of the applicable series of Common Stock with
respect to such Restricted Shares; EXCEPT, THAT, unless otherwise determined by
the Committee and provided in the applicable Agreement, (i) the Holder will not
be entitled to delivery of the stock certificate or certificates representing
such Restricted Shares until the Restriction Period shall have expired and
unless all other vesting requirements with respect thereto shall have been
fulfilled or waived; (ii) the Company or its designee will retain custody of the
stock certificate or certificates representing the Restricted Shares during the
Restriction Period as provided in Section 8.2; (iii) other than such dividends
11
and distributions as the Committee may designate, the Company or its designee
will retain custody of all distributions ("Retained Distributions") made or
declared with respect to the Restricted Shares (and such Retained Distributions
will be subject to the same restrictions, terms and vesting, and other
conditions as are applicable to the Restricted Shares) until such time, if ever,
as the Restricted Shares with respect to which such Retained Distributions shall
have been made, paid or declared shall have become vested, and such Retained
Distributions shall not bear interest or be segregated in a separate account;
(iv) the Holder may not sell, assign, transfer, pledge, exchange, encumber or
dispose of the Restricted Shares or any Retained Distributions or his interest
in any of them during the Restriction Period; and (v) a breach of any
restrictions, terms or conditions provided in the Plan or established by the
Committee with respect to any Restricted Shares or Retained Distributions will
cause a forfeiture of such Restricted Shares and any Retained Distributions with
respect thereto.
8.4 ISSUANCE OF STOCK AT END OF THE RESTRICTION PERIOD. Restricted Shares
issued at the end of the Restriction Period shall not constitute issued and
outstanding shares of the applicable series of Common Stock, and the Holder
shall not have any of the rights of a stockholder with respect to the shares of
Common Stock covered by such an Award of Restricted Shares, in each case until
such shares shall have been transferred to the Holder at the end of the
Restriction Period. If and to the extent that shares of Common Stock are to be
issued at the end of the Restriction Period, the Holder shall be entitled to
receive Dividend Equivalents with respect to the shares of Common Stock covered
thereby either (i) during the Restriction Period or (ii) in accordance with the
rules applicable to Retained Distributions, as the Committee may specify in the
Agreement.
8.5 CASH PAYMENTS. In connection with any Award of Restricted Shares, an
Agreement may provide for the payment of a cash amount to the Holder of such
Restricted Shares at any time after such Restricted Shares shall have become
vested. Such cash amounts shall be payable in accordance with such additional
restrictions, terms and conditions as shall be prescribed by the Committee in
the Agreement and shall be in addition to any other salary, incentive, bonus or
other compensation payments which such Holder shall be otherwise entitled or
eligible to receive from the Company.
8.6 COMPLETION OF RESTRICTION PERIOD. On the Vesting Date with respect to
each Award of Restricted Shares and the satisfaction of any other applicable
restrictions, terms and conditions, (i) all or the applicable portion of such
Restricted Shares shall become vested, (ii) any Retained Distributions and any
unpaid Dividend Equivalents with respect to such Restricted Shares shall become
vested to the extent that the Restricted Shares related thereto shall have
become vested, and (iii) any cash amount to be received by the Holder with
respect to such Restricted Shares shall become payable, all in accordance with
the terms of the applicable Agreement. Any such Restricted Shares, Retained
Distributions and any unpaid Dividend Equivalents that shall not become vested
shall be forfeited to the Company, and the Holder shall not thereafter have any
rights (including dividend and voting rights) with respect to such Restricted
Shares, Retained Distributions and any unpaid Dividend Equivalents that shall
have been so forfeited. The Committee may, in its discretion, provide that the
delivery of any Restricted Shares, Retained Distributions and unpaid Dividend
Equivalents that shall have become vested, and payment of any related cash
amounts that shall have become payable under
12
this Article VIII, shall be deferred until such date or dates as the recipient
may elect. Any election of a recipient pursuant to the preceding sentence shall
be filed in writing with the Committee in accordance with such rules and
regulations, including any deadline for the making of such an election, as the
Committee may provide, and shall be made in compliance with Section 409A of the
Code.
ARTICLE IX
STOCK UNITS
9.1 GRANT. In addition to granting Awards of Options, SARs and Restricted
Shares, the Committee shall, subject to the limitations of the Plan, have
authority to grant to eligible Persons Awards of Stock Units which may be in the
form of shares of any specified series of Common Stock or units, the value of
which is based, in whole or in part, on the Fair Market Value of the shares of
any specified series of Common Stock. Subject to the provisions of the Plan,
including any rules established pursuant to Section 9.2, Awards of Stock Units
shall be subject to such terms, restrictions, conditions, vesting requirements
and payment rules as the Committee may determine in its discretion, which need
not be identical for each Award. The determinations made by the Committee
pursuant to this Section 9.1 shall be specified in the applicable Agreement.
9.2 RULES. The Committee may, in its discretion, establish any or all of
the following rules for application to an Award of Stock Units:
(a) Any shares of Common Stock which are part of an Award of Stock
Units may not be assigned, sold, transferred, pledged or otherwise
encumbered prior to the date on which the shares are issued or, if later,
the date provided by the Committee at the time of the Award.
(b) Such Awards may provide for the payment of cash consideration by
the Person to whom such Award is granted or provide that the Award, and any
shares of Common Stock to be issued in connection therewith, if applicable,
shall be delivered without the payment of cash consideration; PROVIDED,
HOWEVER, that the issuance of any shares of Common Stock in connection with
an Award of Stock Units shall be for at least the minimum consideration
necessary to permit such shares to be deemed fully paid and nonassessable.
(c) Awards of Stock Units may provide for deferred payment schedules,
vesting over a specified period of employment, the payment (on a current or
deferred basis) of dividend equivalent amounts with respect to the number
of shares of Common Stock covered by the Award, and elections by the
employee to defer payment of the Award or the lifting of restrictions on
the Award, if any, provided that any such deferrals shall comply with the
requirements of Section 409A of the Code.
13
(d) In such circumstances as the Committee may deem advisable, the
Committee may waive or otherwise remove, in whole or in part, any
restrictions or limitations to which a Stock Unit Award was made subject at
the time of grant.
ARTICLE X
CASH AWARDS AND PERFORMANCE AWARDS
10.1 CASH AWARDS. In addition to granting Options, SARs, Restricted Shares
and Stock Units, the Committee shall, subject to the limitations of the Plan,
have authority to grant to eligible Persons Cash Awards. Each Cash Award shall
be subject to such terms and conditions, restrictions and contingencies, if any,
as the Committee shall determine. Restrictions and contingencies limiting the
right to receive a cash payment pursuant to a Cash Award shall be based upon the
achievement of single or multiple Performance Objectives over a performance
period established by the Committee. The determinations made by the Committee
pursuant to this Section 10.1 shall be specified in the applicable Agreement.
10.2 DESIGNATION AS A PERFORMANCE AWARD. The Committee shall have the right
to designate any Award of Options, SARs, Restricted Shares or Stock Units as a
Performance Award. All Cash Awards shall be designated as Performance Awards.
10.3 PERFORMANCE OBJECTIVES. The grant or vesting of a Performance Award
shall be subject to the achievement of Performance Objectives over a performance
period established by the Committee based upon one or more of the following
business criteria that apply to the Holder, one or more business units,
divisions or Subsidiaries of the Company or the applicable sector of the
Company, or the Company as a whole, and if so desired by the Committee, by
comparison with a peer group of companies: increased revenue; net income
measures (including income after capital costs and income before or after
taxes); stock price measures (including growth measures and total stockholder
return); price per share of Common Stock; market share; earnings per share
(actual or targeted growth); earnings before interest, taxes, depreciation and
amortization (EBITDA); economic value added (or an equivalent metric); market
value added; debt to equity ratio; cash flow measures (including cash flow
return on capital, cash flow return on tangible capital, net cash flow and net
cash flow before financing activities); return measures (including return on
equity, return on average assets, return on capital, risk-adjusted return on
capital, return on investors' capital and return on average equity); operating
measures (including operating income, funds from operations, cash from
operations, after-tax operating income, sales volumes, production volumes and
production efficiency); expense measures (including overhead cost and general
and administrative expense); margins; stockholder value; total stockholder
return; proceeds from dispositions; total market value and corporate values
measures (including ethics compliance, environmental and safety). Unless
otherwise stated, such a Performance Objective need not be based upon an
increase or positive result under a particular business criterion and could
include, for example, maintaining the status quo or limiting economic losses
(measured, in each case, by reference to specific business criteria). The
Committee shall have the authority to determine whether the Performance
Objectives and other terms and conditions of the Award are satisfied, and the
Committee's determination as to the achievement of Performance Objectives
relating to a Performance Award shall be made in writing.
14
10.4 SECTION 162(m) OF THE CODE. Notwithstanding the foregoing provisions,
if the Committee intends for a Performance Award to be granted and administered
in a manner designed to preserve the deductibility of the compensation resulting
from such Award in accordance with Section 162(m) of the Code, then the
Performance Objectives for such particular Performance Award relative to the
particular period of service to which the Performance Objectives relate shall be
established by the Committee in writing (i) no later than 90 days after the
beginning of such period and (ii) prior to the completion of 25% of such period.
10.5 WAIVER OF PERFORMANCE OBJECTIVES. The Committee shall have no
discretion to modify or waive the Performance Objectives or conditions to the
grant or vesting of a Performance Award unless such Award is not intended to
qualify as qualified performance-based compensation under Section 162(m) of the
Code and the relevant Agreement provides for such discretion.
ARTICLE XI
GENERAL PROVISIONS
11.1 ACCELERATION OF AWARDS.
(a) DEATH OR DISABILITY. If a Holder's employment shall terminate by
reason of death or Disability, notwithstanding any contrary waiting period,
installment period, vesting schedule or Restriction Period in any Agreement
or in the Plan, unless the applicable Agreement provides otherwise: (i) in
the case of an Option or SAR, each outstanding Option or SAR granted under
the Plan shall immediately become exercisable in full in respect of the
aggregate number of shares covered thereby; (ii) in the case of Restricted
Shares, the Restriction Period applicable to each such Award of Restricted
Shares shall be deemed to have expired and all such Restricted Shares, any
related Retained Distributions and any unpaid Dividend Equivalents shall
become vested and any related cash amounts payable pursuant to the
applicable Agreement shall be adjusted in such manner as may be provided in
the Agreement; and (iii) in the case of Stock Units, each such Award of
Stock Units shall become vested in full.
(b) APPROVED TRANSACTIONS; BOARD CHANGE; CONTROL PURCHASE. In the
event of any Approved Transaction, Board Change or Control Purchase,
notwithstanding any contrary waiting period, installment period, vesting
schedule or Restriction Period in any Agreement or in the Plan, unless the
applicable Agreement provides otherwise: (i) in the case of an Option or
SAR, each such outstanding Option or SAR granted under the Plan shall
become exercisable in full in respect of the aggregate number of shares
covered thereby; (ii) in the case of Restricted Shares, the Restriction
Period applicable to each such Award of Restricted Shares shall be deemed
to have expired and all such Restricted Shares, any related Retained
Distributions and any unpaid Dividend Equivalents shall become vested and
any related cash amounts payable pursuant to the applicable Agreement shall
be adjusted in such manner as may be provided in the Agreement; and (iii)
in the case of Stock Units, each such Award of Stock Units shall become
vested in
15
full, in each case effective upon the Board Change or Control Purchase or
immediately prior to consummation of the Approved Transaction. The effect,
if any, on a Cash Award of an Approved Transaction, Board Change or Control
Purchase shall be prescribed in the applicable Agreement. Notwithstanding
the foregoing, unless otherwise provided in the applicable Agreement, the
Committee may, in its discretion, determine that any or all outstanding
Awards of any or all types granted pursuant to the Plan will not vest or
become exercisable on an accelerated basis in connection with an Approved
Transaction if effective provision has been made for the taking of such
action which, in the opinion of the Committee, is equitable and appropriate
to substitute a new Award for such Award or to assume such Award and to
make such new or assumed Award, as nearly as may be practicable, equivalent
to the old Award (before giving effect to any acceleration of the vesting
or exercisability thereof), taking into account, to the extent applicable,
the kind and amount of securities, cash or other assets into or for which
the applicable series of Common Stock may be changed, converted or
exchanged in connection with the Approved Transaction.
11.2 TERMINATION OF EMPLOYMENT.
(a) GENERAL. If a Holder's employment shall terminate prior to an
Option or SAR becoming exercisable or being exercised (or deemed exercised,
as provided in Section 7.2) in full, or during the Restriction Period with
respect to any Restricted Shares or prior to the vesting or complete
exercise of any Stock Units, then such Option or SAR shall thereafter
become or be exercisable, such Stock Units to the extent vested shall
thereafter be exercisable, and the Holder's rights to any unvested
Restricted Shares, Retained Distributions, unpaid Dividend Equivalents and
related cash amounts and any such unvested Stock Units shall thereafter
vest, in each case solely to the extent provided in the applicable
Agreement; PROVIDED, HOWEVER, that, unless otherwise determined by the
Committee and provided in the applicable Agreement, (i) no Option or SAR
may be exercised after the scheduled expiration date thereof; (ii) if the
Holder's employment terminates by reason of death or Disability, the Option
or SAR shall remain exercisable for a period of at least one year following
such termination (but not later than the scheduled expiration of such
Option or SAR); and (iii) any termination of the Holder's employment for
cause will be treated in accordance with the provisions of Section 11.2(b).
The effect on a Cash Award of the termination of a Holder's employment for
any reason, other than for cause, shall be prescribed in the applicable
Agreement.
(b) TERMINATION FOR CAUSE. If a Holder's employment with the Company
or a Subsidiary of the Company shall be terminated by the Company or such
Subsidiary for "cause" during the Restriction Period with respect to any
Restricted Shares or prior to any Option or SAR becoming exercisable or
being exercised in full or prior to the vesting or complete exercise of any
Stock Unit or the payment in full of any Cash Award (for these purposes,
"cause" shall have the meaning ascribed thereto in any employment agreement
to which such Holder is a party or, in the absence thereof, shall include
insubordination, dishonesty, incompetence, moral turpitude, other
misconduct of any kind and the refusal to perform his duties and
responsibilities for any reason other than illness or incapacity; PROVIDED,
HOWEVER, that if such termination occurs within 12 months after an Approved
16
Transaction or Control Purchase or Board Change, termination for "cause"
shall mean only a felony conviction for fraud, misappropriation, or
embezzlement), then, unless otherwise determined by the Committee and
provided in the applicable Agreement, (i) all Options and SARs and all
unvested or unexercised Stock Units and all unpaid Cash Awards held by such
Holder shall immediately terminate, and (ii) such Holder's rights to all
Restricted Shares, Retained Distributions, any unpaid Dividend Equivalents
and any related cash amounts shall be forfeited immediately.
(c) MISCELLANEOUS. The Committee may determine whether any given leave
of absence constitutes a termination of employment; PROVIDED, HOWEVER, that
for purposes of the Plan, (i) a leave of absence, duly authorized in
writing by the Company for military service or sickness, or for any other
purpose approved by the Company if the period of such leave does not exceed
90 days, and (ii) a leave of absence in excess of 90 days, duly authorized
in writing by the Company provided the employee's right to reemployment is
guaranteed either by statute or contract, shall not be deemed a termination
of employment. Unless otherwise determined by the Committee and provided in
the applicable Agreement, Awards made under the Plan shall not be affected
by any change of employment so long as the Holder continues to be an
employee of the Company.
11.3 RIGHT OF COMPANY TO TERMINATE EMPLOYMENT. Nothing contained in the
Plan or in any Award, and no action of the Company or the Committee with respect
thereto, shall confer or be construed to confer on any Holder any right to
continue in the employ of the Company or any of its Subsidiaries or interfere in
any way with the right of the Company or any Subsidiary of the Company to
terminate the employment of the Holder at any time, with or without cause,
subject, however, to the provisions of any employment agreement between the
Holder and the Company or any Subsidiary of the Company.
11.4 NONALIENATION OF BENEFITS. Except as set forth herein, no right or
benefit under the Plan shall be subject to anticipation, alienation, sale,
assignment, hypothecation, pledge, exchange, transfer, encumbrance or charge,
and any attempt to anticipate, alienate, sell, assign, hypothecate, pledge,
exchange, transfer, encumber or charge the same shall be void. No right or
benefit hereunder shall in any manner be liable for or subject to the debts,
contracts, liabilities or torts of the Person entitled to such benefits.
11.5 WRITTEN AGREEMENT. Each Award of Options shall be evidenced by a stock
option agreement; each Award of SARs shall be evidenced by a stock appreciation
rights agreement; each Award of Restricted Shares shall be evidenced by a
restricted shares agreement; each Award of Stock Units shall be evidenced by a
stock units agreement; and each Performance Award shall be evidenced by a
performance award agreement (including a cash award agreement evidencing a Cash
Award), each in such form and containing such terms and provisions not
inconsistent with the provisions of the Plan as the Committee from time to time
shall approve; PROVIDED, HOWEVER, that if more than one type of Award is made to
the same Holder, such Awards may be evidenced by a single Agreement with such
Holder. Each grantee of an Option, SAR, Restricted Shares, Stock Units or
Performance Award (including a Cash Award) shall be notified promptly of such
grant, and a written Agreement shall be promptly executed and delivered by the
Company. Any such written Agreement may contain (but shall not be required
17
to contain) such provisions as the Committee deems appropriate (i) to insure
that the penalty provisions of Section 4999 of the Code will not apply to any
stock or cash received by the Holder from the Company or (ii) to provide cash
payments to the Holder to mitigate the impact of such penalty provisions upon
the Holder. Any such Agreement may be supplemented or amended from time to time
as approved by the Committee as contemplated by Section 11.7(b).
11.6 DESIGNATION OF BENEFICIARIES. Each Person who shall be granted an
Award under the Plan may designate a beneficiary or beneficiaries and may change
such designation from time to time by filing a written designation of
beneficiary or beneficiaries with the Committee on a form to be prescribed by
it, provided that no such designation shall be effective unless so filed prior
to the death of such Person.
11.7 TERMINATION AND AMENDMENT.
(a) GENERAL. Unless the Plan shall theretofore have been terminated as
hereinafter provided, no Awards may be made under the Plan on or after June
30, 2012. The Plan may be terminated at any time prior to such date and
may, from time to time, be suspended or discontinued or modified or amended
if such action is deemed advisable by the Committee.
(b) MODIFICATION. No termination, modification or amendment of the
Plan may, without the consent of the Person to whom any Award shall
theretofore have been granted, adversely affect the rights of such Person
with respect to such Award. No modification, extension, renewal or other
change in any Award granted under the Plan shall be made after the grant of
such Award, unless the same is consistent with the provisions of the Plan.
With the consent of the Holder and subject to the terms and conditions of
the Plan (including Section 11.7(a)), the Committee may amend outstanding
Agreements with any Holder, including any amendment which would (i)
accelerate the time or times at which the Award may be exercised and/or
(ii) extend the scheduled expiration date of the Award. Without limiting
the generality of the foregoing, the Committee may, but solely with the
Holder's consent unless otherwise provided in the Agreement, agree to
cancel any Award under the Plan and grant a new Award in substitution
therefor, provided that the Award so substituted shall satisfy all of the
requirements of the Plan as of the date such new Award is made. Nothing
contained in the foregoing provisions of this Section 11.7(b) shall be
construed to prevent the Committee from providing in any Agreement that the
rights of the Holder with respect to the Award evidenced thereby shall be
subject to such rules and regulations as the Committee may, subject to the
express provisions of the Plan, adopt from time to time or impair the
enforceability of any such provision.
11.8 GOVERNMENT AND OTHER REGULATIONS. The obligation of the Company with
respect to Awards shall be subject to all applicable laws, rules and regulations
and such approvals by any governmental agencies as may be required, including
the effectiveness of any registration statement required under the Securities
Act of 1933, and the rules and regulations of any securities exchange or
association on which the Common Stock may be listed or quoted. For so long as
any series of Common Stock are registered under the Exchange Act, the Company
shall
18
use its reasonable efforts to comply with any legal requirements (i) to maintain
a registration statement in effect under the Securities Act of 1933 with respect
to all shares of the applicable series of Common Stock that may be issued to
Holders under the Plan and (ii) to file in a timely manner all reports required
to be filed by it under the Exchange Act.
11.9 WITHHOLDING. The Company's obligation to deliver shares of Common
Stock or pay cash in respect of any Award under the Plan shall be subject to
applicable federal, state and local tax withholding requirements. Federal, state
and local withholding tax due at the time of an Award, upon the exercise of any
Option or SAR or upon the vesting of, or expiration of restrictions with respect
to, Restricted Shares or Stock Units or the satisfaction of the Performance
Objectives applicable to a Performance Award, as appropriate, may, in the
discretion of the Committee, be paid in shares of the applicable series of
Common Stock already owned by the Holder or through the withholding of shares
otherwise issuable to such Holder, upon such terms and conditions (including the
conditions referenced in Section 6.5) as the Committee shall determine. If the
Holder shall fail to pay, or make arrangements satisfactory to the Committee for
the payment to the Company of, all such federal, state and local taxes required
to be withheld by the Company, then the Company shall, to the extent permitted
by law, have the right to deduct from any payment of any kind otherwise due to
such Holder an amount equal to any federal, state or local taxes of any kind
required to be withheld by the Company with respect to such Award.
11.10 NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as creating any limitations on the power of the Board to
adopt such other incentive arrangements as it may deem desirable, including the
granting of stock options and the awarding of stock and cash otherwise than
under the Plan, and such arrangements may be either generally applicable or
applicable only in specific cases.
11.11 EXCLUSION FROM PENSION AND PROFIT-SHARING COMPUTATION. By acceptance
of an Award, unless otherwise provided in the applicable Agreement, each Holder
shall be deemed to have agreed that such Award is special incentive compensation
that will not be taken into account, in any manner, as salary, compensation or
bonus in determining the amount of any payment under any pension, retirement or
other employee benefit plan, program or policy of the Company or any Subsidiary
of the Company. In addition, each beneficiary of a deceased Holder shall be
deemed to have agreed that such Award will not affect the amount of any life
insurance coverage, if any, provided by the Company on the life of the Holder
which is payable to such beneficiary under any life insurance plan covering
employees of the Company or any Subsidiary of the Company.
11.12 UNFUNDED PLAN. Neither the Company nor any Subsidiary of the Company
shall be required to segregate any cash or any shares of Common Stock which may
at any time be represented by Awards, and the Plan shall constitute an
"unfunded" plan of the Company. Except as provided in Article VIII with respect
to Awards of Restricted Shares and except as expressly set forth in an
Agreement, no employee shall have voting or other rights with respect to the
shares of Common Stock covered by an Award prior to the delivery of such shares.
Neither the Company nor any Subsidiary of the Company shall, by any provisions
of the Plan, be deemed to be a trustee of any shares of Common Stock or any
other property, and the liabilities
19
of the Company and any Subsidiary of the Company to any employee pursuant to the
Plan shall be those of a debtor pursuant to such contract obligations as are
created by or pursuant to the Plan, and the rights of any employee, former
employee or beneficiary under the Plan shall be limited to those of a general
creditor of the Company or the applicable Subsidiary of the Company, as the case
may be. In its sole discretion, the Board may authorize the creation of trusts
or other arrangements to meet the obligations of the Company under the Plan,
PROVIDED, HOWEVER, that the existence of such trusts or other arrangements is
consistent with the unfunded status of the Plan.
11.13 GOVERNING LAW. The Plan shall be governed by, and construed in
accordance with, the laws of the State of Delaware.
11.14 ACCOUNTS. The delivery of any shares of Common Stock and the payment
of any amount in respect of an Award shall be for the account of the Company or
the applicable Subsidiary of the Company, as the case may be, and any such
delivery or payment shall not be made until the recipient shall have paid or
made satisfactory arrangements for the payment of any applicable withholding
taxes as provided in Section 11.9.
11.15 LEGENDS. Each certificate evidencing shares of Common Stock subject
to an Award shall bear such legends as the Committee deems necessary or
appropriate to reflect or refer to any terms, conditions or restrictions of the
Award applicable to such shares, including any to the effect that the shares
represented thereby may not be disposed of unless the Company has received an
opinion of counsel, acceptable to the Company, that such disposition will not
violate any federal or state securities laws.
11.16 COMPANY'S RIGHTS. The grant of Awards pursuant to the Plan shall not
affect in any way the right or power of the Company to make reclassifications,
reorganizations or other changes of or to its capital or business structure or
to merge, consolidate, liquidate, sell or otherwise dispose of all or any part
of its business or assets.
11.17 SECTION 409A. Notwithstanding anything in this Plan to the contrary,
if any Plan provision or Award under the Plan would result in the imposition of
an additional tax under Code Section 409A and related regulations and United
States Department of the Treasury pronouncements ("Section 409A"), that Plan
provision or Award will be reformed to avoid imposition of the applicable tax
and no action taken to comply with Section 409A shall be deemed to adversely
affect the Holder's rights to an Award.
20
Exhibit 10.37
INDEMNIFICATION AGREEMENT
This AGREEMENT is made and entered into as of this 9th day of May, 2006, by
and between Liberty Media Corporation, a Delaware corporation (the "Company"),
and [ ] (the "Indemnitee").
WHEREAS, it is essential to the Company and its mission to retain and
attract as officers and directors the most capable persons available;
WHEREAS, the Company has asked Indemnitee to serve as a(n)
[officer]/[director] of the Company;
WHEREAS, both the Company and Indemnitee recognize the omnipresent risk of
litigation and other claims that are routinely asserted against officers and
directors of companies operating in the public arena in the current environment,
and the attendant costs of defending even wholly frivolous claims;
WHEREAS, it has become increasingly difficult to obtain insurance against
the risk of personal liability of officers and directors on terms providing
reasonable protection to the individual at reasonable cost to the companies;
WHEREAS, the certificate of incorporation and Bylaws of the Company provide
certain indemnification rights to the officers and directors of the Company, as
provided by Delaware law;
WHEREAS, to induce Indemnitee to become a(n) [officer]/[director] of the
Company, in recognition of Indemnitee's need for substantial protection against
personal liability in order to enhance Indemnitee's continued service to the
Company in an effective manner, the increasing difficulty in obtaining and
maintaining satisfactory insurance coverage, and Indemnitee's reliance on
assurance of indemnification, the Company wishes to provide in this Agreement
for the indemnification of and the advancing of expenses to Indemnitee to the
fullest extent permitted by law (whether partial or complete) and as set forth
in this Agreement, and, to the extent insurance is maintained, for the continued
coverage of Indemnitee under the Company's directors' and officers' liability
insurance policies;
NOW, THEREFORE, in consideration of the premises, the mutual covenants and
agreements contained herein and Indemnitee's continuing to serve as an officer
of the Company, the parties hereto agree as follows:
1. CERTAIN DEFINITIONS:
(a) CHANGE IN CONTROL: shall be deemed to have occurred if (i) any
"person" (as such term is used in Sections 13(d) and 14(d) of the
Securities Exchange Act of 1934, as amended), other than a trustee or other
fiduciary holding securities under an employee benefit plan of the Company
or a corporation owned directly or indirectly by the stockholders of the
Company in substantially the same proportions as their ownership of stock
of the Company, is or becomes the "beneficial owner" (as defined in Rule
13d-3
under such Act), directly or indirectly, of securities of the Company
representing 20% or more of the total voting power represented by the
Company's then outstanding Voting Securities, or (ii) during any period of
two consecutive years, individuals who at the beginning of such period
constituted the Board of Directors of the Company and any new director
whose election by the Board of Directors or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds
(66-2/3%) of the directors then still in office who either were directors
at the beginning of the period or whose election or nomination for election
was previously so approved, cease for any reason to constitute a majority
thereof, or (iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a
merger or consolidation which would result in the Voting Securities of the
Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into Voting
Securities of the surviving entity) at least 80% of the total voting power
represented by the Voting Securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation, or the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of (in
one transaction or a series of transactions) all or substantially all the
Company's assets.
(b) CLAIM: any threatened, pending or completed action, suit or
proceeding, whether instituted by the Company or any other party, or any
inquiry or investigation that Indemnitee in good faith believes might lead
to the institution of any such action, suit or proceeding, whether civil
(including intentional and unintentional tort claims), criminal,
administrative, investigative or other.
(c) EXPENSES: include attorneys' fees and all other costs, expenses
and obligations paid or incurred in connection with investigating,
defending, being a witness in or participating in (including on appeal), or
preparing to defend, be a witness in or participate in, any Claim relating
to any Indemnifiable Event.
(d) INDEMNIFIABLE EVENT: any event or occurrence related to the fact
that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or is or was serving at the request of the Company as a
director, officer, employee, trustee, agent or fiduciary of another
corporation, partnership, joint venture, employee benefit plan, trust or
other enterprise, or by reason of anything done or not done by Indemnitee
in any such capacity.
(e) INDEPENDENT LEGAL COUNSEL: an attorney or firm of attorneys,
selected in accordance with the provisions of Section 3, who shall not have
otherwise performed services for the Company or Indemnitee within the last
five years (other than with respect to matters concerning the rights of
Indemnitee under this Agreement, or of other indemnitees under similar
indemnification agreements).
(f) REVIEWING PARTY: any appropriate person or body consisting of a
member or members of the Company's Board of Directors or any other person
or body appointed by the Company's Board of Directors who is not a party to
the particular Claim for which Indemnitee is seeking indemnification, or
Independent Legal Counsel.
2
(g) VOTING SECURITIES: shares of any series or class of common stock
or preferred stock of the Company, in each case, entitled to vote generally
upon all matters that may be submitted to a vote of stockholders of the
Company at any annual or special meeting thereof.
2. BASIC INDEMNIFICATION ARRANGEMENT.
(a) In the event Indemnitee was, is or becomes a party to or witness
or other participant in, or is threatened to be made a party to or witness
or other participant in, a Claim by reason of (or arising in part out of)
an Indemnifiable Event, the Company shall indemnify Indemnitee to the
fullest extent permitted by law as soon as practicable but in any event no
later than thirty days after written demand is presented to the Company,
against any and all Expenses, judgments, fines, penalties and amounts paid
in settlement (including all interest, assessments and other charges paid
or payable in connection with or in respect of such Expenses, judgments,
fines, penalties or amounts paid in settlement) of such Claim. If so
requested by Indemnitee, the Company shall advance (within two business
days of such request) any and all Expenses to Indemnitee as incurred (an
"Expense Advance").
(b) Notwithstanding the foregoing, (i) the obligations of the Company
under Section 2(a) shall be subject to the condition that the Reviewing
Party shall not have determined (in a written opinion, in any case in which
the Independent Legal Counsel referred to in Section 3 hereof is involved)
that Indemnitee would not be permitted to be indemnified under applicable
law, and (ii) the obligation of the Company to make an Expense Advance
pursuant to Section 2(a) shall be subject to the condition that, if, when
and to the extent that the Reviewing Party determines that Indemnitee would
not be permitted to be so indemnified under applicable law, the Company
shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all such amounts theretofore paid; provided,
however, that if Indemnitee has commenced or thereafter commences legal
proceedings in a court of competent jurisdiction to secure a determination
that Indemnitee should be indemnified under applicable law, any
determination made by the Reviewing Party that Indemnitee would not be
permitted to be indemnified under applicable law shall not be binding and
Indemnitee shall not be required to reimburse the Company for any Expense
Advance until a final judicial determination is made with respect thereto
(as to which all rights of appeal therefrom have been exhausted or lapsed).
If there has not been a Change in Control, the Reviewing Party shall be
selected by the Board of Directors, and if there has been such a Change in
Control (other than a Change in Control which has been approved by a
majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control), the Reviewing Party shall be the
Independent Legal Counsel referred to in Section 3 hereof. If there has
been no determination by the Reviewing Party or if the Reviewing Party
determines that Indemnitee substantively would not be permitted to be
indemnified in whole or in part under applicable law, Indemnitee shall have
the right to commence litigation in any court in Delaware having subject
matter jurisdiction thereof and in which venue is proper seeking an initial
determination by the court or challenging any such determination by the
Reviewing Party or any aspect thereof, including the legal or factual bases
therefor, and the Company hereby consents to
3
service of process and agrees to appear in any such proceeding. Any
determination by the Reviewing Party otherwise shall be conclusive and
binding on the Company and Indemnitee.
3. CHANGE IN CONTROL. The Company agrees that if there is a Change in
Control of the Company (other than a Change in Control which has been approved
by a majority of the Company's Board of Directors who were directors immediately
prior to such Change in Control) then with respect to all matters thereafter
arising concerning the rights of Indemnitee to indemnity payments and Expense
Advances under this Agreement or any other agreement or Company Bylaw or charter
provision now or hereafter in effect relating to Claims for Indemnifiable
Events, the Company shall seek legal advice only from Independent Legal Counsel
selected by Indemnitee and approved by the Company (which approval shall not be
unreasonably withheld). Such counsel, among other things, shall render its
written opinion to the Company and Indemnitee as to whether and to what extent
Indemnitee would be permitted to be indemnified under applicable law. The
Company agrees to pay the reasonable fees of the Independent Legal Counsel
referred to above and to fully indemnify such counsel against any and all
expenses (including attorneys' fees), claims, liabilities and damages arising
out of or relating to this Agreement or its engagement pursuant hereto.
4. INDEMNIFICATION FOR ADDITIONAL EXPENSES. The Company shall indemnify
Indemnitee against any and all expenses (including attorneys' fees) and, if
requested by Indemnitee, shall (within two business days of such request)
advance such expenses to Indemnitee, which are incurred by Indemnitee in
connection with any action brought by Indemnitee (whether pursuant to Section 17
of this Agreement or otherwise) for (i) indemnification or advance payment of
Expenses by the Company under this Agreement or any other agreement or Company
Bylaw or charter provision now or hereafter in effect relating to Claims for
Indemnifiable Events or (ii) recovery under any directors' and officers'
liability insurance policies maintained by the Company, to the fullest extent
permitted by law, regardless of whether Indemnitee ultimately is determined to
be entitled to such indemnification, advance expense payment or insurance
recovery, as the case may be.
5. PARTIAL INDEMNITY. If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for some or a portion of the
Expenses, judgments, fines, penalties and amounts paid in settlement of a Claim
but not, however, for all of the total amount thereof, the Company shall
nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is
entitled. Moreover, notwithstanding any other provision of this Agreement, to
the extent that Indemnitee has been successful on the merits or otherwise in
defense of any or all Claims relating in whole or in part to an Indemnifiable
Event or in defense of any issue or matter therein, including dismissal without
prejudice, Indemnitee shall be indemnified against all Expenses incurred in
connection therewith.
6. BURDEN OF PROOF. In connection with any determination by the Reviewing
Party or otherwise as to whether Indemnitee is entitled to be indemnified
hereunder, the burden of proof shall be on the Company to establish that
Indemnitee is not so entitled.
7. NO PRESUMPTIONS. For purposes of this Agreement, the termination of any
claim, action, suit or proceeding, by judgment, order, settlement (whether with
or without court
4
approval) or conviction, or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that Indemnitee did not meet any particular
standard of conduct or have any particular belief or that a court has determined
that indemnification is not permitted by applicable law. In addition, neither
the failure of the Reviewing Party to have made a determination as to whether
Indemnitee has met any particular standard of conduct or had any particular
belief, nor an actual determination by the Reviewing Party that Indemnitee has
not met such standard of conduct or did not have such belief, prior to the
commencement of legal proceedings by Indemnitee to secure a judicial
determination that Indemnitee should be indemnified under applicable law shall
be a defense to Indemnitee's claim or create a presumption that Indemnitee has
not met any particular standard of conduct or did not have any particular
belief.
8. NONEXCLUSIVITY; SUBSEQUENT CHANGE IN LAW. The rights of the Indemnitee
hereunder shall be in addition to any other rights Indemnitee may have under the
Company's Bylaws or certificate of incorporation, under Delaware law or
otherwise. To the extent that a change in Delaware law (whether by statute or
judicial decision) permits greater indemnification by agreement than would be
afforded currently under the Company's Bylaws and certificate of incorporation
and this Agreement, it is the intent of the parties hereto that Indemnitee shall
enjoy by this Agreement the greater benefits so afforded by such change.
9. LIABILITY INSURANCE. To the extent the Company maintains an insurance
policy or policies providing directors' and officers' liability insurance,
Indemnitee shall be covered by such policy or policies, in accordance with its
or their terms, to the maximum extent of the coverage available for any Company
director or officer.
10. AMENDMENTS; WAIVER. No supplement, modification or amendment of this
Agreement shall be binding unless executed in writing by both of the parties
hereto. No waiver of any of the provisions of this Agreement shall be deemed or
shall constitute a waiver of any other provisions hereof (whether or not
similar) nor shall such waiver constitute a continuing waiver.
11. SUBROGATION. In the event of payment under this Agreement, the Company
shall be subrogated to the extent of such payment to all of the rights of
recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
12. NO DUPLICATION OF PAYMENTS. The Company shall not be liable under this
Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, Bylaw or otherwise) of the amounts otherwise
indemnifiable hereunder.
13. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of and be enforceable by the parties hereto and their respective
successors (including any direct or indirect successor by purchase, merger,
consolidation or otherwise to all or substantially all of the business or assets
of the Company), assigns, spouses, heirs, executors and personal and legal
representatives. This Agreement shall continue in effect regardless of whether
Indemnitee
5
continues to serve as a director, officer, employee, agent or fiduciary of the
Company or of any other enterprise at the Company's request.
14. SEVERABILITY. The provisions of this Agreement shall be severable in
the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) is held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable in any respect, and
the validity and enforceability of any such provision in every other respect and
of the remaining provisions hereof shall not be in any way impaired and shall
remain enforceable to the fullest extent permitted by law.
15. EFFECTIVE DATE. This Agreement shall be effective as of the date hereof
and shall apply to any claim for indemnification by the Indemnitee on or after
such date.
16. GOVERNING LAW. This Agreement shall be governed by and construed and
enforced in accordance with the laws of the State of Delaware applicable to
contracts made and to be performed in such state without giving effect to the
principles of conflicts of laws.
17. INJUNCTIVE RELIEF. The parties hereto agree that Indemnitee may enforce
this Agreement by seeking specific performance hereof, without any necessity of
showing irreparable harm or posting a bond, which requirements are hereby
waived, and that by seeking specific performance, Indemnitee shall not be
precluded from seeking or obtaining any other relief to which he may be
entitled.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
LIBERTY MEDIA CORPORATION
By:
-------------------------------------
INDEMNITEE
----------------------------------------
6
EXHIBIT 10.38
SHARE EXCHANGE AGREEMENT
by and between
NEWS CORPORATION
and
LIBERTY MEDIA CORPORATION
----------
As of December 22, 2006
----------
TABLE OF CONTENTS
Page ARTICLE I.
CERTAIN
DEFINITIONS AND
OTHER MATTERS 2
Section 1.1.
CERTAIN
DEFINITIONS 2
Section 1.2.
TERMS DEFINED
IN OTHER
SECTIONS 14
ARTICLE II.
INTERPRETATION
15 Section 2.1.
INTERPRETATION
15 ARTICLE III.
EXCHANGE OF
STOCK; CLOSING
15 Section 3.1.
EXCHANGE OF
STOCK 15
Section 3.2.
CLOSING 16
Section 3.3.
PARENT'S
DELIVERIES AT
THE CLOSING 16
Section 3.4.
LMC'S
DELIVERIES AT
THE CLOSING 16
Section 3.5.
PERFORMANCE 17
Section 3.6.
ADJUSTMENT TO
NUMBER AND TYPE
OF SECURITIES
17 Section 3.7.
PARENT
RESTRUCTURING
AND RELATED
MATTERS 18
Section 3.8.
ESTIMATED NET
WORKING CAPITAL
ADJUSTMENT 18
Section 3.9.
FINAL NET
WORKING CAPITAL
ADJUSTMENT 18
ARTICLE IV.
REPRESENTATIONS
AND WARRANTIES
OF PARENT 20
Section 4.1.
ORGANIZATION
AND STANDING 21
Section 4.2.
CAPITALIZATION
21 Section 4.3.
CORPORATE POWER
AND AUTHORITY
23 Section 4.4.
SHAREHOLDER
VOTES REQUIRED
23 Section 4.5.
CONFLICTS;
CONSENTS AND
APPROVALS 24
Section 4.6.
OPERATIONS OF
THE TRANSFERRED
BUSINESS 25
i
Section 4.7. COMPLIANCE WITH LAW 25
Section 4.8. INTELLECTUAL PROPERTY 25
Section 4.9. ABSENCE OF SPLITCO OPERATIONS; SPLITCO ASSETS AND LIABILITIES 26
Section 4.10. ENVIRONMENTAL MATTERS 26
Section 4.11. LITIGATION 27
Section 4.12. EMPLOYEE BENEFIT PLANS 28
Section 4.13. CONTRACTS 30
Section 4.14. LABOR MATTERS 32
Section 4.15. RSN SUBSIDIARIES FINANCIAL STATEMENTS 32
Section 4.16. PERMITS 33
Section 4.17. REAL ESTATE 34
Section 4.18. GUARANTEES 34
Section 4.19. TITLE TO DTV SHARES 34
Section 4.20. CERTAIN TAX MATTERS 34
Section 4.21. AFFILIATE TRANSACTIONS 36
Section 4.22. BROKERS OR FINDERS 36
Section 4.23. INVESTIGATION; RELIANCE 37
ARTICLE V. REPRESENTATIONS AND WARRANTIES OF LMC 37
Section 5.1. ORGANIZATION AND STANDING 37
Section 5.2. CORPORATE POWER AND AUTHORITY 37
Section 5.3. NO VOTE REQUIRED 38
Section 5.4. CONFLICTS; CONSENTS AND APPROVALS 38
Section 5.5. LMC PARENT SHARES 39
Section 5.6. LITIGATION 39
Section 5.7. GOVERNMENTAL ACTIONS 39
ii
Section 5.8. FCC MATTERS 39
Section 5.9. INVESTMENT PURPOSE AND EXPERIENCE 40
Section 5.10. Investigation; Reliance 40
Section 5.11. BROKERS AND FINDERS 40
ARTICLE VI. COVENANTS AND AGREEMENTS 41
Section 6.1. ACCESS AND INFORMATION 41
Section 6.2. CONDUCT OF BUSINESS BY PARENT 41
Section 6.3. CONDUCT OF BUSINESS BY LMC 44
Section 6.4. PROXY STATEMENT 44
Section 6.5. PARENT STOCKHOLDERS' MEETING 46
Section 6.6. APPROPRIATE ACTION; CONSENTS; FILINGS 47
Section 6.7. FURTHER ASSURANCES 49
Section 6.8. STANDSTILL AGREEMENTS 49
Section 6.9. CONFIDENTIALITY; ACCESS TO RECORDS AFTER CLOSING 53
Section 6.10. EMPLOYEE MATTERS 55
Section 6.11. INTERCOMPANY SERVICES AND ACCOUNTS 57
Section 6.12. COOPERATION WITH RESPECT TO FINANCIAL REPORTING 57
Section 6.13. NO SOLICITATION 57
Section 6.14. DTV CHARTER RESTRICTIONS 59
Section 6.15. CERTAIN TAX MATTERS 60
Section 6.16. ANCILLARY AGREEMENTS 60
Section 6.17. PLEDGED SHARES 60
ARTICLE VII. CONDITIONS TO CLOSING 60
Section 7.1. MUTUAL CONDITIONS 60
Section 7.2. CONDITIONS TO LMC'S OBLIGATIONS 61
iii
Section 7.3. CONDITIONS TO PARENT'S OBLIGATIONS 62
Section 7.4. FRUSTRATION OF CLOSING CONDITIONS 63
ARTICLE VIII. INDEMNIFICATION 63
Section 8.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS 63
Section 8.2. INDEMNIFICATION 64
Section 8.3. PROCEDURES 65
Section 8.4. EXCLUSIVITY 67
Section 8.5. CERTAIN RIGHTS AND LIMITATIONS 67
ARTICLE IX. TERMINATION 67
Section 9.1. TERMINATION 67
Section 9.2. EFFECT OF TERMINATION 69
ARTICLE X. MISCELLANEOUS 70
Section 10.1. NOTICES 70
Section 10.2. EXPENSES 71
Section 10.3. GOVERNING LAW; CONSENT TO JURISDICTION 71
Section 10.4. WAIVER OF JURY TRIAL 71
Section 10.5. ASSIGNMENT; SUCCESSORS AND ASSIGNS; NO THIRD PARTY RIGHTS 72
Section 10.6. COUNTERPARTS 72
Section 10.7. TITLES AND HEADINGS 72
Section 10.8. AMENDMENT AND MODIFICATION 72
Section 10.9. PUBLICITY; PUBLIC ANNOUNCEMENTS 72
Section 10.10. WAIVER 73
Section 10.11. SEVERABILITY 73
Section 10.12. NO STRICT CONSTRUCTION 73
iv
Section 10.13. ENTIRE AGREEMENT 73
Section 10.14. EQUITABLE REMEDIES 73
v
EXHIBITS
Exhibit A-I Tax Matters Agreement
SHARE EXCHANGE AGREEMENT
This SHARE EXCHANGE AGREEMENT, dated as of December 22, 2006 (this
"Agreement"), is entered into by and between NEWS CORPORATION, a Delaware
corporation ("Parent") and LIBERTY MEDIA CORPORATION, a Delaware corporation
("LMC").
WITNESSETH:
WHEREAS, Greenlady Corp. ("Splitco"), a Delaware corporation, as an
indirect wholly owned subsidiary of Parent;
WHEREAS, the Networks (as defined in Article I) conduct a business
consisting of regional sports programming networks (the "Transferred Business");
WHEREAS, Parent through its wholly owned subsidiary Fox Entertainment
Group, Inc. ("FEG") owns the DTV Shares (as defined in Article I);
WHEREAS, the Stockholders (as defined in Article I) are indirect
wholly owned subsidiaries of LMC;
WHEREAS, the Stockholders collectively own the LMC Parent Shares (as
defined in Article I);
WHEREAS, as of the Closing (as defined in Article III) the assets of
Splitco will consist solely of (i) all issued and outstanding equity interests
of each RSN Subsidiary (as defined in Article I), (ii) the DTV Shares and (iii)
the Cash Amount (as defined in Article I);
WHEREAS, upon the terms and subject to the conditions set forth in
this Agreement, (a) Parent desires to exchange the Splitco Shares (as defined in
Article I) for the LMC Parent Shares, and (b) LMC desires to cause the
Stockholders to exchange the LMC Parent Shares for the Splitco Shares;
WHEREAS, the parties hereto intend that the Exchange (as defined in
Section 3.1) qualify as a tax-free exchange under Section 355(a) of the Code (as
defined in Article I) and this Agreement, together with the Tax Matters
Agreement (as defined in Article I), constitute a "plan of reorganization," as
defined in Section 368 of the Code;
WHEREAS, concurrently with the execution of this Agreement, Parent and
certain of its Affiliates party thereto, on the one hand, and LMC and certain of
its Affiliates party thereto, on the other hand, are entering into the Tax
Matters Agreement;
WHEREAS, at or prior to the Closing Parent and LMC shall enter into
the Global Affiliation Agreement Side Letter (as defined in Article I);
WHEREAS, at or prior to the Closing, Parent and certain of its
Affiliates (other than the Transferred Subsidiaries) party thereto, on the one
hand, and the Transferred Subsidiaries and DTV, on the other hand, shall enter
into the following agreements, each in a form reasonably satisfactory to each of
Parent and LMC: (i) the NSP Agreements, (ii) the NAP
Agreements, (iii) the Technical Services Agreement, (iv) the Transitional
Services Agreement, (v) the Production Services Agreement, (vi) the Sports
Access Agreement, (vii) the Webpage Services Agreement, (viii) the FSD
Representation Agreement, (ix) the Fox College Sports License Agreement, (x) the
DTV Non-Competition Agreement and (xi) the RSN Subsidiary Non-Competition
Agreement (such agreements, together with the Global Affiliation Side Letter and
the Tax Matters Agreement, the "Ancillary Agreements");
WHEREAS, the Board of Directors of Parent and the Board of Directors
of LMC and each Stockholder have, in each case, determined that it is in the
best interests of their respective corporations and their respective
stockholders to enter into this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained in
this Agreement, and intending to be legally bound, the parties hereto agree as
follows:
ARTICLE I.
CERTAIN DEFINITIONS AND OTHER MATTERS
Section 1.1. CERTAIN DEFINITIONS. As used in this Agreement and the
schedules hereto, the following terms have the respective meanings set forth
below.
"ACTION" means any demand, action, claim, suit, countersuit,
litigation, arbitration, prosecution, proceeding (including any civil, criminal,
administrative, investigative or appellate proceeding), hearing, inquiry, audit,
examination or investigation commenced, brought, conducted or heard by or
before, or otherwise involving, any court, grand jury or other Governmental
Authority or any arbitrator or arbitration panel.
"AFFILIATE" means, with respect to any Person, any other Person that,
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, such Person; PROVIDED, however
that (i) the Transferred Subsidiaries will be treated as Affiliates of Parent
prior to the Closing and as Affiliates of LMC after the Closing, and (ii) the
term "Affiliate" when used with respect to Parent or any Affiliate of Parent
prior to the Closing, or LMC or any Affiliate of LMC after the Closing, shall
not include DTV or any of its Subsidiaries. The term "control" means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities, by contract or otherwise, including the ability
to elect the members of the board of directors or other governing body of a
Person, and the terms "controlled" and "controlling" have correlative meanings.
"ANTITRUST LAWS" means the HSR Act, the Sherman Act, as amended, the
Clayton Act, as amended, the Federal Trade Commission Act, as amended, and all
other federal, state, and foreign statutes, rules, regulations, orders, decrees,
administrative and judicial doctrines and other laws that are designed or
intended to prohibit, restrict or regulate actions having the purpose or effect
of monopolization or restraint of trade or lessening competition through merger
or acquisition.
"ASSOCIATE" shall have the meaning ascribed to such term under the ASX
Listing Rules.
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"ASX" means the Australian Stock Exchange.
"BENEFICIAL OWNERSHIP" shall have (and related terms such as
"beneficially owned" or "beneficial owner") the meaning set forth in Rule 13d-3
under the Exchange Act; PROVIDED, HOWEVER that a Person shall be deemed to
beneficially own any securities which such Person has the right to acquire
whether such right is exercisable immediately or only after the passage of time
or upon the satisfaction of one or more conditions (whether or not within the
control of such Person) pursuant to any agreement, arrangement or understanding
(whether or not in writing) or upon the exercise of conversion rights, exchange
rights, other rights, warrants or options.
"BUSINESS DAY" means any day that is not a Saturday, Sunday or other
day on which banking institutions in New York, New York are authorized or
required by Law or executive order to close.
"BUSINESS FCC LICENSES" means the material licenses, permits,
authorizations, and approvals issued by the FCC to each of the RSN Subsidiaries
which are used in connection with the operation of the Networks.
"CASH AMOUNT" means five hundred and fifty million dollars
($550,000,000), plus the Estimated Net Working Capital Deficiency Amount (if
any) or minus the Estimated Net Working Capital Excess Amount (if any).
"CLEANUP" means all actions required to (a) clean up, remove, treat or
remediate Hazardous Materials in the indoor or outdoor environment, (b) perform
pre-remedial studies and investigations and post-remedial monitoring and care,
(c) respond to any requests by a Governmental Authority for information or
documents relating to cleanup, removal, treatment or remediation or potential
cleanup, removal, treatment or remediation of Hazardous Materials in the indoor
or outdoor environment or (d) prevent the Release of Hazardous Materials so that
they do not migrate, endanger, or threaten to endanger public health or welfare
or the indoor or outdoor environment.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COMMUNICATIONS ACT" means the Communications Act of 1934, as amended,
and the rules, regulations and published orders of the FCC thereunder.
"COMMUNICATIONS REGULATION" means the Communications Act, the
Telecommunications Act of 1996, any rule, regulation or policy of the FCC,
and/or any statute, rule, regulation or policy of any other Governmental
Authority with respect to the operation of channels of radio communication
and/or the provision of communications services (including the provision of
direct-to-home video programming).
"CONFIDENTIALITY AGREEMENT" means the letter agreement, dated
September 5, 2006, by and between Parent and LMC.
"CONTRACT" means any agreement, contract, lease, power of attorney,
note, loan, evidence of indebtedness, purchase and sales order, letter of
credit, settlement agreement, franchise agreement, undertaking, covenant not to
compete, employment agreement, license,
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instrument, obligation, option, commitment, understanding and other executory
commitment, whether oral or written, express or implied.
"CUSTOMER AGREEMENTS" means all Contracts between any RSN Subsidiary
and a customer of the Transferred Business.
"DAMAGES" means any and all losses, Liabilities, claims, damages,
deficiencies, fines, payments, costs and expenses, whenever or however arising
and whether or not resulting from third party claims (including all amounts paid
in connection with any demands, assessments, judgments, settlements and
compromises relating thereto; interest and penalties with respect thereto; and
costs and expenses, including reasonable attorneys', accountants' and other
experts' fees and expenses, incurred in investigating, preparing for or
defending against any such Actions or other legal matters or in asserting,
preserving or enforcing an Indemnified Party's rights hereunder). Damages shall
expressly exclude special, punitive and consequential damages and any and all
losses, Liabilities, claims, damages, deficiencies, fines, payments, costs or
expenses with respect to diminution of value; PROVIDED that Damages shall
include any of the foregoing awarded in an Action (or settlement thereof) to any
third party against an Indemnified Party, without regard to the foregoing
limitations.
"DIT" means any "deferred intercompany transaction" or "intercompany
transaction" within the meaning of the Treasury Regulations (or predecessors
thereto) that does not occur pursuant to the Parent Restructuring.
"DTV" means The DirecTV Group, Inc., a Delaware corporation.
"DTV NON-COMPETITION AGREEMENT" means the letter agreement relating to
Parent's confidentiality, non-competition and non-solicitation provisions
relating to DTV to be entered into by and between Parent and DTV.
"DTV SHARES" means, the shares of common stock of DTV held by FEG, as
specified in Section 1.1 of the Parent Disclosure Letter, and to be transferred
to Splitco pursuant to Section 3.1.
"ELA" means any "excess loss account" within the meaning of the
Treasury Regulations (or predecessors thereto).
"ENCUMBRANCES" means security interests, liens, charges, claims, title
defects, deficiencies or exceptions (including, with respect to the Leased Real
Property, defects, deficiencies or exceptions in, or relating to, marketability
of title, or leases, subleases or the like affecting title), mortgages, pledges,
easements, encroachments, restrictions on use, rights-of-way, rights of first
refusal, rights of first negotiation or any similar right in favor of any third
party, any restriction on the receipt of any income derived from any asset and
any limitation or restriction on the right to own, vote, sell or otherwise
dispose of any security, conditional sales or other title retention agreements,
covenants, conditions or other similar restrictions (including restrictions on
transfer) or other encumbrances of any nature whatsoever, other than Permitted
Encumbrances.
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"ENVIRONMENTAL CLAIM" means any claim, action, cause of action,
investigation, request for information or notice (written or oral) by any Person
or entity alleging potential liability for investigatory costs, cleanup costs,
governmental response costs, natural resources damages, property damages,
personal injuries, or penalties arising out of, based on or resulting from (a)
the presence, or Release into the environment, of any Hazardous Material at any
location, whether or not owned or operated by such Person or any of its
Subsidiaries or (b) circumstances forming the basis of any violation, or alleged
violation, of any Environmental Law or (c) any contractual liabilities.
"ENVIRONMENTAL LAWS" means all Laws relating to pollution or
protection of human health and safety or the environment (including ambient air,
surface water, groundwater, land surface, natural resources or subsurface
strata), including all such Laws relating to Releases or threatened Releases of
Hazardous Materials into the environment or work place, or otherwise relating to
the environmental or worker health and safety aspects of manufacturing,
processing, distribution, importation, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, including the Comprehensive
Response, Compensation, and Liability Act and its state equivalents, chemical
inventories in all relevant jurisdictions, and all such Laws relating to the
registration of products of the Transferred Business or Splitco under the
Federal Insecticide, Fungicide and Rodenticide Act, the Food Drug and Cosmetic
Act, the Toxic Substances Control Act, the European List of Notified Chemical
Substances, the European Inventory of Existing Commercial Chemical Substances or
similar Laws.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FCC" means the United States Federal Communications Commission,
including a Bureau or subdivision thereof acting on delegated authority.
"FCC CONSENT" means the grant, without regard to whether such grant
has become a final order, by the FCC of its consent to, or approval of, the
transfer of control of Splitco, and consent to, or approval of, transfer of the
DTV Shares and any transfer of control of DTV, to LMC (or any Affiliate of LMC),
pursuant to appropriate applications filed by the parties with the FCC, as
contemplated by this Agreement.
"FLSA" means the Fair Labor Standards Act, 29 U.S.C. Section 201, as
amended.
"FSD REPRESENTATION AGREEMENT" means the FSD representation agreement
entered into by and among Fox Sports Direct and each of the RSN Subsidiaries,
respectively.
"FOX COLLEGE SPORTS LICENSE AGREEMENT" means the agreement relating to
the license of Network programming by the RSN Subsidiaries to Fox College
Sports, Inc.
"GAAP" means United States generally accepted accounting principles,
consistently applied.
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"GLOBAL AFFILIATION AGREEMENT SIDE LETTER" means the letter agreement
relating to global affiliation agreements entered into by and between LMC and
Parent.
"GOVERNMENTAL AUTHORITY" means any supranational, national, federal,
state or local government, foreign or domestic, or the government of any
political subdivision of any of the foregoing, or any entity, authority, agency,
ministry, department, board, commission, court or other similar body exercising
executive, legislative, judicial, regulatory or administrative authority or
functions of or pertaining to government, including any authority or other
quasi-governmental entity established by a Governmental Authority to perform any
of such functions.
"HAZARDOUS MATERIALS" means any substance which is listed, defined or
regulated as a pollutant, contaminant, hazardous, dangerous or toxic substance,
material or waste, or is otherwise classified as hazardous, dangerous or toxic
in or pursuant to any Environmental Law or which is or contains any explosives,
radon, radioactive materials, asbestos, urea formaldehyde foam insulation,
polychlorinated biphenyls, petroleum and petroleum products (including waste
petroleum and petroleum products) as regulated under any applicable
Environmental Law.
"INDEBTEDNESS" of any Person means, without duplication, (i) all
obligations of such Person for money borrowed, whether current or unfunded, or
secured or unsecured; (ii) all obligations of such Person evidenced by notes,
debentures, bonds or other similar instruments or debt securities for the
payment of which such Person is responsible or liable (excluding current
accounts payable incurred in the ordinary course of business); (iii) all
obligations of such Person issued or assumed for deferred purchase price
payments associated with acquisitions, divestments or other transactions; (iv)
all obligations of such Person under leases required to be capitalized in
accordance with GAAP, (v) all obligations of such Person for the reimbursement
of any obligor on any letter of credit, banker's acceptance, guarantees or
similar credit transaction, (vi) all interest, fees, prepayment premiums and
other expenses owed with respect to the indebtedness referred to above and (vii)
all indebtedness of others referred to above which is directly or indirectly
guaranteed by such Person or which such Person has agreed (contingently or
otherwise) to purchase or otherwise acquire or in respect of which it has
otherwise assured a creditor against loss, including through the grant of a
security interest upon any assets of such Person.
"INTELLECTUAL PROPERTY" shall mean all United States and foreign (i)
patents, patent applications, patent disclosures, and all related continuations,
continuations-in-part, divisionals, reissues, re-examinations, substitutions,
and extensions thereof, (ii) trademarks, service marks, trade names, domain
names, logos, slogans, trade dress, and other similar designations of source or
origin, together with the goodwill symbolized by any of the foregoing, (iii)
copyrights and copyrightable subject matter, (iv) rights of publicity, (v) moral
rights and rights of attribution and integrity, (vi) trade secrets and all
confidential information, know-how, inventions, proprietary processes, formulae,
models, and methodologies, (vii) all rights in the foregoing and in other
similar intangible assets, (viii) all applications and registrations for the
foregoing, and (ix) all rights and remedies against infringement,
misappropriation, or other violation thereof.
"IRS" means the Internal Revenue Service of the United States of
America.
6
"KNOWLEDGE" means (i) with respect to Parent, the actual knowledge of
any of the individuals set forth on Schedule 1.1(a) of the Parent Disclosure
Letter, and (ii) with respect to LMC, the actual knowledge of any of the
individuals set forth on Schedule 1.1(b) of the LMC Disclosure Letter. "Know,"
"knows" and correlative terms will be read to have similar meanings.
"LAWS" means all United States federal, state or local, foreign or
supranational laws, constitutions, statutes, codes, rules, regulations,
ordinances, orders, judgments, writs, stipulations, awards, injunctions,
arbitration awards or findings decrees or edicts by a Governmental Authority
having the force of law, including any of the foregoing as they relate to Tax.
"LEASED REAL PROPERTY" means any real property leased or subleased by
the Transferred Subsidiaries and set forth (and designated as leased) in Section
4.17.2 of the Parent Disclosure Letter.
"LIABILITIES" means any and all Indebtedness, liabilities, commitments
and obligations, whether or not fixed, contingent or absolute, matured or
unmatured, direct or indirect, liquidated or unliquidated, accrued or unaccrued,
known or unknown, whether or not required by GAAP to be reflected in financial
statements or disclosed in the notes thereto, including those arising under any
Action, Law, order, judgment, injunction or consent decree of any Governmental
Authority or any award of any arbitrator of any kind, and those arising under
any contract, commitment or undertaking.
"LIBERTY BASKET AMOUNT" means $12,000,000.
"LIBERTY BASKET BREACH" means the failure of any representation or
warranty contained in this Agreement and made by LMC (other than those
representations or warranties contained in Sections 5.1, 5.2, 5.3, 5.5, 5.10 and
5.11) to be true and correct when made or deemed made.
"LIBERTY BASKET EXCEPTION BREACH" means the failure of any
representation or warranty contained in Sections 5.1, 5.2, 5.3, 5.5, 5.10 and
5.11 of this Agreement to be true and correct when made or deemed made.
"LMC DISCLOSURE LETTER" means the disclosure letter that LMC has
delivered to Parent on the date of this Agreement prior to the execution hereof,
which letter is incorporated by reference herein.
"LMC INDEMNITEES" means, collectively, LMC, its Affiliates, and their
respective stockholders, members, partners, officers, directors, employees,
attorneys, representatives and agents.
"LMC PARENT SHARES" means the 324,637,067 Shares of Parent Class A
Common Stock and 188,000,000 shares of Parent Class B Common Stock owned by the
Stockholders.
"LMC TAX OPINION" means the written opinion of LMC's Tax counsel,
addressed to LMC and dated as of the Closing Date, in form and substance
reasonably satisfactory to LMC,
7
to the effect that, based upon the Rulings, the Tax Opinion Representations, and
any other facts, representations and assumptions set forth or referred to in
such opinion, and subject to such qualifications and limitations as may be set
forth in such opinion, for United States federal income tax purposes, no gain or
loss will be recognized by (and no amount will be includible in the income of)
the Stockholders on the Exchange.
"LMC TAX OPINION REPRESENTATIONS" means the representations set forth
in a letter, which shall be executed by LMC on the Closing Date and dated and
effective as of the Closing Date, to be made by LMC to each of the firms
providing the Tax Opinions as a condition to, and in connection with, the
issuance of the Tax Opinions, including representations in form and substance
substantially as set forth in Schedule A to this Agreement (amended as necessary
to reflect changes in relevant facts occurring after the date of this Agreement
and on or before the Closing Date).
"MATERIAL ADVERSE EFFECT" means, with respect to a Person or the
Transferred Business, any change, effect, event, occurrence, development,
condition or circumstance that, individually or in the aggregate with all other
adverse changes, effects, events, occurrences, developments, conditions or
circumstances, is, or is reasonably likely to be, materially adverse to the
business, operations, results of operations, assets, liabilities, or condition
(financial or otherwise) of such Person and its Subsidiaries, taken as a whole,
or the Transferred Business, taken as a whole, or on the ability of such Person
to consummate the Transactions, other than any change, effect, event,
occurrence, development, condition or circumstance resulting from, or relating
to (i) the United States economy in general or (ii) the industry in which such
Person or the Transferred Business operates in general, and not having a
materially disproportionate effect (relative to the effect on other Persons
operating in such industry) on such Person or the Transferred Business; PROVIDED
that for the purposes of any determination as to the existence of a "Material
Adverse Effect" with respect to Splitco, Splitco's assets shall be deemed to
consist of the following as of the time of such determination: (i) all issued
and outstanding equity interests of each RSN Subsidiary and (ii) the DTV Shares;
PROVIDED further that any determination as to the existence of a "Material
Adverse Effect" with respect to Splitco shall be made after taking into account
(without duplication) any amounts actually recovered, under any insurance policy
maintained by Parent or any of its Affiliates or DTV, and/or by Parent, any
Affiliate of Parent or DTV from any other third party, and, in each case, after
giving effect to the application of any such amounts for the benefit of the
Transferred Subsidiaries or DTV. No change, effect, event or occurrence arising
or resulting from any of the following, either alone or in combination, shall
constitute or be taken into account in determining whether there has been, a
Material Adverse Effect: (i) the announcement or performance of this Agreement
and the transactions contemplated hereby (including compliance with the
covenants set forth herein, or any action taken or omitted to be taken by
Parent, any Transferred Subsidiary, Splitco or DTV at the request or with the
prior written consent of LMC), including, to the extent arising therefrom, any
termination of, reduction in or similar negative impact on relationships,
contractual or otherwise, with any customers, suppliers, distributors, partners
or employees of the Transferred Business or DTV, (ii) acts of war or terrorism
or natural disasters, (iii) changes in any Laws or regulations or applicable
accounting regulations or principles or the interpretations thereof, (iv) the
fact, in and of itself (and not the underlying causes thereof) that any
Transferred Subsidiary or DTV failed to meet any projections, forecasts, or
revenue or earnings predictions for any period, or (v) any
8
change, in and of itself (and not the underlying causes thereof) in the stock
price of the LMC Parent Shares or the DTV Shares.
"MAXIMUM AMOUNT" means $75,000,000 (provided that it is the
understanding of the parties that such $75,000,000 amount shall not have
deducted therefrom the amount of the Parent Basket Amount or the Liberty Basket
Amount, as the case may be).
"MULTIEMPLOYER PLAN" means any "multiemployer plan" within the meaning
of Section 3(37) of ERISA.
"MURDOCH INTERESTS" means each of Mr. K. Rupert Murdoch, the Murdoch
Family Trust and Cruden Financial Services LLC and (x) any successor to any of
the foregoing and (y) any transferee of Parent Class B Stock of any of the
foregoing.
"NAP AGREEMENTS" means each national advertising sales representation
agreement by and among National Advertising Partners and each of the RSN
Subsidiaries.
"NETWORK" means each of the regional sports programming cable networks
operated by the RSN Subsidiaries and listed on Section 1.1 of the Parent
Disclosure Letter.
"NET WORKING CAPITAL" means the (A) current assets (excluding cash and
excluding Tax assets) less (B) current liabilities (excluding Tax liabilities,
and calculated after giving effect to the settlement of intercompany accounts
contemplated by Section 6.11), in each case, of the RSN Subsidiaries on a
consolidated basis, all as determined in accordance with the methods, principles
and classifications used in preparing the Interim Balance Sheet included in the
Financial Statements and set forth on Schedule B attached hereto and in
accordance with GAAP (excluding footnotes and normal year-end adjustments).
"NSP AGREEMENTS" mean each national sports programming service license
agreement by and among National Sports Programming and each of the RSN
Subsidiaries.
"PARENT BASKET AMOUNT" means $12,000,000.
"PARENT BASKET BREACH" means the failure of any representation or
warranty contained in this Agreement and made by Parent (other than those
representations or warranties contained in Sections 4.1, 4.2, 4.3, 4.4, 4.19,
4.22 and 4.23 and other than the representations and warranties contained in
Section 4.20 which shall not be the subject of any claim for indemnification
under Article VIII) to be true and correct when made or deemed made.
"PARENT BASKET EXCEPTION BREACH" means the failure of any
representation or warranty contained in Sections 4.1, 4.2, 4.3, 4.4, 4.19, 4.22
and 4.23 of this Agreement to be true and correct when made or deemed made.
"PARENT COMMON STOCK" means, collectively, the Class A Common Stock,
par value $0.01 per share, of Parent ("Parent Class A Stock") and the Class B
Common Stock, par value $0.01 per share, of Parent ("Parent Class B Stock").
9
"PARENT DISCLOSURE LETTER" means the disclosure letter that Parent has
delivered to LMC on the date of this Agreement prior to the execution hereof,
which letter is incorporated by reference herein.
"PARENT INDEMNITEES" means, collectively, Parent, its Affiliates and
its and their respective stockholders (other than LMC and any of its
Affiliates), members, partners, officers, directors, employees, attorneys,
representatives and agents.
"PARENT RESTRUCTURING" means the restructuring effected by Parent and
its Affiliates pursuant to the steps set forth on Schedule C hereto, as the same
may be modified in accordance with the Tax Matters Agreement.
"PARENT TAX OPINION" means the written opinion of Parent's Tax
counsel, addressed to Parent and dated as of the Closing Date, in form and
substance reasonably satisfactory to Parent, to the effect that, based upon the
Rulings, the Tax Opinion Representations and any other facts, representations
and assumptions set forth or referred to in such opinion, and subject to such
qualifications and limitations as may be set forth in such opinion, for United
States federal income tax purposes, no gain or loss will be recognized by (and
no amount will be includible in the income of) Parent or any of its Affiliates
on the Exchange or the Parent Restructuring, except with respect to any DITS or
ELAs.
"PARENT TAX OPINION REPRESENTATIONS" means the representations set
forth in the letter, which shall be executed by Parent on the Closing Date and
dated and effective as of the Closing Date, to be made by Parent to each of the
firms providing the Tax Opinions as a condition to, and in connection with, the
issuance of the Tax Opinions, including representations in form and substance
substantially as set forth in Schedule D to this Agreement (amended as necessary
to reflect changes in relevant facts occurring after the date of this Agreement
and on or before the Closing Date).
"PERMITTED ENCUMBRANCES" means (i) Encumbrances for Taxes not yet due
or being contested in good faith by appropriate proceedings and for which
adequate accruals or reserves have been established, (ii) the claims of
mechanics, materialmen or like Persons that have arisen in the ordinary course
of business or imperfections of title, restrictions and other Encumbrances that,
in any such case, do not materially interfere with the use of (in the ordinary
course of business) or the value (as so used) of, the property subject thereto,
(iii) rights granted to any licensee of any Intellectual Property Rights in the
ordinary course of business consistent with past practices, (iv) Encumbrances
securing Indebtedness not yet in default for the purchase price or lease
payments on property purchased or leased in the ordinary course of business, (v)
Encumbrances created by actions of LMC or its Affiliates, (vi) with respect to
securities, including capital stock, Encumbrances imposed by the Securities Act
or the Exchange Act or (vii) Encumbrances arising from the rights and
obligations under this Agreement or any Ancillary Agreement.
"PERSON" means an individual, partnership (general or limited),
corporation, limited liability company, joint stock company, unincorporated
organization or association, trust, joint venture or other entity, or a
Governmental Authority.
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"PLEDGED SHARES" means the 60,000,000 shares of Parent Class A Common
Stock owned beneficially and of record by the Stockholders pledged, as of the
date hereof, to secure certain of the Stockholders' obligations under variable
forward OTC contracts.
"PRODUCTION SERVICES AGREEMENT" means the agreement relating to the
provision of production services identified therein by the Transferred
Subsidiaries to be entered into by and among each of the Transferred
Subsidiaries and Fox Sports Net, Inc.
"REAL PROPERTY LEASE" means the lease or sublease agreement pursuant
to which a Leased Real Property is leased or subleased.
"RELEASE" means any release, spill, emission, discharge, leaking,
pumping, injection, deposit, disposal, dispersal, leaching or migration into the
indoor or outdoor environment (including ambient air, surface water, groundwater
and surface or subsurface strata) or into or out of any property, including the
movement of Hazardous Materials through or in the air, soil, surface water,
groundwater or property.
"RSN SUBSIDIARIES" means each of Fox Sports Net Rocky Mountain, LLC,
Fox Sports Net Pittsburgh, LLC, and Fox Sports Net Northwest, LLC.
"RSN SUBSIDIARY NON-COMPETITION AGREEMENT" means the letter agreement
relating to Parent's confidentiality, non-competition and non-solicitation
obligations relating to the RSN Subsidiaries to be entered into by and among
Parent, Splitco and each RSN Subsidiary.
"RULINGS" shall mean the Exchange Rulings and the Parent Restructuring
Ruling.
"SEC" means the United States Securities and Exchange Commission.
"SECURITIES ACT" means the United States Securities Act of 1933.
"SECURITIES ENCUMBRANCES" means security interests, liens, charges,
claims, title defects, deficiencies or exceptions, mortgages, pledges, rights of
first refusal, rights of first negotiation or any similar right in favor of any
Person, any restriction on the receipt of any income derived from any security
and any limitation or restriction on the right to own, vote, sell or otherwise
dispose of any security, conditional sales or other title retention agreements,
covenants, conditions or other similar restrictions (including restrictions on
transfer) or other encumbrances of any nature whatsoever, other than (i)
Encumbrances imposed by the Securities Act or the Exchange Act or (ii)
Encumbrances arising from the rights and obligations under this Agreement.
"SPLITCO COMMON STOCK" means the common stock, par value $0.01 per
share, of Splitco.
"SPLITCO SHARES" means all of the issued and outstanding shares of
Splitco Common Stock.
"SPORTS ACCESS AGREEMENTS" means the agreements relating to the
license of highlights and clips for news access by media organizations to the
RSN Subsidiaries to be
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entered into by and among each of the RSN Subsidiaries and Sports Access, a
division of ARC Holding, Ltd.
"STOCKHOLDERS" means Liberty NC, Inc., Liberty NC II, Inc., Liberty NC
IV, Inc., Liberty NC V, Inc., Liberty NC VI, Inc., Liberty NC VII, Inc., Liberty
NC VIII, Inc., Liberty NC IX, Inc., Liberty NC XII, Inc. and LMC Bay Area
Sports, Inc.
"SUBSIDIARY" when used with respect to any Person, means (i)(A) a
corporation of which a majority in voting power of its share capital or capital
stock with voting power, under ordinary circumstances, to elect directors is at
the time, directly or indirectly, owned by such Person, by a Subsidiary of such
Person, or by such Person and one or more Subsidiaries of such Person, whether
or not such power is subject to a voting agreement or similar Encumbrance, (B) a
partnership or limited liability company in which such Person or a Subsidiary of
such Person is, at the date of determination, (1) in the case of a partnership,
a general partner of such partnership with the power affirmatively to direct the
policies and management of such partnership or (2) in the case of a limited
liability company, the managing member or, in the absence of a managing member,
a member with the power affirmatively to direct the policies and management of
such limited liability company, or (C) any other Person (other than a
corporation) in which such Person, a Subsidiary of such Person or such Person
and one or more Subsidiaries of such Person, directly or indirectly, at the date
of determination thereof, has (1) the power to elect or direct the election of a
majority of the members of the governing body of such Person, whether or not
such power is subject to a voting agreement or similar Encumbrance, or (2) in
the absence of such a governing body, at least a majority ownership interest or
(ii) any other Person of which an aggregate of more than 50% of the equity
interests are, at the time, directly or indirectly, owned by such Person and/or
one or more Subsidiaries of such Person. For the purposes of the foregoing, the
Transferred Subsidiaries will be treated as Subsidiaries of Parent until the
Closing is completed and as Subsidiaries of LMC immediately after the Closing,
and neither IAC/InterActiveCorp nor Expedia, Inc., or any of their respective
Subsidiaries, will be treated as Subsidiaries of LMC.
"TAX" or "TAXES" means (i) any and all taxes, charges, fees, levies,
customs, duties, tariffs, or other assessments, including income, gross
receipts, excise, real or personal property, sales, withholding, social
security, retirement, unemployment, occupation, use, goods and services, service
use, license, value added, capital, net worth, payroll, profits, withholding,
franchise, transfer and recording taxes, fees and charges, and any other taxes,
charges, fees, levies, customs, duties, tariffs or other assessments imposed by
the IRS or any taxing authority (whether domestic or foreign including any
state, county, local or foreign government or any subdivision or taxing agency
thereof (including a United States possession)), whether computed on a separate,
consolidated, unitary, combined or any other basis; and such term shall include
any interest thereon, fines, penalties, additions to tax, or additional amounts
attributable to, or imposed upon, or with respect to, any such taxes, charges,
fees, levies, customs, duties, tariffs, or other assessments; (ii) any Liability
for the payment of any amounts described in clause (i) as a result of being a
member of an affiliated, consolidated, combined, unitary or similar group or as
a result of transferor, successor or similar Liability; and (iii) any Liability
for the payments of any amounts as a result of being a party to any Tax sharing
agreement or as a result of any express or implied obligation to indemnify any
other Person with respect to the payment of any amounts of the type described in
clause (i) or (ii).
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"TAX MATTERS AGREEMENT" means the Tax Matters Agreement by and among
Parent and LMC, attached as Exhibit A-I hereto.
"TAX OPINIONS" means the Parent Tax Opinion and the LMC Tax Opinion.
"TAX OPINION REPRESENTATIONS" means the LMC Tax Opinion
Representations and the Parent Tax Opinion Representations.
"TAX RETURNS" means any return, report, certificate, form or similar
statement or document (including any related or supporting information or
schedule attached thereto and any information return, amended Tax Return, claim
for refund or declaration of estimated Tax) required to be supplied to, or filed
with, a Taxing Authority in connection with the determination, assessment or
collection of any Tax or the administration of any laws, regulations or
administrative requirements relating to any Tax.
"TAXING AUTHORITY" shall have the meaning given to such term in the
Tax Matters Agreement.
"TAX SHARING AGREEMENT" shall have the meaning given to such term in
the Tax Matters Agreement.
"TECHNICAL SERVICES AGREEMENT" means the agreement relating to the
provision of uplink, engineering and other services identified therein by and
among Fox Sports Net, Inc. and each of the RSN Subsidiaries.
"TRANSACTIONS" means the transactions contemplated hereby and each of
the Ancillary Agreements, including the Exchange and the Parent Restructuring.
"TRANSFERRED EMPLOYEES" means the individuals listed on Section 1.1 of
the Parent Disclosure Letter (which section of the Disclosure Letter shall be
updated as of the Closing Date to reflect individuals hired following the date
hereof and prior to the Closing Date in compliance with Section 6.2 hereof,
PROVIDED, HOWEVER that any individual listed on Section 1.1.1(a) of the Parent
Disclosure Letter as of the Closing Date whose employment with any Transferred
Subsidiary terminates in the ordinary course of business following the date
hereof and prior to the Closing Date shall not be deemed to be a "Transferred
Employee").
"TRANSFERRED SUBSIDIARIES" means, collectively, Splitco and each RSN
Subsidiary.
"TRANSITIONAL SERVICES AGREEMENT" means the agreement relating to the
provision of corporate transitional services identified therein by and among Fox
Sports Net, Inc. and each of the RSN Subsidiaries.
"TREASURY REGULATIONS" mean the regulations promulgated under the
Code.
"WARN ACT" means the Worker Adjustment and Retraining Notification Act
and any similar state or local Law of any jurisdiction in the United States of
America.
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"WEBPAGE SERVICES AGREEMENT" means the agreement relating to the
provision of website management and other information technology services
identified therein by and among Fox Interactive Media, Inc. and each of the RSN
Subsidiaries.
Section 1.2. TERMS DEFINED IN OTHER SECTIONS. The following terms are
defined elsewhere in this Agreement in the following Sections:
Ancillary Agreements Recitals
Affiliate Transaction Section 4.21
Agreement Preamble
Broker Section 4.22
Broker Fees Section 4.22
Business Records Section 6.9.3
Closing Section 3.2
Closing Certificates Section 3.4.3
Closing Date Section 3.2
Collective Bargaining Agreement Section 4.14.1
Conclusive Net Working Capital Statement Section 3.9.3
Controlled Group Liability Section 4.12.2
Disinterested Stockholder Approval Section 6.4.1
Disputed Items Section 3.9.2
Employee Benefit Plan Section 4.12.1
Employment Agreement Section 4.12.1
ERISA Affiliate Section 4.12.2
Estimated Net Working Capital Section 3.8.1
Estimated Net Working Capital Deficiency Amount Section 3.8.2
Estimated Net Working Capital Excess Amount Section 3.8.2
Exchange Section 3.1
Exchange Rulings Section 7.2.4
Extended Termination Date Section 9.1.2
Extraordinary Transaction Section 6.13.2
FCC Applications Section 6.6.3
Final Net Working Capital Deficiency Amount Section 3.9.4
Final Net Working Capital Excess Amount Section 3.9.4
HSR Act Section 4.5.4
Indemnified Party Section 8.3.1
Indemnifying Party Section 8.3.1
L Acquisition Proposal Section 6.13.2
Licensed Intellectual Property Section 4.8.2
LMC Preamble
LMC Exchange Ruling Section 7.2.4
LMC Related Party Section 10.5
LMC Ruling Section 7.2.4
Material Contracts Section 4.13
Net Working Capital Statement Section 3.9.1
Neutral Arbitrator Section 3.9.3
Owned Intellectual Property Section 4.8.1
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Parent Preamble
Parent Acquisition Proposal Section 6.13.1
Parent Change in Recommendation Section 6.4.1
Parent Exchange Ruling Section 7.2.4
Parent Group Section 4.20.5
Parent Recommendation Section 6.4.1
Parent Restructuring Date Section 3.7
Parent Restructuring Ruling Section 7.3.5
Parent Stockholder Approval Section 4.4
Parent Stockholders' Meeting Section 6.5
Permits Section 4.16
Proxy Statement Section 6.4.1
Records Section 6.9.3
Representatives Section 6.13.1
Requisite Parent Stockholder Approval Section 6.4.1
Resolution Period Section 3.9.2
Seller Disability Plans Section 6.10.2
Settlement Section 6.6.5
Splitco Recitals
Subsidiary Employee Benefit Plan Section 4.12.1
Termination Date Section 9.1.2
Termination Fee Section 9.2.2
Transfer Section 6.8.1
Transferred Business Recitals
ARTICLE II.
INTERPRETATION
Section 2.1. INTERPRETATION. Unless otherwise indicated to the contrary in
this Agreement by the context or use thereof: (a) the words, "herein," "hereto,"
"hereof" and words of similar import refer to this Agreement as a whole and not
to any particular Section or paragraph hereof; (b) words importing the masculine
gender shall also include the feminine and neutral genders, and vice versa; (c)
words importing the singular shall also include the plural, and vice versa; and
(d) the word "including" means "including without limitation"; and (e) the words
"as of the date hereof" means "as of the date of this Agreement."
ARTICLE III.
EXCHANGE OF STOCK; CLOSING
Section 3.1. EXCHANGE OF STOCK. Upon the terms and subject to the
conditions of this Agreement, at the Closing, (a) Parent shall assign, transfer,
convey and deliver to the Stockholders (in accordance with instructions relating
to allocation of such shares provided by LMC to Parent no later than three (3)
Business Days prior to the Closing Date) and LMC shall cause the Stockholders to
accept and acquire from Parent, all of the Splitco Shares (free and clear
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of all Securities Encumbrances) in exchange for the LMC Parent Shares, and (b)
LMC shall cause the Stockholders to assign, transfer, convey and deliver to
Parent, and Parent shall accept and acquire from the Stockholders, the LMC
Parent Shares (free and clear of all Securities Encumbrances) in exchange for
the Splitco Shares (collectively, the "Exchange).
Section 3.2. CLOSING. The closing of the Exchange and the other
transactions contemplated hereby (the "Closing") shall take place at the offices
of Skadden, Arps, Slate, Meagher & Flom LLP, 4 Times Square, New York, New York,
as soon as practicable, but in no event later than three (3) Business Days after
the satisfaction or waiver of the conditions set forth in Article VII (excluding
conditions that, by their terms, cannot be satisfied until the Closing, but
subject to the satisfaction or waiver of such conditions at the Closing), or at
such other place or on such other date as Parent and LMC may mutually agree. The
date upon which the Closing shall be effective is referred to herein as the
"Closing Date."
Section 3.3. PARENT'S DELIVERIES AT THE CLOSING. At the Closing, Parent
shall deliver or cause to be delivered to LMC or the Stockholders, as
applicable, the following:
3.3.1 one or more stock certificates, together with stock powers executed
in blank, representing all of the issued and outstanding capital
stock of Splitco;
3.3.2 the stock books, stock ledgers and minute books of each of the
Transferred Subsidiaries;
3.3.3 each of the Ancillary Agreements (other than the Tax Matters
Agreement which shall be executed and delivered concurrently with
this Agreement) duly executed by Parent and any of its Affiliates
party thereto;
3.3.4 letters of resignation, dated as of the Closing Date, from (i) each
of the directors and officers of Splitco and each RSN Subsidiary
and (ii) each of K. Rupert Murdoch, David DeVoe and Peter Chernin
from the Board of Directors of DTV;
3.3.5 a certificate of an authorized officer of Parent pursuant to
Sections 7.2.1 and 7.2.2 hereof; and
3.3.6 such other documents as are reasonably required by LMC to be
delivered to effectuate the Transactions or to evidence the
authority, existence and good standing of Parent and its relevant
Subsidiaries, including evidence of the possession by Splitco of
the Cash Amount; PROVIDED that LMC shall use its reasonable best
efforts to identify such documents to Parent in writing reasonably
in advance of the anticipated Closing Date.
Section 3.4. LMC'S DELIVERIES AT THE CLOSING. At the Closing, LMC shall
deliver or cause to be delivered to Parent the following:
3.4.1 one or more stock certificates, together with stock powers executed
in blank, representing the LMC Parent Shares owned by the
Stockholders, or a confirmation from Parent's transfer agent,
Computershare Investor Services, LLC, of a book-entry transfer of
the LMC Parent Shares to Parent;
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3.4.2 each of the Ancillary Agreements to which LMC and any of its
Affiliates are party (other than the Tax Matters Agreement which
shall be executed and delivered concurrently with this Agreement)
duly executed by LMC and any of its Affiliates party thereto;
3.4.3 a certificate of an authorized officer of LMC pursuant to Sections
7.3.1 and 7.3.2 hereof (together with the certificate delivered
pursuant to Section 3.3.5 hereof, the "Closing Certificates"); and
3.4.4 such other documents as are reasonably required by Parent to be
delivered to effectuate the Transactions or to evidence the
authority, existence and good standing of LMC and its relevant
Subsidiaries; PROVIDED that Parent shall use its reasonable best
efforts to identify such documents to LMC in writing reasonably in
advance of the anticipated Closing Date.
Each document of transfer or assumption referred to in this Article III (or in
any related definition set forth in Article I) that is not attached as an
Exhibit to this Agreement or is not otherwise an Ancillary Agreement shall be in
customary form and shall be reasonably satisfactory in form and substance to the
parties hereto.
Section 3.5. PERFORMANCE.
3.5.1 LMC undertakes to Parent that to the extent that any Subsidiary of
LMC fails to comply with any of its obligations under this
Agreement and the Tax Matters Agreement when performance of such
obligation has become due, LMC shall either (i) procure that such
Subsidiary shall perform such obligation; or (ii) if such
Subsidiary fails to so perform or if the Parent so elects, itself
perform any such unperformed obligation.
3.5.2 Parent undertakes to LMC that to the extent that any Subsidiary of
Parent fails to comply with any of its obligations under this
Agreement, the Tax Matters Agreement, the DTV Non-Competition
Agreement or the RSN Non-Competition Agreement, when performance of
such obligation has become due, Parent shall either (i) procure
that such Subsidiary shall perform such obligation; or (ii) if such
Subsidiary fails to so perform or if LMC so elects, itself perform
any such unperformed obligation.
Section 3.6. ADJUSTMENT TO NUMBER AND TYPE OF SECURITIES.
3.6.1 If, after the date of this Agreement, there is a subdivision, share
split, consolidation, share dividend, combination, reclassification
or similar event with respect to the securities referred to in this
Agreement, then, in any such event, the numbers and types of such
securities (and if applicable, the share prices thereof) shall be
appropriately adjusted.
3.6.2 In the event that DTV pays any dividend or makes any distribution
(other than any periodic cash dividends paid or set aside in the
ordinary course), in each case on the DTV Shares, in cash, property
or other securities (other than any dividend
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or distribution for which appropriate adjustment is made in
accordance with Section 3.6.1 above) to holders of record prior to
the Closing Date, then upon payment of such dividend or the making
of such distributions, such cash, property or other securities will
(A) continue to be held by Parent and (B) be contributed (including
any dividend or distributions thereon and, in the case of cash,
interest thereon) to Splitco in connection with the Parent
Restructuring without the payment of any additional consideration.
Section 3.7. PARENT RESTRUCTURING AND RELATED MATTERS. Prior to the Closing
Date, Parent shall complete the Parent Restructuring such that after the Parent
Restructuring (the date on which the Parent Restructuring is complete, the
"Parent Restructuring Date"):
(a) Parent will be the sole shareholder of Splitco;
(b) Splitco will be the sole record and beneficial owner of (i) all of
the outstanding equity securities of each RSN Subsidiary and (ii) the DTV
Shares; and (iii) will hold directly the Cash Amount; and
(c) the RSN Subsidiaries will own, directly or indirectly, the
Transferred Business.
Section 3.8. ESTIMATED NET WORKING CAPITAL ADJUSTMENT.
3.8.1 For the purpose of determining the Cash Amount, two (2) Business
Days prior to the Closing Date, Parent shall cause to be prepared
and delivered to LMC a statement setting forth a good faith
estimate of the Net Working Capital (the "Estimated Net Working
Capital") and the components thereof as of the Closing Date,
together with a certificate from the principal financial officer of
Parent stating that the Estimated Net Working Capital has been
calculated in accordance with GAAP (excluding footnotes and normal
year-end adjustments) and in accordance with the methods,
principles and classifications used in preparing the Interim
Balance Sheet included in the Financial Statements.
3.8.2 If the Estimated Net Working Capital is a positive amount (the
"Estimated Net Working Capital Excess Amount"), the Cash Amount
shall be decreased by the Estimated Net Working Capital Excess
Amount. If the Estimated Net Working Capital is a negative amount
(the "Estimated Net Working Capital Deficiency Amount"), the Cash
Amount shall be increased by the Estimated Net Working Capital
Deficiency Amount. If the Estimated Net Working Capital is equal to
zero dollars ($0), no adjustment pursuant to this Section 3.8.2
shall be made to the Cash Amount.
Section 3.9. FINAL NET WORKING CAPITAL ADJUSTMENT.
3.9.1 Within forty-five (45) calendar days after the Closing Date, LMC
shall cause to be prepared and delivered to Parent a statement (the
"Net Working Capital Statement") setting forth the Net Working
Capital and the components thereof as of the Closing Date, together
with a certificate from the principal financial officer
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of LMC stating that the Estimated Net Working Capital has been
calculated in accordance with GAAP (excluding footnotes and normal
year-end adjustments) and in accordance with the methods,
principles and classifications used in preparing the Interim
Balance Sheet included in the Financial Statements. For purposes of
preparing such Net Working Capital Statement, no effect shall be
given to any new accounting pronouncements that may be issued
following the delivery of the statement pursuant to Section 3.8.1.
Following the delivery of such Net Working Capital Statement, LMC
shall provide Parent and any of Parent's Representatives (as
defined below) with access during normal business hours to (and to
examine and make copies of) all documents, records, work papers
(including those of accountants), facilities and personnel of the
Transferred Subsidiaries as is reasonably necessary for purposes of
reviewing the Net Working Capital Statement.
3.9.2 After receipt of the Net Working Capital Statement, Parent will
have thirty (30) calendar days to review the Net Working Capital
Statement. Unless Parent delivers written notice to LMC setting
forth the specific items disputed by Parent on or prior to the
thirtieth (30th) day after Parent's receipt of the Net Working
Capital Statement, Parent will be deemed to have accepted and
agreed to the Net Working Capital Statement and such statement (and
the calculations contained therein) will be final, binding and
conclusive. If Parent notifies LMC of its objections to the Net
Working Capital Statement (or specific calculations contained
therein) within such thirty (30) day period, Parent and LMC shall,
within thirty (30) days following delivery of such notice by Parent
to LMC (the "Resolution Period"), attempt in good faith to resolve
their differences with respect to the disputed items (or
calculations) specified in the notice (the "Disputed Items"), and
all other items (and all calculations relating thereto) will be
final, binding and conclusive. Any resolution by Parent and LMC
during the Resolution Period as to any Disputed Item shall be set
forth in writing and will be final, binding and conclusive.
3.9.3 If Parent and LMC do not resolve all Disputed Items by the end of
the Resolution Period, then all Disputed Items remaining in dispute
will be submitted to an independent accounting firm not retained by
Parent or LMC or such other United States national independent
accounting firm, in each case, mutually acceptable to Parent and
LMC (the "Neutral Arbitrator"). The Neutral Arbitrator, acting as
an expert and not as an arbitrator, shall determine only those
Disputed Items remaining in dispute, consistent with this Section
3.9.3, and shall request a statement from Parent and LMC regarding
such Disputed Items. In resolving each Disputed Item, the Neutral
Arbitrator (i) may not assign a value to any Disputed Item greater
than the greatest value for such Disputed Item claimed by any party
or less than the lowest value for such Disputed Item claimed by any
party and (ii) shall make its determination in accordance with the
methods, principles and classifications used in preparing the
Interim Balance Sheet included in the Financial Statements and in
accordance with GAAP (excluding footnotes and normal year-end
adjustments). All fees and expenses relating to the work, if any,
to be performed by the Neutral Arbitrator will be allocated between
19
Parent and LMC based upon the percentage which the portion of the
contested amount not awarded to each party hereto bears to the
amount actually contested by such party hereto. In addition, Parent
and LMC shall give the Neutral Arbitrator access to all documents,
records, work papers, facilities and personnel of such party and
its Subsidiaries as reasonably necessary to perform its function as
arbitrator. The Neutral Arbitrator will deliver to Parent and LMC a
written determination (such determination to include a work sheet
setting forth all material calculations used in arriving at such
determination and to be based solely on information provided to the
Neutral Arbitrator by Parent and LMC) of the Disputed Items
submitted to the Neutral Arbitrator within thirty (30) days of
receipt of such Disputed Items, which determination will be final,
binding and conclusive. The final, binding and conclusive Net
Working Capital Statement based either upon agreement or deemed
agreement by Parent and LMC or the written determination delivered
by the Neutral Arbitrator in accordance with this Section 3.9.3,
will be the "Conclusive Net Working Capital Statement." If any
party fails to submit a statement regarding any Disputed Item
submitted to the Neutral Arbitrator within the time determined by
the Neutral Arbitrator or otherwise fails to give the Neutral
Arbitrator access as reasonably requested, then the Neutral
Arbitrator shall render a decision based solely on the evidence
timely submitted and the access afforded to the Neutral Arbitrator
by Parent and LMC.
3.9.4 If the amount of Net Working Capital on the Conclusive Net Working
Capital Statement is less than the Estimated Net Working Capital
(the "Final Net Working Capital Deficiency Amount"), Parent shall
pay to Splitco an amount in cash equal to the Final Net Working
Capital Deficiency Amount. If the amount of Net Working Capital on
the Conclusive Net Working Capital Statement is greater than the
Estimated Net Working Capital (the "Final Net Working Capital
Excess Amount"), Splitco shall pay to Parent an amount in cash
equal to the Final Net Working Capital Excess Amount. If the amount
of Net Working Capital on the Conclusive Net Working Capital
Statement is equal to the Estimated Net Working Capital, no payment
shall be required.
3.9.5 All payments to be made pursuant to this Section 3.9 will (i) be
made by wire transfer of immediately available funds on the second
(2nd) Business Day following the date on which Parent and LMC agree
or are deemed to have agreed to, or the Neutral Arbitrator
delivers, the Conclusive Net Working Capital Statement, and (ii)
will bear interest from the Closing Date through the date of
payment at the prime rate of Citibank, N.A. in effect on the date
such payment was required to be made.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF PARENT
Except as set forth in the Parent Disclosure Letter delivered by
Parent to LMC prior to the execution of this Agreement, Parent hereby represents
and warrants to LMC as follows:
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Section 4.1. ORGANIZATION AND STANDING. Each of Parent and the Transferred
Subsidiaries is (a) a corporation, limited liability company or other legal
entity duly organized, validly existing and duly qualified or licensed and in
good standing under the Laws of the state or jurisdiction of its organization
with full corporate or other power, as the case may be, and authority to own,
lease, use and operate its properties and to conduct its business as currently
conducted, and (b) duly qualified or licensed to do business and, to the extent
applicable, in good standing in any other jurisdiction in which the nature of
the business conducted by it or the property it owns, leases, uses or operates
requires it to be so qualified, licensed or in good standing, except where the
failures to be so qualified, licensed or in good standing have not had a
Material Adverse Effect on the Transferred Business. Parent has made available
to LMC a complete and correct copy of the certificate of incorporation and
by-laws (or other comparable organizational documents) of each of the
Transferred Subsidiaries as in effect on the date hereof.
Section 4.2. CAPITALIZATION.
4.2.1 As of the Closing, Splitco's authorized capital stock will consist
of one thousand (1,000) shares of Splitco Common Stock (the
"Splitco Shares"). As of the date of this Agreement, Parent owns
indirectly, through wholly owned Subsidiaries of Parent, all of the
issued and outstanding shares of Splitco beneficially and of
record, free and clear of any Securities Encumbrances. Immediately
prior to the Closing, Parent shall own directly all of the issued
and outstanding shares of Splitco beneficially and of record, free
and clear of any Securities Encumbrances. There are no shares of
capital stock of Splitco issued or outstanding other than the
Splitco Shares. Parent has the sole, absolute and unrestricted
right, power and capacity to exchange, assign and transfer all of
the Splitco Shares to the Stockholders.
4.2.2 Parent, indirectly through one of its Subsidiaries, owns all of the
issued and outstanding equity interests of each of the RSN
Subsidiaries beneficially and of record, free and clear of any
Encumbrances. A Subsidiary of Parent has the sole, absolute and
unrestricted right, power and capacity to exchange, assign and
transfer all of the equity interests of each RSN Subsidiary to
Splitco.
4.2.3 The Splitco Shares are duly authorized, validly issued, fully paid
and nonassessable, and have not been issued in violation of any
preemptive or similar rights. Other than this Agreement, there are
no outstanding subscriptions, options, warrants, puts, calls,
agreements or other rights of any type or other securities (a)
requiring the issuance, sale, transfer, repurchase, redemption or
other acquisition of any shares of capital stock of Splitco or any
equity interests of any RSN Subsidiary, (b) restricting the
transfer of any shares of capital stock of Splitco or any equity
interests of any RSN Subsidiary, or (c) relating to the voting of
any shares of capital stock of Splitco or any equity interests of
any RSN Subsidiary. There are no issued or outstanding bonds,
debentures, notes or other indebtedness of Splitco or any RSN
Subsidiary having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote), upon the
happening of a certain event or otherwise, on any matters on which
the equity holders of Splitco or any RSN Subsidiary may vote.
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4.2.4 Neither Splitco nor any RSN Subsidiary is in default under or in
violation (and no event shall have occurred which, with notice or
the lapse of time or both, would constitute such a default or
violation) of any term, condition or provision of its certificate
of incorporation or bylaws except for any such defaults or
violations which would not materially delay or impair the
performance of this Agreement by Parent.
4.2.5 As of the date hereof, Parent or one of its Subsidiaries has good
and valid title to the Splitco Shares and all issued and
outstanding equity interests of each of the Transferred
Subsidiaries, free and clear of any and all Securities
Encumbrances. As of the Closing, Splitco will have good and valid
title to all shares of the RSN Subsidiaries, free and clear of any
and all Securities Encumbrances. Except as specified in this
Agreement, as of the Closing, Splitco shall not have entered into
any agreement, arrangement or understanding to purchase, capital
stock or other equity interests in any other Person. There exists
no Subsidiary of any RSN Subsidiary. No RSN Subsidiary owns any
equity interest of any Person.
4.2.6 Except as set forth in this Section 4.2, there are no outstanding
subscriptions, options, warrants, puts, calls, trusts (voting or
otherwise), rights (including conversion or preemptive rights and
rights of first refusal), exchangeable or convertible securities or
other commitments or agreements of any nature relating to the
capital stock or other securities or ownership interests of Splitco
(including any phantom shares, phantom equity interests, stock or
equity appreciation rights or similar rights) or obligating Splitco
or any of its Subsidiaries, at any time or upon the happening of
any event, to issue, transfer, deliver, sell repurchase, redeem or
otherwise acquire, or cause to be issued, transferred, delivered,
sold, repurchased, redeemed or otherwise acquired, any of its
capital stock or any phantom shares, phantom equity interests,
stock or equity appreciation rights or similar rights, or other
ownership interest of Splitco or obligating Splitco to grant,
extend or enter into any such subscription, option, warrant, put,
call, trust, right, exchangeable or convertible security,
commitment or agreement.
4.2.7 Immediately after the Closing, the Stockholders will have good
title to all of the Splitco Shares free and clear of all Securities
Encumbrances. As of the Closing, except for the Splitco Shares,
there shall be no outstanding (i) shares of capital stock or voting
securities of, or other ownership interests in, Splitco, (ii)
securities of Splitco or any of its Subsidiaries convertible into
or exchangeable for shares of capital stock or other voting
securities of, or ownership interests in, Splitco or (iii) options
or other rights to acquire from Splitco or any of its Subsidiaries,
or other obligations of Splitco or any of its Subsidiaries to
issue, any capital stock or other voting securities of, or other
ownership interests in, or any securities convertible into or
exercisable or exchangeable for any capital stock or other voting
securities of Splitco. As of the Closing, there will be no
outstanding obligations of any Transferred Subsidiary to
repurchase, redeem or otherwise acquire any such securities from
any other Person.
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Section 4.3. CORPORATE POWER AND AUTHORITY. Parent has all requisite
corporate power and authority to enter into and deliver this Agreement and to
consummate the Transactions. Each of Parent, Splitco and the other Subsidiaries
of Parent party thereto has all requisite corporate or similar power, as the
case may be, and authority to execute and deliver the Ancillary Agreements and
the other agreements, documents and instruments to be executed and delivered by
it in connection with this Agreement, including the Parent Tax Opinion
Representations, the Closing Certificates required by Sections 7.2.1 and 7.2.2,
or the Ancillary Agreements and to consummate the transactions contemplated
thereby. The execution, delivery and, subject to receipt of the Parent
Stockholder Approval, performance of this Agreement by Parent and the
consummation by Parent, Splitco and the other applicable Subsidiaries of Parent
of the Transactions, including the execution, delivery and performance of the
Ancillary Agreements and the other agreements, documents and instruments to be
executed and delivered in connection with this Agreement or the Ancillary
Agreements by Parent, Splitco and the other applicable Subsidiaries of Parent
and the consummation (other than the payment of any Termination Fee) of the
Transactions, have been duly authorized by all necessary action on the part of
Parent, Splitco and the other applicable Subsidiaries of Parent. Each of this
Agreement and the Tax Matters Agreement has been duly executed and delivered by
Parent and constitutes the legal, valid and binding obligation of Parent,
enforceable against Parent in accordance with its terms, except as may be
limited by applicable bankruptcy, insolvency, reorganization, moratorium or
other similar Laws now or hereafter in effect relating to or affecting
creditors' rights generally, including the effect of statutory and other Laws
regarding fraudulent conveyances and preferential transfers and subject to the
limitations imposed by general equitable principles (regardless of whether such
enforceability is considered in a proceeding at Law or in equity). When signed,
each of the Ancillary Agreements (other than the Tax Matters Agreement which is
the subject of the preceding sentence) and the other agreements, documents,
certificates (including the Parent Tax Opinion Representations) and instruments
to be executed and delivered by Parent, Splitco and each Subsidiary of Parent in
connection with this Agreement and the Transactions shall have been duly
executed and delivered by Parent, Splitco and the other Subsidiaries of Parent
party thereto and shall constitute the legal, valid and binding obligations of
Parent, Splitco and such other Subsidiaries of Parent, enforceable against each
such Person in accordance with their respective terms, except as may be limited
by applicable bankruptcy, insolvency, reorganization, moratorium or other
similar Laws now or hereafter in effect relating to or affecting creditors'
rights generally, including the effect of statutory and other Laws regarding
fraudulent conveyances and preferential transfers and subject to the limitations
imposed by general equitable principles (regardless of whether such
enforceability is considered in a proceeding at Law or in equity).
Section 4.4. SHAREHOLDER VOTES REQUIRED. At the Parent Stockholders'
Meeting (as defined in Section 6.5), the affirmative vote of a majority of the
votes cast in person or by proxy by holders of Parent Class B Shares other than
LMC, the Stockholders and any of their respective Associates (the "PARENT
STOCKHOLDER APPROVAL"), in accordance with Chapter 10.1 of the ASX Listing Rules
is the only vote of the holders of any class or series of capital stock of
Parent or any of its Subsidiaries required by any applicable Law to approve the
Exchange. Other than the Parent Stockholder Approval, no vote or other action of
the stockholders of Parent is required by Law, the organizational documents of
Parent, the ASX Listing Rules, the rules and regulations of the New York Stock
Exchange or otherwise in order for Parent to consummate the Transactions. The
Board of Directors of Parent, by vote at a meeting duly called and held, has
23
approved this Agreement, determined that the Exchange is fair to and in the best
interests of Parent's stockholders and has adopted resolutions recommending
approval of the Exchange by the stockholders of Parent. The Murdoch Interests
have agreed with Parent and LMC to be present, in person or by proxy, at the
Parent Stockholder Meeting and to vote all shares of Parent Class B Stock
beneficially owned by them at the Parent Stockholder Meeting (or any adjournment
thereof) in favor of the approval of the Exchange; provided that the foregoing
shall be deemed not to have been violated if the shares held by the Murdoch
Interests shall have been disregarded for purposes of the Parent Shareholder
Approval under the ASX listing rules.
Section 4.5. CONFLICTS; CONSENTS AND APPROVALS. Except as set forth in
Section 4.5 of the Parent Disclosure Letter, neither the execution, delivery and
performance by Parent of this Agreement, nor the execution, delivery and
performance by Parent, the Transferred Subsidiaries and the other Subsidiaries
of Parent party thereto of the Ancillary Agreements and the other agreements,
documents and instruments to be executed and delivered by each of them in
connection with this Agreement and the Ancillary Agreements, will:
4.5.1 conflict with, or result in a breach of any provision of, the
organizational documents of Parent, any Transferred Subsidiary any
applicable Parent Subsidiary;
4.5.2 violate, or conflict with, or result in a breach of any provision
of, or constitute a change of control or default (or an event that,
with the giving of notice, the passage of time or otherwise, would
constitute a default) under, or require any action, consent, waiver
or approval of any third party or entitle any Person (with the
giving of notice, the passage of time or otherwise) to terminate,
accelerate, modify or call a default under, or give rise to any
obligation to make a payment under, or to any increased, additional
or guaranteed rights of any Person under, or result in the creation
of any Encumbrance upon any of the properties or assets of any
Transferred Subsidiary or under any of the terms, conditions or
provisions of any material Contract to which Parent or any
Transferred Subsidiary is a party or pursuant to which any of their
respective properties or assets are bound, except for any such
conflicts, violations, breaches, defaults or occurrences which
would not prevent or materially delay the performance of this
Agreement by Parent;
4.5.3 assuming the approvals required under Section 4.5.4 are obtained,
violate any order, writ, or injunction, or any decree, or any
material Law applicable to Parent or any Transferred Subsidiary, or
any of their respective properties or assets; or
4.5.4 require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Authority, except
for (i) (A) applicable requirements of the Exchange Act, the
Securities Act, and state securities or "blue sky" Laws, (B) the
pre-merger notification requirements of the Hart- Scott-Rodino
Antitrust Improvements Act of 1976, as amended, and the rules and
regulations thereunder (the "HSR Act"), and (C) approval of the
Transactions under the Communications Act and (ii) where the
failure to obtain such consents, approvals, authorizations or
permits, or to make such filings or notifications
24
would not prevent or materially delay the performance of this
Agreement by Parent.
Section 4.6. OPERATIONS OF THE TRANSFERRED BUSINESS. Except as set forth in
Section 4.6 of the Parent Disclosure Letter, since October 1, 2006 and through
the date of this Agreement, the Transferred Business has been conducted in the
ordinary course of business consistent with past practice and there has not been
since such date the occurrence of any fact, event or circumstance described in
Sections 6.2.8, 6.2.9, 6.2.12 - 6.2.17 (assuming that the period referred to
therein is effective beginning October 1, 2006).
Section 4.7. COMPLIANCE WITH LAW. The Transferred Business is currently
being conducted, and since January 1, 2004, has been conducted, in compliance
with all material Laws applicable to the Transferred Business or the Transferred
Employees. Since January 1, 2004 and prior to the date of this Agreement, none
of Parent, Splitco or any of the RSN Subsidiaries has received any material
notice from any Governmental Authority that the Transferred Business has been or
is being conducted in violation of any applicable material Law or that an
investigation or inquiry into any noncompliance with any applicable material Law
is ongoing, pending or, to the Knowledge of Parent, threatened. This Section 4.7
does not relate to matters with respect to Taxes, which are the subject of
Section 4.20 or the Tax Matters Agreement, as the case may be, to Environmental
Matters, which are the subject of Section 4.10, to Employee Benefits Plan
matters, which are the subject of Section 4.12 or to Labor and Employment
Matters, which are the subject of Section 4.14.
Section 4.8. INTELLECTUAL PROPERTY.
4.8.1 Section 4.8.1 of the Parent Disclosure Letter sets forth a list of
all patents, patent applications, registered trademarks, material
unregistered trademarks, registered copyrights and Internet domain
name registrations that are, as of the date of this Agreement,
owned by the RSN Subsidiaries (the "Owned Intellectual Property").
The RSN Subsidiaries own the Owned Intellectual Property, free and
clear of all Encumbrances and have the exclusive right to use and
sublicense, without payment to any other Person, all of the Owned
Intellectual Property. As of the date hereof, no license relating
to any of the Owned Intellectual Property has been granted, except
as provided in the Ancillary Agreements, and except for Customer
Agreements entered into in the ordinary course of business.
4.8.2 Section 4.8.2 of the Parent Disclosure Letter sets forth a list
that includes all material Intellectual Property that is held for
use under license by the RSN Subsidiaries as of the date hereof
(the "Licensed Intellectual Property"). As of the date hereof,
neither Parent nor the RSN Subsidiaries have given or received any
notice of material default or of any event which with the lapse of
time would constitute a material default under any material
agreement relating to the Licensed Intellectual Property; neither
Parent nor the Transferred Subsidiaries, nor, to Parent's
Knowledge, any other Person, currently is in material default under
any such agreement.
25
4.8.3 To Parent's Knowledge, as of the date hereof, no third party is
infringing in any material respect a proprietary right in any Owned
Intellectual Property. To Parent's Knowledge, the use of any Owned
Intellectual Property or Licensed Intellectual Property in
connection with the Transferred Business as currently conducted
does not materially infringe upon, misappropriate, violate or
conflict in any way with any material Intellectual Property rights
of any Person.
4.8.4 There is no pending or, to Parent's Knowledge, threatened material
claim (i) challenging the validity or enforceability of, or
contesting the Parent's or the Transferred Subsidiaries' right to
make, sell, offer to sell, and/or use any of the Owned Intellectual
Property or Licensed Intellectual Property; (ii) challenging the
validity or enforceability of any agreement relating to the Owned
Intellectual Property or Licensed Intellectual Property; or (iii)
asserting that the manufacture, sale, offer of sale, and/or use of
any Owned Intellectual Property or Licensed Intellectual Property
infringes upon, misappropriates, violates or conflicts in any way
with the Intellectual Property rights of any Person.
4.8.5 The making, using, selling, offering to sell, or other
implementation of any apparatus, systems, processes, methods, or
other technologies (and/or combination thereof) used in or
necessary for operation and conducting of the Transferred Business
as currently conducted do not infringe upon, misappropriate,
violate, or conflict in any way with the material Intellectual
Property rights of any Person.
Section 4.9. ABSENCE OF SPLITCO OPERATIONS; SPLITCO ASSETS AND LIABILITIES.
Splitco has conducted no activities other than in connection with the execution
and delivery of the Ancillary Agreements to which it is or will be a party. As
of the Closing, the assets of Splitco will consist solely of (i) all issued and
outstanding equity interests of each RSN Subsidiary, (ii) the DTV Shares and
(iii) the Cash Amount (collectively, the "Splitco Assets"). As of the Closing,
the Transferred Subsidiaries will have no Liabilities other than Liabilities
arising as a result of its ownership of the Splitco Assets and any Liabilities
set forth in Section 4.9(a) of the Parent Disclosure Letter. Except as set forth
in Section 4.9(b) of the Parent Disclosure Letter, the assets of the RSN
Subsidiaries, along with the rights of Splitco and the RSN Subsidiaries under
the Ancillary Agreements, are sufficient to permit the RSN Subsidiaries to
conduct immediately following the Closing the Transferred Business in all
material respects in the manner as the Transferred Business was being conducted
as of the date hereof.
Section 4.10. ENVIRONMENTAL MATTERS.
4.10.1 The Transferred Business is currently being conducted in compliance
in all material respects with, and, since January 1, 2004 has been
conducted in compliance in all material respects with, all
applicable Environmental Laws.
4.10.2 Except as would not reasonably be expected to form the basis of any
material Environmental Claim against the Transferred Business,
since January 1, 2004, the Transferred Business has not disposed
of, Released, transported, stored, or arranged for the disposal of
any Hazardous Materials to, at or upon: (i) any
26
location other than a site lawfully permitted to receive such
Hazardous Materials; (ii) any premises currently or formerly owned
or leased by any of the RSN Subsidiaries, except for the use of
household cleaners and office products in the ordinary course of
business in compliance with applicable Environmental Laws; or (iii)
any site which has been placed on the National Priorities List,
CERCLIS or their state equivalents;
4.10.3 Since January 1, 2004, the operations of the Transferred Business
have not resulted in any Release of Hazardous Materials at or from
any Leased Real Property that requires Cleanup that has not been
completed to the satisfaction of the relevant Governmental
Authority or would reasonably be expected to form the basis of any
material Environmental Claim against the Transferred Business;
4.10.4 The Transferred Business is not subject to, and, since January 1,
2004, none of the RSN Subsidiaries has received written notice of,
any existing, pending, or, to the Knowledge of Parent, threatened
material Action, by any Person under any Environmental Laws or
involving the presence, Release or threatened Release of any
Hazardous Material at any location currently or formerly owned or
operated as part of the Transferred Business.
Section 4.11. LITIGATION.
4.11.1 Other than Actions of the type contemplated by Section 4.11.2 and
judgments, decrees, written agreements, memoranda of understanding
or orders of Governmental Authorities of the type contemplated by
Section 4.11.3, (i) as of the date hereof, there are no Actions
pending or, to the Knowledge of Parent, threatened against any of
the Transferred Subsidiaries, by or before any Governmental
Authority, (ii) there are no material Actions pending, or to the
Knowledge of Parent, threatened against any of the Transferred
Subsidiaries, by or before any Governmental Authority, (iii) as of
the date hereof, there is no judgment, decree, injunction, ruling
or order of any Governmental Authority outstanding against any
Transferred Subsidiary and (iv) there is no material judgment,
decree, injunction, ruling or order of any Governmental Authority
outstanding against any Transferred Subsidiary.
4.11.2 As of the execution of this Agreement, there is no Action pending
or, to Parent's Knowledge, threatened against Parent or any of its
Affiliates that seeks, or would reasonably be expected, to prohibit
or restrain the ability of Parent or any of its Affiliates to enter
into this Agreement or any of the Ancillary Agreements to which it
is a party or to timely consummate the Transactions.
4.11.3 As of the execution of this Agreement, there are no material
judgments, decrees, written agreements, memoranda of understanding
or orders of any Governmental Authority outstanding against Parent
or any of its Affiliates which would reasonably be expected to
prevent, prohibit, materially delay or enjoin the consummation of
the Transactions.
27
Section 4.12. EMPLOYEE BENEFIT PLANS.
4.12.1 Section 4.12.1 of the Parent Disclosure Letter sets forth, as of
the date of this Agreement, a list of all material "employee
pension benefit plans" (as defined in Section 3(2) of ERISA),
"employee welfare benefit plans" (as defined in Section 3(1) of
ERISA), and deferred compensation, bonus, retention bonus,
incentive, severance, stock bonus, stock option, restricted stock,
stock appreciation right, stock purchase, holiday pay, and vacation
pay plans, and any other employee benefit plan, program, policy or
arrangement covering Transferred Employees as of the date hereof,
that are currently either maintained by or contributed to by Parent
or any of its Subsidiaries or to which Parent or any of its
Subsidiaries is obligated to make payments or otherwise have any
liability (collectively, the "Employee Benefit Plans"), and each
employment, severance, retention, consulting or similar agreement
currently in effect that has been entered into by Parent, any
Transferred Subsidiary or any of their respective Affiliates, on
the one hand, and any Transferred Employee, on the other hand
(collectively, the "Employment Agreements"). Each Employee Benefit
Plan which provides, as of the date of hereof, benefits solely with
respect to the Transferred Employees and no other active employees
of Parent or any other Subsidiary is separately identified on
Section 4.12.1 of the Parent Disclosure Letter (collectively, the
"Subsidiary Employee Benefit Plans"). Summaries of all Employee
Benefit Plans (except for plans contributed to pursuant to a
Collective Bargaining Agreement set forth on Section 4.12.1 of the
Parent Disclosure Letter), copies of all such written Subsidiary
Employee Benefit Plans and Employment Agreements and written
summaries of all unwritten Subsidiary Employee Benefit Plans have
been made available to LMC.
4.12.2 No Controlled Group Liability has been incurred by any Transferred
Subsidiary or any trade or business that together with any
Transferred Subsidiary would be deemed a "single employer," within
the meaning of section 4001(b) of ERISA (an "ERISA Affiliate"), no
condition exists that presents a material risk to any Transferred
Subsidiary or any ERISA Affiliate of incurring any Controlled Group
Liability, and no Controlled Group Liability would reasonably be
expected to be incurred by the Transferred Subsidiaries following
the Closing by reason of such Transferred Subsidiaries having been
an ERISA Affiliate of Parent (or of any other ERISA Affiliate of
Parent) prior to the Closing. For purposes of this Agreement,
"Controlled Group Liability" means any and all liabilities (i)
under Title IV of ERISA, other than for payment of premiums to the
Pension Benefit Guaranty Corporation (which premiums have been paid
when due), (ii) under Section 302 or 4068(a) of ERISA, (iii) under
Sections 412(n) or 4971 of the Code and (iv) for violation of the
continuation coverage requirements of Section 601 et seq. of ERISA
and Section 4980B of the Code or the group health requirements of
Sections 9801 et seq. of the Code and Sections 701 et seq. of
ERISA. The consummation of the Transactions will not result in the
occurrence of any reportable event within the meaning of Section
4043(c) of ERISA with respect to any pension plan maintained by
Parent or an ERISA Affiliate. None of the
28
Subsidiary Employee Benefit Plans is subject to Title IV of ERISA
or Section 412 of the Code.
4.12.3 No Transferred Subsidiary has any liability, fixed or contingent,
with respect to a Multiemployer Plan.
4.12.4 Each Employee Benefit Plan has been operated and administered in
all material respects in accordance with its terms and applicable
law, including but not limited to ERISA and the Code. As of the
date hereof, there are no actions, suits or claims pending (other
than routine claims for benefits) or, to the Knowledge of Parent,
threatened against, or with respect to, any of the Employee Benefit
Plans or their assets. There are no material actions, suits or
claims pending (other than routine claims for benefits) or, to the
Knowledge of Parent, threatened against, or with respect to, any of
the Employee Benefit Plans or their assets. There have been no
"prohibited transactions" (as described in Section 406 of ERISA or
Section 4975 of the Code) with respect to any of the Employee
Benefit Plans. Other than routine filings, there is no matter
pending or audit in progress with respect to any of the Employee
Benefit Plans before or by any Governmental Authority.
4.12.5 Each Employee Benefit Plan intended to be qualified, within the
meaning of Section 401(a) of the Code, has received a favorable
determination letter regarding the Employee Benefit Plan's
qualification from the IRS with respect to all amendments required
by applicable law (or such plan has been submitted to the IRS for a
determination as to its qualification within the applicable
remedial amendment period).
4.12.6 The execution and delivery of this Agreement and the consummation
of the Transactions will not (except as otherwise provided in this
Agreement) (A) require any Transferred Subsidiary to make a larger
contribution to, or pay greater benefits or provide other rights
under, any Employee Benefit Plan, any Employment Agreement or any
other employee benefit plan or arrangement than it otherwise would,
whether or not some other subsequent action or event would be
required to cause such payment or provision to be triggered or (B)
create, give rise to or accelerate any additional benefits, vested
rights or service credits under any Employee Benefit Plan,
Employment Agreement or any other employee benefit plan or
arrangement. In connection with the consummation of the
Transactions, no payment of money or other property, acceleration
of benefits or provision of other rights has been made under this
Agreement, any Employee Benefit Plan or otherwise that would be
nondeductible for income Tax purposes by Splitco or the Transferred
Subsidiaries by virtue Section 280G of the Code.
4.12.7 No Subsidiary Employee Benefit Plan provides post employment
medical, disability, life insurance benefits or other welfare
benefits, except as required by Section 4980B of the Code or Part 6
of Title I of ERISA and at no expense to any Transferred
Subsidiary.
29
4.12.8 Except as disclosed on Section 4.12.8 of the Parent Disclosure
Schedule, no Subsidiary Employee Benefit Plan, Employment Agreement
or payment or benefit provided pursuant to any Subsidiary Employee
Benefit Plan, Employment Agreement or other contract, agreement or
benefit arrangement covering any "service provider" (within the
meaning of Section 409A of the Code), including the grant, vesting
or exercise of any option or appreciation right, will or may
provide for the deferral of compensation subject to Section 409A of
the Code, whether pursuant to the execution and delivery of this
Agreement or the consummation of the transactions contemplated
hereby (either alone or upon the occurrence of any additional or
subsequent events) or otherwise. Each Subsidiary Employee Benefit
Plan that is a nonqualified deferred compensation plan subject to
Section 409A of the Code has been operated and administered in good
faith compliance with Section 409A of the Code from the period
beginning January 1, 2005 through the date hereof.
Section 4.13. CONTRACTS. Section 4.13 of the Parent Disclosure Letter
contains a complete list, as of the date hereof, of all Contracts (together with
each material amendment, modification, change or waiver thereto) by and between
any Transferred Subsidiary and one or more third parties (other than this
Agreement or the Ancillary Agreements), pursuant to which any Transferred
Subsidiary is obligated or liable or is entitled to any rights or benefits or
pursuant to which any Transferred Subsidiary or any of its properties or assets
is subject, in each case, which fall within any of the following categories
(such Contracts as are required to be set forth in Section 4.13 of the Parent
Disclosure Letter, the "Material Contracts"):
(a) each advertising and sponsorship Contract pursuant to which
payment of more than $100,000 annually is required to be paid to any Transferred
Subsidiary;
(b) each Contract providing for the sale, lease or other disposition
of a material portion of the assets of any Transferred Subsidiary other than in
the ordinary course of business;
(c) each material Contract relating to the production or licensing of
any programming for any Network;
(d) each affiliation, distribution, carriage or similar agreement
between any Transferred Subsidiary (or under which any Transferred Subsidiary is
bound or is liable or pursuant to which any Transferred Subsidiary or any of its
properties or assets is subject) and any of its affiliates, distributors,
carriers, over-the-air broadcast operators and multichannel video programming
distributors, in which such affiliate, distributor, carrier or operator accounts
for at least 50,000 subscribers to a Network operated by such Transferred
Subsidiary as of July 31, 2006;
(e) each material definitive rights agreement relating to the telecast
of professional, collegiate conference, university or high school sports teams
or any sports related tournaments or events on any Network;
30
(f) each Contract pursuant to which any Transferred Subsidiary is
obligated (or assuming performance of any Contract in effect at the date hereof,
would be obligated) to any Person for payments in respect of capital
expenditures in excess of $1,000,000;
(g) each currently effective joint venture or partnership or similar
agreement and each Contract providing for the formation of a joint venture,
limited liability company, long-term alliance or partnership or involving an
equity investment;
(h) each currently effective Contract (including any Employment
Agreements) which (A) materially restricts the ability of any Transferred
Subsidiary or any of its Affiliates or the Transferred Business to engage in any
business activity in any geographic area or line of business following the
Closing or (B) materially restricts the ability of any Transferred Subsidiary or
any of its Affiliates or the Transferred Business to compete with any Person
following the Closing;
(i) each Contract (or group of related Contracts) under which there
has been created, incurred, assumed, or guaranteed any Indebtedness, or that
relates to the lending or advancing of amounts or investment in any other
Person, in each case, in excess of $100,000, or providing for the creation of
any Encumbrance securing an obligation likely to exceed $100,000 upon any asset
of any Transferred Subsidiary;
(j) each lease, sublease or similar agreement relating to tangible
personal property used or held for use in the Transferred Business, for an
annual rent in excess of $100,000, or agreement regarding the purchase of real
property;
(k) each currently effective material Real Property Lease;
(l) any currently effective Contract concerning the marketing or
distribution by third parties of any products or services of the Transferred
Business (including any Contract requiring the payment of any sales or marketing
or distribution commissions or granting to any Person rights to market,
distribute or sell such products or services) involving sales of products of
more than $100,000 annually;
(m) any other currently effective Contract which was entered into
other than in the ordinary course of business involving payments to or from
third parties in excess of $500,000 over the remaining term of such Contract;
and
(n) each satellite and transponder agreement to which any Transferred
Subsidiary is a party or pursuant to which any Transferred Subsidiary or under
which any Transferred Subsidiary is bound or is liable or pursuant to which any
Transferred Subsidiary or any of its properties or assets is subject.
Parent has made available to LMC or its Representatives (as defined below)
correct and complete copies of all such Material Contracts (other than such
Material Contracts referenced in Section 4.13(n) pursuant to which the
Transferred Subsidiaries shall have no liabilities or obligations of any kind
after Closing other than pursuant to the Technical Services Agreement) with all
amendments thereto. Each such Material Contract is valid, binding and
enforceable against a Transferred Subsidiary and the other parties thereto in
accordance with its terms and is
31
in full force and effect, subject to expiration in accordance with its terms.
Except as set forth in Section 4.13 of the Parent Disclosure Letter, none of the
Transferred Subsidiaries is in material default under or in material breach of
any such Material Contract, and no event has occurred that, with notice or lapse
of time, or both, would constitute such a material default. Except as set forth
in Section 4.13 of the Parent Disclosure Letter, each of the other parties to
the Material Contracts has performed in all material respects all of the
obligations required to be performed by it under, and is not in material default
under, any such Material Contract, and to the Knowledge of Parent, no event has
occurred that, with notice or lapse of time, or both, would constitute such a
material default.
Section 4.14. LABOR MATTERS.
4.14.1 Except as set forth in the Parent Disclosure Letter, as of the date
hereof, there are no collective bargaining agreements, union
contracts or similar agreements or arrangements in effect that
cover any Transferred Employee (each, a "Collective Bargaining
Agreement"). With respect to the Transferred Business, (a) there is
no material labor strike, dispute, slowdown, lockout or stoppage
pending or, to the Knowledge of Parent, threatened, and no
Transferred Subsidiary has experienced any labor strike, dispute,
slowdown, lockout or stoppage relating to the Transferred Business
or any Transferred Employee since January 1, 2004; (b) there is no
material unfair labor practice charge or complaint pending or, to
Parent's Knowledge, threatened before the National Labor Relations
Board or before any similar state or foreign agency; (c) there is
no material grievance or arbitration arising out of any Collective
Bargaining Agreement or other grievance procedure; (d) no material
charges are pending before the Equal Employment Opportunity
Commission or any other agency responsible for the prevention of
unlawful employment practices; and (e) Parent, Splitco and the
Transferred Subsidiaries have complied in all material respects
with all laws relating to the employment of labor, including
provisions thereof relating to wages, hours, equal opportunity,
collective bargaining, affirmative action, occupational safety and
health, immigration and the withholding and payment of social
security and other taxes, and no claim to the contrary has been
made by any employee or Governmental Authority.
4.14.2 Neither Parent nor any of its Affiliates has effected any of the
following with respect to any Transferred Employee: (a) a "plant
closing" (as defined in the WARN Act) affecting any site of
employment or one or more facilities or operating units within any
site of employment or facility; or (b) a "mass layoff" (as defined
in the WARN Act) affecting any site of employment or facility. None
of the Transactions or any of the actions taken by Parent or its
Affiliates in preparation for the Closing have or will result in
plant closing or mass layoff under the WARN Act.
Section 4.15. RSN SUBSIDIARIES FINANCIAL STATEMENTS.
4.15.1 Attached as Section 4.15.1 of the Parent Disclosure Letter are the
unaudited consolidated interim balance sheet (with respect to each
RSN Subsidiary, the
32
"INTERIM BALANCE SHEET") of each RSN Subsidiary as of October 1,
2006 (the "INTERIM BALANCE SHEET DATE"), and the unaudited
consolidated statements of operations and partners' deficit and
cash flows for each RSN Subsidiary for the fiscal year ended July
2, 2006 (such unaudited consolidated financial statements,
collectively, the "FINANCIAL STATEMENTS"). Except as provided in
Section 4.15.1 of the Parent Disclosure Letter, the Financial
Statements (i) conform to the books and records of the RSN
Subsidiaries in all material respects, (ii) present fairly in all
material respects the financial position of the RSN Subsidiaries as
of the dates indicated and the results of operations and partners'
deficit and cash flows for the respective periods indicated, and
(iii) were prepared in accordance with GAAP, consistently applied;
PROVIDED that each Interim Balance Sheet is subject to normal,
recurring year-end audit adjustments (none of which are material,
individually or in the aggregate, to Parent's Knowledge).
4.15.2 From the Interim Balance Sheet Date to the date hereof, except as
set forth on Section 4.15.2 of the Parent Disclosure Letter, (i)
the business of the RSN Subsidiaries has been conducted in the
ordinary course of business consistent with past practices, (ii)
there has not been any event, circumstance, change or effect that
has had or could reasonably be expected to have, individually or in
the aggregate, Material Adverse Effect on the Transferred Business,
(iii) no RSN Subsidiary has redeemed any ownership interests in any
RSN Subsidiary, (iv) no RSN Subsidiary has waived, released,
compromised or settled any right or claim of substantial value to
such RSN Subsidiary or any other Person and (v) no RSN Subsidiary
has engaged in any transaction or taken any other action except in
the ordinary course of business consistent with past practices. No
RSN Subsidiary has engaged in any activity other than the operation
of the Networks.
4.15.3 There are no Liabilities of the RSN Subsidiaries, and there is no
existing condition, situation or set of circumstances that could
reasonably be expected to result in such a Liability, other than:
(i) Liabilities disclosed or provided for in the Interim Balance
Sheet or in the notes to the Financial Statements; (ii) the
Liabilities set forth on Section 4.15.3 of the Parent Disclosure
Letter; and (iii) Liabilities incurred in the ordinary course of
business consistent with past practice since the Interim Balance
Sheet Date that have not had and could not reasonably be expected
to have, individually or in the aggregate, a Material Adverse
Effect on the Transferred Business.
4.15.4 Except as set forth in Section 4.15.4 of the Parent Disclosure
Letter, each RSN Subsidiary is, and since the Interim Balance Sheet
Date has been, in compliance with and, as of the date hereof, to
the Knowledge of Parent is not under investigation with respect to
and has not been threatened to be charged with or given any notice
of any violation of, any applicable Law.
Section 4.16. PERMITS. The RSN Subsidiaries are in possession of, all
franchises, grants, authorizations, licenses, permits, easements, variances,
exemptions, consents, certificates, approvals and orders necessary to own, lease
and operate the Transferred Business as it is being operated as of the date
hereof, other than such franchises, grants, authorizations, licenses,
33
permits, easements, variances, exemptions, consents, certificates, approvals and
orders which the failure to hold would not adversely affect the ability of the
RSN Subsidiaries to conduct the Transferred Business in all material respects as
it is currently conducted by the RSN Subsidiaries (collectively, the "PERMITS").
As of the date hereof, there are no Business FCC Licenses. Except as set forth
in Section 4.16 of the Parent Disclosure Letter (a) (i) as of the date hereof,
there is no Action pending, or, to the Knowledge of Parent, threatened,
regarding any of the Permits and (ii) there is no material Action pending, or to
the Knowledge of Parent, threatened regarding any of the Permits and (b) each
such Permit is in full force and effect. The RSN Subsidiaries do not possess any
Business FCC Licenses.
Section 4.17. REAL ESTATE.
4.17.1 None of the Transferred Subsidiaries owns or has owned any real
property.
4.17.2 As of the date hereof, the RSN Subsidiaries have good and valid
leasehold interests in all Leased Real Property except for any such
Leased Real Property which is no longer used or useful in the
conduct of the Transferred Business.
4.17.3 Each of the RSN Subsidiaries has complied in all material respects
with the terms of all Real Property Leases to which it is a party
and under which it is in occupancy, and all such Real Property
Leases and deeds are in full force and effect. Section 4.17.3 of
the Parent Disclosure Letter sets forth a complete list, as of the
date hereof, of all leases pursuant to which parcels of the Leased
Real Property are held. The RSN Subsidiaries enjoy peaceful and
undisturbed possession under all such leases and there are no
existing material defaults beyond any applicable grace periods
under such leases.
Section 4.18. GUARANTEES. Except to the extent contemplated by this
Agreement or as set forth in Section 4.18 of the Parent Disclosure Letter, none
of the Transferred Subsidiaries is directly or indirectly (a) liable, by
guarantee or otherwise, upon or with respect to or (b) obligated to provide
funds with respect to, or to guarantee or assume, any Indebtedness or other
Liability of any other Person.
Section 4.19. TITLE TO DTV SHARES. As of the date hereof, FEG is the sole
record owner and has good and valid title to the DTV Shares, free and clear of
any and all Securities Encumbrances. As of the Closing, Splitco will be the sole
record beneficial owner of, and will have good and valid title to the DTV
Shares, free and clear of any and all Securities Encumbrances. The DTV Shares
are duly authorized, validly issued, fully paid and nonassessable, and have not
been issued in violation of any preemptive or similar rights. The DTV Shares
constitute all shares of common stock of DTV beneficially owned by Parent.
Section 4.20. CERTAIN TAX MATTERS.
4.20.1 FILING AND PAYMENT. (i) All material Tax Returns required to be
filed with any Taxing Authority by or on behalf of the Transferred
Subsidiaries or otherwise with respect to the Transferred Business
have been filed when due (taking into account any extension of time
within which to file) in accordance with all applicable Laws; (ii)
all such Tax Returns are accurate and complete in all
34
material respects and have been prepared in substantial compliance
with all applicable Laws; (iii) all material Taxes due and payable
by the Transferred Subsidiaries or with respect to the Transferred
Business have been timely paid, or withheld and remitted to the
appropriate Taxing Authority; (iv) no written claim has been made
by any Taxing Authority in a jurisdiction where any of the
Transferred Subsidiaries does not file a Tax Return that it is, or
may be, subject to Tax by that jurisdiction; and (v) there are no
Encumbrances on any of the assets of any of the Transferred
Subsidiaries that arose in connection with any failure (or alleged
failure) to pay any Tax (except for Encumbrances that arise by
operation of Law for Taxes not yet due and payable).
4.20.2 WITHHOLDING. Each of the Transferred Subsidiaries has complied with
all applicable Laws relating to the payment and withholding of any
material amount of Taxes and have, within the time and the manner
prescribed by applicable Law, withheld from and paid over to the
proper Taxing Authorities all material amounts required to be so
withheld and paid over under all applicable Laws.
4.20.3 PROCEEDINGS AND COMPLIANCE. (i) No outstanding written claim has
been received, and no audit, action, suit or proceeding is in
progress, against or with respect to any of the Transferred
Subsidiaries in respect of any material Tax; and (ii) all material
deficiencies, assessments or proposed adjustments asserted against
any of the Transferred Subsidiaries by any Taxing Authority have
been paid or fully and finally settled.
4.20.4 AVAILABILITY OF TAX RETURNS. Parent has furnished or made available
to LMC complete and accurate copies of all portions of United
States federal income Tax Returns and material state income Tax
Returns relating to the Transferred Subsidiaries, and including, in
each case, any amendments thereto, filed by or on behalf of any
such Transferred Subsidiaries for all taxable periods beginning
after December 31, 2000.
4.20.5 CONSOLIDATION AND SIMILAR ARRANGEMENTS; TAX SHARING AGREEMENTS.
None of the Transferred Subsidiaries (i) is or has been a member of
an affiliated group (within the meaning of Section 1504 of the
Code) filing a consolidated federal income Tax Return, other than
an affiliated group the common parent of which is or was Parent (a
"Parent Group"), (ii) is or has been a member of any affiliated,
combined, consolidated, unitary or similar group for state, local
or foreign Tax purposes other than a group the common parent of
which is Parent, (iii) is a party to, or has any liability for any
Tax under, any Tax Sharing Agreement or (iv) has any liability for
the Taxes of any Person under Treasury Regulations Section 1.1502-6
(or any similar provision of state, local, or foreign Law) or as a
transferee or successor, except for such liability arising from
membership in a Parent Group.
4.20.6 TIMING. None of the Transferred Subsidiaries will be required to
include any item of income in, or exclude any item of deduction
from, taxable income for any taxable period (or portion thereof)
ending after the Closing Date as a result of any
35
(i) change in method of accounting for a taxable period (or portion
thereof) ending on or prior to the Closing Date (other than any
change in method of accounting made by LMC or any of its
Affiliates, except for any change in method of accounting made on
any Tax Return of or including the Transferred Subsidiaries which
Parent is responsible for preparing pursuant to Section 2.1(a) of
the Tax Matters Agreement), (ii) "closing agreement" as described
in Section 7121 of the Code (or any corresponding or similar
provision of state, local or foreign income Tax Law) executed prior
to the Closing, or (iii) installment sale or open transaction
occurring prior to the Closing.
4.20.7 STATUTE OF LIMITATIONS. No waiver or extension of any statute of
limitations in respect of material Taxes or any extension of time
with respect to a material Tax assessment or deficiency is in
effect for any of the Transferred Subsidiaries.
4.20.8 SECTION 355. Except with respect to the Transactions, none of the
Transferred Subsidiaries has constituted either a "distributing
corporation" or a "controlled corporation" (or is otherwise a
successor to a "distributing corporation" or a "controlled
corporation") in a distribution of stock qualifying or intended to
qualify under Section 355 of the Code.
4.20.9 REPORTABLE TRANSACTIONS. None of the Transferred Subsidiaries has
participated in a "listed transaction" within the meaning of
Treasury Regulations Section 1.6011-4(b)(2).
4.20.10 CERTAIN AGREEMENTS AND RULINGS. None of the Transferred
Subsidiaries is a party to or bound by any advance pricing
agreement, closing agreement or other agreement or ruling relating
to Taxes with any Taxing Authority that will remain in effect with
respect to such Transferred Subsidiary after the Closing.
4.20.11 DTV SHARES. To the Knowledge of Parent, for United States federal
income Tax purposes the aggregate basis of the DTV Shares is $6.8
billion. Parent has not taken any position for Tax purposes or in
computing any deferred income tax provision or reserve for
financial reporting purposes that is inconsistent with the
representation set forth in the preceding sentence.
Section 4.21. AFFILIATE TRANSACTIONS. Section 4.21 of the Parent Disclosure
Letter sets forth, as of the date hereof, all Contracts and all material
allocations, obligations, transactions or other arrangements (oral or written)
between DTV, on the one hand, and Parent or any of its Subsidiaries, on the
other hand, that, in each case, shall be in effect following the Closing (each,
an "Affiliate Transaction").
Section 4.22. BROKERS OR FINDERS. Except as set forth in Section 4.22 of
the Parent Disclosure Letter, no agent, broker, investment banker, financial
advisor or other Person (any such Person, a "Broker") is or will be entitled to
any financial advisory, broker's, finder's or similar fee or commission in
connection with the Transactions (collectively, "Broker Fees") based upon
arrangements made by or on behalf of Parent, DTV, a Transferred Subsidiary or
any of their respective Affiliates.
36
Section 4.23. INVESTIGATION; RELIANCE.
4.23.1 Notwithstanding anything to the contrary set forth herein, the
express representations and warranties set forth in this Agreement,
the Parent Tax Opinion Representations and the Tax Matters
Agreement are the only representations and warranties concerning
Parent and the DTV Shares made to LMC by Parent. Such
representations and warranties are made expressly in lieu of all
other warranties and representations, express or implied.
4.23.2 Parent hereby acknowledges and agrees that LMC makes no
representations or warranties to Parent, express or implied, other
than those representations and warranties set forth in this
Agreement, the LMC Tax Opinion Representations, the Tax Matters
Agreement and the Ancillary Agreements. Parent hereby expressly
acknowledges and agrees that it is not relying on, is not entitled
to rely on and, except in the case of fraud or willful breach,
neither LMC nor any Person will have or be subject to any liability
to Parent or any other Person resulting from, any statements or
communications by LMC or any of its Affiliates or Representatives
with respect to any matter in connection with its investigation or
evaluation of the Transactions, except for the representations and
warranties expressly set forth in this Agreement, the Tax Matters
Agreement, the LMC Tax Opinion Representations and the Ancillary
Agreements.
ARTICLE V.
REPRESENTATIONS AND WARRANTIES OF LMC
Except as set forth in the LMC Disclosure Letter delivered by LMC to
Parent prior to the execution of this Agreement, LMC hereby represents and
warrants to Parent as follows:
Section 5.1. ORGANIZATION AND STANDING. LMC and each Stockholder is (a) a
corporation, limited liability company or other legal entity duly organized,
validly existing and duly qualified or licensed and in good standing under the
Laws of the state or jurisdiction of its organization with full corporate or
other power and authority to own, lease, use and operate its properties and to
conduct its business, and (b) duly qualified or licensed to do business and in
good standing in any other jurisdiction in which the nature of the business
conducted by it or the property it owns, leases or operates requires it to so
qualify, be licensed or be in good standing, except where the failures to be so
qualified, licensed or in good standing have not had a Material Adverse Effect
on LMC or any of the Stockholders, as the case may be.
Section 5.2. CORPORATE POWER AND AUTHORITY. LMC and each Stockholder has
all requisite corporate or other power and authority to execute and deliver this
Agreement and to consummate the Transactions. LMC and each Stockholder has all
requisite corporate or other power and authority to execute and deliver the
Ancillary Agreements and the other agreements, documents and instruments to be
executed and delivered by it in connection with this Agreement, including the
LMC Tax Opinion Representations, the Closing Certificates required by Sections
7.3.1 and 7.3.2, or the Ancillary Agreements and to consummate the Transactions.
37
The execution, delivery and performance of this Agreement by LMC and each
Stockholder and the consummation by LMC and each Stockholder of the
Transactions, including the exchange and delivery by the Stockholders to Parent
of the LMC Parent Shares, and the execution, delivery and performance of the
Ancillary Agreements and the other agreements, documents, certificates and
instruments to be executed and delivered in connection with this Agreement or
the Ancillary Agreements by LMC and each Stockholder and the consummation of the
Transactions, have been duly authorized by all necessary action on the part of
LMC and each Stockholder. Each of this Agreement and the Tax Matters Agreement
has been duly executed and delivered by LMC and constitutes the legal, valid and
binding obligation of LMC, enforceable against LMC in accordance with its terms,
except as may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar Laws now or hereafter in effect relating to or
affecting creditors' rights generally, including the effect of statutory and
other Laws regarding fraudulent conveyances and preferential transfers and
subject to the limitations imposed by general equitable principles (regardless
of whether such enforceability is considered in a proceeding at Law or in
equity). When signed, the Ancillary Agreements (other than the Tax Matters
Agreement which is the subject of the preceding sentence) and the other
agreements, documents, certificates (including the LMC Tax Opinion
Representations) and instruments to be executed and delivered by LMC and each
Stockholder in connection with this Agreement or the Transactions shall have
been duly executed and delivered by LMC and each Stockholder and shall
constitute the legal, valid and binding obligations of LMC and each Stockholder,
enforceable against LMC and each Stockholder in accordance with their respective
terms, except as may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar Laws now or hereafter in effect
relating to or affecting creditors' rights generally, including the effect of
statutory and other Laws regarding fraudulent conveyances and preferential
transfers and subject to the limitations imposed by general equitable principles
(regardless of whether such enforceability is considered in a proceeding at Law
or in equity).
Section 5.3. NO VOTE REQUIRED. No vote or other action of the shareholders
of LMC or any Stockholder is required by Law, the organizational documents of
LMC or any Stockholder otherwise in order for LMC and/or the Stockholders to
consummate the Exchange and the transactions contemplated hereby. The Board of
Directors of LMC, by vote at a meeting duly called and held, has approved the
Exchange.
Section 5.4. CONFLICTS; CONSENTS AND APPROVALS. Except as set forth in
Section 5.4 of the LMC Disclosure Letter, neither the execution and delivery by
LMC and each Stockholder of this Agreement, the Ancillary Agreements and the
other agreements, documents and instruments to be executed and delivered by LMC
and each Stockholder in connection with this Agreement and the Ancillary
Agreements, nor the consummation of the Transactions, will:
5.4.1 conflict with, or result in a breach of any provision of, the
organizational documents of LMC or any Stockholder;
5.4.2 violate, or conflict with, or result in a breach of any provision
of, or constitute a default (or an event that, with the giving of
notice, the passage of time or otherwise, would constitute a
default) under, or entitle any Person (with the giving of notice,
the passage of time or otherwise) to terminate, accelerate, modify
or call
38
a default under, or give rise to any obligation to make a payment
under, or to any increased, additional or guaranteed rights of any
Person under, or result in the creation of any Encumbrance upon any
of the LMC Parent Shares or any of the other properties or assets
of LMC or any Stockholder under any of the terms, conditions or
provisions of any Contract to which LMC or any Stockholder is a
party or pursuant to which any of its properties or assets are
bound, except for any such conflicts, violations, breaches,
defaults or occurrences which would not prevent or materially delay
the performance of this Agreement by LMC or a Stockholder;
5.4.3 assuming the approvals required under Section 5.4.4 are obtained,
violate any order, writ, or injunction, or any material decree, or
material Law applicable to LMC or any Stockholder or any of their
properties or assets except as would not have a Material Adverse
Effect on LMC's or the Stockholders' ability to consummate the
Exchange and the transactions contemplated hereby; or
5.4.4 require any consent, approval, authorization or permit of, or
filing with or notification to, any Governmental Authority, except
for (i) (A) applicable requirements of the Exchange Act, the
Securities Act, and state securities or "blue sky" Laws, (B) the
pre-merger notification requirements of the HSR Act, and (C)
approval of the transactions contemplated by this Agreement under
the Communications Act or (ii) where the failure to obtain such
consents, approvals, authorizations or permits, or to make such
filings or notifications would not prevent or materially delay the
performance of this Agreement by LMC.
Section 5.5. LMC PARENT SHARES. The LMC Parent Shares constitute all shares
of Parent Class A Common Stock and all shares of Parent Class B Common Stock
beneficially owned by the Stockholders and/or LMC. Except as set forth on
Section 5.5 of the LMC Disclosure Letter, each Stockholder has good and valid
title to the LMC Parent Shares owned by it, free and clear of any and all
Securities Encumbrances. Upon delivery to Parent of the certificates
representing the LMC Parent Shares at the Closing, or evidence of a book-entry
transfer of the LMC Parent Shares to an account of Parent, Parent will acquire
good and valid title to such shares, free and clear of any and all Securities
Encumbrances.
Section 5.6. LITIGATION. As of the execution of this Agreement, there is no
Action pending or, to LMC's Knowledge, threatened against LMC that seeks, or
would reasonably be expected, to prohibit or restrain the ability of LMC to
enter into this Agreement or any Ancillary Agreement to which it is a party or
to timely consummate any of the Transactions.
Section 5.7. GOVERNMENTAL ACTIONS. As of the execution of this Agreement,
there are no material judgments, decrees, written agreements, memoranda of
understanding or orders of any Governmental Authority outstanding against LMC
which would reasonably be expected to prevent, prohibit, materially delay or
enjoin the consummation of the Transactions.
Section 5.8. FCC MATTERS. LMC is legally and financially qualified under
the Communications Act to hold the Business FCC Licenses and the DTV Shares. To
LMC's Knowledge, there are no facts or circumstances pertaining to LMC or any of
its Subsidiaries
39
which, under the Communications Act, would reasonably be expected to result in
the FCC's refusal to grant the FCC Consent or which would require waiver of, or
exemption from, any provision of the Communications Act necessary to obtain the
FCC Consent.
Section 5.9. INVESTMENT PURPOSE AND EXPERIENCE. The Stockholders are
receiving the Splitco Shares, and indirectly the DTV Shares, for their own
account and not with a view towards, or for resale in connection with, the
public sale or distribution thereof, except pursuant to sales registered or
exempted under the Securities Act. Each Stockholder is an "accredited investor,"
as that term is defined in Regulation D promulgated under the Securities Act.
LMC acknowledges that each Stockholder can bear the economic risk and complete
loss of its investment in the Splitco Shares, and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment contemplated hereby.
Section 5.10. Investigation; Reliance.
5.10.1 Notwithstanding anything to the contrary set forth herein, the
express representations and warranties set forth in this Agreement,
the LMC Tax Opinion Representations and the Tax Matters Agreement
are the only representations and warranties concerning LMC and the
LMC Parent Shares made to Parent by LMC. Such representations and
warranties are made expressly in lieu of all other warranties and
representations, express or implied.
5.10.2 LMC hereby acknowledges and agrees that Parent makes no
representations or warranties to LMC, express or implied, other
than those representations and warranties set forth in this
Agreement, the Parent Tax Opinion Representations, the Tax Matters
Agreement and the Ancillary Agreements. LMC hereby expressly
acknowledges and agrees that it is not relying on, is not entitled
to rely on and, except in the case of fraud or willful breach,
neither Parent nor any Person will have or be subject to any
liability to LMC or any other Person resulting from, any statements
or communications by Parent, any Transferred Subsidiary, DTV or any
of their respective Affiliates or Representatives with respect to
any matter in connection with its investigation or evaluation of
the Transferred Business, the Transferred Subsidiaries, Splitco or
DTV (including any of the assets or liabilities of the Transferred
Business, the Transferred Subsidiaries, Splitco or DTV), including
any information, document or material made available in any
offering memorandum, in any "data room," in any management
presentations or in any other form, except for the representations
and warranties expressly set forth in this Agreement, the Parent
Tax Opinion Representations, the Tax Matters Agreement and the
Ancillary Agreements
Section 5.11. BROKERS AND FINDERS. Except as set forth in Section 5.11 of
the LMC Disclosure Letter, no Broker is or will be entitled to any Broker Fees
based upon arrangements made by or on behalf of LMC or any of its Affiliates.
40
ARTICLE VI.
COVENANTS AND AGREEMENTS
Section 6.1. ACCESS AND INFORMATION. During the period from the date of
this Agreement to the Closing, except to the extent prohibited by applicable Law
or the terms of any Contract entered into prior to the date hereof for which
Parent has been unable, despite use of its reasonable best efforts, to obtain a
consent or waiver from the other parties thereto (other than any Affiliate of
Parent) to enable disclosure to LMC, or as would reasonably be expected to
violate or result in a loss or impairment of any attorney-client or work product
privilege (it being understood that the parties shall use reasonable best
efforts to cause such information to be provided in a manner that does not
result in such violation, loss or impairment), and subject to the obligations of
LMC under the Confidentiality Agreement with respect thereto, Parent will permit
(and will cause the Transferred Subsidiaries to permit) Representatives of LMC
to have reasonable access during normal business hours and upon reasonable
notice to all premises, properties, personnel, books, records, Contracts,
commitments, reports of examination, and documents of or pertaining to the
Transferred Business, and reasonable opportunity upon prior notice and
consultation with Parent to communicate with employees of the Transferred
Business (PROVIDED that Parent and the Transferred Subsidiaries shall have the
right to be present by representative for all such contacts between LMC and any
employee of the Transferred Business, whether in person, telephonic or
otherwise), except with respect to DTV, as may be necessary to permit LMC to, at
its sole expense, make, or cause to be made, such investigations thereof as are
reasonably necessary in connection with the consummation of the Transactions,
and Parent shall (and shall cause the Transferred Subsidiaries to) reasonably
cooperate with any such investigations; PROVIDED that Parent's designees on the
Board of Directors of DTV, subject to their fiduciary duties to DTV and its
stockholders, shall take no action to interfere with the investigation of DTV by
LMC. No information or knowledge obtained in any investigation pursuant to this
Section 6.1 or otherwise shall affect or be deemed to modify any representation
or warranty contained herein or delivered pursuant hereto or to modify the
conditions to the obligations of the parties hereto to consummate the
Transactions.
Section 6.2. CONDUCT OF BUSINESS BY PARENT. Except (i) as contemplated or
permitted by this Agreement and the Ancillary Agreements, (ii) as required by
applicable Law, (iii) as described in Section 6.2 of the Parent Disclosure
Letter or (iv) with the prior written consent of LMC (not to be unreasonably
withheld or delayed), during the period from the date hereof to the Closing
Date, Parent shall, and shall cause each of the Transferred Subsidiaries to,
conduct the Transferred Business only in the ordinary course of business
consistent with past practice and use reasonable best efforts to preserve intact
current business organizations of the Transferred Business and relationships
with third parties and keep available the service of the current officers and
employees of the Transferred Business. From the date hereof until the earlier of
the Closing or the termination of this Agreement, Parent will vote or cause its
Affiliates to vote all shares of DTV over which it has the power to vote or
cause to be voted against any action by DTV or any of its Subsidiaries, which is
outside its ordinary course of business (including amendments to DTV's Charter)
that is presented or proposed for consideration by DTV stockholders at any time
after the date of this Agreement and prior to the Closing or termination of this
Agreement, subject to Parent's obligations under Section 6.13.3 of this
Agreement. Without limiting the generality of the foregoing, except (i) as
contemplated or permitted by this Agreement and the
41
Ancillary Agreements, (ii) as required by applicable Law, (iii) as described in
Section 6.2 of the Parent Disclosure Letter or (iv) with the prior written
consent of LMC, prior to the Closing Date, Parent shall not take any action that
would violate the terms of the RSN Non-Competition Agreement (assuming that the
period referred to therein is effective beginning as of the date hereof) and
Parent shall cause each of the Transferred Subsidiaries not to:
6.2.1 make any change in or amendments to the charter, bylaws,
partnership agreement, membership agreement or other organizational
documents applicable to any Transferred Subsidiary;
6.2.2 issue, grant, sell or deliver any shares of capital stock or other
equity interests or securities of any Transferred Subsidiary, or
any securities convertible into, or options, warrants or rights of
any kind to subscribe for or acquire, any shares of capital stock
or other equity interests or securities of any Transferred
Subsidiary, or any phantom shares, phantom equity interests or
stock or equity appreciation rights of any Transferred Subsidiary,
or enter into any Contract, commitment or arrangement with respect
to any of the foregoing;
6.2.3 split, combine or reclassify the outstanding shares of capital
stock or other equity interests or securities of any Transferred
Subsidiary or issue any capital stock or other equity interests or
securities of any Transferred Subsidiary in exchange for any such
shares or interests;
6.2.4 redeem, purchase or otherwise acquire, directly or indirectly, any
shares of capital stock or any other equity interests or securities
of any Transferred Subsidiary;
6.2.5 adopt or authorize any stock or equity appreciation rights,
restricted stock or equity, stock or equity purchase, stock or
equity bonus or similar plan, arrangement or agreement applicable
to any Transferred Subsidiary;
6.2.6 make any other changes in the capital structure or the partnership
or membership structure of any Transferred Subsidiary;
6.2.7 make any change in any method of financial accounting or financial
accounting principles, practice or policy employed by or applicable
to a Transferred Subsidiary, except for any such change required by
reason of a concurrent change in GAAP;
6.2.8 except to the extent sold or otherwise disposed of in the ordinary
course of business consistent with past practices, sell, lease (as
lessor), mortgage, pledge or otherwise dispose of any material
asset of a Transferred Subsidiary to any Person;
6.2.9 except (A) in accordance with Parent's cash management system or
(B) for dividends and distributions permitted under clause (6.2.10)
below, make any loans or advances to, investments in, or guarantees
for the benefit of, any Person, except for travel and similar
advances made to employees, officers or directors, in the ordinary
course of business, or engage in or amend, or modify, or extend any
42
Contract, arrangement, commitment or transaction with any Affiliate
of Parent which will continue in full force and effect following
the Closing;
6.2.10 declare or pay any dividend or make any other distribution to its
stockholders whether or not upon or in respect of any shares of its
capital stock or equity interest; PROVIDED, HOWEVER, that LMC
acknowledges and agrees that (A) the Transferred Subsidiaries do
not maintain cash balances and, at the time of the Closing, Parent
will withdraw any cash balances of the Transferred Subsidiaries
(other than the material proceeds from an insurance claim) and (B)
from the date hereof until the Closing, dividends and distributions
of cash may continue to be made by the Transferred Subsidiaries to
wholly owned Subsidiaries of Parent in the ordinary course of
business consistent with past practices;
6.2.11 except to the extent required pursuant to the terms of any Employee
Benefit Plan or in effect on the date hereof, (i) increase salary,
wages or other compensation (including any bonuses, commissions and
any other payments) of any Transferred Employee whose annual
salary, wages and such other compensation is, or after giving
effect to such change would be, in the aggregate, $150,000 or more
per annum; (ii) hire any new employee who would be a Transferred
Employee or enter into a contract with any consultant to perform
services relating to the Transferred Business, in each case on
terms providing for annual salary, wages and other compensation, in
the aggregate, of $150,000 or more per annum; (iii) adopt, enter
into or amend any Employee Benefit Plan other than a Subsidiary
Employee Benefit Plan, except as required by applicable Law or
applicable to all participants of such plan; PROVIDED that such
plan does not disproportionately affect Transferred Employees; or
(iv) adopt, enter into or amend any Collective Bargaining Agreement
or other labor union contract, Subsidiary Employee Benefit Plan or
Employment Agreement applicable to Transferred Employees, or enter
into any Contract, commitment or arrangement with respect to any of
the foregoing; PROVIDED that it is the understanding of the parties
that Parent shall have the right, prior to or at the Closing, to
transfer the employment of each Transferred Employee not already
employed by one of the Transferred Subsidiaries to the applicable
Transferred Subsidiary;
6.2.12 pay, discharge or satisfy Liabilities, other than (i) the payment,
discharge or satisfaction of Liabilities reflected or reserved
against in the Interim Balance Sheet or incurred since the Interim
Balance Sheet Date in the ordinary course of business consistent
with past practices and (ii) scheduled repayments of indebtedness
reflected on any Interim Balance Sheet;
6.2.13 cancel any Indebtedness or waive or assign any claims or rights
(tangible and intangible), except in the ordinary course of
business and consistent with past practices;
6.2.14 (i) incur or assume or become obligated with respect to any
Indebtedness or guarantee any such Indebtedness of another Person,
issue or sell any debt securities or warrants or other rights to
acquire any debt securities, or guarantee
43
any debt securities of another Person, except, in each case, in the
ordinary course of business consistent with past practices, (ii)
secure any of its outstanding unsecured Indebtedness or provide
additional security for any of its outstanding secured Indebtedness
or (iii) except in the ordinary course of business consistent with
past practices, incur, impose or permit to exist any Encumbrance on
any asset;
6.2.15 (i) other than in the ordinary course of business, enter into any
Contract of a character required to be disclosed in Section 4.13 of
the Parent Disclosure Letter or terminate, renew, modify or amend
any of the Material Contracts; PROVIDED that, for the avoidance of
doubt, the expiration in accordance with its terms of any Material
Contract shall not constitute termination, renewal or amendment of
such Material Contracts; or (ii) cancel or terminate, or permit to
be cancelled or terminated, any material insurance relating to the
Transferred Business or any related assets;
6.2.16 (i) acquire any business or significant assets and properties of
any Person (whether by merger, consolidation or otherwise); (ii)
make any capital contribution or investment (or agree to make any
capital contribution or investment) in or acquire any securities or
debt or equity interests in any other Person; or (iii) except as
necessary in the ordinary course of business consistent with past
practices, dispose of, grant, or obtain, or permit to lapse any
rights to, any material Owned or Licensed Intellectual Property;
6.2.17 settle any Actions in a manner in which the settlement of such
Action would materially adversely affect the conduct of the
Transferred Business following the Closing Date, except where any
such material adverse effect on the conduct of the Transferred
Business resulting from the settlement of any such Action is not
disproportionate to the adverse effect of such settlement on the
conduct of the business of the regional sports programming cable
networks operated by Parent and its Subsidiaries (other than the
RSN Subsidiaries); or
6.2.18 enter into an agreement to do any of the foregoing.
Section 6.3. CONDUCT OF BUSINESS BY LMC. Except as described in Schedule
6.3, during the period from the date hereof to the Closing Date, or the date, if
any, on which this Agreement is earlier terminated in accordance with Article
IX, neither LMC nor any of its Subsidiaries shall acquire or make any investment
in any corporation, partnership, limited liability company, other business
organization or any division thereof that holds, or has an attributable interest
in, any license, authorization, permit or approval issued by the FCC if such
acquisition or investment would reasonably be expected to prevent or materially
delay or impede receipt of the FCC Consent.
Section 6.4. PROXY STATEMENT.
6.4.1 Within forty-five (45) days of the signing of this Agreement,
Parent shall prepare and shall cause to be filed with each of the
SEC and the ASX a proxy statement in
44
preliminary form (together with any amendments thereof or
supplements thereto, the "Proxy Statement") relating to the Parent
Stockholders' Meeting. Parent shall include in the Proxy Statement
the recommendation of the Board of Directors of Parent that the
Parent stockholders approve the Exchange (the "Parent
Recommendation"); PROVIDED that prior to the approval of the
Exchange by Parent's stockholders in accordance with this Agreement
the Board of Directors of Parent may fail to make or withdraw,
modify or change in a manner adverse to LMC its recommendation that
the stockholders vote in favor of this Agreement (a "Parent Change
in Recommendation"), if, and only if, the Board of Directors of
Parent has determined, in its good faith judgment and after
consultation with outside legal counsel, that the failure to effect
such action could reasonably be expected to be inconsistent with
the fulfillment of its fiduciary duties to Parent's stockholders
under applicable Law; PROVIDED that a Parent Change in
Recommendation shall not relieve Parent of its obligations pursuant
to Section 6.5 hereof. Parent shall use its reasonable best efforts
to respond as promptly as practicable to any comments of the SEC
and the ASX with respect to the Proxy Statement. Parent shall
promptly notify LMC upon the receipt of any comments (written or
oral) from the SEC or the ASX or their respective staff or any
request from the SEC or the ASX or their respective staff for
amendments or supplements to the Proxy Statement, shall consult
with LMC prior to responding to any such comments or request or
filing any amendment or supplement to the Proxy Statement, and
shall provide LMC with copies of all correspondence between Parent
and its Representatives, on the one hand, and the SEC and the ASX
and their respective staff, on the other hand. In addition to the
Parent Stockholder Approval required by Law, the parties have
agreed as a matter of contract that the affirmative vote of a
majority of the votes cast in person or by proxy by holders of
Parent Class B Shares other than LMC, the Stockholders and any of
their respective Associates, and the Murdoch Interests (the
"Disinterested Stockholder Approval" and, together with the Parent
Stockholder Approval, the "Requisite Parent Stockholder Approval")
is required to approve the Exchange. Parent represents and warrants
that (i) none of the information with respect to Parent or its
Subsidiaries to be included in the Proxy Statement or incorporated
by reference therein will, at the time of the mailing of the Proxy
Statement or any amendments or supplements thereto, and at the time
of the Parent Stockholders' Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made,
not misleading; and (ii) the Proxy Statement will comply as to form
in all material respects with the provisions of the Exchange Act
and the rules and regulations promulgated thereunder and any
applicable rules and regulations promulgated by the ASX, except for
any such failures to comply as to form which result from any
actions or omissions of LMC or any person authorized to act on its
behalf, and will include, or be accompanied by, a report from Grant
Samuel & Associates as to the fairness and reasonableness of the
Exchange, which is qualified as an independent expert for these
purposes under the ASX Listing Rules and applicable Law (the
"Independent Expert Report"). Parent will provide LMC with drafts
of the
45
Independent Expert Report received by Parent to the extent
permitted by applicable Law and to the extent that Australian
counsel to Parent has advised Parent that such action will not
compromise the independence of such expert. LMC represents and
warrants that none of the information with respect to LMC or its
Subsidiaries supplied by LMC or any person authorized to act on its
behalf for inclusion in the Proxy Statement or incorporated by
reference therein will, at the time of the mailing of the Proxy
Statement or any amendments or supplements thereto, and at the time
of the Parent Stockholders' Meeting, contain any untrue statement
of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made,
not misleading.
6.4.2 Parent and LMC shall cooperate and consult with each other in
preparation of the Proxy Statement and any other documents or
reports to be disseminated to holders of Parent Class B Common
Stock primarily in connection with such holders' consideration of
the Exchange (other than, except, to the extent permitted by
applicable Law, any factual matters contained in such report, the
Independent Expert Report). Without limiting the generality of the
foregoing, LMC will use reasonable best efforts to furnish to
Parent the information relating to it required by the Exchange Act
and the rules and regulations promulgated thereunder or any
applicable rules and regulations promulgated by the ASX to be set
forth or incorporated by reference in the Proxy Statement.
Notwithstanding anything to the contrary stated above, prior to
filing and mailing the Proxy Statement (or any amendment or
supplement thereto) or responding to any comments of the SEC or the
ASX with respect thereto, Parent shall provide LMC an opportunity
to review and comment on such document or response.
6.4.3 As promptly as reasonably practicable after the Proxy Statement has
been cleared by the SEC and the ASX, Parent shall mail the Proxy
Statement to the holders of Parent Class B Common Stock as of the
record date established for the Parent Stockholders' Meeting. If at
any time prior to the Parent Stockholders' Meeting any event,
occurrence or circumstance relating to the Parent, LMC or any of
their respective Subsidiaries, or their respective officers or
directors, should be discovered by Parent or LMC, respectively,
which, pursuant to the Securities Act or Exchange Act or any
applicable rule or regulation promulgated by the ASX, should be set
forth in an amendment or a supplement to the Proxy Statement, such
party shall promptly inform the other parties hereto. Each of LMC
and Parent agrees to correct any information provided by it for use
or incorporated by reference in the Proxy Statement which shall
have become false or misleading. Parent will be solely responsible
for all filing fees, costs and expenses relating to the preparation
of the Proxy Statement and matters related to the Parent
Stockholder Meeting.
Section 6.5. PARENT STOCKHOLDERS' MEETING. Unless this Agreement has been
earlier terminated in accordance with Article VIII, Parent shall, acting through
its Board of Directors, as promptly as reasonably practicable following the date
of this Agreement, establish a record date for, duly call, give notice of,
convene and hold a meeting of the holders of Parent Class B
46
Common Stock in accordance with the Listing Rules of the ASX and any other
applicable Laws, for the purpose of voting upon the approval of the Exchange
(the "Parent Stockholders' Meeting"). Except as required by any Governmental
Authority, and for matters to which LMC shall have provided its prior written
consent (which consent shall not be unreasonably withheld or delayed), the only
matters Parent shall propose to be acted on by the holders of Parent Class B
Common Stock at the Parent Stockholders' Meeting shall be the approval of the
Exchange. In connection with the Parent Stockholders' Meeting, Parent will use
reasonable best efforts to obtain the requisite quorum at the Parent
Stockholders' Meeting and to obtain the Requisite Parent Stockholder Approval,
including by soliciting from its stockholders proxies in favor of the approval
of the Exchange, PROVIDED that Parent shall have no obligation to solicit from
its stockholders proxies in favor of the approval of the Exchange from and after
the date upon which there shall have been a Parent Change in Recommendation in
accordance with Section 6.4.1; provided, however, Parent shall continue to be
obligated to convene and hold the Parent Stockholders' Meeting in accordance
with the terms of this Agreement.
Section 6.6. APPROPRIATE ACTION; CONSENTS; FILINGS.
6.6.1 The parties hereto will use their respective reasonable best
efforts to consummate and make effective the Transactions and to
cause the conditions to the Closing set forth in Article VII to be
satisfied, including (i) the obtaining of all necessary actions or
nonactions, consents and approvals from Governmental Authorities or
other Persons necessary in connection with the consummation of the
Transactions, and the making of all necessary registrations and
filings (including filings with Governmental Authorities if any)
and the taking of all reasonable steps as may be necessary to
obtain an approval from, or to avoid an Action by, any Governmental
Authority or other Persons necessary in connection with the
consummation of the Transactions; and (ii) the defending of any
lawsuits or other Actions, whether judicial or administrative,
challenging this Agreement or the consummation of the transactions
performed or consummated by such party in accordance with the terms
of this Agreement, including the Exchange, including seeking to
have any stay or temporary restraining order entered by any court
or other Governmental Authority vacated or reversed.
6.6.2 Each of the parties hereto shall promptly (in no event later than
twenty (20) Business Days following the date that this Agreement is
executed) make its respective filings, and thereafter make any
other required submissions under the HSR Act with respect to the
Transactions.
6.6.3 LMC and Parent shall cooperate to prepare such applications as may
be necessary for submission to the FCC in order to obtain the FCC
Consent (the "FCC Applications"). LMC and Parent shall promptly (in
no event later than twenty (20) Business Days following the date
that this Agreement is executed) file the FCC Applications with the
FCC, and the parties shall diligently take, or cooperate in the
taking of, all necessary, desirable and proper actions, and provide
any additional information, reasonably required or requested by the
FCC. Each of LMC and Parent agrees not to, and shall not permit any
of its respective
47
Subsidiaries to, take any action that would reasonably be expected
to prevent or materially delay or impede receipt of the FCC
Consent.
6.6.4 Each of LMC and Parent shall give (or shall cause its respective
Subsidiaries to give) any notices to third parties, and each of LMC
and Parent shall use, and cause each of its Subsidiaries to use,
its reasonable best efforts to obtain any third party consents not
covered by Sections 6.6.1, 6.6.2 and 6.6.3 above, necessary, proper
or advisable to consummate Transactions. Each of the parties hereto
will furnish to the other such necessary information and reasonable
assistance as the other may request in connection with the
preparation of any required governmental filings or submissions and
will cooperate in responding to any inquiry from a Governmental
Authority, including promptly informing the other party of such
inquiry, consulting in advance before making any presentations or
submissions to a Governmental Authority, and supplying each other
with copies of all correspondence, filings or communications
between either party and any Governmental Authority with respect to
this Agreement. No party hereto shall independently participate in
any formal meeting with any Governmental Authority in respect of
any such filings, submissions, investigation, or other inquiry
without giving the other parties hereto prior notice of the meeting
and, to the extent permitted by such Governmental Authority, the
opportunity to attend and/or participate.
6.6.5 If any objections are asserted with respect to the Transactions
under any Antitrust Law or any Communications Regulation or if any
suit is instituted by any Governmental Authority or any private
party challenging any of the Transactions as violative of any
Antitrust Law or Communications Regulation, the parties shall use
their reasonable best efforts to resolve any such objections or
challenge as such Governmental Authority or private party may have
to such transactions under such law so as to permit consummation of
the Transactions. In furtherance of the parties' obligations under
this Section 6.6, LMC and Parent shall be required to (and, to the
extent required by any Governmental Authority, shall cause their
respective current and future Subsidiaries to), propose, negotiate,
commit to and enter into one or more settlements, undertakings,
conditions, consent decrees, stipulations and other agreements with
or to one or more Governmental Authorities (each, a "Settlement")
in connection with the Transactions (including obtaining the
requisite consent of such Governmental Authorities), including one
or more Settlements that require LMC or Parent to restructure the
operations of, or sell or otherwise divest or dispose of, its
assets and/or the assets of its current and future Subsidiaries;
provided, however, that (i) neither LMC nor any of its Subsidiaries
shall be required to take (or commit to take) any of the foregoing
actions, or any other action contemplated by this Section 6.6, (A)
if any such actions would reasonably be expected to have a material
adverse effect on the business or operations of LMC and its
Subsidiaries or any of their cable, television (including video or
electronic home shopping) or satellite businesses, or (B) if the
Board of Directors of LMC determines, in good faith, that the
taking of such actions would be reasonably likely to have a
Material Adverse Effect on Splitco (without giving effect, for
purposes of this Section
48
6.6.5, to the exception contained in clause (i) of the second
sentence of the definition of "Material Adverse Effect" relating to
the performance of this Agreement), (ii) neither Parent nor any of
its Subsidiaries shall be required to take (or commit to take) any
of the foregoing actions or any other action contemplated by this
Section 6.6, if the Board of Directors of Parent determines, in
good faith, that the taking of such actions would be reasonably
expected to have a Material Adverse Effect on Splitco (without
giving effect, for purposes of this Section 6.6.5, to the exception
contained in clause (i) of the second sentence of the definition of
"Material Adverse Effect" relating to the performance of this
Agreement), without the prior written consent of LMC, and (iii)
neither Parent nor any of its Subsidiaries shall be required to
take (or commit to take) any of the foregoing actions, or any other
action contemplated by this Section 6.6, if any such actions would
reasonably be expected to have a material adverse effect on the
business or operations of Parent and its Subsidiaries or any of
their cable programming or television businesses.
Section 6.7. FURTHER ASSURANCES.
6.7.1 Each of the parties shall use its reasonable best efforts to take,
or cause to be taken, all appropriate action, do or cause to be
done all things necessary, proper or advisable under applicable
Law, and execute and deliver such documents and other papers, as
may be reasonably required to consummate the Transactions.
Section 6.8. STANDSTILL AGREEMENTS.
6.8.1 LMC agrees that, during the period commencing on the date hereof
and ending on the earliest of (w) the valid termination of this
Agreement in accordance with Article IX hereof, (x) the 10th
anniversary of the date hereof, (y) the consummation of the sale of
all or substantially all of the assets of Parent and its
Subsidiaries to any Person and (z) the effective time of any
merger, consolidation or business combination of Parent with or
into any other Person, other than a merger, consolidation or
business combination in which the holders of Parent common stock
immediately prior to such consummation hold immediately following
the consummation of such merger, consolidation or other business
combination, shares of the surviving entity constituting at least a
majority of the outstanding voting power of such surviving entity,
it shall not, and shall not authorize or permit any of its
Affiliates or their respective Representatives to do or agree to do
any of the following, without the prior written consent of Parent:
(a) effect or seek, offer or propose (whether publicly or
otherwise) to effect, or announce any intention to effect or cause
or participate in or in any way assist, facilitate or encourage any
other Person to effect or seek, offer or propose (whether publicly
or otherwise) to effect or participate in, (i) any acquisition of
any equity securities (or beneficial ownership thereof), or rights
or options to acquire any equity securities (or beneficial
ownership thereof), or any securities convertible into or
exercisable or exchangeable for equity securities (or beneficial
ownership thereof) ("Convertible Securities") any assets,
indebtedness or businesses of Parent or any of its Affiliates, (ii)
any tender or exchange offer,
49
consolidation, business combination, acquisition, merger, joint
venture or other business combination involving Parent, any of
Parent's Affiliates or any of the assets of Parent or its
Affiliates, (iii) any recapitalization, restructuring, liquidation,
dissolution or other extraordinary transaction with respect to
Parent or any of its Affiliates, or (iv) any "solicitation" of
"proxies" (as such terms are used in the proxy rules of the SEC) to
vote any voting securities of Parent or consents to any action from
any holder of any voting securities of Parent or seek to advise or
influence any Person with respect to the voting of or the granting
of any consent with respect to any voting securities of Parent; (b)
form, join or in any way participate in a "group" (as defined under
the Exchange Act) in connection with the voting securities of
Parent or otherwise act in concert with any Person in respect of
any such securities; (c) otherwise act, alone or in concert with
others, to seek representation on or to control or influence the
management, Board of Directors or policies of Parent or to obtain
representation on the Board of Directors of Parent; (d) enter into
any discussions or arrangements with any third party with respect
to any of the foregoing; (e) request that Parent or any of its
Representatives amend or waive any provision of this paragraph, or
make any public announcement with respect to the restrictions of
this paragraph, or take any action which would reasonably be
expected to require Parent make a public announcement regarding the
possibility of a business combination or merger; or (f) advise,
assist or encourage, or direct any Person to advise, assist or
encourage any other Persons, in connection with any of the
foregoing; PROVIDED, HOWEVER, that, notwithstanding anything
contained herein, (1) any acquisition (or proposed acquisition) of
an indirect interest in equity securities of Parent or any of its
Affiliates arising out of an acquisition by LMC or any of its
Affiliates of an interest in another Person (which Person,
immediately following such acquisition, would be an Affiliate of
LMC) that beneficially owns equity securities or Convertible
Securities of Parent or any of its Affiliates will not constitute a
breach or violation of LMC's obligations under this Section 6.8.1
and, for all purposes of this Section 6.8.1, LMC will not be deemed
to have acquired beneficial ownership of, and following such
acquisition will not be deemed to have beneficial ownership of, any
such equity securities or Convertible Securities of Parent or any
of its Affiliates, so long as such equity securities and
Convertible Securities of Parent or any of its Affiliates
beneficially owned by such Person do not constitute, in the
aggregate, on an as-converted basis, more than two percent (2%) of
any class of Parent's or any of its Affiliate's equity securities
immediately prior to the execution in full of a binding purchase or
similar agreement relating to such acquisition (but after giving
effect to any sale or other disposition of equity securities or
Convertible Securities of Parent or any of its Affiliates by such
Person to occur on a reasonably prompt basis after the closing of
such acquisition pursuant to a binding agreement entered into by
such acquired Person prior to or in connection with the closing of
such acquisition to sell or dispose of such Person's shares of
equity securities or Convertible Securities of Parent or any of its
Affiliates, subject to such disposition closing; provided that
prior to such disposition, LMC shall vote, and shall cause its
Affiliates to vote, any such equity securities or Convertible
Securities at any special or annual meeting of the
50
shareholders of Parent or any of its Affiliates, as applicable, in
proportion to the votes cast by shareholders of Parent or its
Affiliates, as applicable, other than LMC and its Affiliates, at
such meeting), and (2) for all purposes of this Section 6.8.1, LMC
will not be deemed to have acquired beneficial ownership of, and
following such acquisition will not be deemed to have beneficial
ownership of, any equity securities or Convertible Securities of
Parent or any of its Affiliates to the extent that such equity
securities or Convertible Securities are received by LMC or its
Affiliates as a result of any dividend or other distribution made,
or similar action taken (including the receipt by LMC or any of its
Affiliates of any rights, warrants or other securities granting to
the holder the right to acquire equity securities or Convertible
Securities of Parent or its Affiliates, and any acquisition of
equity securities or Convertible Securities of Parent or its
Affiliates upon the exercise thereof), by Parent, any of its
Affiliates or any other Person which is not LMC or an Affiliate of
LMC. Except as provided on Section 6.8 of the LMC Disclosure
Letter, from the date hereof until the Closing Date or the date
upon which this Agreement is earlier terminated in accordance with
Article IX, LMC shall not, and shall cause its respective
Affiliates not to, without Parent's prior written consent, (i)
offer for sale, sell (including short sales), transfer, tender,
pledge, encumber, assign or otherwise dispose of (including by
gift) (collectively, a "Transfer"), or enter into any contract,
option, derivative, hedging or other agreement or arrangement or
understanding (including any profit-sharing arrangement) with
respect to, or consent to, a Transfer of, any or all of the LMC
Parent Shares; (ii) grant any proxies or powers of attorney with
respect to any or all of the LMC Parent Shares; (iii) permit to
exist any Encumbrance (other than pursuant to this Agreement or the
Ancillary Agreements) of any nature whatsoever with respect to any
or all of the LMC Parent Shares; or (iv) take any action that would
have the effect of preventing, impeding, interfering with or
adversely affecting LMC's ability to perform its obligations under
this Agreement.
6.8.2 Parent agrees that, during the period commencing on the date hereof
and ending on the earliest of (w) the valid termination of this
Agreement in accordance with Article IX hereof, (x) the 10th
anniversary of the date hereof, (y) solely with respect to the
securities of LMC or DTV, as applicable, the consummation of the
sale of all or substantially all of the assets of LMC and its
Subsidiaries or DTV and its Subsidiaries, as applicable, to any
Person and (z) solely with respect to the securities of LMC or DTV,
as applicable, the effective time of any merger, consolidation or
business combination of LMC or DTV, as applicable, with or into any
other Person, other than a merger, consolidation or business
combination in which the holders of LMC or DTV, as applicable,
immediately prior to such consummation hold immediately following
the consummation of such merger, consolidation or other business
combination shares of the surviving entity constituting at least a
majority of the outstanding voting power of such surviving entity,
it shall not, and shall not authorize or permit any of its
Affiliates or their respective Representatives to do or agree to do
any of the following, without the prior written consent of LMC: (a)
effect or seek, offer or propose (whether publicly or otherwise) to
effect, or announce any intention to effect or cause or participate
in or in any way assist, facilitate or encourage any other Person
to
51
effect or seek, offer or propose (whether publicly or otherwise) to
effect or participate in, (i) any acquisition of any equity
securities (or beneficial ownership thereof), or rights or options
to acquire any equity securities (or beneficial ownership thereof),
Convertible Securities or any assets, indebtedness or businesses of
LMC, DTV or any of their respective Affiliates, (ii) any tender or
exchange offer, consolidation, business combination, acquisition,
merger, joint venture or other business combination involving LMC,
DTV or any of their respective Affiliates or any of the assets of
LMC, DTV or their respective Affiliates, (iii) any
recapitalization, restructuring, liquidation, dissolution or other
extraordinary transaction with respect to LMC, DTV or any of their
respective Affiliates, or (iv) any "solicitation" of "proxies" (as
such terms are used in the proxy rules of the SEC) to vote any
voting securities of LMC, DTV or any of their respective Affiliates
or consents to any action from any holder of any voting securities
of LMC or DTV or seek to advise or influence any Person with
respect to the voting of or the granting of any consent with
respect to any voting securities of LMC or DTV; (b) form, join or
in any way participate in a "group" (as defined under the Exchange
Act) in connection with the voting securities of LMC or DTV or
otherwise act in concert with any Person in respect of any such
securities; (c) otherwise act, alone or in concert with others, to
seek representation on or to control or influence the management,
Board of Directors or policies of LMC or DTV or to obtain
representation on the Board of Directors of LMC or DTV; (d) enter
into any discussions or arrangements with any third party with
respect to any of the foregoing; (e) request that LMC or any of its
Representatives amend or waive any provision of this paragraph, or
make any public announcement with respect to the restrictions of
this paragraph, or take any action which would reasonably be
expected to require LMC make a public announcement regarding the
possibility of a business combination or merger; or (f) advise,
assist or encourage, or direct any Person to advise, assist or
encourage any other Persons, in connection with any of the
foregoing; PROVIDED, HOWEVER, that, notwithstanding anything
contained herein, (1) any acquisition (or proposed acquisition) of
an indirect interest in equity securities of LMC, DTV or any of
their respective Affiliates arising out of an acquisition by Parent
or any of its Affiliates of an interest in another Person (which
Person, immediately following such acquisition, would be an
Affiliate of Parent) that beneficially owns equity securities or
Convertible Securities of LMC, DTV or any of their respective
Affiliates will not constitute a breach or violation of Parent's
obligations under this Section 6.8.2 and, for all purposes of this
Section 6.8.2, Parent will not be deemed to have acquired
beneficial ownership of, and following such acquisition will not be
deemed to have beneficial ownership of, any such equity securities
or Convertible Securities of LMC, DTV or any of their respective
Affiliates, so long as such equity securities or Convertible
Securities beneficially owned by such Person do not constitute, in
the aggregate on an as-converted basis, more than two percent (2%)
of any class of LMC's or DTV's or any of their respective
Affiliates' equity securities, as applicable, immediately prior to
the execution in full of a binding purchase or similar agreement
relating to such acquisition (but after giving effect to any sale
or other disposition of equity securities or
52
Convertible Securities of LMC, DTV or any of their respective
Affiliates by such Person to occur on a reasonably prompt basis
after the closing of such acquisition pursuant to a binding
agreement entered into by such acquired Person prior to or in
connection with the closing of such acquisition to sell or dispose
of such Person's shares of equity securities or Convertible
Securities of LMC, DTV or any of their respective Affiliates,
subject to such disposition closing; provided that prior to such
disposition, Parent shall vote, and shall cause its Affiliates to
vote, any such equity securities or Convertible Securities at any
specified or annual meeting of the shareholders of LMC or DTV or
any of their Affiliates, as applicable, in proportion to the votes
cast by shareholders of LMC, DTV or their Affiliates, as
applicable, other than Parent and its Affiliates, at such meeting),
and (2) for all purposes of this Section 6.8.2, Parent will not be
deemed to have acquired beneficial ownership of, and following such
acquisition will not be deemed to have beneficial ownership of, any
equity securities or Convertible Securities of LMC, DTV or any of
their respective Affiliates to the extent that such equity
securities or Convertible Securities are received by Parent or its
Affiliates as a result of any dividend or other distribution made,
or similar action taken (including the receipt by Parent or any of
its Affiliates of any rights, warrants or other securities granting
to the holder the right to acquire equity securities or Convertible
Securities of LMC, DTV or their respective Affiliates, and any
acquisition of equity securities or Convertible Securities of LMC,
DTV or their respective Affiliates upon the exercise thereof), by
LMC, DTV, any of their respective Affiliates or any other Person
which is not Parent or an Affiliate of Parent. Notwithstanding
anything to the contrary in this Section 6.8.2, neither Parent nor
any Affiliate of Parent nor any of their respective Representatives
shall be bound by any of the restrictions set forth in this Section
6.8.2 with respect to DTV or the equity securities or Convertible
Securities of DTV from and after the date upon which LMC and its
Affiliates (including any LMC Related Party) shall have disposed
of, in the aggregate, in any transaction or series of transactions,
50% or more (by number, with appropriate adjustment for any
subdivision, share split, consolidation, share dividend,
combination, reclassification or similar event occurring following
the Closing) of the DTV Shares (or an equivalent amount of
securities (based on voting power) of any successor to DTV, whether
by consolidation, business combination, acquisition, or merger, or
any entity which shall acquire a majority of DTV's voting power,
whether by tender or exchange offer or otherwise, or any entity to
which DTV shall sell, lease or otherwise transfer all or
substantially all of its assets).
Section 6.9. CONFIDENTIALITY; ACCESS TO RECORDS AFTER CLOSING.
6.9.1 LMC acknowledges that the information being provided to it in
connection with the Exchange and the consummation of the other
transactions contemplated hereby, or by any of the Ancillary
Agreements, is subject to the terms of the Confidentiality
Agreement, the terms of which are incorporated herein by reference.
Effective upon, and only upon, the Closing, the Confidentiality
Agreement shall terminate with respect to information relating to
the Transferred Business; PROVIDED, HOWEVER, that LMC acknowledges
that any and all other
53
information provided to it by Parent or its Representatives
concerning Parent or any of its Affiliates (other than information
relating to the Transferred Business) shall remain subject to the
terms and conditions of the Confidentiality Agreement after the
Closing. Parent agrees to hold all Proprietary Information (as
defined in the Confidentiality Agreement) in its possession as of
the Closing Date confidential and to refrain from using such
Proprietary Information for a period of two (2) years following the
Closing Date; PROVIDED, that, notwithstanding anything to the
contrary herein, Parent may use such Proprietary Information to the
extent reasonably necessary for purposes of preparing and filing
Tax Returns, corresponding with tax authorities, preparing
accounting records, and in connection with any litigation,
including, without limitation, litigation arising out of, relating
to or resulting from the Transactions or the subject matter of such
Proprietary Information.
6.9.2 LMC acknowledges and agrees that Parent may from time to time,
subsequent to the consummation of the Transactions require access
to or copies of the business records of Splitco or Transferred
Subsidiaries to the extent relating to the operations of the
Transferred Business prior to the Closing and LMC agrees that upon
reasonable prior notice from Parent it will, during normal business
hours, provide or cause to be provided to Parent, at Parent's
option, access to or copies of such records. Parent hereby agrees
to hold any Proprietary Information so provided in confidence;
PROVIDED, that, notwithstanding anything to the contrary herein,
Parent may use such Proprietary Information to the extent
reasonably necessary for purposes of preparing and filing Tax
Returns, corresponding with tax authorities, preparing accounting
records, and in connection with any litigation, including, without
limitation, litigation arising out of, relating to or resulting
from the Transactions or the subject matter of such Proprietary
Information.
6.9.3 Parent recognizes that, after the Closing, it may have documents,
books, records, work papers and information, whether in written,
magnetic, electronic or optical form (collectively, "Records")
which relate to the Transferred Business with respect to the period
or matters arising prior to the Closing, including Records
pertaining to the assets and Liabilities related to the Transferred
Business and Splitco's or the Transferred Subsidiaries' respective
employees, assets and liabilities (the "Business Records") or other
Records relating to the Transferred Business. Parent recognizes
that LMC, the Stockholders or their respective Affiliates may need
access to such Business Records and other Records after the
Closing. Upon LMC's, a Stockholder's or Splitco's reasonable
request Parent shall provide LMC, the Stockholders or Splitco and
their respective Representatives access to, and the right to
photocopy (at LMC's, the Stockholders' or Splitco's expense),
during normal business hours on reasonable advance notice, such
reasonably requested Records. For a period of five (5) years
following the Closing, Parent shall use reasonable best efforts to
maintain all such Records or, at Parent's discretion or at LMC's,
the Stockholders' or Splitco's reasonable request (at LMC's, the
Stockholders' or Splitco's expense), transfer any such Records to
LMC, the Stockholders or Splitco.
54
6.9.4 Notwithstanding any provision herein to the contrary, from and
after the Closing, Records pertaining to Taxes shall be governed
solely by the Tax Matters Agreement.
Section 6.10. EMPLOYEE MATTERS.
6.10.1 Section 1.1 of the Parent Disclosure Letter sets forth the name of
each Transferred Employee, along with such employee's job title and
reporting position, current salary and incentive bonus
opportunities, and years of service, and designating such
employee's status as exempt or non-exempt under the FLSA, whether
such employee is full-time or part-time. Prior to the Closing,
Parent shall update Section 1.1 of the Parent Disclosure Letter.
6.10.2 LMC acknowledges and agrees that, effective as of the Closing Date,
each Transferred Employee, including any such employee on approved
leave of absence (whether family leave, workers' maternity or
parental leave, workers' compensation, short-term and long-term
disability, medical leave or otherwise) shall be employed in a
substantially comparable position to the position in which such
Transferred Employee was employed immediately prior to Closing
Date. As of and for no less than one year following the Closing,
LMC shall, and shall cause its Affiliates to, provide the
Transferred Employees who remain employed with LMC and its
Affiliates with the same rate of base salary and wages and
commissions and with employee benefit and compensation plans,
programs and arrangements that are substantially equivalent in the
aggregate to those provided to similarly situated employees of LMC
and its Affiliates. Any Transferred Employee who became entitled to
short-term or long-term disability benefits under the applicable
Employee Benefit Plans (the "Seller Disability Plans") prior to
Closing shall be entitled to continue to receive such benefits
under the terms of the Seller Disability Plans until his or her
return to active employment, so long as such benefits are payable
pursuant to third-party insurance coverage. Parent agrees to use
commercially reasonable efforts to cause the insurance policies
underlying the Seller Disability Plans to provide for such
payments. Notwithstanding anything to the contrary contained
herein, LMC and its Affiliates shall have no obligation to keep any
Transferred Employee employed for any period of time following the
Closing, PROVIDED that if the employment of any Transferred
Employee is terminated by LMC or its Affiliates during the 12-month
period beginning on the Closing Date, LMC or its Affiliates shall
pay to such terminated employee severance payments that are no less
favorable than those provided under the Employee Benefit Plans
immediately prior to the Closing Date. Parent and its Affiliates
shall cause the Employment Agreements and, to the extent necessary,
any talent Contract identified on Sections 4.13(c) of the Parent
Disclosure Letter, to be assigned to the appropriate Transferred
Subsidiary prior to the Closing. Notwithstanding the provisions of
the employment agreement between Mark Shuken ("Shuken") and Fox
Cable Networks Services, LLC, dated as of July 16, 2006 (the
"Shuken Agreement"), during the period between the date of this
Agreement and Closing, Parent agrees to allow (and to cause its
Affiliates to allow) Shuken to discuss terms of potential
employment
55
with LMC and its Affiliates, and to waive (and cause its Affiliates
to waive) any restrictions in the Employment Agreement or any other
agreement that would prevent Shuken from accepting employment with
LMC or its Affiliates as of the Closing. Following the Closing, LMC
shall assume and honor and/or shall cause its Affiliates to assume
and to honor in accordance with their terms all Employment
Agreements, and take all actions necessary to update such
Employment Agreements to reflect such assumption, and Parent and
Parent Group shall cease to have any further obligations under the
Employment Agreements as of the Closing Date. Parent shall take all
actions necessary such that following the Closing, the LMC
Indemnitees, as applicable, shall have no liabilities with respect
to any Employee Benefit Plans or any other employee benefit plans,
arrangements or agreements sponsored or contributed to by Parent
Group other than the Subsidiary Employee Benefit Plans and the
Employment Agreements. For purposes of all plans, programs or
arrangements maintained, sponsored or contributed to by LMC or its
Affiliates in which the Transferred Employees shall be eligible to
participate, LMC shall cause each such plan, program or arrangement
to treat the prior service of each Transferred Employee with
Parent, the Parent Entities or any of their Subsidiaries as service
rendered to LMC for purposes of eligibility and vesting for all
purposes and levels of benefits for purposes of severance and
vacation, except to the extent such treatment would result in the
duplication of benefits with respect to the same period of service.
From and after the Closing, LMC and its Affiliates shall (i) cause
any pre-existing conditions, limitations and eligibility waiting
periods under any group health plans of LMC or its Affiliates to be
waived with respect to the Transferred Employees and their eligible
dependents to the extent such condition would have been covered, or
limitation or waiting period would not have applied, with respect
to such Transferred Employee (or dependent) under the terms of the
Employee Benefit Plan in which such Transferred Employee was a
participant immediately prior to the Closing and (ii) give each
Transferred Employee credit for the plan year in which the Closing
(or the transition from Parent's plans to LMC's plans) occurs
towards applicable deductibles and annual out-of-pocket limits for
expenses incurred prior to the Closing (or such later transition
date). LMC or its Affiliates shall not provide financial incentive
to any Transferred Employee to elect continued group health plan
coverage under Section 601 et seq. of ERISA and Section 4980B of
the Code (or any similar state Law) with respect to plans
maintained by Parent and its Affiliates, except to the extent LMC
or its Affiliates directly or indirectly pay for such continued
group health plan coverage for all Transferred Employees, whether
pursuant to the Transitional Services Agreement or otherwise.
6.10.3 Effective as of the Closing, Parent and its Affiliates shall cause
each Transferred Employee to be fully vested in his or her accrued
benefit under the savings plan in which such Transferred Employee
participates immediately prior to Closing.
6.10.4 Notwithstanding the foregoing, nothing contained herein, whether
express or implied, shall be treated as an amendment or other
modification of any Subsidiary Employee Benefit Plan, or shall
limit the right of LMC, Splitco, the Transferred
56
Subsidiaries or any of their Subsidiaries to amend, terminate or
otherwise modify any Subsidiary Employee Benefit Plan following the
Closing Date. In the event that (i) a party other than Parent makes
a claim or takes other action to enforce any provision in this
Agreement as an amendment to any Subsidiary Employee Benefit Plan,
and (ii) such provision is deemed to be an amendment to such
Subsidiary Employee Benefit Plan even though not explicitly
designated as such in this Agreement, then such provision shall
lapse retroactively and shall have no amendatory effect. Parent
acknowledges and agrees that all provisions contained in this
Section 6.10 with respect to the Transferred Employees are included
for the sole benefit of Parent, and that nothing in this Agreement,
whether express or implied, shall create any third party
beneficiary or other rights (i) in any other Person, including,
without limitation, any employees, former employees, any
participant in any Subsidiary Employee Benefit Plan, or any
dependent or beneficiary thereof, or (ii) to continued employment
with LMC, Splitco, the Transferred Subsidiaries or any of their
respective Affiliates.
Section 6.11. INTERCOMPANY SERVICES AND ACCOUNTS. Except for the Ancillary
Agreements, and except as set forth in Section 6.11 of the Parent Disclosure
Letter, all Contracts pursuant to which any goods, services, materials or
supplies have at any time been provided (i) by any RSN Subsidiary, on the one
hand, to Parent or any of its Affiliates (other than the RSN Subsidiaries), on
the other hand, or (ii) by Parent or any of its Affiliates (other than the RSN
Subsidiaries), on the one hand, to any RSN Subsidiary, on the other hand, will
be terminated as of the Closing. Parent shall use commercially reasonable
efforts to obtain at or before the Closing the written release and waiver from
all appropriate Persons of any Encumbrances arising therefrom. Without
derogating from the Parent's rights to withdraw cash from the RSN Subsidiaries
pursuant to Section 6.2.10, prior to the Closing, all intercompany receivables
or payables and loans then existing between Parent and its Affiliates (other
than the RSN Subsidiaries), on the one hand, and the RSN Subsidiaries, on the
other hand, shall be settled by way of capital contribution, dividend or
otherwise and all intercompany arrangements shall be terminated, except for
those arrangements contemplated by the Ancillary Agreements or as expressly set
forth in Section 6.11 of the Parent Disclosure Letter.
Section 6.12. COOPERATION WITH RESPECT TO FINANCIAL REPORTING. Until the
third anniversary of the Closing Date, each of Parent, on the one hand, and LMC,
on the other hand, shall, and shall cause each of their respective Affiliates
to, reasonably cooperate with the other (at the other's expense) in connection
with the other's preparation of historical financial statements of, or
including, the Transferred Business as required for the other's filings under
the Exchange Act following the Closing. Until the third anniversary of the
Closing Date, LMC shall, and shall cause Splitco to, (i) reasonably cooperate
with Parent (at Parent's expense) in connection with Parent's preparation of pro
forma and historical financial statements of the Transferred Business as may be
required for Parent's filings under the Exchange Act following the Closing and
(ii) use its reasonable best efforts to cause DTV to reasonably cooperate with
Parent (at Parent's expense) in connection with Parent's preparation of Parent's
financial statements as may be required for Parent's filings under the Exchange
Act following the Closing.
Section 6.13. NO SOLICITATION.
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6.13.1 Parent and its Affiliates have ceased all, and, from the date of
this Agreement until the Closing or the earlier termination of this
Agreement, Parent shall not, nor shall it authorize or permit any
of its Affiliates nor any of its or their respective officers,
directors, employees, representatives, consultants, advisors,
accountants or agents ("Representatives") to, (A) directly or
indirectly, initiate, solicit or knowingly encourage or facilitate
(including, in each case, by way of furnishing information) any
inquiries or the making of any proposal or offer with respect to,
or any indication of interest in, any acquisition by any third
party of all or a substantial portion of the assets of any
Transferred Subsidiary, any acquisition by any third party of any
securities or other ownership interests of any of the Transferred
Subsidiaries or any acquisition of all or a portion of the DTV
Shares (any such proposal, offer or indication of interest, a
"Parent Acquisition Proposal"), (B) directly or indirectly, engage
in any negotiations or discussions concerning a Parent Acquisition
Proposal, or provide access to its properties, books and records or
any non-public information or data to, any third party that has
made, or to Parent's Knowledge, is considering making a Parent
Acquisition Proposal or any Representatives thereof, (C) approve or
recommend, or propose to approve or recommend, or execute or enter
into any letter of intent, agreement in principle, option
agreement, acquisition agreement or other agreement relating to a
Parent Acquisition Proposal or (D) propose publicly or agree to any
of the foregoing relating to a Parent Acquisition Proposal.
6.13.2 Parent will, and will take such lawful action solely in its
capacity as a stockholder of DTV as may be reasonable to cause DTV
and each of its Affiliates to, cease any ongoing, and not initiate
any new, activities, directly or indirectly, through any
Representative or otherwise, to solicit, initiate or encourage
inquiries or submission of proposals or offers from any Person
relating to (A) any sale or other disposition of all or any
substantial portion of the assets of DTV or its Affiliates or all
or any substantial portion of the equity interests in DTV or its
Affiliates or (B) any business combination involving DTV or any of
its Affiliates, whether by merger, consolidation, tender offer or
otherwise (any of the foregoing, an "Extraordinary Transaction") or
to participate in any negotiation regarding, or furnishing to any
other Person any information with respect to, or otherwise
cooperate in any way with or assist in, facilitate or encourage,
any effort or attempt by any other Person to do or seek to do any
of the foregoing; PROVIDED, HOWEVER, that nothing in this Section
6.13.2 shall prohibit (or require Parent to prohibit) any director
of DTV from exercising (solely in his or her capacity as a director
of DTV) fiduciary duties to DTV or its shareholders (other than
Parent) under applicable Law;
6.13.3 From the date hereof until the earlier of the Closing or the
termination of this Agreement, Parent will (A) vote all voting
shares of DTV or of any other Person held by Parent and any
Affiliate of Parent against any Extraordinary Transaction that is
presented or proposed to them at any time after the date of this
Agreement and prior to the Closing or termination of this
Agreement, (B) not solicit proxies or become a "participant" in a
"solicitation" with respect to the shares of capital stock of DTV
(as such terms are defined in Regulation 14A under the Exchange
58
Act) in opposition to or in competition with the consummation of
the Exchange or otherwise encourage or assist any party in taking
or planning any action which would compete with or materially
impede, interfere with, adversely effect or tend to discourage or
inhibit the timely consummation of the Exchange and (C) in the
event of a tender offer for all or a portion of the outstanding
shares of capital stock of DTV, not tender any DTV Shares in such
tender offer and publicly announce, within 5 days of the
announcement of such tender offer, Parent's intention not to tender
any DTV Shares in such tender offer; PROVIDED, HOWEVER that, in the
event this Agreement is terminated by Parent or LMC pursuant to
Section 9.1.6 or 9.1.7 or by LMC pursuant to Section 9.1.9,
Parent's obligations under clauses (A), (B) and (C) of this
sentence shall continue until the date that is six (6) months from
the date of such termination, and, solely with respect to any
transaction in respect of at least a majority of DTV's outstanding
shares or all or substantially all of DTV's assets with respect to
which a bona fide written proposal was publicly announced and not
withdrawn prior to such termination, until the date that is twelve
(12) months from the date of such termination. Parent will notify
LMC promptly if any inquiries or proposals are received by, any
information is requested from, or any negotiations or discussions
are sought to be initiated or continued with, Parent or, to the
knowledge of Parent, DTV or any of its Affiliates, in each case in
connection with any Extraordinary Transaction.
6.13.4 LMC and its Affiliates have ceased all, and from the date hereof
until the Closing or the earlier termination of this Agreement, LMC
shall not, nor shall it authorize or permit any of its Affiliates
nor any of its Representatives to, (A) directly or indirectly,
initiate, solicit or knowingly encourage or facilitate (including,
in each case, by way of furnishing information) any inquiries or
the making of any proposal or offer with respect to, or any
indication of interest in, any acquisition by any third party of
all or a portion of the LMC Parent Shares (any such proposal, offer
or indication of interest, a "L Acquisition Proposal"), (B)
directly or indirectly, engage in any negotiations or discussions
concerning an L Acquisition Proposal, or provide access to its
properties, books and records or any non-public information or data
to, any third party that has made, or to LMC's Knowledge, is
considering making an L Acquisition Proposal or any Representatives
thereof, (C) approve or recommend, or propose to approve or
recommend, or execute or enter into any letter of intent, agreement
in principle, option agreement, acquisition agreement or other
agreement relating to an L Acquisition Proposal or (D) propose
publicly or agree to any of the foregoing relating to an L
Acquisition Proposal.
Section 6.14. DTV CHARTER RESTRICTIONS. From the date of this Agreement to
the Closing, neither LMC nor Parent shall, and each shall cause its respective
Affiliates not to, propose to the Board of Directors of DTV, nor enter into any
discussion with the Board of Directors of DTV regarding, any amendment to the
DTV certificate of incorporation or bylaws. From the date of this Agreement
until the earlier of the termination of this Agreement or the Closing,
notwithstanding the foregoing, to the extent that any amendment to DTV's
certificate of incorporation is proposed by DTV for approval of DTV's
stockholders, Parent will publicly state its intention to vote against, and
cause all DTV Shares beneficially owned by Parent to be voted
59
against any such amendment, unless LMC has consented to Parent voting in favor
of such amendment
Section 6.15. CERTAIN TAX MATTERS. Notwithstanding anything to the contrary
in this Agreement, except as expressly provided in the Tax Matters Agreement, as
set forth in Sections 4.20, 7.2.4, 7.2.5, 7.3.5, 7.3.6 or this 6.15, or as set
forth in Sections 4.12 or 6.10 (including any indemnities related to Sections
4.12 or 6.10), the parties' sole and exclusive representations, warranties,
agreements or other obligations (including indemnities) with respect to Tax
matters (interpreted in its broadest sense), including the Tax consequences of
the Transactions, shall be as set forth in the Tax Matters Agreement, and in the
event of any conflict or inconsistency between any provision of this Agreement
and any provision of the Tax Matters Agreement, the applicable provision of the
Tax Matters Agreement shall govern.
Section 6.16. ANCILLARY AGREEMENTS. Each of Parent and LMC shall, and shall
cause each of its respective Affiliates to, at or prior to the Closing, duly
execute and deliver each of the Ancillary Agreements (other than the Tax Matters
Agreement which shall be executed and delivered concurrently with this
Agreement) to which it is to become a party pursuant to the terms of this
Agreement.
Section 6.17. PLEDGED SHARES. Prior to or at the Closing, LMC shall unwind
or terminate any variable forward OTC contracts to which any or all of the
Pledged Shares are subject or substitute other securities, property or assets
for the Pledged Shares under any such contracts, such that, at the Closing all
of the Pledged Shares shall be delivered to Parent pursuant to Section 3.1;
provided, that, nothing in this Section 6.17 shall require LMC to terminate or
unwind such contracts; provided further, that, nothing in this Section 6.17
shall derogate from LMC's obligation to deliver the LMC Parent Shares in
accordance with Section 3.1.
ARTICLE VII.
CONDITIONS TO CLOSING
Section 7.1. MUTUAL CONDITIONS. The respective obligations of each party
hereto to consummate the transactions contemplated by this Agreement, including
the Exchange, shall be subject to the fulfillment or, if legally permitted,
waiver at or prior to the Closing of the following conditions:
7.1.1 No Governmental Authority of competent jurisdiction located in the
United States shall have enacted, issued, promulgated, enforced or
entered any statute, rule, regulation, judgment, decree, injunction
or other order of any nature that prohibits, enjoins or restrains
the consummation of the transactions contemplated by this
Agreement, including the Exchange.
7.1.2 Any waiting period (and any extension thereof) applicable to the
consummation of the transactions contemplated by this Agreement,
including the Exchange, under the HSR Act shall have expired or
been terminated.
7.1.3 Each of the Tax Matters Agreement and the Global Affiliation
Agreement Side Letter shall be valid, binding and in full force and
effect and shall not have been
60
repudiated by any party thereto (PROVIDED that the right to assert
this condition shall not be available to any party if the failure
of such condition to be satisfied was due to any wrongful action or
omission by such party).
7.1.4 The Parent Stockholder Approval shall have been obtained.
Section 7.2. CONDITIONS TO LMC'S OBLIGATIONS. The obligations of LMC to
consummate the transactions contemplated by this Agreement, including the
Exchange, shall be subject to the fulfillment or waiver by LMC prior to or at
the Closing of each of the following conditions:
7.2.1 Except as set forth in the following sentence, the representations
and warranties of Parent contained in this Agreement and in Article
III of the Tax Matters Agreement shall be true and correct (without
giving effect to any limitation as to "materiality" or "Material
Adverse Effect" set forth therein) at and as of the Closing Date as
if made at and as of such time (except to the extent expressly made
as of an earlier date, in which case as of such earlier date),
except where the failure of such representations and warranties to
be true and correct (without giving effect to any limitation as to
"materiality" or "Material Adverse Effect" set forth therein) would
not, individually or in the aggregate, have a Material Adverse
Effect on Splitco. The representations and warranties of the Parent
contained in Section 4.2 and Section 4.19 shall be true and correct
in all respects at and as of the Closing Date as if made at and as
of such time (except to the extent expressly made as of an earlier
date, in which case as of such earlier date). LMC shall have
received a certificate, dated the Closing Date, signed on behalf of
Parent by an executive officer of Parent to such effect.
7.2.2 Parent shall have performed in all material respects each
obligation and agreement to be performed by it at or prior to
Closing, and shall have complied in all material respects with each
covenant required by this Agreement and by Article V of the Tax
Matters Agreement to be performed or complied with by it at or
prior to the Closing, and LMC shall have received a certificate,
dated the Closing Date, signed on behalf of Parent by an authorized
officer of Parent to such effect.
7.2.3 Prior to or at the Closing, Parent shall have delivered to the
Stockholders the items to be delivered by Parent pursuant to
Section 3.3.
7.2.4 (i) Parent shall have received a private letter ruling from the IRS
which includes rulings to the effect that, subject to customary
caveats, for United States federal income tax purposes, no gain or
loss will be recognized by (and no amount will be includible in the
income of) Parent or any of its Affiliates on the Exchange, except
with respect to any DITs or ELAs (the "Parent Exchange Ruling"),
(ii) LMC shall have received a private letter ruling from the IRS
which includes rulings to the effect that, subject to customary
caveats, for United States federal income tax purposes, no gain or
loss will be recognized by (and no amount will be includible in the
income of) the Stockholders on the Exchange (the "LMC
61
Exchange Ruling," and collectively with the Parent Exchange Ruling,
the "Exchange Rulings"), (iii) each of the Exchange Rulings shall
be in form and substance reasonably satisfactory to LMC, and (iv)
neither LMC, Parent nor any of their respective Affiliates shall
have been notified by the IRS that either Exchange Ruling has been
withdrawn, invalidated or modified in an adverse manner.
7.2.5 LMC shall have received the LMC Tax Opinion.
7.2.6 No change, effect, event, occurrence, development, condition or
circumstance shall have occurred which has had or would be
reasonably expected to have a Material Adverse Effect on Splitco.
7.2.7 The FCC Consent shall have been obtained, without the imposition of
any conditions other than those contemplated by Sections 6.6.5 as
applicable to LMC and its Affiliates.
Section 7.3. CONDITIONS TO PARENT'S OBLIGATIONS. The obligations of Parent
to consummate the transactions contemplated by this Agreement, including the
Exchange shall be subject to the fulfillment or waiver at or prior to the
Closing of each of the following conditions:
7.3.1 Except as set forth in the following sentence, the representations
and warranties of LMC contained in this Agreement and in Article IV
of the Tax Matters Agreement shall be true and correct (without
giving effect to any limitation as to "materiality" or "Material
Adverse Effect" set forth therein) at and as of the Closing Date as
if made at and as of such time (except to the extent expressly made
as of an earlier date, in which case as of such earlier date),
except where the failure of such representations and warranties to
be true and correct (without giving effect to any limitation as to
"materiality" or "Material Adverse Effect" set forth therein) would
not, individually or in the aggregate, have a Material Adverse
Effect on LMC's ability to consummate the transactions contemplated
by this Agreement, including the Exchange. The representations and
warranties of LMC contained in Section 5.5 shall be true and
correct in all respects at and as of the Closing Date as if made at
and as of such time (except to the extent expressly made as of an
earlier date, in which case as of such earlier date). Parent shall
have received a certificate, dated the Closing Date, signed on
behalf of LMC by an executive officer of LMC to such effect.
7.3.2 LMC and each Stockholder shall have performed in all material
respects each obligation and agreement to be performed by it at or
prior to Closing, and shall have complied in all material respects
with each covenant required by this Agreement and by Article V of
the Tax Matters Agreement to be performed or complied with by it at
or prior to the Closing, and Parent shall have received a
certificate, dated the Closing Date, signed on behalf of LMC by an
authorized officer of LMC to such effect.
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7.3.3 Prior to or at the Closing, the Stockholders shall have delivered
to Parent the items to be delivered pursuant to Section 3.4.
7.3.4 The Disinterested Stockholder Approval shall have been obtained.
7.3.5 (i) LMC shall have received the LMC Exchange Ruling, (ii) Parent
shall have received the Parent Exchange Ruling, (iii) Parent shall
have received a private letter ruling from the IRS, in form and
substance reasonably satisfactory to Parent, which includes rulings
to the effect that, subject to customary caveats, for United States
federal income tax purposes, no gain or loss will be recognized by
(and no amount will be includible in the income of) Parent or any
of its Affiliates on the Parent Restructuring, except with respect
to any DITs or ELAs (the "Parent Restructuring Ruling"), (iv) each
of the Exchange Rulings and the Parent Restructuring Ruling shall
be in form and substance reasonably satisfactory to Parent, and (v)
neither LMC, Parent nor any of their respective Affiliates shall
have been notified by the IRS that either Exchange Ruling or the
Parent Restructuring Ruling has been withdrawn, invalidated or
modified in an adverse manner.
7.3.6 Parent shall have received the Parent Tax Opinion.
7.3.7 The FCC Consent shall have been obtained, without the imposition of
any conditions other than those contemplated by Sections 6.6.5 as
applicable to Parent and its Affiliates.
Section 7.4. FRUSTRATION OF CLOSING CONDITIONS. Neither Parent, nor LMC may
rely on the failure of any condition set forth in this Article VII to be
satisfied if such failure was caused by such party's failure to act in good
faith or to use its reasonable best efforts to cause the Closing to occur as
required by Section 6.6.
ARTICLE VIII.
INDEMNIFICATION
Section 8.1. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
8.1.1 The representations and warranties contained in this Agreement
shall survive the Closing as follows: (i) the representations and
warranties contained in Sections 4.1 (Organization and Standing),
4.2 (Capitalization), 4.3 (Corporate Power and Authority), 4.4
(Shareholder Votes Required), 4.19 (Title to DTV Shares), 4.22
(Brokers and Agents), 4.23 (Investigation; Reliance), 5.1
(Organization and Standing), 5.2 (Corporate Power and Authority),
5.3 (No Vote Required), 5.5 (LMC Parent Shares), 5.10
(Investigation and Reliance) and 5.11 (Brokers and Agents) shall
survive indefinitely; (ii) the representations and warranties
contained in Sections 4.12 (Employee Benefit Plans) shall survive
until the date that is 60 calendar days following the expiration of
the statute of limitations applicable to actions with respect
thereto; (iii) the representations and warranties contained in
Sections 4.20.6, 4.20.10 and 4.20.11 (relating to Certain Tax
63
Matters) shall survive, but solely for purposes of the Tax Matters
Agreement as provided therein; and (iv) all other representations
and warranties contained in this Agreement (other than the
representations and warranties contained in Sections 4.20.1 -
4.20.5 and Sections 4.20.7 - 4.20.9 (Certain Tax Matters), which
shall not survive the Closing) shall survive until the date that is
18 months following the Closing Date.
8.1.2 The covenants and agreements made by each party in this Agreement
shall survive the Closing, unless specified to the contrary herein.
Notwithstanding Section 8.1.1, any breach of representation,
warranty, covenant or agreement in respect of which indemnity may
be sought under this Agreement shall survive the time at which it
would otherwise terminate pursuant to Section 8.1.1 or 8.1.2 if
notice of the inaccuracy or breach thereof giving rise to such
right of indemnity shall have been given to the party against whom
such indemnity may be sought prior to such time.
Section 8.2. INDEMNIFICATION.
8.2.1 Provided that the Closing shall have occurred, subject to Sections
8.1 and 8.2.2, Parent hereby agrees to indemnify each LMC
Indemnitee against and agrees to hold each of them harmless
(without duplication) from any and all Damages incurred or suffered
by any LMC Indemnitee arising out of or resulting from (i) any
representation or warranty of Parent contained in this Agreement
(other than the representations and warranties contained in Section
4.20) not being true and correct (which representations and
warranties (except those made as of a specified date) shall be
deemed to have been made again as of the Closing Date for purposes
of this Section 8.2.1) or (ii) any breach or nonperformance of any
covenant or agreement made or to be performed by Parent.
8.2.2 No indemnification by Parent shall be due and payable under Section
8.2.1 in respect of any Parent Basket Breach unless and until the
cumulative amount of all Damages arising out of or resulting from
all such Parent Basket Breaches exceeds the Parent Basket Amount,
whereupon Parent will be obligated to indemnify the LMC Indemnitees
for the cumulative amount of Damages incurred or suffered by the
LMC Indemnitees in excess of the Parent Basket Amount, and only to
the extent of such excess. Parent shall not be obligated to
indemnify the LMC Indemnitees for Damages arising out of or
resulting from all Parent Basket Breaches under this Agreement in
an aggregate amount in excess of the Maximum Amount; PROVIDED that
the limitation on Parent's obligations set forth in this sentence
shall not apply to breaches of the representations and warranties
contained in Section 4.12. The limitations on indemnification set
forth in this Section 8.2.2 shall not be applicable to (x) any
Parent Basket Exception Breach (and the LMC Indemnitees will be
entitled to indemnification with respect to any Parent Basket
Exception Breach without regard to any Parent Basket Amount or any
Maximum Amount) and (y) any claim based upon fraud or knowing
misrepresentation. For purposes of determining the amount of
Damages arising from any Parent Basket Breach (but not for purposes
of determining whether any
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such Parent Basket Breach has occurred), the representations and
warranties shall be read without giving effect to any limitations
or qualifications as to "materiality" (including the words
"material" or "materially") or "Material Adverse Effect" set forth
therein.
8.2.3 Provided that the Closing shall have occurred, subject to Sections
8.1 and 8.2.4, LMC hereby agrees to indemnify each Parent
Indemnitee against and agrees to hold each of them harmless
(without duplication) from any and all Damages incurred or suffered
by any Parent Indemnitee arising out of or resulting from (i) any
representation or warranty of LMC contained in this Agreement not
being true and correct (which representations and warranties
(except those made as of a specified date) shall be deemed to have
been made again as of the Closing Date for purposes of this Section
8.2.3) or (ii) any breach or nonperformance of any covenant or
agreement made or to be performed by LMC pursuant to this
Agreement.
8.2.4 No indemnification by LMC shall be due and payable under Section
8.2.3(i) in respect of any Liberty Basket Breach unless and until
the cumulative amount of all Damages arising out of or resulting
from all such Liberty Basket Breaches exceeds the Liberty Basket
Amount, whereupon LMC will be obligated to indemnify the Parent
Indemnitees for the cumulative amount of Damages incurred or
suffered by the Parent Indemnitees in excess of the Liberty Basket
Amount, and only to the extent of such excess. LMC shall not be
obligated to indemnify the Parent Indemnitees for Damages arising
out of or resulting from all Liberty Basket Breaches under this
Agreement in an aggregate amount in excess of the Maximum Amount.
The limitations on indemnification set forth in this Section 8.2.4
shall not be applicable to (x) any Liberty Basket Exception Breach
(and the Parent Indemnitees will be entitled to indemnification
with respect to any Liberty Basket Exception Breach without regard
to any Liberty Basket Amount or any Maximum Amount) and (y) any
claim based upon fraud or knowing misrepresentation. For purposes
of determining the amount of Damages arising from any Liberty
Basket Breach (but not for purposes of determining whether any such
Liberty Basket Breach has occurred), the representations and
warranties shall be read without giving effect to any limitations
or qualifications as to "materiality" (including the words
"material" and "materially") or "Material Adverse Effect" set forth
therein.
Section 8.3. PROCEDURES.
8.3.1 The party or parties seeking indemnification under Section 8.2 (the
"Indemnified Party") agrees to give prompt notice to the party or
parties against whom indemnity is sought (the "Indemnifying Party")
of the assertion of any claim, or the commencement of any suit,
action or proceeding in respect of which indemnity may be sought
under such Section and will provide the Indemnifying Party such
information with respect thereto in its possession that the
Indemnifying Party may reasonably request; PROVIDED, HOWEVER, that
failure to give such notification shall not affect the
indemnification provided hereunder except to the
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extent the Indemnifying Party shall have been actually materially
prejudiced as a result of such failure.
8.3.2 In the case of a third party claim, the Indemnified Party shall be
entitled to exercise full control of the defense, compromise or
settlement of any third party claim, investigation, action, suit or
proceeding unless the Indemnifying Party within a reasonable time
after the giving of notice of such indemnity claim by the
Indemnified Party shall: (i) deliver a written confirmation to such
Indemnified Party that the indemnification provisions of Section
8.2 are applicable to such claim, investigation, action, suit or
proceeding and that the Indemnifying Party will indemnify such
Indemnified Party in respect of such claim, action or proceeding
pursuant to the terms of Section 8.2, (ii) notify such Indemnified
Party in writing of the Indemnifying Party's intention to assume
the defense thereof and (iii) retain legal counsel reasonably
satisfactory to such Indemnified Party to conduct the defense of
such claim, investigation, action, suit or proceeding.
8.3.3 If the Indemnifying Party so assumes the defense of any such claim,
investigation, action, suit or proceeding in accordance herewith,
then such Indemnified Party shall cooperate with the Indemnifying
Party in any manner that the Indemnifying Party reasonably may
request in connection with the defense, compromise or settlement
thereof. If the Indemnifying Party so assumes the defense of any
such claim, investigation, action, suit or proceeding, the
Indemnified Party shall have the right to employ separate counsel
and to participate in (but not control) the defense, compromise or
settlement thereof, but the fees and expenses of such counsel shall
be the expense of such Indemnified Party unless (i) the
Indemnifying Party has agreed to pay such fees and expenses, (ii)
any relief other than the payment of money damages is sought
against the Indemnified Party or (iii) such Indemnified Party shall
have been advised by its regular outside counsel that there may be
one or more legal defenses available to it that are different from
or additional to those available to the Indemnifying Party or that
a conflict of interest between the Indemnifying Party and the
Indemnified Party in the conduct of the defense of such action
would reasonably be expected (in which case the Indemnifying Party
shall not have the right to control the defense, compromise or
settlement of such action on behalf of the Indemnified Party), and
in any such case described in clauses (i), (ii) or (iii) the
reasonable fees and expenses of one such separate counsel, and one
local counsel, if necessary, shall be borne by the Indemnifying
Party. No Indemnified Party shall settle or compromise or consent
to entry of any judgment with respect to any such action for which
it is entitled to indemnification hereunder without the prior
consent of the Indemnifying Party, which consent shall not be
unreasonably withheld or delayed, unless the Indemnifying Party
shall have failed, after reasonable notice thereof, to undertake
control of such action in the manner provided above in this Section
8.3 to the extent the Indemnifying Party was entitled to do so
pursuant to this Section 8.3. The Indemnifying Party shall not,
without the consent of such Indemnified Party, settle or compromise
or consent to entry of any judgment with respect to any such claim,
investigation, action, suit or proceeding (x) in which any relief
other than the payment of money damages is or may be sought against
such Indemnified
66
Party or (y) that does not include as an unconditional term thereof
the giving by the claimant, party conducting such investigation,
plaintiff or petitioner to such Indemnified Party of a release from
all liability with respect to such claim, action, suit or
proceeding.
Section 8.4. EXCLUSIVITY. Following the Closing, except in the case of
common law fraud, the sole and exclusive monetary remedy of the parties with
respect to any and all claims arising from any breach of this Agreement or any
of the other matters addressed in Section 8.2 shall be pursuant to the
indemnification provisions set forth in this Article VIII; PROVIDED that this
Section 8.4 shall not be construed so as to derogate from or otherwise limit any
party's right to seek the remedy of specific performance, injunctive relief or
other non-monetary equitable remedies with respect to any such breach.
Section 8.5. CERTAIN RIGHTS AND LIMITATIONS.
8.5.1 The treatment of any Tax costs or Tax benefits to any party as a
result of any indemnification payment(s) pursuant to this Article
VIII shall be as set forth in the Tax Matters Agreement.
8.5.2 Notwithstanding anything to the contrary herein, no party shall be
entitled to assert any right to indemnification under this Article
VIII unless, and until, the Closing shall have occurred.
ARTICLE IX.
TERMINATION
Section 9.1. TERMINATION. This Agreement may be terminated and the Exchange
and other transactions contemplated hereby abandoned at any time prior to the
consummation of the Closing, whether before or after receipt of the Requisite
Parent Stockholder Approval, under the following circumstances:
9.1.1 by mutual written consent of Parent and LMC;
9.1.2 by LMC or Parent upon written notice to the other if the Closing
shall not have been consummated on or before December 22, 2007 (the
"Termination Date"); PROVIDED, that if, as of the Termination Date
all conditions to this Agreement shall have been satisfied or
waived (other than those that are satisfied by action taken at the
Closing) other than the conditions set forth in Sections 7.2.7,
7.3.7, 7.2.4 or 7.3.5 then the Termination Date shall be extended
to March 22, 2008 (the "Extended Termination Date");
9.1.3 by LMC upon written notice to Parent, if there has been a breach by
Parent or Splitco of any representation, warranty, covenant or
agreement contained in this Agreement or the Tax Matters Agreement
which would result in a failure of a condition set forth in Section
7.2 and either cannot be cured prior to the Termination Date, or is
not cured within 45 days after LMC shall have given Parent written
notice stating LMC's intention to terminate this Agreement
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pursuant to this Section 9.1.3 and the basis for such termination;
PROVIDED, at the time of the delivery of such notice, LMC shall not
be in material breach of its obligations under this Agreement or
the Tax Matters Agreement;
9.1.4 by Parent upon written notice to LMC, if there has been a breach by
LMC of any representation, warranty, covenant or agreement
contained in this Agreement or the Tax Matters Agreement which
would result in a failure of a condition set forth in Section 7.3
and either cannot be cured prior to the Termination Date, or is not
cured within 45 days after Parent shall have given LMC written
notice stating Parent's intention to terminate this Agreement
pursuant to this Section 9.1.4 and the basis for such termination;
PROVIDED, at the time of the delivery of such notice, Parent shall
not be in material breach of its obligations under this Agreement
or the Tax Matters Agreement;
9.1.5 by either LMC or Parent upon written notice to the other party
hereto, if any Governmental Authority of competent jurisdiction
shall have issued an order or taken any other action permanently
restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement, and such order or other action
shall have become final and non-appealable, PROVIDED that the party
seeking to terminate this Agreement pursuant to this Section 9.1.5
shall have used its reasonable best efforts to remove such order or
other action; PROVIDED, FURTHER, that the right to terminate this
Agreement under this Section 9.1.5 shall not be available to a
party if the issuance of such final, non-appealable order was
primarily due to the failure of such party to perform any of its
obligations under this Agreement, including, without limitation,
the obligation of LMC and Parent to comply with Section 6.6 of this
Agreement so as to allow the parties to close the transactions
contemplated by this Agreement as promptly as practicable;
9.1.6 by either LMC or Parent upon written notice to the other party
hereto if the Parent Stockholder Approval shall not have been
obtained by reason of the failure to obtain the required vote at
the Parent Stockholders' Meeting or any adjournment thereof;
9.1.7 by either LMC or Parent upon written notice to the other party
hereto, if the Disinterested Stockholder Approval shall not have
been obtained by reason of the failure to obtain the required vote
at the Parent Stockholders' Meeting or any adjournment thereof;
PROVIDED that LMC (i) shall not be entitled to exercise its
termination right pursuant to this Section 9.1.7 earlier than the
eleventh (11th) Business Day following the Parent Stockholders'
Meeting; and (ii) shall only be entitled to exercise such right if
Parent shall not have delivered written notice of its waiver of the
condition set forth in Section 7.3.4 and its termination right
under this Section 9.1.7 prior to such eleventh (11th) Business
Day;
9.1.8 by LMC if there shall have occurred following the date of this
Agreement a Material Adverse Effect on Splitco which is continuing
and has not been cured within 30 days after LMC shall have given
Parent written notice stating LMC's
68
intention to terminate this Agreement pursuant to this Section
9.1.8 and describing in reasonable detail the basis for such
termination; or
9.1.9 by LMC upon written notice to Parent, if there shall have occurred
a Parent Change in Recommendation; PROVIDED that LMC's right to
terminate pursuant to this Section 9.1.9 shall terminate ten (10)
Business Days following the earlier of the date notice of the
Parent Change in Recommendation is filed with the SEC and the date
LMC receives written notice from Parent pursuant to Section 10.1 of
such Parent Change in Recommendation.
Section 9.2. EFFECT OF TERMINATION.
9.2.1 In the event of the termination of this Agreement pursuant to
Section 9.1, this Agreement, except for the provisions of (i)
Section 6.9.1 relating to the obligation of the parties to keep
confidential certain information obtained by them, (ii) Section
6.13.3 relating to Parents obligation with respect to the DTV
Shares, (iii) Article X, and (iv) this Section 9.2.1, which shall,
in each case, remain in full force and effect, shall become void
and have no effect, without any liability on the part of any party
hereto or its directors, officers or stockholders. Notwithstanding
the foregoing, nothing in this Section 9.2.1 shall relieve any
party hereto of liability for a willful breach of any of its
obligations under this Agreement.
9.2.2 If:
(i) either LMC or Parent terminates this Agreement pursuant to
9.1.6 (and the votes associated with the shares held by the Murdoch
Interests shall have been disregarded under the ASX listing rules
for purposes of the Parent Stockholder Approval) or 9.1.7 (and
prior to vote at the Parent Stockholders' Meeting there shall not
have occurred a Parent Change in Recommendation), then Parent shall
pay to LMC by wire transfer of immediately available funds an
amount equal to one hundred million dollars ($100,000,000); or
(ii) (A) (1) either LMC or Parent terminates this Agreement
pursuant to Section 9.1.7 and (2) prior to the vote at Parent
Stockholders' Meeting, there shall have occurred a Parent Change in
Recommendation, (B) (1) either LMC or Parent terminates this
Agreement pursuant to Section 9.1.6 and (2) the votes associated
with the shares held by the Murdoch Interests shall not have been
disregarded under the ASX listing rules for purposes of the Parent
Stockholder Approval or (C) LMC terminates this Agreement pursuant
to Section 9.1.9, then Parent shall pay to LMC by wire transfer of
immediately available funds an amount equal to three hundred
million dollars ($300,000,000) (the amounts payable under
paragraphs (i) and (ii) of Section 9.2.2, as the case may be, the
"Termination Fee").
Parent acknowledges that the agreements contained in this Section
9.2.2 are an integral part of the transactions contemplated by this
Agreement and that, without these agreements, LMC would not enter
into this Agreement; accordingly, if
69
Parent fails to pay when due the amounts due pursuant to this
Section 9.2.2, LMC shall be entitled to interest on the amounts set
forth in this Section 9.2.2 at the prime rate of Citibank, N.A. in
effect on the date such payment was required to be made. All
payments made pursuant to paragraphs (i) and (ii) of this Section
9.2.2 shall be made by wire transfer of immediately available funds
within two (2) Business Days of the applicable termination date. If
payable, the Termination Fee shall not be payable more than once
under this Agreement.
ARTICLE X.
MISCELLANEOUS
Section 10.1. NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered personally, by
facsimile (with confirming copy sent by one of the other delivery methods
specified herein), by overnight courier or sent by certified, registered or
express air mail, postage prepaid, and shall be deemed given when so delivered
personally, or when so received by facsimile or courier, or, if mailed, three
calendar days after the date of mailing, as follows:
If to Parent: News Corporation
1211 Avenue of the Americas
New York, NY 10036
Facsimile: (212) 768-9896
Attention: General Counsel
with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Facsimile: (917) 777-2000
Attention: Lou R. Kling
Howard L. Ellin
If to LMC: Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Facsimile: (720) 875-5382
Attention: General Counsel
with a copy to: Baker Botts L.L.P.
30 Rockefeller Plaza
44th Fl.
New York, NY 10112
Facsimile: (212) 408-2501
Attention: Frederick H. McGrath
Jonathan Gordon
70
or to such other address and with such other copies as any party hereto shall
notify the other parties hereto (as provided above) from time to time.
Section 10.2. EXPENSES. Regardless of whether the transactions provided for
in this Agreement are consummated, except as otherwise expressly provided
herein, each of the parties hereto shall pay its own expenses incident to this
Agreement and the transactions contemplated herein (including legal fees,
accounting fees, investment banking fees and filing fees). Notwithstanding
anything herein to the contrary, Parent shall pay and be responsible for all
reasonable and reasonably documented out-of-pocket fees, costs and expenses
incurred by DTV in connection with the negotiation of this Agreement and any of
the Ancillary Agreements, LMC's due diligence review of DTV and DTV's
Subsidiaries, and DTV's actions taken in anticipation of the consummation of the
Transactions, including the fees and expenses of the advisers, accountants and
legal counsel of DTV and of any special committee of the board of directors of
DTV and any filing fees paid to any Governmental Authority.
Section 10.3. GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement shall
be governed by, and construed in accordance with, the internal Laws of the State
of Delaware, without reference to the choice of law principles thereof. Each of
the parties hereto irrevocably submits to the exclusive jurisdiction of the
courts of the Delaware Chancery Courts, or, if the Delaware Chancery Courts do
not have subject matter jurisdiction, in the state courts of the State of
Delaware located in Wilmington, Delaware, or in the United States District Court
for any district within such state, for the purpose of any Action or judgment
relating to or arising out of this Agreement or any of the transactions
contemplated hereby and to the laying of venue in such court. Service of process
in connection with any such Action may be served on each party hereto by the
same methods as are specified for the giving of notices under this Agreement.
Each party hereto irrevocably and unconditionally waives and agrees not to plead
or claim any objection to the laying of venue of any such Action brought in such
courts and irrevocably and unconditionally waives any claim that any such Action
brought in any such court has been brought in an inconvenient forum.
Section 10.4. WAIVER OF JURY TRIAL. EACH PARTY HERETO ACKNOWLEDGES AND
AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND, THEREFORE, EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO
ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
EACH PARTY HERETO CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT
OR ATTORNEY OF ANY OTHER PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF SUCH ACTION, SEEK TO ENFORCE
THE FOREGOING WAIVER, (B) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (C) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY,
AND (D) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
71
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 10.4.
Section 10.5. ASSIGNMENT; SUCCESSORS AND ASSIGNS; NO THIRD PARTY RIGHTS.
This Agreement may not be assigned by any party hereto without the prior written
consent of the other parties hereto, and any attempted assignment shall be null
and void; PROVIDED, HOWEVER, that following the Closing LMC will be permitted to
assign its rights hereunder, without obtaining the consent of Parent, to any
Person (any such Person a "LMC Related Party") to which ownership of one hundred
percent (100%) of the shares of capital stock of Splitco are or have been
transferred in connection with any spin off, split off or other distribution of
the securities of such transferee in which holders of LMC capital stock
immediately prior thereto are entitled to, or have the opportunity to,
participate in such distribution. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
permitted assigns. This Agreement shall be for the sole benefit of the parties
hereto, and their respective successors and permitted assigns and is not
intended, nor shall be construed, to give any Person, other than the parties
hereto and their respective successors and permitted assigns any legal or
equitable right, benefit, remedy or claim hereunder, except in the case of
Section 10.2, DTV.
Section 10.6. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed an original agreement, but all of which together
shall constitute one and the same instrument.
Section 10.7. TITLES AND HEADINGS. The headings and table of contents in
this Agreement are for reference purposes only, and shall not in any way affect
the meaning or interpretation of this Agreement.
Section 10.8. AMENDMENT AND MODIFICATION. This Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 10.9. PUBLICITY; PUBLIC ANNOUNCEMENTS. The initial press release
concerning this Agreement and the Transactions shall be a joint press release
approved in advance by Parent and LMC and thereafter each of Parent and LMC
shall consult with the other prior to issuing any press releases or otherwise
making public announcements with respect to this Agreement and the Transactions
and prior to making any filings with any third party or any Governmental
Authority (including any national securities exchange or interdealer quotation
system) with respect thereto, except as may be required by applicable Laws or
the requirements of any national securities exchange or interdealer quotation
system on which the securities of Parent or LMC are listed or quoted; PROVIDED
that the foregoing limitations shall not apply to any disclosure of any
information concerning this Agreement or the Transactions (i) which Parent or
LMC deems appropriate in its reasonable judgment, in light of its status as a
publicly owned company, including without limitation to securities analysts and
institutional investors and in press interviews; and (ii) in connection with any
dispute between the parties regarding this Agreement or the Transactions.
72
Section 10.10. WAIVER. Any of the terms or conditions of this Agreement may
be waived at any time by the party or parties hereto entitled to the benefit
thereof, but only by a writing signed by the party or parties waiving such terms
or conditions.
Section 10.11. SEVERABILITY. If any term, provisions, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any party. Upon such
determination, the parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the parties as closely as
possible in an acceptable manner in order that the transactions contemplated
hereby be consummated as originally contemplated to the fullest extent possible.
Section 10.12. NO STRICT CONSTRUCTION. LMC and Parent each acknowledge that
this Agreement has been prepared jointly by the parties hereto and shall not be
strictly construed against any party hereto.
Section 10.13. ENTIRE AGREEMENT. This Agreement (including the Disclosure
Letters, Schedules and Exhibits attached hereto or delivered in connection
herewith), the Ancillary Agreements and the Confidentiality Agreement constitute
the entire agreement among the parties hereto with respect to the matters
covered hereby and thereby, and supersede all previous written, oral or implied
understandings among them with respect to such matters.
Section 10.14. EQUITABLE REMEDIES. Neither rescission, set-off nor
reformation of this Agreement shall be available as a remedy to any of the
parties hereto. The parties hereto agree that irreparable damage would occur in
the event any of the provisions of this Agreement were not to be performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof in addition to any other remedies at
Law or in equity.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
NEWS CORPORATION
By: /s/ John P. Nallen
------------------------------------------
Name: John P. Nallen
Title: Executive Vice President & Deputy
CFO
LIBERTY MEDIA CORPORATION
By: /s/ Gregory B. Maffei
------------------------------------------
Name: Gregory B. Maffei
Title: President & CEO
OMITTED SCHEDULES
The following schedules to the Share Exchange Agreement have been omitted
pursuant to Regulation S-K Item 601(b)(2):
Schedule A: Form of LMC Tax Opinion Representations
Schedule B: Fox Sports net Current Assets & Liabilities Descriptions
Schedule C: Parent Restructuring
Schedule D: Form of Parent Tax Opinion Representations
The Registrant agrees to furnish supplementally a copy of any of the foregoing
to the Commission upon request.
2
EXHIBIT 10.39
TAX MATTERS AGREEMENT
This Tax Matters Agreement (the "AGREEMENT") is entered into as of
December 22, 2006, by and among News Corporation, a Delaware corporation
("PARENT"), and Liberty Media Corporation, a Delaware corporation ("LMC").
RECITALS
WHEREAS, as of the date hereof, Parent is the common parent of an
affiliated group of domestic corporations within the meaning of Section 1504(a)
of the Code, and the members of the affiliated group have heretofore joined in
filing consolidated federal income Tax Returns;
WHEREAS, pursuant to the Share Exchange Agreement, dated as of
December 22, 2006 (the "SHARE EXCHANGE AGREEMENT"), by and between Parent and
LMC, as of the Closing Date, (a) the assets of Greenlady Corp., a newly formed
Delaware corporation ("SPLITCO"), will consist solely of (i) all issued and
outstanding equity interests of each Transferred Subsidiary, (ii) the DTV Shares
and (iii) the Cash Amount and (b) Parent will own all of the Splitco Shares;
WHEREAS, on the Closing Date, Parent will transfer the Splitco Shares
to the Stockholders in exchange for the LMC Parent Shares;
WHEREAS, the obligation of LMC to consummate the Exchange is
conditioned, among other things, upon the receipt of the LMC Exchange Ruling and
the LMC Tax Opinion, and the obligation of Parent to consummate the Exchange is
conditioned, among other things, upon the receipt of the Parent Exchange Ruling,
the Parent Restructuring Ruling and the Parent Tax Opinion;
WHEREAS, the Parties to this Agreement intend that the Exchange
qualify as a tax-free exchange under Section 355(a) of the Code and this
Agreement together with the Share Exchange Agreement constitute a "plan of
reorganization," as defined in Section 368 of the Code; and
WHEREAS, in anticipation of the Exchange, the Parties desire to enter
into this Agreement to provide for certain Tax matters, including the assignment
of responsibility for the preparation and filing of Tax Returns, the payment of
and indemnification for Taxes (including Taxes with respect to the Exchange and
the Parent Restructuring), entitlement to refunds of Taxes, and the prosecution
and defense of any Tax Contest;
NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the Parties hereby agree as follows:
1
ARTICLE I
DEFINITIONS
Section 1.1 GENERAL. Capitalized terms used in this Agreement and not
defined herein shall have the meanings that such terms have in the Share
Exchange Agreement. As used in this Agreement, the following terms shall have
the following meanings:
"ACQUISITION TRANSACTIONS" shall mean the acquisition by the LMC
Entities, Liberty Media LLC or their respective predecessors or Affiliates of
LMC Parent Shares or stock (or ADSs) of The News Corporation Limited (now known
as News Holdings Limited) in each of the Domestication and the Merger
Transactions.
"ACTION" shall have the meaning specified in the Share Exchange
Agreement.
"AFFILIATE" shall have the meaning specified in the Share Exchange
Agreement.
"AGREEMENT" shall have the meaning specified in the preamble.
"ANCILLARY AGREEMENTS" shall have the meaning specified in the Share
Exchange Agreement.
"BUSINESS DAY" shall have the meaning specified in the Share Exchange
Agreement.
"CLOSING" shall have the meaning specified in the Share Exchange
Agreement.
"CLOSING DATE" shall have the meaning specified in the Share Exchange
Agreement.
"CLOSING OF THE BOOKS METHOD" means the apportionment of items between
portions of a Taxable period based on a closing of the books and records as of
the end of the day on the Closing Date (as if the Closing Date were the end of
the Taxable period), provided that any items not susceptible to such
apportionment shall be apportioned pro rata on the basis of elapsed days during
the relevant portion of the Taxable period.
"CODE" shall have the meaning specified in the Share Exchange
Agreement.
"DAMAGES" shall have the meaning specified in the Share Exchange
Agreement.
"DISCLOSING PARTY" shall have the meaning specified in Section 8.3.
"DTV SHARES" shall have the meaning specified in the Share Exchange
Agreement.
"DOMESTICATION" means the "Proposed Transaction" as defined in the
Information Memorandum.
"EXCHANGE" shall have the meaning specified in the Share Exchange
Agreement.
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"EXCHANGE TAXES" means all Taxes (including any United States federal,
state, local or foreign Taxes, but excluding Transfer Taxes) resulting from the
Exchange or the Parent Restructuring.
"FINAL DETERMINATION" means a determination within the meaning of
Section 1313 of the Code or any similar provision of state or local Law.
"FOX SPORTS AGREEMENTS" means (i) the Parents' Agreement, dated as of
July 15, 1999, by and among Liberty Media Corporation (now known as Liberty
Media LLC) and The News Corporation Limited (now known as News Holdings
Limited), and (ii) the Agreement and Plan of Merger, dated as of July 15, 1999,
by and among Liberty Media Corporation (now known as Liberty Media LLC), LMC
Newco U.S., Inc., New LMC KBL, Inc., New LMC Bay Area, Inc., New LMC Chicago,
Inc., New LMC Northwest, Inc., New LMC Upper Midwest, Inc., The News Corporation
Limited (now known as News Holdings Limited), and News Publishing Australia
Limited.
"GM AGREEMENTS" means (i) the Stock Purchase Agreement, dated April 9,
2003, as amended, by and among General Motors Corporation, Hughes Electronics
Corporation and The News Corporation Limited (now known as News Holdings
Limited), and (ii) the Agreement and Plan of Merger, dated April 9, 2003, as
amended, between Hughes Electronics Corporation, The News Corporation Limited
(now known as News Holdings Limited), and GMH Merger Sub, Inc.
"GM TRANSACTION" means the transactions effected by GM Agreements.
"GOVERNMENTAL AUTHORITY" shall have the meaning specified in the Share
Exchange Agreement.
"INFORMATION MEMORANDUM" means the information memorandum of The News
Corporation Limited (now known as News Holdings Limited), dated September 15,
2004, relating to the U.S. reincorporation and certain acquisitions from Murdoch
family interests.
"INTEREST RATE" means LIBOR, as adjusted as of each Interest Rate
Determination Date, plus 2%. Interest will be calculated at the applicable
Interest Rate based upon the number of days elapsed in each year of 365/366
days.
"INTEREST RATE DETERMINATION DATE" means the Closing Date and each
March 31, June 30, September 30 and December 31 thereafter.
"INTERNAL RESTRUCTURING" means the "Post-Transaction Internal
Restructuring" as defined in the Information Memorandum.
"IRS" shall have the meaning specified in the Share Exchange
Agreement.
"IRS SUBMISSION" shall mean the Ruling Request and any supplemental
materials submitted to the IRS relating thereto.
3
"JOINT RULING REQUEST" means any ruling request submitted jointly by
Parent and LMC to the IRS for (x) the Rulings, and (y) any other ruling in
connection with the Exchange or the Parent Restructuring that Parent and LMC
deem to be appropriate.
"LIBERTY NEWCO INTERNATIONAL AGREEMENT" shall mean the Agreement and
Plan of Merger, dated as of December 3, 2001, by and among Liberty Media
Corporation (now known as Liberty Media LLC), Liberty Newco International, Inc.,
The News Corporation Limited (now known as News Holdings Limited), and News
Publishing Australia Limited.
"LIBOR" means, with respect to each period between two consecutive
Interest Rate Determination Dates (an "interest period"), a rate determined at
approximately 11:00 a.m., London time, two London business days before the
applicable Interest Rate Determination Date (the "determination time") on the
following basis: (A) the rate appearing on Telerate Page 3750 (or on any
successor or substitute page of such service, or any successor to or substitute
for such service, providing rate quotations comparable to those currently
provided on such page of such service, as determined by LMC from time to time,
for purposes of providing quotations of interest rates applicable to dollar
deposits in the London interbank market) at the determination time as the rate
for dollar deposits with a maturity comparable to such interest period, and (B)
if such rate is not available at such time for any reason, then the arithmetic
mean (rounded upward, if necessary, to the nearest 1/16 of 1%) of the offered
rates for deposits in U.S. dollars, for a period comparable to such interest
period and in an amount approximately equal to the aggregate outstanding
principal amount as to which the interest period applies, quoted at the
determination time, as such rates appear on the display designated as page
"LIBO" on the Reuters Monitor Money Rates Service (or such other page as may
replace the "LIBO" page on that service for the purpose of displaying London
interbank offered rates of major banks). If neither rate is available at such
time for any reason, then "LIBOR" with respect to such interest period shall be
the average (rounded upward, if necessary, to the next higher 1/16 of 1%) of the
respective rates per annum at which dollar deposits of $5,000,000 and for a
maturity comparable to such interest period are offered by the principal London
office of JPMorgan Chase Bank at the determination time.
"LMC" shall have the meaning specified in the preamble.
"LMC ENTITIES" mean LMC and the Stockholders.
"LMC EXCHANGE RULING" shall have the meaning specified in the Share
Exchange Agreement.
"LMC INDEMNITEES" shall have the meaning specified in the Share
Exchange Agreement.
"LMC MATERIALS" shall have the meaning specified in Section 5.2(b).
"LMC PARENT SHARES" shall have the meaning specified in the Share
Exchange Agreement.
4
"LMC RULING REQUEST" means any ruling request submitted by LMC to the
IRS for (x) the LMC Exchange Ruling, and (y) any other ruling in connection with
the Exchange or the Parent Restructuring that Parent and LMC deem to be
appropriate.
"LMC TAX OPINION" shall have the meaning specified in the Share
Exchange Agreement.
"LMC TAX OPINION REPRESENTATIONS" shall have the meaning specified in
the Share Exchange Agreement.
"MERGER TRANSACTIONS" shall mean each of the transactions effected by
the TVGIA Agreement, the UVSG Agreement, the Liberty Newco International
Agreement, and the Fox Sports Agreements.
"PARENT" shall have the meaning specified in the preamble.
"PARENT EXCHANGE RULING" shall have the meaning specified in the Share
Exchange Agreement.
"PARENT INDEMNITEES" shall have the meaning specified in the Share
Exchange Agreement.
"PARENT MATERIALS" shall have the meaning specified in Section 5.2(a).
"PARENT RESTRUCTURING" shall have the meaning specified in the Share
Exchange Agreement.
"PARENT RESTRUCTURING RULING" shall have the meaning specified in the
Share Exchange Agreement.
"PARENT RULING REQUEST" means any ruling request submitted by Parent
to the IRS for (x) the Parent Exchange Ruling, (y) the Parent Restructuring
Ruling, and (z) any other ruling in connection with the Exchange or the Parent
Restructuring that Parent and LMC deem to be appropriate.
"PARENT TAX OPINION" shall have the meaning specified in the Share
Exchange Agreement.
"PARENT TAX OPINION REPRESENTATIONS" shall have the meaning specified
in the Share Exchange Agreement.
"PARTY" means any of Parent or LMC, as the case may be.
"PERSON" shall have the meaning specified in the Share Exchange
Agreement.
"POST-EXCHANGE PERIOD" means any Taxable year or other Taxable period
beginning after the Closing Date and, in the case of any Taxable year or other
Taxable period
5
that begins on or before and ends after the Closing Date, that part of the
Taxable year or other Taxable period that begins at the beginning of the day
after the Closing Date.
"PRE-EXCHANGE PERIOD" means any Taxable year or other Taxable period
that ends on or before the Closing Date and, in the case of any Taxable year or
other Taxable period that begins on or before and ends after the Closing Date,
that part of the Taxable year or other Taxable period through the end of the day
on the Closing Date.
"PRE-EXCHANGE TAX RETURN" means any Tax Return that is required to be
filed with respect to any Transferred Subsidiary for a Taxable period ending on
or before the Closing Date.
"RECEIVING PARTY" shall have the meaning specified in Section 8.3.
"RULING REQUEST" shall mean the Joint Ruling Request, if permitted to
be filed by the IRS, and if the IRS does not permit a Joint Ruling Request to be
filed, the Parent Ruling Request and the LMC Ruling Request.
"RULINGS" shall have the meaning specified in the Share Exchange
Agreement.
"SHARE EXCHANGE AGREEMENT" shall have the meaning specified in the
recitals.
"SPLITCO" shall have the meaning specified in the recitals.
"SPLITCO SHARES" shall have the meaning specified in the Share
Exchange Agreement.
"STOCKHOLDERS" shall have the meaning specified in the Share Exchange
Agreement.
"STRADDLE PERIOD" means any Taxable period commencing on or prior to,
and ending after, the Closing Date.
"STRADDLE RETURN" means a Tax Return that is required to be filed with
respect to any Transferred Subsidiary for a Straddle Period.
"SUBSIDIARY" shall have the meaning specified in the Share Exchange
Agreement.
"TAX" or "TAXES" shall have the meaning specified in the Share
Exchange Agreement.
"TAXING AUTHORITY" means any Governmental Authority or any
quasi-governmental or private body having jurisdiction over the assessment,
determination, collection, or imposition of any Tax (including the IRS).
"TAX CONTEST" shall have the meaning specified in Section 6.5.
"TAX-FREE STATUS OF THE TRANSACTIONS" means no Exchange Taxes will be
imposed upon Parent, LMC or any of their respective Affiliates.
6
"TAX MATERIALS" shall have the meaning specified in Section 3.1.
"TAX OPINION REPRESENTATIONS" shall have the meaning specified in the
Share Exchange Agreement.
"TAX OPINIONS" shall have the meaning specified in the Share Exchange
Agreement.
"TAX RETURNS" shall have the meaning specified in the Share Exchange
Agreement.
"TAX SHARING AGREEMENTS" means all existing agreements or arrangements
(whether or not written) between or among Parent or any of its Affiliates (other
than any of the Transferred Subsidiaries), on the one hand, and any of the
Transferred Subsidiaries, on the other hand, including any such agreements or
arrangements where a third party is also a party, that provide for the
allocation, apportionment, sharing, assignment or indemnification of any Tax
liability or benefit, or the transfer or assignment of income, revenues,
receipts or gains for the purpose of determining any Person's Tax liability,
other than the Ancillary Agreements (including this Agreement) and the Share
Exchange Agreement.
"TRANSFER TAXES" means all U.S. federal, state, local or foreign
sales, use, privilege, transfer, documentary, gains, stamp, duties, recording,
and similar Taxes and fees (including any penalties, interest or additions
thereto) imposed upon any Party in connection with the Exchange or the Parent
Restructuring.
"TRANSFERRED BUSINESS" shall have the meaning specified in the Share
Exchange Agreement.
"TRANSFERRED SUBSIDIARIES" shall have the meaning specified in the
Share Exchange Agreement.
"TREASURY REGULATIONS" shall have the meaning specified in the Share
Exchange Agreement.
"TVGIA AGREEMENT" shall mean the Agreement and Plan of Merger, dated
as of November 27, 2001, by and among Liberty Media Corporation (now known as
Liberty Media LLC), Liberty TVGIA, Inc., The News Corporation Limited (now known
as News Holdings Limited) and News Publishing Australia Limited.
"UVSG AGREEMENT" shall mean the Agreement and Plan of Merger, dated as
of May 2, 2001, by and among Liberty Media Corporation (now known as Liberty
Media LLC), Liberty UVSG, Inc., The News Corporation Limited (now known as News
Holdings Limited) and News Publishing Australia Limited.
Section 1.2 REFERENCES; INTERPRETATION. References in this Agreement
to any gender include references to all genders, and references to the singular
include references to the plural and vice versa. The word "including" when used
in this Agreement shall be deemed to be followed by the phrase "without
limitation". Unless the context otherwise requires, references in
7
this Agreement to Articles, Sections, Exhibits and Schedules shall be deemed
references to Articles and Sections of, and Exhibits and Schedules to, such
Agreement. Unless the context otherwise requires, the words "hereof", "hereby",
and "herein" and words of similar meaning when used in this Agreement refer to
this Agreement in its entirety and not to any particular Article, Section or
provision of this Agreement.
ARTICLE II
PREPARATION OF TAX RETURNS; ALLOCATION AND PAYMENT OF TAXES
Section 2.1 PREPARATION OF TAX RETURNS.
(a) PRE-EXCHANGE TAX RETURNS.
(i) CONSOLIDATED AND COMBINED RETURNS FOR PRE-EXCHANGE
PERIODS. Where required or permitted by applicable Law, Parent shall include the
Transferred Subsidiaries in, or cause the Transferred Subsidiaries to be
included in, and shall prepare and file or cause to be prepared and filed, (A)
the United States consolidated federal income Tax Returns of Parent for the
Taxable periods (or portions thereof) of the Transferred Subsidiaries ending on
or prior to the Closing Date and (B) all other consolidated, combined or unitary
Tax Returns for the Taxable periods (or portions thereof) of the Transferred
Subsidiaries ending on or prior to the Closing Date. Parent shall pay any and
all Taxes due with respect to the Tax Returns referred to in clause (A) or (B)
of this Section 2.1(a)(i).
(ii) SEPARATE RETURNS FOR PRE-EXCHANGE PERIODS. In addition
to the Tax Returns described in Section 2.1(a)(i), Parent shall prepare (or
cause to be prepared) (A) all Tax Returns required to be filed by any of the
Transferred Subsidiaries on or prior to the Closing Date (taking into account
any applicable extensions), and (B) all Tax Returns required to be filed by any
of the Transferred Subsidiaries after the Closing Date (taking into account any
applicable extensions) for a Pre-Exchange Period (other than a Pre-Exchange
Period that is part of a Straddle Period). With respect to Tax Returns described
in clause (A) of this Section 2.1(a)(ii), Parent shall cause the applicable
Transferred Subsidiary to file such Tax Returns and Parent shall pay any and all
Taxes shown due thereon. With respect to Tax Returns described in clause (B) of
this Section 2.1(a)(ii), provided that the applicable Transferred Subsidiary has
received such Tax Returns from Parent not less than five days prior to the due
date for filing such Tax Returns (taking into account any applicable extensions)
along with the amount of any and all Taxes shown as due thereon, LMC shall cause
the applicable Transferred Subsidiary to execute and timely file such Tax
Returns and timely remit such Taxes.
(iii) PROVISION OF TAX INFORMATION. After the Closing, LMC
shall cause the Transferred Subsidiaries to furnish Tax information to Parent as
reasonably requested in order to permit Parent to prepare and timely file the
Pre-Exchange Tax Returns described in Section 2.1(a)(i) and (ii).
(b) OTHER TAX RETURNS. All Tax Returns of the Transferred
Subsidiaries other than those Tax Returns described in Section 2.1(a), shall be
prepared and timely filed by LMC. LMC shall timely pay or cause to be paid all
Taxes shown on such Tax Returns.
8
(c) STRADDLE RETURNS. With respect to any Straddle Return, LMC
shall deliver, at least 20 days prior to the due date for filing such Straddle
Return (taking into account any applicable extensions), to Parent a statement
setting forth the amount of Tax that Parent owes pursuant to clause (i) of
Section 6.2, including the allocation of Taxes under Section 6.4, and copies of
such Straddle Return and related work-papers. Parent shall have the right to
review such Straddle Return and related work-papers and liability for Taxes and
to suggest to LMC any reasonable changes to such Straddle Return no later than
10 days prior to the date for the filing of such Straddle Return. Parent and LMC
agree to consult and to attempt to resolve in good faith any issue arising as a
result of the review of such Straddle Return and related work-papers and
allocation of liability for Taxes and mutually to consent to the filing as
promptly as possible of such Straddle Return. Not later than five days before
the due date for the payment of Taxes with respect to such Straddle Return
(taking into account any applicable extensions), Parent shall pay to LMC an
amount equal to the Taxes as agreed to by LMC and Parent as being owed by Parent
pursuant to Sections 6.2 and 6.4 with respect to such Straddle Return. If LMC
and Parent cannot agree on the amount of Taxes owed by Parent with respect to a
Straddle Return, Parent shall pay to LMC the amount of Taxes reasonably
determined using the mid-point of LMC's and Parent's determination of the amount
of Taxes to be owed by Parent in respect of such Straddle Return pursuant to
Sections 6.2 and 6.4. Within 10 days after such payment, Parent and LMC shall
refer the matter to an independent nationally recognized accounting firm agreed
to by LMC and Parent to arbitrate the dispute. Parent and LMC shall equally
share the fees and expenses of such accounting firm and its determination as to
the amount owing by Parent pursuant to Sections 6.2 and 6.4 with respect to a
Straddle Return shall be binding on both parties. Within five days after the
determination by such accounting firm, if necessary, the appropriate Party shall
pay the other Party any amount which is determined by such accounting firm to be
owed plus interest from the due date for the payment of Taxes with respect to
such Straddle Return (taking into account any applicable extensions) at the
Interest Rate.
Section 2.2 MANNER OF PREPARATION. All Tax Returns that include any of
the Transferred Subsidiaries, Parent, LMC, the Stockholders, or any of their
respective Affiliates, or otherwise relate to the Transferred Business or the
ownership of the DTV Shares shall be prepared in a manner that is consistent
with the Ruling Request, the Rulings, and the Tax Opinions. To the extent that
the items reported on any Tax Return of or with respect to any Transferred
Subsidiary that is prepared by a Party or its Affiliates is likely to increase
any Tax liability or Tax indemnity obligation under this Agreement of the other
Party or its Affiliates, such Tax Return shall be prepared in accordance with
Tax accounting and other practices used by such Transferred Subsidiary or Parent
with respect to the relevant Tax Returns filed prior to the date hereof (unless
such past practices are not permissible under applicable Law), and to the extent
any items are not covered by past practices (or in the event such past practices
are not permissible under applicable Law), in accordance with reasonable
practices selected by the Party (or its Affiliate) responsible for filing such
Tax Return hereunder with the consent, not to be unreasonably withheld or
delayed, of the other Party. Unless otherwise required by applicable Law,
neither Party nor any of their respective Affiliates will make, change or revoke
(or cause to be made, changed, or revoked) any Tax election with respect to the
Transferred Subsidiaries that is likely to increase materially any Tax liability
(or Tax indemnity obligation under this Agreement) of the other Party or its
Affiliates without the consent, not to be unreasonably withheld or delayed, of
the other Party.
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Section 2.3 REFUNDS, CREDITS OR OFFSETS.
(a) Except as otherwise contemplated by this Section 2.3 or
Section 2.4, (i) any refunds, credits or offsets with respect to Taxes of any
Transferred Subsidiaries or that otherwise relate to the Transferred Business or
the ownership of the DTV Shares for a Pre-Exchange Period shall be for the
account of Parent, and (ii) any refunds, credits or offsets with respect to
Taxes of any Transferred Subsidiaries or that otherwise relate to the
Transferred Business or the ownership of the DTV Shares for a Post-Exchange
Period shall be for the account of LMC.
(b) Notwithstanding Section 2.3(a), (i) any refunds, credits or
offsets with respect to Exchange Taxes allocated to, and actually paid by,
Parent pursuant to this Agreement shall be for the account of Parent, and (ii)
any refunds, credits or offsets with respect to Exchange Taxes allocated to, and
actually paid by, LMC pursuant to this Agreement shall be for the account of
LMC.
(c) Any such refunds, credits or offsets shall be allocated
between the Pre-Exchange Period and the Post-Exchange Period in a manner
consistent with the principles of Section 6.4. LMC shall forward to Parent, or
reimburse Parent, for any such refunds, credits or offsets, plus any interest
received thereon, for the account of Parent within 10 days from receipt thereof
by LMC or any of its Affiliates. Parent shall forward to LMC, or reimburse LMC,
for any refunds, credits or offsets, plus any interest received thereon, for the
account of LMC within 10 days from receipt thereof by Parent or any of its
Affiliates. Any refunds, credits or offsets, plus any interest received thereon,
or reimbursements not forwarded or made within the 10 day period specified above
shall bear interest from the date received by the refunding or reimbursing party
(or its Affiliate) at the Interest Rate. If, subsequent to a Taxing Authority's
allowance of a refund, credit or offset, such Taxing Authority reduces or
eliminates such allowance, any refund, credit or offset, plus any interest
received thereon, forwarded or reimbursed under this Section 2.3 shall be
returned to the party who had forwarded or reimbursed such refund, credit or
offset and interest upon the request of such forwarding party in an amount equal
to the applicable reduction, including any interest received thereon.
Section 2.4 CARRYBACKS. To the extent permitted by Law, LMC and its
Affiliates shall waive the right to carryback any Tax attribute of the
Transferred Subsidiaries arising in a Post-Exchange Period to a Pre-Exchange
Period. If and to the extent that LMC or any of its Affiliates are not permitted
by applicable Law to elect to forego such carryback and LMC requests in writing
that Parent or any of its Affiliates obtain a refund, credit or offset of Taxes
with respect to such carryback, and provided that Parent or any of its
Affiliates would not otherwise be required to forego a refund, credit or offset
of Taxes for its own account or otherwise be adversely affected as a result of
such carryback, then (i) Parent (or its Affiliate) shall take all reasonable
measures to obtain a refund, credit or offset of Tax with respect to such
carryback (including by filing an amended Tax Return), and (ii) to the extent
that Parent or any of its Affiliates receives any refund, credit or offset of
Taxes attributable (on a last dollar basis) to such carryback, Parent shall pay
such refund, credit or offset, plus any interest net of Taxes received thereon,
to LMC within 10 days from receipt thereof by Parent or any of its Affiliates;
provided, that Parent shall be entitled to reduce the amount of any such refund,
credit or offset for its reasonable costs and expenses; and provided further
that LMC, upon the request of Parent,
10
agrees to repay such refund, credit or offset, plus any interest net of Taxes
received thereon, to Parent in the event, and to the extent, that Parent is
required to repay such refund, credit or offset, plus any interest net of Taxes
received thereon, to a Governmental Authority.
Section 2.5 AMENDED RETURNS. Any amended Tax Return or claim for Tax
refund, credit or offset with respect to any Transferred Subsidiary may be made
only by the Party (or its Affiliates) responsible for preparing the original Tax
Return with respect to such Transferred Subsidiary pursuant to Section 2.1. Such
Party (or its Affiliates) shall not, without the prior written consent of the
other Party, which consent shall not be unreasonably withheld or delayed, file,
or cause to be filed, any such amended Tax Return or claim for Tax refund,
credit or offset to the extent that such filing, if accepted, is likely to
change the Tax liability of, or give rise to a payment under this Agreement by,
such other Party (or any Affiliate of such other Party) for any Taxable period
(or portion thereof).
Section 2.6 ALLOCATION OF EXCHANGE TAXES.
(a) Except as otherwise provided in this Section 2.6, any
Exchange Taxes imposed on Parent, the Transferred Subsidiaries or on any
Affiliate of Parent shall be allocated to Parent, and any Exchange Taxes imposed
on the LMC Entities or on any Affiliate of the LMC Entities (other than the
Transferred Subsidiaries) shall be allocated to LMC.
(b) LMC shall be allocated any Exchange Taxes imposed on Parent,
the Transferred Subsidiaries or any Affiliate of Parent that result from (i) any
of the representations and warranties of LMC in this Agreement not being true
and correct when made or deemed made, (ii) any breach or nonperformance of any
covenant or agreement made or to be performed by LMC in this Agreement, or (iii)
any other action (x) by LMC or any of its Affiliates (other than the Transferred
Subsidiaries) or (y) by, after the Closing, the Transferred Subsidiaries.
(c) Parent shall be allocated any Exchange Taxes imposed on the
LMC Entities or any Affiliate of the LMC Entities that result from (i) any of
the representations and warranties of Parent in this Agreement not being true
and correct when made or deemed made, (ii) any breach or nonperformance of any
covenant or agreement made or to be performed by Parent in this Agreement, or
(iii) any other action (x) by Parent or any of its Affiliates (other than the
Transferred Subsidiaries) or (y) by, prior to the Closing, the Transferred
Subsidiaries.
Section 2.7 TRANSFER TAXES. All Transfer Taxes imposed by a U.S.
federal, state or local Taxing Authority shall be allocated one-half to LMC and
one-half to Parent. All Transfer Taxes imposed by a foreign Taxing Authority
shall be allocated to Parent. LMC, on the one hand, or Parent, on the other
hand, whichever is required under applicable Law, shall file all necessary
documentation with respect to such Transfer Taxes on a timely basis.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PARENT
Parent represents and warrants to LMC as of the date hereof and as of the
Closing that:
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Section 3.1 THE RULING REQUEST AND THE RULINGS. Parent (i) has
examined (A) the Ruling Request and each other IRS Submission, (B) the Rulings,
and (C) any other materials delivered in connection with the issuance of the
Rulings (collectively, the "TAX MATERIALS"), and (ii) the facts presented and
representations made therein, to the extent descriptive of or otherwise relating
to Parent, the Transferred Subsidiaries or any of their respective Affiliates
are true, correct, and complete in all material respects. This representation is
made as of the Closing Date and not as of the date hereof.
Section 3.2 PARENT TAX OPINION AND PARENT TAX OPINION REPRESENTATIONS.
(a) As of the date hereof, none of Parent or its Affiliates has
taken or agreed to take any action, has failed to take any action or knows after
consultation with Tax counsel, of any fact, agreement, plan or other
circumstance, that is reasonably likely, directly or indirectly, in whole or in
part, to (i) jeopardize the receipt of any of the Rulings or the Tax Opinions,
or (ii) adversely affect the Tax-Free Status of the Transactions.
(b) The Parent Tax Opinion Representations are true, correct and
complete in all respects and are incorporated herein by this reference. This
representation is made as of the Closing Date and not as of the date hereof.
(c) Parent does not have any plan or intention to take any
action, or to fail to take any action, which action or omission would be
inconsistent with the Parent Tax Opinion Representations.
(d) As of the date hereof, Parent expects the Parent Tax Opinion
Representations to be true, correct and complete in all respects as of the
Closing Date.
Section 3.3 REPRESENTATIONS RELATED TO THE TRANSFERRED SUBSIDIARIES.
The representations and warranties set forth in Sections 4.20.6, 4.20.10, and
4.20.11 of the Share Exchange Agreement are true, correct and complete in all
respects and are incorporated herein by this reference. For purposes of the
representation made by this Section 3.3 as of the Closing Date, the
representations and warranties set forth in Sections 4.20.6, 4.20.10, and
4.20.11 of the Share Exchange Agreement shall be deemed to have been made again
as of the Closing Date.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF LMC
LMC represents and warrants to Parent as of the date hereof and as of the
Closing that:
Section 4.1 THE RULING REQUEST AND THE RULINGS. LMC (i) has examined
the Tax Materials, and (ii) the facts presented and representations made
therein, to the extent descriptive of or otherwise relating to the LMC Entities
or any of their respective Affiliates, are true, correct, and complete in all
material respects, subject to the limitations described in the next sentence.
With respect to any facts or representations related to the application of
Section 355(d) of the Code to the Exchange, LMC is permitted to assume, and has
assumed, all matters it is expressly permitted to assume pursuant to Section 4.3
(subject to the limitations set forth in such section). This representation is
made as of the Closing Date and not as of the date hereof.
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Section 4.2 LMC TAX OPINION AND LMC TAX OPINION REPRESENTATIONS.
(a) As of the date hereof, none of LMC or its Affiliates has
taken or agreed to take any action, has failed to take any action or knows,
after consultation with Tax counsel, of any fact, agreement, plan or other
circumstance, that is reasonably likely, directly or indirectly, in whole or in
part, to (i) jeopardize the receipt of any of the Rulings or the Tax Opinions,
or (ii) adversely affect the Tax-Free Status of the Transactions.
(b) The LMC Tax Opinion Representations are true, correct and
complete in all respects and are incorporated herein by this reference. This
representation is made as of the Closing Date and not as of the date hereof.
(c) LMC does not have any plan or intention to take any action,
or to fail to take any action, which action or omission would be inconsistent
with the LMC Tax Opinion Representations.
(d) As of the date hereof, LMC expects the LMC Tax Opinion
Representations to be true, correct and complete in all respects as of the
Closing Date.
Section 4.3 SECTION 355(d). For purposes of Section 355(d) of the
Code, immediately after the Exchange, no person (determined after applying
Section 355(d)(7) of the Code) will hold stock possessing 50 percent or more of
the total combined voting power of all classes of Splitco stock entitled to
vote, or 50 percent or more of the total value of shares of all classes of
Splitco stock, that was attributable to distributions on Parent stock that was
acquired by "purchase" (within the meaning of Section 355(d) of the Code) during
the five-year period (determined after applying Section 355(d)(6) of the Code)
ending on the date of the Exchange; provided, however, that for purposes of
making this representation, LMC is permitted to assume that:
(a) for U.S. federal income tax purposes, (i) the Domestication
constituted a transfer of property governed by Section 351 of the Code pursuant
to which an amount of stock in The News Corporation Limited (now known as News
Holdings Limited), a South Australia corporation, that meets the requirements of
Section 1504(a)(2) of the Code was acquired, and (ii) each of the Merger
Transactions constituted a reorganization within the meaning of Section 368(a)
of the Code;
(b) each of the Acquisition Transactions was not, in and of
itself, a "purchase" within the meaning of Section 355(d)(5)(A) and (B) of the
Code, as such provisions are interpreted by Treasury Regulations Section
1.355-6(d), and as such provisions would apply without regard to any other
provision of Section 355(d) of the Code or the Treasury Regulations thereunder
(including, for the avoidance of doubt, the application of Section 355(d)(5)(C)
of the Code and Treasury Regulations Section 1.355-6(e));
(c) neither Parent nor any of its Affiliates has taken any action
at any time that did not, directly or indirectly, involve any of the LMC
Entities, Liberty Media LLC or any of their respective predecessors or
Affiliates, which action would cause any of the Acquisition Transactions to
constitute a "purchase" within the meaning of Section 355(d) of the Code and the
Treasury Regulations thereunder; and
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(d) the Internal Restructuring did not result in a "purchase,"
within the meaning of Section 355(d) of the Code and the Treasury Regulations
thereunder, of any stock by any Person.
Notwithstanding the foregoing, the assumptions set forth in Section 4.3(a) and
(b) shall not apply to the extent that any of the LMC Entities, Liberty Media
LLC or any of their respective predecessors or Affiliates has taken any action
at any time inconsistent with such assumptions.
ARTICLE V
COVENANTS AND AGREEMENTS
Section 5.1 PREPARATION AND FILING OF IRS SUBMISSIONS.
(a) As soon as reasonably practicable after the date of this
Agreement, the Ruling Request shall be submitted to the IRS. Parent and LMC
shall use reasonable best efforts to cause the IRS to accept a Joint Ruling
Request; provided, however, that if the IRS does not permit a Joint Ruling
Request to be submitted, then Parent shall submit the Parent Ruling Request and
LMC shall submit the LMC Ruling Request. The Joint Ruling Request and any other
IRS Submissions relating thereto shall be prepared by Parent and submitted to
the IRS jointly on behalf of Parent and LMC. If a Joint Ruling Request is not
permissible, then Parent shall prepare the Parent Ruling Request and any other
IRS Submissions relating thereto. The LMC Ruling Request shall be prepared in a
form substantially similar to the Parent Ruling Request, except to the extent
reasonably necessary or appropriate to reflect the fact that such LMC Ruling
Request will be filed by LMC (including with respect to any rulings requested),
and other IRS Submissions relating to the LMC Ruling Request shall be prepared
in a form substantially similar to any corresponding IRS Submission relating to
the Parent Ruling Request, except to the extent reasonably necessary or
appropriate to reflect the fact that such IRS Submission will be filed by LMC.
Parent shall provide LMC with a reasonable opportunity to review and comment on
each IRS Submission to be filed by Parent prior to the filing of such IRS
Submission with the IRS, and LMC shall provide Parent with a reasonable
opportunity to review and comment on each IRS Submission to be filed by LMC
prior to the filing of such IRS Submission with the IRS. Each of Parent and LMC
will designate certain representatives to be listed on the power of attorney
delivered to the IRS in connection with any Ruling Request.
(b) No IRS Submission shall be filed by Parent with the IRS
unless, prior to such filing, LMC shall have agreed as to the contents of such
IRS Submission to the extent that the IRS Submission (i) includes statements or
representations relating to facts that are or will be under the control of LMC
or any of its Affiliates or (ii) is relevant to, or creates, any actual or
potential obligations of, or limitations on, LMC or any of its Affiliates
(including any of the Transferred Subsidiaries for periods after the Exchange),
including any such obligations of, or limitations on, LMC or its Affiliates
under the Share Exchange Agreement and other documents related to the Exchange;
provided, however, that if the IRS requests same-day filing of an IRS Submission
that does not include any material issue or statement, then Parent is required
only to make a good faith effort to notify LMC's representatives and to give
such representatives an opportunity to review and comment on such IRS Submission
prior to filing it with the IRS. No IRS Submission shall be filed by LMC with
the IRS unless, prior to such filing, Parent shall have agreed as to the
contents of such IRS Submission to the extent that the
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IRS Submission (i) includes statements or representations relating to facts that
are or will be under the control of Parent or any of its Affiliates or (ii) is
relevant to, or creates, any actual or potential obligations of, or limitations
on, Parent or any of its Affiliates (including any of the Transferred
Subsidiaries for periods prior to the Exchange), including any such obligations
of, or limitations on, Parent or its Affiliates under the Share Exchange
Agreement and other documents related to the Exchange; provided, however, that
if the IRS requests same-day filing of an IRS Submission that does not include
any material issue or statement, then LMC is required only to make a good faith
effort to notify Parent's representatives and to give such representatives an
opportunity to review and comment on such IRS Submission prior to filing it with
the IRS. Each Party shall provide the other Party with copies of each IRS
Submission filed with the IRS promptly following the filing thereof. Neither
Party nor their representatives shall conduct any substantive communications
with the IRS regarding any material issue arising with respect to the Ruling
Request, including meetings or conferences with IRS personnel, whether
telephonically, in person or otherwise, without first notifying the other Party
(or their representatives) and giving the latter Party (or their
representatives) a reasonable opportunity to participate, and a reasonable
number of each Party's representatives shall have an opportunity to participate
in all conferences or meetings with IRS personnel that take place in person,
regardless of the nature of the issues expected to be discussed. Each Party
shall copy the other Party (or their representatives) on all written
correspondence of such Party (or their representatives) to the IRS, and shall
promptly provide the other Party (or their representatives) with copies of any
correspondence received by such Party (or their representatives) from the IRS.
Section 5.2 COMPLIANCE WITH TAX MATERIALS.
(a) Parent hereby confirms and agrees to (and to cause its
Affiliates to) comply and otherwise act in a manner consistent with any and all
representations, statements, covenants and agreements in (i) the Tax Materials
applicable to Parent or any of its Affiliates (other than the Transferred
Subsidiaries), and (ii) the Parent Tax Opinion, the Parent Tax Opinion
Representations, and any other materials delivered or deliverable by Parent or
any of its Affiliates in connection with the rendering of the Tax Opinions
(collectively, the material described in clause (ii), the "PARENT MATERIALS").
Prior to the Exchange, Parent will cause the Transferred Subsidiaries to comply
and otherwise act in a manner consistent with any and all representations,
statements, covenants and agreements in the Tax Materials and the Parent
Materials applicable to the Transferred Subsidiaries.
(b) LMC hereby confirms and agrees to (and to cause its
Affiliates to) comply and otherwise act in a manner consistent with any and all
representations, statements, covenants and agreements in (i) the Tax Materials
applicable to LMC or any of its Affiliates (other than the Transferred
Subsidiaries), and (ii) the LMC Tax Opinion, the LMC Tax Opinion
Representations, and any other materials delivered or deliverable by LMC or any
of its Affiliates in connection with the rendering of the Tax Opinions
(collectively, the material described in clause (ii), the "LMC MATERIALS").
After the Exchange, LMC will cause the Transferred Subsidiaries to comply and
otherwise act in a manner consistent with any and all representations,
statements, covenants and agreements in the Tax Materials and the LMC Materials
applicable to the Transferred Subsidiaries.
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Section 5.3 ADDITIONAL COVENANTS.
(a) None of Parent, LMC or their respective Affiliates will take
or permit to be taken any action at any time that is reasonably likely, directly
or indirectly, in whole or in part, to (i) jeopardize the receipt of any of the
Rulings or the Tax Opinions or (ii) adversely affect the Tax-Free Status of the
Transactions.
(b) Parent, LMC, and their respective Affiliates will use
reasonable best efforts to take or cause to be taken any action reasonably
necessary (i) to ensure the receipt of, as well as the continued validity and
applicability of, the Rulings and the Tax Opinions and (ii) to preserve the
Tax-Free Status of the Transactions.
(c) Parent shall not modify the steps of the Parent Restructuring
set forth on Schedule C to the Share Exchange Agreement in a manner that would
be reasonably likely, directly or indirectly, in whole or in part, to (x)
jeopardize the receipt of any of the Rulings or the Tax Opinions or (y)
adversely affect the Tax-Free Status of the Transactions.
Section 5.4 TAX SHARING AGREEMENTS. Parent shall cause all Tax Sharing
Agreements to which any of the Transferred Subsidiaries is a party or may be
subject and all obligations thereunder to terminate as to such Transferred
Subsidiaries on or prior to the Closing, and after the Closing, none of the
Transferred Subsidiaries shall be bound by such Tax Sharing Agreements or have
any liability or rights thereunder.
Section 5.5 ACTIONS BETWEEN SIGNING AND CLOSING. From the date hereof
until the Closing Date, Parent will not, and will not permit its respective
Affiliates to (i) make, change or revoke any material Tax election relating
primarily to any of the Transferred Subsidiaries, (ii) change materially any
method of accounting relating primarily to any of the Transferred Subsidiaries
with respect to Taxes, (iii) consent to any extension or waiver of the
limitations period applicable to any material Tax claim or assessment relating
primarily to any of the Transferred Subsidiaries, (iv) settle or compromise any
material Tax liability relating primarily to any of the Transferred
Subsidiaries, (v) enter into any material agreement relating primarily to Taxes
of the Transferred Subsidiaries with any Taxing Authority or (vi) make any
material change in any Tax practice or policy relating primarily to any of the
Transferred Subsidiaries; except, in each case, (A) as consented to or approved
in advance by LMC, which consent shall not be unreasonably withheld or delayed,
(B) as otherwise required because of a change in Law or a Final Determination or
(C) if such actions would not affect material Taxes of or with respect to the
Transferred Subsidiaries due for any Post-Exchange Period.
Section 5.6 SECTION 355(e). For a period of six months from the
Closing Date, none of LMC, its Affiliates, or any of their respective officers,
directors or authorized agents will enter into any agreement, understanding or
arrangement or any substantial negotiations with respect to any transaction or
series of transactions, including any issuance or transfer of an option (within
the meaning of Section 355(e) of the Code), that is for purposes of Section
355(e) of the Code and any proposed, temporary or final Treasury Regulations
thereunder, part of a plan or series of related transactions with the Exchange
pursuant to which one or more Persons acquire (other than pursuant to the
Exchange), directly or indirectly, stock possessing fifty percent or
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more of the total combined voting power of all classes of stock of Splitco
entitled to vote or stock possessing fifty percent or more of the total value of
all classes of stock of Splitco.
ARTICLE VI
SURVIVAL; INDEMNIFICATION
Section 6.1 SURVIVAL. The representations and warranties contained (or
incorporated by reference, including, for the avoidance of doubt, Sections
4.20.6, 4.20.10, and 4.20.11 of the Share Exchange Agreement) in this Agreement
shall, for purposes of this Agreement, survive the Closing until the date that
is 60 calendar days following the expiration of the statute of limitations
applicable to actions with respect thereto. Except as otherwise specified to the
contrary herein, all covenants and agreements of each Party contained in this
Agreement shall, for purposes of this Agreement, survive the Closing, unless
specified to the contrary herein.
Section 6.2 PARENT INDEMNITY. Parent hereby indemnifies each LMC
Indemnitee against and agrees to hold each of them harmless (without
duplication), from any and all (i) Taxes of the Transferred Subsidiaries or that
otherwise relate to the Transferred Business or the ownership of the DTV Shares
for any Pre-Exchange Period (consistent with the principles of Section 6.4),
(ii) liabilities of any Transferred Subsidiary for Taxes of any Person (other
than any of the Transferred Subsidiaries) as a result of such Transferred
Subsidiary being, or having been, on or before the Closing Date, a member of an
affiliated, consolidated, combined or unitary group, pursuant to Treasury
Regulations Section 1.1502-6 or any other provision of federal, state, local or
foreign Law, (iii) liabilities for Taxes of any Transferred Subsidiary under any
Tax Sharing Agreement, (iv) liabilities for Taxes of any Person (other than any
of the Transferred Subsidiaries) imposed on any of the Transferred Subsidiaries
as a result of their becoming, prior to the Closing, a transferee or successor
to any other Person's liabilities, (v) Taxes and Damages arising out of or based
upon any of the representations and warranties of Parent in this Agreement not
being true and correct when made or deemed made, (vi) Taxes and Damages arising
out of or based upon any breach or nonperformance of any covenant or agreement
made or to be performed by Parent in this Agreement, (vii) Transfer Taxes
allocated to Parent pursuant to Section 2.7, (viii) Exchange Taxes allocated to
Parent pursuant to Section 2.6, (ix) liabilities of Parent or any of its
Affiliates for Taxes of any Person arising out of the GM Transaction or under
the GM Agreements, and (x) reasonable out-of-pocket legal, accounting and other
advisory and court fees incurred in connection with the items described in
clauses (i) through (ix); provided, however, that notwithstanding clauses (i),
(ii), (iv), (v) and (vi) of this Section 6.2, Parent shall not be responsible
for (x) Exchange Taxes allocated to LMC pursuant to Section 2.6, (y) Taxes
arising out of or based upon any of the representations and warranties of LMC in
this Agreement not being true and correct when made or deemed made, or (z) Taxes
arising out of or based upon any breach or nonperformance of any covenant or
agreement made or to be performed by LMC in this Agreement.
Section 6.3 LMC INDEMNITY. LMC hereby indemnifies each Parent
Indemnitee against and agrees to hold each of them harmless (without
duplication), from any and all (i) Taxes of the Transferred Subsidiaries or that
otherwise relate to the Transferred Business or the ownership of the DTV Shares
for any Post-Exchange Period (consistent with the principles of Section 6.4),
(ii) Taxes and Damages arising out of or based upon any of the representations
17
and warranties of LMC in this Agreement not being true and correct when made or
deemed made, (iii) Taxes and Damages arising out of or based upon any breach or
nonperformance of any covenant or agreement made or to be performed by LMC in
this Agreement, (iv) Transfer Taxes allocated to LMC pursuant to Section 2.7,
(v) Exchange Taxes allocated to LMC pursuant to Section 2.6, and (vi) reasonable
out-of-pocket legal, accounting and other advisory and court fees incurred in
connection with the items described in clauses (i) through (v); provided,
however, that notwithstanding clauses (i), (ii) and (iii) of this Section 6.3,
LMC shall not be responsible for (x) Exchange Taxes allocated to Parent pursuant
to Section 2.6, (y) Taxes arising out of or based upon any of the
representations and warranties of Parent in this Agreement not being true and
correct when made or deemed made, or (z) Taxes arising out of or based upon any
breach or nonperformance of any covenant or agreement made or to be performed by
Parent in this Agreement.
Section 6.4 ALLOCATION OF TAXES BETWEEN PRE-EXCHANGE AND POST-EXCHANGE
PERIODS. In the case of Taxes that are attributable to a Straddle Period, such
Taxes shall be allocated between the portion of the Straddle Period that is a
Pre-Exchange Period and the portion of the Straddle Period that is a
Post-Exchange Period based on a Closing of the Books Method. Notwithstanding the
foregoing provisions of this Section 6.4 or Treasury Regulations Section
1.1502-76(b)(1)(ii)(B), Taxes attributable to any transaction or action taken by
or with respect to any Transferred Subsidiary out of the ordinary course of
business before the Closing on the Closing Date shall be allocated to the
Pre-Exchange Period, and Taxes attributable to any transaction or action taken
by or with respect to any Transferred Subsidiary out of the ordinary course of
business after the Closing on the Closing Date shall be allocated to the
Post-Exchange Period.
Section 6.5 NOTICE OF TAX CONTESTS. Each Party shall promptly notify
the other Party of a written communication from any Taxing Authority with
respect to any pending or threatened audit, dispute, suit, action, proposed
assessment, or other proceeding, concerning any Tax, or any other adjustment or
claim (each a "TAX CONTEST") (i) which could reasonably give rise to an
indemnification liability or indemnification payment of the other Party pursuant
to this Agreement or (ii) which could reasonably be expected to affect the Tax
consequences of the Exchange to either Party or its Affiliates; provided,
however, that failure to give such notification shall not affect the
indemnification provided hereunder except, and only to the extent that, the
indemnifying party shall have been actually prejudiced as a result of such
failure. Thereafter, the indemnified party shall deliver to the indemnifying
party such additional information with respect to such Tax Contest in its
possession that the indemnifying party may reasonably request.
Section 6.6 INDEMNIFICATION PROCEDURES.
(a) In the case of a Tax Contest, the indemnified party shall be
entitled to exercise full control of the defense, compromise or settlement of
any Tax Contest unless the indemnifying party within a reasonable time after the
giving of notice of such Tax Contest by the indemnified party (i) delivers a
written confirmation to such indemnified party that the indemnification
provisions of this Agreement are applicable to such Tax Contest and that the
indemnifying party will indemnify such indemnified party in respect of such Tax
Contest pursuant to the applicable indemnification provisions of this Agreement,
(ii) notifies such indemnified party in writing of the indemnifying party's
intention to assume the defense thereof
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and (iii) retains legal counsel reasonably satisfactory to such indemnified
party to conduct the defense of such Tax Contest, in which case the indemnifying
party shall be entitled to exercise full control of the defense, compromise or
settlement of such Tax Contest.
(b) If the indemnifying party so assumes the defense of any such
Tax Contest in accordance herewith, then such indemnified party shall cooperate
with the indemnifying party in any manner that the indemnifying party reasonably
may request in connection with the defense, compromise or settlement thereof. If
the indemnifying party so assumes the defense of any such Tax Contest, the
indemnified party shall have the right to employ separate counsel and to
participate in (but not control) the defense, compromise or settlement thereof,
but the fees and expenses of such counsel shall be the expense of such
indemnified party. If such indemnified party shall have been advised by outside
counsel that there may be one or more legal defenses available to it that are
different from or additional to those available to the indemnifying party or
that a conflict of interest between the indemnifying party and the indemnified
party in the conduct of the defense of such Tax Contest would reasonably be
expected, then (i) the indemnifying party shall not have the right to control
the defense, compromise or settlement of such Tax Contest on behalf of the
indemnified party, (ii) the indemnifying and indemnified party shall have the
right to control jointly the defense, compromise or settlement of such Tax
Contest, and (iii) the reasonable fees and expenses of the indemnified party's
separate counsel shall be borne by the indemnifying party. No indemnified party
shall settle or compromise or consent to entry of any judgment with respect to
any such Tax Contest for which it is entitled to indemnification hereunder
without the prior consent of the indemnifying party, which shall not be
unreasonably withheld, unless the indemnifying party shall have failed, after
reasonable notice thereof, to undertake control of such action in the manner
provided above in this Section 6.6 to the extent the indemnifying party was
entitled to do so pursuant to this Section 6.6. If the indemnifying party
assumes the defense of a Tax Contest, the indemnified party shall agree to any
settlement, compromise or discharge of a Tax Contest that the indemnifying party
may recommend and as to which the indemnifying party acknowledges in writing its
obligation to make payment in full; provided that such settlement, compromise or
discharge of such Tax Contest would not otherwise materially and adversely
affect the indemnified party.
(c) Notwithstanding the foregoing, in the case of a Tax Contest
relating to the Tax-Free Status of the Transactions, both the indemnifying party
and the indemnified party shall have the right to control jointly the defense,
compromise or settlement of any such Tax Contest. No indemnified party shall
settle or compromise or consent to entry of any judgment with respect to any
such Tax Contest without the prior consent of the indemnifying party, which
consent may be withheld in the indemnifying party's sole discretion.
Section 6.7 PAYMENTS. Except as otherwise provided herein, payments
due under this Agreement shall be made no later than ten (10) Business Days
after (i) the receipt or crediting of a refund, (ii) the realization of a Tax
benefit for which the other Party is entitled to reimbursement, or (iii) the
delivery of notice of payment of a Tax for which the other Party is responsible
under this Agreement, in each case by wire transfer of immediately available
funds to an account designated by the Party entitled to such payment. Payments
due hereunder, but not made within such period, shall bear interest at the
Interest Rate.
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Section 6.8 TREATMENT OF PAYMENTS; AFTER TAX BASIS. Notwithstanding
anything to the contrary contained herein or in the Share Exchange Agreement,
the Parties agree that (i) following the Closing and subject to LMC's consent,
which consent shall not be unreasonably withheld or delayed, any amounts owing
between the Parties and their respective Affiliates pursuant to this Agreement
or the Share Exchange Agreement shall be settled by making payments by or to
Splitco instead of LMC, and (ii) any payments made between the Parties or their
Affiliates pursuant to this Agreement or the Share Exchange Agreement (other
than interest accruing on payments not timely made under such agreements) with
respect to a Pre-Exchange Period or as a result of an event or action occurring
in a Pre-Exchange Period shall be treated, to the extent permitted by law, for
all Tax purposes as a distribution from or a capital contribution to Splitco
made immediately prior to the Exchange. If the receipt or accrual of any such
payment results in Taxable income (including an increase in the amount of any
gain or other income realized on the Exchange) to the recipient thereof, such
payment shall be increased so that, after the payment of any Taxes with respect
to the payment, the recipient thereof shall have realized the same net amount it
would have realized had the payment not resulted in Taxable income. To the
extent that Taxes for which one Party (the indemnifying Party) is required to
pay the other Party (the indemnified party) pursuant to this Agreement (the
"INDEMNIFIED TAXES") may be deducted or credited in determining the amount of
any other Taxes required to be paid by the indemnified Party (for example, state
Taxes which are permitted to be deducted in determining federal Taxes), the
amount of any payment made to the indemnified Party by the indemnifying Party
shall be decreased by taking into account any resulting reduction in other Taxes
of the indemnified Party. If such a reduction in Taxes of the indemnified Party
occurs following the payment made to the indemnified Party with respect to the
relevant Indemnified Taxes, the indemnified Party shall promptly repay the
indemnifying Party the amount of such reduction when actually realized. If the
Tax benefit arising from the foregoing reduction of Taxes described in this
Section 6.8 is subsequently decreased or eliminated, then the indemnifying Party
shall promptly pay the indemnified Party the amount of the decrease in such Tax
benefit.
ARTICLE VII
COOPERATION
Section 7.1 GENERAL. Parent, LMC and their respective Affiliates shall
cooperate with each other and with each other's agents, including accounting
firms and legal counsel, in connection with (a) Tax matters relating to the
Transferred Subsidiaries and their assets and operations, including (i)
preparation and filing of Tax Returns, (ii) determining the liability and amount
of any Taxes due, the right to and amount of any refund, credit or offset of
Taxes and the amount of any Tax attributes allocable to the Transferred
Subsidiaries, (iii) obtaining any refund, credit or offset of Taxes, (iv)
examinations of Tax Returns, and (v) any administrative or judicial proceeding,
or other Tax Contest, in respect of Taxes assessed or proposed to be assessed,
and (b) the defense of any Tax Contest involving the Exchange or the Parent
Restructuring. Each Party shall also make available to the other Party, as
reasonably requested and available, personnel (including officers, directors,
employees and agents) responsible for preparing, maintaining, and interpreting
information and providing information or documents in connection with any
administrative or judicial proceedings relating to Taxes.
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Section 7.2 CONSISTENT TREATMENT. Unless and until there has been a
Final Determination to the contrary, each Party agrees (a) to treat the Exchange
as a tax-free exchange under Section 355(a) of the Code, and (b) not to take any
position on any Tax Return, in connection with any Tax Contest, or otherwise for
Tax purposes (in each case, excluding any position taken for financial
accounting purposes) that is inconsistent with (i) the allocation of Taxes and
Tax benefits hereunder, (ii) the Rulings, (iii) the Tax Opinions, or (iv) the
Tax-Free Status of the Transactions.
ARTICLE VIII
RECORDS; ACCESS
Section 8.1 DELIVERY OF TAX RECORDS. At or before the Closing, Parent
shall provide to LMC (to the extent not previously provided or held by any
Transferred Subsidiary at Closing) copies of (A) the separate Tax Returns of any
Transferred Subsidiaries, (B) the relevant portions of any other Tax Returns
with respect to any Transferred Subsidiaries, and (C) other existing Tax records
(or the relevant portions thereof) reasonably necessary to prepare and file any
Tax Returns of, or with respect to, the Transferred Subsidiaries, or to defend
or contest Tax matters relevant to the Transferred Subsidiaries, including in
each case, all Tax records related to Tax attributes of the Transferred
Subsidiaries and any and all communications or agreements with, or rulings by,
any Taxing Authority with respect to any Transferred Subsidiary.
Section 8.2 RETENTION OF RECORDS; ACCESS. The Parties shall (a) retain
all Tax Returns, schedules and work papers and all other records, documents,
accounting data, and other information (including computer data) necessary for
the preparation and filing of all Tax Returns in respect of Taxes of the
Transferred Subsidiaries for any Taxable period, or for any Tax Contests
relating to such Tax Returns, and (b) give to the other Party reasonable access
to such records, documents, accounting data, and other information (including
computer data) and to its personnel (insuring their cooperation) and premises,
for the purpose of the review or audit of such Tax Returns to the extent
relevant to an obligation or liability of a Party under this Agreement or for
purposes of the preparation or filing of any such Tax Return, the conduct of any
Tax Contest or any other matter reasonably and in good faith related to the Tax
affairs of the requesting Party.
Section 8.3 CONFIDENTIALITY; OWNERSHIP OF INFORMATION; PRIVILEGED
INFORMATION. Each Party hereby agrees that it will hold, and shall use its
reasonable best efforts to cause its officers, directors, employees,
accountants, counsel, consultants, advisors and agents to hold, in confidence
all records and information prepared and shared by and among the Parties in
carrying out the intent of this Agreement, unless disclosure is compelled by a
Governmental Authority. Information and documents of one Party (the "DISCLOSING
PARTY") shall not be deemed to be confidential for purposes of this Section 8.3
to the extent such information or document (i) is previously known to or in the
possession of the other party (the "RECEIVING PARTY") and is not otherwise
subject to a requirement to keep confidential, (ii) becomes publicly available
by means other than unauthorized disclosure under this Agreement or the Share
Exchange Agreement by the Receiving Party or (iii) is received from a third
party without, to the knowledge of the Receiving Party after reasonable
diligence, a duty of confidentiality owed to the Disclosing Party.
21
Section 8.4 CONTINUATION OF RETENTION OF INFORMATION, ACCESS
OBLIGATIONS. The obligations set forth above in Section 8.2 shall continue until
the longer of (a) the time of a Final Determination of any controversy with
respect to such Taxable period and until the final determination of any payments
that may be required with respect to such Taxable period under this Agreement,
or (b) expiration of all applicable statutes of limitations (including any
extensions thereof) of the Taxable period to which the records and information
relate. For purposes of the preceding sentence, each Party shall assume that no
applicable statute of limitations has expired unless such Party has received
notification or otherwise has actual knowledge that such statute of limitations
has expired.
ARTICLE IX
MISCELLANEOUS PROVISIONS
Section 9.1 TERMINATION. This Agreement will automatically terminate
upon termination of the Share Exchange Agreement pursuant to the terms thereto.
In the event of the termination of this Agreement pursuant to this Section 9.1,
this Agreement, except for the provisions of (i) Section 8.3 relating to the
obligation of the parties to keep confidential certain information obtained by
them and (ii) Article IX, which shall, in each case, remain in full force and
effect, shall become void and have no effect, without any liability on the part
of any party hereto or its directors, officers or stockholders. Notwithstanding
the foregoing, nothing in this Section 9.1 shall relieve any party hereto of
liability for a willful breach of any of its obligations under this Agreement.
Section 9.2 COMPLETE AGREEMENT; CONSTRUCTION. This Agreement and the
Share Exchange Agreement (including the Schedules and Exhibits attached hereto
or thereto or delivered in connection herewith or therewith) shall constitute
the entire agreement among the Parties with respect to the matters covered
hereby and thereby and supersedes all previous written, oral or implied
understandings, among them with respect to such matters. Notwithstanding
anything to the contrary contained in this Agreement or the Share Exchange
Agreement, in the event of any conflict or inconsistency between any provision
of this Agreement and any provision of the Share Exchange Agreement, the
applicable provision of this Agreement shall govern.
Section 9.3 COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall be deemed an original agreement, but all of
which together shall constitute one and the same instrument.
Section 9.4 JOINT AND SEVERAL LIABILITY. Following the Exchange,
Splitco and the Stockholders shall be jointly and severally liable for any
liability or obligation of LMC under this Agreement.
Section 9.5 NOTICES. All notices or other communications required or
permitted hereunder shall be in writing and shall be delivered personally, by
facsimile (with confirming copy sent by one of the other delivery methods
specified herein), by overnight courier or sent by certified, registered or
express air mail, postage prepaid, and shall be deemed given when so delivered
personally, or when so received by facsimile or courier, or, if mailed,
22
three (3) calendar days after the date of mailing, as follows:
If to Parent: News Corporation
1211 Avenue of the Americas
New York, New York 10036
Facsimile: (212) 768-9896
Attention: General Counsel
with a copy to: Skadden, Arps, Slate, Meagher & Flom LLP
Four Times Square
New York, New York 10036
Facsimile: (917) 777-2000
Attention: Lou R. Kling
Howard L. Ellin
J. Phillip Adams
If to LMC: Liberty Media Corporation
12300 Liberty Boulevard
Englewood, Colorado 80112
Facsimile: (720) 875-5382
Attention: General Counsel
with a copy to: Baker Botts L.L.P.
30 Rockefeller Plaza, 44th Floor
New York, New York 10112-4498
Facsimile: (212) 408-2501
Attention: Frederick H. McGrath
or to such other address and with such other copies as any Party hereto shall
notify the other Parties hereto (as provided above) from time to time.
Section 9.6 WAIVERS. The failure of any Party to require strict
performance by the other Party of any provision in this Agreement will not waive
or diminish that Party's right to demand strict performance thereafter of that
or any other provision hereof.
Section 9.7 AMENDMENT AND MODIFICATION. This Agreement may not be
amended except by an instrument in writing signed on behalf of each of the
Parties hereto.
Section 9.8 ASSIGNMENT; SUCCESSORS AND ASSIGNS; NO THIRD PARTY RIGHTS.
This Agreement may not be assigned by any Party hereto without the prior written
consent of the other Parties hereto, and any attempted assignment shall be null
and void; PROVIDED, HOWEVER, that following the Closing LMC will be permitted to
assign its rights hereunder, without
23
obtaining the consent of Parent, to any Person to which ownership of one hundred
percent (100%) of the shares of capital stock of Splitco are or have been
transferred in connection with any spin off, split off or other distribution of
the securities of such transferee in which holders of LMC capital stock
immediately prior thereto are entitled to, or have the opportunity to,
participate in such distribution. This Agreement shall be binding upon and inure
to the benefit of the Parties hereto and their respective successors and
permitted assigns. This Agreement shall be for the sole benefit of the Parties
hereto, and their respective successors and permitted assigns, and is not
intended, nor shall be construed, to give any Person, other than the Parties
hereto and their respective successors and permitted assigns any legal or
equitable right, benefit, remedy or claim hereunder.
Section 9.9 NO STRICT CONSTRUCTION. Parent and LMC each acknowledge
that this Agreement has been prepared jointly by the Parties hereto and shall
not be strictly construed against any Party hereto.
Section 9.10 TITLES AND HEADINGS. The headings and table of contents
in this Agreement are for reference purposes only, and shall not in any way
affect the meaning or interpretation of this Agreement.
Section 9.11 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement
shall be governed by, and construed in accordance with, the internal Laws of the
State of Delaware, without reference to the choice of law principles thereof.
Each of the Parties hereto irrevocably submits to the exclusive jurisdiction of
the courts of the State of Delaware and the United States District Court for any
district within such state for the purpose of any Action or judgment relating to
or arising out of this Agreement or any of the transactions contemplated hereby
and to the laying of venue in such court. Service of process in connection with
any such Action may be served on each Party hereto by the same methods as are
specified for the giving of notices under this Agreement. Each Party hereto
irrevocably and unconditionally waives and agrees not to plead or claim any
objection to the laying of venue of any such Action brought in such courts and
irrevocably and unconditionally waives any claim that any such Action brought in
any such court has been brought in an inconvenient forum.
Section 9.12 SEVERABILITY. If any term, provisions, covenant, or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void, or unenforceable, the remainder of the
terms, provisions, covenants, and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired, or invalidated
so long as the economic or legal substance of the transactions contemplated
hereby is not affected in any manner materially adverse to any Party. Upon such
determination, the Parties shall negotiate in good faith to modify this
Agreement so as to effect the original intent of the Parties as closely as
possible in an acceptable manner in order that the transactions contemplated
hereby are consummated as originally contemplated to the fullest extent
possible.
Section 9.13 WAIVER OF JURY TRIAL. EACH PARTY HERETO ACKNOWLEDGES AND
AGREES THAT ANY CONTROVERSY WHICH MAY ARISE UNDER THIS AGREEMENT IS LIKELY TO
INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND, THEREFORE, EACH SUCH PARTY HEREBY
IRREVOCABLY AND UNCONDITIONALLY WAIVES TO THE FULLEST EXTENT PERMITTED BY
24
APPLICABLE LAW, ANY RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT TO
ANY ACTION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
EACH PARTY HERETO CERTIFIES AND ACKNOWLEDGES THAT (A) NO REPRESENTATIVE, AGENT
OR ATTORNEY OF ANY OTHER PARTY HERETO HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF SUCH ACTION, SEEK TO ENFORCE
THE FOREGOING WAIVER, (B) EACH SUCH PARTY UNDERSTANDS AND HAS CONSIDERED THE
IMPLICATIONS OF THIS WAIVER, (C) EACH SUCH PARTY MAKES THIS WAIVER VOLUNTARILY,
AND (D) EACH SUCH PARTY HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG
OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 9.13.
Section 9.14 EQUITABLE REMEDIES. Neither rescission, set-off nor
reformation of this Agreement shall be available as a remedy to any of the
parties hereto. The parties hereto agree that irreparable damage would occur in
the event any of the provisions of this Agreement were not to be performed in
accordance with the terms hereof and that the parties shall be entitled to
specific performance of the terms hereof in addition to any other remedies at
Law or in equity.
[remainder of page intentionally left blank]
25
IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
NEWS CORPORATION
By: /s/ John P. Nallen
------------------------------------
Name: John P. Nallen
Title: Executive Vice President &
Deputy CFO
LIBERTY MEDIA CORPORATION
By: /s/ Gregory B. Maffei
------------------------------------
Name: Gregory B. Maffei
Title: President & CEO
26
EXHIBIT 21
AS OF DECEMBER 31, 2006
A TABLE OF SUBSIDIARIES OF LIBERTY MEDIA CORPORATION IS SET FORTH BELOW,
INDICATING AS TO EACH THE STATE OR JURISDICTION OF ORGANIZATION AND THE NAMES
UNDER WHICH SUCH SUBSIDIARIES DO BUSINESS. SUBSIDIARIES NOT INCLUDED IN THE
TABLE ARE INACTIVE OR, CONSIDERED IN THE AGGREGATE AS A SINGLE SUBSIDIARY, WOULD
NOT CONSTITUTE A SIGNIFICANT SUBSIDIARY.
State/Country
Name of
Formation - ---
- ------------
1227844 Ontario
Ltd. CANADA
(Ontario) 4G
Media Ltd.
Turks & Caicos
4G Media Ltd.
BVI ACTV
Entertainment,
Inc. NY ACTV
Intellocity
GmbH GERMANY
ACTV
International
BV NETHERLANDS
ACTV, Inc. DE
Advision, LLC
DE AEI Music
Network, Inc.
WA Affiliate
Marks
Investments,
Inc. DE
Affiliate
Investment,
Inc. DE
Affiliate
Relations
Holdings, Inc.
DE Affiliate
Sales &
Marketing, Inc.
DE AltaDena
Productions,
LLC DE Anchor
Bay
Entertainment
Australia PTY
LTD AUSTRALIA
Anchor Bay
Entertainment
Canada, Corp.
NOVA SCOTIA
Anchor Bay
International
Limited CANADA
Aries Pictures
LLC CO Ascent
Entertainment
Group, Inc. DE
Associated
Information
Services
Corporation DE
Associated PCN
Holding
Corporation DE
Barefoot
Acquisition,
LLC DE BDTV II
Inc. DE BDTV
III Inc. DE
BDTV Inc. DE
BDTV IV, Inc.
DE BET
Movies/STARZ!3,
LLC DE Betmart
Limited UK
BettingCorp. UK
Ltd. UK BOCOO
Media, LLC DE
BOCOO Online,
LLC DE
BuySeasons,
Inc. UK
CableSoft
Corporation DE
CDirect Mexico
I, Inc. DE
CDirect Mexico
II, Inc. DE
Chalk Line
Productions,
LLC DE Columbia
Exchange
Systems Ltd.
CANADA Commerce
Technologies,
Inc. NY
Communication
Capital Corp.
DE Connectid,
LLC DE Corcom,
Inc. [dba Don
Best Sports] DE
CVN Companies,
Inc. MN
State/Country
Name of
Formation - -
--- ---------
--- CVN
Direct
Marketing
Corp. MN CVN
Distribution
Co., Inc. MN
CVN
Management,
Inc. MN CVN
Michigan,
Inc. MN
Diamonique
Canada
Holdings,
Inc. DE
Diamonique
Corporation
NJ Digital
ADCO, Inc. DE
Digital
Entertainment
Limited UK
Diversion
Entertainment,
LLC DE Dry
Creek
Productions
LLC CO EI
Holdings,
Inc. CO
Encore Asia
Management
Limited HONG
KONG Encore
International
Newco, LLC CO
Encore London
Limited DE
Equipment
OCV, Inc. DE
ER
Development
International,
Inc. PA ER
Marks, Inc.
DE EZShop
International,
Inc. DE
Fanball UK
Limited UK
Fantasy
Sports
Acquisition,
LLC DE Film
Roman
California,
LLC DE Film
Roman, LLC DE
FUN
Technologies
Corp. DE FUN
Technologies
Inc. UK FUN
Technologies
plc Columbia
Exchange
Systems
Limited UK
Game Show
Enterprises,
LLC DE Game
Show Network
Music, LLC DE
Georgina
Productions,
LLC DE Gold
Striped
Shirt, LLC DE
GSN Music,
LLC DE GSN
Texas, L.P.
DE Health
Ventures
Partners G.P.
PA Hotel
Digital
Network Inc.
CA HyperTV
Networks,
Inc. DE IC
Marks, Inc.
DE IDT
Entertainment
Canada, Corp.
(unlimited
liability
company) NOVA
SCOTIA IDT
Entertainment
Film
Productions
Puerto Rico
Corp. PUERTO
RICO IM
Experience,
Inc. PA
Influence
Marketing
Corp (dba QVC
@ theMall)
[Unlimited
Liability
Corp.] NOVA
SCOTIA
Influence
Marketing
Services,
Inc. CANADA
(Ontario)
Ingenius CO
Innovative
Retailing,
Inc. DE
Intellocity
USA, Inc. DE
iQVC GmbH
GERMANY KSI,
Inc. DE LBTW
I, Inc. CO
LBTW II, Inc.
CO LBTW III,
Inc. CO LDIG
Aloy, Inc. DE
LDIG Cars,
Inc. DE LDIG
Film, Inc. DE
LDIG
Financing LLC
DE LDIG Food,
Inc. DE LDIG
Gamenet, Inc.
DE
State/Country
Name of
Formation - -
--- ---------
--- LDIG
House, Inc.
DE LDIG ICTV
Corp. DE LDIG
Koz, Inc. DE
LDIG NL, Inc.
DE LDIG
Online
Retail, Inc.
DE LDIG
Order, Inc.
DE LDIG OTV,
Inc. DE LDIG
Respond, Inc.
DE LDIG UGON,
Inc. DE LDIG,
LLC DE Level
13
Entertainment,
LLC DE
Liberty
Academic
Systems
Holdings,
Inc. CO
Liberty AEG,
Inc. DE
Liberty Aero,
LLC DE
Liberty AGI,
LLC DE
Liberty
Animal
Planet, LLC
CO Liberty
Associated
Holdings LLC
DE Liberty
Associated,
Inc. DE
Liberty ATCL,
Inc. CO
Liberty
Auction
Holdings LLC
DE Liberty
Auction, Inc.
DE Liberty
BBandnow
Holdings, LLC
DE Liberty
BBandnow,
Inc. DE
Liberty BC
Capital, LLC
DE Liberty
BETI, Inc. DE
Liberty
Broadband
Interactive
Television,
Inc. DE
Liberty
Centennial
Holdings,
Inc. DE
Liberty
Challenger,
LLC DE
Liberty
Citation,
Inc. DE
Liberty CM,
Inc. DE
Liberty CNBC,
Inc. CO
Liberty
Crown, Inc.
DE Liberty
CSG Cash, LLC
DE Liberty
CSG Warrants,
LLC DE
Liberty
Denver Arena
LLC DE
Liberty
Entertainment,
Inc. DE
Liberty
Equator, Inc.
DE Liberty
ETC Holdings,
LLC DE
Liberty ETC,
LLC DE
Liberty EVNT,
Inc. DE
Liberty
Finance LLC
DE Liberty
Freedom, Inc.
CANADA
Liberty
Geonet, Inc.
DE Liberty GI
II, Inc. DE
Liberty GI,
Inc. DE
Liberty GIC.
Inc. CO
Liberty HSN
II, Inc. DE
Liberty IATV
Events, Inc.
DE Liberty
IATV
Holdings,
Inc. DE
Liberty IATV,
Inc. DE
Liberty IB2,
LLC DE
Liberty ICGX,
Inc. DE
Liberty
International
B-L LLC DE
Liberty Java,
Inc. CO
State/Country
Name of
Formation -
---- -------
-----
Liberty KI,
Inc. DE
Liberty KV
Holdings,
Inc. DE
Liberty KV
Partners I,
LLC DE
Liberty
Lightspan
Holdings,
Inc. CO
Liberty LQ
VII, LLC DE
Liberty LSAT
II, Inc. DE
Liberty
LSAT, Inc.
DE Liberty
MCNS
Holdings,
Inc. CO
Liberty
Media LLC DE
Liberty
MicroUnity
Holdings,
Inc. CO
Liberty MLP,
Inc. CO
Liberty NC
II, Inc. DE
Liberty NC
III, Inc. DE
Liberty NC
IV, Inc. DE
Liberty NC
IX, Inc. DE
Liberty NC
V, Inc. DE
Liberty NC
VI, Inc. DE
Liberty NC
VII, Inc. DE
Liberty NC
VIII, Inc.
DE Liberty
NC XII, Inc.
DE Liberty
NC XIII,
Inc. DE
Liberty NC,
Inc. DE
Liberty NEA,
Inc. DE
Liberty
Next, Inc.
DE Liberty
NP, Inc. DE
Liberty
Online
Health KI
Holdings,
Inc. CO
Liberty
Online
Health RN
Holdings,
Inc. CO
Liberty
PCLN, Inc.
DE Liberty
PL2, Inc. DE
Liberty PL3,
LLC DE
Liberty
Prime, Inc.
DE Liberty
Programming
Company LLC
DE Liberty
Property
Holdings,
Inc. DE
Liberty QS,
Inc. DE
Liberty QVC
Holding, LLC
DE Liberty
Replay, Inc.
DE Liberty
Satellite &
Technology,
Inc. DE
Liberty
Satellite,
LLC DE
Liberty
Sling, Inc.
DE Liberty
SMTRK of
Texas, Inc.
CO Liberty
SMTRK, LLC
DE Liberty
Tower, Inc.
DE Liberty
TP Holdings,
Inc. DE
Liberty TP
Investment,
LLC DE
Liberty TP
LLC DE
Liberty TP
Management,
Inc. DE
Liberty
TSAT, Inc.
DE Liberty
TWSTY II,
Inc. CO
Liberty
TWSTY III,
Inc. CO
Liberty VF,
Inc. DE
Liberty
Virtual I/O,
Inc. CO
Liberty
Virtual
Pets, LLC DE
Liberty
WDIG, Inc.
DE Liberty
WF Holdings
LLC DE
State/Country
Name of
Formation - -
--- ---------
--- Liberty
WF, Inc. DE
Liberty
Wireless 1,
Inc. DE
Liberty
Wireless 10,
Inc. DE
Liberty
Wireless 11,
Inc. DE
Liberty
Wireless 2,
Inc. DE
Liberty
Wireless 3,
Inc. DE
Liberty
Wireless 4,
Inc. DE
Liberty
Wireless 5,
Inc. DE
Liberty
Wireless 6,
Inc. DE
Liberty
Wireless 7,
Inc. DE
Liberty
Wireless 8,
Inc. DE
Liberty
Wireless 9,
Inc. DE
Liberty XMSR,
Inc. DE LMC
Bay Area
Sports, Inc.
CO LMC BET
Holdings LLC
DE LMC BET,
LLC CO LMC
Capital LLC
DE LMC Denver
Arena, Inc.
DE LMC IATV
Events, LLC
DE LMC IATV
Events, LLC
DE LMC
Information
Services, LLC
DE LMC
Request, Inc.
CO LMC Silver
King, Inc. CO
LMC USA IX,
Inc. DE LMC
USA VIII,
Inc. DE LMC
USA XI, Inc.
DE LMC USA
XII, Inc. DE
LMC USA XIII,
Inc. DE LMC
USA XIV, Inc.
DE LMC USA
XV, Inc. DE
LMC Wireless
1, LLC DE LMC
Wireless 2,
LLC DE LMC
Wireless 3,
LLC DE LMC
Wireless 4,
LLC DE LMC
Wireless 5,
LLC DE LMC
Wireless 6,
LLC DE LMC
Wireless
Holdings, LLC
DE LMC
Wireless IV,
LLC DE
LMC/LSAT
Holdings,
Inc. DE LQ
III, Inc. DE
LQ IV, Inc.
DE LQ V, Inc.
DE LQ VI, LLC
DE LSAT Astro
LLC DE LTP
Wireless 1,
LLC DE LTWX
I, Inc. CO
LTWX II, Inc.
CO LTWX III,
Inc. CO LTWX
IV, Inc. CO
LTWX V, Inc.
CO Manga
Entertainment
Limited UK
Manga
Entertainment,
LLC DE Maxide
Acquisition,
Inc. DE
Maxide Music,
Inc. DE
State/Country
Name of
Formation -
---- -------
----- Media
Online
Services,
Inc. DE
Millcreek
Holdings,
LLC DE
Montana
Productions,
LLC DE Namor
Productions,
LLC DE
Octopi LLC
DE On
Command
Argentina,
SRL
Argentina On
Command
Canada, Inc.
Canada On
Command
Corporation
DE On
Command
Development
Corporation
DE On
Command
Video
Corporation
DE ONCO-HTV,
Inc. DE
OpenGaming
Ltd. ISRAEL
OpenPlay
(BVI) Ltd.
BVI OpenTV
(Cayman)
Digital
Solutions
CAYMAN
ISLANDS
OpenTV
Advertising
Holdings,
Inc. DE
OpenTV AG
SWITZERLAND
OpenTV
Australia
Pty. Ltd.
AUSTRALIA
OpenTV Corp.
British
Virgin
Islands
OpenTV
Europe
S.A.S.
FRANCE
OpenTV GmbH
GERMANY
OpenTV
Holding N.V.
Netherlands
Antilles
OpenTV
Holdings
B.V.
NETHERLANDS
OpenTV Hong
Kong Pte
Limited HONG
KONG OpenTV
Iberia SL
SPAIN OpenTV
Interactive
Software
(Beijing)
Co. Ltd.
CHINA OpenTV
Japan K.K.
JAPAN OpenTV
UK Limited
UK OpenTV US
Holdings
Inc. DE
OpenTV US
Investments,
Inc. DE
OpenTV, Inc.
DE Overture
Films, LLC
DE Picture
Finance
Group, LLC
DE Pioneer
Studios,
Inc. DE
Provide
Commerce,
Inc. DE
Puerto Rico
Video
Entertainment
Corporation
DE Q The
Music, Inc.
DE Q2, Inc.
NY QC Marks,
Inc. DE QCom
TV, Inc. DE
QDirect
Ventures,
Inc. DE
QExhibits,
Inc. DE
QHealth,
Inc. DE QK
Holdings,
Inc. DE QRT
Enterprises
L.P. QS
Holdings,
Inc. DE QVC
[English
Unlimited
Liability
Company]
GREAT
BRITAIN QVC
Britain
[English
Unlimited
Liability
Company]
ENGLAND QVC
Britain I
Limited
[English
limited
liability
company]
ENGLAND QVC
Britain I,
Inc. DE QVC
Britain II,
Inc. DE QVC
Britain III,
Inc. DE QVC
Call Center
GmbH & Co.
KG GERMANY
QVC Call
Center
Verwaltungs-
GmbH GERMANY
QVC
Chesapeake,
Inc. VA
State/Country Name of
Formation - ---- ----
-------- QVC China
Domain Limited HONG
KONG QVC China, Inc.
DE QVC de Mexico de
S. de R.L. de C.V.
MEXICO QVC Delaware,
Inc. DE QVC
Deutschland Inc. &
Co. KG (a
partnership) GERMANY
QVC eDistribution
Inc. & Co. KG GERMANY
QVC eProperty
Management GmbH & Co.
KG GERMANY QVC
eService Inc. & Co.
KG GERMANY QVC
Germany I, Inc. DE
QVC Germany II, Inc.
DE QVC
Grundstucksverwaltungs
GmbH GERMANY QVC GV
Real Estate GmbH &
Co. KG GERMANY QVC
Handel GmbH GERMANY
QVC International,
Inc. DE QVC
Investment, LLC CO
QVC Japan Holdings,
Inc. DE QVC Japan
Services, Inc. DE QVC
Japan, Inc. JAPAN QVC
Local, Inc. DE QVC
Management GmbH
GERMANY QVC Mexico
II, Inc. DE QVC
Mexico III, Inc. DE
QVC Mexico, Inc. DE
QVC of Thailand, Inc.
DE QVC Productworks,
Inc. DE QVC
Properties, Inc.
BRITAIN QVC
Publishing, Inc. DE
QVC Realty, Inc. PA
QVC Rocky Mount, Inc.
NC QVC RS Naples,
Inc. FL QVC San
Antonio, Inc. TX QVC
Satellite, Ltd JAPAN
QVC St. Lucie, Inc.
FL QVC Studio GmbH
GERMANY QVC, Inc. DE
QVC-QRT, Inc. DE RS
Marks, Inc. DE RS
Myrtle Beach, Inc. SC
Satellite MGT, Inc.
DE Savor North
Carolina, Inc. NC SEG
Investments, Inc. DE
Sheepish, LLC DE
SkillJam EU Limited
UK SkillJam
Technologies
Corporation DE
Spectradyne
International, Inc.
DE SpotOn
International Ltd.
BERMUDA Spyglass
Integration, Inc. DE
Spyglass, Inc. DE
Starz Animation
Slate, LLC DE Starz
Animation Special
Projects, LLC DE
Starz Australia
Holdings PTY Ltd.
AUSTRALIA Starz
Canada Holdings I
B.V. NETHERLANDS
Starz Canada Holdings
I Co. (unlimited
liability company)
NOVA SCOTIA Starz
Canada Holdings II
B.V. NETHERLANDS
State/Country
Name of
Formation - ----
------------
Starz Canada
Holdings II Co.
(unlimited
liability
company) NOVA
SCOTIA Starz
Digital, LLC
(fka IDT
Entertainment
Digital, Inc.)
DE Starz
Entertainment,
LLC CO Starz
Foreign Holdings
B.V. NETHERLANDS
Starz Foreign
Holdings, LLC DE
Starz Home
Entertainment UK
Limited UK Starz
Home
Entertainment,
LLC DE Starz
Latin, LLC DE
Starz Media
Holdings, LLC DE
Starz Media
Holdings, LLC DE
Starz Media, LLC
DE Starz
Presents, LLC DE
Starz
Productions, LLC
DE Starz R2
Video, L.P. CA
Starz
R2Communications,
LLC DE Starz UK
Holdings Limited
UK Starz
Worldwide
Distribution,
LLC DE Starz,
LLC DE Static
2358 France
S.A.S. FRANCE
Static 2358
Holdings Limited
UK Static 2358
Limited UK
Static 2358,
Inc. CA TATV,
Inc. DE TBH
Marks, Inc. DE
Texas Game Ball,
LLC DE Texas
Winnie, LLC DE
The Box Music
Network S.L.
SPAIN The Box
Worldwide-
Europe, B.V.
NETHERLANDS The
Hotel Networks,
Inc. DE TOBH,
Inc. DE TP
Middle East, LLC
DE TruePosition
China, LLC DE
TruePosition,
Inc. DE TSAT
Holding 1, Inc.
DE TSAT Holding
2, Inc. DE Video
Jukebox Network
Europe, Ltd. UK
Virgin Islands
Video
Entertainment
Corporation (dba
Hotel Video
Services) DE
Wink
Communications,
Inc. DE Wink
Interactive,
Inc. DE
WorldWinner.com,
Inc. DE X*PRESS
Electronic
Services, Ltd.
CO X*PRESS
Information
Services, Ltd.
CO Yankee
Irving, LLC DE
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Liberty Media Corporation:
We consent to the incorporation by reference in the following registration
statements of Liberty Media Corporation of our reports dated February 28, 2007
with respect to the consolidated balance sheets of Liberty Media Corporation and
subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of operations, comprehensive earnings (loss), stockholders' equity,
and cash flows for each of the years in the three-year period ended December 31,
2006, management's assessment of the effectiveness of internal control over
financial reporting as of December 31, 2006 and the effectiveness of internal
control over financial reporting as of December 31, 2006, which reports appear
in the December 31, 2006 annual report on Form 10-K of Liberty Media
Corporation:
FORM
REGISTRATION
STATEMENT
NO.
DESCRIPTION
-----------
-----------
-----------
-----------
-----------
-----------
--- S-8
333-134067
LMC 401(k)
Plan S-8
333-134115
LMC
Incentive
Plan S-8
333-134114
Non-
employee
Director
Plan S-3
333-136856
BuySeasons
Acquisition
Our report on the consolidated financial statements of Liberty Media
Corporation refers to the Company's adoption of Statement of Financial
Accounting Standards No. 123(R), SHARE BASED PAYMENT on January 1, 2006.
KPMG LLP
Denver, Colorado
February 28, 2007
EXHIBIT 31.1
CERTIFICATION
I, Gregory B. Maffei, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Media
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 1, 2007
/s/
GREGORY
B.
MAFFEI -
--------
--------
--------
--------
--------
----
Gregory
B.
Maffei
CHIEF
EXECUTIVE
OFFICER
AND
PRESIDENT
EXHIBIT 31.2
CERTIFICATION
I, David J.A. Flowers, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Media
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 1, 2007
/s/
DAVID
J.A.
FLOWERS
- ------
--------
--------
--------
--------
------
David
J.A.
Flowers
SENIOR
VICE
PRESIDENT
AND
TREASURER
EXHIBIT 31.3
CERTIFICATION
I, Christopher W. Shean, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Media
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report is
being prepared;
b) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures as of the end of
the period covered by this annual report based on such evaluation; and
d) disclosed in this annual report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record,
process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 1, 2007
/s/
CHRISTOPHER
W. SHEAN -
----------
----------
----------
----------
----
Christopher
W. Shean
SENIOR
VICE
PRESIDENT
AND
CONTROLLER
EXHIBIT 32
CERTIFICATION
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(SUBSECTIONS (A) AND (B) OF SECTION 1350, CHAPTER 63 OF TITLE 18, UNITED STATES
CODE)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections
(a) and (b) of section 1350, chapter 63 of title 18, United States Code), each
of the undersigned officers of Liberty Media Corporation, a Delaware corporation
(the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the period ended December 31, 2006 (the
"Form 10-K") of the Company fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information
contained in the Form 10-K fairly presents, in all material respects, the
financial condition and results of operations of the Company as of December 31,
2006 and 2005 and for the three years ended December 31, 2006.
Dated: March 1, 2007 /s/ GREGORY B. MAFFEI
---------------------------------------------
Gregory B. Maffei
CHIEF EXECUTIVE OFFICER AND PRESIDENT
Dated: March 1, 2007 /s/ DAVID J.A. FLOWERS
---------------------------------------------
David J.A. Flowers
SENIOR VICE PRESIDENT AND TREASURER
(PRINCIPAL FINANCIAL OFFICER)
Dated: March 1, 2007 /s/ CHRISTOPHER W. SHEAN
---------------------------------------------
Christopher W. Shean
SENIOR VICE PRESIDENT AND CONTROLLER
(PRINCIPAL ACCOUNTING OFFICER)
The foregoing certification is being furnished solely pursuant to
section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of
section 1350, chapter 63 of title 18, United States Code) and is not being filed
as part of the Form 10-K or as a separate disclosure document.
EXHIBIT 99.1
UNAUDITED ATTRIBUTED FINANCIAL INFORMATION FOR TRACKING STOCK GROUPS
On May 9, 2006, we completed a restructuring and recapitalization pursuant
to which we issued two new tracking stocks, one ("Liberty Interactive Stock")
intended to reflect the separate performance of our businesses engaged in video
and on-line commerce, including our subsidiaries, QVC, Inc., Provide
Commerce, Inc. and BuySeasons, Inc. and our interests in IAC/InterActiveCorp and
Expedia, Inc., the second ("Liberty Capital Stock") intended to reflect the
separate performance of all of our assets and businesses not attributed to the
Interactive Group. Each share of our existing Series A and Series B common stock
was exchanged for .25 of a share of the same series of Liberty Interactive Stock
and .05 of a share of the same series of Liberty Capital Stock.
The following tables present our assets, liabilities, revenue, expenses and
cash flows as of and for the years ended December 31, 2006, 2005 and 2004. The
tables further present our assets, liabilities, revenue, expenses and cash flows
that are attributed to the Interactive Group and the Capital Group,
respectively. The financial information should be read in conjunction with our
audited financial statements for the years ended December 31, 2006, 2005 and
2004 included in this Annual Report on Form 10-K. The attributed financial
information presented in the tables has been prepared assuming the restructuring
had been completed as of January 1, 2004.
Notwithstanding the following attribution of assets, liabilities, revenue,
expenses and cash flows to the Interactive Group and the Capital Group, the
restructuring does not affect the ownership or the respective legal title to our
assets or responsibility for our liabilities. We and our subsidiaries each
continue to be responsible for our respective liabilities. Holders of Liberty
Interactive Stock and Liberty Capital Stock are holders of our common stock and
continue to be subject to risks associated with an investment in our company and
all of our businesses, assets and liabilities. The issuance of Liberty
Interactive Stock and Liberty Capital Stock does not affect the rights of our
creditors.
SUMMARY ATTRIBUTED FINANCIAL DATA
INTERACTIVE GROUP
DECEMBER 31, ------------------------------ 2006 2005
2004 -------- -------- -------- (AMOUNTS IN MILLIONS)
SUMMARY BALANCE SHEET DATA: Current
assets.............................................. $
2,984 2,729 2,423 Cost
investments............................................
$ 2,572 2,084 3,844 Equity
investments..........................................
$ 1,358 1,229 78 Total
assets................................................
$19,820 18,351 18,977 Long-term debt, including
current portion................... $ 6,383 5,327 6,253
Deferred income tax liabilities,
noncurrent................. $ 3,115 3,104 3,465
Attributed net
assts........................................ $ 8,561
8,231 7,782
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) SUMMARY OPERATIONS DATA:
Revenue.....................................................
$7,326 6,501 5,687 Cost of goods
sold.......................................... (4,565)
(4,112) (3,594) Operating
expenses.......................................... (596)
(570) (497) Selling, general and administrative
expenses(1)............. (544) (454) (411) Depreciation and
amortization............................... (491) (449)
(437) ------ ------ ------ Operating
income........................................ 1,130 916
748 Interest
expense............................................ (417)
(374) (385) Other income,
net........................................... 130 29 11
Income tax
expense.......................................... (210)
(225) (162) Minority interests in earnings of
subsidiaries.............. (35) (48) (25) ------ ------ ---
--- Earnings before cumulative effect of accounting
change.... 598 298 187 Cumulative effect of accounting
change, net of taxes........ (87) -- -- ------ ------ -----
- Net earnings............................................
$ 511 298 187 ====== ====== ======
- ------------------------
(1) Includes stock-based compensation of $59 million, $52 million and
$39 million for the years ended December 31, 2006, 2005 and 2004,
respectively.
2
SUMMARY ATTRIBUTED FINANCIAL DATA
CAPITAL GROUP
DECEMBER 31, ------------------------------ 2006 2005
2004 -------- -------- -------- (AMOUNTS IN MILLIONS)
SUMMARY BALANCE SHEET DATA: Current
assets.............................................. $
3,776 2,984 2,152 Cost
investments............................................
$19,050 16,405 17,990 Equity
investments..........................................
$ 484 679 706 Total
assets................................................
$27,849 23,750 31,320 Long-term debt, including
current portion................... $ 2,640 2,422 2,323
Deferred income tax liabilities,
noncurrent................. $ 6,669 5,592 6,280
Attributed net
assets....................................... $13,072
10,889 16,804
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) SUMMARY OPERATIONS DATA:
Revenue.....................................................
$1,287 1,145 1,056 Operating
expenses.......................................... (930)
(827) (663) Selling, general and administrative
expenses(1)............. (262) (194) (285) Litigation
settlement....................................... -- -- 42
Depreciation and
amortization............................... (91) (96) (110)
Impairment of long-lived
assets............................. (113) -- -- ------ ----
- ------ Operating income
(loss)................................. (109) 28 40
Interest
expense............................................ (263)
(252) (234) Realized and unrealized gains (losses) on
derivative instruments,
net.......................................... (299) 274
(1,267) Gain (losses) on dispositions,
net.......................... 607 (401) 1,404 Nontemporary
declines in fair value of investments.......... (4) (449)
(129) Other income,
net........................................... 213 111 98
Income tax benefit
(expense)................................ (42) 351 3
Minority interests in losses (earnings) of
subsidiaries..... 8 (3) 3 ------ ----- ------ Earnings
(loss) from continuing operations.............. 111 (341)
(82) Earnings (loss) from discontinued operations, net of
taxes.....................................................
220 10 (59) Cumulative effect of accounting change, net of
taxes........ (2) -- -- ------ ----- ------ Net earnings
(loss)..................................... $ 329 (331)
(141) ====== ===== ======
- ------------------------
(1) Includes stock-based compensation of $8 million, zero and $59 million for
the years ended December 31, 2006, 2005 and 2004, respectively.
3
BALANCE SHEET INFORMATION
DECEMBER 31, 2006
(UNAUDITED)
ATTRIBUTED (NOTE 1) ----------------------
INTERACTIVE CAPITAL CONSOLIDATED GROUP GROUP
ELIMINATIONS LIBERTY ----------- -------- --------
---- ------------ (AMOUNTS IN MILLIONS) ASSETS
Current assets: Cash and cash
equivalents........................ $ 946 2,153 --
3,099 Trade and other receivables,
net................. 977 299 -- 1,276 Inventory,
net................................... 831 -- --
831 Derivative instruments (note
2).................. 12 227 -- 239 Current
deferred tax assets...................... 159 --
(31) 128 Other current
assets............................. 59 585 -- 644
Assets of discontinued operations................
-- 512 -- 512 ------- ------ --- ------ Total
current assets........................... 2,984
3,776 (31) 6,729 ------- ------ --- ------
Investments in available-for-sale securities and
other cost investments...........................
2,572 19,050 -- 21,622 Long-term derivative
instruments (note 2).......... 2 1,338 -- 1,340
Investments in affiliates, accounted for using the
equity method....................................
1,358 484 -- 1,842 Property and equipment,
net........................ 912 234 -- 1,146
Goodwill...........................................
5,755 1,833 -- 7,588
Trademarks.........................................
2,450 21 -- 2,471 Intangible assets subject to
amortization, net..... 3,756 154 -- 3,910 Other
assets, at cost, net of accumulated
amortization.....................................
31 959 -- 990 ------- ------ --- ------ Total
assets................................... $19,820
27,849 (31) 47,638 ======= ====== === ======
LIABILITIES AND EQUITY Current liabilities:
Accounts payable.................................
$ 475 33 -- 508 Accrued
interest................................. 136 78 -
- 214 Other accrued
liabilities........................ 663 372 --
1,035 Intergroup
payable/receivable.................... 81 (81) --
-- Derivative instruments (note
2).................. -- 1,484 -- 1,484 Current
portion of debt (note 3)................. 11 103 -
- 114 Current deferred tax
liabilities................. -- 31 (31) -- Other
current liabilities........................ 91 22
-- 113 Liabilities of discontinued
operations........... -- 101 -- 101 ------- ------
--- ------ Total current
liabilities...................... 1,457 2,143 (31)
3,569 ------- ------ --- ------ Long-term debt
(note 3)............................ 6,372 2,537 -
- 8,909 Long-term derivative instruments (note
2).......... 9 1,697 -- 1,706 Deferred income tax
liabilities (note 6)........... 3,115 6,669 --
9,784 Other
liabilities.................................. 210
1,537 -- 1,747 ------- ------ --- ------ Total
liabilities.............................. 11,163
14,583 (31) 25,715 Minority interests in equity of
subsidiaries....... 96 194 -- 290
Equity/Attributed net
assets....................... 8,561 13,072 --
21,633 ------- ------ --- ------ Total liabilities
and equity................... $19,820 27,849 (31)
47,638 ======= ====== === ======
4
BALANCE SHEET INFORMATION
DECEMBER 31, 2005
(UNAUDITED)
ATTRIBUTED (NOTE 1) ----------------------
INTERACTIVE CAPITAL CONSOLIDATED GROUP GROUP
ELIMINATIONS LIBERTY ----------- -------- --------
---- ------------ (AMOUNTS IN MILLIONS) ASSETS
Current assets: Cash and cash
equivalents........................ $ 945 951 --
1,896 Trade and other receivables,
net................. 837 222 -- 1,059 Inventory,
net................................... 719 -- --
719 Derivative instruments (note
2).................. 17 644 -- 661 Current
deferred tax assets...................... 182 --
(136) 46 Other current
assets............................. 29 651 -- 680
Assets of discontinued operations................
-- 516 -- 516 ------- ------ ---- ------ Total
current assets........................... 2,729
2,984 (136) 5,577 ------- ------ ---- ------
Investments in available-for-sale securities and
other cost investments...........................
2,084 16,405 -- 18,489 Long-term derivative
instruments (note 2).......... 17 1,106 -- 1,123
Investments in affiliates, accounted for using the
equity method....................................
1,229 679 -- 1,908 Property and equipment,
net........................ 746 200 -- 946
Goodwill...........................................
5,273 1,536 -- 6,809
Trademarks.........................................
2,385 -- -- 2,385 Intangible assets subject to
amortization, net..... 3,867 108 -- 3,975 Other
assets, at cost, net of accumulated
amortization.....................................
21 732 -- 753 ------- ------ ---- ------ Total
assets................................... $18,351
23,750 (136) 41,965 ======= ====== ==== ======
LIABILITIES AND EQUITY Current liabilities:
Accounts payable.................................
$ 466 26 -- 492 Accrued
liabilities.............................. 681 126
-- 807 Intergroup
payable/receivable.................... 95 (95) --
-- Accrued stock-based
compensation................. -- 133 -- 133
Derivative instruments (note 2)..................
12 1,927 -- 1,939 Current portion of debt (note
3)................. 1,377 2 -- 1,379 Current
deferred tax liabilities................. -- 296
(136) 160 Other current
liabilities........................ 36 284 -- 320
Liabilities of discontinued operations...........
-- 114 -- 114 ------- ------ ---- ------ Total
current liabilities...................... 2,667
2,813 (136) 5,344 ------- ------ ---- ------ Long-
term debt (note 3)............................
3,950 2,420 -- 6,370 Long-term derivative
instruments (note 2).......... -- 1,087 -- 1,087
Deferred income tax liabilities (note
6)........... 3,104 5,592 -- 8,696 Other
liabilities.................................. 239
819 -- 1,058 ------- ------ ---- ------ Total
liabilities.............................. 9,960
12,731 (136) 22,555 Minority interests in equity
of subsidiaries....... 160 130 -- 290
Equity/Attributed net
assets....................... 8,231 10,889 --
19,120 ------- ------ ---- ------ Total
liabilities and equity................... $18,351
23,750 (136) 41,965 ======= ====== ==== ======
5
STATEMENT OF OPERATIONS AND COMPREHENSIVE EARNINGS INFORMATION
YEAR ENDED DECEMBER 31, 2006
(UNAUDITED)
ATTRIBUTED (NOTE 1) ---------------------- INTERACTIVE
CAPITAL CONSOLIDATED GROUP GROUP LIBERTY ----------- ----
---- ------------ (AMOUNTS IN MILLIONS) Revenue: Net
retail sales..........................................
$7,326 -- 7,326 Communications and programming
services................... -- 1,287 1,287 ------ ----- -
---- 7,326 1,287 8,613 ------ ----- ----- Operating costs
and expenses: Cost of
sales............................................. 4,565
-- 4,565
Operating.................................................
596 930 1,526 Selling, general and administrative
(including stock-based compensation of $59 million and $8
million for Interactive Group and Capital Group,
respectively) (notes 4 and
5)......................................... 544 262 806
Depreciation and
amortization............................. 491 91 582
Impairment of long-lived
assets........................... -- 113 113 ------ -----
----- 6,196 1,396 7,592 ------ ----- ----- Operating
income (loss)................................. 1,130
(109) 1,021 Other income (expense): Interest
expense.......................................... (417)
(263) (680) Dividend and interest
income.............................. 40 174 214 Share of
earnings of affiliates, net...................... 47 44
91 Realized and unrealized gains (losses) on financial
instruments, net........................................
20 (299) (279) Gains on dispositions of assets,
net...................... -- 607 607 Nontemporary
declines in fair value of investments........ -- (4) (4)
Other,
net................................................ 23
(5) 18 ------ ----- ----- (287) 254 (33) ------ ----- ---
-- Earnings from continuing operations before income
taxes and minority
interests................................ 843 145 988
Income tax expense (note
6)................................. (210) (42) (252)
Minority interests in losses (earnings) of
subsidiaries..... (35) 8 (27) ------ ----- ----- Earnings
from continuing operations..................... 598 111
709 Earnings from discontinued operations, net of
taxes......... -- 220 220 Cumulative effect of accounting
change, net of taxes........ (87) (2) (89) ------ ----- -
---- Net
earnings............................................ $
511 329 840 ------ ----- ----- Other comprehensive
earnings (loss), net of taxes: Foreign currency
translation adjustments.................. 109 2 111
Unrealized holding gains arising during the
period........ 351 2,254 2,605 Recognition of previously
unrealized gains on available-for-sale securities,
net...................... -- (185) (185) ------ ----- ---
-- Other comprehensive
earnings.............................. 460 2,071 2,531 --
---- ----- ----- Comprehensive
earnings...................................... $ 971
2,400 3,371 ====== ===== =====
6
STATEMENT OF OPERATIONS AND COMPREHENSIVE EARNINGS INFORMATION
YEAR ENDED DECEMBER 31, 2005
(UNAUDITED)
ATTRIBUTED (NOTE 1) ---------------------- INTERACTIVE
CAPITAL CONSOLIDATED GROUP GROUP LIBERTY ----------- ----
---- ------------ (AMOUNTS IN MILLIONS) Revenue: Net
retail sales..........................................
$6,501 -- 6,501 Communications and programming
services................... -- 1,145 1,145 ------ ------
------ 6,501 1,145 7,646 ------ ------ ------ Operating
costs and expenses: Cost of
sales............................................. 4,112
-- 4,112
Operating.................................................
570 827 1,397 Selling, general and administrative
(including stock-based compensation of $52 million and $0
for Interactive Group and Capital Group, respectively)
(notes 4 and 5)........ 454 194 648 Depreciation and
amortization............................. 449 96 545 ----
-- ------ ------ 5,585 1,117 6,702 ------ ------ ------
Operating income........................................
916 28 944 Other income (expense): Interest
expense.......................................... (374)
(252) (626) Dividend and interest
income.............................. 35 108 143 Share of
earnings of affiliates, net...................... 9 4 13
Realized and unrealized gains (losses) on financial
instruments, net........................................
(17) 274 257 Gains (losses) on dispositions of assets,
net............. 40 (401) (361) Nontemporary declines in
fair value of investments........ -- (449) (449) Other,
net................................................ (38)
(1) (39) ------ ------ ------ (345) (717) (1,062) ------
------ ------ Earnings (loss) from continuing operations
before income taxes and minority
interests.......................... 571 (689) (118)
Income tax benefit (expense) (note
6)....................... (225) 351 126 Minority
interests in earnings of subsidiaries.............. (48)
(3) (51) ------ ------ ------ Earnings (loss) from
continuing operations.............. 298 (341) (43)
Earnings from discontinued operations, net of
taxes......... -- 10 10 ------ ------ ------ Net earnings
(loss)..................................... $ 298 (331)
(33) ------ ------ ------ Other comprehensive earnings
(loss), net of taxes: Foreign currency translation
adjustments.................. (5) -- (5) Recognition of
previously unrealized foreign currency translation
losses...................................... -- 312 312
Unrealized holding losses arising during the
period....... (160) (961) (1,121) Recognition of
previously unrealized losses (gains) on available-for-
sale securities, net...................... (13) 230 217
Reclass unrealized gain on available-for-sale security to
equity method investment................................
(197) -- (197) Other comprehensive loss from discontinued
operations..... -- (7) (7) ------ ------ ------ Other
comprehensive loss..................................
(375) (426) (801) ------ ------ ------ Comprehensive
loss.......................................... $ (77)
(757) (834) ====== ====== ======
7
STATEMENT OF OPERATIONS AND COMPREHENSIVE EARNINGS INFORMATION
YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
ATTRIBUTED (NOTE 1) ---------------------- INTERACTIVE
CAPITAL CONSOLIDATED GROUP GROUP LIBERTY ----------- ----
---- ------------ (AMOUNTS IN MILLIONS) Revenue: Net
retail sales..........................................
$5,687 -- 5,687 Communications and programming
services................... -- 1,056 1,056 ------ ------
------ 5,687 1,056 6,743 ------ ------ ------ Operating
costs and expenses: Cost of
sales............................................. 3,594
-- 3,594
Operating.................................................
497 663 1,160 Selling, general and administrative
(including stock-based compensation of $39 million and
$59 million for Interactive Group and Capital Group,
respectively) (notes 4 and
5)......................................... 411 285 696
Litigation
settlement..................................... -- (42)
(42) Depreciation and
amortization............................. 437 110 547 ---
--- ------ ------ 4,939 1,016 5,955 ------ ------ ------
Operating income........................................
748 40 788 Other income (expense): Interest
expense.......................................... (385)
(234) (619) Dividend and interest
income.............................. 20 110 130 Share of
earnings (losses) of affiliates, net............. (3) 18
15 Realized and unrealized losses on derivative
instruments,
net.......................................................
(17) (1,267) (1,284) Gains on dispositions,
net................................ 7 1,404 1,411
Nontemporary declines in fair value of
investments........ -- (129) (129) Other,
net................................................ 4
(30) (26) ------ ------ ------ (374) (128) (502) ------ -
----- ------ Earnings (loss) from continuing operations
before income taxes and minority
interest........................... 374 (88) 286 Income
tax benefit (expense) (note 6).......................
(162) 3 (159) Minority interests in losses (earnings) of
subsidiaries..... (25) 3 (22) ------ ------ ------
Earnings (loss) from continuing operations..............
187 (82) 105 Loss from discontinued operations, net of
taxes............. -- (59) (59) ------ ------ ------ Net
earnings (loss)..................................... $
187 (141) 46 ------ ------ ------ Other comprehensive
earnings (loss), net of taxes: Foreign currency
translation adjustments.................. 20 -- 20
Unrealized holding gains (losses) arising during the
period....................................................
(517) 2,007 1,490 Recognition of previously unrealized
gains on available-for-sale securities,
net...................... -- (486) (486) Other
comprehensive loss from discontinued operations..... --
(54) (54) ------ ------ ------ Other comprehensive
earnings (loss)....................... (497) 1,467 970 --
---- ------ ------ Comprehensive earnings
(loss)............................... $ (310) 1,326 1,016
====== ====== ======
8
STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 2006
(UNAUDITED)
ATTRIBUTED (NOTE 1) ---------------------- INTERACTIVE
CAPITAL CONSOLIDATED GROUP GROUP LIBERTY ----------- ----
---- ------------ (AMOUNTS IN MILLIONS) Cash flows from
operating activities: Net
earnings.............................................. $
511 329 840 Adjustments to reconcile net earnings to net
cash provided by operating activities: Earnings from
discontinued operations................... -- (220) (220)
Cumulative effect of accounting change..................
87 2 89 Depreciation and
amortization........................... 491 91 582
Impairment of long-lived assets.........................
-- 113 113 Stock-based
compensation................................ 59 8 67
Payments of stock-based compensation....................
(111) (4) (115) Noncash interest
expense................................ 4 104 108 Share
of earnings of affiliates, net.................... (47)
(44) (91) Realized and unrealized losses (gains) on
financial instruments,
net....................................... (20) 299 279
Gains on disposition of assets, net.....................
-- (607) (607) Nontemporary declines in fair value of
investments...... -- 4 4 Minority interests in earnings
(losses) of
subsidiaries............................................
35 (8) 27 Deferred income tax
benefit............................. (262) (203) (465)
Other noncash charges (credits), net....................
(13) 57 44 Changes in operating assets and liabilities,
net of the effects of acquisitions: Current
assets........................................ (219) (91)
(310) Payables and other current
liabilities................ 38 622 660 ------ ----- -----
- Net cash provided by operating activities...........
553 452 1,005 ------ ----- ------ Cash flows from
investing activities: Cash proceeds from
dispositions........................... -- 1,322 1,322
Premium proceeds (payments) from origination of
derivatives...............................................
(5) 64 59 Net proceeds from settlement of
derivatives............... -- 101 101 Cash paid for
acquisitions, net of cash acquired.......... (436) (440)
(876) Capital
expenditures...................................... (259)
(19) (278) Net sales of short term
investments....................... 23 264 287 Repurchases
of subsidiary common stock.................... (331) --
(331) Other investing activities,
net........................... (8) (161) (169) ------ ---
-- ------ Net cash provided (used) by investing
activities.... (1,016) 1,131 115 ------ ----- ------ Cash
flows from financing activities: Borrowings of
debt........................................ 3,227 2
3,229 Repayments of
debt........................................ (2,188) (3)
(2,191) Intergroup cash transfers,
net............................ 293 (293) -- Repurchases
of Liberty common stock....................... (954) --
(954) Other financing activities,
net........................... 68 (88) (20) ------ -----
------ Net cash provided (used) by financing
activities.... 446 (382) 64 ------ ----- ------ Effect of
foreign currency rates on cash.................... 18 --
18 ------ ----- ------ Net cash provided to discontinued
operations: Cash provided by operating
activities..................... -- 62 62 Cash used by
investing activities......................... -- (67)
(67) Cash provided by financing
activities..................... -- 6 6 Change in
available cash held by discontinued
operations................................................
-- -- -- ------ ----- ------ Net cash provided by
discontinued operations........ -- 1 1 ------ ----- -----
- Net increase in cash and cash equivalents........... 1
1,202 1,203 Cash and cash equivalents at beginning of
year...... 945 951 1,896 ------ ----- ------ Cash and
cash equivalents at end of year............ $ 946 2,153
3,099 ====== ===== ======
9
STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 2005
(UNAUDITED)
ATTRIBUTED (NOTE 1) ---------------------- INTERACTIVE
CAPITAL CONSOLIDATED GROUP GROUP LIBERTY ----------- ----
---- ------------ (AMOUNTS IN MILLIONS) Cash flows from
operating activities: Net earnings
(loss)....................................... $ 298 (331)
(33) Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities: Earnings from
discontinued operations................... -- (10) (10)
Depreciation and amortization...........................
449 96 545 Stock-based
compensation................................ 52 -- 52
Payments of stock-based compensation....................
-- (103) (103) Noncash interest
expense................................ 3 98 101 Share of
earnings of affiliates, net.................... (9) (4)
(13) Realized and unrealized losses (gains) on financial
instruments, net...................................... 17
(274) (257) Losses (gains) on disposition of assets,
net............ (40) 401 361 Nontemporary declines in
fair value of investments...... -- 449 449 Minority
interests in earnings of subsidiaries.......... 48 3 51
Deferred income tax benefit.............................
(188) (201) (389) Other noncash charges,
net.............................. 38 3 41 Changes in
operating assets and liabilities, net of the effects of
acquisitions: Current
assets........................................ (162) (13)
(175) Payables and other current
liabilities................ 248 198 446 ------ ---- -----
- Net cash provided by operating activities...........
754 312 1,066 ------ ---- ------ Cash flows from
investing activities: Cash proceeds from
dispositions........................... 1 48 49 Premium
proceeds from origination of derivatives.......... -- 473
473 Net proceeds from settlement of
derivatives............... -- 461 461 Capital
expenditures...................................... (153)
(15) (168) Net purchases of short term
investments................... -- (85) (85) Cash paid for
acquisitions, net of cash acquired.......... -- (1) (1)
Repurchases of subsidiary common
stock.................... (85) (10) (95) Other investing
activities, net........................... (19) (12) (31)
------ ---- ------ Net cash provided (used) by investing
activities.... (256) 859 603 ------ ---- ------ Cash
flows from financing activities: Borrowings of
debt........................................ 800 61 861
Repayments of
debt........................................ (1,734) (67)
(1,801) Intergroup cash transfers,
net............................ 548 (548) -- Other
financing activities, net........................... 23
66 89 ------ ---- ------ Net cash used by financing
activities............... (363) (488) (851) ------ ---- -
----- Effect of foreign currency rates on
cash.................... (45) -- (45) ------ ---- ------
Net cash provided to discontinued operations: Cash
provided by operating activities..................... --
75 75 Cash used by investing
activities......................... -- (110) (110) Cash
provided by financing activities..................... --
11 11 Change in available cash held by discontinued
operations................................................
-- (177) (177) ------ ---- ------ Net cash provided to
discontinued operations........ -- (201) (201) ------ ---
- ------ Net increase in cash and cash
equivalents......... 90 482 572 Cash and cash equivalents
at beginning of year.... 855 469 1,324 ------ ---- ------
Cash and cash equivalents at end of year.......... $ 945
951 1,896 ====== ==== ======
10
STATEMENT OF CASH FLOWS INFORMATION
YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
ATTRIBUTED (NOTE 1) ---------------------- INTERACTIVE
CAPITAL CONSOLIDATED GROUP GROUP LIBERTY ----------- ----
---- ------------ (AMOUNTS IN MILLIONS) Cash flows from
operating activities: Net earnings
(loss)....................................... $187 (141)
46 Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities: Loss from
discontinued operations....................... -- 59 59
Depreciation and amortization...........................
437 110 547 Stock
compensation...................................... 39 59
98 Payments of stock
compensation.......................... -- (10) (10)
Noncash interest expense................................
3 93 96 Share of losses (earnings) of affiliates,
net........... 3 (18) (15) Nontemporary decline in fair
value of investments....... -- 129 129 Realized and
unrealized losses on derivative instruments,
net...................................... 17 1,267 1,284
Gains on disposition of assets, net.....................
(7) (1,404) (1,411) Minority interests in earnings
(losses) of
subsidiaries............................................
25 (3) 22 Deferred income tax
benefit............................. (187) (7) (194)
Other noncash charges (credits), net....................
(4) 24 20 Changes in operating assets and liabilities,
net of the effect of acquisitions and dispositions:
Current assets........................................
(181) (351) (532) Payables and other current
liabilities................ 114 533 647 ---- ------ -----
- Net cash provided by operating activities...........
446 340 786 ---- ------ ------ Cash flows from investing
activities: Cash proceeds from
dispositions........................... 7 472 479 Premium
proceeds from origination of derivatives.......... -- 193
193 Net proceeds from settlement of
derivatives............... -- 322 322 Investments in and
loans to cost and equity investees..... (8) (952) (960)
Cash paid for acquisitions, net of cash
acquired.......... (92) 1 (91) Capital
expenditures...................................... (121)
(7) (128) Net sales of short term
investments....................... -- 263 263 Repurchases
of subsidiary common stock.................... (168) (3)
(171) Other investing activities,
net........................... (20) 123 103 ---- ------ -
----- Net cash provided (used) by investing
activities.... (402) 412 10 ---- ------ ------ Cash flows
from financing activities: Repayments of
debt........................................ (961) (45)
(1,006) Intergroup cash transfers,
net............................ 718 (718) -- Purchases of
Liberty Series A common stock................ -- (547)
(547) Other financing activities,
net........................... 87 (59) 28 ---- ------ ---
--- Net cash used by financing activities...............
(156) (1,369) (1,525) ---- ------ ------ Effect of
foreign currency rates on cash.................... 3 -- 3
---- ------ ------ Net cash provided to discontinued
operations: Cash provided by operating
activities..................... -- 260 260 Cash used by
investing activities......................... -- (289)
(289) Cash provided by financing
activities..................... -- 1,005 1,005 Change in
available cash held by discontinued
operations................................................
-- (1,839) (1,839) ---- ------ ------ Net cash provided
to discontinued operations........ -- (863) (863) ---- --
---- ------ Net decrease in cash and cash
equivalents......... (109) (1,480) (1,589) Cash and cash
equivalents at beginning of year.... 964 1,949 2,913 ----
------ ------ Cash and cash equivalents at end of
year.......... $855 469 1,324 ==== ====== ======
11
NOTES TO ATTRIBUTED FINANCIAL INFORMATION
(UNAUDITED)
(1) The assets attributed to our Interactive Group as of December 31, 2006
include our 100% interests in QVC, Inc., Provide Commerce, Inc. and
BuySeasons, Inc., our ownership interest in IAC/ InterActiveCorp, which we
account for as an available-for-sale security, and our interests in Expedia
and GSI Commerce, Inc., which we account for as equity affiliates.
Accordingly, the accompanying attributed financial information for the
Interactive Group includes our investments in IAC/InterActiveCorp, Expedia
and GSI, as well as the assets, liabilities, revenue, expenses and cash
flows of QVC, Provide and BuySeasons. We have also attributed certain of our
debt obligations (and related interest expense) to the Interactive Group
based upon a number of factors, including the cash flow available to the
Interactive Group and its ability to pay debt service and our assessment of
the optimal capitalization for the Interactive Group. The specific debt
obligations attributed to each of the Interactive Group and the Capital
Group are described in note 3 below. In addition, we have allocated certain
corporate general and administrative expenses between the Interactive Group
and the Capital Group as described in note 4 below.
The Interactive Group focuses on video and on-line commerce businesses.
Accordingly, we expect that businesses that we may acquire in the future
that we believe are complementary to this strategy will also be attributed
to the Interactive Group.
The Capital Group consists of all of our businesses not included in the
Interactive Group, including our consolidated subsidiaries Starz
Entertainment, LLC, Starz Media, LLC, FUN Technologies, Inc., and
TruePosition, Inc., and our cost and equity investments in GSN, LLC,
WildBlue Communications, Inc. and others. Accordingly, the accompanying
attributed financial information for the Capital Group includes these
investments and the assets, liabilities, revenue, expenses and cash flows of
these consolidated subsidiaries. In addition, we have attributed to the
Capital Group all of our notes and debentures (and related interest expense)
that have not been attributed to the Interactive Group. See note 3 below for
the debt obligations attributed to the Capital Group.
Any businesses that we may acquire in the future that are not attributed to
the Interactive Group will be attributed to the Capital Group.
While we believe the allocation methodology described above is reasonable
and fair to each group, we may elect to change the allocation methodology in
the future. In the event we elect to transfer assets or businesses from one
group to the other, such transfer would be made on a fair value basis and
would be accounted for as a short-term loan unless our board of directors
determines to account for it as a long-term loan or through an inter-group
interest.
(2) Derivative instruments attributed to the Interactive Group are comprised of
total return bond swaps and interest rate swaps that are related to the
corporate debt attributed to the Interactive Group.
12
NOTES TO ATTRIBUTED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
(3) Debt attributed to the Interactive Group and the Capital Group is comprised
of the following:
DECEMBER 31, 2006 ---------------------- OUTSTANDING
CARRYING PRINCIPAL VALUE ----------- --------
(AMOUNTS IN MILLIONS) Interactive Group 7.875% Senior
Notes due 2009.............................. $ 670
667 7.75% Senior Notes due
2009............................... 234 234 5.7%
Senior Notes due 2013................................
802 800 8.5% Senior Debentures due
2029........................... 500 495 8.25% Senior
Debentures due 2030.......................... 902 895
QVC bank credit
facilities................................ 3,225
3,225 Other subsidiary
debt..................................... 67 67 -----
-- ----- Total Interactive Group
debt............................ 6,400 6,383 -------
----- Capital Group 4% Senior Exchangeable Debentures
due 2029................ 869 254 3.75% Senior
Exchangeable Debentures due 2030............. 810 234
3.5% Senior Exchangeable Debentures due
2031.............. 600 238 3.25% Senior Exchangeable
Debentures due 2031............. 551 119 0.75% Senior
Exchangeable Debentures due 2023............. 1,750
1,637 Subsidiary
debt........................................... 158
158 ------- ----- Total Capital Group
debt................................ 4,738 2,640 ----
--- ----- Total
debt..................................................
$11,138 9,023 ======= =====
(4) Cash compensation expense for our corporate employees has been allocated
between the Interactive Group and the Capital Group based on the estimated
percentage of time spent providing services for each group. Stock-based
compensation expense for our corporate employees has been allocated between
the Interactive Group and the Capital Group based on the compensation
derived from the equity awards for the respective tracking stock. Other
general and administrative expenses are charged directly to the groups
whenever possible and are otherwise allocated based on estimated usage or
some other reasonably determined methodology. Amounts allocated from the
Capital Group to the Interactive Group for the years ended December 31,
2006, 2005 and 2004 were $13 million, $5 million and $11 million,
respectively. While we believe that this allocation method is reasonable and
fair to each group, we may elect to change the allocation methodology or
percentages used to allocate general and administrative expenses in the
future.
(5) Prior to January 1, 2006, we accounted for compensation expense related to
stock options and stock appreciation rights pursuant to the recognition and
measurement provisions of Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB Opinion No. 25").
Compensation was recognized based upon the percentage of the options that
were vested and the difference between the market price of the underlying
common stock and the exercise price of the options at the balance sheet
date. The following tables illustrate the effect on earnings (loss) from
continuing operations if we had applied the fair value recognition
provisions of Statement of Financial Accounting Standards No. 123,
"ACCOUNTING FOR STOCK-BASED COMPENSATION," ("Statement 123") to our options.
Compensation expense for SARs and options with tandem SARs
13
NOTES TO ATTRIBUTED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
is the same under APB Optinion No. 25 and Statement 123. Accordingly, no pro
forma adjustment for such awards is included in the following table.
INTERACTIVE GROUP
YEARS ENDED DECEMBER 31, ---------
---------- 2005 2004 -------- ----
---- (AMOUNTS IN MILLIONS)
Earnings from continuing
operations.........................
$298 187 Add stock-based
compensation as determined under
the intrinsic value method, net of
taxes.................... 1 1
Deduct stock-based compensation as
determined under the fair value
method, net of
taxes.........................
(24) (21) ---- --- Pro forma
earnings from continuing
operations............... $275 167
==== ===
CAPITAL GROUP
YEARS ENDED DECEMBER 31, -------------
------ 2005 2004 -------- --------
(AMOUNTS IN MILLIONS) Loss from
continuing
operations.............................
$(341) (82) Add stock-based
compensation as determined under the
intrinsic value method, net of
taxes.................... 1 1 Deduct
stock-based compensation as determined
under the fair value method, net of
taxes......................... (18)
(20) ----- ---- Pro forma loss from
continuing
operations................... $(358)
(101) ===== ====
(6) We have accounted for income taxes for the Interactive Group and the Capital
Group in the accompanying attributed financial information in a manner
similar to a stand-alone company basis. To the extent this methodology
differs from our tax sharing policy, differences have been reflected in the
attributed net assets of the groups.
14
NOTES TO ATTRIBUTED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
The Interactive Group's income tax benefit (expense) consists of:
YEARS ENDED DECEMBER 31, ------------------------------
2006 2005 2004 -------- -------- -------- (AMOUNTS IN
MILLIONS) Current:
Federal...................................................
$(305) (259) (240) State and
local........................................... (57)
(69) (62)
Foreign...................................................
(110) (85) (47) ----- ---- ---- (472) (413) (349) ----- -
--- ---- Deferred:
Federal...................................................
197 150 137 State and
local........................................... 62 40 42
Foreign...................................................
3 (2) 8 ----- ---- ---- 262 188 187 ----- ---- ----
Income tax
expense.......................................... $(210)
(225) (162) ===== ==== ====
The Interactive Group's income tax benefit (expense) differs from the
amounts computed by applying the U.S. federal income tax rate of 35% as a
result of the following:
YEARS ENDED DECEMBER 31, ---------------------------
--------- 2006 2005 2004 -------- -------- --------
(AMOUNTS IN MILLIONS) Computed expected tax
expense............................... $(283) (183)
(122) Change in estimated foreign and state tax
rates............. 132 28 -- State and local income
taxes, net of federal income taxes... (23) (25) (24)
Foreign taxes, net of foreign tax
credits................... (20) (29) (6) Change in
valuation allowance affecting tax expense.........
(14) 2 1 Minority
interest...........................................
(12) (12) (6) Disqualifying disposition of incentive
stock options not deductible for book
purposes.............................. 14 -- --
Other,
net..................................................
(4) (6) (5) ----- ---- ---- Income tax
expense........................................
$(210) (225) (162) ===== ==== ====
15
NOTES TO ATTRIBUTED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
The tax effects of temporary differences that give rise to significant
portions of the Interactive Group's deferred tax assets and deferred tax
liabilities are presented below:
DECEMBER 31, ------------------- 2006 2005 -------- -----
--- (AMOUNTS IN MILLIONS) Deferred tax assets: Net
operating and capital loss carryforwards.............. $
35 6 Accrued stock
compensation................................ 23 33 Other
future deductible amounts........................... 213
160 ------ ----- Deferred tax
assets..................................... 271 199
Valuation
allowance....................................... (19) (6)
------ ----- Net deferred tax
assets................................. 252 193 ------ --
--- Deferred tax liabilities:
Investments...............................................
884 618 Intangible
assets......................................... 2,238
2,418
Other.....................................................
86 79 ------ ----- Deferred tax
liabilities................................ 3,208 3,115 -
----- ----- Net deferred tax
liabilities................................ $2,956 2,922
====== =====
The Capital Group's income tax benefit (expense) consists of:
YEARS ENDED DECEMBER 31, --------------------------------
---- 2006 2005 2004 -------- -------- -------- (AMOUNTS
IN MILLIONS) Current:
Federal...................................................
$(208) 159 62 State and
local........................................... (35) (6)
1
Foreign...................................................
(2) (3) (67) ----- --- --- (245) 150 (4) ----- --- ---
Deferred:
Federal...................................................
165 69 (14) State and
local........................................... 37 132
21
Foreign...................................................
1 -- -- ----- --- --- 203 201 7 ----- --- --- Income tax
benefit (expense)................................ $ (42)
351 3 ===== === ===
16
NOTES TO ATTRIBUTED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
The Capital Group's income tax benefit (expense) differs from the amounts
computed by applying the U.S. federal income tax rate of 35% as a result of
the following:
YEARS ENDED DECEMBER 31, --------------------------------
---- 2006 2005 2004 -------- -------- -------- (AMOUNTS
IN MILLIONS) Computed expected tax benefit
(expense)..................... $(53) 242 30 State and
local income taxes, net of federal income taxes... (11)
32 20 Foreign
taxes............................................... --
(2) (41) Change in valuation allowance affecting tax
expense......... 90 (42) (4) Change in estimated foreign
and state tax rates............. (2) 119 2 Impairment of
goodwill not deductible for tax purposes...... (39) -- --
Disposition of nondeductible goodwill in sales
transaction...............................................
(43) -- -- Dividends received
deduction................................ 12 12 -- Other,
net.................................................. 4
(10) (4) ---- --- --- Income tax benefit
(expense)................................ $(42) 351 3
==== === ===
The tax effects of temporary differences that give rise to significant
portions of the Capital Group's deferred tax assets and deferred tax
liabilities are presented below:
DECEMBER 31, ------------------------- 2006 2005 --------
-------- (AMOUNTS IN MILLIONS) Deferred tax assets: Net
operating and capital loss carryforwards.............. $
435 507 Accrued stock
compensation................................ 56 57 Other
future deductible amounts........................... 272
239 ------ ----- Deferred tax
assets..................................... 763 803
Valuation
allowance....................................... (74)
(149) ------ ----- Net deferred tax
assets................................. 689 654 ------ --
--- Deferred tax liabilities:
Investments...............................................
6,001 5,430 Intangible
assets......................................... 124 105
Discount on exchangeable
debentures....................... 981 1,006
Other.....................................................
283 10 ------ ----- Deferred tax
liabilities................................ 7,389 6,551 -
----- ----- Net deferred tax
liabilities................................ $6,700 5,897
====== =====
(7) The Liberty Interactive Stock and the Liberty Capital Stock have voting and
conversion rights under our amended charter. Following is a summary of those
rights. Holders of Series A common stock of each group are entitled to one
vote per share, and holders of Series B common stock of each group are
entitled to ten votes per share. Holders of Series C common stock of each
group, if issued, will be entitled to 1/100th of a vote per share in certain
limited cases and will otherwise not be entitled to vote. In general,
holders of Series A and Series B common stock vote as a single class. In
certain limited circumstances, the board may elect to seek the approval of
the holders of
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NOTES TO ATTRIBUTED FINANCIAL INFORMATION (CONTINUED)
(UNAUDITED)
only Series A and Series B Liberty Interactive Stock or the approval of the
holders of only Series A and Series B Liberty Capital Stock.
At the option of the holder, each share of Series B common stock will be
convertible into one share of Series A common stock of the same group. At
the discretion of our board, Liberty Interactive Stock may be converted into
Liberty Capital Stock at any time following the first anniversary of the
restructuring. In addition, following certain group dispositions and subject
to certain limitations, Liberty Capital Stock may be converted into Liberty
Interactive Stock, and Liberty Interactive Stock may be converted into
Liberty Capital Stock.
18