Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
For the transition period from to
Commission File Number 001-33982
LIBERTY INTERACTIVE CORPORATION
(Exact name of Registrant as specified in its charter)
State of Delaware
(State or other jurisdiction of
incorporation or organization)
12300 Liberty Boulevard
Englewood, Colorado
(Address of principal executive offices)
84-1288730
(I.R.S. Employer
Identification No.)
80112
(Zip Code)
Registrant's telephone number, including area code: (720) 875-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of exchange on which registered
Series A QVC Group Common Stock, par value $.01 per share
Series B QVC Group Common Stock, par value $.01 per share
Series A Liberty Ventures Common Stock, par value $.01 per share
Series B Liberty Ventures Common Stock, par value $.01 per share
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
The Nasdaq Stock Market LLC
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ 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 ☒
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒
Accelerated filer ☐
Non-accelerated filer ☐
(do not check if
smaller reporting company)
Smaller reporting company ☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting stock held by nonaffiliates of Liberty Interactive Corporation computed by reference to the last sales price of Liberty Interactive Corporation common stock, as of the closing of trading on June 30, 2017, was
approximately $14.3 billion.
The number of outstanding shares of Liberty Interactive Corporation's common stock as of January 31, 2018 was:
QVC Group common stock
Liberty Ventures common stock
Series A
448,261,047
81,687,188
Series B
29,203,895
4,455,308
Documents Incorporated by Reference
The Registrant's definitive proxy statement for its 2018 Annual Meeting of Stockholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K.
Table of Contents
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
LIBERTY INTERACTIVE CORPORATION
2017 ANNUAL REPORT ON FORM 10‑K
Table of Contents
Part I
Page
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Part II
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Part III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Exhibits and Financial Statement Schedules
Form 10-K Summary
Part IV
I-2
I-3
I-23
I-43
I-43
I-44
I-44
II-1
II-3
II-5
II-26
II-28
II-28
II-28
II-28
III‑1
III‑1
III‑1
III‑1
III‑1
IV‑1
IV‑9
Table of Contents
Item 1. Business.
(a) General Development of Business
PART I.
Liberty Interactive Corporation, formerly known as Liberty Media Corporation, ("Liberty", the “Company”, “we”, “us” and “our”) owns interests in
subsidiaries and other companies which are primarily engaged in the video and online commerce industries. Through our subsidiaries and affiliates, we
operate in North America, Europe and Asia. Our principal businesses and assets include our consolidated subsidiaries QVC, Inc. ("QVC"), HSN, Inc.
(“HSNi”), zulily, llc (“zulily”) and Evite, Inc. (“Evite”) and our equity affiliates FTD Companies, Inc. (“FTD”), LendingTree, Inc. (“LendingTree”) and
Liberty Broadband Corporation (“Liberty Broadband”).
On September 23, 2011, Liberty completed the split-off of a wholly owned subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty
CapStarz, Inc. and prior thereto known as Liberty Splitco, Inc.) (the "LMC Split-Off"). At the time of the LMC Split-Off, LMC owned all the assets,
businesses and liabilities previously attributed to the Capital and Starz tracking stock groups. The LMC Split-Off was effected by means of a redemption of
all of the Liberty Capital common stock and Liberty Starz common stock of Liberty in exchange for the common stock of LMC. Following the LMC Split-
Off, Liberty and LMC operate as separately publicly traded companies and neither has any stock ownership, beneficial or otherwise, in the other.
On August 9, 2012, Liberty completed the approved recapitalization of its common stock through the creation of the Liberty Interactive common stock
and Liberty Ventures common stock as tracking stocks. In the recapitalization, each holder of Liberty Interactive Corporation common stock remained a
holder of the same amount and series of Liberty Interactive common stock and received 0.05 of a share of the corresponding series of Liberty Ventures
common stock, by means of a dividend, with cash issued in lieu of fractional shares of Liberty Ventures common stock.
On October 3, 2014, Liberty reattributed from the Interactive Group to the Ventures Group approximately $1 billion in cash and its Digital Commerce
businesses (as defined below), including Backcountry.com, Inc., Bodybuilding.com, LLC (“Bodybuilding”), CommerceHub, Inc. (then, Commerce
Technologies, Inc.) (“CommerceHub”), Provide Commerce, Inc. (“Provide”), and Evite (collectively, the “Digital Commerce businesses”). Subsequent to the
reattribution, the Interactive Group is now referred to as the QVC Group. The QVC Group has attributed to it Liberty’s wholly-owned subsidiaries QVC,
zulily (as of October 1, 2015) and HSNi (as of December 29, 2017), along with cash and certain liabilities. In connection with the reattribution, the Liberty
Interactive tracking stock trading symbol “LINTA” was changed to "QVCA" and the "LINTB" trading symbol to "QVCB," effective October 7, 2014. Other
than the issuance of Liberty Ventures shares in the fourth quarter of 2014, the reattribution of tracking stock groups has no consolidated impact on Liberty.
Effective June 4, 2015, the name of the “Liberty Interactive common stock” was changed to the “QVC Group common stock.”
Tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or
"group," rather than the economic performance of the company as a whole. Liberty has two tracking stocks, QVC Group common stock and Liberty
Ventures common stock, which are intended to track and reflect the economic performance of Liberty’s QVC Group and Ventures Group, respectively. While
the QVC Group and the Ventures Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity
and therefore no group can own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's
stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a
single board of directors and subject to all of the risks and liabilities of the parent corporation.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed
to that group. The Ventures Group consists of our businesses not included in the QVC Group including Evite and our interests in Liberty Broadband,
LendingTree, FTD, investments in Charter Communications, Inc. and ILG, Inc. (“ILG”), as well as cash in the amount of approximately $573 million (at
December 31, 2017), including subsidiary cash. The Ventures Group also has attributed to it certain liabilities related to our
I-3
Table of Contents
exchangeable debentures and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments
and investing in new business opportunities.
The term "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to
that group. The QVC Group is primarily focused on our video operating businesses. The QVC Group has attributed to it the remainder of our businesses and
assets, including our wholly-owned subsidiaries QVC, HSNi (as of December 29, 2017), and zulily (as of October 1, 2015) as well as cash in the amount of
approximately $330 million (at December 31, 2017), including subsidiary cash.
On August 27, 2014, Liberty completed the spin-off to holders of its Liberty Ventures common stock shares of its former wholly-owned subsidiary,
Liberty TripAdvisor Holdings, Inc. (“TripAdvisor Holdings”) (the “TripAdvisor Holdings Spin-Off”), which was effected as a pro-rata dividend of shares of
TripAdvisor Holdings to the stockholders of Liberty’s Series A and Series B Liberty Ventures common stock. At the time of the TripAdvisor Holdings Spin-
Off, TripAdvisor Holdings was comprised of Liberty’s former 22% economic and 57% voting interest in TripAdvisor, Inc. (“TripAdvisor”), as well as
BuySeasons, Inc., Liberty’s former wholly-owned subsidiary, and a corporate level net debt balance of $350 million. Concurrently with TripAdvisor
Holdings’ execution of certain margin loans in connection with the TripAdvisor Holdings Spin-Off, Liberty and TripAdvisor Holdings entered into a
promissory note that expired in 2017 pursuant to which TripAdvisor Holdings could have requested, if the closing price per share of TripAdvisor common
stock were to fall below certain minimum values, up to $200 million in funds from Liberty. The TripAdvisor Holdings Spin-Off was recorded at historical
cost due to the pro rata nature of the distribution. Following the completion of the TripAdvisor Holdings Spin-Off, Liberty and TripAdvisor Holdings operate
as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. The consolidated financial statements of
Liberty have been prepared to reflect TripAdvisor Holdings as discontinued operations.
On October 1, 2015, Liberty acquired zulily, inc. (now known as zulily, llc) for consideration of approximately $2.3 billion, comprised of $9.375 of cash
and 0.3098 newly issued shares of Series A QVC Group common stock for each zulily share, with cash paid in lieu of any fractional shares. zulily is
attributed to the QVC Group. zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product
styles launched every day.
On May 18, 2016, Liberty completed a $2.4 billion investment in Liberty Broadband in connection with the merger of Charter Communications, Inc.
("Legacy Charter") and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition
of $5 billion of stock in the new public parent company (“Charter”) of the combined enterprises. Liberty, along with third party investors, all of whom
invested on the same terms as Liberty, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which
was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the-parts basis at the time the investment agreements were executed.
Liberty's investment in Liberty Broadband was funded using cash on hand and is attributed to the Ventures Group. See note 9 of our consolidated financial
statements found in Part II of this report for additional information related to this investment.
Liberty also exchanged, in a tax-free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one-for-one basis,
and Liberty has granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Liberty
in the exchange.
On July 22, 2016, Liberty completed the spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary CommerceHub. The
CommerceHub Spin-Off was accomplished by the distribution by Liberty of a dividend of (i) 0.1 of a share of CommerceHub’s Series A common stock for
each outstanding share of Liberty’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on July 8, 2016 (such date and time, the
“Record Date”), (ii) 0.1 of a share of CommerceHub’s Series B common stock for each outstanding share of Liberty’s Series B Liberty Ventures common
stock as of the Record Date and (iii) 0.2 of a share of CommerceHub’s Series C common stock for each outstanding share of Series A and Series B Liberty
Ventures common stock as of the Record Date, in each case, with cash paid in lieu of fractional shares. This transaction has been recorded at historical cost
due to the pro rata nature of the distribution. The Internal Revenue Service (“IRS”) completed its review of the CommerceHub Spin-Off and notified Liberty
that it agreed with the nontaxable characterization of the CommerceHub Spin-Off. CommerceHub is included in Liberty’s Corporate and other segment
through July 22, 2016 and is not presented as a discontinued operation as the
I-4
Table of Contents
CommerceHub Spin-Off did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
On November 4, 2016, Liberty completed the split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia
Holdings, Inc. (“Expedia Holdings”). At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’s
former interest in Expedia, Inc. (“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding. On November 2, 2016, Expedia Holdings
borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016. The
Expedia Holdings Split-Off was accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’s Series A Liberty Ventures common stock
for 0.4 of a share of Expedia Holdings Series A common stock at 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the
“Redemption Date”) and (ii) 0.4 of each outstanding share of Liberty’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings
Series B common stock on the Redemption Date, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia
Holdings common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable). The IRS completed its review of
the Expedia Holdings Split-Off and informed Liberty that it agreed with the nontaxable characterization of the Expedia Holdings Split-Off.
Liberty viewed Expedia and Bodybuilding as separate components and evaluated them separately for discontinued operations presentation. Based on a
quantitative analysis, the split-off of Liberty’s interest in Expedia represented a strategic shift that had a major effect on Liberty’s operations, primarily due to
one-time gains on transactions recognized by Expedia during 2015. Accordingly, Liberty’s interest in Expedia is presented as a discontinued operation. The
disposition of Bodybuilding as part of the Expedia Holdings Split-Off did not have a major effect on Liberty’s historical results nor is it expected to have a
major effect on Liberty’s future operations. The disposition of Bodybuilding did not represent a strategic shift in Liberty’s operations. Accordingly,
Bodybuilding is not presented as a discontinued operation.
On December 29, 2017, Liberty acquired the approximate remaining 62% of HSNi it did not already own in an all-stock transaction, making HSNi its
wholly-owned subsidiary, attributed to the QVC Group. HSNi is an interactive multi-channel retailer that markets and sells a wide range of third party and
proprietary merchandise directly to consumers through various platforms including (i) television home shopping programming broadcast on the HSN
television networks (“HSN”); (ii) catalogs, consisting primarily of the Cornerstone portfolio of leading print catalogs which includes Ballard Designs,
Frontgate, Garnet Hill, Grandin Road and Improvements (“Cornerstone”); (iii) websites, which consist primarily of HSN.com, the five branded websites
operated by Cornerstone and joymangano.com; (iv) mobile applications; (v) retail and outlet stores; and (vi) wholesale distribution of certain proprietary
products to other retailers.
On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (as amended, the “GCI Reorganization Agreement” and the
transactions contemplated thereby, the “Transactions”) with General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a
Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“LI LLC”), whereby Liberty will acquire GCI through a reorganization
in which certain Ventures Group assets and liabilities will be contributed to GCI Liberty (as defined below) in exchange for a controlling interest in GCI
Liberty. Liberty and LI LLC will contribute to GCI Liberty its entire equity interest in Liberty Broadband and Charter, along with, subject to certain
exceptions, Liberty’s entire equity interests in LendingTree, together with the Evite operating business and certain other assets and liabilities, in exchange for
(i) the issuance to LI LLC of a number of shares of new GCI Liberty Class A Common Stock and a number of shares of new GCI Liberty Class B Common
Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on
the closing date of the Contribution, respectively, (ii) cash and (iii) the assumption of certain liabilities by GCI Liberty (the “Contribution”).
Liberty will then effect a tax-free separation of its controlling interest in the combined company (which has since been renamed GCI Liberty, Inc.
(“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for
each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only
outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified
GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty
Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The
exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new
GCI Liberty Class
I-5
Table of Contents
A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65 (with no additional
premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at an initial rate of 5%
per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st
anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the
“Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI
LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75%
Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be
reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable
Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an
indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises
its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash
attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1 billion.
Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement
and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a
tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI
Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference
between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash
reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits attributable to such
1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange
right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including
taking into account the advice of its financial advisor. The Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of
customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock of Liberty, and
thus QVC Group common stock will cease to function as a tracking stock and will effectively become regular common stock, and Liberty will be renamed
Qurate Retail Group, Inc., with QVC, HSNi and zulily as wholly-owned subsidiaries.
* * * * *
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; the Transactions and the
Reattribution; revenue growth at QVC; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; and the
anticipated 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 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 anticipate customer demand and to adapt to changes in demand;
competitor responses to our products and services;
I-6
Table of Contents
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
·
increased digital TV penetration and the impact on channel positioning of our programs;
the levels of online traffic to our businesses' websites and our ability to convert visitors into consumers or contributors;
uncertainties inherent in the development and integration of new business lines and business strategies;
our future financial performance, including availability, terms and deployment of capital;
our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire;
the cost and ability of shipping companies, 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 (“FCC”), and adverse outcomes from regulatory proceedings;
changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;
domestic and international economic and business conditions and industry trends;
changes in tariffs, trade policy and trade relations following the 2016 United States (“U.S.”) presidential election and the vote by the United
Kingdom (“U.K.”) to exit from the European Union (“Brexit”);
consumer spending levels, including the availability and amount of individual consumer debt;
advertising spending levels;
changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on
demand and Internet protocol (“IP”) television and their impact on home shopping programming;
rapid technological changes;
failure to protect the security of personal information about our customers, subjecting us to potentially costly government enforcement actions
or private litigation and reputational damage;
the regulatory and competitive environment of the industries in which we operate;
threatened terrorist attacks, political unrest in international markets and ongoing military action around the world;
fluctuations in foreign currency exchange rates; and
uncertainties, costs and expenses related to and/or failure to complete the Transactions.
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 companies in which we have controlling and non-controlling interests that file reports and other
information with the Securities and Exchange Commission (“SEC”) in accordance with the Securities Exchange Act of 1934, as amended. Information 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 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 Segments
Through our ownership of interests in subsidiaries and other companies, we are primarily engaged in the video and online commerce industries. Each of
these businesses is separately managed.
I-7
Table of Contents
We identify our reportable segments as (A) those consolidated subsidiaries that represent 10% or more of our annual consolidated revenue, Adjusted
OIBDA (defined in Part II, Item 7 of this report) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of our
annual pre-tax earnings. Financial information related to our operating segments can be found in note 19 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:
Consolidated Subsidiaries
QVC, Inc.
HSN, Inc.
zulily, llc
Evite, Inc.
Equity Method Investments
FTD Companies, Inc. (Nasdaq: FTD)
LendingTree, Inc. (Nasdaq: TREE)
Liberty Broadband Corporation (Nasdaq: LBRDA; LBRDK)
QVC
QVC, a wholly-owned subsidiary, markets and sells a wide variety of consumer products primarily through live merchandise-focused televised shopping
programs distributed to approximately 374 million worldwide households each day (including the joint venture in China as discussed below in further detail)
and via its websites, including QVC.com, and other interactive media, such as mobile applications. QVC believes it is the global leader in television retailing
and a leading multimedia retailer, with operations based in the U.S., Germany, Japan, the U.K., Italy and France. Additionally, it has a 49% interest in a
retailing joint venture in China, which operates through a television shopping channel with an associated website. The joint venture is accounted for by QVC
as an equity method investment. The name, QVC, stands for "Quality, Value and Convenience," which is what QVC strives to deliver to its customers.
QVC’s operating strategy is to create a premier multimedia lifestyle brand and shopping destination for its customers, further penetrate its core customer
base, generate new customers, enhance programming distribution offerings and expand internationally to drive revenue and profitability. For the year ended
December 31, 2017, approximately 93% of its worldwide shipped sales were from repeat and reactivated customers (i.e., customers who made a purchase
from QVC during the prior twelve months and customers who previously made a purchase from QVC but not during the prior twelve months). In the same
period, QVC attracted approximately 3.2 million new customers. QVC’s global e-commerce operation comprised $4.4 billion, or 50%, of its consolidated
net revenue for the year ended December 31, 2017.
QVC markets its products in an engaging, entertaining format primarily through merchandise-focused live television programs and interactive features
on its websites and other interactive media. In the U.S., QVC distributes its programming live 24 hours per day, 364 days per year and presents on average
800 products every week (such U.S. operations, “QVC-U.S”). Internationally, QVC distributes live programming 8 to 24 hours per day, depending on the
market. QVC classifies its products into six groups: home, apparel, beauty, accessories, electronics and jewelry.
Product category
Home
Apparel
Beauty
Accessories
Electronics
Jewelry
Total
2017
Years ended December 31,
2016
2015
33%
19%
17%
13%
9%
9%
100%
33%
17%
17%
13%
10%
10%
100%
34%
19%
17%
13%
9%
8%
100%
I-8
Table of Contents
Many of QVC's brands are exclusive, while others are created by well-known designers. It is QVC's product sourcing team's mission to research and
locate compelling and differentiated products from manufacturers who have sufficient scale to meet anticipated demand. QVC offers many QVC-exclusive
products, as well as popular brand name and lesser known products available from other retailers. Many of its products are endorsed by celebrities, designers
and other well-known personalities who often join its presenters to personally promote their products and provide lead-in publicity on their own television
shows. QVC believes that its ability to demonstrate product features and present “faces and places” differentiates and defines the QVC shopping experience.
QVC closely monitors customer demand and its product mix to remain well-positioned and relevant in popular and growing retail segments, which QVC
believes is a significant competitive advantage relative to competitors who operate brick-and-mortar stores.
QVC does not depend on any single supplier or designer for a significant portion of its inventory purchases.
Since its inception, QVC has shipped over 2 billion packages in the U.S. alone. QVC operates nine distribution centers and seven call centers
worldwide. In the U.S., QVC is able to ship approximately 90% of its orders within two days of the order placement. Globally, QVC is able to ship
approximately 91% of its orders within two days of the order placement. In 2017, QVC's work force of approximately 17,100 employees handled
approximately 131 million customer calls, shipped approximately 191 million units globally and served approximately 13 million customers. QVC believes
its long-term relationships with major U.S. television distributors, including cable operators (e.g., Comcast and Cox), satellite television providers (e.g.,
DISH Network and DIRECTV) and telecommunications companies (e.g., Verizon and AT&T (excluding DIRECTV)), provide it with broad distribution,
favorable channel positioning and significant competitive advantages. QVC believes that its significant market share, brand awareness, outstanding customer
service, repeat customer base, international reach and scalable infrastructure distinguishes QVC from its competitors.
QVC-U.S.'s live televised shopping programs are distributed nationally, 24 hours per day, 364 days per year, to approximately 101 million television
households. QVC distributes its programming to approximately 99% of television households subscribing to services offered by television distributors.
QVC-U.S. programming is also available on QVC.com, its U.S. website, and mobile applications via streaming video; over-the air broadcasters in 93
markets; and on the Roku and Apple TV platforms. QVC-U.S., including QVC.com, contributed $6.1 billion, or 70%, of consolidated net revenue, $994
million of operating income and $1.4 billion of Adjusted OIBDA (defined in Part II, Item 7 of this report) for the year ended December 31, 2017.
In March 2013, QVC-U.S. launched over-the-air broadcasting in designated U.S. markets that can be accessed by any television household with a digital
antennae in such markets, regardless of whether it subscribes to a paid television service. This allows QVC-U.S. to reach new customers who previously did
not have access to the program through other television platforms. In August 2013, QVC-U.S. launched an additional channel, QVC2, which is being
distributed through cable and satellite systems. The channel allows viewers to have access to a broader range of QVC programming options as well as more
relevant programming for viewers in differing time zones. In October 2016, QVC-U.S. launched a third channel, Beauty iQ, which is being distributed
through satellite and streaming platforms. The channel and supporting platforms are dedicated to a complete beauty shopping experience for customers.
QVC.com, launched in 1996, complements QVC-U.S.'s televised shopping programs by allowing consumers to purchase a wide assortment of goods
offered on its televised programs, as well as other products that are available only on QVC.com. QVC views e-commerce (QVC.com and mobile devices) as
a natural extension of its business, allowing it to stream live video and offer on-demand video segments of items recently presented live on its televised
programs. QVC.com allows shoppers to browse, research, compare and perform targeted searches for products, control the order‑entry process and
conveniently access their QVC account. For the year ended December 31, 2017, approximately 80% of new U.S. customers made their first purchase
through QVC.com (including mobile).
QVC's televised shopping programs reached approximately 144 million television households outside of the U.S., primarily in Germany, Austria, Japan,
the U.K., the Republic of Ireland, Italy and France. In addition, QVC's joint venture in China reached approximately 129 million homes. The programming
created for most of these markets is also available via streaming video on its international websites and mobile applications. QVC's international business
employs product sourcing teams who select products tailored to the interests of each local market. For the year ended December 31, 2017, QVC's
international operations generated $2.6 billion, or 30%, of consolidated net revenue, $353 million of operating
I-9
Table of Contents
income and $451 million of Adjusted OIBDA and QVC's international websites generated $950 million, or 36%, of its total international net revenue.
On July 4, 2012, QVC entered into a joint venture with Beijing‑based CNR Media Group, formerly known as China Broadcasting Corporation, a limited
liability company owned by China National Radio (“CNR”), China's government‑owned radio division. The joint venture, CNR Home Shopping Co., Ltd.
(“CNRS”), is owned 49% by QVC and 51% by CNR through subsidiaries of each company. CNRS operates a retailing business in China through a shopping
television channel with an associated website. CNRS distributes live programming for 10 hours each day and recorded programming for 14 hours each day.
The CNRS joint venture is accounted for as an equity method investment.
QVC distributes its television programs, via satellite and optical fiber, to cable television and/or direct-to-home satellite system operators for
retransmission to their subscribers in the U.S., Germany, Japan, the U.K., France and neighboring countries. QVC also transmits its television programs over
digital terrestrial broadcast television to viewers throughout Italy, Germany, and the U.K. and to viewers in certain geographic regions in the U.S. In the
U.S., QVC uplinks its digital programming transmissions using a third-party service. The transmissions are uplinked to protected, non-preemptible
transponders on U.S. satellites. "Protected" status means that, in the event of a transponder failure, the 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, QVC's transponders
cannot be preempted in favor of a user of a failed transponder, even another user with "protected status." The international business units each obtain
uplinking services from third parties and transmit their programming to non-preemptible transponders on international satellites and terrestrial transmitters.
The transponder service agreements for the U.S. transponders expire at the earlier of the end of the lives of the satellites or the service agreements. The
service agreements in the U.S. expire between 2018 and 2023. The transponder service agreements for the international transponders and terrestrial
transmitters expire between 2019 and 2027.
QVC continually seeks to expand and enhance its television and e-commerce platforms, as well as to further its international operations and multimedia
capabilities. QVC launched QVCHD in the U.S. in April 2008, and in May 2009, became the first U.S. multimedia retailer to offer a native high definition
(“HD”) service. QVCHD is a HD simulcast of QVC's U.S. telecast utilizing the full 16x9 screen ratio, while keeping the side panel for additional
information. HD programming allows QVC to utilize a typically wider television screen with crisper and more colorful images to present a larger
“storefront,” which QVC believes captures the attention of channel “surfers” and engages its customers. In the U.S., QVCHD reaches approximately
89 million television households. QVC continues to develop and launch features to further enrich the television viewing experience.
Beyond the main live programming QVC channels, including QVCHD, in the U.S., Germany and the U.K. also broadcast shows on additional channels
that offer viewers access to a broader range of QVC programming options. These channels include QVC2 and Beauty iQ in the U.S., QVC Beauty & Style
and QVC2 in Germany, and QVC Beauty, QVC Extra, and QVC Style in the U.K.
QVC enters into long-term affiliation agreements with certain of its television distributors who downlink its programming and distribute the
programming to customers. QVC's affiliation agreements with both domestic and international distributors have termination dates ranging from 2018 to
2027. 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.
Although QVC is typically successful in obtaining and renewing these agreements, it does not have distribution agreements with some of the distributors that
carry its programming. In total, QVC is currently providing programming without affiliation agreements to distributors representing approximately 10% of
its U.S. distribution, and short-term, rolling 30 day letters of extension, to distributors who represent approximately 27% of its U.S. distribution. Some of its
international programming may continue to be carried by distributors after the expiration dates on its affiliation agreements with such distributors have
passed.
In return for carrying QVC's signals, each programming distributor in the U.S. receives an allocated portion, based upon market share, of up to 5% of
the net sales of merchandise sold via the television programs and from certain Internet sales to customers located in the programming distributor's service
areas. Internationally, programming distributors
I-10
Table of Contents
predominately receive an agreed-upon annual fee, a monthly or yearly fee per subscriber regardless of the net sales, a variable percentage of net sales or
some combination of the above arrangements.
In addition to sales-based commissions or per-subscriber fees, QVC also makes payments to distributors primarily in the U.S. for carriage and to secure
positioning within a broadcast area or within the general entertainment area on the distributor's channel line-up. QVC believes that a portion of its sales are
attributable to purchases resulting from channel “surfing” and that a channel position near broadcast networks and more popular cable networks increases the
likelihood of such purchases. As technology evolves, QVC will continue to monitor optimal channel placement and attempt to negotiate agreements with its
distributors to maximize the viewership of its television programming.
QVC enjoys a very loyal customer base, as demonstrated by the fact that for the twelve months ended December 31, 2017, approximately 87% of its
worldwide shipped sales came from repeat customers (i.e., customers who made a purchase from QVC during the prior twelve months), who spent an
average of $1,264 each during this period. An additional 6% of shipped sales in that period came from reactivated customers (i.e., customers who previously
made a purchase from QVC, but not during the prior twelve months).
Customer growth was essentially flat in 2017. On a trailing twelve month basis, total consolidated customers (excluding the joint venture in China) were
approximately 12.7 million, which includes approximately 8.1 million in the U.S. and approximately 4.6 million internationally. QVC believes its core
customer base represents an attractive demographic target market. Based on internal customer data, approximately 48% of its 8.1 million U.S. customers for
the twelve months ended December 31, 2017 were women between the ages of 35 and 64.
QVC strives to be prompt and efficient in order taking and fulfillment. QVC has two domestic phone centers, located in San Antonio, Texas and
Chesapeake, Virginia, that can direct calls from one call center to the other as volume mandates. Internationally, QVC also has one phone center in each of
Japan, the U.K. and Italy, and two call centers in Germany. For France, order taking is handled by a third party located in Portugal. Many markets also utilize
home agents to handle calls, allowing staffing flexibility for peak hours. In addition, QVC utilizes computerized voice response units, which handle
approximately 25% of all orders taken on a worldwide basis.
In addition to taking orders from its customers through phone centers and online, QVC continues to expand its ordering platforms. QVC is expanding
mobile device ordering capabilities and over the past several years has launched iPhone, iPad, Apple Watch, Android, Blackberry and Apple TV
applications, a WAP (wireless application protocol) mobile website and a robust SMS (short message services) program. On a global basis, customers placed
approximately 32% of all orders directly through their mobile devices in 2017.
Through QVC's nine worldwide distribution centers, QVC shipped approximately 91% of its orders within two days of the order placement in 2017.
QVC's domestic distribution centers are located in Suffolk, Virginia; Lancaster, Pennsylvania; Rocky Mount, North Carolina; Florence, South Carolina; and
Ontario, California. QVC’s domestic distribution centers and dropship partners have shipped nearly 743,000 units and over 669,000 packages in a single day
during 2017. QVC also has distribution centers in Sakura-shi, Chiba, Japan; Hücklehoven, Germany; Knowsley, U.K.; and Castel San Giovanni, Italy.
QVC has built a scalable operating infrastructure focused on sustaining efficient, flexible and cost-effective sale and distribution of its products. Since
its physical store locations are minimal, QVC requires lower inventory levels and capital expenditures compared to traditional brick-and-mortar retailers. In
recent years, QVC has made significant investments in its distribution centers that it believes will accommodate its foreseeable growth needs. Further, since
QVC has no set “floor plan” and can closely manage inventory levels at its centralized warehouses, QVC believes it has the flexibility to analyze and react
quickly to changing trends and demand by shifting programming time and product mix. QVC's cost structure is highly variable, which QVC believes allows
it to consistently achieve attractive margins relative to brick-and-mortar retailers.
QVC's web and mobile platforms are fully integrated with its televised programming and product distribution capabilities. QVC's web and mobile
platform features include a live video stream of its television programming, full integration with its order fulfillment and its product branding, as well as the
thematic offerings and events that have become fundamental to its televised programming.
I-11
Table of Contents
Third party carriers transport QVC's packages from its distribution centers to its customers. In each market where QVC operates, it has negotiated long-
term contracts with shipping companies, which in certain circumstances provides for favorable shipping rates.
QVC operates in a rapidly evolving and highly competitive retail business environment. Based on domestic net revenue for the twelve months ended
December 31, 2017, QVC is the leading television retailer in the U.S. and generates substantially more net revenue than its two closest televised shopping
competitors, HSNi and EVINE Live Inc. (“EVINE Live”). On December 29, 2017, the Company acquired the remaining 62% ownership interest of HSNi
and QVC no longer considers HSNi a competitor. QVC's international operations face similar competition in their respective markets, such as Shop Channel
in Japan, HSE 24 in Germany and Italy, Ideal World in the U.K., and M6 Boutique in France. Additionally, QVC has numerous and varied competitors at
the national and local levels, ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers, wholesale clubs,
discount retailers, infomercial retailers, Internet retailers, and mail-order and catalog companies.
QVC also competes for access to customers and audience share with other providers of televised, online and hard copy entertainment and content. The
price and availability of other programming and the conversion to digital programming platforms may unfavorably affect the placement of its programming
in the channel line-ups of its distributors, and may affect its ability to obtain distribution agreements with small cable distributors. Competition from other
programming also affects the compensation that must be paid to distributors for carriage, which continues to increase. Principal competitive factors for QVC
include (i) value, quality and selection of merchandise; (ii) customer experience, including customer service and reliability of fulfillment and delivery
services; and (iii) convenience and accessibility of sales channels.
QVC established QVC-U.S. as the televised shopping leader after building a track record of outstanding quality and customer service, establishing
favorable channel positioning and generating repeat business from its core customer base. QVC believes QVC-U.S. also compares favorably in terms of
sales to general, non-television based retailers due to its extensive customer reach and efficient cost structure.
QVC regards its trademarks, service marks, copyrights, domain names, trade dress, trade secrets, proprietary technologies and similar intellectual
property as critical to its success. QVC relies on a combination of trademark and copyright law, trade‑secret protection, and confidentiality and/or license
agreements with its employees, customers, suppliers, affiliates and others to protect these proprietary rights. QVC has registered, or applied for the
registration of, a number of domain names, trademarks, service marks and copyrights by U.S. and foreign governmental authorities and vigorously protects
its proprietary rights against infringement.
Domestically, QVC has registered service marks including, but not limited to its brand name, "QVC," "Quality Value Convenience," "Find What You
Love, Love What You Find," the "Q QVC Ribbon Logo," and "Q" and trademarks for its proprietary products sold such as "Arte D'Oro," "Cook's
Essentials," "Denim & Co.," "Diamonique," “Nature’s Code,” "Northern Nights" and "Ultrafine Silver." Similarly, foreign registrations have been obtained
for many trademarks and service marks for its brand name and propriety products including, but not limited to, "QVC," the "Q QVC Ribbon Logo," "Q,"
"Cook’s Essentials," "Denim & Co.," "Diamonique" and "Northern Nights." QVC considers the service mark for the "QVC" name the most significant
trademark or service mark held by it because of its impact on market awareness across all of its geographic markets and on customers' identification with
QVC. As with all domestic trademarks or service marks, QVC's trademark and service mark registrations in the U.S. are for a ten year period and are
renewable every ten years, prior to their respective expirations, as long as the trademarks or service marks are used in the regular course of trade.
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, on average, between 22% and 24% of its global revenue in each of the first three quarters of the year and between 30% and 32% of its global
revenue in the fourth quarter of the year.
HSNi
HSNi became a separate public company in August 2008 in connection with the separation of IAC/InterActiveCorp (“IAC”) into five separate
companies. HSNi offers innovative, differentiated retail experiences and markets and sells a
I-12
Table of Contents
wide range of third party and proprietary merchandise directly to consumers through its two operating segments, HSN and Cornerstone.
HSN. HSN includes the HSN television networks; its related website, HSN.com; its mobile applications; a limited number of outlet stores; and its
wholesale distribution of certain proprietary products to other retailers. The HSN television network broadcasts customer interactive home shopping
programming live seven days a week. HSN2, which debuted in August 2010, is a network that primarily distributes taped programming. HSN’s
programming is intended to promote sales and customer loyalty through a combination of product quality, value and selection, coupled with product
information, entertainment and interactive experiences. Programming is divided into separately televised segments, most of which have hosts who present
and convey information regarding featured products, sometimes with the assistance of a celebrity, industry expert, representative from the product vendor or
someone retained to aid in the sale of the products. HSN also produces entertainment to engage with customers and promote certain products. HSN.com is a
business-to-consumer digital commerce site that sells all of the merchandise offered on the HSN television networks, together with complementary products
and select merchandise sold exclusively on HSN.com. HSN provides seamless experiences across all digital platforms and optimizes each unique platform
by delivering exclusive content both at HSN.com and on mobile phones and tablets, including the iPad, iPhone, Android and Windows devices. The HSN
strategy is to create immersive experiences, offer differentiated products and leverage technology to build seamless relationships with its customers across all
of its platforms. HSN fosters social communities as part of the HSN experience to encourage customers to share their product finds, thoughts and reviews
with their friends via Facebook, Twitter, Pinterest and Instagram.
HSN produces both live and recorded programming for the HSN television network primarily from its studios in St. Petersburg, Florida, and distributes
this programming by means of satellite uplink facilities, which it owns and operates, to a satellite transponder which service is leased for a multi-year term.
The satellite transponder agreement provides for continued carriage of the HSN television networks on a replacement transponder and/or replacement
satellite, as applicable, in the event of a failure of the transponder and/or satellite.
As of December 31, 2017 and 2016, HSN's live broadcast reached approximately 89.1 million and 91.1 million homes of the approximately 112.1 million
and 114.7 million homes, respectively, in the United States with a television set. Television households reached by the HSN television network as of
December 31, 2017 and 2016 include approximately 59.8 million and 61.1 million households capable of receiving cable and/or telephone company
("Telco") transmissions, respectively, and approximately 29.3 million and 30.0 million direct broadcast satellite system ("DBS") households, respectively. As
of December 31, 2017 and 2016, HSN2 reached approximately 52.1 million and 47.5 million homes, respectively. Television households reached by HSN2
as of December 31, 2017 and 2016 primarily include approximately 42.8 million and 37.3 million households capable of receiving cable and/or Telco
transmissions, respectively, and approximately 9.3 million and 10.2 million DBS households, respectively.
HSN has entered into distribution and affiliation agreements with cable television, Telco and DBS operators, collectively referred to in this document as
pay television operators, in the United States to carry the HSN television networks. HSN’s larger pay television operators include Comcast, AT&T/DirecTV,
Charter Communications and Echostar/DISH. In exchange for this carriage and related promotional and other efforts, HSN generally pays these pay
television operators a fee consisting of commissions based on a percentage of the net merchandise sales to their subscriber bases and/or a per subscriber fee.
In some cases, pay television operators receive additional compensation in the form of commission guarantees in exchange for their commitments to deliver
a specified number of subscribers, channel placement incentives and advertising insertion time on the HSN television network.
HSN typically negotiates agreements that require HSN to pay monthly or annual fees. Distribution and affiliation agreements with pay television
operators expire from time to time and renewal and negotiation processes may be lengthy. At any given time in the ordinary course of business HSN is likely
to be engaged in renewal and/or negotiation processes with multiple pay television operators. In some cases, renewals are not agreed upon prior to the
expiration of a given agreement and the HSN television networks continue to be carried by the relevant pay television operator without an effective
affiliation agreement in place or via month-to-month contracts. HSN expects that any extension of agreements that have expired will be on terms that, when
taken as a whole, are commercially reasonable.
As of December 31, 2017, HSN also had affiliation agreements with 120 broadcast television stations for leased carriage of the HSN television networks
with terms ranging from several weeks to several years. In exchange for this carriage, HSN pays the broadcast television stations hourly or monthly fixed
rates or commissions based on a percentage
I-13
Table of Contents
of the net merchandise sales to their viewership bases. As of December 31, 2017, HSNi’s subsidiary, Ventana Television, Inc. also owned 23 broadcast
television stations that carry the HSN television networks on a full-time basis.
HSN also includes HSN.com, a transactional e-commerce site that sells merchandise offered on the HSN television networks, as well as select
merchandise sold exclusively on HSN.com. HSN.com provides customers with additional content to support and enhance HSN television programming. For
example, HSN.com provides users with an online program guide, value-added video of product demonstrations, live streaming video of the HSN television
network, customer-generated product reviews and additional information about HSN show hosts and guest personalities. HSN.com offers customers a
content-rich experience that houses more than 50,000 product and how-to videos.
HSN has applications for the iPhone, iPad, Android and Windows devices. These applications are highly video-centric, customized experiences that
allow users to order merchandise, stream live video from HSN and watch previously-aired content from the network’s video library while simultaneously
browsing related products. Among other things, these applications also allow customers to create their own personalized channels, select their favorite
brands or categories of merchandise and compile videos focused on these preferences. Mobile devices represent HSN’s fastest growing sales channel.
HSN purchases products from numerous foreign and domestic manufacturers and importers by way of short- and long-term contracts and purchase
orders, including products made to their respective specifications, as well as name brand merchandise and lines from third party partners, typically with
certain exclusive rights. In some cases, these contracts provide for the payment of additional amounts to partners in the form of commissions, the amount of
which is based upon the achievement of agreed upon sales targets, among other milestones. In addition, in the case of some purchases, HSN may have
certain return, extended payment and/or termination rights. No single vendor accounted for more than 10% of HSNi’s consolidated net sales in 2017, 2016 or
2015. HSN classifies its products into six groups: home, electronics, beauty, accessories, jewelry and apparel.
Product Category
Home
Electronics
Beauty
Accessories
Jewelry
Apparel
Total
2017
Years Ended December 31,
2016
2015
41%
22%
13%
9%
8%
7%
100%
40%
23%
13%
9%
8%
7%
100%
40%
23%
13%
9%
9%
6%
100%
HSN offers its customers a broad assortment of differentiated products in a compelling, informative and entertaining format that will inspire them to
regularly engage and shop with HSN. For example, HSN frequently collaborates with experts from a variety of fields to present special events on the HSN
television network featuring HSN products and relevant expert content. HSN produces live entertainment as a way to further engage with its customers.
These events are staged at HSN’s television studios or elsewhere.
In an effort to promote its own differentiated brand, HSN seeks to provide its customers with unique products that can only be purchased through HSN.
HSN frequently partners with leading personalities and brands to develop product lines exclusive to HSN and believes that these affiliations enhance the
awareness of the HSN brand among consumers, as well as increase the extent to which HSN and/or products sold through HSN are featured in the media. In
some cases, vendors have agreed to market their HSN affiliation to their existing customers (e.g., notifying customers when their products will be featured
on the HSN television network).
HSN engages in co-promotional partnerships with major media companies. These are done primarily because they offer HSN editorial authority while
they also secure print advertising in national fashion, style and/or lifestyle publications to market HSN to prospective customers in its target demographics.
HSN also engages in targeted offline advertising. As part of HSN's entertainment strategy, it participates in innovative joint marketing and promotional
partnerships with major motion picture companies as well as well-known recording artists. HSN also creates strategic alliances with world-class, consumer
brands in an effort to reach new prospects through relevant brand integrations and occasion-based event
I-14
Table of Contents
marketing. These promotions are designed to not only generate additional revenue and create brand awareness, but to also provide unique experiences for
HSN customers in its continued effort to drive customer engagement as well as position HSN as a proven and powerful marketing vehicle.
HSN's credit card program offers eligible customers a private label credit card. All cardholders receive certain rewards and benefits which are designed to
recognize and promote customer loyalty. HSN designs, executes and administers marketing programs to promote usage of the card to current and potential
customers. These marketing programs are funded largely by the sponsoring bank. Typically, customers using the HSN private label credit card shop with
HSN more frequently, as well as spend more money per visit, than customers not using the card. In addition to fostering greater customer loyalty and driving
more sales, HSN also saves on interchange fees that it would incur if its customers used third-party cards.
Cornerstone. Cornerstone consists of a portfolio of aspirational home and apparel brands, prominent in the direct marketing and retail space, including
catalog distribution and related websites. Although there is some overlap in the product offerings, the home brands are comprised of Frontgate, Ballard
Designs, Grandin Road and Improvements. Garnet Hill focuses primarily on apparel and accessories and is categorized by HSNi as an apparel brand. There
are also 19 retail and outlet stores located throughout the United States.
Frontgate features premium, high quality indoor (including bed, bath, kitchen, dining and living room) and outdoor (including patio, garden and pool)
furnishings and accessories. Ballard Designs features European‑inspired bed, bath, dining, outdoor and office furnishings and accessories, as well as rugs,
shelving and architectural accents for the home. Grandin Road offers an affordable style assortment of products ranging from occasional furniture,
accessories, holiday décor and outdoor furniture and Improvements features thousands of innovative home, patio and outdoor products. Garnet Hill offers
apparel and accessories for women and children as well as bed and bath furnishings and soft goods.
The Cornerstone brands generally incorporate on-site photography and real-life settings, coupled with related editorial content describing the
merchandise and depicting situations in which it may be used. Branded catalogs are designed and produced in-house, which enables each individual brand to
control the production process and reduces the amount of lead time required to produce a given catalog.
New editions of full-color catalogs are mailed to customers several times each year, with a total annual circulation in 2017 of approximately 267 million
catalogs. The timing and frequency of catalog circulation varies by brand and depends upon a number of factors, including the timing of the introduction of
new products, marketing campaigns and promotions and inventory levels, among other factors.
Cornerstone also operates websites for each of its featured brands, such as Frontgate.com, BallardDesigns.com, GarnetHill.com, GrandinRoad.com and
Improvementscatalog.com. These websites serve as additional storefronts for products featured in related print catalogs, as well as provide customers with
additional content and product assortments to support and enhance their shopping experience. Additional content provided by these websites, which differs
across the various websites, includes decorating tips, measuring information, online design centers, gift registries and travel centers, as well as a feature that
allows customers to browse the related catalog online. In addition, a growing number of customers use mobile devices to shop the Cornerstone brands.
The Cornerstone brands differentiate themselves by offering customers an assortment of innovative proprietary and branded apparel and home products.
In many cases, Cornerstone seeks to secure exclusive distribution rights for certain products. Cornerstone employs in-house designers and partners with
leading manufacturers and designers to aid in the development of its unique, exclusive product assortment. The Cornerstone brands use their respective
websites and e-mail marketing to promote special offers, including cross-promotions for other Cornerstone brands. In addition, Cornerstone partners with
third parties to offer promotional events such as sweepstakes and/or enter into other advertising agreements. Cornerstone believes that these affiliations
enhance the awareness of the Cornerstone brands among consumers as well as strengthen its various brands overall. Cornerstone has also been extending its
distributed commerce platform through both its experiential and more traditional retail and outlet stores, as a marketing tool to increase demand in the
overall regions where the stores reside.
HSNi provides customers with convenient options in connection with the purchase, payment and shipment of merchandise. Merchandise may be
purchased online, through mobile devices, or ordered using toll free phone numbers
I-15
Table of Contents
through live sales and service agents. HSN also offers the convenience of an automated attendant system and, in limited markets, remote control ordering
capabilities through pay television set-top boxes. Cornerstone’s catalog orders can also be made via submission of traditional catalog sales order forms.
HSNi allows the customer to pay using traditional payment options (credit and certain debit cards), as well as evolving payment alternatives such as
PayPal, VISA Checkout and Apple Pay. HSNi also offers other payment options including private label and co-branded credit cards and, in the case of HSN,
Flexpay. By utilizing Flexpay, customers may pay for select merchandise in two to six interest-free, monthly credit or debit card payments. HSN also offers
its customers the convenience of ordering products under its Autoship program, through which customers may arrange to have products automatically
shipped and billed at scheduled intervals. Standard and express shipping options are available and customers may generally return most merchandise for a
full refund or exchange in accordance with applicable return policies (which vary by brand and business). Returns generally must be received within
specified time periods after purchase, ranging from a minimum of thirty days to a maximum of one year, depending upon the applicable policy.
HSNi seeks to fulfill customer orders and process returns quickly and accurately from a network of fulfillment centers. For HSN, these centers are
located in Tennessee, California, Virginia and New York, and for Cornerstone, the fulfillment centers are located in Ohio and Arizona. HSNi contracts with
several third party carriers and other fulfillment partners for the delivery of products to its customers and processing of returns.
Through HSN.com and the various websites operated by Cornerstone or through HSNi’s common carriers, customers can also generally track the status
of their orders, confirm information regarding shipping and, in some cases, confirm the availability of inventory and establish and manage personal accounts.
Customers may communicate directly with customer service via e-mail or by telephone with call center representatives available seven days a week.
HSNi regards its intellectual property rights, including patents, service marks, trademarks, domain names, copyrights and trade secrets, as important to its
success. HSNi’s businesses also rely heavily upon software, informational databases and other systemic components that are necessary to manage and
support its operations. HSNi relies on a combination of laws and contractual restrictions with employees, customers, suppliers, licensees, affiliates and other
third parties to establish and protect these proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and
use trade secrets or copyrighted intellectual property without authorization which, if discovered, might require legal action to correct. In addition, third
parties may independently and lawfully develop substantially similar intellectual properties.
HSNi has generally registered and continues to apply to register, or secure by contract when appropriate, its trademarks and service marks as they are
developed and used, and reserve and register domain names as HSNi deems appropriate. HSNi considers the protection of its trademarks to be important for
purposes of brand maintenance and reputation. While HSNi vigorously protects its trademarks, service marks and domain names, effective trademark
protection may not be available or may not be sought in every country in which products and services are made available, and contractual disputes may
affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available to be registered, even if available.
HSNi’s failure to protect its intellectual property rights in a meaningful manner or challenges to related contractual rights could result in dilution of brand
names and/or limit its ability to control marketing on or through the internet using its various domain names either of which could adversely affect HSNi’s
business, financial condition and results of operations.
Some of HSNi’s businesses have been granted patents and/or have patent applications pending with the United States Patent and Trademark Office and/or
foreign patent authorities for various proprietary technologies and other inventions. HSNi considers applying for patents or for other appropriate statutory
protection when it develops or identifies new or improved proprietary technologies or inventions, and will continue to consider the appropriateness of filing
for patents to protect future proprietary technologies and inventions as circumstances may warrant. The issuance or assessment of the validity of any patent
involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, any patent application filed may not result in a
patent being issued or existing or future patents may not be adjudicated valid by a court or be afforded adequate protection against competitors with similar
technology. In addition, third parties may create new products or methods that achieve similar results without infringing upon patents that HSNi owns.
Likewise, the issuance of a patent to HSNi does not mean that its processes or inventions will not be found to infringe upon patents or other rights previously
issued to third parties.
I-16
Table of Contents
HSNi'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, HSNi
has earned, on average, between 23% and 24% of its global revenue in each of the first three quarters of the year and between 29% and 30% of its global
revenue in the fourth quarter of the year.
zulily
On October 1, 2015, we acquired 100% of zulily. zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh
selection of new product styles launched each day. The zulily website was launched in January 2010 with the goal of revolutionizing the way women shop.
Through its desktop, mobile, and app experiences, zulily helps its customers discover new and unique products at great values that they would likely not find
elsewhere. zulily’s merchandise includes women’s, children’s and men’s apparel and other products such as home, beauty and personalized products. zulily
sources its merchandise from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing
together millions of customers and a daily selection of products chosen from its vendor base, zulily has built a large scale and uniquely curated marketplace.
Every morning, zulily launches a variety of flash sales events. These events feature thousands of product styles from different vendors and typically last
for 72 hours. The day’s events are kicked off by an early morning email to zulily’s email subscribers and “push” communication to users of zulily’s mobile
applications and other platforms such as Facebook Messenger. Product offerings are typically only available for a limited time and in a limited quantity,
creating urgency to browse, discover and purchase.
Before zulily launches an event, zulily shoots or obtains photographs of the merchandise and its editorial team writes about the merchandise based on
the product details provided by the vendor. zulily works to create the most compelling price points for its customers, with the average item offered for a
significant discount off the manufacturer’s suggested or comparison retail price. zulily then uses its proprietary technology, data analytics and
personalization tools to segment its audience, offering each customer a curated and optimized shopping experience that features brands, products and events
that it believes are most relevant for that customer.
zulily acquires new email subscribers through a diverse set of paid and unpaid marketing channels, including affiliate channels and partners, customer
referrals, direct navigation, display advertising, key word search campaigns, search engine optimization, social media and television ads. Core to its business
model is that zulily acquires customers once via paid and unpaid sources, and then drives engagement and repeat purchases from those customers over a long
period of time through the sending of daily emails, mobile “push” communications, remarketing as well as offers and incentives.
Continual innovation through investment in technology is core to zulily’s business. zulily uses its technology platform to improve the experience of its
customers and vendors, increase the purchase frequency and average order size and optimize the efficiency of its business operations. zulily’s technology
team is focused on rapid innovation through advanced agile software development processes. zulily’s scalable platform uses custom-built and third-party
technologies to support its specific customer and vendor requirements, including handling significant spikes in site traffic and transactions on a daily basis,
and the rapid and complex order supply chain needs that are unique to zulily’s flash sales and minimal inventory model. zulily believes it can quickly scale
its infrastructure to accommodate significantly higher volumes of site traffic, customers, orders and the overall growth in its business.
To best serve its customers and vendors, zulily has a custom, fully integrated fulfillment infrastructure consisting of receiving, sorting, inventory
management and repackaging systems which are driven by proprietary fulfillment management software. zulily’s supply chain solution efficiently handles
the small-to-medium lot sizes and high inventory turnover required by constantly changing, limited-time product offerings. zulily operates a minimal
inventory, intermediary model where it typically takes customer orders before purchasing inventory from vendors. As a result, zulily is able to offer a much
larger selection of products to customers and to generate greater sales for vendors, who are able to match a broader range of their product supply to actual
customer demand. In addition, zulily also offers third party fulfillment services to its vendors. This program allows vendors to store their inventory in
zulily’s warehouses and fulfill orders for zulily’s events or other retail channels and has helped reduce shipping times to its customers.
I-17
Table of Contents
zulily views its target market broadly and competes with any retailer where its customers shop. It faces significant competition from both online and
offline retailers, competing on: product curation and selection, personalization, value, convenience, ease of use, consumer experience, vendor satisfaction
and shipping time and cost.
zulily relies on laws and regulations, contractual restrictions, copyrights, and trademarks to protect its intellectual property and proprietary rights.
zulily’s employees and contractors also typically enter into agreements to assign to zulily the inventions and content they produce in performing their jobs.
zulily controls access to confidential information by entering into confidentiality agreements with its employees, contractors and third parties, such as
vendors, service providers, individuals and entities that may be exploring a business relationship with zulily. Despite the protection of general intellectual
property law and its contractual restrictions, it may be possible for a third party to copy or otherwise obtain and use zulily’s intellectual property without
zulily’s authorization.
zulily has registered numerous Internet domain names related to its business. In addition, zulily pursues the registration of its trademarks in the U.S. and
certain other locations outside of the U.S.; however, effective intellectual property protection or enforcement may not be available in every country in which
zulily’s products and services are made available in the future. In the U.S. and certain other countries, zulily has registered or has applications pending for its
key trademarks: zulily, the zulily design mark and the “Z” design associated with its mobile applications.
zulily’s results are impacted by a pattern of increased sales during the back-to-school shopping season in the third quarter and holiday shopping season
in the fourth quarter, which it expects would result in lower sequential growth in the first quarter. The fourth quarter accounted for approximately 32.2% and
30.2% of zulily’s revenue for the years ended December 31, 2017 and 2016, respectively.
Evite
With over 250 million accounts, Evite (www.evite.com), a wholly owned subsidiary, is the world’s leading digital platform for bringing people together
to celebrate their most important life moments. The service has sent over 2 billion invitations in its history, enabling 3 billion unique face-to-face
connections. Evite makes getting together effortless and more memorable for its over one hundred million annual users, sending 20,000 invitations every
hour and handling hundreds of millions of RSVPs every year. Evite also offers a free private sharing feed in every invitation where users can share photos
and conversations before, during and after an event, as well as free thank you notes, gifting, donations and video content. With its recent launch of SMS
invitations, Evite is now the leading provider of text-based invitations online. Evite generates revenue primarily from the sale of digital advertising for
publication on its platform, including custom display advertising, native advertising content, custom video and brand partnerships. The company conducts
advertising sales through its direct regional sales teams and programmatically through ad exchanges. Launched in 1998, Evite is headquartered in Los
Angeles.
FTD
FTD is a premier floral and gifting company that provides floral, specialty foods, gift, and related products and services to consumers, retail florists, and
other retail locations and companies in need of floral and gifting solutions. Liberty obtained its ownership interest in FTD during December 2014 in a
transaction whereby Liberty exchanged its former wholly-owned subsidiary Provide for cash and a 35% ownership interest in FTD. We owned
approximately 37% of the outstanding common stock of FTD as of December 31, 2017. We have entered into an agreement with FTD pursuant to which,
among other things, we have the right to proportional representation on FTD’s board of directors based on our ownership interest in FTD. In connection
with this transaction, FTD increased the size of its board of directors from seven to 11 directors. Liberty nominated the four additional directors to the board
of directors.
LendingTree
LendingTree was spun off by IAC in August 2008. LendingTree operates what it believes to be the leading online loan marketplace for consumers
seeking loans and other credit-based offerings. LendingTree offers consumers tools and resources, including free credit scores, that facilitate comparison-
shopping for mortgage loans, home equity loans, reverse mortgage loans, auto loans, credit cards, personal loans, deposit accounts, student loans, small
business loans and other related offerings. LendingTree primarily seeks to match in-market consumers with multiple lenders on its marketplace who
I-18
Table of Contents
can provide them with competing quotes for the loans, deposits or credit-based offerings they are seeking. LendingTree also serves as a valued partner to
lenders seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer loan inquiries
it generates with these lenders. LendingTree is headquartered in Charlotte, North Carolina.
We own approximately 27% of the outstanding common stock of LendingTree as of December 31, 2017. We have entered into an agreement with
LendingTree pursuant to which, among other things, we have the right to nominate 20% of the members of LendingTree’s board of directors. We have
nominated two of the ten current board members.
Liberty Broadband
Liberty Broadband was spun off by LMC in November 2014. Liberty Broadband consists of its interest in Charter and its subsidiary Skyhook Holding,
Inc. (“Skyhook”). Charter is one of the largest providers of cable services in the U.S., offering a variety of entertainment, information and communications
solutions to residential and commercial customers. Skyhook provides mobile positioning and contextual location intelligence solutions.
In May 2016, Liberty completed a $2.4 billion investment in Liberty Broadband in connection with the merger of Legacy Charter and TWC. We own
approximately 23.5% of the outstanding common stock of Liberty Broadband as of December 31, 2017. Due to overlapping boards of directors and
management, Liberty has been deemed to have significant influence over Liberty Broadband (for accounting purposes) even though Liberty does not have
any voting rights. Liberty has elected to apply the fair value option for its investment in Liberty Broadband as it is believed that the Company’s investors
value this investment based on the trading price of Liberty Broadband.
Regulatory Matters
Programming and Interactive Television Services
Although QVC and HSN, wholly owned subsidiaries, market and sell consumer products through a variety of outlets, each does so, in large part,
through live video programming services distributed by cable television systems, satellite systems and over-the-air broadcasters. Consequently, regulation of
programming services and the entities that distribute them can affect QVC and HSN. In the U.S., the FCC regulates broadcasters, the providers of satellite
communications services and facilities for the transmission of programming services, the cable television systems and other MVPDs that distribute such
services, and, to some extent, the availability of the programming services themselves through its regulation of program licensing. Cable television systems
in the U.S. are also regulated by municipalities or other state and local government authorities. Regulatory carriage requirements also could adversely affect
the number of channels available to QVC and HSN.
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 MVPDs (including cable operators) and satellite-delivered
programming services in which a cable operator has an attributable interest. The 1992 Cable Act and implementing regulations 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 MVPDs.
Further, the 1992 Cable Act requires that such affiliated programmers make their programming services available to cable operators and competing MVPDs
such as multi-channel multi-point distribution systems and DBS distributors on terms and conditions that do not unfairly discriminate among distributors,
and the FCC has established complaint enforcement and damages remedy procedures. FCC rules attribute the ownership interest in Charter of Liberty
Broadband, and Liberty Global plc’s ownership interest in Liberty Cablevision of Puerto Rico, LLC to us, thereby subjecting us and satellite-delivered
programming services in which we have an interest to the program access rules. Our subsidiaries QVC and HSN are subjected to program access rules as a
result of our ownership interest in Charter. We are also subject to the program access rules as a condition of FCC approval of Liberty’s transaction with
News Corporation in 2008.
In 2014, the FCC released a notice of proposed rulemaking seeking comment on a proposal to revise the definition of MVPD in its rules to include
services, such as Internet-based services, that make available for purchase by viewers, multiple linear streams of video programming, regardless of the
technology used to distribute the programming. If the
I-19
Table of Contents
FCC were to adopt its proposed definition and determine that the program access rules apply to such MVPDs, QVC and HSNi potentially would be required
to negotiate with, and license their programming services to, such MVPDs and to comply with other related regulatory requirements.
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. The FCC has established program carriage
complaint rules. Our subsidiaries QVC and HSN are subjected to program carriage rules as a result of our ownership interest in Charter.
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 MVPDs (including cable operators) may engage
in the creation or production of video programming. Although the FCC adopted regulations limiting carriage by a cable operator, the United States Court of
Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated the channel occupancy limits adopted by the FCC and remanded the rule to the FCC
for further consideration in 2001. In response to the D.C. Circuit’s decision, the FCC subsequently issued further notices of proposed rulemaking to consider
channel occupancy limitations, but has not adopted any rules.
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 QVC and HSN by limiting the carriage of such services in cable systems with limited channel capacity.
Closed Captioning 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, with only limited exemptions. In 2012, the FCC adopted regulations pursuant to the Twenty-First Century Communications and Video
Accessibility Act of 2010 that require, among other things, video programming owners to send caption files for IP delivered video programming to video
programming distributors and providers along with program files. In 2014, the FCC adopted closed captioning quality standards regarding captioning
accuracy, synchronicity, completeness and placement, and captioning best practices for programmers. In 2016, the FCC amended its closed captioning
regulations to assign captioning compliance responsibility to programmers jointly with distributors, and to adopt certain registration, certification and
complaint procedures applicable to programmers. The video programmer registration and compliance certification requirements of the amended rules have
not yet become effective. As a result of these captioning requirements, QVC and HSNi may incur additional costs for closed captioning.
Internet Services
Our online commerce businesses are subject, both directly and indirectly, to various domestic and foreign laws and governmental regulations. Certain of
these businesses 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 ("COPPA") prohibits web sites from collecting personally
identifiable information online from children under age 13 without parental consent and imposes a number of operational requirements. The Federal Trade
Commission ("FTC") has adopted regulations implementing COPPA. 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.
I-20
Table of Contents
Both of these laws include statutory penalties for non-compliance. The Digital Millennium Copyright Act limits, but does not eliminate, liability for listing
or linking to third party websites that may include content that infringes on copyrights or other rights so long as our Internet businesses comply with the
statutory requirements. Various states also have adopted laws regulating certain aspects of Internet communications. In 2016, Congress enacted a permanent
moratorium on state and local taxes on Internet access and commerce.
Our online commerce businesses also are subject to laws governing the collection, use, retention, security and transfer of personally-identifiable
information about their users. In particular, the collection and use of personal information by companies has received increased regulatory scrutiny on a
global basis. The enactment, interpretation and application of user data protection laws are in a state of flux, and the interpretation and application of such
laws may vary from country to country. For example, in April 2016, the European Parliament and the Council of the European Union adopted the General
Data Protection Regulation which established new data laws that give customers additional rights and impose additional restrictions and penalties on
companies for illegal collection and misuse of personal information. The new data laws take effect in May 2018. Further, in 2015, the Court of Justice of the
European Union invalidated the “Safe Harbor Framework,” which had allowed companies to collect and process personal data in European Union (“EU”)
nations for use in the U.S. A new data transfer framework, the EU-U.S. Privacy Shield, became fully operational on August 1, 2016, but is the subject of
litigation. Finally, on January 10, 2017, the European Commission proposed new regulations in 2017 regarding privacy and electronic communications,
including additional regulation of the Internet tracking tools known as “cookies.”
In the U.S., the FTC has proposed a privacy policy framework, and the new Congress may consider legislation that would require organizations that
suffer a breach of security related to personal information to notify owners of such information. Many states have adopted laws requiring notification to
users when there is a security breach affecting personal data, such as California's Information Practices Act. Complying with these different national and
state privacy requirements may cause the Internet companies in which we have interests to incur substantial costs. In addition, such companies generally
have and post on their websites privacy policies and practices regarding the collection, use and disclosure of user data. A failure to comply with such posted
privacy policies or with the regulatory requirements of federal, state, or foreign privacy laws could result in proceedings or actions by governmental agencies
or others (such as class action litigation) which could adversely affect our online commerce businesses. Technical violations of certain privacy laws can
result in significant penalties, including statutory penalties. In 2012, the FCC amended its regulations under the Telephone Consumer Protection Act
("TCPA"), which could subject our Internet businesses to increased liability for certain telephonic communications with customers, including but not limited
to text messages to mobile phones. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is
greater, and courts may treble such damage awards for willful or knowing violations. Data collection, privacy and security are growing public concerns. If
consumers were to decrease their use of our Internet businesses' websites to purchase products and services, such businesses could be harmed. Congress,
individual states and foreign authorities may consider additional online privacy legislation.
Goods sold over the Internet also must comply with traditional regulatory requirements, such as the FTC requirements regarding truthful and accurate
claims. 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 our online commerce businesses and increase their 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.
In 2015, the FCC adopted open Internet rules that reclassified wireline and wireless broadband services as Title II common carrier services and regulate
broadband services offered by Internet service providers (“ISPs”) under Title II, Title III and Section 706 of the Telecommunications Act of 1996. Among
other things, the regulations prohibited ISPs from: (1) blocking access to, or impairing or degrading, legal content, applications, services or non-harmful
devices; and (2) favoring selected Internet traffic in exchange for consideration. On December 14, 2017, the FCC adopted a Declaratory Ruling, Report and
Order and Order (“2017 Order”) that, among other things, eliminates these prohibitions. The 2017
I-21
Table of Contents
Order does require ISPs to disclose information to consumers regarding practices such as throttling, paid prioritization and affiliated prioritization. Various
parties likely will challenge the 2017 Order in court and at the FCC. Legislative proposals regarding the open Internet rules are pending in Congress.
Proposed Changes in Regulation
The regulation of programming services, cable television systems, DBS providers, Internet services, online sales and other forms of product marketing
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 online commerce compete with traditional brick-and-mortar and online retailers ranging from large department
stores to specialty shops, electronic retailers, direct marketing retailers, such as mail order and catalog companies, and discount retailers. Due to the nature
of these businesses there is not a single or small group of competitors that own a significant portion of the overall market share. However, some of these
competitors, such as Amazon and Walmart, have a significantly greater web-presence than our e-commerce subsidiaries and equity affiliates. We believe that
the principal competitive factors in the markets in which our electronic commerce businesses compete are high-quality products, brand recognition,
selection, value, convenience, price, website performance, customer service and accuracy of order shipment. Our businesses that offer services through the
Internet compete with businesses that offer their own services directly through the Internet as well as with traditional offline providers of similar
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.
Employees
As of December 31, 2017, our corporate function is supported by a services agreement with LMC which has approximately 85 corporate employees
who are also considered employees of Liberty. Additionally, our consolidated subsidiaries had an aggregate of approximately 28,170 full and part-time
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 19 to our consolidated financial statements found in Part II
of this report.
(e) Available Information
All of our filings with 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.libertyinteractive.com.
Our corporate governance guidelines, code of business conduct and 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 Interactive Corporation, 12300 Liberty Boulevard, Englewood,
Colorado 80112, Tel. No. (866) 876-0461.
The information contained on our website and the websites of our subsidiaries and affiliated businesses mentioned throughout this report are not
incorporated by reference herein.
I-22
Table of Contents
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.
Risk Factors Related to our Company, the QVC Group and the Ventures Group
The risks described below apply to our company and to the businesses and assets attributable to the QVC Group and the Ventures Group.
The historical financial information of the QVC Group and the Ventures Group included in this Annual Report, may not necessarily reflect their
results had they been separate companies. One of the reasons for the creation of a tracking stock is to permit equity investors to apply more specific criteria
in valuing the shares of a particular group, such as comparisons of earnings multiples with those of other companies in the same business sector. In valuing
shares of QVC Group tracking stock and Ventures Group tracking stock, investors should recognize that the historical financial information of the QVC
Group and the Ventures Group has been extracted from our consolidated financial statements and may not necessarily reflect what the QVC Group’s and the
Ventures Group’s results of operations, financial condition and cash flows would have been had the QVC Group and the Ventures Group been separate,
stand-alone entities pursuing independent strategies during the periods presented.
Our subsidiaries QVC and HSN depend on the television distributors that carry their programming, and no assurance can be given that QVC and
HSN will be able to maintain and renew their affiliation agreements on favorable terms or at all. QVC and HSN currently distribute their programming
through affiliation or transmission agreements with many television providers, including, but not limited to, Comcast, AT&T/DIRECTV, Charter, DISH
Network, Verizon and Cox in the U.S., Vodafone Kabel Deutschland GmbH, Media Broadcast GmbH, SES ASTRA, SES Platform Services GmbH,
Telekom Deutschland GmbH, Unitymedia GmbH, Tele Columbus and Primacom in Germany, Jupiter Telecommunications, Ltd., Sky Perfect and World Hi-
Vision Channel, Inc. in Japan, A1 Telekom Austria AG and UPC Telekabel Wien GmbH in Austria, British Sky Broadcasting, Freesat, Freeview and Virgin
Media in the U.K. and Mediaset, Hot Bird and Sky Italia in Italy, Orange, Free, Canalsat, Bouygues Telecom and Fransat. QVC’s and HSN’s affiliation
agreements with their distributors are scheduled to expire between 2018 and 2027. As part of normal course renewal discussions, occasionally QVC and
HSN have disagreements with their distributors over the terms of their carriage, such as channel placement or other contract terms. If not resolved through
business negotiation, such disagreements could result in litigation or termination of an existing agreement. Termination of an existing agreement resulting in
the loss of distribution of QVC’s or HSN’s programming to a material portion of their television households may adversely affect their growth, net revenue
and earnings. The renewal negotiation process for affiliation agreements is typically lengthy. In some cases, renewals are not agreed upon prior to the
expiration of a given agreement while the programming continues to be carried by the relevant distributor without an effective agreement in place. QVC and
HSN do not have distribution agreements with some of the cable operators that carry their programming. In total, QVC and HSN are currently providing
programming without affiliation agreements to distributors representing approximately 10% and 0.4% of their U.S. distribution, respectively, and short-term,
rolling 30 day letters of extension, to distributors who represent approximately 27% and 51% of their U.S. distribution, respectively. Some of QVC’s
international programming may continue to be carried by distributors after the expiration dates on its affiliation agreements with such distributors have
passed. QVC and HSN may be unable to obtain renewals with their current distributors on acceptable terms, if at all. QVC and HSN may also be unable to
successfully negotiate affiliation agreements with new or existing distributors to carry their programming and no assurance can be given that they will be
successful in negotiating renewals with these distributors or that the financial and other terms of these renewals will be acceptable. Although QVC and HSN
consider their current levels of distribution without written agreement to be ordinary course, no assurance can be given that QVC and HSN will be successful
in negotiating renewals with all these operators or that the financial and other terms of renewal will be on
I-23
Table of Contents
acceptable terms. The failure to successfully renew or negotiate new affiliation agreements covering a material portion of television households on
acceptable terms could result in a discontinuation of carriage that may adversely affect their viewership, growth, net revenue and earnings.
Our programming and online commerce businesses depend on their relationships with third party suppliers and vendors and any adverse changes
in these relationships could adversely affect our results of operations and those attributed to any of our groups. An important component of the success of
our programming and online commerce businesses is their ability to maintain their existing, as well as build new, relationships with a limited number of local
and foreign suppliers, manufacturers and vendors, among other parties. There can be no assurance that our subsidiaries and business affiliates will be able to
maintain their existing supplier or vendor arrangements on commercially reasonable terms or at all or, with respect to goods sourced from foreign markets, if
the supply costs will remain stable. In addition, our subsidiaries and business affiliates cannot guarantee that goods produced and delivered by third parties
will meet applicable quality standards, which is impacted by a number of factors, some which are not within the control of these parties. Adverse changes in
existing relationships or the inability to enter into new arrangements with these parties on favorable terms, if at all, could result in lost sales or cause a failure
to meet customer expectations and timely delivery of products, which could in turn have a significant adverse effect on our results of operations and those
attributed to our groups.
Our businesses attributed to each group are subject to risks of adverse government regulation. Our programming businesses, such as QVC and
HSNi, market and provide a broad range of merchandise through television shopping programs and proprietary websites. Similarly, our online commerce
businesses, such as zulily and the e-commerce companies, market and provide a broad range of merchandise and/or services through their proprietary
websites. As a result, these businesses are subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions, including
foreign jurisdictions, which are subject to change at any time, including laws regarding consumer protection, data privacy and security, the regulation of
retailers generally, the license requirements for television retailers in foreign jurisdictions, the importation, sale and promotion of merchandise and the
operation of retail stores and warehouse facilities, as well as laws and regulations applicable to the Internet and businesses engaged in online commerce,
such as those regulating the sending of unsolicited, commercial electronic mail and texts. The failure by our businesses to comply with these laws and
regulations could result in a revocation of required licenses, fines and/or proceedings by governmental agencies and/or consumers, which could adversely
affect our businesses, financial condition and results of operations. Moreover, unfavorable changes in the laws, rules and regulations applicable to our
businesses could decrease demand for our businesses’ products and services, increase costs and/or subject our businesses to additional liabilities. Similarly,
new disclosure and reporting requirements, established under existing or new state, federal or foreign laws, such as regulatory rules regarding requirements
to disclose efforts to identify the origin and existence of certain “conflict minerals” or abusive labor practices in portions of QVC’s and HSNi’s supply
chains, could increase the cost of doing business, adversely affecting our results of operations. In addition, certain of these regulations may impact the
marketing efforts of our businesses and their brands.
As mentioned above, the manner in which certain of our subsidiaries and business affiliates sell and promote merchandise and related claims and
representations made in connection with these efforts is regulated by federal, state and local law, as well as the laws of the foreign countries in which they
operate. Certain of our subsidiaries and business affiliates may be exposed to potential liability from claims by purchasers or from regulators and law
enforcement agencies, including, but not limited to, claims for personal injury, wrongful death and damage to personal property relating to merchandise sold
and misrepresentation of merchandise features and benefits. In certain instances, these subsidiaries and business affiliates have the right to seek
indemnification for related liabilities from their respective vendors and may require such vendors to carry minimum levels of product liability and errors and
omissions insurance. These vendors, however, may be unable to satisfy indemnification claims, obtain suitable coverage or maintain this coverage on
acceptable terms, or insurance may provide inadequate coverage or be unavailable with respect to a particular claim.
In addition, programming services, cable television systems, the Internet, telephony services and satellite service providers are subject to varying
degrees of regulation in the U.S. by the FCC and other entities and in foreign countries by similar regulators. 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 the products and services of our subsidiaries and certain of our business affiliates sold via the Internet, television and telephone is
I-24
Table of Contents
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 our subsidiaries and certain of our business affiliates, which could have a material adverse effect on their businesses. In addition, there have been
numerous attempts at the federal, state and local levels to impose additional taxes on online commerce transactions. Moreover, most foreign countries in
which our subsidiaries or business affiliates have, or may in the future make, an investment, regulate, in varying degrees, the distribution, content and
ownership of programming services and foreign investment in programming companies and the Internet.
In addition, certain of our businesses are subject to consent decrees issued by the FTC barring them from making deceptive claims for specified
weight-loss products and dietary supplements and prohibiting them from making certain claims about specified weight-loss, dietary supplement and anti-
cellulite products unless they have competent and reliable scientific evidence to substantiate such claims. In October 1996, HSNi became subject to a
consent order issued by the FTC which terminates on the later of April 15, 2019, or 20 years from the most recent date that the United States or the FTC files
a complaint in federal court alleging any violation thereunder. Pursuant to this consent order, HSNi (including its subsidiaries and affiliates) is prohibited
from making claims for specified categories of products, including claims that a given product can cure, treat or prevent any disease or have an effect on the
structure or function of the human body, unless it has competent and reliable scientific evidence to substantiate such claims. The FTC periodically
investigates HSNi’s business and operations on an ongoing basis for purposes of determining its compliance with the consent order. Violation of these
consent decrees may result in the imposition of significant civil penalties for non-compliance and related redress to consumers and/or the issuance of an
injunction enjoining these businesses from engaging in prohibited activities. Further material changes in the law and increased regulatory requirements must
be anticipated, and there can be no assurance that the businesses and assets attributed to each group will not become subject to increased expenses or more
stringent restrictions as a result of any future legislation, new regulation or deregulation.
Weak economic conditions worldwide may reduce consumer demand for our businesses’ products and services. Prolonged economic uncertainty in
various regions of the world in which our subsidiaries and affiliates operate could adversely affect demand for our businesses’ products and services since a
substantial portion of our businesses’ revenue is derived from discretionary spending by individuals, which typically falls during times of economic
instability. Global financial markets may experience disruptions, including increased volatility and diminished liquidity and credit availability. If economic
and financial market conditions in the U.S. or other key markets, including China, Japan and Europe deteriorate, customers of our subsidiaries and affiliates
may respond by suspending, delaying, or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely
affect revenue across each of our tracking stock groups. Accordingly, our ability to increase or maintain revenue and earnings could be adversely affected to
the extent that relevant economic environments decline. Such weak economic conditions may also inhibit the expansion of our subsidiaries and affiliates into
new European and other markets. We currently are unable to predict the extent of any of these potential adverse effects.
We may be subject to significant tax liabilities related to the CommerceHub Spin-Off or the Expedia Holdings Split-Off. In connection with the
CommerceHub Spin-Off, we received an opinion of counsel to the effect that, for U.S. federal income tax purposes, the CommerceHub Spin-Off will qualify
as a tax-free transaction to Liberty and to the holders of its Liberty Ventures common stock under Section 355 of the Internal Revenue Code of 1986, as
amended (the “Code”), except with respect to the receipt of cash in lieu of fractional shares. We also received an opinion of counsel in connection with the
Expedia Holdings Split-Off to the effect that the Expedia Holdings Split-Off will qualify as a tax-free transaction to Liberty and to the holders of its Liberty
Ventures common stock under Section 355, Section 368(a)(1)(D) and related provisions of the Code, except with respect to the receipt of cash in lieu of
fractional shares. In September 2016, the IRS completed its review of the CommerceHub Spin-Off and informed Liberty that it agreed with the nontaxable
characterization of the transaction. Liberty received an Issue Resolution Agreement from the IRS documenting this conclusion. In February 2017, the IRS
completed its review of the Expedia Holdings Split-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty
received an Issue Resolution Agreement from the IRS documenting this conclusion.
Prior to the CommerceHub Spin-Off, we entered into a tax sharing agreement with CommerceHub. Under this agreement with CommerceHub, our
company is generally responsible for any taxes and losses resulting from the failure of the CommerceHub Spin-Off to qualify as a tax-free transaction;
however, CommerceHub is required to indemnify our company for any taxes and losses which (i) result primarily from, individually or in the aggregate, the
breach of certain
I-25
Table of Contents
covenants made by CommerceHub (applicable to actions or failures to act by CommerceHub and its subsidiaries following the completion of the
CommerceHub Spin-Off), or (ii) result from the application of Section 355(e) of the Code to the CommerceHub Spin-Off as a result of the treatment of the
CommerceHub Spin-Off as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-
percent or greater interest (measured by either vote or value) in the stock of CommerceHub or any successor corporation. As the taxpaying entity, however,
we are subject to the risk of non-payment by CommerceHub of its indemnification obligations under the tax sharing agreement.
Similarly, prior to the Expedia Holdings Split-Off, we entered into a tax sharing agreement with Expedia Holdings. Under this agreement with Expedia
Holdings, our company is generally responsible for any taxes and losses resulting from the failure of the Expedia Holdings Split-Off to qualify as a tax-free
transaction; however, Expedia Holdings is required to indemnify our company for any taxes and losses which (i) result primarily from, individually or in the
aggregate, the breach of certain covenants made by Expedia Holdings (applicable to actions or failures to act by Expedia Holdings and its subsidiaries
following the completion of the Expedia Holdings Split-Off), or (ii) result from the application of Section 355(e) of the Code to the Expedia Holdings Split-
Off as a result of the treatment of the Expedia Holdings Split-Off as part of a plan (or series of related transactions) pursuant to which one or more persons
acquire, directly or indirectly, a 50-percent or greater interest (measured by either vote or value) in the stock of Expedia Holdings or any successor
corporation. As the taxpaying entity, however, we are subject to the risk of non-payment by Expedia Holdings of its indemnification obligations under the
tax sharing agreement.
To preserve the tax-free treatment of the CommerceHub Spin-Off and the Expedia Holdings Split-Off, we may determine to forego certain transactions
that might have otherwise been advantageous to our company, including certain asset dispositions or other strategic transactions for some period of time
following each of the CommerceHub Spin-Off and the Expedia Holdings Split-Off. In addition, our potential tax liabilities related to the CommerceHub
Spin-Off and the Expedia Holdings Split-Off might discourage, delay or prevent a change of control transaction for some period of time following each of
the CommerceHub Spin-Off and the Expedia Holdings Split-Off.
Rapid technological advances could render the products and services offered by our subsidiaries and our business affiliates attributed to our QVC
Group and our Ventures Group obsolete or non-competitive. Our 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. As their operations grow in size and
scope, our subsidiaries and business affiliates must continuously improve and upgrade their systems and infrastructure while maintaining or improving the
reliability and integrity of their systems and infrastructure. These subsidiaries and business affiliates must be able to incorporate new technologies into their
products and services in order to address the needs of their customers. The emergence of alternative platforms such as mobile and tablet computing devices
and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in
technology. New developments in other areas, such as cloud computing, could also make it easier for competition to enter their markets due to lower up-
front technology costs. There can be no assurance that our subsidiaries and business affiliates will be able to compete with advancing technology or be able
to maintain existing systems or replace or introduce new technologies and systems as quickly as they would like or in a cost-effective manner, and any
failure to do so could result in customers seeking alternative service providers and may adversely affect the group to which they are attributed, thereby
adversely impacting our revenue and operating income.
Our subsidiaries and business affiliates attributed to each of our QVC and Ventures Groups conduct their businesses under highly competitive
conditions. Although QVC and HSNi are two of the nation’s largest home shopping networks, they and their e-commerce businesses have numerous and
varied competitors at the national and local levels, ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers,
wholesale clubs, discount retailers, infomercial retailers, Internet retailers, and mail-order and catalog companies. In addition, QVC and HSNi compete with
other televised shopping retailers, such as EVINE Live in the U.S., Shop Channel in Japan, HSE 24 in Germany and Italy, Ideal World in the U.K., and M6
Boutique in France, infomercial retailers, Internet retailers, and mail-order and catalog companies. QVC and HSNi also compete for access to customers and
audience share with other providers of televised, online and hard copy entertainment and content. Similarly, zulily competes with e-commerce businesses
such as Amazon.com, Inc. and Alibaba Group, the e-commerce platforms of traditional retailers such as Target Corporation, Toys”R”Us, Inc. and Wal-Mart
Stores, Inc., and online marketplaces such as eBay Inc. zulily expects
I-26
Table of Contents
increased competition with companies employing a flash sales model as there are no significant barriers to entry. Competition is characterized by many
factors, including assortment, advertising, price, quality, service, accessibility, site functionality, reputation and credit availability, as well as the financial,
technical and marketing expertise of competitors. For example, many of our businesses’ competitors have greater resources, longer histories, more customers
and greater brand recognition than our businesses do, and competitors may secure better terms from vendors, adopt more aggressive pricing, offer free or
subsidized shipping and devote more resources to technology, fulfillment and marketing. In addition, many retailers, especially online retailers with whom
our subsidiaries and business affiliates compete, are increasingly offering customers aggressive shipping terms, including free or discounted expedited
shipping. As these practices become more prevalent, our subsidiaries and business affiliates may experience further competitive pressures to attract
customers and/or to change their shipping programs. Other companies also may enter into business combinations or alliances that strengthen their
competitive positions. If our subsidiaries and business affiliates do not compete effectively with regard to these factors, our results of operations could be
materially and adversely affected.
The sales and operating results of the businesses attributed to each of our QVC Group and Ventures Group depend on their ability to attract new
customers, retain existing customers and predict or respond to consumer preferences. In an effort to attract and retain customers, these businesses
engage in various merchandising and marketing initiatives, which involve the expenditure of money and resources. For example, HSNi has spent, and
expects to continue to spend, increasing amounts of money on, and devote greater resources to, certain of these initiatives, particularly in connection with the
growth and maintenance of its brands generally, as well as in the continuing efforts of its businesses to increasingly engage customers through digital
channels. These initiatives, however, may not resonate with existing customers or consumers generally or may not be cost-effective. In addition, costs
associated with the production and distribution of television programming (in the case of QVC and HSN), paper and printing costs for catalogs (in the case
of Cornerstone) and costs associated with online marketing, including search engine marketing (primarily the purchase of relevant keywords) have increased
and are likely to continue to increase in the foreseeable future and, if significant, could have a material adverse effect to the extent that they do not result in
corresponding increases in net revenue. These companies also continuously develop new retail concepts and adjust their 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
effect on the businesses of these subsidiaries and business affiliates. Consumer spending may be affected by many factors outside of their control, including
competition from store-based retailers, mail-order and third-party Internet companies, consumer confidence and preferences, and general economic
conditions.
The failure of our subsidiaries QVC and HSN to maintain suitable placement for their respective programming could adversely affect their ability
to attract and retain television viewers and could result in a decrease in revenue. QVC and HSN are dependent upon the continued ability of their
programming to compete for viewers. Effectively competing for television viewers is dependent, in substantial part, on their ability to negotiate and
maintain placement of their programming at a favorable channel position, such as in a basic tier or within a general entertainment or general broadcasting
tier. The advent of digital compression technologies and the adoption of digital cable have resulted in increased channel capacity, which together with other
changing laws, rules and regulations regarding cable television ownership, impacts the ability of both QVC and HSN to negotiate and maintain suitable
channel placement with their respective distributors. Increased channel capacity could adversely affect the ability to attract television viewers to QVC’s or
HSN’s programming to the extent it results in a less favorable channel position for their respective programming, such as placement adjacent to
programming that does not complement their respective programming, a position next to their respective televised home shopping competitors or isolation in
a "shopping" tier, more competitors entering the marketplace, or more programming options being available to the viewing public in the form of new
television networks and timeshifted viewing (e.g., personal video recorders, video-on-demand, interactive television and streaming video over Internet
connections). In addition, if QVC’s or HSN’s programming is carried exclusively by a distributor on a digital programming tier, QVC or HSN may
experience a reduction in revenue to the extent that the digital programming tier has less television viewer penetration than the basic or expanded basic
programming tier. QVC and HSN may experience a further reduction in revenue due to increased television viewing audience fragmentation to the extent
that not all television sets within a digital cable home are equipped to receive television programming in a digital format. The future success of each of QVC
and HSN will depend, in part, on their ability to anticipate and adapt to technological changes and to offer elements of their respective programming via new
technologies in a cost-effective manner that meets customer demands and evolving industry standards.
I-27
Table of Contents
Any continued or permanent inability of QVC or HSN to transmit their programming via satellite would result in lost revenue and could result in
lost customers. The success of our subsidiaries QVC and HSN is dependent upon their continued ability to transmit their respective programming to
television providers from their respective satellite uplink facilities, which transmissions are subject to FCC compliance in the U.S. and foreign regulatory
requirements in QVC’s international operations. In most cases, each of QVC and HSN has entered into long-term satellite transponder leases to provide for
continued carriage of its programming on replacement transponders and/or replacement satellites, as applicable, in the event of a failure of either the
transponders and/or satellites currently carrying its programming. Although QVC and HSN believe that they take reasonable and customary measures to
ensure continued satellite transmission capability and believe that these international transponder service agreements can be renewed (or replaced, if
necessary) in the ordinary course of business, termination or interruption of satellite transmissions may occur, particularly if either QVC or HSN is not able
to successfully negotiate renewals or replacements of any of its expiring transponder service agreements in the future.
System interruption and the lack of integration and redundancy in the systems and infrastructures of our subsidiaries QVC and HSNi and our
other online commerce businesses may adversely affect their ability to, as applicable, operate their businesses, transmit their television programs, operate
websites, process and fulfill transactions, respond to customer inquiries and generally maintain cost-efficient operations. The success of our subsidiaries
and business affiliates depends, in part, on their ability to maintain the integrity of their transmissions, systems and infrastructures, including the
transmission of television programs (in the case of QVC and HSN), as well as their websites, information and related systems, call centers and fulfillment
facilities. These subsidiaries and business affiliates may experience occasional system interruptions that make some or all transmissions, systems or data
unavailable or prevent them from transmitting their signals or efficiently providing services or fulfilling orders, as the case may be. QVC is in the process of
implementing new technology systems and upgrading others. The failure to properly implement new systems or delays in implementing new systems could
impair the ability of our subsidiaries and business affiliates to provide services and content, fulfill orders and/or process transactions. QVC and HSNi also
rely on affiliate and third-party computer systems, broadband, transmission and other communications systems and service providers in connection with the
transmission of their respective signals, as well as to facilitate, process and fulfill transactions. Any interruptions, outages or delays in their signal
transmissions, systems and infrastructures, or any deterioration in the performance of these transmissions, systems and infrastructures, could impair their
ability to provide services, fulfill orders and/or process transactions. Fire, flood, power loss, telecommunications failure, hurricanes, tornadoes, earthquakes,
acts of war or terrorism, acts of God and similar events or disruptions may damage or interrupt television transmissions, computer, broadband or other
communications systems and infrastructures at any time. Any of these events could cause transmission or system interruption, delays and loss of critical
data, and could prevent our subsidiaries and business affiliates from providing services, fulfilling orders and/or processing transactions. While our
subsidiaries and business affiliates have backup systems for certain aspects of their operations, these systems are not fully redundant and disaster recovery
planning is not sufficient for all possible risks. In addition, some of our subsidiaries and business affiliates may not have adequate insurance coverage to
compensate for losses from a major interruption.
The processing, storage, sharing, use, disclosure and protection of personal data could give rise to liabilities as a result of governmental regulation,
conflicting legal requirements or differing views of personal privacy rights. In the processing of consumer transactions and managing their employees, our
businesses receive, transmit and store a large volume of personally identifiable information and other user data. The processing, storage, sharing, use,
disclosure and protection of this information are governed by the privacy and data security policies maintained by these businesses. Moreover, there are
federal, state and international laws regarding privacy and the processing, storage, sharing, use, disclosure and protection of personally identifiable
information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations, including changes in
legislation and regulations, in numerous jurisdictions around the world, the intent of which is to protect the privacy of personal information that is collected,
processed and transmitted in or from the governing jurisdiction. Compliance with these laws and regulations, or changes in these laws and regulations, may
be onerous and expensive and may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance. For example, the European
Court of Justice in 2015 invalidated the U.S.-EU Safe Harbor Framework, which facilitated personal data transfers to the U.S. in compliance with applicable
European data protection laws. A new data transfer framework, the EU-U.S. Privacy Shield became fully operational on August 1, 2016, but is the subject of
litigation. In addition, Standard Contractual Clauses - another key mechanism to allow data transfers between the U.S. and the EU - are also subject to
litigation over whether Standard Contractual Clauses can
I-28
Table of Contents
be used for transferring personal data from the EU to the U.S. Further, the European Parliament and the Council of the European Union have approved a
General Data Protection Regulation, which becomes effective on May 25, 2018 and which will give consumers additional rights and impose additional
restrictions and penalties on companies for illegal collection and misuse of personal information. Finally, the European Commission proposed new
regulations in 2017 regarding privacy and electronic communications, including additional regulation of the Internet tracking tools known as “cookies.”
QVC’s, HSNi’s and zulily’s failure, and/or the failure by the various third party vendors and service providers with which QVC, HSNi and zulily do
business, to comply with applicable privacy policies or federal, state or similar international laws and regulations, or changes in applicable laws and
regulations, or any compromise of security that results in the unauthorized release of personally identifiable information or other user data could damage
QVC’s, HSNi’s and zulily’s reputations and the reputation of their third party vendors and service providers, discourage potential users from trying their
products and services and/or result in fines and/or proceedings by governmental agencies and/or consumers, any one or all of which could adversely affect
QVC’s, HSNi’s, and zulily’s business, financial condition and results of operations and, as a result, our company. In addition, we, our subsidiaries or our
business affiliates may not have adequate insurance coverage to compensate for losses.
Our home television and online commerce businesses are subject to security risks, including security breaches and identity theft. In order to
succeed, our home television and online commerce businesses must be able to provide for secure transmission of confidential information over public
networks and protect their confidential information on their systems. Unauthorized parties may attempt to gain access to our businesses’ systems by, among
other things, hacking into our businesses’ systems or those of our businesses’ partners or vendors, or through fraud or other means of deceiving our
businesses’ employees, partners or vendors. The techniques used to gain such access to our businesses’ information technology systems, our businesses' data
or customers' data, disable or degrade service, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized
until launched against a target. Our businesses’ have implemented systems and processes intended to secure their information technology systems and
prevent unauthorized access to or loss of sensitive data, but as with all companies, these security measures may not be sufficient for all eventualities and
there is no guarantee that they will be adequate to safeguard against all data security breaches, system compromises or misuses of data. Any penetration of
network security or other misappropriation or misuse of personal information could cause interruptions in the operations of our businesses and subject them
to increased costs, litigation and other liabilities. Security breaches could also significantly damage their reputation with their customers and third parties
with whom they do business. If our businesses’ are unable to maintain the security of their retail commerce websites and mobile commerce applications,
they could suffer loss of sales, reductions in traffic, and deterioration of their competitive position and incur liability for any damage to customers whose
personal information is unlawfully obtained and used. Our businesses may be required to expend significant capital and other resources to protect against
and remedy any potential or existing security breaches and their consequences. They also face risks associated with security breaches affecting third parties
with which they are affiliated or otherwise conduct business online. The loss of confidence in our online commerce businesses resulting from any such
security breaches or identity theft could adversely affect the business, financial condition and results of operations of our online commerce businesses and, as
a result, our company.
Certain of our subsidiaries and business affiliates may fail to adequately protect their intellectual property rights or may be accused of infringing
intellectual property rights of third parties. Our subsidiaries and business affiliates regard their respective intellectual property rights, including service
marks, trademarks and domain names, copyrights (including their programming and their websites), trade secrets and similar intellectual property, as critical
to their success. These businesses also rely heavily upon software codes, informational databases and other components that make up their products and
services. From time to time, these businesses are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged
infringement of the trademarks, patents, copyrights and other intellectual property rights of third parties. In addition, litigation may be necessary to enforce
the intellectual property rights of these businesses, protect trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any
litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which
could adversely affect the business, financial condition and results of operations of these businesses and in turn our financial condition and results of
operations. The failure of these businesses to protect their intellectual property rights, particularly their proprietary brands, in a meaningful manner or third
party challenges to related contractual rights could result in erosion of brand names and limit the ability of these businesses to control marketing on or
through the Internet using their various domain names, which could adversely affect the business, financial condition and results of operations of these
businesses, as well as the financial condition and results of operations of our company.
I-29
Table of Contents
Our home television and online commerce businesses rely on independent shipping companies to deliver the products they sell. Our home television
and online commerce businesses rely on third party carriers to deliver merchandise from vendors and manufacturers to them and to ship merchandise to their
customers. As a result, they are subject to carrier disruptions and delays due to factors that are beyond their control, including employee strikes, inclement
weather and regulation and enforcement actions by customs agencies. Any failure to deliver products to their customers in a timely and accurate manner
may damage their reputation and brand and could cause them to lose customers. Enforcement actions by customs agencies can also cause the costs of
imported goods to increase, negatively affecting profits. These businesses are also impacted by increases in shipping rates charged by third party carriers,
which over the past few years have increased significantly in comparison to historical levels, and it is currently expected that shipping and postal rates will
continue to increase. In the case of deliveries to customers, in each market where they operate, they have negotiated agreements with one or more
independent, third party shipping companies, which in certain circumstances provide for favorable shipping rates. If any of these relationships were to
terminate or if a shipping company was unable to fulfill its obligations under its contract for any reason, these businesses would have to work with other
shipping companies to deliver merchandise to customers, which would most likely be at less favorable rates. Other potential adverse consequences of
changing carriers include reduced visibility of order status and package tracking, delays in order processing and product delivery, and reduced shipment
quality, which may result in damaged products and customer dissatisfaction. Any increase in shipping rates and related fuel and other surcharges passed on
to these businesses by their current carriers or any other shipping company would adversely impact profits, given that these businesses may not be able to
pass these increased costs directly to customers or offset them by increasing prices without a detrimental effect on customer demand.
Certain businesses attributed to our QVC Group face significant inventory risk. Certain businesses attributed to our QVC Group are exposed to
significant inventory risks that may adversely affect their operating results as a result of seasonality, new product launches, rapid changes in product cycles
and pricing, defective merchandise, changes in consumer demand, consumer spending patterns, changes in consumer tastes with respect to their products and
other factors. These businesses endeavor to accurately predict these trends and avoid overstocking or understocking products they sell. Demand for products,
however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when these businesses begin
selling a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast
demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable.
These businesses carry a broad selection and significant inventory levels of certain products, and they may be unable to sell products in sufficient quantities
or during the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect their operating results.
The seasonality of certain of our businesses places increased strain on their operations. The net revenue of our home television and online
commerce businesses in recent years indicates that these businesses are seasonal due to a higher volume of sales in certain months or calendar quarters or
related to particular holiday shopping. For example, in recent years, QVC and HSNi have earned, on average, between 22% and 24% of their combined
global revenue in each of the first three quarters of the year and between 29% and 32% of their combined global revenue in the fourth quarter of the year.
Similarly, our subsidiary zulily experiences a stronger third quarter during the back-to-school shopping season and stronger fourth quarter due to the holiday
shopping season. If the vendors for these businesses are not able to provide popular products in sufficient amounts such that these businesses fail to meet
customer demand, it could significantly affect their revenue and future growth. If too many customers access the websites of these businesses within a short
period of time due to increased demand, our businesses may experience system interruptions that make their websites unavailable or prevent them from
efficiently fulfilling orders, which may reduce the volume of goods they sell and the attractiveness of their products and services. In addition, they may be
unable to adequately staff their fulfillment and customer service centers during these peak periods and delivery and other third party shipping (or carrier)
companies may be unable to meet the seasonal demand. To the extent these businesses pay for holiday merchandise in advance of certain holidays (e.g., in
the case of QVC and HSNi, in August through November of each year), their available cash may decrease, resulting in less liquidity.
The failure of our subsidiaries QVC and HSN to effectively manage the Easy-Pay and revolving credit card programs and Flexpay program,
respectively, could result in less income. QVC offers Easy-Pay in the U.S., U.K., Germany and Italy (known as Q-Pay in Germany and Italy), a payment
plan that, when offered by QVC, allows customers
I-30
Table of Contents
to pay for certain merchandise in two or more monthly installments. When Easy-Pay is offered by QVC and elected by the customer, the first installment is
typically billed to the customer’s credit card upon shipment. Generally, the customer’s credit card is subsequently billed up to five additional monthly
installments until the total purchase price of the products has been billed by QVC. QVC cannot predict whether customers will pay all of their Easy-Pay
installments. In addition, QVC-U.S. has an agreement with a large consumer financial institution (the “Bank”) pursuant to which the Bank provides
revolving credit directly to QVC’s customers for the sole purpose of purchasing merchandise from QVC with a QVC branded credit card (“Q Card”). QVC
receives a portion of the net economics of the credit card program. We cannot predict the extent to which QVC’s customers will use the Q Card, nor the
extent that they will make payments on their outstanding balances.
HSN offers Flexpay, a program which customers may pay for certain merchandise in two to six interest-free, monthly credit or debit card installments.
HSN maintains allowances for estimated losses resulting from the inability of customers to make required payments. Actual losses due to the inability of
customers to make required payments may increase in a given period or exceed related estimates. As Flexpay usage continues to grow, HSN may experience
these losses at greater rates, which will require it to maintain greater allowances for doubtful accounts of estimated losses than it has historically. To the
extent that Flexpay losses exceed historical levels, HSN’s results of operations may be negatively impacted.
The success of our home television and online commerce businesses depends in large part on their ability to recruit and retain key personnel
capable of executing their unique business models. QVC and HSNi, as well as our e-commerce subsidiaries and business affiliates have business models
that require them to recruit and retain key employees, including management, 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 cannot assure you that if QVC, HSNi or our
online commerce businesses experience turnover of these key employees they will be able to recruit and retain acceptable replacements because the market
for such employees is very competitive and limited.
Certain of our subsidiaries and business affiliates have operations outside of the United States that are subject to numerous operational and
financial risks. Certain of our subsidiaries and business affiliates have operations in countries other than the United States that 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, including fiscal policies that are implementing austerity measures in certain countries, which are
affecting overseas markets;
limited ability to repatriate funds to the U.S. at favorable tax rates;
potentially adverse tax consequences;
export and import restrictions, changes in tariffs, trade policies and trade relations;
increases in taxes and governmental royalties and fees;
the ability to obtain and maintain required licenses or certifications, such as for web services and electronic devices, that enable us to operate our
businesses in foreign jurisdictions;
changes in foreign and U.S. laws, regulations and policies that govern operations of foreign-based companies;
changes to general consumer protection laws and regulations;
difficulties in staffing and managing international operations as a result of distance, language and cultural differences; and
threatened and actual terrorist attacks, political unrest in international markets and ongoing military action around the world that may result in
disruptions of service that are critical to QVC’s and HSNi’s international businesses.
Moreover, in many foreign countries, particularly in certain developing economies, it is not uncommon to encounter business practices that are
prohibited by certain regulations, such as the Foreign Corrupt Practices Act and similar laws. Although certain of our subsidiaries and business affiliates
have undertaken compliance efforts with respect to these laws, their respective employees, contractors and agents, as well as those companies to which they
outsource certain of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited by the
policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on the financial condition of these
subsidiaries and business affiliates. Any failure by these subsidiaries and business
I-31
Table of Contents
affiliates to effectively manage the challenges associated with the international operation of their businesses could materially adversely affect their, and
hence our, financial condition.
Significant developments stemming from the 2016 U.S. presidential election or the Brexit vote could have a material adverse effect on businesses
attributed to the QVC and Ventures Groups. After the presidential inauguration on January 20, 2017, President Donald J. Trump and his administration took
office in the United States. As a presidential candidate, President Trump expressed apprehension towards existing trade agreements, such as the North
American Free Trade Agreement and the Trans-Pacific Partnership, and suggested that the U.S. would renegotiate or withdraw from these agreements.
During the campaign, he also raised the possibility of significantly increasing tariffs on goods imported into the United States, particularly from China and
Mexico. On January 23, 2017, the President of the United States signed a presidential memorandum to withdraw the U.S. from the Trans-Pacific Partnership.
This and other proposed actions, if implemented, could adversely affect businesses attributed to the QVC and Ventures Groups that sell imported products.
Additionally, the Brexit process and negotiations have created political and economic uncertainty, particularly in the U.K. and the EU, and this
uncertainty may last for years. QVC’s business could be affected during this period of uncertainty, and perhaps longer, by the impact of this vote. In addition,
QVC’s business could be negatively affected by new trade agreements between the U.K. and other countries, including the U.S., and by the possible
imposition of trade or other regulatory barriers in the U.K. These possible negative impacts, and others resulting from the U.K.’s actual withdrawal from the
EU, may adversely affect QVC’s operating results.
Our online commerce businesses, including QVC, HSNi and zulily could be negatively affected by changes in search engine algorithms and
dynamics or search engine disintermediation as well as their inability to monetize the resulting web traffic. The success of our online commerce
businesses depends on a high degree of website traffic, which is dependent on many factors, including the availability of appealing website content, user
loyalty and new user generation from search portals that charge a fee (such as Google). In obtaining a significant amount of website traffic via search
engines, they utilize techniques such as search engine optimization (“SEO”) which is the practice of developing websites with relevant and current content
that rank well in “organic,” or unpaid, search engine results) and search engine marketing (“SEM”) (which is a form of Internet marketing that involves the
promotion of websites by increasing their visibility in search engine results pages through the use of paid placement, contextual advertising, and paid
inclusion) to improve their placement in relevant search queries. Search engines, including Google, frequently update and change the logic that determines
the placement and display of results of a user’s search, such that the purchased or algorithmic placement of links to the websites of our online commerce
businesses can be negatively affected. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results causing their
websites to place lower in search query results. If a major search engine changes its algorithms in a manner that negatively affects their paid or unpaid search
ranking, or if competitive dynamics impact the effectiveness of SEO or SEM in a negative manner, the business and financial performance of our online
commerce businesses would be adversely affected, potentially to a material extent. Furthermore, the failure of our online commerce businesses to
successfully manage their SEO and SEM strategies could result in a substantial decrease in traffic to their websites, as well as increased costs if they were to
replace free traffic with paid traffic. Even if our online commerce businesses are successful in generating a high level of website traffic, no assurance can be
given that our online commerce businesses will be successful in achieving repeat user loyalty or that new visitors will explore the offerings on their sites.
Monetizing this traffic by converting users to consumers is dependent on many factors, including availability of inventory, consumer preferences, price, ease
of use and website quality. No assurance can be given that the fees paid to search portals will not exceed the revenue generated by their visitors. Any failure
to sustain user traffic or to monetize such traffic could materially adversely affect the financial performance of our online commerce businesses and, as a
result, adversely affect our financial results.
I-32
Table of Contents
Our online commerce businesses, including QVC, HSNi and zulily may experience difficulty in achieving the successful development,
implementation and customer acceptance of, and a viable advertising market via, applications for smartphone and tablet computing devices, which could
harm their business. Although our online commerce businesses have developed services and applications to address user and consumer interaction with
website content on smartphone and other non-traditional desktop or laptop computer systems (which typically have smaller screens and less convenient
typing capabilities), the efficacy of the smartphone application and its advertising market is still developing. Moreover, if smartphone computing services
prove to be less effective for the users of our online commerce businesses or less economically attractive for advertisers and the smartphone segment of
Internet traffic grows at the expense of traditional computer and tablet Internet access, our online commerce businesses may experience difficulty attracting
and retaining traffic and, in turn, advertisers, on these platforms. Additionally, as new devices and new platforms are continually being released, it is difficult
to predict the challenges that may be encountered in developing versions of our online commerce businesses’ offerings for use on these alternative devices,
and our online commerce businesses may need to devote significant resources to the creation, support, and maintenance of their services on such devices. To
the extent that revenue generated from advertising placed on smartphone computing devices becomes increasingly more important to their businesses and
they fail to adequately evolve and address this market, their business and financial performance could be negatively impacted. In addition, growth in the use
of smartphone products as a substitute for use on personal computers and tablets may adversely impact revenue derived from advertising, as many of the
processes used for smartphone advertising and related monetization strategies are still in development.
Our subsidiaries QVC and HSNi have significant indebtedness, which could limit their flexibility to respond to current market conditions, restrict
their business activities and adversely affect their financial condition. As of December 31, 2017, QVC had total debt of approximately $5,215 million,
consisting of $3,550 million in senior secured notes, $1,496 million under its senior secured credit facility and $169 million of capital and build to suit lease
obligations. QVC also had $877 million available for borrowing under its senior secured credit facility as of that date. As of December 31, 2017, HSNi had
total debt of approximately $460 million and also had $533 million available for borrowing. QVC or HSNi may incur significant additional indebtedness in
the future. The indebtedness of QVC and HSNi, combined with other financial obligations and contractual commitments, could among other things:
·
·
·
·
·
·
·
increase QVC’s and HSNi’s vulnerability to general adverse economic and industry conditions;
require a substantial portion of QVC’s and HSNi’s cash flow from operations to be dedicated to the payment of principal and interest on its
indebtedness;
limit QVC’s and HSNi’s ability to use cash flow or obtain additional financing for future working capital, capital expenditures or other general
corporate purposes, which reduces the funds available to it for operations and any future business opportunities;
limit flexibility in planning for, or reacting to, changes in its business and the markets in which it operates;
competitively disadvantage QVC and HSNi compared with competitors that have less debt;
limit QVC’s and HSNi’s ability to borrow additional funds or to borrow funds at rates or on other terms that it finds acceptable; and
expose QVC and HSNi to the risk of increased interest rates because certain of QVC’s and HSNi’s borrowings, including borrowings under its
credit facility, are at variable interest rates.
In addition, it is possible that QVC or HSNi may need to incur additional indebtedness in the future in the ordinary course of business. If new debt is added
to their current debt levels, the risks described above could intensify. If QVC or HSNi experiences adverse effects on their financial condition as a result of
their indebtedness, our financial performance could be adversely affected as well.
We may fail to realize the potential benefits of the acquisition of HSNi or those benefits may take longer to realize than expected. We believe there
are significant benefits and synergies that may be realized through leveraging the scale, vendor relationships, merchandizing expertise and customer base of
QVC and HSNi. However, the efforts to realize these benefits and synergies will be a complex process and may disrupt each company’s existing operations
if not implemented in a timely and efficient manner. If the respective managements of Liberty, QVC and HSNi are unable to minimize the potential
disruption to their respective businesses and operations during this period, we may not realize the anticipated benefits of the acquisition of HSNi. Realizing
these benefits may depend in part on the efficient coordination and alignment of various functions, including marketing, merchandising, buying expertise,
customer acquisition and the integration of certain administrative functions, while maintaining adequate focus on QVC’s and HSNi’s core businesses.
I-33
Table of Contents
The operating expenses attributed to the QVC Group are expected to increase over the near term due to the increased headcount, expanded operations
and changes related to the assimilation of HSNi. In addition, we have incurred expenses related to the acquisition of HSNi that have been attributed to the
QVC Group, which may adversely affect our financial results. To the extent that our expenses increase but revenue does not increase commensurately, there
are unanticipated expenses related to the assimilation process, there are significant costs associated with presently unknown liabilities, or if the foregoing
charges and expenses are larger than anticipated, our consolidated business, operating results and financial condition, as well as those attributable to the
QVC Group, may be adversely affected. Failure to timely implement, or problems with implementing, the post-acquisition strategy for HSNi also may
adversely affect the trading price of QVC Group common stock.
We depend on the continued growth of e-commerce in general and zulily depends on the flash sales model in particular. The business of selling
products over the Internet, particularly on the flash sales model, is dynamic and evolving. The market segment for the flash sales model has grown
significantly, and this growth may not be sustainable. If customers cease to find the flash sales model shopping experience fun, entertaining and a good
value, or otherwise lose interest in shopping in this manner, zulily may not acquire new customers at rates consistent with its historical or projected periods,
and existing customers’ buying patterns and levels may be less than historical or projected rates. If zulily is unable to successfully deliver emails or mobile
alerts to its subscribers, or if subscribers decline to open its emails or mobile alerts, zulily’s net sales and profitability would be adversely affected. In
addition, changes in how webmail application providers, such as Google Inc. and Yahoo! Inc., prioritize, filter and deliver email may also reduce the number
of subscribers opening zulily’s emails which may also result in a decline in net sales. If the market segment for the flash sales model were to become
saturated or decline overall, zulily may not be able to acquire new customers or engage existing customers, which could adversely affect the QVC Group’s
financial condition and operating results.
We do not have the right to manage our business affiliates attributed to our Ventures Group, which means we are not able to cause those affiliates
to act in a manner that we deem desirable. 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 voting stake or with respect to which we have provided a proxy over our voting power to a third party).
Rather, our rights may take the form of representation on the board of directors or similar committee that supervises management or possession of veto rights
over significant or extraordinary actions. The scope of our veto rights varies 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 our stockholders or partners,
they will not enable us to cause these actions to be taken as these companies are business affiliates in which we own a partial interest.
We have overlapping directors and officers with LMC, TripAdvisor Holdings, Liberty Broadband and Expedia Holdings, and are expected to have
overlapping directors and officers with GCI Liberty, Inc., which may lead to conflicting interests. As a result of the LMC Split-Off, other transactions
between 2011 and 2016 that resulted in the separate corporate existence of Liberty, TripAdvisor Holdings, Liberty Broadband and Expedia Holdings, as well
as the completion of the proposed transactions (the “Transactions”) involving Liberty and GCI (renamed GCI Liberty), most of the executive officers of
Liberty also serve or will serve as executive officers of LMC, TripAdvisor Holdings, Liberty Broadband, Expedia Holdings and GCI Liberty and there are
overlapping directors. Other than Liberty’s current ownership of shares of Liberty Broadband’s non-voting Series C common stock, which we expect to be
held by GCI Liberty after the completion of the Transactions, none of the foregoing companies has any ownership interest in any of the others. Our executive
officers and the members of our company’s board of directors have fiduciary duties to our stockholders. Likewise, any such persons who serve in similar
capacities at LMC, TripAdvisor Holdings, Liberty Broadband, Expedia Holdings or GCI Liberty have fiduciary duties to that company’s stockholders.
Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting more than one
of the companies to which they owe fiduciary duties. For example, there may be the potential for a conflict of interest when our company, LMC, TripAdvisor
Holdings, Liberty Broadband, Expedia Holdings or GCI Liberty looks at acquisitions and other corporate opportunities that may be suitable for each of
them. Moreover, most of our company's directors and officers own LMC, TripAdvisor Holdings, Liberty Broadband, Expedia Holdings, and will own GCI
Liberty, stock and equity awards. These ownership interests could create, or appear to create, potential conflicts of interest when the applicable individuals
are faced with decisions that could have different implications for our company, LMC, TripAdvisor Holdings,
I-34
Table of Contents
Liberty Broadband, Expedia Holdings and/or GCI Liberty. Any potential conflict that qualifies as a "related party transaction" (as defined in Item 404 of
Regulation S-K under the Securities Act of 1933, as amended) is subject to review by an independent committee of the applicable issuer's board of directors
in accordance with its corporate governance guidelines. Each of Liberty Broadband, TripAdvisor Holdings and Expedia Holdings has renounced its rights to
certain business opportunities and each company’s restated certificate of incorporation contains provisions deeming directors and officers not in breach of
their fiduciary duties in certain cases for directing a corporate opportunity to another person or entity (including LMC, TripAdvisor Holdings, Liberty
Broadband and Expedia Holdings) instead of such company. In addition, we understand that GCI Liberty is expected to adopt similar renouncement and
waiver provisions if it is successfully able to reincorporate in Delaware following the closing of the Transactions. Any other potential conflicts that arise will
be addressed on a case-by-case basis, keeping in mind the applicable fiduciary duties owed by the executive officers and directors of each issuer. From time
to time, we may enter into transactions with LMC, TripAdvisor Holdings, Liberty Broadband, Expedia Holdings or GCI Liberty and/or their subsidiaries or
other affiliates. There can be no assurance that the terms of any such transactions will be as favorable to our company, LMC, TripAdvisor Holdings, Liberty
Broadband, Expedia Holdings or GCI Liberty or any of their respective subsidiaries or affiliates as would be the case where there is no overlapping officer or
director.
The liquidity and value of our public investments may be affected by market conditions beyond our control that could cause us to record losses for
declines in their market value. Included among our assets are equity interests in publicly-traded companies that are not consolidated subsidiaries. The value
of these interests may be affected by economic and market conditions that are beyond our control; and our ability to liquidate or otherwise monetize these
interests without adversely affecting their value may be limited. In addition, as of December 31, 2017, we owned (and attributed to our Ventures Group)
shares of Charter valued at approximately $1.8 billion and shares of Liberty Broadband, which is Charter's largest stockholder with a 25.01% voting interest
in Charter, valued at approximately $3.6 billion. The risks associated with the business of Charter, and hence the business of Liberty Broadband, are different
than those associated with the video and online commerce industries in which our subsidiaries and equity affiliates operate. For additional information
regarding these risks and uncertainties, we refer the holders of Liberty Ventures common stock to “Item 1A, Risk Factors, Factors Relating to Our Corporate
History and Structure” and “Item 1A, Risk Factors, Factors Relating to Charter” of Liberty Broadband Corporation’s Annual Report on Form 10-K for the
year ended December 31, 2017, filed with the SEC on February 9, 2018.
A substantial portion of our 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, 2017, our wholly-owned
subsidiary Liberty Interactive LLC (“Liberty LLC”) had $2,738 million principal amount of publicly-traded debt outstanding. Liberty LLC is a holding
company for all of our subsidiaries and investments. Our ability to meet the financial obligations of Liberty LLC and our other financial obligations will
depend on 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 at the operating subsidiary level, 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, including QVC and HSNi, to pay dividends or to make other payments or advances to us or Liberty LLC
depends on their individual operating results, any statutory, regulatory or contractual restrictions to which they may be or may become subject and the terms
of their own indebtedness, including QVC’s credit facility and bond indentures and HSNi’s credit facility. The agreements governing such indebtedness
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 LLC will generally receive cash, in the form of dividends, loans, advances or otherwise, from our business affiliates. See “We do not have the
right to manage our business affiliates attributed to our Ventures Group, which means we are not able to cause those affiliates to act in a manner that we
deem desirable” above.
We have disposed of certain of the reference shares underlying the exchangeable debentures of Liberty LLC attributed to our Ventures Group,
which exposes us to liquidity risk. Liberty LLC currently has outstanding multiple tranches of exchangeable debentures in the aggregate principal amount
of $1,947 million as of December 31, 2017. Under the terms of these exchangeable debentures, which are attributed to our Ventures Group (other than the
1% Exchangeable Senior Debentures due 2043, which are attributed to the QVC Group), the holders may elect to require Liberty LLC to exchange the
debentures for the value of a specified number of the underlying reference shares, which Liberty LLC may
I-35
Table of Contents
honor through delivery of reference shares, cash or a combination thereof. Also, Liberty LLC is required to distribute to the holders of its exchangeable
debentures any cash, securities (other than publicly traded securities, which would themselves become reference shares) or other payments made by the
issuer of the reference shares in respect of those shares. The principal amount of the debentures will be reduced by the amount of any such required
distributions other than regular cash dividends. As Liberty LLC has disposed of some of the reference shares underlying certain of these exchangeable
debentures, any exercise of the exchange right by, or required distribution of cash, securities or other payments to, holders of such debentures will require
that Liberty LLC fund the required payments from its own resources, which will depend on the availability of cash or other sources of liquidity to Liberty
LLC at that time. Additionally, in the event all reference shares underlying a series of exchangeable debentures are liquidated or otherwise cease to be
outstanding without replacement, there is a possibility that the treatment of tax matters associated with that series could change. This may include
acceleration of tax liabilities that are recorded as deferred tax liabilities in our financial statements, in amounts that would be significant.
Risks Relating to the Ownership of Our Common Stock due to our Tracking Stock Capitalization
Holders of QVC Group tracking stock and Ventures Group tracking 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 does not own shares of common stock of both of our groups. Even
though we have attributed, for financial reporting purposes, all of our consolidated assets, liabilities, revenue, expenses and cash flows to either the QVC
Group or the Ventures Group in order to prepare the separate financial statement schedules for each of those 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 included in any set of financial statement schedules.
Holders of QVC Group tracking stock and Ventures Group tracking stock do not have any legal rights related to specific assets attributed to the QVC Group
or the Ventures Group and, in any liquidation, holders of QVC Group tracking stock and holders of Ventures Group tracking stock will be entitled to receive
a pro rata share of our available net assets based on their respective numbers of liquidation units.
Our board of directors' ability to reattribute businesses, assets and expenses between tracking stock groups may make it difficult to assess the
future prospects of either tracking stock group based on its past performance. Our board of directors is vested with discretion to reattribute businesses,
assets and liabilities that are attributed to one tracking stock group to the other tracking stock group, without the approval of any of our stockholders. For
example, in October 2014, our board of directors approved the change in attribution from the QVC Group to the Ventures Group of certain Liberty online
commerce subsidiaries and approximately $1 billion in cash, without stockholder approval. Any reattribution made by our board of directors, as well as the
existence of the right in and of itself to effect a reattribution, may impact the ability of investors to assess the future prospects of either tracking stock group,
including its liquidity and capital resource needs, based on its past performance. Stockholders may also have difficulty evaluating the liquidity and capital
resources of each group based on past performance, as our board of directors may use one group's liquidity to fund the other group's liquidity and capital
expenditure requirements through the use of inter-group loans and inter-group interests.
We could be required to use assets attributed to one group to pay liabilities attributed to the other group. The assets attributed to one group are
potentially subject to the 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 reattributions of assets between groups will result in the creation of an
inter-group loan or an inter-group interest or an offsetting reattribution of cash or other assets, no provision of our restated 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.
I-36
Table of Contents
The market price of QVC Group tracking stock and Ventures Group tracking stock may not reflect the performance of the QVC Group and the
Ventures Group, respectively, as we intend. We cannot assure you that the market price of the common stock of a group, in fact, will reflect the
performance of the group of businesses, assets and liabilities attributed to that group. Holders of QVC Group tracking stock and Ventures Group tracking
stock are common stockholders of our company as a whole and, as such, will be 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 QVC Group tracking stock and Ventures Group tracking stock may be volatile, could fluctuate substantially and could be
affected by factors that do not affect traditional common stock. The market prices of QVC Group tracking stock and Ventures Group tracking stock may be
materially affected by, among other things:
·
·
·
·
·
·
actual or anticipated fluctuations in a group's operating results or in the operating results of particular companies attributable to such group;
potential acquisition activity by our company, our subsidiaries or our business affiliates;
issuances of debt or equity securities to raise capital by our company, our subsidiaries or our business affiliates 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 QVC Group tracking stock or Ventures Group tracking stock or the companies
attributable to either of our tracking stock groups;
the complex nature and the potential difficulties investors may have in understanding the terms of both of our tracking stocks, as well as concerns
regarding the possible effect of certain of those terms on an investment in our stock; and
general market conditions.
The market value of QVC Group tracking stock and Ventures Group tracking stock could be adversely affected by events involving the assets and
businesses attributed to either of the groups. Because we are the issuer of QVC Group tracking stock and Ventures Group tracking stock, an adverse
market reaction to events relating to the assets and businesses attributed to either of our groups, such as earnings announcements, announcements of new
products or services, or acquisitions or dispositions that the market does not view favorably, may cause an adverse reaction to the common stock of our other
group. This could occur even if the triggering event is not material to us as a whole. A certain triggering event may also have a greater impact on one group
than the same triggering event would have on the other group due to the asset composition of the affected group. 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, could affect our credit rating and that of our subsidiaries and, therefore, could increase the borrowing costs of businesses
attributable to our other group or the borrowing costs of our company as a whole.
We may not pay dividends equally or at all on QVC Group tracking stock or Ventures Group tracking stock. We do not presently intend to pay cash
dividends on QVC Group tracking stock or Ventures Group tracking stock for the foreseeable future. However, we will have the right to pay dividends on the
shares of common stock of each group in equal or unequal amounts, and we may pay dividends on the shares of common stock of one group and not pay
dividends on shares of common stock of the other group. 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 QVC Group and the Ventures Group. Our tracking stock groups are not separate entities and thus holders of
QVC Group tracking stock and Ventures Group tracking stock do not have the right to elect separate boards of directors. As a result, our company's officers
and directors owe fiduciary duties to our company as a whole and all of our stockholders as opposed to only holders of a particular group. Decisions deemed
to be in the best interest of our
I-37
Table of Contents
company and all of our stockholders 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 QVC Group and the Ventures Group or the terms of any
reattributions of assets or liabilities between the groups;
decisions as to the allocation of consideration among the holders of QVC Group tracking stock and Ventures Group tracking stock, or among the
series of stocks relating to either of our groups, to be received in connection with a merger involving our company;
decisions as to the allocation of corporate opportunities between the groups, especially where the opportunities might meet the strategic business
objectives of both groups;
decisions as to operational and financial matters that could be considered detrimental to one group but beneficial to the other;
decisions as to the conversion of shares of common stock of one group into shares of common stock of the other;
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 group;
decisions as to the internal or external financing attributable to businesses or assets attributed to either of our groups;
decisions as to the dispositions of assets of either of our groups; and
decisions as to the payment of dividends on the stock relating to either of our groups.
Our directors' or officers' ownership of QVC Group tracking stock and Ventures Group tracking stock may create or appear to create conflicts of
interest. If directors or officers own disproportionate interests (in percentage or value terms) in QVC Group tracking stock or Ventures Group tracking
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 QVC Group tracking stock or Ventures Group tracking stock.
Other than pursuant to our 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 our two 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 our best interests and the best interests of all of our stockholders.
Our board of directors believes the advantage of retaining flexibility in determining how to fulfill its responsibilities in any such circumstances as they
may arise outweighs any perceived advantages of adopting additional specific procedures in advance.
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
QVC Group and the Ventures Group with respect to matters such as tax liabilities and benefits, inter-group loans, inter-group interests, attribution of assets,
financing alternatives, corporate opportunities and similar items. These policies also set forth the initial focuses and strategies of these groups and the initial
attribution of our businesses, assets and liabilities between them. These policies are not included in the restated certificate of incorporation (the “restated
charter”). 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
I-38
Table of Contents
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.
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 restated 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, the 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 stockholders and does not have separate or additional duties to any subset of stockholders. 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.” 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. Under the principles of Delaware law and the business
judgment rule referred to above, a stockholder may not be able to successfully challenge decisions that a stockholder believes have a disparate impact upon
the stockholders of one of our groups if a majority of our board of directors is disinterested and independent with respect to the action taken, is adequately
informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of Liberty and all of our
stockholders.
Stockholders will not vote on how to attribute consideration received in connection with a merger involving our company among holders of QVC
Group tracking stock and Ventures Group tracking stock. Our restated 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 QVC Group tracking stock and holders of Ventures
Group tracking stock or to the holders of different series of stock, and none of the holders of QVC Group tracking stock or Ventures Group tracking 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 among holders of QVC Group
tracking stock and Ventures Group tracking 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 a particular stock, might have materially different results, the consideration
to be received by holders of QVC Group tracking stock and Ventures Group tracking 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.
We may dispose of assets of the QVC Group or the Ventures 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 restated charter does not require a separate class
vote in the case of a sale of a significant amount of assets of any of our groups. As long as the assets attributed to the QVC Group or the Ventures Group
proposed to be disposed of represent less than substantially all of our assets, we may approve sales and other dispositions of any amount of the assets of such
group without any stockholder approval.
If we dispose of all or substantially all of the assets attributed to any 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 would be required, if the disposition is not an exempt
disposition under the terms of our restated 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 in exchange for cash, securities or other property; and/or
convert all or a portion 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.
I-39
Table of Contents
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 any group of our common stock.
Holders of QVC Group tracking stock or Ventures Group tracking 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 QVC Group or the Ventures 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 with the same assets might receive a greater amount of proceeds than the holders of QVC Group tracking
stock or Ventures Group tracking 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 our stockholders that in the event of such a sale the per share consideration to be paid to holders of QVC Group tracking stock or Ventures
Group tracking 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. Further, there is no requirement that the consideration paid be tax-free to the holders of the
shares of common stock of that group. Accordingly, if we sell all or substantially all of the assets attributed to the QVC Group or the Ventures Group, our
stockholders could suffer a loss in the value of their investment in our company.
We may split off, spin off or reattribute assets, liabilities and businesses attributed to our tracking stock groups in a manner that may disparately
impact some of our stockholders if our board of directors determines such transaction to be in the best interest of all of our stockholders, and in some
cases, not all of our stockholders would be entitled to vote on such a transaction. Pursuant to the terms of the restated charter, our board of directors may
determine that it is in the best interest of all of our stockholders to effect a redemptive split-off whereby all or a portion of the outstanding shares of a
particular tracking stock would be redeemed for shares of common stock of a subsidiary (“Splitco”) that holds all or a portion of the assets and liabilities
attributed to such tracking stock group subject to the approval of only the holders of the tracking stock to be redeemed. However, the vote of holders of our
other tracking stock would not be required, unless Splitco also held assets and liabilities of such other tracking stock group. If we were to effect a redemptive
split-off, then, pursuant to the terms of the restated charter, we would be required to redeem the outstanding shares of the affected tracking stock from its
holders on an equal per share basis (i.e., we could not redeem shares from holders of only certain series of the affected tracking stock or redeem from all
holders of the affected tracking stock on a non-pro rata basis). Following a redemptive split-off, the other tracking stock would become the only outstanding
common stock of Liberty, and thus would cease to function as a tracking stock and would effectively become a regular common stock (even if the tracking
stock structure set forth in the restated charter remained in place until the restated charter was amended to eliminate the tracking stock specific
provisions). In addition, in the case of a partial redemptive split-off, holders of the affected tracking stock would hold shares of Splitco and continue to hold
a reduced number of shares of the affected tracking stock which would track the remaining assets and liabilities retained by us and attributed to such tracking
stock after the split-off.
We are also permitted, pursuant to the terms of the restated charter, to effect a spin-off of certain of our assets and liabilities through the dividend of
shares of a subsidiary holding such assets and liabilities, and the spin-off would not be subject to prior stockholder approval. In this situation, a tracking
stock holder would retain their tracking stock shares and receive shares of the spun-off entity.
Furthermore, in structuring these transactions, our board of directors may determine to alter the composition of the assets and liabilities underlying our
tracking stock groups through a reattribution. As contemplated by both the restated charter and the Management and Allocation Policies designed to assist us
in managing and separately presenting the businesses and operations attributed to our tracking stock groups, our board of directors is vested with the
discretion to reattribute assets and liabilities from one tracking stock group to another tracking stock group without the approval of any of its stockholders,
and the only limitations on its exercise of such discretion are that the reattribution be in the best interest of all of our stockholders and that the reattribution
be done on a fair value basis. Holders of the affected tracking stock groups will not be entitled to a separate vote to approve a reattribution, even if such
reattribution is occurring in connection with a redemptive split-off and such stockholders would otherwise be entitled to vote on the redemptive split-off
itself.
I-40
Table of Contents
In the event of a liquidation of Liberty, holders of Ventures Group tracking stock and QVC Group tracking stock will not have a priority with
respect to the assets attributed to the related tracking stock group remaining for distribution to stockholders. Under the restated charter, upon Liberty's
liquidation, dissolution or winding up, holders of the Ventures Group tracking stock and the QVC Group tracking stock will be entitled to receive, in respect
of their shares of such stock, their proportionate interest in all of Liberty's assets, if any, remaining for distribution to holders of common stock in proportion
to their respective number of "liquidation units" per share. Relative liquidation units were determined based on the volume weighted average prices of the
Ventures Group tracking stock and the QVC Group tracking stock over the 20 trading day period which commenced shortly after the initial filing of the
restated charter. Hence, the assets to be distributed to a holder of either tracking stock upon a liquidation, dissolution or winding up of Liberty will have
nothing to do with the value of the assets attributed to the related tracking stock group or to changes in the relative value of the QVC Group tracking stock
and the Ventures Group tracking stock over time.
Our board of directors may in its sole discretion elect to convert the common stock relating to one group into common stock relating to the other
group, 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 restated charter permits our board of directors, in its sole discretion, to convert all of the outstanding shares of common stock relating to
either of our groups into shares of common stock of the other group on specified terms. A conversion would preclude the holders of stock in each group
involved in such conversion from retaining their investment in a security that is intended to reflect separately the performance of the relevant group. 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 our company. In addition, our board of directors may effect such a conversion at a time when the market value of our stock could cause
the stockholders of one group to be disadvantaged.
Holders of QVC Group tracking stock and Ventures Group tracking stock will vote together and will have limited separate voting rights. Holders of
QVC Group tracking stock and Ventures Group tracking stock will vote together as a single class, except in certain limited circumstances prescribed by our
restated 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 each group have no voting rights, other than those required under
Delaware law. When holders of QVC Group tracking stock and Ventures Group tracking stock vote together as a single class, holders having a majority of
the votes will be 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.
Transactions in our common stock by our insiders could depress the market price of our common stock. Sales of or hedging transactions such as
collars relating to our shares by our Chairman of the Board or any of our other directors or executive officers could cause a perception in the marketplace
that our stock price has peaked or that adverse events or trends have occurred or may be occurring at our company. This perception can result
notwithstanding any personal financial motivation for these insider transactions. As a result, insider transactions could depress the market price for shares of
one or more series of our tracking stocks.
Our capital structure, as well as the fact that the QVC Group and the Ventures Group are not independent companies, may inhibit or prevent
acquisition bids for the QVC Group or the Ventures Group and may make it difficult for a third party to acquire us, even if doing so may be beneficial to
our stockholders. If the QVC Group and the Ventures Group were separate independent companies, any person interested in acquiring the QVC Group or
the Ventures 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 QVC Group tracking stock and Ventures Group tracking stock to reflect the separate
economic performance of the QVC Group and the Ventures 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 that
do not have capital structures similar to ours.
I-41
Table of Contents
Certain provisions of our restated 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;
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;
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;
requiring stockholder approval by holders of at least 66 2/3% of our aggregate voting power or the approval by at least 75% of our board of
directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our
assets or an amendment to our restated charter; and
the existence of authorized and unissued stock, including "blank check" preferred stock, which could be issued by our board of directors to persons
friendly to our then current management, thereby protecting the continuity of our management, or which could be used to dilute the stock
ownership of persons seeking to obtain control of our company.
Our chairman, John C. Malone, beneficially owns shares representing the power to direct approximately 37% and 32% of the aggregate voting power
in our company, due to his beneficial ownership of approximately 95% and 90% of the outstanding shares of each of our Series B QVC Group common
stock and Series B Liberty Ventures common stock, respectively, as of January 31, 2018.
Risks Relating to the Transactions
In addition to the other information included in this Annual Report and the risks described below, you should carefully consider the risks associated
with the Transactions, including the risks relating to the completion of the Transactions and, subject to the completion of the Transactions, the risks relating
to the legacy GCI operations and GCI Liberty’s corporate and capital structure and certain financial matters. These risks are described in “Risk Factors” in
Amendment No. 3 to GCI’s Registration Statement on Form S-4, filed with the SEC on December 27, 2017.
We expect to incur significant costs and expenses in connection with the Transactions. We expect to incur certain nonrecurring costs in connection
with the consummation of the Transactions contemplated by the related GCI Reorganization Agreement including advisory, legal and other transaction
costs. A majority of these costs have already been incurred or will be incurred regardless of whether the Transactions are completed. While many of the
expenses that will be incurred, by their nature, are difficult to estimate accurately at the present time, our management continues to assess the magnitude of
these costs, and additional unanticipated costs may be incurred in connection with the Transactions. Although we expect that the realization of benefits
related to the Transactions will offset such costs and expenses over time, no assurances can be made that this net benefit will be achieved in the near term, or
at all.
The announcement and pendency of the Transactions could divert the attention of management and cause disruptions in the businesses of GCI
and Liberty, which could have an adverse effect on the business and financial results of both GCI and Liberty. Liberty and GCI are unaffiliated
companies that are currently operating independently of each other. Management of both GCI and Liberty may be required to divert a disproportionate
amount of attention away from their respective day-to-day activities and operations, and devote time and effort to consummating the Transactions. The
risks, and adverse effects, of such disruptions and diversions could be exacerbated by a delay in the completion of the Transactions. These factors could
adversely affect the financial position or results of operations of Liberty and GCI, regardless of whether the Transactions are completed.
I-42
Table of Contents
We are subject to contractual restrictions while the Transactions are pending, which could adversely affect our business. The GCI Reorganization
Agreement imposes certain restrictive interim covenants on our Company. For instance, the consent of GCI is required in respect of, among other things,
amendments to our organizational documents, certain payments of dividends with respect to the Liberty Ventures common stock and certain issuances of
shares of Liberty Ventures common stock. These restrictions may prevent us from taking certain actions before the closing of the Transactions or the
termination of the GCI Reorganization Agreement, including making certain acquisitions or otherwise pursuing certain business opportunities, or making
certain changes to our capital stock, that our board of directors may deem beneficial.
Failure to complete the Transactions could negatively impact our stock price and financial results. If the Transactions are not completed for any
reason, including as a result of the GCI stockholders or Liberty stockholders failing to approve the necessary proposals, we may be subject to numerous
risks, including the following:
·
·
·
·
Liberty experiencing negative reactions from the financial markets, including negative impacts on the price of Liberty Ventures common stock;
Liberty being required to pay GCI a termination fee in connection with the termination of the GCI Reorganization Agreement under certain
circumstances;
Liberty experiencing reputational harm due to the adverse perception of any failure to successfully complete the Transactions; and
Liberty (i) operating under the restrictions on the conduct of its business set forth in the GCI Reorganization Agreement, (ii) having its
management divert attention away from their respective day-to-day activities and operations and devoting time and effort to consummating the
Transactions and (iii) incurring significant costs, including advisory, legal and other transaction costs, each as explained above, without realizing
any of the benefits of having completed the Transactions.
In addition, we could be subject to the cost of litigation related to any dispute regarding an alleged failure of a closing condition or any related enforcement
proceeding commenced against us to perform our obligations under the GCI Reorganization Agreement or any of the other transaction documents, as well as
any judgment potentially sustained against us in any such action. All of these risks, expenses and contingencies could adversely affect our financial position
and results of operation.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties.
We lease our corporate headquarters in Englewood, Colorado under a facilities agreement with LMC. 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, which consist of office space and include executive offices,
television studios, showrooms, broadcast facilities and administrative offices for QVC. QVC also owns call centers in San Antonio, Texas; Chesapeake,
Virginia; Bochum and Kassel, Germany; and Chiba-Shi, Japan. QVC owns distribution centers in Lancaster, Pennsylvania; Suffolk, Virginia; Rocky Mount,
North Carolina; Florence, South Carolina; Ontario, California; Chiba, Japan; and Hücklehoven, Germany. Additionally, QVC owns multi-functional
buildings in Knowsley, United Kingdom, Chiba, Japan and Brugherio, Italy. In Germany, QVC owns its administrative offices within the headquarters
located in Düsseldorf, Germany which also includes leased television studios and broadcast facilities. To supplement the facilities QVC owns, it also leases
various facilities worldwide.
zulily leases its corporate headquarters in Seattle, Washington, fulfillment centers in Lockbourne, Ohio, McCarran, Nevada and Bethlehem,
Pennsylvania, and a corporate office in Gahanna, Ohio.
I-43
Table of Contents
HSNi owns its corporate headquarters in St. Petersburg, Florida, which consist of office space and include executive offices, television studios,
showrooms, broadcast facilities and administrative offices for HSNi. HSN owns its fulfillment center in Piney Flats, Tennessee. HSN leases its fulfillment
centers in Fontana, California; Roanoke, Virginia; Ronkonkoma, New York and Greeneville, Tennessee; as well as five outlet stores and other properties in
various locations in the United States for administrative offices and data centers. Cornerstone owns an office and storage facility in Franconia, New
Hampshire. Cornerstone leases its fulfillment centers in West Chester, Ohio; Monroe, Ohio and Phoenix, Arizona. It also leases other properties consisting of
administrative offices, 19 retail stores and outlets, and photo centers in various locations throughout the United States.
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 and telecommunications switches.
Item 3. Legal Proceedings
On September 7, 2017, a putative class action complaint was filed by a purported HSNi stockholder in the United States District Court for the
District of Delaware: McClure v. HSN, Inc., et al., Case No. 1:17-cv-01279. The complaint names as defendants HSNi and members of the HSNi board. The
complaint asserts claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and rules and regulations promulgated thereunder, and
alleges that HSNi and the members of the HSNi board caused a registration statement that allegedly omitted material information to be filed in connection
with the merger, which allegedly rendered the registration statement false and misleading. The complaint further alleges that the members of the HSNi board
acted as controlling persons of HSNi and had knowledge of the allegedly false statements contained in the registration statement or were negligent in not
knowing that material information was allegedly omitted from the registration statement. Among other relief, the complaint seeks a declaration certifying a
class, an injunction to prevent the merger from proceeding unless and until HSNi discloses the material information allegedly omitted from the registration
statement, unspecified damages, and unspecified costs, expenses and attorneys’ fees. The complaint was dismissed in early 2018.
On September 28, 2017, a putative class action complaint was filed by a purported HSNi stockholder in the United States District Court for the
Middle District of Florida: Palkon v. HSN, Inc., et al., Case No. 8:17-cv-2271. The complaint names as defendants HSNi, members of the HSNi board,
Liberty and Liberty Horizon, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Liberty (“Merger Sub”). The complaint asserts claims
under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and rules and regulations promulgated thereunder, and alleges that
HSNi and the members of the HSNi board caused a registration statement that omitted material information to be filed in connection with Liberty’s
acquisition on December 29, 2017 of the approximately 62% of HSNi it did not already own in an all-stock transaction (the “Merger”), which registration
statement allegedly rendered the registration statement false and misleading.
The complaint further alleges that the members of the HSNi board, Liberty and Merger Sub acted as controlling persons of HSNi, were involved in
the making and composition of the registration statement, and had knowledge of the allegedly false statements contained in the registration statement. The
complaint seeks, among other relief, an injunction to prevent the Merger from proceeding, rescission of the Merger, an order directing HSNi to disseminate a
registration statement that does not contain any untrue statements of material fact, a judgment declaring a violation of Sections 14(a) and/or 20(a) of the
Exchange Act, as well as Rule 14a-9 promulgated thereunder, unspecified damages, and unspecified costs, expenses, and attorneys’ fees. In early 2018, the
case was voluntarily dismissed.
Item 4. Mine Safety Disclosures
Not applicable.
I-44
Table of Contents
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
PART II
Market Information
Each series of the common stock of Liberty Interactive Corporation (“Liberty,” the “Company,” “we,” “us” and “our”) trades on the Nasdaq Global
Select Market. Our Series A and Series B QVC Group common stock trade under the symbols “QVCA” and “QVCB,” respectively. Our Series A and
Series B Liberty Ventures common stock trade under the symbols “LVNTA” and “LVNTB,” respectively. Our Series B QVC Group common stock and
Series B Liberty Ventures common stock are not actively traded. In connection with the Expedia Holdings Split-Off (as defined below), Liberty redeemed (i)
0.4 of each outstanding share of Liberty’s Series A and Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series A and Series
B common stock, respectively, at 5:00 p.m., New York City time, on November 4, 2016. Accordingly, the high and low sales prices of the Series A and
Series B Liberty Ventures common stock have been retroactively restated in the table below. Each series of our common stock trades on the Nasdaq Global
Select Market. 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, 2017
and 2016.
2016
First quarter
Second quarter
Third quarter
Fourth quarter
2017
First quarter
Second quarter
Third quarter
Fourth quarter
2016
First quarter
Second quarter
Third quarter (July 1 - July 22)
Third quarter (July 23 - September 30) (1)
Fourth quarter (October 1 - November 4)
Fourth quarter (November 5 - December 31) (2)
2017
First quarter
Second quarter
Third quarter
Fourth quarter
QVC Group
Series A (QVCA)
Series B (QVCB)
High
Low
High
Low
26.97
27.25
27.06
22.33
20.88
24.94
26.00
26.79
22.51
23.01
18.42
17.88
17.24
19.81
20.90
20.79
30.62
26.98
26.69
24.10
22.05
24.93
25.10
26.79
24.40
24.02
19.00
17.78
17.62
19.40
21.14
20.93
Liberty Ventures
Series A (LVNTA)
Series B (LVNTB)
High
Low
High
Low
40.22
36.55
38.59
40.80
41.37
41.74
45.17
55.93
62.41
59.90
29.24
30.97
32.76
36.09
38.40
36.54
36.69
44.13
50.56
52.43
36.83
36.72
37.87
39.89
41.57
41.94
46.61
56.33
59.88
54.30
33.14
34.36
37.33
38.05
39.29
36.93
38.61
53.33
51.80
54.30
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) As discussed in Part I of this report, the CommerceHub Spin-Off (as defined below) was effected on July 22, 2016 as a pro-rata dividend of shares
of CommerceHub to the stockholders of Liberty’s Series A and Series B Liberty Ventures common stock.
II-1
Table of Contents
(2) As discussed in Part I of this report, the Expedia Holdings Split-Off was effected on November 4, 2016 as a redemption of Liberty’s Series A and
Series B Liberty Ventures common stock for shares of Expedia Holdings.
Holders
As of January 31, 2018, there were 2,742 and 85 record holders of our Series A and Series B QVC Group common stock, respectively, and 991 and 61
record holders of our Series A and Series B Liberty Ventures common stock, respectively. The foregoing numbers of record holders do not include the
number of stockholders whose shares are held nominally by banks, brokerage houses or other institutions, but include each such institution as one
shareholder.
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. See Item 7. “Management’s
Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources.”
Securities Authorized for Issuance Under Equity Compensation Plans
Information required by this item is incorporated by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders that will
be filed with the Securities and Exchange Commission on or before April 30, 2018.
Purchases of Equity Securities by the Issuer
Share Repurchase Programs
On several occasions our board of directors has authorized a share repurchase program for our Series A and Series B QVC Group common stock. On
each of May 5, 2006, November 3, 2006 and October 30, 2007 our board authorized the repurchase of $1 billion of Series A and Series B Liberty Interactive
common stock for a total of $3 billion. These previous authorizations remained effective following the LMC Split-Off, notwithstanding the fact that the
Liberty Interactive common stock ceased to be a tracking stock during the period following the LMC Split-Off (as defined below) and prior to the creation of
our Liberty Ventures common stock in August 2012. On February 22, 2012 the board authorized the repurchase of an additional $700 million of Series A
and Series B Liberty Interactive common stock. Additionally, on each of October 30, 2012 and February 27, 2014, the board authorized the repurchase of an
additional $1 billion of Series A and Series B Liberty Interactive common stock. In connection with the TripAdvisor Holdings Spin-Off (as defined below)
during August 2014, the board authorized $350 million for the repurchase of either the Liberty Interactive or Liberty Ventures tracking stocks. In October
2014, the board authorized the repurchase of an additional $650 million of Series A and Series B Liberty Ventures common stock. In August 2015, the board
authorized the repurchase of an additional $1 billion of Series A or Series B QVC Group common stock. In addition, on October 26, 2016, the board
authorized the repurchase of an additional $300 million of either the QVC Group common stock or the Liberty Ventures common stock. On September 19,
2017, the board authorized the repurchase of an additional $1 billion of Series A QVC Group common stock.
II-2
Table of Contents
A summary of the repurchase activity for the three months ended December 31, 2017 is as follows:
Period
October 1 - 31, 2017
November 1 - 30, 2017
December 1 - 31, 2017
Total
Series A QVC Group Common Stock (QVCA)
Total Number
of Shares
Purchased
Average
Price Paid per
Share
Total Number of
Shares Purchased as Part
of Publicly Announced
Plans or Programs
7,736,267 $
5,901,315 $
— $
13,637,582
23.03
23.23
—
7,736,267 $
5,901,315 $
— $
13,637,582
Maximum Number
(or Approximate Dollar
Value) of Shares that
May Yet Be purchased
Under the Plans or
Programs
822 million
684 million
684 million
3,135 shares of Series A QVC Group common stock and zero shares of Series A Liberty Ventures common stock were surrendered by certain of our
officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock during the three months
ended December 31, 2017.
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. Certain
prior period amounts have been reclassified for comparability with the current year presentation. The following data should be read in conjunction with our
consolidated financial statements.
Summary Balance Sheet Data:
Cash and cash equivalents
Investments in available-for-sale securities and other cost investments
Investment in affiliates, accounted for using the equity method
Investment in Liberty Broadband measured at fair value
Intangible assets not subject to amortization (1)
Noncurrent assets of discontinued operations (2) (3)
Total assets
Long-term debt
Deferred income tax liabilities
Noncurrent liabilities of discontinued operations (2) (3)
Total equity (1)
Noncontrolling interest in equity of subsidiaries (2)
II-3
December 31,
2017
2016
2015
2014
2013
amounts in millions
$
$
$
$
$
$
$
$
$
$
$
$
903
2,363
309
3,635
11,011
—
24,122
7,553
2,803
—
10,083
99
825
1,922
581
3,161
9,354
—
20,355
7,166
3,636
—
6,861
89
2,449
1,353
714
—
9,485
927
21,180
7,481
3,217
285
6,875
88
2,306
1,224
1,119
—
7,893
514
18,598
7,062
2,681
140
5,780
107
902
1,313
760
—
8,383
7,572
24,642
6,072
2,794
1,584
11,435
4,499
Table of Contents
Summary Statement of Operations Data:
Revenue
Operating income (loss)
Interest expense
Share of earnings (losses) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net (1)
Earnings (loss) from continuing operations (4):
QVC Group common stock
Liberty Ventures common stock
Basic earnings (loss) from continuing operations attributable to Liberty Interactive Corporation stockholders per common
share (5):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted earnings (loss) from continuing operations attributable to Liberty Interactive Corporation stockholders per
common share (5):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock (3)
2017
10,404
1,043
(355)
(200)
618
410
1,254
1,233
2,487
2.71
14.34
2.70
14.17
$
$
$
$
$
$
$
$
$
$
$
$
Years ended December 31,
2016
2015
2014
amounts in millions,
except per share amounts
10,647
968
(363)
(68)
1,175
9
511
743
1,254
0.99
5.54
0.98
5.49
9,989
1,116
(360)
(178)
114
110
674
(43)
631
1.35
(0.36)
1.33
(0.36)
10,499
1,188
(387)
(19)
(57)
74
574
(36)
538
1.10
(0.43)
1.09
(0.43)
2013
10,219
1,136
(380)
2
(22)
(1)
500
27
527
0.88
0.37
0.86
0.36
(1) On December 29, 2017, the Company acquired the remaining approximately 62% of HSNi it did not already own in an all-stock transaction, making
HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. In conjunction with the application of acquisition accounting, the
Company recorded a full step up in basis of HSNi along with a gain between our historical basis and the fair value of our interest in HSNi.
(2) On December 11, 2012, the Company acquired approximately 4.8 million additional shares of common stock of TripAdvisor, Inc. ("TripAdvisor") (an
additional 4% equity ownership interest), for $300 million, along with the right to control the vote of the shares of TripAdvisor's common stock and
class B common stock the Company owns. Following the transaction the Company owned approximately 22% of the equity and 57% of the total votes
of all classes of TripAdvisor common stock. On August 27, 2014, the Company completed the TripAdvisor Holdings Spin-Off. The consolidated
financial statements of Liberty have been prepared to reflect TripAdvisor Holdings as discontinued operations. However, the noncontrolling interest
attributable to our former ownership interest in TripAdvisor is included in the noncontrolling interest line item in the consolidated balance sheet from
the date of acquisition until the date of completion of the TripAdvisor Holdings Spin-Off. See Item 1 “ Business” for further details on the TripAdvisor
Holdings Spin-Off.
(3) The Expedia Holdings Split-Off was effected on November 4, 2016 as a split-off through the redemption of a portion of Liberty’s Series A and Series
B Liberty Ventures common stock for shares of Expedia Holdings (as defined below). The consolidated financial statements of Liberty have been
prepared to reflect Liberty’s interest in Expedia (as defined below) as a discontinued operation.
(4)
Includes earnings (losses) from continuing operations attributable to the noncontrolling interests of $46 million, $39 million, $42 million, $40 million
and $45 million for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
II-4
Table of Contents
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. Additionally, see note 3 in the accompanying
consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an
impact on our financial statements.
Overview
We own controlling and non-controlling interests in a broad range of video and online commerce companies. Our largest business and reportable
segment, is QVC, Inc. (“QVC”). QVC markets and sells a wide variety of consumer products in the United States and several foreign countries, primarily by
means of its televised shopping programs and via the Internet through its domestic and international websites and mobile applications. On December 29,
2017, we acquired the approximately 62% of HSN, Inc. (“HSNi”) we did not already own in an all-stock transaction (the “Merger”) making HSNi a wholly-
owned subsidiary, attributed to the QVC Group. HSNi has two main operating segments: its televised shopping business “HSN” and its catalog retail
business “Cornerstone.” HSN is a reportable segment, and Cornerstone is included in the “Corporate and other” reportable segment. QVC and HSN are
referred to collectively as the “Televised Shopping Businesses.” On October 1, 2015, we acquired zulily, inc. (“zulily”) (now known as zulily, llc), an online
retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day, which is also a
reportable segment. See note 5 of the accompanying consolidated financial statements for further details on the acquisitions of zulily and HSNi.
Our Corporate and other category includes entire or majority interests in consolidated subsidiaries, which operate online commerce businesses in a
broad range of retail categories, ownership interests in unconsolidated businesses and corporate expenses. These consolidated subsidiaries include Evite, Inc.
(“Evite”), Backcountry.com, Inc. ("Backcountry") (through June 30, 2015, see note 6 of the accompanying consolidated financial statements),
CommerceHub, Inc. (“CommerceHub”) (through July 22, 2016, see note 6 of the accompanying consolidated financial statements) and
Bodybuilding.com, LLC ("Bodybuilding") (through November 4, 2016, see note 6 of the accompanying consolidated financial statements) (collectively, the
“Digital Commerce businesses”), and Cornerstone. Evite is an online invitation and social event planning service on the web. Backcountry operates websites
offering sports gear and clothing for outdoor and active individuals in a variety of categories. CommerceHub provides a cloud-based platform for online
retailers and their suppliers (manufacturers and distributors) to sell products to consumers without physically owning inventory, or managing the fulfillment
of those products. Bodybuilding manages websites related to sports nutrition, bodybuilding and fitness. We also hold ownership interests in FTD Companies,
Inc. (“FTD”) and LendingTree, Inc. (“LendingTree”), which we account for as equity method investments; an interest in Liberty Broadband Corporation
(“Liberty Broadband”), which we account for at fair value; and we maintain investments and related financial instruments in public companies such as
Charter Communications, Inc. (“Charter”), ILG, Inc. (“ILG”) and Time Warner Inc. (“Time Warner”), which are accounted for at their respective fair market
values.
Tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or
"group," rather than the economic performance of the company as a whole. Liberty has two tracking stocks, QVC Group common stock and Liberty
Ventures common stock, which are intended to track and reflect the economic performance of Liberty’s QVC Group and Ventures Group, respectively. While
the QVC Group and the Ventures Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity
and therefore no group can own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's
stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a
single board of directors and subject to all of the risks and liabilities of the parent corporation.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been
attributed to that group. The Ventures Group consists of our businesses not included in the QVC Group including Evite and our interests in Liberty
Broadband, LendingTree, FTD, investments in Charter and ILG, as well as cash in the amount of approximately $573 million (at December 31, 2017),
including subsidiary cash. The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures and certain deferred tax
liabilities.
II-5
Table of Contents
The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities.
On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (as amended, the “GCI Reorganization Agreement” and the
transactions contemplated thereby, the “Transactions”) with General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a
Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“LI LLC”), whereby Liberty will acquire GCI through a reorganization
in which certain Ventures Group assets and liabilities will be contributed to GCI Liberty (as defined below) in exchange for a controlling interest in GCI
Liberty. Liberty and LI LLC will contribute to GCI Liberty its entire equity interest in Liberty Broadband and Charter, along with, subject to certain
exceptions, Liberty’s entire equity interests in LendingTree, together with the Evite operating business and certain other assets and liabilities, in exchange for
(i) the issuance to LI LLC of a number of shares of new GCI Liberty Class A Common Stock and a number of shares of new GCI Liberty Class B Common
Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on
the closing date of the Contribution, respectively, (ii) cash and (iii) the assumption of certain liabilities by GCI Liberty (the “Contribution”).
Liberty will then effect a tax-free separation of its controlling interest in the combined company (which has since been renamed GCI Liberty, Inc.
(“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for
each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only
outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified
GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty
Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The
exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new
GCI Liberty Class A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65
(with no additional premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at
an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be
redeemable upon the 21st anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the
“Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI
LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75%
Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be
reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable
Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an
indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises
its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash
attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1 billion.
Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement
and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a
tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI
Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference
between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash
reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits attributable to such
1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange
right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
II-6
Table of Contents
Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including
taking into account the advice of its financial advisor. The Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of
customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock of Liberty, and
thus QVC Group common stock will cease to function as a tracking stock and will effectively become regular common stock, and Liberty will be renamed
Qurate Retail Group, Inc., with QVC, HSNi and zulily as wholly-owned subsidiaries.
The term "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to
that group. The QVC Group is primarily focused on the Televised Shopping Businesses and other online or catalog retail businesses. The QVC Group has
attributed to it the remainder of our businesses and assets not attributed to the Ventures Group, including our wholly-owned subsidiaries QVC, zulily (as of
October 1, 2015), and HSNi (as of December 29, 2017) as well as cash in the amount of approximately $330 million (at December 31, 2017), including
subsidiary cash.
Disposals
On June 30, 2015, Liberty sold Backcountry for aggregate consideration, including assumption of debt, amounts held in escrow, and a noncontrolling
interest, of approximately $350 million. The sale resulted in a $105 million gain, which is included in Gains (losses) on transactions, net in the
accompanying consolidated statements of operations. Backcountry is included in the Corporate and other segment through June 30, 2015 and is not
presented as a discontinued operation as the sale did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
On July 22, 2016, Liberty completed its previously announced spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary
CommerceHub. CommerceHub is included in the Corporate and other segment through July 22, 2016 and is not presented as a discontinued operation as the
CommerceHub Spin-Off did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
On November 4, 2016, Liberty completed its previously announced split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary
Liberty Expedia Holdings, Inc. (“Expedia Holdings”). Expedia Holdings is comprised of, among other things, Liberty’s former interest in Expedia, Inc.
(“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding. On November 2, 2016, Expedia Holdings borrowed $350 million under a new
margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016.
Liberty viewed Expedia and Bodybuilding as separate components and evaluated them separately for discontinued operations presentation. Based on a
quantitative analysis, the split-off of Liberty’s interest in Expedia represented a strategic shift that had a major effect on Liberty’s operations, primarily due to
prior year one-time gains on transactions recognized by Expedia. Accordingly, the consolidated financial statements of Liberty have been prepared to reflect
Liberty’s interest in Expedia as a discontinued operation. The disposition of Bodybuilding as part of the Expedia Holdings Split-Off does not have a major
effect on Liberty’s historical results nor is it expected to have a major effect on Liberty’s future operations. The disposition of Bodybuilding does not
represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding is not presented as a discontinued operation in the consolidated financial
statements of Liberty. Bodybuilding is included in the Corporate and other segment through November 4, 2016.
Strategies and Challenges
Televised Shopping Businesses. The goal of QVC is to become the preeminent global multimedia shopping community for people who love to shop, and
to offer a shopping experience that is as much about entertainment and enrichment as it is about buying. The goal of HSN is to become the preeminent
interactive entertainment and lifestyle retailer offering a curated assortment of exclusive products and top brand names to its customers through
entertainment, inspiration and personalities providing an entirely unique shopping experience. The objective for both of the Televised Shopping Businesses
is to provide an integrated shopping experience that utilizes all forms of media including television, the internet and mobile devices. The Televised Shopping
Businesses intend to employ several strategies to achieve these goals and objectives. Among these strategies are to (i) extend the breadth, relevance and
exposure of the QVC and HSN brands; (ii) source products that represent unique quality and value; (iii) create engaging presentation content in televised
programming, mobile and online; (iv) leverage customer loyalty and continue multi-platform expansion; and (v) create a
II-7
Table of Contents
compelling and differentiated customer experience. In addition, QVC expects to expand globally by leveraging its existing systems, infrastructure and skills
in other countries around the world.
Future net revenue growth will primarily depend on sales growth from e-commerce and mobile platforms, additions of new customers from households
already receiving the Company’s television programming, and increased spending from existing customers. Future net revenue may also be affected by
(i) the willingness of cable television and direct-to-home satellite system operators to continue carrying the Company’s programming services; (ii) the
Televised Shopping Businesses’ ability to maintain favorable channel positioning, which may become more difficult due to governmental action or from
distributors converting analog customers to digital; (iii) changes in television viewing habits because of personal video recorders, video-on-demand and
internet video services; and (iv) general economic conditions.
Prolonged economic uncertainty in various regions of the world in which the Televised Shopping Businesses’ subsidiaries and affiliates operate could
adversely affect demand for our businesses’ products and services since a substantial portion of our businesses’ revenue is derived from discretionary
spending by individuals, which typically falls during times of economic instability. Global financial markets may experience disruptions, including increased
volatility and diminished liquidity and credit availability. If economic and financial market conditions in the United States (“U.S.”) or other key markets,
including Japan and Europe deteriorate, customers may respond by suspending, delaying, or reducing their discretionary spending. A suspension, delay or
reduction in discretionary spending could adversely affect revenue. Accordingly, our businesses’ ability to increase or maintain revenue and earnings could
be adversely affected to the extent that relevant economic environments decline. Such weak economic conditions may also inhibit QVC’s expansion into
new European and other markets. The Company is currently unable to predict the extent of any of these potential adverse effects.
On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which British citizens approved an exit from the European Union (the "EU"),
commonly referred to as “Brexit.” As a result of the referendum, the global markets and currencies have been adversely impacted, including a sharp decline
in the value of the U.K. Pound Sterling as compared to the U.S. Dollar. Volatility in exchange rates is expected to continue in the short term as the U.K.
negotiates its exit from the EU. In the longer term, any impact from Brexit on QVC will depend, in part, on the outcome of tariff, trade, regulatory and other
negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect QVC’s operations and
financial results.
During his campaign in the 2016 U.S. presidential election, the current President of the U.S. expressed apprehension towards existing trade agreements,
such as the North American Free Trade Agreement and the Trans-Pacific Partnership, and suggested that the U.S. would renegotiate or withdraw from these
agreements. He also raised the possibility of significantly increasing tariffs on goods imported into the United States, particularly from China and Mexico,
which, if implemented, could adversely affect our subsidiaries’ businesses because they sell imported products.
zulily. zulily’s objective is to be the leading online retail destination for women who love to shop. zulily’s goal is to be part of its customers’ daily routine,
allowing them to visit zulily sites and discover a selection of fresh, new and affordable merchandise curated for them every morning. zulily intends to
employ the following strategies to achieve these goals and objectives: (i) acquire new customers; (ii) increase customer loyalty and repeat purchasing; (iii)
add new vendors and strengthen existing vendor relationships; and (iv) invest in mobile platform and channels that its customers want to engage with the
brand in. In addition, zulily expects to invest in and develop international markets and supply chain systems.
zulily has limited contractual assurances of continued supply, pricing or access to new products, and vendors could change the terms upon which they sell
to zulily or discontinue selling to zulily for future sales at any time. As zulily grows, continuing to identify a sufficient number of new emerging brands and
smaller boutique vendors may become more and more of a challenge. If zulily is not able to identify and effectively promote these new brands, it may lose
customers to competitors. Even if zulily identifies new vendors, it may not be able to purchase desired merchandise in sufficient quantities or on acceptable
terms in the future, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. In addition,
larger national brands may offer products that are less unique, and it may be easier for zulily’s competitors to offer such products at prices or upon terms that
may be compelling to consumers. An inability to purchase suitable merchandise on acceptable terms or to source new vendors could have an adverse effect
on zulily’s business.
II-8
Table of Contents
To support its large and diverse base of vendors and its flash sales model that requires constantly changing products, zulily must incur costs related to its
merchandising team, photography studios and creative personnel. As zulily grows, it may not be able to continue to expand its product offerings in a cost-
effective manner. In addition, the variety in size and sophistication of zulily’s vendors presents different challenges to its infrastructure and operations.
zulily’s emerging brands and smaller boutique vendors may be less experienced in manufacturing and shipping, which in the past has led to inconsistencies
in quality, delays in the delivery of merchandise or additional fulfillment cost. zulily’s larger national brands may impose additional requirements or offer
less favorable terms than smaller vendors related to margins and inventory ownership and risk and may also be unable to ship products timely. If zulily is
unable to maintain and effectively manage its relationships with emerging brands and smaller boutique vendors or larger national brands, zulily’s business
could be adversely affected.
II-9
Table of Contents
Results of Operations—Consolidated
General. We provide in the tables below information regarding our Consolidated Operating Results and Other Income and Expense, as well as
information regarding the contribution to those items from our principal reportable segments. The "Corporate and other" category consists of those assets or
businesses which we do not disclose separately, including our Digital Commerce businesses. For a more detailed discussion and analysis of the financial
results of the principal reporting segments, see "Results of Operations - Businesses" below.
Operating Results
Revenue
QVC Group
QVC
HSN
zulily
Corporate and other
Inter-segment eliminations
Total QVC Group
Ventures Group
Corporate and other
Total Ventures Group
Consolidated Liberty
Operating Income (Loss)
QVC Group
QVC
HSN
zulily
Corporate and other
Total QVC Group
Ventures Group
Corporate and other
Total Ventures Group
Consolidated Liberty
Adjusted OIBDA
QVC Group
QVC
HSN
zulily
Corporate and other
Total QVC Group
Ventures Group
Corporate and other
Total Ventures Group
Consolidated Liberty
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
$
$
$
$
8,771
—
1,613
—
(3)
10,381
23
23
10,404
1,347
(38)
(129)
(80)
1,100
(57)
(57)
1,043
1,897
—
91
(35)
1,953
(27)
(27)
1,926
8,682
NA
1,547
—
(10)
10,219
428
428
10,647
1,203
NA
(152)
(40)
1,011
(43)
(43)
968
1,840
NA
112
(16)
1,936
3
3
1,939
8,743
NA
426
—
—
9,169
820
820
9,989
1,275
NA
(53)
(52)
1,170
(54)
(54)
1,116
1,894
NA
21
(28)
1,887
59
59
1,946
Revenue. Our consolidated revenue decreased 2.3% and increased 6.6% for the years ended December 31, 2017 and 2016, respectively, as compared
to the corresponding prior year periods. Corporate and other revenue decreased $405 million for the year ended December 31, 2017, as compared to the
corresponding period in the prior year due to the
II-10
Table of Contents
disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($355 million) and the CommerceHub Spin-Off in July 2016 ($51
million). Corporate and other revenue decreased $392 million for the year ended December 31, 2016, as compared to the corresponding prior year period
due to the sale of Backcountry in June 2015 ($227 million), the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off
($109 million) and the CommerceHub Spin-Off in July 2016 ($38 million). QVC’s revenue increased $89 million and decreased $61 million for the years
ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. zulily’s revenue increased $66 million during the
year ended December 31, 2017, as compared to the corresponding prior year period. The increase in zulily’s revenue in 2016 compared to the same period in
the prior year was due to the acquisition of zulily on October 1, 2015. With the exception of $38 million of severance-related costs incurred on December 30,
2017, HSN’s results of operations are not included in our consolidated operating results for the year ended December 31, 2017. See "Results of Operations -
Businesses" below for a more complete discussion of the results of operations of QVC, HSN and zulily.
Operating income (loss). Our consolidated operating income increased $75 million and decreased $148 million for the years ended December 31,
2017 and 2016, respectively, as compared to the corresponding prior year periods. Operating losses for Corporate and other declined $54 million for the
year ended December 31, 2017, as compared to the corresponding prior year period, primarily due to an increase in stock compensation expense as a result
of the stock option exchange (see note 15 to the accompanying consolidated financial statements), and transaction costs associated with the acquisition of
HSN, partially offset by the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off, and the CommerceHub Spin-Off.
Operating losses for Corporate and other decreased $23 million for the year ended December 31, 2016, as compared to the corresponding prior year period,
primarily due to the CommerceHub Spin-Off. QVC’s operating income increased $144 million and decreased $72 million for the years ended December
31, 2017 and 2016, respectively as compared to the corresponding prior year periods. zulily’s operating losses improved $23 million and declined $99
million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. HSN’s operating loss was the
result of $38 million of severance-related expenses, including salaries and wages and stock-based compensation expense, recorded in the period ended
December 31, 2017. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC, HSN and zulily.
Adjusted OIBDA. We define Adjusted OIBDA as revenue less cost of sales, operating expenses and selling, general and administrative ("SG&A")
expenses (excluding stock compensation). Our chief operating decision maker and management team use this measure of performance in conjunction with
other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of
the operational strength and performance of our businesses, including each business's ability to service debt and fund capital expenditures. In addition, this
measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve
performance. This measure of performance excludes such costs as depreciation and amortization, stock-based compensation and restructuring and
impairment charges that are included in the measurement of operating income pursuant to generally accepted accounting policies (“GAAP”). Accordingly,
Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities
and other measures of financial performance prepared in accordance with GAAP. See note 19 to the accompanying consolidated financial statements for a
reconciliation of Adjusted OIBDA to operating income and earnings (loss) from continuing operations before income taxes.
Consolidated Adjusted OIBDA decreased $13 million and $7 million for the years ended December 31, 2017 and 2016, respectively, as compared to the
corresponding prior year periods. Corporate and other Adjusted OIBDA decreased $49 million for the year ended December 31, 2017, as compared to the
corresponding period in the prior year, primarily due to the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($24
million), the CommerceHub Spin-Off in July 2016 ($16 million), and transaction costs associated with the acquisition of HSNi (approximately $15 million).
Corporate and other adjusted OIBDA decreased $44 million for the year ended December 31, 2016, as compared to the corresponding prior year period,
primarily due to the CommerceHub Spin-Off in July 2016 ($28 million), the sale of Backcountry in June 2015 ($8 million) and the disposition of
Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($5 million). QVC’s Adjusted OIBDA increased $57 million and decreased $54
million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. zulily’s Adjusted OIBDA
decreased $21 million and increased $91 million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year
periods. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC, HSN and zulily.
II-11
Table of Contents
Other Income and Expense
Components of Other Income (Expense) are presented in the table below.
Interest expense
QVC Group
Ventures Group
Consolidated Liberty
Share of earnings (losses) of affiliate, net
QVC Group
Ventures Group
Consolidated Liberty
Realized and unrealized gains (losses) on financial instruments, net
QVC Group
Ventures Group
Consolidated Liberty
Gains (losses) on transactions, net
QVC Group
Ventures Group
Consolidated Liberty
Other, net
QVC Group
Ventures Group
Consolidated Liberty
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
$
$
$
$
$
$
$
$
(293)
(62)
(355)
38
(238)
(200)
—
618
618
409
1
410
(3)
10
7
(289)
(74)
(363)
42
(110)
(68)
2
1,173
1,175
—
9
9
42
89
131
(283)
(77)
(360)
55
(233)
(178)
42
72
114
—
110
110
(6)
20
14
Interest expense. Interest expense decreased $8 million and increased $3 million for the years ended December 31, 2017 and 2016, respectively, as
compared to the corresponding prior year periods. The decrease in interest expense for the year ended December 31, 2017 is due to higher average debt
balances at the corporate level in 2016, and the redemption of the majority of our 0.75% Exchangeable Senior Debentures due 2043 during the second and
third quarter of 2016. The increase in interest expense for the year ended December 31, 2016 is due to higher average debt balances at QVC, partially offset
by lower interest rates under QVC’s credit facility.
II-12
Table of Contents
Share of earnings (losses) of affiliates. The following table presents our share of earnings (losses) of affiliates:
QVC Group
HSN
Other
Total QVC Group
Ventures Group
FTD (1)
LendingTree
Other
Total Ventures Group
Consolidated Liberty
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
40
(2)
38
(146)
7
(99)
(238)
(200)
48
(6)
42
(41)
12
(81)
(110)
(68)
64
(9)
55
(83)
2
(152)
(233)
(178)
(1) The carrying value of Liberty’s investment in FTD was written down to its fair value as of December 31, 2017 and as of December 31, 2015.
The Other category for the Ventures Group is comprised of alternative energy investments and other investments. The alternative energy investments
generally operate at a loss but provide favorable tax attributes recorded through the income tax (expense) benefit line item in the consolidated statements of
operations. During the year ended December 31, 2015, Liberty recorded an impairment of approximately $98 million related to one of its alternative energy
investments which has underperformed operationally.
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:
Fair Value Option Securities - AFS
Fair Value Option Securities - Liberty Broadband
Exchangeable senior debentures
Other financial instruments
Years ended December 31,
2017
2016
2015
amounts in millions
434
473
(193)
(96)
618
723
761
(308)
(1)
1,175
84
NA
30
—
114
$
$
The changes in these accounts are due primarily to market factors and changes in the fair value of the underlying stocks or financial instruments to
which these relate. The decrease for the year ended December 31, 2017 as compared to the corresponding prior year period was primarily driven by the
investments in Liberty Broadband and Charter experiencing higher gains during 2016 compared to 2017, as well as the exchange of a majority of our 0.75%
Exchangeable Senior Debentures due 2043 during 2016. The increase for the year ended December 31, 2016 as compared to the corresponding prior year
period was primarily driven by the investment in Liberty Broadband, the investment in Charter, and the change in Liberty’s ownership interest in ILG, which
resulted in its classification as an available-for-sale security rather than an equity method investment.
Gains on transactions, net. Gain on transactions, net, increased $401 million and decreased $101 million for the years ended December 31, 2017 and
2016, respectively, as compared to the corresponding prior year periods. The gain on transactions, net for the year ended December 31, 2017 is related to
the acquisition of HSNi. In conjunction with the application of acquisition accounting, we recorded a full step up in basis of HSNi along with a gain between
our historical basis and the fair value of our interest in HSNi. The gain on transactions, net, for the year ended December 31, 2016 is primarily the result of
the sale of Right Start in January 2016. The gain on transactions, net for the year ended December 31, 2015 primarily relates to the sale of Backcountry on
June 30, 2015, which resulted in a $105 million gain.
II-13
Table of Contents
Other, net. The primary components of other, net are gains (losses) on dilution of investments in affiliates, foreign exchange gains (losses) and interest
income. Other, net decreased $124 million for the year ended December 31, 2017 when compared to the corresponding prior year period primarily due to a
change in gain (loss) on dilution of investments of $80 million and a change in foreign exchange gains (losses) of $44 million. Other, net increased $117
million for the year ended December 31, 2016 when compared to the corresponding prior year period primarily due to a change in gain (loss) on dilution of
investments in affiliates of $83 million, and a change in foreign exchange gains (losses) of $26 million.
Income taxes. The Company had an income tax benefit of $964 million, and income tax expense of $598 million and $185 million for the years ended
December 31, 2017, 2016 and 2015, respectively. In connection with the initial analysis of the impact of the Tax Cuts and Jobs Act (the “Tax Act”), as
discussed in note 12 in the accompanying consolidated financial statements, the Company has recorded a discrete net tax benefit in the period ending
December 31, 2017. This net benefit primarily consists of a net benefit for the corporate rate reduction. In addition our tax rate was impacted by the
consolidation of our equity method investment in HSNi during the year ended December 31, 2017.
Our effective tax rate for the years ended December 31, 2016 and 2015 was 32.3% and 22.7%, respectively. The effective tax rate is less than the U.S.
federal tax rate of 35% in both periods primarily due to tax credits and incentives derived from our alternative energy investments. In addition, in 2015,
Liberty recognized tax benefits related to the receipt of taxable dividends that are subject to dividends received deductions.
Net earnings. We had net earnings of $2,487 million, $1,274 million and $911 million for the years ended December 31, 2017, 2016 and 2015,
respectively. The change in net earnings was the result of the above-described fluctuations in our revenue, expenses and other gains and losses.
Liquidity and Capital Resources
As of December 31, 2017 substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, other government securities or
government guaranteed funds, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, equity issuances, dividend and interest receipts, proceeds from asset sales,
monetization of our public investment portfolio, debt (including availability under QVC’s Bank Credit Facilities, (the “Third Amended and Restated Credit
Facility”) and HSNi’s Bank Credit Facility, as discussed in note 11 of the accompanying consolidated financial statements) and cash generated by the
operating activities of our wholly-owned subsidiaries. Cash generated by the operating activities of our subsidiaries is only a source of liquidity to the extent
such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted such as, in the case of QVC, zulily and HSNi, due to a
requirement that a leverage ratio (defined as the ratio of subsidiaries’ consolidated total debt to Adjusted OIBDA for the most recent four fiscal quarter
period) of less than 3.5 to 1.0 must be maintained.
During the year, there were no changes to our corporate debt credit ratings or our consolidated subsidiaries' debt credit ratings. Liberty, QVC and HSNi
are in compliance with their debt covenants as of December 31, 2017.
As of December 31, 2017, Liberty's liquidity position consisted of the following:
QVC
HSNi
zulily
Corporate and other
Total QVC Group
Corporate and other
Total Ventures Group
Consolidated Liberty
Cash and cash
equivalents
Available-for-
sale securities
amounts in millions
$
$
261
22
17
30
330
573
573
903
—
—
3
3
2,360
2,360
2,363
To the extent that the Company recognizes any taxable gains from the sale of assets, we may incur tax expense and be required to make tax payments,
thereby reducing any cash proceeds. Additionally, we have $877 million available for
II-14
Table of Contents
borrowing under the QVC Bank Credit Facility at December 31, 2017, and $533 million available for borrowing under the HSNi Bank Credit Facility as of
December 31, 2017. As of December 31, 2017, QVC had approximately $204 million of cash and cash equivalents held in foreign subsidiaries that is
available for domestic purposes with no significant tax consequences upon repatriation to the U.S. QVC accrues taxes on the unremitted earnings of its
international subsidiaries. Approximately 79% of this foreign cash balance was that of QVC-Japan. QVC owns 60% of QVC-Japan and shares all profits and
losses with the 40% minority interest holder, Mitsui & Co, LTD. QVC believes that it currently has appropriate legal structures in place to repatriate foreign
cash as tax efficiently as possible and meet the business needs of QVC.
Additionally, our operating businesses have generated, on average, more than $1 billion in annual cash provided by operating activities over the prior
three years and we do not anticipate any significant reductions in that amount in future periods.
Cash Flow Information
QVC Group cash provided (used) by operating activities
Ventures Group cash provided (used) by operating activities
Net cash provided (used) by operating activities
QVC Group cash provided (used) by investing activities
Ventures Group cash provided (used) by investing activities
Net cash provided (used) by investing activities
QVC Group cash provided (used) by financing activities
Ventures Group cash provided (used) by financing activities
Net cash provided (used) by financing activities
QVC Group
Years ended December 31,
2017
2016
2015
$
$
$
$
$
$
1,222
270
1,492
(229)
(162)
(391)
(1,014)
(22)
(1,036)
amounts in millions
1,273
170
1,443
(238)
(1,254)
(1,492)
(1,103)
(469)
(1,572)
1,005
57
1,062
(909)
121
(788)
(89)
(33)
(122)
During the year ended December 31, 2017, the QVC Group uses of cash were primarily the net repayment of certain debt obligations of $149 million
and repurchase of Series A QVC Group common stock of $765 million. Additionally, the QVC Group had approximately $201 million of capital
expenditures during the year ended December 31, 2017.
In 2018, the projected uses of QVC Group cash are the cost to service outstanding debt, approximately $280 million in interest payments on QVC and
corporate level debt, anticipated capital improvement spending of approximately $290 million and the continued buyback of QVC Group common stock
under the approved share buyback program.
Ventures Group
During the year ended December 31, 2017, the Ventures Group uses of cash were primarily the repayment of certain debt obligations of $13 million and
the purchase of additional cost and equity investments of $159 million.
The projected uses of Ventures Group cash are approximately $58 million in interest payments to service outstanding debt, and further investments in
existing or new businesses through continued investment activity.
Consolidated
During the year ended December 31, 2017, Liberty's primary uses of cash were $162 million of net repayments on outstanding debt, repurchases of
Series A QVC Group common stock of $765 million, purchase of additional cost and equity investments of $159 million and capital expenditures of $204
million.
The projected uses of Liberty’s cash, outside of normal operating expenses (inclusive of tax payments), are the costs to service outstanding debt,
approximately $338 million for interest payments on outstanding debt, corporate level and other subsidiary debt, anticipated capital improvement spending
at the QVC Group of approximately $290 million, the repayment of certain debt obligations and the potential buyback of common stock under the approved
share buyback program and additional investments in existing or new businesses. We also may be required to make net payments of income tax liabilities to
settle items under discussion with tax authorities. We expect that cash on hand and cash provided by operating activities in future periods and outstanding
borrowing capacity will be sufficient to fund projected uses of cash.
II-15
Table of Contents
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In connection with agreements for the sale of assets by our company, we may 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 obligations may extend for a number of years. We are unable to estimate
the maximum potential liability for these types of indemnification obligations as the sale agreements may not specify a maximum amount and the amounts
are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, 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 obligations.
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.
Information concerning the amount and timing of required payments, both accrued and off-balance sheet, under our contractual obligations, excluding
uncertain tax positions as it is undeterminable when payments will be made, is summarized below.
Consolidated contractual obligations
Long-term debt (1)
Interest payments (2)
Operating lease obligations
Build to suit lease
Purchase orders and other obligations
Total
Payments due by period
Less than
Total
1 year
2 - 3 years
4 - 5 years
amounts in millions
After
5 years
$
$
8,594
5,743
413
87
1,756
16,593
24
338
73
5
1,688
2,128
448
667
116
12
64
1,307
2,766
580
81
12
4
3,443
5,356
4,158
143
58
—
9,715
(1) Amounts are reflected in the table at the outstanding principal amount, assuming the debt instruments will remain outstanding until the stated
maturity date, 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 sheets. Amounts also include 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, 2017, (ii) assume the interest rates on our variable rate debt remain constant at the
December 31, 2017 rates and (iii) assume that our existing debt is repaid at maturity.
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 the audit committee of our board of directors.
II-16
Table of Contents
Fair Value Measurements
Financial Instruments. We record a number of assets and liabilities in our consolidated balance sheets at fair value on a recurring basis, including
available-for-sale ("AFS") securities, our investment in Liberty Broadband, financial instruments and our exchangeable senior debentures. GAAP provides a
hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active
markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. We use quoted market prices, or Level 1
inputs, to value our Fair Value Option (as defined below) securities and our investment in Liberty Broadband. As of December 31, 2017 and 2016, the
carrying value of our Fair Value Option securities was $2,275 million and $1,846 million, respectively. As of December 31, 2017, the carrying value of our
investment in Liberty Broadband was $3,635 million.
Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. We use
quoted market prices to determine the fair value of our exchangeable senior debentures. However, these debentures are not traded on active markets as
defined in GAAP, so these liabilities fall in Level 2. As of December 31, 2017 and 2016, the principal amount and carrying value of our exchangeable
debentures were $1,947 million and $1,846 million, respectively.
Level 3 inputs are unobservable inputs for an asset or liability. We currently have no Level 3 financial instrument assets or liabilities.
Non-Financial Instruments. Our non-financial instrument valuations are primarily comprised of our annual assessment of the recoverability of our
goodwill and other nonamortizable intangible assets, such as trademarks and our evaluation of the recoverability of our other long-lived assets upon certain
triggering events, and our determination of the estimated fair value allocation of net tangible and identifiable intangible assets acquired in business
combinations. If the carrying value of our long-lived assets exceeds their undiscounted cash flows, 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 statements 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. 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. Due to the high degree of judgment involved in our estimation techniques, 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.
As of December 31, 2017, the intangible assets not subject to amortization for each of our significant reportable segments were as follows:
QVC
HSNi
zulily
Corporate and other
Goodwill
Trademarks
Total
$
$
5,190
933
917
42
7,082
amounts in millions
2,428
627
870
4
3,929
7,618
1,560
1,787
46
11,011
We perform our annual assessment of the recoverability of our goodwill and other non-amortizable intangible assets during the fourth quarter of each
year. We utilize a qualitative assessment for determining whether a quantitative goodwill impairment analysis is necessary. The accounting guidance permits
entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount
as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. In evaluating goodwill on a qualitative basis the
Company reviews the business performance of each reporting unit and evaluates other relevant factors as identified in the relevant accounting guidance to
determine whether it is more likely than not that an indicated impairment exists for any of our reporting units. The Company considers whether there are any
negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business,
II-17
Table of Contents
management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis
the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current and prior years
for other purposes. There were no goodwill and other intangible impairments in 2017, 2016 and 2015.
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 consolidated statements of operations. For the years ended December 31, 2017, 2016 and 2015, sales returns represented 18.1%, 18.3% and
19.1% of QVC's gross product revenue, respectively. The inventory obsolescence reserve is calculated as a percent of QVC's inventory at the end of a
reporting period based on, among other factors, the average inventory balance for the preceding 12 months and historical experience with liquidated
inventory. The change in the reserve is included in cost of retail sales in our consolidated statements of operations. At December 31, 2017, QVC's inventory
was $1,019 million, which was net of the obsolescence adjustment of $92 million. At December 31, 2016, inventory was $950 million, which was net of the
obsolescence adjustment of $76 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 a provision for doubtful accounts in Selling, general, and administrative expenses in our consolidated
statements of operations. At December 31, 2017, QVC's trade accounts receivable were $1,388 million, net of the allowance for doubtful accounts of
$91 million. At December 31, 2016, trade accounts receivable were $1,246 million, net of the allowance for doubtful accounts of $97 million. Each of these
estimates requires management judgment and may not reflect actual results.
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.
Results of Operations—Businesses
QVC
QVC is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised shopping programs,
the Internet and mobile applications. In the U.S., QVC's televised shopping programs, including live and recorded content, are broadcast across multiple
channels nationally on a full-time basis, including QVC, QVC2 and Beauty iQ. The Company's U.S. programming is also available on QVC.com, QVC's
U.S. website; mobile applications via streaming video; over-the-air broadcasters; and over-the-top content platforms (Roku, Apple TV, etc.) (such U.S.
operations, “QVC-U.S.”). QVC's international televised shopping programs, including live and recorded content, are distributed to households outside of the
U.S., primarily in Germany, Austria, Japan, the U.K., the Republic of Ireland, Italy and France (such international operations, “QVC-International”). In some
of the countries where QVC operates, QVC's televised shopping programs are broadcast across multiple QVC channels: QVC Beauty & Style and QVC2 in
Germany and QVC Beauty, QVC Extra, QVC Style in the U.K. The programming created for most of these markets is also available via streaming video on
QVC's digital platforms. QVC's international business employs product sourcing teams who select products tailored to the interests of each local market.
QVC also has a joint venture with CNR Media Group, formerly known as China Broadcasting Corporation, a limited liability company owned by
China National Radio (''CNR''). QVC owns a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS operates a retail business
in China through a shopping television channel with an associated website. The CNRS joint venture is accounted for as an equity method investment.
II-18
Table of Contents
QVC's operating results were as follows:
Net revenue
Cost of sales
Operating expenses
SG&A expenses (excluding stock-based compensation)
Adjusted OIBDA
Stock-based compensation
Depreciation and amortization
Operating income
Years ended December 31,
2017
2016
2015
amounts in millions
8,771
(5,598)
(601)
(675)
1,897
(31)
(519)
1,347
8,682
(5,540)
(606)
(696)
1,840
(32)
(605)
1,203
8,743
(5,528)
(607)
(714)
1,894
(31)
(588)
1,275
$
$
Net revenue was generated from the following geographical areas:
QVC-U.S.
QVC-International
Years ended December 31,
2016
2017
2015
$
$
amounts in millions
6,140
2,631
8,771
6,120
2,562
8,682
6,257
2,486
8,743
QVC's consolidated net revenue increased 1.0% and decreased 0.7% for the years ended December 31, 2017 and 2016, respectively, as compared to the
corresponding prior years. The 2017 increase of $89 million in net revenue was primarily comprised of an increase of $405 million due to a 4.2% increase in
units sold. This was primarily offset by a 2.3% decrease in average selling price per unit ("ASP") attributing $237 million, $33 million due to unfavorable
foreign currency rates, a decrease of $27 million in shipping and handling revenue, a $15 million decrease in miscellaneous income and an increase of $4
million in estimated product returns. The 2016 decrease of $61 million in net revenue was primarily due to a 3.9% decrease in ASP attributing $393 million
and a $17 million decrease in shipping and handling revenue in constant currency. The decrease was offset by a 2.4% increase in units shipped attributing
$237 million, and a decrease of $105 million in estimated product returns.
During the years ended December 31, 2017 and 2016, the changes in revenue and expenses were affected by changes in the exchange rates for the
Japanese Yen, the Euro and the U.K. Pound Sterling. 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 affected. QVC’s product margins may continue to be under pressure due to the devaluation of foreign currencies,
and it will attempt to reduce its exposure through pricing and vendor negotiations as Brexit negotiations progress.
In discussing QVC’s operating results, the term “currency exchange rates” refers to the currency exchange rates QVC uses to convert the operating
results for all countries where the functional currency is not the U.S. dollar. QVC calculates the effect of changes in currency exchange rates as the
difference between current period activity translated using the prior period's currency exchange rates. Throughout our discussion, we refer to the results of
this calculation as the impact of currency exchange rate fluctuations. When we refer to “constant currency operating results”, this means operating results
without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to understand better
QVC’s underlying performance without the effects of currency exchange rate fluctuations.
II-19
Table of Contents
The percentage change in net revenue for QVC-U.S. and QVC-International in U.S. Dollars and in constant currency was as follows:
QVC-US
QVC-International
0.3 %
2.7 %
— %
(1.3)%
Year ended December 31, 2017
Foreign Currency
Exchange Impact
U.S. dollars
Constant currency
0.3 %
4.0 %
Year ended December 31, 2016
Foreign Currency
Exchange Impact
U.S. dollars
(2.2)%
3.1 %
— %
0.1 %
Constant currency
(2.2)%
3.0 %
In 2017, QVC-U.S. net revenue increase was primarily due to a 3.7% increase in units shipped and a decrease in estimated product returns. This
increase was offset by a 2.9% decrease in ASP, a $32 million decrease in shipping and handling revenue and a $14 million decrease in miscellaneous
income. QVC-U.S. experienced shipped sales growth in all categories except jewelry. The decrease in estimated product returns was primarily due to an
overall lower return rate across all product categories except jewelry. The decrease in net shipping and handling revenue was a result of a decrease in
shipping and handling revenue per unit from promotional offers. QVC-International net revenue growth in constant currency was primarily due to a 5.0%
increase in units shipped, driven by increases in Japan, Germany, France and the U.K. offset by a decrease in units shipped in Italy. There was a $5 million
increase in shipping and handling revenue, primarily driven by Japan. This was offset by a decrease of 1.0% in ASP, primarily driven in Japan and Germany
offset by increases in Italy and the U.K. and a $20 million increase in estimated product returns, driven by all markets except Japan. QVC-International
experienced shipped sales growth in constant currency in all categories except electronics and jewelry.
In 2016, QVC-U.S. net revenue decline was primarily due to a 5.5% decrease in ASP and a 4.0% decrease in shipping and handling revenue. The
decline was offset by a 2.3% increase in units shipped and a decrease in estimated product returns. QVC-U.S. experienced shipped sales declines in jewelry,
electronics and beauty with growth in apparel, home and accessories. The decrease in net shipping and handling revenue was primarily due to the decrease in
shipping and handling rates per unit from promotional offers. The decrease in estimated product returns was primarily due to a decrease in an overall lower
return rate across all categories and sales. QVC-International net revenue growth in constant currency was primarily due to a 2.5% increase in units shipped,
driven mainly in Germany and the U.K., offset by the increase in estimated product returns, driven primarily by product returns in Germany. QVC-
International experienced shipped sales growth in constant currency in all categories except jewelry and apparel.
QVC's cost of sales as a percentage of net revenue was 63.8%, 63.8% and 63.2% for the years ended December 31, 2017, 2016 and
2015, respectively. The slight increase in 2016 was primarily due to decreased product margins and increased freight costs in the U.S. associated with the
increases in units shipped, partially offset by a favorable inventory obsolescence provision in the U.S.
QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees, and
telecommunications expenses. Operating expenses decreased $5.0 million or 0.8% and decreased $1.0 million or 0.2% for the years ended December 31,
2017 and 2016, respectively. The decrease in 2017 was primarily due to favorable exchange rates. The slight decrease in 2016 was primarily due to lower
telecommunication expense, partially offset by increased commissions expense. The decrease in telecommunication expense was primarily due to lower
phone and network rates in the U.S. The increase in commissions expense was primarily due to increases internationally offset by a decrease in sales in the
U.S.
QVC's SG&A expenses (excluding stock compensation) include personnel, information technology, provision for doubtful accounts, credit card
income, production costs and marketing and advertising expense. Such expenses decreased $21 million, and remained at 8% of net revenue for the year
ended December 31, 2017 as compared to the prior year and decreased $18 million and 8% of net revenue for the year ended December 31, 2016 as
compared to the prior year, as a result of a variety of factors.
II-20
Table of Contents
The decrease in 2017 was primarily due to a decrease in bad debt expense of $35 million, a decrease in severance expense of $13 million, $4 million
from favorable foreign currency rates and a $6 million increase in credit card income offset by an increase in bonus expense of $33 million and a $4 million
increase in marketing expenses. The decrease in bad debt expense was primarily related to lower default rates associated with the Easy-Pay program in the
U.S. The increase in credit card income was due to the favorable economics of the QVC-branded credit card (“Q card”) portfolio in the U.S. The increase in
marketing expenses was primarily due to an increase in the investment made to eMarketing partially offset by discontinuing the naming rights to the Chiba
Marine Stadium in Japan.
The decrease in 2016 was primarily related to reduced personnel costs of $63 million and an increase of credit card income of $8 million which was
partially offset by increases in bad debt expense of $25 million, software expense of $13 million, franchise tax expense of $10 million and external services
of $8 million. The decrease in personnel costs was primarily due to a decrease in bonuses and benefits in the U.S., and severance. The increase in credit card
income was due to the favorable economics and usage of the Q card portfolio in the U.S. The increase in bad debt expense was primarily related to an
increase in U.S. Easy-Pay sales penetration and default rates. The increase in software expense was mainly due to an increase in software licensing and
software maintenance. The increase in franchise tax expense was mainly due to a favorable franchise tax reserve adjustment related to an audit settlement in
2015 which was not experienced in the year ended December 31, 2016. The increase in external services was primarily due to internal control enhancements
and the establishment of a global business service center located in Krakow, Poland.
Stock-based compensation includes compensation related to options and restricted stock granted to certain officers and employees. QVC recorded $31
million, $32 million and $31 million of stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015, respectively.
Depreciation and amortization consisted of the following:
Affiliate agreements
Customer relationships
Acquisition related amortization
Property and equipment
Software amortization
Channel placement amortization and related expenses
Total depreciation and amortization
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
97
113
210
155
93
61
519
146
169
315
142
100
48
605
146
170
316
134
93
45
588
For the year ended December 31, 2017, acquisition related amortization expense decreased primarily due to the end of the useful lives of certain
affiliate agreements and customer relationships established at the time of Liberty's acquisition of QVC in 2003. This was offset by an increase in channel
placement amortization related to the addition of Beauty iQ in the U.S. and the increase in depreciation related to the additions at the California distribution
center. For the year ended December 31, 2016, depreciation and amortization increased primarily due to expense related to the additions at the California
distribution center and new website functionality.
II-21
Table of Contents
HSN
On December 29, 2017, Liberty acquired the approximately 62% of HSNi it did not already own in an all-stock transaction making HSNi a wholly-
owned subsidiary, attributed to the QVC Group tracking stock group. As HSNi’s Cornerstone operating segment was included in the “Corporate and other”
reportable segment (see note 19 in the accompanying consolidated financial statements), the information presented in this section relates to the HSN
reportable segment. With the exception of $38 million of severance-related costs incurred on December 30, 2017, HSN’s results of operations are not
included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial.
However, we believe a discussion of HSN’s stand alone results promotes a better understanding of the overall results of its business.
HSN is an interactive entertainment and lifestyle retailer offering a curated assortment of exclusive products and top brand names to its customers
primarily through television home shopping programming on the HSN television networks, through its business-to-consumer digital commerce site
HSN.com, through mobile applications, through outlet stores and through wholesale distribution of certain proprietary products to other retailers. HSN
incorporates entertainment, inspiration and personalities to provide an entirely unique shopping experience. HSN’s live programming is distributed via its
nationally televised shopping program seven days a week, 364 days per year.
HSN’s stand-alone operating results for the last three years were as follows:
December 31,
2017 (3)
Years ended
December 31,
2016 (3)
amounts in millions
December 31,
2015 (3)
Net revenue
Cost of sales
SG&A expenses (excluding stock-based compensation and acquisition related
expenses)
Adjusted OIBDA
Stock-based compensation
Depreciation and amortization
Acquisition and restructuring related expenses (1) (2)
Operating income (loss)
$
$
2,343
(1,533)
(590)
220
(17)
(31)
(69)
103
2,479
(1,638)
(582)
259
(15)
(29)
—
215
2,552
(1,647)
(605)
300
(14)
(29)
(5)
252
(1) For the year ended December 31, 2017, Acquisition and restructuring related expenses includes $69 million of transaction related costs related
to the acquisition of HSN by the Company.
(2) For the year ended December 31, 2015, Acquisition and restructuring related expenses includes $2 million of severance costs associated with
a reorganization at HSN and $3 million for certain costs associated with the planned closure of one of HSN's distribution centers.
(3) HSN has reclassified certain costs between financial statement line items to conform with Liberty’s reporting structure for ease of
comparability for the periods presented.
HSN’s net sales primarily relate to the sale of merchandise, including shipping and handling fees, and are reduced by incentive discounts and actual
and estimated sales returns. Sales taxes collected are not included in net sales. Digital sales include sales placed through our websites and our mobile
applications, including tablets and smart phones. Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred
when the customer takes title and assumes the risks and rewards of ownership, which is on the date of shipment. HSNi’s sales policy allows customers to
return virtually all merchandise for a full refund or exchange, subject to pre-established time restrictions.
II-22
Table of Contents
HSN's net revenue decreased 5.5% and 2.9% for the years ended December 31, 2017 and December 31, 2016, respectively, as compared to the
corresponding prior years. The decrease in net revenue for the year ended December 31, 2017 was primarily attributed to a 3.3% decrease in ASP, a 3.5%
decrease in units shipped and a 21.7% decrease in shipping and handling revenue. The decline was partially offset by a 1.4% improvement in the sales return
rate from 16.3% to 14.9%. HSN experienced sales declines in all categories. The decrease in net shipping and handling revenue was primarily due to the
decrease in shipping and handling rates per unit from promotional offers and due to a reduction in HSN’s standard shipping rates which became effective in
August 2016. The decrease in estimated product returns was primarily due to a decrease in return rates experienced across most categories. The decrease in
net revenue for the year ended December 31, 2016 was primarily attributed to a 3.4% decrease in ASP and a 20.0% decrease in shipping and handling
revenue, partially offset by a 0.8% improvement in the sales return rate from 17.1% to 16.3%. HSN experienced sales declines in all categories with the
exception of apparel and electronics. The decrease in net shipping and handling revenue was primarily due to the decrease in shipping and handling rates per
unit from promotional offers and due to a reduction in HSN’s standard shipping rates which became effective in August 2016. The decrease in the sales
return rate was primarily due to a sales mix shift to categories with lower return rates and an overall lower return rate across all categories. Approximately
one-third of the decline in net sales was attributable to a direct-response television marketing campaign that began in 2014 and concluded in the first quarter
of 2016.
HSN's cost of sales as a percentage of net revenue was 65.4%, 66.1% and 64.5% for the years ended December 31, 2017, 2016 and 2015 respectively.
The decrease for the year ended December 31, 2017, as compared to the prior year, was primarily attributed to increased product margins and a favorable
inventory obsolescence provision, partially offset by higher freight costs driven largely by annual rate increases with HSN’s outbound shipping carriers. The
increase for the year ended December 31, 2016 was primarily attributed to lower shipping revenues and higher fulfillment and shipping costs resulting from
issues with the implementation of HSN’s warehouse automation initiative. Shipping and handling costs were also impacted by changes in product mix and
annual rate increases with HSN’s outbound shipping carriers.
HSN’s SG&A expenses (excluding stock-based compensation and acquisition-related costs) include personnel, commissions, information technology,
order processing and customer service expenses, credit card processing fees, credit card income, provision for doubtful accounts, productions costs and
marketing and advertising expense. These expenses increased $8 million, and as a percentage of net revenue, increased from 23.5% to 25.2% for the year
ended December 31, 2017, as compared to the prior year. The increase in SG&A expense was primarily due to higher personnel costs of $8 million and an
increase in bad debt expense of $5 million related to HSN’s Flexpay program, partially offset by lower marketing expense of $8 million. The increase in
personnel costs was primarily due to higher bonus expense and higher wages driven by annual merit increases. The decrease in marketing expense is due to
lower digital marketing costs and due to advertising and media costs incurred in the prior year related to the expansion of HSN’s wholesale business and
direct-response television business. The increase in expense as a percentage of net revenue was driven by the deleveraging of fixed costs due to the decrease
in net sales and due to the increases in bonus and bad debt expenses.
HSN’s SG&A expenses decreased $23 million, and as a percentage of revenue decreased from 23.7% to 23.5% for the year ended December 31, 2016,
as compared to 2015. The SG&A expense decrease was primarily due to a $11 million decline in bad debt expense driven by higher loss rates from HSN's
Flexpay program in the prior year. The decrease is also due to decreases in personnel costs, including performance-based incentives of $10 million. There
was also a $9 million decrease in media costs related to direct-response television business. These decreases were partially offset by higher commissions
expense of $7 million primarily due to expanded coverage of HSN2, an increase in digital marketing and an increase in consulting costs.
Stock-based compensation includes compensation related to stock appreciation rights and restricted stock units granted to certain employees. HSN
recorded $17 million, $15 million and $14 million of stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015,
respectively. Stock-based compensation in 2017 included the acceleration of vesting of certain awards for employees terminated in connection with the
Merger, offset by the cancellation of awards as a result of the resignation of HSN’s former CEO in 2017.
HSN’s depreciation and amortization expense increased $2 million and remained flat for the years ended December 31, 2017 and 2016, respectively, as
compared to the corresponding prior years. The increase in 2017 is primarily attributed to additions related to HSN’s warehouse automation initiative.
II-23
Table of Contents
Included in HSN’s operating income for the year ended December 31, 2017 are allocated acquisition-related costs of $69 million primarily related to
investment banking fees, legal fees and severance-related costs. Of the $38 million of acquisition costs recorded by the Company for the two day period
after the acquisition, $30 million related to severance and bonus payments is included in the amount reported by HSN. The additional $8 million recorded
by the Company related to accelerated vesting of stock options, was not included in HSN’s acquisition-related costs, and has been included in Selling,
general and administrative, including stock-based compensation expense in the accompanying consolidated statements of operations.
zulily
Liberty acquired zulily on October 1, 2015, and zulily’s results are only included in Liberty’s results for periods subsequent to October 1, 2015. We
believe a discussion of zulily’s stand alone results, including certain one-time purchase accounting related adjustments detailed below, promotes a better
understanding of the overall results of its business.
zulily's operating results for the last three years were as follows:
December 31,
2017
Years ended
December 31,
2016
amounts in millions
December 31,
2015 (1)
Net revenue
Cost of sales
Operating expenses
SG&A expenses (excluding stock-based compensation and acquisition related
expenses)
Adjusted OIBDA
Acquisition related expenses
Stock-based compensation
Depreciation and amortization
Deferred revenue adjustment
Operating income (loss)
$
$
1,613
(1,195)
(47)
(280)
91
—
(18)
(202)
—
(129)
1,547
(1,108)
(47)
(280)
112
—
(19)
(245)
—
(152)
1,361
(978)
(43)
(269)
71
(30)
(19)
(83)
(17)
(78)
(1) zulily has reclassified certain costs between financial statement line items to conform with Liberty’s reporting structure for ease of comparability
for the period ended December 31, 2015.
Net revenue consists primarily of sales of women's, children's and men's apparel, children's merchandise and other product categories such as home,
beauty and personalized products. zulily recognizes product sales at the time all revenue recognition criteria has been met, which is generally at delivery. Net
revenue represents the sales of these items plus shipping and handling charges to customers, net of estimated refunds, store credits, and promotional
discounts. Net revenue is primarily driven by growth in zulily’s active customers, the frequency with which customers purchase and average order value.
zulily's consolidated net revenue increased 4.3% and 13.7% for the years ended December 31, 2017 and December 31, 2016, respectively, as compared
to the corresponding prior years. The increase in net revenue for the year ended December 31, 2017 was primarily attributed to a 5.1% increase in orders
placed driven by a 15.9% increase in active customers year over year, coming from accelerated growth in the fourth quarter. Along with the increase in
orders placed, units per order also increased but was offset by lower average sales price per unit. The increase in net revenue for the year ended December
31, 2016 was primarily attributed to an increase in total orders placed of 14.5%, driven by a 14.1% increase in the number of orders placed per active
customer. An active customer is defined as an individual who had purchased at least once in the last twelve months, measured from the last day of the
period.
zulily's cost of sales as a percentage of net revenue was 74.1%, 71.6% and 71.9% for the years ended December 31, 2017, 2016 and
2015, respectively. The increase for the year ended December 31, 2017 was primarily attributed to higher free shipping and promotional offers, as well as
higher supply chain expenses resulting from an increase in international
II-24
Table of Contents
shipping, a shift in product mix, ramping up of zulily’s Pennsylvania fulfillment center and growth of its third-party fulfillment services and higher unit
volume at a lower average sales price per unit. The decrease for the year ended December 31, 2016 was primarily attributed to improved operational
efficiency, partially offset by higher shipping and handling costs.
zulily’s operating expenses are principally comprised of credit card processing fees and customer service expenses. Operating expenses remained flat
and increased $4 million, or 9.3%, for the years ended December 31, 2017 and 2016, respectively. The increase in operating expenses was primarily
attributed to an increase in credit card processing fees which are driven by higher sales volume.
zulily’s SG&A expenses include personnel related costs for general corporate functions, marketing and advertising expenses, information technology,
and the costs associated with the use by these functions of facilities and equipment, including rent. As a percentage of net revenue, SG&A decreased from
18.1% to 17.4% for the year ended December 31, 2017 primarily due to a shift in marketing and advertising spend to promotional offers.
zulily’s SG&A expenses increased $11 million, and as a percentage of net revenue decreased from 19.8% to 18.1% for the year ended December 31,
2016. The SG&A expense increase was primarily due to an increase in overall marketing spend. The decrease in expense as a percentage of net revenue was
driven by top line revenue growth over a partially fixed cost base.
zulily’s stock-based compensation expense decreased slightly for the year ended December 31, 2017 as compared to the corresponding period in the
prior year primarily due to the transfer of certain senior leadership to QVC. zulily’s stock-based compensation expense remained flat for the year ended
December 31, 2016, compared to the corresponding period in the prior year.
zulily’s depreciation and amortization expense decreased $43 million and increased $162 million for the years ended December 31, 2017 and 2016,
respectively, as compared to the corresponding prior years. The decrease for the year ended December 31, 2017 as compared to the prior year was primarily
attributable to the decelerating amortization of intangible assets recognized in purchase accounting. The increase for the year ended December 31, 2016 as
compared to the prior year was primarily attributed to amortization of intangible assets as a result of purchase accounting. To a lesser extent, the increase in
depreciation and amortization was related to additional automation equipment and leasehold improvements in its fulfillment centers.
II-25
Table of Contents
zulily’s results for the year ended December 31, 2015, including certain one-time purchase accounting related adjustments, were as follows (amounts in
millions):
Net revenue
Cost of sales
Operating expenses
SG&A expenses (excluding stock-based compensation and
acquisition related expenses)
Adjusted OIBDA
Acquisition related expenses
Stock-based compensation
Depreciation and amortization
Deferred revenue adjustment
Operating income (loss)
Post-Acquisition:
$
October 1, 2015 -
December 31, 2015
426
(318)
(13)
(74)
21
—
(5)
(69)
—
(53)
$
Pre-Acquisition:
December 29,
2014 -
September 30,
2015
2015 Total
Deferred Revenue
Adjustment
17
—
—
—
17
—
—
—
(17)
—
918
(660)
(30)
(195)
33
(30)
(14)
(14)
—
(25)
1,361
(978)
(43)
(269)
71
(30)
(19)
(83)
(17)
(78)
The results of operations for the year ended December 31, 2015 include approximately $30 million in costs associated with the closing of the
acquisition. The results of operations for the period October 1, 2015 through December 31, 2015 include approximately $63 million of depreciation and
amortization as a result of purchase accounting related to new intangible assets and to a lesser extent stepped up valuation on assets existing prior to the date
of the acquisition. Additionally, as a result of our application of purchase accounting, zulily’s deferred revenue was adjusted to fair value, based on a broader
market margin, instead of a company specific margin. This adjustment had the one-time impact of lowering revenue and Adjusted OIBDA in the post-
acquisition period.
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 the conduct of operations by
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.
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
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
II-26
Table of Contents
maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when we deem
appropriate. As of December 31, 2017, our debt is comprised of the following amounts:
QVC Group
QVC
HSNi
zulily
Corporate and other
Ventures Group
Corporate and other
Variable rate debt
Principal
amount
Weighted avg
interest rate
Fixed rate debt
Principal
amount
Weighted avg
interest rate
dollar amounts in millions
$
$
$
$
$
1,496
460
267
—
—
3.0 % $
3.1 % $
3.0 % $
— % $
3,719
—
—
792
— % $
1,947
4.6 %
— %
— %
8.3 %
3.0 %
We are 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 periodically use equity collars and other
financial instruments to manage market risk associated with certain investment positions. These instruments, when utilized, are recorded at fair value based
on option pricing models.
At December 31, 2017, the fair value of our AFS securities was $2,275 million. Had the market price of such securities been 10% lower at December
31, 2017, the aggregate value of such securities would have been $228 million lower. Our investments in FTD and LendingTree are publicly traded
securities and are accounted for as equity method affiliates, which are not reflected at fair value in our balance sheets. The aggregate fair value of such
securities was $1,171 million at December 31, 2017 and had the market price of such securities been 10% lower at December 31, 2017, the aggregate value
of such securities would have been $117 million lower. These securities are also subject to market risk that is not directly reflected in our statements of
operations. At December 31, 2017, the fair value of our investment in Liberty Broadband was $3,635 million. Had the market price of such security been
10% lower at December 31, 2017, the fair value of such security would have been $364 million lower. Additionally, our exchangeable senior debentures are
also subject to market risk. Because we mark these instruments to fair value each reporting date, increases in the price of the respective underlying security
generally result in higher liabilities and unrealized losses in our statements of operations.
Liberty 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 accumulated 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, Liberty 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. QVC's reported Adjusted OIBDA for the year ended December 31, 2017 would have been impacted by approximately
$5 million for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
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 largely offset by the effects of interest rate movements on the underlying debt facilities. 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.
II-27
Table of Contents
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of Liberty are filed under this Item, beginning on page II-33. 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.
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an
evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and 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, 2017 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.
Changes in Internal Control Over Financial Reporting
The Company acquired HSNi in December 2017. As a result of the acquisition, the Company is reviewing the internal controls of HSNi and is making
appropriate changes as deemed necessary. Except for the changes in internal control at HSNi, there has been no change in the Company's internal control
over financial reporting that occurred during the three months ended December 31, 2017 that has materially affected, or is reasonably likely to materially
affect, its internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
See page II-29 for Management's Report on Internal Control Over Financial Reporting.
See page II-30 for KPMG LLP’s attestation report regarding the effectiveness of our internal control over financial reporting.
Item 9B. Other Information.
None.
II-28
Table of Contents
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Liberty Interactive Corporation’s (the “Company”) management is responsible for establishing and maintaining adequate internal control over the
Company’s financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over
financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with accounting principles generally accepted in the United States of America. 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's management assessed the effectiveness of internal control over financial reporting as of December 31, 2017, using the criteria in
Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this
evaluation the Company's management believes that, as of December 31, 2017, its internal control over financial reporting is effective. The Company's
assessment of internal control over financial reporting did not include the internal controls of HSN, Inc. (“HSNi”) which the Company acquired on
December 29, 2017. The amount of total assets and revenue of HSNi included in our consolidated financial statements as of and for the year ended
December 31, 2017 was $3.0 billion and zero, respectively.
The Company's independent registered public accounting firm that audited the consolidated financial statements and related disclosures in the Annual
Report on Form 10-K has issued an audit report on the effectiveness of the Company's internal control over financial reporting. This report appears on page
II-30 of this Annual Report on Form 10-K.
II-29
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Liberty Interactive Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Liberty Interactive Corporation and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based
on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,
based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated
balance sheets of the Company as of December 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive earnings (loss),
cash flows, and equity for each of the years in the three-year period ended December 31, 2017, and related notes, and our report dated March 1, 2018
expressed an unqualified opinion on those consolidated financial statements.
The Company acquired HSN, Inc. during 2017, and management excluded from its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2017, HSN, Inc.’s internal control over financial reporting associated with total assets of $3,011 million and total
revenues of zero included in the consolidated financial statements of the Company as of and for the year ended December 31, 2017. Our audit of internal
control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of HSN, Inc.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. 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 of internal control over financial
reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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.
II-30
Table of Contents
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.
Denver, Colorado
March 1, 2018
/s/ KPMG LLP
II-31
Table of Contents
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Liberty Interactive Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Liberty Interactive Corporation and subsidiaries (the “Company”) as of December 31,
2017 and 2016, the related consolidated statements of operations, comprehensive earnings (loss), cash flows, and equity for each of the years in the three-
year period ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, based on our audits and
the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of
December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017,
in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2018 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
We did not audit the financial statements of HSN, Inc., a wholly-owned subsidiary, which statements reflect certain assets constituting $786 million as of
December 31, 2017. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for HSN, Inc., is based solely on the report of the other auditors.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included
performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well
as evaluating the overall presentation of the consolidated financial statements. We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
We have served as the Company’s auditor since 1995.
/s/ KPMG LLP
Denver, Colorado
March 1, 2018
II-32
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2017 and 2016
Assets
Current assets:
Cash and cash equivalents
Trade and other receivables, net
Inventory, net
Other current assets
Total current assets
Investments in available-for-sale securities and other cost investments (note 8)
Investments in affiliates, accounted for using the equity method (note 9)
Investment in Liberty Broadband measured at fair value (note 9)
Property and equipment, at cost
Accumulated depreciation
Intangible assets not subject to amortization (note 10):
Goodwill
Trademarks
Intangible assets subject to amortization, net (note 10)
Other assets, at cost, net of accumulated amortization
Total assets
II-33
2017
2016
amounts in millions
$
$
903
1,726
1,411
125
4,165
2,363
309
3,635
2,564
(1,223)
1,341
7,082
3,929
11,011
1,248
50
24,122
825
1,308
968
68
3,169
1,922
581
3,161
2,163
(1,032)
1,131
6,052
3,302
9,354
1,005
32
20,355
(continued)
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31, 2017 and 2016
Liabilities and Equity
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of debt, including $978 million and $862 million measured at fair value (note 11)
Other current liabilities
Total current liabilities
Long-term debt, including $868 million and $805 million measured at fair value (note 11)
Deferred income tax liabilities (note 12)
Other liabilities
Total liabilities
Equity
Stockholders' equity (note 13):
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued
Series A QVC Group common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and
outstanding 449,335,940 shares at December 31, 2017 and 429,005,932 shares at December 31, 2016
Series B QVC Group common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,203,895
shares at December 31, 2017 and 29,358,638 shares at December 31, 2016
Series A Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares at December 31, 2017 and
December 31, 2016; issued and outstanding 81,686,659 shares at December 31, 2017 and 81,150,711 shares at
December 31, 2016
Series B Liberty Ventures common stock, $.01 par value. Authorized 15,000,000 shares at December 31, 2017 and
December 31, 2016; issued and outstanding 4,455,311 shares at December 31, 2017 and 4,271,958 shares at December
31, 2016
Additional paid-in capital
Accumulated other comprehensive earnings (loss), net of taxes
Retained earnings
Total stockholders' equity
Noncontrolling interests in equity of subsidiaries
Total equity
Commitments and contingencies (note 18)
Total liabilities and equity
2017
2016
amounts in millions
$
1,151
1,125
996
169
3,441
7,553
2,803
242
14,039
—
5
—
790
706
876
162
2,534
7,166
3,636
158
13,494
—
5
—
1
1
—
1,043
(133)
9,068
9,984
99
10,083
—
—
(266)
7,032
6,772
89
6,861
$
24,122
20,355
See accompanying notes to consolidated financial statements.
II-34
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Operations
Years ended December 31, 2017, 2016 and 2015
Total revenue, net
Operating costs and expenses:
Cost of retail sales (exclusive of depreciation shown separately below)
Operating expense
Selling, general and administrative, including stock-based compensation (note 3)
Acquisition and restructuring charges
Depreciation and amortization
Operating income
Other income (expense):
Interest expense
Share of earnings (losses) of affiliates, net (note 9)
Realized and unrealized gains (losses) on financial instruments, net (note 7)
Gains (losses) on transactions, net
Other, net
Earnings (loss) from continuing operations before income taxes
Income tax (expense) benefit (note 12)
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations, net of taxes (note 6)
Net earnings (loss)
Less net earnings (loss) attributable to the noncontrolling interests
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders:
QVC Group common stock
Liberty Ventures common stock
Basic net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 3):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share
(note 3):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Basic net earnings (loss) attributable to Liberty Interactive Corporation shareholders per common share (note 3):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted net earnings (loss) attributable to Liberty Interactive Corporation shareholders per common share (note 3):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
See accompanying notes to consolidated financial statements.
II-35
2017
2016
2015
amounts in millions,
except per share amounts
$
10,404
10,647
9,989
6,789
659
1,153
35
725
9,361
1,043
(355)
(200)
618
410
7
480
1,523
964
2,487
—
2,487
46
2,441
1,208
1,233
2,441
2.71
14.34
2.70
14.17
2.71
14.34
2.70
14.17
$
$
$
$
$
$
$
$
$
$
6,908
707
1,190
—
874
9,679
968
(363)
(68)
1,175
9
131
884
1,852
(598)
1,254
20
1,274
39
1,235
473
762
1,235
0.99
5.54
0.98
5.49
0.99
5.69
0.98
5.64
6,393
699
1,078
—
703
8,873
1,116
(360)
(178)
114
110
14
(300)
816
(185)
631
280
911
42
869
640
229
869
1.35
(0.36)
1.33
(0.36)
1.35
1.61
1.33
1.60
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Comprehensive Earnings (Loss)
Years ended December 31, 2017, 2016 and 2015
Net earnings (loss)
Other comprehensive earnings (loss), net of taxes:
Foreign currency translation adjustments
Share of other comprehensive earnings (loss) of equity affiliates
Other
Other comprehensive earnings (loss)
Comprehensive earnings (loss)
Less comprehensive earnings (loss) attributable to the noncontrolling interests
Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders
Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders:
QVC Group common stock
Liberty Ventures common stock
See accompanying notes to consolidated financial statements.
II-36
2017
2016
2015
2,487
amounts in millions
1,274
$
134
3
—
137
2,624
50
2,574
1,338
1,236
2,574
$
$
$
(84)
(5)
4
(85)
1,189
40
1,149
388
761
1,149
911
(101)
(4)
(17)
(122)
789
41
748
540
208
748
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
Years ended December 31, 2017, 2016 and 2015
2017
2016
2015
amounts in millions
(See note 4)
Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
2,487
(Earnings) loss from discontinued operations
Depreciation and amortization
Stock-based compensation
Cash payments for stock-based compensation
Noncash interest expense
Share of (earnings) losses of affiliates, net
Cash receipts from returns on equity investments
Realized and unrealized (gains) losses on financial instruments, net
(Gains) losses on transactions, net
(Gains) losses on extinguishment of debt
Deferred income tax expense (benefit)
Other noncash charges (credits), net
Changes in operating assets and liabilities
Current and other assets
Payables and other liabilities
Net cash provided (used) by operating activities
Cash flows from investing activities:
Cash (paid) for acquisitions, net of cash acquired
Cash proceeds from dispositions of investments
Investment in and loans to cost and equity investees
Cash receipts from returns of equity investments
Capital expended for property and equipment
Purchases of short term investments and other marketable securities
Sales of short term investments and other marketable securities
Investment in Liberty Broadband
Other investing activities, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Borrowings of debt
Repayments of debt
Repurchases of QVC Group common stock
Withholding taxes on net share settlements of stock-based compensation
Distribution from Liberty Expedia Holdings
Other financing activities, net
Net cash provided (used) by financing activities
Effect of foreign currency exchange rates on cash
Net cash provided (used) by discontinued operations:
Cash provided (used) by operating activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities
Change in available cash held by discontinued operations
Net cash provided (used) by discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
—
725
123
—
—
200
29
(618)
(410)
—
(1,136)
10
(143)
225
1,492
22
3
(159)
—
(204)
—
—
—
(53)
(391)
2,469
(2,631)
(765)
(70)
—
(39)
(1,036)
13
—
—
—
—
—
78
825
903
See accompanying notes to consolidated financial statements.
$
II-37
1,274
(20)
874
97
(92)
12
68
31
(1,175)
(9)
6
473
(115)
136
(117)
1,443
—
353
(86)
—
(233)
(264)
1,174
(2,400)
(36)
(1,492)
3,427
(4,498)
(799)
(16)
299
15
(1,572)
(20)
17
—
—
—
17
(1,624)
2,449
825
911
(280)
703
127
(16)
5
178
32
(114)
(110)
21
(103)
(11)
(237)
(44)
1,062
(844)
271
(120)
250
(258)
(1,370)
1,359
—
(76)
(788)
4,558
(3,811)
(785)
(30)
—
(54)
(122)
(3)
17
(23)
—
—
(6)
143
2,306
2,449
Table of Contents
Balance at January 1, 2015
Net earnings
Other comprehensive earnings (loss)
Stock-based compensation
Minimum withholding taxes on net share settlements of stock-based compensation
Excess tax benefits on stock-based compensation
Stock issued upon exercise of stock options
Series A QVC Group stock repurchases
Distribution to noncontrolling interest
Acquisition of zulily
Acquisition of noncontrolling interest
Other
Balance at December 31, 2015
Net earnings
Other comprehensive earnings (loss)
Cumulative effect of accounting change
Stock-based compensation
Withholding taxes on net share settlements of stock-based compensation
Stock issued upon exercise of stock options
Series A QVC Group stock repurchases
Distribution to noncontrolling interest
Distribution of Liberty Expedia Holdings
Reclassification
Other
Balance at December 31, 2016
Net earnings
Other comprehensive earnings (loss)
Stock-based compensation
Series A QVC Group stock repurchases
Distribution to noncontrolling interest
Stock issued upon exercise of stock options
Withholding taxes on net share settlements of stock-based compensation
Issuance of Series A QVC Group stock in connection HSNi acquisition (note 5)
Reclassification
Other
Balance at December 31, 2017
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Equity
Years ended December 31, 2017, 2016 and 2015
Stockholders' Equity
QVC
Group
Liberty
Ventures
Preferred
Stock
Series A
Series B
Series A
Series B
Additional
paid-in
capital
amounts in millions
Accumulated
other
comprehensive
earnings (loss),
net of taxes
Retained
Earnings
Noncontrolling
interest in
equity of
subsidiaries
Total
equity
$
$
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
1
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
—
—
70
(30)
16
40
(785)
—
1,087
(31)
(1)
370
—
—
—
89
(16)
24
(799)
—
—
341
(9)
—
—
—
123
(765)
—
5
(70)
1,343
405
2
1,043
(94)
—
(121)
—
—
—
—
—
—
—
—
—
(215)
—
(86)
—
—
—
—
—
—
35
—
—
(266)
—
133
—
—
—
—
—
—
—
—
(133)
5,757
869
—
—
—
—
—
—
—
—
—
—
6,626
1,235
—
5
—
—
—
—
—
(493)
(341)
—
7,032
2,441
—
—
—
—
—
—
—
(405)
—
9,068
107
42
(1)
—
—
—
—
—
(58)
—
(2)
—
88
39
1
—
—
—
—
—
(39)
—
—
—
89
46
4
—
—
(40)
—
—
—
—
—
99
5,780
911
(122)
70
(30)
16
40
(785)
(58)
1,087
(33)
(1)
6,875
1,274
(85)
5
89
(16)
24
(799)
(39)
(458)
—
(9)
6,861
2,487
137
123
(765)
(40)
5
(70)
1,343
—
2
10,083
See accompanying notes to consolidated financial statements.
II-38
Table of Contents
(1) Basis of Presentation
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2017, 2016 and 2015
The accompanying consolidated financial statements include the accounts of Liberty Interactive Corporation (formerly known as Liberty Media
Corporation) and its controlled subsidiaries (collectively, "Liberty," the "Company," “we,” “us,” and “our”) unless the context otherwise requires). All
significant intercompany accounts and transactions have been eliminated in consolidation.
Liberty, through its ownership of interests in subsidiaries and other companies, is primarily engaged in the video and online commerce industries in
North America, Europe and Asia.
On October 1, 2015, Liberty acquired all the outstanding shares of zulily, inc. (“zulily”) (now known as zulily, llc). zulily is an online retailer offering
customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day. zulily is attributed to the QVC
Group. See note 5 for additional information related to the acquisition.
On July 22, 2016, Liberty completed the spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary CommerceHub, Inc.
(“CommerceHub”). The CommerceHub Spin-Off was accomplished by the distribution by Liberty of a dividend of (i) 0.1 of a share of CommerceHub’s
Series A common stock for each outstanding share of Liberty’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on July 8,
2016 (such date and time, the “Record Date”), (ii) 0.1 of a share of CommerceHub’s Series B common stock for each outstanding share of Liberty’s Series B
Liberty Ventures common stock as of the Record Date and (iii) 0.2 of a share of CommerceHub’s Series C common stock for each outstanding share of
Series A and Series B Liberty Ventures common stock as of the Record Date, in each case, with cash paid in lieu of fractional shares. In September 2016, the
IRS completed its review of the CommerceHub Spin-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty
received an Issue Resolution Agreement from the Internal Revenue Service (“IRS”) documenting this conclusion. CommerceHub is included in Liberty’s
Corporate and other segment through July 22, 2016 and is not presented as a discontinued operation as the CommerceHub Spin-Off did not represent a
strategic shift that had a major effect on Liberty’s operations and financial results.
On November 4, 2016, Liberty completed the split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia
Holdings, Inc. (“Expedia Holdings”). At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’s
former interest in Expedia, Inc. (“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding. On November 2, 2016, Expedia Holdings
borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016. The
Expedia Holdings Split-Off was accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’s Series A Liberty Ventures common stock
for 0.4 of a share of Expedia Holdings Series A common stock at 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the
“Redemption Date”) and (ii) 0.4 of each outstanding share of Liberty’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings
Series B common stock on the Redemption Date, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia
Holdings common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable). In February 2017, the IRS
completed its review of the Expedia Holdings Split-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty
received an Issue Resolution Agreement from the IRS documenting this conclusion.
Liberty viewed Expedia and Bodybuilding as separate components and evaluated them separately for discontinued operations presentation. Based on a
quantitative analysis, the split-off of Liberty’s interest in Expedia represented a strategic shift that had a major effect on Liberty’s operations, primarily due to
one-time gains on transactions recognized by Expedia in 2015. Accordingly, the consolidated financial statements of Liberty have been prepared to reflect
Liberty’s interest in Expedia as a discontinued operation. The disposition of Bodybuilding as part of the Expedia Holdings Split-Off
II-39
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
does not have a major effect on Liberty’s historical results nor is it expected to have a major effect on Liberty’s future operations. The disposition of
Bodybuilding did not represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding is not presented as a discontinued operation in the
consolidated financial statements of Liberty. Bodybuilding is included in the Corporate and other segment through November 4, 2016.
Pursuant to a reimbursement agreement entered into in connection with the Expedia Holdings Split-Off, Liberty reimbursed Expedia, a related party
prior to the Expedia Holdings Split-Off, $4 million during October 2016, thereby settling the reimbursement agreement.
Liberty and Liberty Media Corporation (“LMC”) (for accounting purposes a related party of Liberty) entered into certain agreements in order to govern
certain of the ongoing relationships between the two companies. These agreements include a reorganization agreement, a services agreement, a facilities
sharing agreement and a tax sharing agreement.
The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Liberty and LMC and other
agreements related to tax matters. Liberty is party to on-going discussions with the IRS under the Compliance Assurance Process audit program. The IRS
may propose adjustments that relate to tax attributes allocated to and income allocable to LMC. Any potential outcome associated with any proposed
adjustments would be covered by the Tax Sharing Agreement and are not expected to have any impact on Liberty's financial position. Pursuant to the
Services Agreement, LMC will provide Liberty with general and administrative services including legal, tax, accounting, treasury and investor relations
support. Liberty will reimburse LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Liberty's allocable portion of
costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Liberty. Under the Facilities
Sharing Agreement, Liberty will share office space with LMC and related amenities at LMC's corporate headquarters. Under these various agreements
approximately $11 million, $10 million and $13 million of these allocated expenses were reimbursed from Liberty to LMC for the years ended December 31,
2017, 2016 and 2015, respectively.
(2) Tracking Stocks
Tracking stocks are a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or
"group," rather than the economic performance of the company as a whole. Liberty has two tracking stocks—QVC Group common stock and Liberty
Ventures common stock, which are intended to track and reflect the economic performance of Liberty’s QVC Group and Ventures Group, respectively. While
the QVC Group and the Ventures Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity
and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's stock
or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single
board of directors and subject to all of the risks and liabilities of the parent corporation.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been
attributed to that group. The Ventures Group consists of our businesses not included in the QVC Group including Evite, Inc. (“Evite”) and our interests in
Liberty Broadband Corporation (“Liberty Broadband”), LendingTree, Inc. (“LendingTree”), FTD Companies, Inc. (“FTD”), investments in Charter
Communications, Inc. (“Charter Communications, Inc.”) and ILG, Inc. (“ILG”), as well as cash in the amount of approximately $573 million (at
December 31, 2017), including subsidiary cash. The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures and
certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business
opportunities.
On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (as amended, the “GCI Reorganization Agreement” and the
transactions contemplated thereby, the “Transactions”) with General
II-40
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned
subsidiary of Liberty (“LI LLC”), whereby Liberty will acquire GCI through a reorganization in which certain Ventures Group assets and liabilities will be
contributed to GCI Liberty (as defined below) in exchange for a controlling interest in GCI Liberty. Liberty and LI LLC will contribute to GCI Liberty its
entire equity interest in Liberty Broadband and Charter, along with, subject to certain exceptions, Liberty’s entire equity interests in LendingTree, together
with the Evite operating business and certain other assets and liabilities, in exchange for (i) the issuance to LI LLC of a number of shares of new GCI Liberty
Class A Common Stock and a number of shares of new GCI Liberty Class B Common Stock equal to the number of outstanding shares of Series A Liberty
Ventures common stock and Series B Liberty Ventures common stock outstanding on the closing date of the Contribution, respectively, (ii) cash and (iii) the
assumption of certain liabilities by GCI Liberty (the “Contribution”).
Liberty will then effect a tax-free separation of its controlling interest in the combined company (which has since been renamed GCI Liberty, Inc.
(“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for
each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only
outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified
GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty
Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The
exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new
GCI Liberty Class A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65
(with no additional premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at
an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be
redeemable upon the 21st anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the
“Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI
LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75%
Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be
reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable
Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an
indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises
its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash
attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1
billion. Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the
commencement and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated
transactions or a tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI
Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to
the difference between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the
amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits
attributable to such 1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s
exercise of its exchange right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
II-41
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
On December 29, 2017, Broadband Holdco, LLC, a wholly owned subsidiary of the Company, entered into a margin loan agreement with an
availability of $1 billion with various lender parties. Approximately 42.7 million shares of Liberty Broadband series C common stock held by the Company
with a value of $3.6 billion were pledged by Broadband Holdco, LLC as collateral to the loan as of December 31, 2017. This margin loan has a term of two
years and bears interest at a rate of LIBOR plus 1.85% and contains an undrawn commitment fee of 0.75% per annum. As of December 31, 2017 there were
no outstanding borrowings on the margin loan.
Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including
taking into account the advice of its financial advisor. The Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of
customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock of Liberty, and
thus QVC Group common stock will cease to function as a tracking stock and will effectively become regular common stock, and Liberty will be renamed
Qurate Retail Group, Inc., with QVC, HSNi and zulily as wholly-owned subsidiaries.
The term "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to
that group. The QVC Group is primarily comprised of our merchandise-focused televised-shopping programs, Internet and mobile application businesses.
The QVC Group has attributed to it the remainder of our businesses and assets not attributed to the Ventures Group, including our wholly-owned subsidiaries
QVC and zulily (as of October 1, 2015) and HSN, Inc. (“HSNi”) (as of December 29, 2017) as well as cash in the amount of approximately $330 million (at
December 31, 2017), including subsidiary cash.
On May 18, 2016, Liberty completed a $2.4 billion investment in Liberty Broadband (for accounting purposes a related party of the Company) in
connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in
part, its acquisition of $5 billion of stock in the new public parent company (“Charter”) of the combined enterprises. Liberty, along with third party investors,
all of whom invested on the same terms as Liberty, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of
$56.23, which was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the-parts basis at the time the investment agreements
were executed (May 2015). Liberty's investment in Liberty Broadband was funded using cash on hand and is attributed to the Ventures Group. See note 9 for
additional information related to this investment.
Liberty, as part of the merger of Charter and TWC described above, exchanged, in a tax-free transaction, its shares of TWC common stock for shares of
Charter Class A common stock, on a one-for-one basis, and Liberty has granted to Liberty Broadband a proxy and a right of first refusal with respect to the
shares of Charter Class A common stock held by Liberty in the exchange.
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.
II-42
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Receivables
Receivables are reflected net of an allowance for doubtful accounts and sales returns. A provision for bad debts is provided as a percentage of accounts
receivable based on historical experience and included in selling, general and administrative expense. A provision for vendor receivables are determined
based on an estimate of probable expected losses and included in cost of retail sales.
A summary of activity in the allowance for doubtful accounts is as follows:
Balance
Additions
beginning
Charged
Deductions-
write-offs
to expense
Other
amounts in millions
73
109
84
(1)
(1)
(1)
(79)
(96)
(88)
Balance
end of
year
92
99
87
of year
$
$
$
99
87
92
2017
2016
2015
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. Assessments about the realizability of inventory require the Company to make judgments based on currently
available information about the likely method of disposition including sales to individual customers, returns to product vendors, liquidations and the
estimated recoverable values of each disposition category. Inventory is stated net of inventory obsolescence reserves of $93 million and $76 million for the
years ended December 31, 2017 and 2016, respectively.
In July 2015, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that changes the measurement principle for
inventory from the lower of cost or market to lower of cost and net realizable value. The new principle is part of the FASB’s simplification initiative and
applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method. The new standard is effective for the
Company for fiscal years and interim periods beginning after December 15, 2016. The Company has determined there is no significant effect of the standard
on its ongoing financial reporting.
Investments
All marketable equity and debt securities held by the Company are classified as available-for-sale ("AFS") and are carried at fair value generally based
on quoted market prices. United States (“U.S.”) generally accepted accounting principles ("GAAP") permit entities to choose to measure many financial
instruments, such as AFS securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity's
statements of operations (the "fair value option"). Liberty had previously entered into economic hedges for certain of its non-strategic AFS securities
(although such instruments were not accounted for as fair value hedges by the Company). Changes in the fair value of these economic hedges were reflected
in Liberty's statements of operations as unrealized gains (losses). In order to better match the changes in fair value of the subject AFS securities and the
changes in fair value of the corresponding economic hedges in the Company's financial statements, Liberty has elected the fair value option for those of its
AFS securities which it considers to be non-strategic ("Fair Value Option Securities"). Accordingly, changes in the fair value of Fair Value Option
Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying
consolidated statements of operations. The total value of AFS securities for which the Company has elected the fair value option aggregated $2,275 million
and $1,846 million as of December 31, 2017 and 2016, respectively.
II-43
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Other investments in which the Company's ownership interest is less than 20%, unless the Company has the ability to exercise significant influence, and
that 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,
except in situations where the fair value option has been selected. Under the equity method of accounting, the investment, originally recorded at cost, is
adjusted to recognize the Company's share of net earnings or losses of the affiliate 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. In the event the Company is
unable to obtain accurate financial information from an equity affiliate in a timely manner, the Company records its share of earnings or losses of such
affiliate on a lag.
Changes in the Company's proportionate share of the underlying equity of an equity method investee, which result from the issuance of additional equity
securities by such equity investee, are recognized in the statements of operations through the Other, net line item. To the extent there is a difference between
our ownership percentage in the underlying equity of an equity method investee and our carrying value, such difference is accounted for as if the equity
method investee were a consolidated subsidiary.
The Company continually reviews its equity investments and its AFS securities which are not Fair Value Option Securities to determine whether a
decline in fair value below the carrying value is other than temporary. 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; the severity of the decline; 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 other than temporary, the carrying value 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 considerable management judgment and accordingly,
actual results may differ materially from the Company's estimates and judgments. Writedowns for AFS securities which are not Fair Value Option Securities
would be included in the consolidated statements of operations as other than temporary declines in fair values of investments. Writedowns for equity method
investments would be included in share of earnings (losses) of affiliates.
In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments. The
new guidance requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those
that result in consolidation) to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of
equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for
the Company for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The
Company plans to adopt this standard during the first quarter of 2018 and does not expect that the adoption will have a material effect on its consolidated
financial statements.
Derivative Instruments and Hedging Activities
All of the Company's 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 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 statements of operations when the hedged item affects earnings. Ineffective portions of changes
II-44
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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.
The Company generally enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows
to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the
hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the
risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a
description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income to the extent that
the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of the
change in fair value of a derivative instrument that qualifies as a cash flow hedge is reported in earnings.
Property and Equipment
Property and equipment consisted of the following:
Land
Buildings and improvements
Support equipment
Projects in progress
Total property and equipment
December 31,
December 31,
2017
2016
amounts in millions
$
108
1,165
1,240
51
2,564
$
81
1,016
1,034
32
2,163
Property and equipment, including significant improvements, is stated at cost. Depreciation is computed using the straight-line method using estimated
useful lives of 2 to 15 years for support equipment and 8 to 20 years for buildings and improvements. Depreciation expense for the years ended December
31, 2017, 2016 and 2015 was $176 million, $171 million and $153 million, respectively.
Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed
for impairment upon certain triggering events. Goodwill and other intangible assets with indefinite useful lives (collectively, "indefinite lived intangible
assets") are not amortized, but instead are tested for impairment at least annually. Our annual impairment assessment of our indefinite-lived intangible assets
is performed during the fourth quarter of each year.
In January 2017, the FASB issued new accounting guidance to simplify the measurement of goodwill impairment. Under the new guidance, an entity no
longer performs a hypothetical purchase price allocation to measure goodwill impairment. Instead, a goodwill impairment is measured using the difference
between the carrying value and the fair value of the reporting unit. The Company early adopted this guidance during the fourth quarter of 2017.
In evaluating goodwill on a qualitative basis, the Company reviews the business performance of each reporting unit and evaluates other relevant factors
as identified in the relevant accounting guidance to determine whether it was more likely than not that an indicated impairment exists for any of our
reporting units. The Company considers whether there
II-45
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business,
management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis
the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current year and prior
year for other purposes. If based on the qualitative analysis it is more likely than not that an impairment exists, the Company performs the quantitative
impairment test.
The quantitative goodwill impairment test compares the estimated fair value of a reporting unit to its carrying value. Developing estimates of fair value
requires significant judgments, including making assumptions about appropriate discount rates, perpetual growth rates, relevant comparable market
multiples, public trading prices and the amount and timing of expected future cash flows. The cash flows employed in Liberty's valuation analyses are based
on management's best estimates considering current marketplace factors and risks as well as assumptions of growth rates in future years. There is no
assurance that actual results in the future will approximate these forecasts.
The accounting guidance also permits entities to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-
lived intangible asset, other than goodwill, is impaired. The accounting guidance also allows entities the option to bypass the qualitative assessment for any
indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The entity may resume performing the qualitative
assessment in any subsequent period. If the qualitative assessment supports that it is more likely than not that the carrying value of the Company’s indefinite-
lived intangible assets, other than goodwill, exceeds its fair value, then a quantitative assessment is performed. If the carrying value of an indefinite-lived
intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of its property and equipment and its intangible assets (other than goodwill and indefinite-lived
intangible assets) to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount
of the asset group is greater than the expected undiscounted cash flows to be generated by such asset group, including its ultimate disposition, an impairment
adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such asset groups exceeds their fair value. The
Company generally measures fair value by considering sale prices for similar asset groups or by discounting estimated future cash flows using an
appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of asset groups. Accordingly, actual results could vary
significantly from such estimates. Asset groups to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs
to sell.
Noncontrolling Interests
The Company reports noncontrolling interests of subsidiaries within equity in the balance sheet and the amount of consolidated net income attributable
to the parent and to the noncontrolling interest is presented in the statements of operations. Also, changes in ownership interests in subsidiaries in which the
Company maintains a controlling interest are recorded in equity.
Foreign Currency Translation
The functional currency of the Company is the 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.
II-46
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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 (loss) as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the
transactions. These realized and unrealized gains and losses are reported in the Other, net line item in the consolidated statements of operations.
Revenue Recognition
Retail revenue is recognized at the time of delivery to customers. The revenue for shipments in-transit is recorded as deferred revenue and included in
other current liabilities. Additionally, service revenue, which is less than one percent of overall revenue, is recognized when the applicable criteria are met:
persuasive evidence of an arrangement exists, services have been rendered, the price is fixed and determinable and collectability is reasonably assured.
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, 2017, 2016 and 2015 aggregated $1,861 million, $1,865 million and $2,037 million, respectively. Sales tax collected from
customers on retail sales is recorded on a net basis and is not included in revenue.
A summary of activity in the allowance for sales returns, is as follows:
Balance beginning of
year
Additions - charged to
earnings
2017
2016
2015
$
$
$
98
106
109
in millions
1,027
1,051
1,213
Deductions
(1,023)
(1,060)
(1,216)
Balance end of
year
102
98
106
In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to recognize
the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional
guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of
performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue recognition guidance in
GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning
after December 15, 2016. The Company will adopt the accounting guidance effective as of January 1, 2018 with an immaterial adjustment to retained
earnings using the modified transition method. The Company has completed our review of the applicable ASU and has concluded it will recognize revenue
at the time of shipment to its customers consistent with when title passes. This is a change from the current practice whereby the Company recognizes
revenue at the time of delivery to the customers and deferred revenue is recorded to account for the shipments in-transit. The Company has also concluded
that it will continue to act as principal in certain vendor arrangements and will recognize credit card income for its QVC-branded credit card as part of net
revenue. At the current time, the credit card income is included as an offset to selling, general, and administrative expenses. In addition, the Company’s
balance sheet presentation of its sales return reserve will change to present a separate return asset and liability, instead of the net presentation currently used.
The Company will also elect the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component
when its payment terms are less than one year, as well
II-47
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
as the practical expedient to exclude from the measurement of the transaction price sales and similar taxes collected from customers.
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 $217 million, $231 million and $154 million for the years ended
December 31, 2017, 2016 and 2015, respectively. Advertising costs are reflected in the selling, general and administrative, including stock-based
compensation line item in our consolidated statements of operations.
Stock-Based Compensation
As more fully described in note 15, the Company has granted to its directors, employees and employees of its subsidiaries options, restricted stock and
stock appreciation rights relating to shares of QVC Group and/or Liberty Ventures common stock ("Liberty common stock") (collectively, "Awards"). The
Company measures the cost of employee services received in exchange for an Award of equity instruments (such as stock options and restricted stock) based
on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service
(usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for an Award of liability instruments
(such as stock appreciation rights that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each
reporting date.
Stock compensation expense was $123 million, $97 million and $127 million for the years ended December 31, 2017, 2016 and 2015, respectively,
included in selling, general and administrative expense in the accompanying consolidated statements of operations.
In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions,
including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early application permitted. The
Company adopted this guidance in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as
income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue
to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the consolidated
statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. For tax benefits that were
not previously recognized and for adjustments to compensation cost based on actual forfeitures, the Company has recorded a cumulative-effect adjustment in
retained earnings as of January 1, 2016. The presentation changes for excess tax benefits have been applied retrospectively in the consolidated statements of
cash flows, resulting in $33 million of excess tax benefits for the year ended December 31, 2015 reclassified from cash flows from financing activities to
cash flows from operating activities.
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
II-48
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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.
When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the
interest would begin accruing according to the relevant tax law. Such interest expense is included in interest expense in the accompanying consolidated
statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense)
in the accompanying consolidated statements of operations.
In October 2016, the FASB issued new guidance amending the accounting for income taxes associated with intra-entity transfers of assets other than
inventory. This accounting update, which is part of the FASB's simplification initiative, is intended to reduce diversity in practice and the complexity of tax
accounting, particularly for those transfers involving intellectual property. This new guidance requires an entity to recognize the income tax consequences of
an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is effective for annual periods, and interim periods within
those annual periods, beginning after December 15, 2017 with early adoption permitted. We anticipate an immaterial retained earnings decrease upon
adoption related to the unrecognized income tax effects of asset transfers that occurred prior to adoption.
Earnings (Loss) Attributable to Liberty Stockholders and Earnings (Loss) Per Common Share
Net earnings (loss) attributable to Liberty stockholders is comprised of the following (amounts in millions):
QVC Group
Net earnings (loss) from continuing operations
Net earnings (loss) from discontinued operations
Liberty Ventures
Net earnings (loss) from continuing operations
Net earnings (loss) from discontinued operations
Years ended December 31,
2017
2016
2015
$
$
$
$
1,208
NA
1,233
—
473
NA
742
20
640
NA
(51)
280
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) attributable to such common stock 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.
II-49
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Series A and Series B QVC Group Common Stock
EPS for all periods through December 31, 2017, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the
years ended December 31, 2017, 2016 and 2015 are approximately 20 million, 13 million and 6 million potential common shares, respectively, because their
inclusion would be antidilutive.
Basic WASO
Potentially dilutive shares
Diluted WASO
Series A and Series B Liberty Ventures Common Stock
Years ended December 31,
2017
2016
2015
number of shares in millions
445
3
448
476
5
481
475
6
481
EPS for all periods through December 31, 2017, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the
years ended December 31, 2017, 2016, and 2015 are less than a million potential common shares because their inclusion would be antidilutive.
Basic WASO
Potentially dilutive shares
Diluted WASO
Reclasses and adjustments
Years ended December 31,
2017
2016
2015
number of shares in millions
86
1
87
134
1
135
142
1
143
Certain prior period amounts have been reclassified for comparability with the current year presentation.
As a result of repurchases of Series A QVC Group common stock, the Company’s additional paid-in capital balance was in a deficit position in certain
quarterly periods during the year ended December 31, 2017. In order to maintain a zero balance in the additional paid-in capital account, we reclassified the
amount of the deficit ($405 million) at December 31, 2017 to retained earnings.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates. Liberty considers (i) recurring and non-recurring fair value measurements, (ii) accounting for income taxes, (iii)
assessments of other-than-temporary declines in fair value of its investments and (iv) estimates of retail-related adjustments and allowances to be its most
significant estimates.
Liberty holds investments that are accounted for using the equity method. Liberty does not control the decision making process or business
management practices of these affiliates. Accordingly, Liberty relies on management of these affiliates to provide it with accurate financial information
prepared in accordance with GAAP that Liberty uses in the application of the equity method. In addition, Liberty relies on audit reports that are provided by
the affiliates' independent auditors on
II-50
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, lessees will be required to recognize
a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard,
to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15,
2018, with early adoption permitted. The Company has not yet determined the effect of the standard on its ongoing financial reporting. The Company is
currently working with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements,
including identifying the population of leases, evaluating technology solutions and collecting lease data.
(4) Supplemental Disclosures to Consolidated Statements of Cash Flows
Cash paid for acquisitions:
Fair value of assets acquired
Intangible assets not subject to amortization
Intangible assets subject to amortization
Net liabilities assumed
Deferred tax assets (liabilities)
Fair value of equity consideration
Cash paid (received) for acquisitions, net of cash acquired
Cash paid for interest
Cash paid for income taxes
0
(5) Acquisitions
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
$
$
956
1,577
651
(977)
(281)
(1,948)
(22)
—
7
(40)
—
33
—
—
154
1,791
837
(214)
(637)
(1,087)
844
343
354
374
158
204
318
On December 29, 2017, Liberty acquired the approximately 62% of HSNi it did not already own in an all-stock transaction making HSNi a wholly-
owned subsidiary, attributed to the QVC Group. HSNi shareholders (other than Liberty) received fixed consideration of 1.65 shares of Series A QVC Group
common stock (“QVCA”) for each share of HSNi common stock. Liberty issued 53.6 million shares QVCA common stock to HSNi shareholders. In
conjunction with application of acquisition accounting, we recorded a full step up in basis of HSNi which resulted in a $409 million gain. The fair market
value of our ownership interest previously held in HSNi ($605 million) was determined based on the trading price of QVCA common stock on the date of
the acquisition (Level 1) less a control premium. The market value of the shares of QVCA common stock issued to HSNi shareholders ($1.3 billion) was
determined based on the trading price of QVCA common stock on the date of the acquisition. The total equity value of the transaction was $1.9 billion. With
the exception of $43 million of severance-related costs incurred on December 30, 2017, HSNi’s results of operations
II-51
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
are not included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial.
The preliminary purchase price allocation for HSNi is as follows (amounts in millions):
Cash and cash equivalents
Property and equipment
Other assets
Goodwill
Trademarks
Intangible assets subject to amortization
Accounts payable & accrued liabilities
Debt
Other liabilities assumed
Deferred tax liabilities
$
$
22
214
752
950
676
602
(515)
(460)
(12)
(281)
1,948
Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits
expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with
future customers, continued innovation and noncontractual relationships. Intangible assets acquired during 2017 were comprised of customer relationships of
$425 million with a weighted average life of approximately 9 years, capitalized software of $16 million with a weighted average life of approximately 1
year, and technology of $161 million with a weighted average life of approximately 7 years. None of the acquired goodwill is expected to be deductible for
tax purposes. As of December 31, 2017, the valuation related to the purchase is not final and the purchase price allocation is preliminary and subject to
revision. The primary areas of the purchase price allocation that are not yet finalized are related to certain fixed and intangible assets, liabilities and tax
balances.
Included in net earnings (loss) from continuing operations for the year ended December 31, 2017 is $43 million related to HSNi’s operations since the
date of acquisition, which is primarily related to severance cost post acquisition. Of the $43 million, $38 million related to HSN ($8 million of which related
to stock-based compensation expense and is included in Selling, general and administrative, including stock-based compensation expense in the consolidated
statements of operations) and $5 million related to Cornerstone.
The pro forma revenue and net earnings from continuing operations of Liberty, prepared utilizing the historical financial statements of HSNi, giving
effect to purchase accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, are as
follows:
Revenue
Net earnings (loss) from continuing operations
Years Ended December 31,
2017
2016
amounts in millions
(unaudited)
13,791
2,200
14,220
1,258
$
II-52
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The pro forma information is not representative of Liberty’s future financial position, future results of operations or future cash flows nor does it reflect
what Liberty’s financial position, results of operations or cash flows would have been as if the transaction had happened previously and Liberty controlled
HSNi during the periods presented. The pro forma information includes a nonrecurring adjustment for transactions costs incurred as a result of the
acquisition.
On October 1, 2015, Liberty acquired zulily for consideration of approximately $2.3 billion, comprised of $9.375 of cash and 0.3098 newly issued
shares of QVCA for each zulily share, with cash paid in lieu of any fractional shares. The fair value of the issued shares was determined based on the
trading price of QVCA shares on the last trading day prior to the acquisition. Funding for the $1.2 billion cash portion of the consideration came from cash
on hand at zulily and a distribution from QVC funded by a drawdown under its revolving credit facility (see note 11). zulily is attributed to the QVC Group.
The final purchase price allocation for zulily is as follows (amounts in millions):
Cash and cash equivalents
Property and equipment
Other assets
Goodwill
Trademarks
Intangible assets subject to amortization
Accounts payable & accrued liabilities
Other liabilities assumed
Deferred tax liabilities
$
$
341
105
46
917
870
790
(145)
(65)
(607)
2,252
Intangible assets acquired during 2015 were comprised of customer relationships of $490 million with a weighted average life of approximately 4 years,
email lists of $250 million with a weighted average life of approximately 2 years, and capitalized software of $50 million with a weighted average life of
approximately 3 years. None of the acquired goodwill is deductible for tax purposes. Subsequent to December 31, 2015, the preliminary purchase price
allocation was adjusted, resulting in decreases of $50 million to trademarks, $40 million to intangible assets subject to amortization and $33 million to
deferred tax liabilities and a corresponding increase of $57 million to goodwill. If these adjustments had been recorded as of the acquisition date,
amortization expense would have been approximately $3 million lower for the period ended December 31, 2015. There have been no other significant
changes to our purchase price allocation since December 31, 2015.
Included in net earnings (loss) from continuing operations for the year ended December 31, 2015 is $34 million related to zulily’s operations since the
date of acquisition.
(6) Disposals
Disposals - Presented as Discontinued Operations
On November 4, 2016, Liberty completed the Expedia Holdings Split-Off. Expedia Holdings is comprised of, among other things, Liberty’s former
interest in Expedia, Inc. and Liberty’s former wholly-owned subsidiary Bodybuilding. Liberty views Expedia and Bodybuilding as separate components and
evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the split-off of Liberty’s interest in Expedia represents a
strategic shift that has a major effect on Liberty’s operations, primarily due to prior year one-time gains on transactions recognized
II-53
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
by Expedia. Accordingly, the consolidated financial statements of Liberty have been prepared to reflect Liberty’s interest in Expedia as a discontinued
operation. The disposition of Bodybuilding as part of the Expedia Holdings Split-Off does not have a major effect on Liberty’s historical results nor is it
expected to have a major effect on Liberty’s future operations. The disposition of Bodybuilding does not represent a strategic shift in Liberty’s operations.
Accordingly, Bodybuilding is not presented as a discontinued operation in the consolidated financial statements of Liberty. See “Disposals – Not Presented
as Discontinued Operations” below for additional information regarding Bodybuilding.
Prior to the Expedia Holdings Split-Off, Liberty accounted for the investment in Expedia as an equity method affiliate and recorded our share of
Expedia’s earnings (losses) in our consolidated statements of operations. Accordingly, Expedia’s assets, liabilities and results of operations were not included
in Liberty’s consolidated financial statements. Certain financial information for Expedia for the periods prior to the Expedia Holdings Split-Off is as follows:
Current assets
Total assets
Current liabilities
Total liabilities
Equity
Operating income
Gain on sale of business
Income tax (expense) benefit
Net earnings (loss) attributable to Expedia shareholders
December 31,
2015
amounts in millions
$
$
$
$
$
2,976
15,486
5,926
10,556
4,930
Year ended December 31,
2015
amounts in millions
414
509
(203)
764
$
$
$
$
Certain financial information for Liberty’s investment in Expedia, which is included in the discontinued operations line items of the consolidated Liberty
balance sheets as of December 31, 2015, is as follows (amounts in millions):
Investments in affiliates, accounted for using the equity method
Deferred income tax liabilities
$
$
December 31, 2015
927
285
II-54
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Certain financial information for Liberty’s investment in Expedia, which is included in earnings (loss) from discontinued operations, is as follows
(amounts in millions):
Earnings (loss) before income taxes
Income tax (expense) benefit
The combined impact from discontinued operations, discussed above, is as follows:
Basic earnings (loss) from discontinued operations attributable to Liberty shareholders per common share
(note 3):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted earnings (loss) from discontinued operations attributable to Liberty shareholders per common share
(note 3):
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Years ended December 31,
2016
2015
24
(4)
437
(157)
Years ended December 31,
2016
2015
NA
0.15
NA
0.15
NA
1.97
NA
1.96
$
$
$
$
$
$
Disposals – Not Presented as Discontinued Operations
On June 30, 2015, Liberty sold Backcountry for aggregate consideration, including assumption of debt, amounts held in escrow, and a noncontrolling
interest, of approximately $350 million. The sale resulted in a $105 million gain, which is included in Gains (losses) on transactions, net in the
accompanying consolidated statements of operations. Backcountry is not presented as a discontinued operation as the sale did not represent a strategic shift
that has a major effect on Liberty’s operations and financial results. Included in Total revenue, net in the accompanying consolidated statements of
operations is $227 million for the year ended December 31, 2015, related to Backcountry. Included in Net earnings (loss) in the accompanying consolidated
statements of operations are losses of $3 million for the year ended December 31, 2015, related to Backcountry.
On July 22, 2016, Liberty completed the CommerceHub Spin-Off. CommerceHub is included in the Corporate and other segment through July 22,
2016 and is not presented as a discontinued operation as the CommerceHub Spin-Off did not represent a strategic shift that had a major effect on Liberty’s
operations and financial results. Included in Total revenue, net in the accompanying consolidated statements of operations is $51 million and $89 million for
the years ended December 31, 2016 and 2015, respectively, related to CommerceHub. Included in Net earnings (loss) in the accompanying consolidated
statements of operations are earnings of $5 million and losses of $10 million for the years ended December 31, 2016 and 2015, respectively, related to
CommerceHub. Included in Total assets in the accompanying consolidated balance sheets as of December 31, 2015 is $115 million related to
CommerceHub.
As discussed above, on November 4, 2016, Liberty completed the Expedia Holdings Split-Off. Although Liberty’s interest in Expedia has been
presented as a discontinued operation, Bodybuilding is not presented as a discontinued operation in the consolidated financial statements of Liberty.
Bodybuilding is included in the Corporate and other segment through November 4, 2016. Included in Total revenue, net in the accompanying consolidated
statements of operations is
II-55
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
$355 million and $464 million for the years ended December 31, 2016 and 2015, respectively, related to Bodybuilding. Included in Net earnings (loss) in the
accompanying consolidated statements of operations are earnings of $6 million and $3 million for the years ended December 31, 2016 and 2015,
respectively, related to Bodybuilding. Included in Total assets in the accompanying consolidated balance sheets as of December 31, 2015 is $198 million
related to Bodybuilding.
(7) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure
fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the
ability to access at the measurement date. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability,
either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities
measured at fair value that would be considered Level 3.
The Company's assets and liabilities measured at fair value are as follows:
December 31, 2017
Quoted prices
December 31, 2016
Quoted prices
Description
Cash equivalents
Available-for-sale securities
Investment in Liberty Broadband
Debt
Total
$
$
$
$
655
2,275
3,635
1,846
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Total
amounts in millions
—
—
—
1,846
625
1,846
3,161
1,667
655
2,275
3,635
—
in active
markets
for identical
assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
625
1,846
3,161
—
—
—
—
1,667
The majority of the Company's Level 2 financial assets and liabilities are debt instruments with quoted market prices that are not considered to be traded
on "active markets," as defined in GAAP. Accordingly, the debt instruments are reported in the foregoing table as Level 2 fair value.
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:
Fair Value Option Securities - AFS
Fair Value Option Securities - Liberty Broadband
Exchangeable senior debentures
Other financial instruments
Years ended December 31,
2017
2016
2015
amounts in millions
723
761
(308)
(1)
1,175
434
473
(193)
(96)
618
84
NA
30
—
114
$
$
II-56
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
(8) Investments in Available-for-Sale Securities and Other Cost Investments
All marketable equity and debt securities held by the Company are classified as AFS and are carried at fair value generally based on quoted market
prices. GAAP permits entities to choose to measure many financial instruments, such as AFS securities, and certain other items at fair value and to recognize
the changes in fair value of such instruments in the entity's statements of operations (the "fair value option"). Liberty has elected the fair value option for its
AFS securities ("Fair Value Option Securities"). Accordingly, changes in the fair value of Fair Value Option Securities, as determined by quoted market
prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying consolidated statements of operations.
Investments in AFS securities, the majority of which are considered Fair Value Option Securities and other cost investments, are summarized as follows:
QVC Group
Other investments
Total attributed QVC Group
Ventures Group
Charter
ILG
Other investments
Total attributed Ventures Group
Consolidated Liberty
December 31,
December 31,
2017
2016
amounts in millions
$
$
3
3
1,800
474
86
2,360
2,363
4
4
1,543
302
73
1,918
1,922
(9) 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, 2017 and the carrying amount at December 31, 2016:
QVC Group
HSNi (1)
Other
Total QVC Group
Ventures Group
FTD (2)
LendingTree (3)
Other (4)
Total Ventures Group
Consolidated Liberty
December 31, 2017
December 31, 2016
Percentage
ownership
Market
value
Carrying
amount
Carrying
amount
dollars in millions
100 % $
various
$
NA
NA
37 % $
27 %
various
73
1,098
NA
$
NA
40
40
73
115
81
269
309
184
40
224
216
31
110
357
581
II-57
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The following table presents Liberty's share of earnings (losses) of affiliates:
QVC Group
HSNi (1)
Other
Total QVC Group
Ventures Group
FTD (2)
LendingTree (3)
Other (4)
Total Ventures Group
Consolidated Liberty
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
40
(2)
38
(146)
7
(99)
(238)
(200)
48
(6)
42
(41)
12
(81)
(110)
(68)
64
(9)
55
(83)
2
(152)
(233)
(178)
(1) As discussed in note 5, on December 29, 2017, the Company acquired the approximately 62% of HSNi it did not already own in an all-stock
transaction making HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. Therefore the Company no longer has an
equity method investment in HSNi as of December 31, 2017. In addition, HSNi paid dividends of $28 million, $28 million, and $228 million during the
years ended December 31, 2017, 2016 and 2015, respectively, which were recorded as reductions to the investment balances, and recorded as a cash
inflow from operations in the Cash receipts from returns on equity investments line item in the consolidated statements of cash flows. Dividends from
HSNi during the year ended December 31, 2015 included a special dividend of $10 per share from which Liberty received approximately $200 million
in cash, which was recorded as a cash inflow from investing activities in the Cash receipts from returns of equity investments line item in the
consolidated statements of cash flows.
(2) The carrying value of Liberty’s investment in FTD was written down to its fair value (based on the closing price (Level 1)) as of December 31, 2017
and December 31, 2015.
(3) During the year ended December 31, 2017, the Company purchased an additional 450 thousand shares of LendingTree common stock (“TREE”). In
order to purchase the additional shares, Ventures Holdco, LLC, a wholly owned subsidiary of the Company executed a 2-year postpaid variable forward
with a notional value of $110 million. The company pledged 642,850 shares of TREE and purchased the delta underlying of 450,000 shares for $77
million. Changes in the fair value of the derivative are reflected in the Realized and unrealized gains (losses) on financial instruments, net line item in
the consolidated statements of operations. For the period ended December 31, 2017, the Company recorded an unrealized loss of $95 million.
(4) The Other category for the Ventures Group is comprised of alternative energy investments and other investments. The alternative energy investments
generally operate at a loss but provide favorable tax attributes recorded through the income tax (expense) benefit line item in the consolidated
statements of operations. During the year ended December 31, 2015, Liberty recorded an impairment of approximately $98 million, based on a
discounted cash flow valuation (Level 3), related to one of its alternative energy investments which had underperformed operationally.
II-58
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Investment in Liberty Broadband
As discussed in note 2, in connection with the merger of Charter and TWC, on May 18, 2016, Liberty invested $2.4 billion in Liberty Broadband Series
C nonvoting shares. As of December 31, 2017, Liberty has a 23.5% economic ownership interest in Liberty Broadband. Due to overlapping boards of
directors and management, Liberty has been deemed to have significant influence over Liberty Broadband for accounting purposes, even though Liberty
does not have any voting rights. Liberty has elected to apply the fair value option for its investment in Liberty Broadband (Level 1) as it is believed that the
Company’s investors value this investment based on the trading price of Liberty Broadband. Liberty recognizes changes in the fair value of its investment in
Liberty Broadband in realized and unrealized gains (losses) on financial instruments, net in the consolidated statements of operations.
(10) Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
Balance at January 1, 2016
Acquisition (1)
Disposition (2)
Foreign currency translation adjustments
Balance at December 31, 2016
Acquisition (3)
Foreign currency translation adjustments
Balance at December 31, 2017
QVC
zulily
HSN
amounts in millions
Corporate
and Other
Total
$
$
5,149
—
—
(39)
5,110
—
80
5,190
860
57
—
—
917
—
—
917
—
—
—
—
—
933
—
933
103
—
(78)
—
25
17
—
42
6,112
57
(78)
(39)
6,052
950
80
7,082
(1) Subsequent to December 31, 2015, the preliminary purchase price allocation for the zulily acquisition was adjusted, resulting in a $57 million increase
to goodwill.
(2) As discussed in note 6, Liberty completed the CommerceHub Spin-Off on July 22, 2016, resulting in a $21 million decrease to goodwill. In addition, as
discussed in note 6, Liberty completed the Expedia Holdings Split-Off on November 4, 2016, resulting in a $57 million decrease to goodwill related to
Bodybuilding.
(3) As discussed in note 5, on December 29, 2017, the Company acquired the approximately 62% of HSNi it did not already own in an all-stock transaction
making HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. The acquisition resulted in an increase to goodwill of $950
million.
Goodwill recognized from acquisitions primarily relates to assembled workforces, website community and other intangible assets that do not qualify for
separate recognition.
As presented in the accompanying consolidated balance sheets, trademarks is the other significant indefinite lived intangible asset.
II-59
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Intangible Assets Subject to Amortization
Intangible assets subject to amortization are comprised of the following:
Television distribution rights
Customer relationships
Other
Total
December 31, 2017
December 31, 2016
Gross
carrying
amount
$
$
730
3,356
1,268
5,354
Accumulated
amortization
Net
carrying
amount
Gross
carrying
amount
amounts in millions
Accumulated
amortization
Net
carrying
amount
(652)
(2,626)
(828)
(4,106)
78
730
440
1,248
2,279
2,910
965
6,154
(2,095)
(2,394)
(660)
(5,149)
184
516
305
1,005
The weighted average life of these amortizable intangible assets was approximately 9 years, at the time of acquisition. However, amortization is
expected to match the usage of the related asset and will be on an accelerated basis as demonstrated in table below.
Amortization expense for intangible assets with finite useful lives was $549 million, $703 million and $550 million for the years ended December 31,
2017, 2016 and 2015, respectively. Based on its amortizable intangible assets as of December 31, 2017, Liberty expects that amortization expense will be as
follows for the next five years (amounts in millions):
2018
2019
2020
2021
2022
Impairments
$
$
$
$
$
401
236
162
129
77
As of December 31, 2017 accumulated goodwill impairment losses for certain e-commerce companies was $56 million.
II-60
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
(11) Debt
Debt is summarized as follows:
QVC Group
Corporate level notes and debentures
8.5% Senior Debentures due 2029
8.25% Senior Debentures due 2030
Subsidiary level notes and facilities
QVC 3.125% Senior Secured Notes due 2019
QVC 5.125% Senior Secured Notes due 2022
QVC 4.375% Senior Secured Notes due 2023
QVC 4.85% Senior Secured Notes due 2024
QVC 4.45% Senior Secured Notes due 2025
QVC 5.45% Senior Secured Notes due 2034
QVC 5.95% Senior Secured Notes due 2043
QVC Bank Credit Facilities
HSNi Bank Credit Facility
Other subsidiary debt
Deferred loan costs
Total QVC Group
Ventures Group
Corporate level debentures
4% Exchangeable Senior Debentures due 2029
3.75% Exchangeable Senior Debentures due 2030
3.5% Exchangeable Senior Debentures due 2031
0.75% Exchangeable Senior Debentures due 2043
1.75% Exchangeable Senior Debentures due 2046
Total Ventures Group
Total consolidated Liberty debt
Less debt classified as current
Total long-term debt
Exchangeable Senior Debentures
Outstanding
principal
Carrying value
December 31,
December 31,
December 31,
2017
2017
amounts in millions
2016
$
$
$
$
$
287
504
400
500
750
600
600
400
300
1,763
460
170
—
6,734
434
435
328
—
750
1,947
8,681
285
502
399
500
750
600
599
399
300
1,763
460
170
(24)
6,703
316
318
342
2
868
1,846
8,549
(996)
7,553
285
501
399
500
750
600
599
399
300
1,896
NA
174
(28)
6,375
276
267
316
3
805
1,667
8,042
(876)
7,166
Each $1,000 debenture of Liberty Interactive LLC’s (“Liberty LLC”) 4% Exchangeable Senior Debentures is exchangeable at the holder's option for the
value of 3.2265 shares of Sprint Corporation (“Sprint”) common stock and 0.7860 shares of CenturyLink, Inc. ("CenturyLink") common stock. Liberty LLC
may, at its election, pay the exchange value in cash, Sprint and CenturyLink common stock or a combination thereof. Liberty LLC, 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 LLC's 3.75% Exchangeable Senior Debentures is exchangeable at the holder's option for the value of 2.3578 shares of
Sprint common stock and 0.5746 shares of CenturyLink common stock. Liberty LLC may, at its election, pay the exchange value in cash, Sprint and
CenturyLink common stock or a combination thereof.
II-61
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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 LLC's 3.5% Exchangeable Senior Debentures (the "Motorola Exchangeables") was exchangeable at the holder's
option for the value of 5.2598 shares of Motorola Solutions, Inc. and 4.6024 shares of Motorola Mobility Holdings, Inc., as a result of Motorola Inc.'s
separation of Motorola Mobility Holdings, Inc. ("MMI") in a 1 for 8 stock distribution, and the subsequent 1 for 7 reverse stock split of Motorola, Inc.
(which has been renamed Motorola Solutions, Inc. ("MSI")), effective January 4, 2011. MMI was acquired on May 22, 2012 for $40 per share in cash.
Pursuant to the indenture, the cash paid to shareholders in the MMI acquisition was to be paid to the holders of the Motorola Exchangeables as an
extraordinary distribution. Liberty LLC made a cash payment of $184.096 per debenture in the second quarter of 2012 for a total payment of $111
million. The remaining exchange value is payable, at Liberty's option, in cash or MSI stock or a combination thereof. Liberty LLC, 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 a
cash distribution made by Liberty LLC in 2007, the cash disbursement discussed above and various principal payments made to holders of the Motorola
Exchangeables, the adjusted principal amount of each $1,000 debenture is $547 as of December 31, 2017.
Each $1,000 original principal amount of the 0.75% Exchangeable Senior Debentures due 2043 is exchangeable for a basket of 3.1648 shares of
common stock of Charter, 5.1635 shares of common stock of Time Warner and 0.6454 shares of Time, Inc., which may change over time to include other
publicly traded common equity securities that may be distributed on or in respect of those shares of Charter and Time Warner (or into which any of those
securities may be converted or exchanged). This basket of shares for which each Debenture in the original principal amount of $1,000 may be exchanged is
referred to as the Reference Shares attributable to such Debenture, and to each issuer of Reference Shares as a reference company. Each Debenture is
exchangeable at the option of the holder at any time, upon which they will be entitled to receive the Reference Shares attributable to such Debenture or, at
the election of Liberty LLC, cash or a combination of Reference Shares and cash having a value equal to such Reference Shares. Upon exchange, holders
will not be entitled to any cash payment representing accrued interest or outstanding additional distributions. Subsequent to December 31, 2017, an
extraordinary additional distribution was made to the holders of the 0.75% Exchangeable Senior Debentures due 2043 in the amount of $11.9399 per $1,000
original principal of the debentures, which is attributable to the cash consideration of $18.50 per share paid to former holders of common stock of Time Inc.
on January 31, 2018, in connection with the acquisition of Time Inc. by Meredith Corporation. The Company expects to pay the extraordinary additional
distribution on March 1, 2018, to holders of record of the 0.75% Exchangeable Senior Debentures due 2043 on February 14, 2018, the special record date for
the extraordinary additional distribution.
During the year ended December 31, 2016, holders exchanged, under the terms of the debentures, approximately $523 million principal of the 0.75%
Exchangeable Senior Debentures due 2043 and Liberty made cash payments of approximately $1,181 million to settle the obligations. In addition, in
conjunction with the Liberty Broadband transaction (see note 9), an extraordinary distribution of approximately $325 million was paid to holders of the
0.75% Exchangeable Senior Debentures due 2043.
In August 2016, Liberty issued $750 million principal amount of new senior exchangeable debentures due September 2046 which bear interest at an
annual rate of 1.75%. Each $1,000 debenture is exchangeable at the holder’s option for the value of 2.9317 shares of Charter Class A common stock. Liberty
may, at its election, pay the exchange value in cash, Charter Class A common stock or a combination thereof. The number of shares of Charter Class A
common stock attributable to a debenture represents an initial exchange price of approximately $341.10 per share. On October 5, 2023, 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.
II-62
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Liberty has elected to account for all of its Exchangeables using the fair value option. Accordingly, changes in the fair value of these instruments are
recognized as unrealized gains (losses) in the statements of operations. Liberty will review the triggering events on a quarterly basis to determine whether a
triggering event has occurred to require current classification of certain Exchangeables, see additional discussion below.
Liberty has sold, split-off or otherwise disposed of all of its shares of MSI, Sprint and CenturyLink common stock which underlie the respective
Exchangeable Senior Debentures. Because such exchangeable debentures are exchangeable at the option of the holder at any time and Liberty can no longer
use owned shares to redeem the debentures, Liberty has classified for financial reporting purposes the portion due 2043 of the debentures that could be
redeemed for cash as a current liability. Exchangeable Senior Debentures classified as current totaled $978 million at December 31, 2017. Although such
amount has been classified as a current liability for financial reporting purposes, the Company believes the probability that the holders of such instruments
will exchange a significant principal amount of the debentures prior to maturity is unlikely.
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.
Senior Debentures
Interest on the 8.5% Senior Debentures due 2029 and the 8.25% Senior Debentures due 2030 (the “Senior Debentures”) is payable semi-annually based
on the date of issuance. The Senior Debentures are stated net of an aggregate unamortized discount of $4 million at December 31, 2017 and $5 million at
December 31, 2016. Such discount is being amortized to interest expense in the accompanying consolidated statements of operations.
QVC Senior Secured Notes
On March 18, 2014, QVC issued $400 million principal amount of 3.125% Senior Secured Notes due 2019 at an issue price of 99.828% and $600
million principal amount of 4.85% Senior Secured Notes due 2024 at an issue price of 99.927% (collectively, the “March Notes”). The March Notes are
secured by the capital stock of QVC and certain of QVC’s subsidiaries and have equal priority to QVC’s senior secured credit facility. The net proceeds from
the March Notes offerings were used to repay indebtedness under QVC’s senior secured credit facility and for working capital and other general corporate
purposes.
On August 21, 2014, QVC issued $600 million principal amount of 4.45% Senior Secured Notes due 2025 at an issue price of 99.860% and $400
million principal amount 5.45% Senior Secured Notes due 2034 at an issue price of 99.784% (collectively, the “August Notes”). The August Notes are
secured by the capital stock of QVC and certain of QVC’s subsidiaries and have equal priority to QVC’s senior secured credit facility.
During prior years, QVC issued $500 million principal amount of 7.375% Senior Secured Notes due 2020 at par, $500 million principal amount of
5.125% Senior Secured Notes due 2022 at par, $750 million principal amount of 4.375% Senior Secured Notes due 2023 at par and $300 million principal
amount of 5.95% Senior Secured Notes due 2043 at par.
On April 15, 2015, QVC completed the redemption of $500 million principal amount of its 7.375% Senior Secured Notes due 2020, whereby holders
received consideration of $1,036.88 for each $1,000 of principal tendered. As a result of the redemption, a $21 million extinguishment loss is included in
other, net in the accompanying consolidated statement of operations for the year ended December 31, 2015.
II-63
Table of Contents
QVC Bank Credit Facilities
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
On March 9, 2015, QVC amended and restated its senior secured credit facility, which is a multi-currency facility that provided for a $2.25 billion
revolving credit facility with a $250 million sub-limit for standby letters of credit and $1.5 billion of uncommitted incremental revolving loan commitments
or incremental term loans.
On June 23, 2016, QVC amended and restated its senior secured credit facility (the “Third Amended and Restated Credit Agreement”) with zulily as co-
borrower (the “Borrowers”). The Third Amended and Restated Credit Agreement is a multi-currency facility that provides for a $2.65 billion revolving
credit facility, with a $300 million total sub-limit for standby letters of credit and $1.5 billion of uncommitted incremental revolving loan commitments or
incremental term loans. The Third Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by QVC or zulily, with
an additional $50 million sub-limit for standing letters of credit. The remaining $2.25 billion and any incremental loans may be borrowed only by QVC. The
borrowers may elect that the loans extended under the senior secured credit facility bear interest at a rate per annum equal to the ABR or LIBOR, as each is
defined in the senior secured credit facility agreement, plus a margin of 0.25% to 1.75% depending on various factors. Each loan may be prepaid in whole or
in part without penalty other than customary breakage costs. No mandatory prepayments are required other than when borrowings and letter of credit usage
exceed availability; provided that, if zulily ceases to be controlled by Liberty, all of its loans must be repaid and its letters of credit cash collateralized. Any
amounts prepaid on the revolving facility may be reborrowed. The facility matures on June 23, 2021, except that $140 million of the $2.25 billion
commitment available to QVC matures on March 9, 2020. Borrowings under the facility may be accelerated following certain customary events of default.
The purpose of the amendment was to, among other things, extend the maturity of QVC’s senior secured credit facility, provide zulily the opportunity to
borrow on the senior secured credit facility and lower the interest rate on borrowings.
The payment and performance of the borrowers’ obligations (including zulily’s obligations) under the Third Amended and Restated Credit Agreement
are guaranteed by each of QVC’s Material Domestic Subsidiaries (as defined in the Third Amended and Restated Credit Agreement). Further, the
borrowings under the Third Amended and Restated Credit Agreement are secured, pari passu with QVC’s existing notes, by a pledge of all of QVC’s equity
interests. In addition, the payment and performance of the borrowers’ obligations with respect to the $400 million tranche available to both QVC and zulily
are also guaranteed by zulily and secured by a pledge of all of zulily’s equity interests.
The Third Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on QVC and
zulily and each of their restricted subsidiaries (subject to certain exceptions) with respect to, among other things: incurring additional indebtedness; creating
liens on property or assets; making certain loans or investments; selling or disposing of assets; paying certain dividends and other restricted payments;
dissolving, consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; restricting subsidiary
distributions; limiting QVC’s consolidated leverage ratio, which is defined in QVC’s senior secured credit facility as QVC’s consolidated total debt to
Adjusted OIBDA ratio for the most recent four fiscal quarter period; and limiting the borrowers’ combined consolidated leverage ratio, which is defined in
QVC’s senior secured credit facility as QVC and zulily’s combined debt to Adjusted OIBDA ratio for the most recent four fiscal quarter period. Liberty
defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-based
compensation).
The interest rate on borrowings outstanding under the Third Amended and Restated Credit Agreement was 3.0% at December 31, 2017. Availability
under the Third Amended and Restated Credit Agreement at December 31, 2017 was $877 million, net of $10 million of standby letters of credit.
II-64
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
QVC Interest Rate Swap Arrangement
During the year ended December 31, 2016, QVC entered into a three-year interest rate swap arrangement with a notional amount of $125 million to
mitigate the interest rate risk associated with interest payments related to its variable rate debt. The swap arrangement does not qualify as a cash flow hedge
under GAAP. Accordingly, changes in the fair value of the swap are reflected in Realized and unrealized gains or losses on financial instruments, net in the
accompanying consolidated statements of operations.
HSNi Bank Credit Facility
On January 27, 2015, HSNi entered into a $1.25 billion five-year syndicated credit agreement ("Credit Agreement") which is secured by 100% of the
voting equity securities of HSNi's U.S. subsidiaries and 65% of HSNi's first-tier foreign subsidiaries. Certain HSNi subsidiaries have unconditionally
guaranteed HSNi's obligations under the Credit Agreement. The Credit Agreement, which included a $750 million revolving credit facility and a $500
million term loan, could be increased up to $1.75 billion subject to certain conditions and was set to expire on January 27, 2020. On December 29, 2017, the
Credit Agreement was amended, the outstanding balance on the term loan was repaid, and the revolving credit facility was increased to $1 billion. The
maturity of the revolving credit facility was extended to December 29, 2022. Loans under the amended Credit Agreement bear interest at a per annum rate
equal to LIBOR plus a predetermined margin that ranges from 1.25% to 1.75% or the Base Rate (as defined in the Credit Agreement) plus a predetermined
margin that ranges from 0.25% to 0.75%. HSNi pays a commitment fee ranging from 0.20% to 0.30% (based on the leverage ratio) on the unused portion of
the revolving credit facility.
The Credit Agreement includes various covenants, limitations and events of default customary for similar facilities including a maximum leverage ratio
of 3.50x (as defined in the Credit Agreement). The interest rate on the $460 million outstanding long-term debt balance as of December 31, 2017 was
3.07%. The amount available to HSNi under the revolving credit facility portion of the Credit Agreement is reduced by the amount of outstanding letters of
credit issued under the revolving credit facility, which totaled $7 million as of December 31, 2017. The ability to draw funds under the revolving credit
facility is dependent upon meeting the aforementioned financial covenants. As of December 31, 2017, the amount that could be borrowed under the
revolving credit facility, after consideration of the financial covenants and the outstanding letters of credit, was approximately $533 million.
HSNi Interest Rate Swap Arrangement
HSNi has an outstanding interest rate swap that effectively converts $250 million of its variable rate bank credit facility to a fixed rate of 1.05% with a
maturity date in January 2020 (the swapped fixed rate is exclusive of the credit spread under the Credit Agreement). Based on HSNi's leverage ratio as of
December 31, 2017, the all-in fixed rate was 2.3525%. The interest rate swaps were previously designated and qualified as cash flow hedges; therefore, the
effective portions of the changes in fair value were recorded in accumulated other comprehensive income (loss). Going forward the Company will account
for the interest rate swaps at fair value with changes recorded through unrealized gain (loss).
Other Subsidiary Debt
Other subsidiary debt at December 31, 2017 is comprised of capitalized satellite transponder lease obligations.
Debt Covenants
Liberty, QVC and other subsidiaries were in compliance with all debt covenants at December 31, 2017.
II-65
Table of Contents
Five Year Maturities
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The annual principal maturities of Liberty's debt, based on stated maturity dates, for each of the next five years is as follows (amounts in millions):
2018
2019
2020
2021
2022
Fair Value of Debt
$
$
$
$
$
24
425
23
1,786
980
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, based on quoted prices of instruments not considered to be active markets (Level 2), of Liberty's
publicly traded debt securities that are not reported at fair value in the accompanying consolidated balance sheets is as follows (amounts in millions):
Senior debentures
QVC senior secured notes
December 31,
2017
2016
$
$
866
3,636
853
3,496
Due to the variable rate nature, Liberty believes that the carrying amount of its subsidiary debt not discussed above approximated fair value at
December 31, 2017.
(12) Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate from 35
percent to 21 percent; (2) providing bonus depreciation that will allow for full expensing of qualified property; (3) creating a new limitation on deductible
interest expense; (4) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (5) changing rules
related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (6) adding limitations on the
deductibility of certain executive compensation; and (7) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is
payable over eight years. The SEC issued guidance on accounting for the tax effects of the Tax Act. The Company must reflect the income tax effects of
those aspects of the Tax Act for which the accounting is known. To the extent that a company’s accounting for certain income tax effects of the Tax Act is
incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements and the Tax Act provides a
measurement period that should not extend beyond one year from the Tax Act enactment date. If a company cannot determine a provisional estimate to be
included in the financial statements, it should continue to apply the tax laws that were in effect immediately before the enactment of the Tax Act.
The corporate rate reduction was applied to our inventory of deferred tax assets and deferred tax liabilities which resulted in the net tax benefit in the
period ended December 31, 2017. The Company has determined a reasonable estimate
II-66
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
for these amounts, and based on a continued analysis of the estimates and further guidance and interpretations on the application of the law, additional
revisions may occur, and may be material, throughout the allowable measurement period.
Income tax benefit (expense) consists of:
Current:
Federal
State and local
Foreign
Deferred:
Federal
State and local
Foreign
Income tax benefit (expense)
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
$
$
(61)
(23)
(88)
(172)
1,266
(130)
—
1,136
964
(40)
(12)
(73)
(125)
(444)
(33)
4
(473)
(598)
(188)
(26)
(74)
(288)
74
21
8
103
(185)
The following table presents a summary of our domestic and foreign earnings from continuing operations before income taxes:
Domestic
Foreign
Total
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
1,314
209
1,523
1,684
168
1,852
674
142
816
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:
Computed expected tax benefit (expense)
State and local income taxes, net of federal income taxes
Foreign taxes, net of foreign tax credits
Dividends received deductions
Alternative energy tax credits and incentives
Change in valuation allowance affecting tax expense
Change in tax rate due to Tax Act
Change in state tax rate
Consolidation of equity investment
Other, net
Income tax benefit (expense)
II-67
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
(533)
(26)
(32)
10
85
(101)
1,485
(84)
138
22
964
(649)
(26)
(9)
9
94
(16)
—
1
—
(2)
(598)
(286)
(15)
(5)
51
61
6
—
(7)
—
10
(185)
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
For the year ended December 31, 2017 the significant reconciling items are net tax benefits for the effect of the change in the U.S. federal corporate tax
rate from 35% to 21% on deferred taxes, the tax-free consolidation of our equity method investment in HSNi, and tax benefits derived from Liberty’s
alternative energy tax credits and incentives, partially offset by net tax expense for an increase in the Company’s valuation allowance and an increase in the
Company’s state effective tax rate used to measure deferred taxes.
The Company has also evaluated the impact of the one-time mandatory repatriation provision of the Tax Act. Under that provision, earnings and profits
of certain of the Company’s foreign subsidiaries not previously subjected to US tax could be subjected to US tax in 2017 at reduced rates. The Tax Act
allows that earnings and profits deficits of certain subsidiaries may be used to offset the surpluses in others in computing the amount subject to the tax under
the mandatory repatriation provision. The Company has performed an evaluation of its earnings and profits of its foreign subsidiaries and estimates that
deficits in some of the subsidiaries offset the surpluses in others so that no amount is subject to the mandatory repatriation provision of the Tax Act.
Income tax expense was lower than the U.S. statutory tax rate of 35% in 2016 due to tax benefits derived from Liberty’s alternative energy tax credits
and incentives. Income tax expense was lower than the U.S. statutory tax rate of 35% in 2015 due to the receipt of taxable dividends that are subject to a
dividends received deduction.
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:
Deferred tax assets:
Net operating and capital loss carryforwards
Foreign tax credit carryforwards
Accrued stock compensation
Other accrued liabilities
Other future deductible amounts
Deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Investments
Intangible assets
Discount on exchangeable debentures
Deferred gain on debt retirements
Other
Deferred tax liabilities
Net deferred tax liabilities
December 31,
2017
2016
amounts in millions
$
$
160
98
51
19
190
518
(165)
353
903
1,188
981
43
41
3,156
2,803
123
134
56
118
144
575
(64)
511
1,057
1,540
1,404
129
17
4,147
3,636
The Company's valuation allowance increased $101 million in 2017. The entire change in valuation allowance affected tax expense and is primarily the
result of new provisions in the Tax Act that changed the Company’s judgment with respect to the future utilization of its foreign tax credit carryforward.
II-68
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
At December 31, 2017, the Company had net operating losses (on a tax effected basis), federal business tax credits and foreign tax credit carryforwards
for income tax purposes aggregating approximately $160 million, $31 million and $98 million, respectively, which will begin to expire in 2017 and beyond
if not utilized to reduce domestic, state or foreign income tax liabilities in future periods. The net operating losses are expected to be utilized prior to
expiration, except for $67 million. The federal business tax credits are expected to be utilized prior to expiration. As a result of the international provisions
in the Tax Act, the Company estimates that $98 million of its foreign tax credit carryforward will expire without utilization.
A reconciliation of unrecognized tax benefits is as follows:
Balance at beginning of year
Additions based on tax positions related to the current year
Additions for tax positions of prior years
Reductions for tax positions of prior years
Lapse of statute and settlements
Balance at end of year
Years ended December 31,
2017
2016
2015
amounts in millions
72
10
4
—
(15)
71
104
16
—
(26)
(22)
72
136
14
—
(12)
(34)
104
$
$
As of December 31, 2017, 2016 and 2015, the Company had recorded tax reserves of $71 million, $72 million and $104 million, respectively, related to
unrecognized tax benefits for uncertain tax positions. If such tax benefits were to be recognized for financial statement purposes, $60 million, $50 million
and $47 million for the years ended December 31, 2017, 2016 and 2015, respectively, would be reflected in the Company's tax expense and affect its
effective tax rate. Liberty's estimate of its unrecognized tax benefits related to uncertain tax positions requires a high degree of judgment. The Company has
tax positions for which the amount of related unrecognized tax benefits could change during 2018. The amount of unrecognized tax benefits related to these
issues could change as a result of potential settlements, lapsing of statute of limitations and revisions of estimates. It is reasonably possible that the amount
of the Company's gross unrecognized tax benefits may decrease within the next twelve months by up to $3 million.
As of December 31, 2017, the Company's tax years prior to 2014 are closed for federal income tax purposes, and the IRS has completed its examination
of the Company's 2014 tax year. The Company's 2015, 2016 and 2017 tax years are being examined currently as part of the IRS's Compliance Assurance
Process ("CAP") program. Various states are currently examining the Company's prior years state income tax returns. Certain QVC subsidiaries are
currently under audit in Germany for 2012 through 2014.
The Company recorded $17 million of accrued interest and penalties related to uncertain tax positions as of each of December 31, 2017, 2016 and 2015.
(13) 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
II-69
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
resolutions providing for the issue of such preferred stock adopted by Liberty's Board of Directors. As of December 31, 2017, no shares of preferred stock
were issued.
Common Stock
Series A QVC Group and Liberty Ventures common stock has one vote per share, and Series B QVC Group and Liberty Ventures common stock 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. The Series A and Series B common stock participate on an equal basis with respect to dividends and distributions.
At the Annual Meeting of Stockholders held on June 2, 2015, the Company’s stockholders approved an amendment to the Restated Certificate of
Incorporation that increased (i) the total number of shares of the Company’s capital stock which the Company will have the authority to issue to 9,015
million shares, (ii) the number of shares of the Company’s capital stock designated as “Common Stock” to 8,965 million shares and (iii) the number of
shares of Common Stock designated as “Series A Liberty Ventures Common Stock,” “Series B Liberty Ventures Common Stock” and “Series C Liberty
Ventures Common Stock” to 400 million shares, 15 million shares and 400 million shares, respectively.
As of December 31, 2017, Liberty reserved for issuance upon exercise of outstanding stock options approximately 32.4 million shares of Series A QVC
Group common stock and approximately 1.6 million shares of Series B QVC Group common stock. As of December 31, 2017, Liberty reserved for issuance
upon exercise of outstanding stock options approximately 1.7 million shares of Series A Liberty Ventures common stock and approximately 1.1 million
shares of Series B Liberty Ventures common stock.
In addition to the Series A and Series B QVC Group and Ventures common stock, there are 4 billion and 400 million shares of Series C QVC Group and
Ventures common stock authorized for issuance, respectively. As of December 31, 2017, no shares of any Series C QVC Group and Ventures common stock
were issued or outstanding.
On October 1, 2015, in conjunction with the acquisition of zulily, Liberty issued 38.5 million shares of Series A QVC Group common stock. On
December 29, 2017, in conjunction with the acquisition of HSNi, Liberty issued 53.6 million shares of Series A QVC Group common stock. See additional
discussion about both acquisitions in note 5.
Additionally, as discussed in note 1, on November 4, 2016, Liberty completed the Expedia Holdings Split-Off. The Expedia Holdings Split-Off was
accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’s Series A Liberty Ventures common stock for 0.4 of a share of Expedia
Holdings Series A common stock and (ii) 0.4 of each outstanding share of Liberty’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia
Holdings Series B common stock, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia Holdings
common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable).
Purchases of Common Stock
During the year ended December 31, 2015, the Company repurchased 28,134,498 shares of Series A QVC Group common stock for aggregate cash
consideration of $785 million.
During the year ended December 31, 2016, the Company repurchased 34,836,196 shares of Series A QVC Group common stock for aggregate cash
consideration of $799 million.
During the year ended December 31, 2017, the Company repurchased 34,765,751 shares of Series A QVC Group common stock for aggregate cash
consideration of $766 million.
II-70
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
All of the foregoing 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.
In connection with the Expedia Holdings Split-Off, holders of Liberty Ventures common stock were paid cash in lieu of fractional shares of Series A
and Series B Liberty Ventures common stock. In order to fund the cash payments made to holders of shares of Series B Liberty Ventures common stock,
the fractional shares that would have otherwise been issued to those holders were aggregated into an immaterial number of shares of Series B Liberty
Ventures common stock by the Company’s transfer agent and were repurchased by Liberty.
(14) Related Party Transactions with Officers and Directors
Chief Executive Officer Compensation Arrangement
In December 2014, the Compensation Committee of Liberty approved a compensation arrangement, including term options discussed in note 15, for its
President and Chief Executive Officer (the "CEO"). The arrangement provides for a five year employment term beginning January 1, 2015 and ending
December 31, 2019, with an annual base salary of $960,750, increasing annually by 5% of the prior year's base salary, and an annual target cash bonus equal
to 250% of the applicable year's annual base salary. The arrangement also provides that, in the event the CEO is terminated for "cause," he will be entitled
only to his accrued base salary and any amounts due under applicable law and he will forfeit all rights to his unvested term options. If, however, the CEO is
terminated by Liberty without cause or if he terminates his employment for “good reason,” the arrangement provides for him to receive his accrued base
salary, his accrued but unpaid bonus and any amounts due under applicable law, a severance payment of 1.5 times his base salary during the year of his
termination, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, a payment equal to
$17.5 million, and for his unvested term options to generally vest pro rata based on the portion of the term elapsed through the termination date plus 18
months and for all vested and accelerated options to remain exercisable until their respective expiration dates. If the CEO terminates his employment without
“good reason,” he will be entitled to his accrued base salary, his accrued but unpaid bonus and any amounts due under applicable law and a payment of the
$11.75 million and for his unvested term options to generally vest pro rata based on the portion of the term elapsed through the termination date and all
vested and accelerated options to remain exercisable until their respective expiration dates. Lastly, in the case of the CEO's death or his disability, the
arrangement provides that he will be entitled only to his accrued base salary and any amounts due under applicable law, a payment of 1.5 times his base
salary during that year, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, a payment
equal to $17.5 million and for his unvested term options to fully vest and for his vested and accelerated term options to remain exercisable until their
respective expiration dates.
Pursuant to the CEO’s compensation arrangement, he will receive aggregate target equity awards to be allocated between Liberty and Liberty Media in
the amounts of $16 million with respect to calendar year 2015, $17 million with respect to calendar year 2016, $18 million with respect to calendar year
2017, $19 million with respect to calendar year 2018 and $20 million with respect to calendar year 2019. Such target equity awards are comprised of options
to purchase shares of QVCB and LVNTB, along with performance-based restricted stock units (“Performance RSUs”). Vesting of the Performance RSUs is
determined based on satisfaction of performance metrics that are set by Liberty and Liberty Media’s respective compensation committees in the first quarter
of each applicable year, except that the CEO will forfeit his unvested Performance RSUs if his employment is terminated for any reason before the end of the
applicable year. In addition, Liberty and Liberty Media’s compensation committees may grant additional equity awards, with a value of up to 50% of the
target amount allocated to Liberty for the relevant year (the “Above Target Awards”), and the compensation committees may determine to establish
additional performance metrics with respect to such Above Target Awards.
II-71
Table of Contents
(15) Stock-Based Compensation
Liberty - Incentive Plans
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Pursuant to the Liberty Interactive 2016 Omnibus Incentive Plan (the “2016 Plan”), the Company may grant stock options (“Awards”) to be made in
respect of a maximum of 39.9 million shares of Series A and Series B QVC Group common stock and Liberty Ventures common stock. Awards generally
vest over 4-5 years and have a term of 7-10 years. Liberty issues new shares upon exercise of equity awards.
In connection with the HSNi acquisition in December 2017 (see note 5), outstanding awards to purchase shares of HSNi common stock (an “HSN
Award”) were exchanged for awards to purchase shares of Series A QVC Group common stock (a “QVCA Award”). The exercise prices and number of
shares subject to the QVCA Award were determined based on (1) the exercise prices and number of shares subject to the HSN Award and (2) the acquisition
exchange ratio. The exchange of such awards was considered a modification under ASC 805 – Business Combinations. A portion of the fair value of the
replacement QVCA Awards was attributed to the consideration paid in the acquisition. The remaining portion of the fair value will be recognized in the
consolidated financial statements over the remaining vesting period of each individual award.
In connection with the Expedia Holdings Split-Off in November 2016, the holder of an outstanding award to purchase shares of Liberty Ventures Series
A and Series B common stock (a “Liberty Ventures Award”) received an Award to purchase shares of the corresponding series of Expedia Holdings common
stock and an adjustment to the exercise price and number of shares subject to the Liberty Ventures Award (as so adjusted, an “Adjusted Liberty Ventures
Award”). Following the Expedia Holdings Split-Off, employees of Liberty hold Awards in both Liberty Ventures common stock and Expedia Holdings
common stock. The compensation expense relating to employees of Liberty is recorded at Liberty.
In connection with the CommerceHub Spin-Off in July 2016, the holder of an outstanding award to purchase shares of Liberty Ventures Series A and
Series B common stock (an “Original Liberty Ventures Award”) received an adjustment to the exercise price and number of shares subject to the Original
Liberty Ventures Award (as so adjusted, an “Adjusted Liberty Ventures Award”). A holder of an Original Liberty Ventures Award who was a member of the
board of directors or an officer of Liberty holding the position of Vice President or above also received an Award to purchase shares of the corresponding
series of CommerceHub common stock as well as Series C CommerceHub common stock (in each case, a “CommerceHub Award”). Following the
CommerceHub Spin-Off, employees of Liberty may hold Awards in both Liberty Ventures common stock and CommerceHub common stock. The
compensation expense relating to employees of Liberty is recorded at Liberty.
II-72
Table of Contents
Liberty – Grants
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The following table presents the number and weighted average grant-date fair value (“GDFV”) of options granted by Liberty during the years ended
December 31, 2017, 2016 and 2015:
Series A QVC Group common stock, QVC employees (1)
Series A QVC Group common stock, zulily employees (1)
Series A QVC Group common stock, Liberty employees and directors (2)
Series A QVC Group common stock, QVC CEO (3)
Series B QVC Group common stock, Liberty CEO (4)
Series A Ventures Group common stock, Liberty employees and directors (2)
Series B Ventures Group common stock, Liberty CEO (4)
(1) Mainly vests semi-annually over four years.
For the Years ended December 31,
2017
2016
2015
Options
Granted
(000's)
Weighted
Average
GDFV
Options
Granted
(000's)
Weighted
Average
GDFV
Options
Granted
(000's)
Weighted
Average
GDFV
3,115 $
483 $
518 $
NA
154 $
188 $
269 $
7.86
7.86
7.81
NA
7.92
16.52
15.41
2,860 $
433 $
421 $
NA
730 $
114 $
209 $
7.84
7.57
8.02
NA
7.47
12.25
12.48
2,002 $
264 $
2,459 $
1,680 $
132 $
683 $
135 $
11.87
9.84
11.63
10.40
10.10
18.10
16.94
(2) Mainly vests between three and five years for employees and in one year for directors.
(3) Vests 50% on each of December 31, 2019 and 2020. Grant was made in connection with a new compensation arrangement.
(4) Grants in 2017 and 2016 cliff vested at the end of their respective grant year; grant in 2015 cliff vested in March 2016. Grants were made in
connection with his employment agreement (see note 14).
In connection with the Option Exchange (see below), Liberty granted 5.9 million, 946 thousand and 1.1 million options to purchase shares of Series A
QVC Group common stock, Series A Liberty Ventures common stock and Series B Liberty Ventures common stock, respectively. Such options had an
incremental weighted average GDFV of $3.49, $8.53 and $6.94, respectively.
In addition to the stock option grants to the Liberty CEO, Liberty granted performance-based restricted stock units ("RSUs") of Series B QVC Group
common stock in 2017, 2016 and 2015 of 115 thousand, 53 thousand and 182 thousand, respectively. The RSUs had a fair value of $19.90, $25.11 and
$29.41 per share, respectively, at the time they were granted. Liberty also granted performance-based RSUs of Series B Liberty Ventures common stock in
2016 and 2015 of 16 thousand and 13 thousand, respectively. The RSUs had a fair value of $38.79 and $42.33 per share, respectively, at the time they were
granted. The 2017, 2016 and 2015 performance-based RSUs cliff vested in one year, subject to the satisfaction of certain performance objectives and based
on an amount determined by the compensation committee.
During the fourth quarter of 2017, the Company entered into a series of transactions with certain officers of Liberty, associated with certain outstanding
stock options, in order to recognize tax deductions in the current year versus future years (the “Option Exchange”). On December 26, 2017 (the “Grant
Date”), pursuant to the approval of the Compensation Committee of its Board of Directors, the Company effected the acceleration of (i) each unvested in-
the-money option to acquire shares of LVNTA and (ii) each unvested in-the-money option to acquire shares of LVNTB, in each case, held by certain of its
officers (collectively, the “Eligible Optionholders”). Following this acceleration, also on the Grant Date, each
II-73
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Eligible Optionholder exercised, on a net settled basis, all of his outstanding in-the-money vested and unvested options to acquire QVCA shares, LVNTA
shares and LVNTB shares (the “Eligible Options”), and:
·
·
with respect to each vested Eligible Option, the Company granted the Eligible Optionholder a vested new option with substantially the same
terms and conditions as the exercised vested Eligible Option, except that the exercise price for the new option is, in the case of options to
acquire shares of QVCA or LVNTA, the closing price on the Grant Date per QVCA or LVNTA share, as applicable, and, in the case of options
to acquire shares of LVNTB, the fair market value on the Grant Date of the LVNTB shares as determined pursuant to the incentive plan under
which the awards were granted; and
with respect to each unvested Eligible Option:
o
o
in satisfaction of the exercise, on a net settled basis, of the unvested Eligible Options, the Company granted the Eligible Optionholder
a number of restricted LVNTA or LVNTB shares (the “Restricted Shares”) with a vesting schedule identical to that of the unvested
Eligible Options so exercised, and the Eligible Optionholder made an election under Section 83(b) of the Internal Revenue Code with
respect to such Restricted Shares; and
the Company granted the Eligible Optionholder a new option (the “Unvested New Option”) to acquire the same series of common
stock and with substantially the same terms and conditions, including with respect to vesting and expiration, as the unvested Eligible
Option exercised as set forth above, except that the number of LVNTA or LVNTB shares subject to such Unvested New Option is
equal to the number of shares subject to the unvested Eligible Option minus the number of Restricted Shares received upon exercise of
such unvested Eligible Option. The exercise price of such new option is, in the case of a LVNTA option, the closing price on the Grant
Date per share of LVNTA, or, in the case of a LVNTB option, the fair market value on the Grant Date of the LVNTB shares as
determined pursuant to the incentive plan under which the Unvested New Options were granted.
The Option Exchange was considered a modification under ASC 718 – Stock Compensation, with the following impacts on compensation expense. The
unamortized value of the unvested Eligible Options that were exercised, which was $14 million for LVNTA and LVNTB combined, will be expensed over
the vesting period of the Restricted Shares attributable to the exercise of those options. The grant of new vested options resulted in incremental
compensation expense in the fourth quarter of 2017 of $30 million for QVCA, LVNTA and LVNTB combined. The grant of Unvested New Options resulted
in incremental compensation expense totaling $6 million for LVNTA and LVNTB combined, which will be amortized over the vesting periods of those
options.
The Company has calculated the GDFV for all of its equity classified awards using the Black-Scholes-Merton Model. The Company estimates the
expected term of the Awards based on historical exercise and forfeiture data. For grants made in 2017, 2016 and 2015, the range of expected terms was 2.0
to 6.7 years. The volatility used in the calculation for Awards is based on the historical volatility of Liberty's stocks and the implied volatility of publicly
traded Liberty options. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.
II-74
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The following table presents the range of volatilities used by Liberty in the Black-Scholes-Merton Model for the 2017, 2016 and 2015 QVC Group and
Liberty Ventures grants.
2017 grants
QVC Group options
Liberty Ventures options
2016 grants
QVC Group options
Liberty Ventures options
2015 grants
QVC Group options
Liberty Ventures options
Liberty - Outstanding Awards
Volatility
26.9 %
25.9 %
27.4 %
30.6 %
27.4 %
30.6 %
-
-
-
-
-
-
32.7 %
28.9 %
27.4 %
30.6 %
39.7 %
42.4 %
The following table presents the number and weighted average exercise price ("WAEP") of the Awards to purchase QVC Group and Liberty Ventures
common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic
value of the Awards.
Outstanding at January 1, 2017
HSNi Acquisition
Granted
Exercised
Forfeited/Cancelled
Option Exchange, Exercised
Option Exchange, Granted
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Outstanding at January 1, 2017
Granted
Exercised
Forfeited/Cancelled
Option Exchange, Exercised
Option Exchange, Granted
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Awards
(000's)
29,585 $
3,635 $
4,116 $
(3,611) $
(1,364) $
(5,931) $
5,931 $
32,361 $
20,286 $
WAEP
20.80
26.22
23.82
16.34
27.23
17.76
25.74
23.48
22.66
Awards
(000's)
WAEP
22.18
55.42
16.69
38.50
20.99
55.96
47.12
47.45
1,974 $
188 $
(451) $
(12) $
(975) $
946 $
1,670 $
1,273 $
Series A
Weighted
average
remaining
life
QVC Group
Aggregate
intrinsic
value
(in millions)
Awards
(000's)
Series B
Weighted
average
remaining
life
Aggregate
intrinsic
value
(in millions)
WAEP
27.50
—
23.87
—
—
—
—
27.16
25.40
1,489 $
— $
154 $
— $
— $
— $
— $
1,643 $
997 $
WAEP
35.02
52.39
—
—
38.74
56.38
56.38
56.38
987 $
269 $
— $
— $
(1,256) $
1,080 $
1,080 $
443 $
4.0 years
3.2 years
$
$
86
71
4.8 years
4.3 years
$
$
—
—
Series A
Weighted
average
remaining
life
Liberty Ventures
Aggregate
intrinsic
value
(in millions)
Awards
(000's)
Series B
Weighted
average
remaining
life
Aggregate
intrinsic
value
(in millions)
2.6 years
2.0 years
$
$
14
10
II-75
4.7 years
2.0 years
$
$
—
—
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
As of December 31, 2017, the total unrecognized compensation cost related to unvested Liberty Awards was approximately $116 million. Such amount
will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.8 years.
Liberty - Exercises
The aggregate intrinsic value of all options exercised during the years ended December 31, 2017, 2016 and 2015 was $145 million, $44 million and
$115 million, respectively. The aggregate intrinsic value of options exercised for the year ended December 31, 2017 includes approximately $104 million
related to the intrinsic value of options exercised as a result of the Option Exchange.
Liberty - Restricted Stock
The Company had approximately 5.2 million and 252 thousand unvested restricted shares of QVC Group and Liberty Ventures common stock,
respectively, held by certain directors, officers and employees of the Company as of December 31, 2017. These Series A and Series B unvested restricted
shares of QVC Group and Liberty Ventures had a weighted average GDFV of $24.00 and $50.46 per share, respectively.
The aggregate fair value of all restricted shares of Liberty common stock that vested during the years ended December 31, 2017, 2016 and 2015 was
$23 million, $26 million and $16 million, respectively.
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 and are typically cash settled and recorded as
liability awards. During the year ended December 31, 2016, approximately $90 million of cash payments were made to settle CommerceHub stock based
awards. The awards and compensation recorded, if any, under the plans at the other subsidiaries are not significant to Liberty.
(16) Employee Benefit Plans
Subsidiaries of Liberty sponsor 401(k) plans, which provide their employees an opportunity to make contributions to a trust for investment in Liberty
common stock, as well as other mutual funds. The Company's subsidiaries make matching contributions to their plans based on a percentage of the amount
contributed by employees. Employer cash contributions to all plans aggregated $20 million, $25 million and $27 million, respectively, for the years ended
December 31, 2017, 2016 and 2015, respectively.
(17) Other Comprehensive Earnings (Loss)
Accumulated other comprehensive earnings (loss) included in Liberty's consolidated balance sheets and consolidated statements of equity reflect the
aggregate of foreign currency translation adjustments, unrealized holding gains and losses on AFS securities and Liberty's share of accumulated other
comprehensive earnings of affiliates.
II-76
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The change in the components of accumulated other comprehensive earnings (loss), net of taxes ("AOCI"), is summarized as follows:
Balance at January 1, 2015
Other comprehensive earnings (loss) attributable to Liberty Interactive Corporation stockholders
Balance at December 31, 2015
Other comprehensive earnings (loss) attributable to Liberty Interactive Corporation stockholders
Distribution of Liberty Expedia Holdings
Balance at December 31, 2016
Other comprehensive earnings (loss) attributable to Liberty Interactive Corporation stockholders
Balance at December 31, 2017
Foreign
currency
translation
adjustments
Share of
AOCI
of equity
affiliates
$
$
$
amounts in millions
(19)
(21)
(40)
(1)
35
(6)
3
(3)
(75)
(100)
(175)
(85)
—
(260)
130
(130)
AOCI
(94)
(121)
(215)
(86)
35
(266)
133
(133)
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).
Year ended December 31, 2017:
Foreign currency translation adjustments
Share of other comprehensive earnings (loss) of equity affiliates
Other comprehensive earnings (loss)
Year ended December 31, 2016:
Foreign currency translation adjustments
Share of other comprehensive earnings (loss) of equity affiliates
Other comprehensive earnings (loss) from discontinued operations
Other
Other comprehensive earnings (loss)
Year ended December 31, 2015:
Foreign currency translation adjustments
Share of other comprehensive earnings (loss) of equity affiliates
Other comprehensive earnings (loss) from discontinued operations
Other comprehensive earnings (loss)
II-77
Before-tax
amount
Tax
(expense)
benefit
Net-of-tax
amount
amounts in millions
$
$
$
$
$
$
155
5
160
(97)
(8)
(3)
10
(98)
(118)
(6)
(27)
(151)
(21)
(2)
(23)
13
3
1
(4)
13
17
2
10
29
134
3
137
(84)
(5)
(2)
6
(85)
(101)
(4)
(17)
(122)
Table of Contents
(18) Commitments and Contingencies
Operating Leases
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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 $45 million, $46 million and $39 million for the years ended December 31, 2017, 2016 and 2015,
respectively.
A summary of future minimum lease payments under noncancelable operating leases and build to suit leases as of December 31, 2017 follows (amounts
in millions):
Years ending December 31:
2018
2019
2020
2021
2022
Thereafter
$
$
$
$
$
$
78
70
58
51
42
201
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 2017.
Distribution Center Lease
On July 2, 2015, QVC entered into a lease (the “Lease”) for a west coast distribution center. Pursuant to the Lease, the landlord built an approximately
one million square foot rental building in Ontario, California (the “Premises”), and thereafter leased the Premises to QVC as its new California distribution
center for an initial term of 15 years. Under the Lease, QVC is required to pay an initial base rent of approximately $6 million per year, increasing to
approximately $8 million per year by the final year of the initial term, as well as all real estate taxes and other building operating costs. QVC also has an
option to extend the term of the Lease for up to two consecutive terms of 10 years each.
QVC has the right to purchase the Premises and related land from the landlord by entering into an amended and restated agreement at any time during
the twenty-fifth or twenty-sixth months of the Lease's initial term with a $10 million initial payment and annual payments of $12 million over a term of 13
years.
QVC concluded that it was the deemed owner (for accounting purposes only) of the Premises during the construction period under build to suit lease
accounting. Building construction began in July of 2015. During the construction period, QVC recorded estimated project construction costs incurred by the
landlord as a projects in progress asset and a corresponding long-term liability in “Property and equipment, net” and “Other long-term liabilities,”
respectively. In addition, QVC paid for normal tenant improvements and certain structural improvements and recorded these amounts as part of the projects
in progress asset. Upon completion of construction, the long-term liability was reclassified to debt. QVC incurred construction costs of $89 million during
the year ended December 31, 2016. No such costs were incurred for the year ended December 31, 2017.
On August 29, 2016, QVC’s California distribution center officially opened. QVC concluded that the Lease does not meet the criteria for “sale-
leaseback” treatment under U.S. GAAP. Therefore, QVC treats the Lease as a financing obligation and lease payments are attributed to: (1) a reduction of the
principal financing obligation; (2) imputed interest
II-78
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
expense; and (3) land lease expense representing an imputed cost to lease the underlying land of the Premises. In addition, the building asset will be
depreciated over its estimated useful life of 20 years. Although QVC did not begin making monthly lease payments pursuant to the Lease until February
2017, the portion of the lease obligations allocated to the land has been treated for accounting purposes as an operating lease that commenced in 2015. If
QVC does not exercise its right to purchase the Premises and related land, QVC will derecognize both the net book values of the asset and the financing
obligation.
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.
(19) Information About Liberty's Operating Segments
Liberty, through its ownership interests in subsidiaries and other companies, is primarily engaged in the video and on-line commerce industries. Liberty
identifies its reportable segments as (A) those consolidated subsidiaries that represent 10% or more of its consolidated annual revenue, annual Adjusted
OIBDA or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Liberty's annual pre-tax earnings. The
segment presentation for prior periods has been conformed to the current period segment presentation.
Liberty evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue,
Adjusted OIBDA, gross margin, average sales price per unit, number of units shipped and revenue or sales per customer equivalent. In addition, Liberty
reviews nonfinancial measures such as unique website visitors, conversion rates and active customers, as appropriate.
Liberty defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-
based compensation). Liberty believes this measure is an important indicator of the operational strength and performance of its businesses, including each
business's ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical
comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and
amortization, stock-based compensation, certain purchase accounting adjustments, separately reported litigation settlements and restructuring and
impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in
addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance
prepared in accordance with GAAP. Liberty generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at
current prices.
For the year ended December 31, 2017, Liberty has identified the following consolidated subsidiaries as its reportable segments:
·
·
QVC – consolidated subsidiary that markets and sells a wide variety of consumer products in the U.S. and several foreign countries, primarily by
means of its televised shopping programs and via the Internet and mobile transactions through its domestic and international websites.
zulily – consolidated subsidiary that markets and sells unique products in the U.S. and several foreign countries through flash sales events,
primarily through its desktop and mobile websites and mobile applications.
II-79
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
·
HSN – consolidated subsidiary that markets and sells a wide variety of consumer products primarily in the U.S. by means of its televised shopping
programs and via the Internet and mobile transactions through its domestic websites.
Liberty's operating segments are strategic business units that offer different products and services. They are managed separately because each segment
requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments that are also consolidated
subsidiaries are the same as those described in the Company's summary of significant accounting policies.
Performance Measures
QVC Group
QVC
HSN
zulily
Corporate and other
Inter-segment eliminations
Total QVC Group
Ventures Group
Corporate and other
Total Ventures Group
Consolidated Liberty
Years ended December 31,
2017
Adjusted
OIBDA
Revenue
Revenue
2016
Adjusted
OIBDA
Revenue
2015
Adjusted
OIBDA
amounts in millions
$
$
8,771
—
1,613
—
(3)
10,381
23
23
10,404
1,897
—
91
(35)
—
1,953
(27)
(27)
1,926
8,682
NA
1,547
—
(10)
10,219
428
428
10,647
1,840
NA
112
(16)
—
1,936
3
3
1,939
8,743
NA
426
—
—
9,169
820
820
9,989
1,894
NA
21
(28)
—
1,887
59
59
1,946
II-80
Table of Contents
Other Information
QVC Group
QVC
HSN
zulily
Corporate and other
Total QVC Group
Ventures Group
Corporate and other
Total Ventures Group
Inter-group eliminations
Consolidated Liberty
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
December 31, 2017
Investments Investment
in Liberty
in
Capital
affiliates
Broadband expenditures
December 31, 2016
Investments Investment
in Liberty
in
Capital
affiliates
Broadband expenditures
Total
assets
Total
assets
$
$
11,550
2,798
2,323
566
17,237
6,885
6,885
—
24,122
40
—
—
—
40
269
269
—
309
—
—
—
—
—
3,635
3,635
3,635
amounts in millions
152
—
49
—
201
3
3
—
204
11,545
NA
2,461
351
14,357
5,998
5,998
—
20,355
40
NA
—
184
224
357
357
—
581
—
NA
—
—
—
3,161
3,161
3,161
179
NA
27
—
206
27
27
—
233
The following table provides a reconciliation of consolidated segment Adjusted OIBDA to operating income and earnings (loss) from continuing
operations before income taxes:
Consolidated segment Adjusted OIBDA
Stock-based compensation
Depreciation and amortization
Acquisition and restructuring related costs
Operating income
Interest expense
Share of earnings (loss) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net
Other, net
Earnings (loss) from continuing operations before income taxes
II-81
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
1,926
(123)
(725)
(35)
1,043
(355)
(200)
618
410
7
1,523
1,939
(97)
(874)
—
968
(363)
(68)
1,175
9
131
1,852
1,946
(127)
(703)
—
1,116
(360)
(178)
114
110
14
816
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Revenue by Geographic Area
Revenue by geographic area based on the location of customers is as follows:
United States
Japan
Germany
Other foreign countries
Long-lived Assets by Geographic Area
United States
Japan
Germany
Other foreign countries
Years ended December 31,
2017
7,684
934
899
887
10,404
2016
amounts in millions
7,979
900
866
902
10,647
$
$
2015
7,412
811
850
916
9,989
December 31,
2017
2016
amounts in millions
$
$
895
143
164
139
1,341
694
145
154
138
1,131
II-82
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
(20) Quarterly Financial Information (Unaudited)
As discussed in note 3, during the third quarter of 2016, the Company adopted new accounting guidance that requires the recognition of excess tax
benefits and tax deficiencies as income tax benefit or expense rather than as additional paid-in capital. The Company has applied the new guidance
prospectively from January 1, 2016. The unaudited quarterly information for the first and second quarters of 2016 has been retrospectively adjusted to reflect
the impact of the adoption of this guidance.
In addition, as discussed in note 6, in November 2016, Liberty completed the Expedia Holdings Split-Off. The unaudited quarterly information
below for 2016 reflects Liberty’s interest in Expedia as a discontinued operation for all periods presented.
2017:
Revenue
Operating income
Earnings from continuing operations
Net earnings (loss) attributable to Liberty Interactive Corporation stockholders:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Basic net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation
stockholders per common share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation
stockholders per common share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Basic net earnings (loss) attributable to Liberty Interactive Corporation stockholders per common share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted net earnings (loss) attributable to Liberty Interactive Corporation stockholders per common
share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
II-83
1st
Quarter
2nd
3rd
Quarter
Quarter
amounts in millions,
except per share amounts
4th
Quarter
$
$
$
$
$
$
$
$
$
$
$
$
$
2,327
213
519
91
416
2,352
254
184
111
64
2,381
208
308
119
177
0.20
4.89
0.25
0.75
0.27
2.06
0.20
4.84
0.20
4.89
0.24
0.74
0.25
0.75
0.26
2.03
0.27
2.06
0.20
4.84
0.24
0.74
0.26
2.03
3,344
368
1,476
887
576
2.07
6.70
2.05
6.70
2.07
6.70
2.05
6.70
Table of Contents
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
2016:
Revenue
Operating income
Earnings from continuing operations
Net earnings (loss) attributable to Liberty Interactive Corporation stockholders:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Basic net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation
stockholders per common share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation
stockholders per common share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Basic net earnings (loss) attributable to Liberty Interactive Corporation stockholders per common
share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
Diluted net earnings (loss) attributable to Liberty Interactive Corporation stockholders per common
share:
Series A and Series B QVC Group common stock
Series A and Series B Liberty Ventures common stock
1st
Quarter
2nd
3rd
Quarter
Quarter
4th
Quarter
amounts in millions,
except per share amounts
2,510
189
92
94
(26)
2,563
250
387
130
249
2,412
157
451
61
408
0.19
(0.07)
0.27
1.73
0.13
2.68
0.19
(0.07)
0.27
1.72
0.13
2.64
3,162
372
324
188
131
0.41
1.15
0.40
1.15
0.19
(0.18)
0.27
1.75
0.13
2.87
0.41
1.21
0.19
(0.18)
0.27
1.74
0.13
2.83
0.40
1.21
$
$
$
$
$
$
$
$
$
$
$
$
$
II-84
Table of Contents
The following required information is incorporated by reference to our definitive proxy statement for our 2018 Annual Meeting of Stockholders
presently scheduled to be held in the second quarter of 2018:
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
We expect to file our definitive proxy statement for our 2018 Annual Meeting of Stockholders with the Securities and Exchange Commission on or
before April 30, 2018.
III-1
Table of Contents
Item 15. Exhibits and Financial Statement Schedules.
(a)(1) Financial Statements
Included in Part II of this report:
PART IV.
Liberty Interactive Corporation:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2017 and 2016
Consolidated Statements of Operations, Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Earnings (loss), Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows, Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Equity, Years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements, December 31, 2017, 2016 and 2015
(a)(2) Financial Statement Schedules
Page No.
II-30 & II-32
II-33
II-35
II-36
II-37
II-38
II-39
(i)
(ii)
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.
Balance sheet only Report of Independent Registered Public Accounting Firm for HSN, Inc. referenced by current year Report of
Independent Registered Public Accounting Firm.
(iii)
Separate financial statements for Liberty Broadband Corporation:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, December 31, 2017 and 2016
Consolidated Statements of Operations, Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income (Loss), Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows, Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Changes in Shareholders’ Equity, Years ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
IV-1
Page No.
IV-11
IV-12
IV-13
IV-14
IV-15
IV-16
IV-17
Table of Contents
(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):
2 - Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:
2.1
2.2
2.3
2.4
2.5
2.6
Reorganization Agreement, dated as of July 15, 2016, between Liberty Interactive Corporation and CommerceHub, Inc. (incorporated by
reference to Exhibit 2.1 to CommerceHub, Inc.’s Current Report on Form 8-K filed on July 26, 2016 (File No. 001-37840) (the
“CommerceHub 8-K”)).
Reorganization Agreement, dated as of October 26, 2016, between Liberty Interactive Corporation and Liberty Expedia Holdings, Inc.
(incorporated by reference to Exhibit 2.1 to Post-Effective Amendment No. 1 to Liberty Expedia Holdings, Inc.’s Registration Statement
on Form S-4 filed on November 4, 2016 (File No. 333-210377)).
Agreement and Plan of Reorganization, dated as of April 4, 2017, by and among Liberty Interactive Corporation, General Communication,
Inc. and Liberty Interactive LLC (incorporated by reference to Annex A to Liberty Interactive Corporation’s Definitive Proxy Statement
on Schedule 14A filed on December 29, 2017 (File No. 001-33982)).
Agreement and Plan of Merger, dated as of July 5, 2017, by and among Liberty Interactive Corporation, Liberty Horizon, Inc. and HSN,
Inc. (included as Annex A to the proxy statement/prospectus forming a part of Liberty Interactive Corporation’s Registration Statement on
Form S-4 filed on August 31, 2017 (File No. 333-220270).
Amendment No. 1 to Agreement and Plan of Reorganization, dated as of July 19, 2017, by and among Liberty Interactive Corporation,
Liberty Interactive LLC and General Communication, Inc. (incorporated by reference to Annex B to Liberty Interactive Corporation’s
Definitive Proxy Statement on Schedule 14A filed on December 29, 2017 (File No. 001-33982)).
Amendment No. 2 to Agreement and Plan of Reorganization, dated as of November 8, 2017, by and among Liberty Interactive
Corporation, Liberty Interactive LLC and General Communication, Inc. (incorporated by reference to Annex C to Liberty Interactive
Corporation’s Definitive Proxy Statement on Schedule 14A filed on December 29, 2017 (File No. 001-33982)).
3 - Articles of Incorporation and Bylaws:
3.1
3.2
3.3
Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Amendment No. 4 to the Registrant's
Form 8-A filed on June 4, 2015 (File No. 001-33982) (the “Form 8-A”)).
Certificate of Amendment to the Restated Certificate of Incorporation of Liberty Interactive Corporation (incorporated by reference to
Exhibit 3.2 to the Form 8-A).
Amended and Restated Bylaws of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K
filed on August 6, 2015 (File No. 001-33982)).
IV-2
Table of Contents
4 - Instruments Defining the Rights to Securities Holders, including Indentures:
4.1
4.2
4.3
4.4
4.5
Form of Specimen certificate for shares of the Registrant's Series A QVC Group common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.1 to the Form 8-A).
Form of Specimen certificate for shares of the Registrant's Series B QVC Group common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.2 to the Form 8-A).
Specimen certificate for shares of the Registrant's Series A Liberty Ventures common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.3 to the Registrant's Registration Statement on Form S-4 filed on April 3, 2012 (File No. 333-180543) (the “Liberty
S-4”)).
Specimen certificate for shares of the Registrant's Series B Liberty Ventures common stock, par value $.01 per share (incorporated by
reference to Exhibit 4.4 to the Liberty S-4).
The Registrant undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all instruments with respect to
long-term debt not filed herewith.
10 - Material Contracts:
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated Effective November 7, 2011) (the "2000 Incentive Plan")
(incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ending September
30, 2011 filed on November 8, 2011 (File No. 001-33982) (the “Liberty 2011 10-Q”)). +
Amendment to the 2000 Incentive Plan (effective as of August 5, 2013) (incorporated by reference to Exhibit 10.3 to the Liberty Quarterly
Report on Form 10-Q for the quarterly period ended September 30, 2013 filed on November 5, 2013) (File No. 001-33982) (the “Liberty
2013 10-Q”). +
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated Effective November 7, 2011) (the "2007 Incentive Plan")
(incorporated by reference to Exhibit 10.6 to the Liberty 2011 10-Q). +
Amendment to the 2007 Incentive Plan (effective as of August 5, 2013) (incorporated by reference to Exhibit 10.4 to the Liberty 2013 10-
Q). +
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated Effective November 7, 2011) (the “2010 Incentive Plan”)
(incorporated by reference to Exhibit 10.7 to the Liberty 2011 10-Q). +
Amendment to the 2010 Incentive Plan (effective August 5, 2013) (incorporated by reference to Exhibit 10.5 to the Liberty 2013 10-Q). +
Liberty Interactive Corporation 2002 Nonemployee Director Incentive Plan (As Amended and Restated Effective November 7, 2011) (the
"2002 Directors Plan") (incorporated by reference to Exhibit 10.8 to the Liberty 2011 10-Q). +
Amendment to the 2002 Directors Plan (effective as of August 5, 2013) (incorporated by reference to Exhibit 10.1 to the Liberty 2013 10-
Q). +
IV-3
Table of Contents
10.9
10.10
10.11
10.12
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended and restated as of December 17, 2015) (the “2011
Directors Plan”) (incorporated by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December
31, 2015 filed on February 26, 2016 (File No. 001-33982) (the “Liberty 2015 10-K”). +
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of March 31, 2015) (the “2012 Incentive Plan”)
(incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended on March 31,
2015 filed on May 8, 2015 (File No. 001-33982)). +
Liberty Interactive Corporation 2016 Omnibus Incentive Plan (incorporated by reference to Annex A to the Registrant’s Proxy Statement
on Schedule 14A filed on July 8, 2016 (File No. 001-33982)). +
Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form
10-K for the year ended December 31, 2013 filed on February 28, 2014 (File No. 001-33982) (the “Liberty 2013 10-K”)). +
10.13
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.14 to the Liberty 2013 10-K). +
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
Form of Non-Qualified Stock Option Agreement under the 2000 Incentive Plan, the 2007 Incentive Plan and the 2010 Incentive Plan [for
certain designated award recipients] (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the
year ended December 31, 2011 filed on February 23, 2012 (File No. 001-33982) (the “Liberty 2011 10-K”)). +
Form of Restricted Stock Award Agreement under the 2000 Incentive Plan, the 2007 Incentive Plan and the 2010 Incentive Plan [for
certain designated award recipients] (incorporated by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2009 filed on February 25, 2010 (File No. 001-33982) (the “Liberty 2009 10-K)). +
Form of Non-Qualified Stock Option Agreement under the 2002 Directors Plan and the 2011 Directors Plan (incorporated by reference to
10.19 to the Liberty 2011 10-K). +
Form of Restricted Stock Award Agreement under the 2002 Directors Plan and the 2011 Directors Plan (incorporated by reference to 10.20
to the Liberty 2011 10-K). +
Non-Qualified Stock Option Agreement under the 2007 Incentive Plan for Michael George dated March 2, 2011 (incorporated by
reference to 10.22 to the Liberty 2011 10-K). +
Amended and Restated Non-Qualified Stock Option Agreement under the 2000 Incentive Plan for Gregory B. Maffei (incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2012 filed on August
8, 2012 (File No. 001-33982) (the “Liberty 2012 10-Q”)). +
Amended and Restated Non-Qualified Stock Option Agreement under the 2007 Incentive Plan for Gregory B. Maffei (incorporated by
reference to Exhibit 10.2 to the Liberty 2012 10-Q). +
Employment Agreement between Michael George and QVC, effective December 16, 2015 (incorporated by reference to Exhibit 10.23 to
the Liberty 2015 10-K). +
IV-4
Table of Contents
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
Employment Agreement between Gregory B. Maffei and Liberty Interactive Corporation dated December 29, 2014 (incorporated by
reference to Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 27,
2015 (File No. 001-33982)). +
Non-Qualified Stock Option Agreement under the Liberty Interactive Corporation 2010 Incentive Plan for Gregory B. Maffei, effective
December 24, 2014 (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period
ended June 30, 2015 filed on August 5, 2015 (File No. 001-33982)). +
Letter Agreement regarding personal use of the Liberty aircraft, dated as of February 5, 2013, between Gregory B. Maffei and Liberty
Media Corporation (incorporated by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2012 filed on February 28, 2013 (File No. 001-33982)). +
Letter Agreement regarding personal use of Liberty Media’s aircraft, dated as of November 11, 2015, between Gregory B. Maffei and
Liberty Media Corporation (incorporated by reference to Exhibit 10.27 to the Liberty 2015 10-K). +
Agreement Regarding LINTA Equity Awards dated September 23, 2011, between Liberty Interactive Corporation and Gregory B. Maffei
(incorporated by reference to Exhibit 10.25 to the Liberty 2011 10-K). +
Call Agreement, dated as of February 9, 1998 (the "Call Agreement"), between Liberty Interactive Corporation (as successor of Liberty
Interactive LLC (f/k/a Liberty Media LLC, “Old Liberty”), as assignee of Tele-Communications, Inc.) and the Malone Group
(incorporated by reference to Exhibit 10.26 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 filed
on February 27, 2009 (File No. 001-33982)).
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 10.27 to the Liberty 2009 10-K).
Form of Indemnification Agreement between the Registrant and its executive officers/directors (incorporated by reference to Exhibit 10.29
to the Liberty 2011 10-K).
Tax Sharing Agreement, dated September 23, 2011, between Liberty Interactive Corporation, Liberty Interactive LLC and Liberty Media
Corporation (as assignee of Starz (f/k/a Liberty Media Corporation)) (incorporated by reference to Exhibit 10.4 to Post-Effective
Amendment No. 1 to Starz's Registration Statement on Form S-4 filed on September 23, 2011 (File No. 333-171201) (the “Starz S-4”)).
Services Agreement, dated as of September 23, 2011, by and between Liberty Interactive Corporation and Liberty Media Corporation (as
assignee of Starz (f/k/a Liberty Media Corporation)) (incorporated by reference to Exhibit 10.5 to the Starz S-4).
Tax Sharing Agreement, dated as of August 27, 2014, between Liberty Interactive Corporation and Liberty TripAdvisor Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on September 3, 2014 (File No. 001-
33982)).
IV-5
Table of Contents
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
10.42
10.43
Amendment to Tax Sharing Agreement, dated as of October 3, 2014, between Liberty Interactive Corporation and Liberty TripAdvisor
Holdings, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended
on March 31, 2015 filed on May 8, 2015 (File No. 001-33982)).
Tax Sharing Agreement, dated as of July 22, 2016, between Liberty Interactive Corporation and CommerceHub, Inc. (incorporated by
reference to Exhibit 10.1 to the CommerceHub 8-K).
Tax Sharing Agreement, dated as of November 4, 2016, between Liberty Interactive Corporation and Liberty Expedia Holdings, Inc.
(incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 7, 2016 (File No. 001-
33982)).
Indenture dated as of March 23, 2010 among QVC, the guarantors party thereto and U.S. Bank National Association, as trustee, as
supplemented by that Supplemental Indenture dated as of June 30, 2011 (incorporated by reference to Exhibit 10.2 to the QVC S-4).
Indenture dated as of July 2, 2012 among QVC, the guarantors party thereto and U.S. Bank National Association (incorporated by
reference to Exhibit 4.1 to the QVC S-4).
Indenture dated as of March 18, 2013 among QVC, Inc., the guarantors party thereto and U.S. Bank National Association (incorporated by
reference to Exhibit 10.2 to QVC's Quarterly Report on Form 10-Q filed on May 9, 2013 (File No. 333-184501)).
Form of the Indenture dated as of March 18, 2014 among QVC, Inc., the guarantors party thereto and U.S. Bank National Association
(incorporated by reference to Exhibit 4.1 to QVC’s Registration Statement on Form S-4 filed on April 30, 2014 (File No. 333-195586)).
Indenture dated as of August 21, 2014 among QVC, Inc., the guarantors party thereto and U.S. Bank National Association (incorporated
by reference to Exhibit 4.1 to QVC’s Registration Statement on Form S-4 filed on October 10, 2014 (File No. 333-199254)).
Second Amended and Restated Credit Agreement, dated as of March 9, 2015, among QVC, Inc., as Borrower, J.P. Morgan Securities LLC,
as Lead Arranger and Lead Bookrunner, JPMorgan Chase Bank, N.A., as Administrative Agent, Wells Fargo Bank, N.A., and BNP
Paribas, as Syndication Agents, and the parties named therein as Lenders, Issuing Banks, Documentation Agents and Co-Lead Arrangers
and Co-Bookrunners (incorporated by reference to Exhibit 4.1 to QVC’s Current Report on Form 8-K (File No. 333-184501) as filed on
March 13, 2015).
Third Amended and Restated Credit Agreement, dated as of June 23, 2016, among QVC, Inc. and zulily, llc, as Borrowers, JPMorgan
Chase Bank, N.A., as Lead Arranger, Lead Bookrunner and Administrative Agent and the parties named therein as Lenders, Co-
Bookrunners, Co-Syndication Agents and Co-Documentation Agents (incorporated by reference to Exhibit 4.1 to the Registrant’s Current
Report on Form 8-K filed on June 28, 2016 (File No. 001-33982)).
Amended and Restated Investment Agreement, dated May 28, 2015, by and among Liberty Broadband Corporation, Liberty Interactive
Corporation, JANA Nirvana Master Fund, Ltd., JANA Master Fund, Ltd., and Coatue Offshore Master Fund, Ltd. (incorporated by
reference to Exhibit 10.5 to Liberty Broadband Corporation’s Current Report on Form 8-K filed on May 29, 2015 (File No. 001-36713)
(the “LBC 8-K”).
IV-6
Table of Contents
10.44
10.45
10.46
10.47
Amended and Restated Assignment and Assumption Agreement, dated May 29, 2015, by and among Liberty Broadband Corporation,
Liberty Interactive Corporation, Soroban Master Fund LP, and Soroban Opportunities Master Fund LP (incorporated by reference to
Exhibit 10.8 to the LBC 8-K).
Liberty Interactive Corporation Nonemployee Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.4 to the
Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended on March 31, 2015 filed on May 8, 2015 (File No. 001-
33982)).
zulily, inc. 2009 Equity Incentive Plan, as amended (incorporated by reference to Exhibit 10.1 to zulily, inc.’s Registration Statement on
Form S-1 filed on October 8, 2013 (File No. 333-191617)). +
zulily, inc. 2013 Equity Plan (incorporated by reference to Exhibit 10.3 to Amendment No. 1 to zulily, inc.’s Registration Statement on
Form S-1 filed on October 17, 2013 (File No. 333-191617)). +
10.48
Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.48 to the Liberty 2015 10-K). +
10.49
Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.49 to the Liberty 2015 10-K). +
10.50
10.51
10.52
10.53
10.54
10.55
10.56
Form of 2017 Performance-based Restricted Stock Unit Agreement (QVCB) under the Liberty Interactive Corporation 2016 Omnibus
Incentive Plan (the “2016 Incentive Plan”) for Gregory B. Maffei (incorporated by reference to Exhibit 10.1 to Liberty Interactive
Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed on November 9, 2017 (File No. 001-33982)
(the “LIC 2017 10-Q”)). +
Form of 2017 Term Option Agreement under the 2016 Incentive Plan for Gregory B. Maffei (incorporated by reference to Exhibit 10.2 to
the LIC 2017 10-Q). +
Form of 2017 Performance-based Restricted Stock Unit Agreement under the 2016 Incentive Plan for certain officers other than the Chief
Executive Officer and Chief Legal Officer (incorporated by reference to Exhibit 10.3 to the LIC 2017 10-Q). +
Form of Restricted Stock Units Agreement under the 2016 Incentive Plan for Nonemployee Directors (incorporated by reference to
Exhibit 10.4 to the LIC 2017 10-Q). +
Form of Nonqualified Stock Option Agreement under the 2016 Incentive Plan for Nonemployee Directors (incorporated by reference to
Exhibit 10.5 to the LIC 2017 10-Q). +
HSN, Inc. Second Amended and Restated 2008 Stock and Annual Incentive Plan (incorporated by reference to Exhibit 10.13 to
HSN, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013 (File No. 01-34061) as filed on February 20, 2014). +
HSN, Inc. 2017 Omnibus Incentive Plan (incorporated by reference to Annex A of HSN, Inc.’s 2017 Proxy Statement on Schedule 14A
(File No. 01-34061) as filed on April 10, 2017). +
10.57
Form of Election Form with respect to December 2017 Option Exchange Proposal for participants.* +
IV-7
Table of Contents
10.58
10.59
10.60
10.61
Voting Agreement, dated as of April 4, 2017, by and among Liberty Interactive Corporation, General Communication, Inc., John C.
Malone and Leslie Malone (incorporated by reference to Annex F to Liberty Interactive Corporation’s Definitive Proxy Statement on
Schedule 14A filed on December 29, 2017 (File No. 001-33982)). +
Voting Agreement, dated as of April 4, 2017, by and among Liberty Interactive Corporation, General Communication, Inc., John W.
Stanton and Theresa E. Gillespie (incorporated by reference to Annex G to Liberty Interactive Corporation’s Definitive Proxy Statement
on Schedule 14A filed on December 29, 2017 (File No. 001-33982)).
Voting Agreement, dated as of April 4, 2017, by and among Liberty Interactive Corporation, General Communication, Inc., Ronald A.
Duncan and Dani Bowman (incorporated by reference to Annex H to Liberty Interactive Corporation’s Definitive Proxy Statement on
Schedule 14A filed on December 29, 2017 (File No. 001-33982)).
Letter Agreement between Liberty Interactive Corporation and Liberty Media Corporation relating to the Services Agreement dated
September 23, 2011 (incorporated by reference to Exhibit 10.60 to Liberty Media Corporation’s Annual Report on Form 10-K for the year
ended December 31, 2017 as filed on February 28, 2018 (File No. 001-35707)).
21
Subsidiaries of Liberty Interactive Corporation.*
23.1
23.2
23.3
31.1
31.2
Consent of KPMG LLP.*
Consent of KPMG LLP.*
Consent of Ernst & Young LLP.*
Rule 13a-14(a)/15d - 14(a) Certification.*
Rule 13a-14(a)/15d - 14(a) Certification.*
32
Section 1350 Certification.**
99.1
99.2
Unaudited Attributed Financial Information for Tracking Stock Groups.*
Reconciliation of Liberty Interactive Corporation Net Assets and Net Earnings to Liberty Interactive LLC Net Assets and Net Earnings. **
101.INS
XBRL Instance Document.*
101.SCH
XBRL Taxonomy Extension Schema Document.*
101.CAL
XBRL Taxonomy Calculation Linkbase Document.*
101.LAB
XBRL Taxonomy Label Linkbase Document.*
101.PRE
XBRL Taxonomy Presentation Linkbase Document.*
101.DEF
XBRL Taxonomy Definition Document.*
* Filed herewith.
IV-8
Table of Contents
** Furnished herewith.
+ This document has been identified as a management contract or compensatory plan or arrangement.
Item 16. Form 10-K Summary.
Not applicable.
IV-9
Table of Contents
Report of Independent Registered Certified Public Accounting Firm
To the Shareholders and the Board of Directors of HSN, Inc.
Opinion on the Financial Statement
We have audited the accompanying consolidated balance sheet of HSN, Inc. and subsidiaries (a wholly owned subsidiary of Liberty Interactive Corporation)
(the Company) as of December 31, 2017, and the related notes (collectively referred to as the “financial statement”) (not presented separately herein). In our
opinion, the financial statement presents fairly, in all material respects, the financial position of the Company at December 31, 2017, in conformity with U.S.
generally accepted accounting principles.
Basis for Opinion
This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial
statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. The Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of
internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in
the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2007.
Tampa, Florida
March 1, 2018
IV-10
Table of Contents
To the Stockholders and Board of Directors
Liberty Broadband Corporation:
Opinion on the Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
We have audited the accompanying consolidated balance sheets of Liberty Broadband Corporation and subsidiaries (the “Company”) as of December 31,
2017 and 2016, the related consolidated statements of operations, comprehensive earnings (loss), cash flows, and equity for each of the years in the three‑year period
ended December 31, 2017, and the related notes (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for
each of the years in the three‑year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s
internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 9, 2018 expressed an unqualified opinion on the effectiveness
of the Company’s internal control over financial reporting.
Basis for Opinion
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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to
the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing
procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of
the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2014.
Denver, Colorado
February 9, 2018
/s/ KPMG LLP
IV-11
Table of Contents
LIBERTY BROADBAND CORPORATION
Consolidated Balance Sheets
December 31, 2017 and 2016
2017
2016
amounts in thousands
Assets
Current assets:
Cash and cash equivalents
Derivative instruments
Other current assets
Total current assets
Investment in Charter, accounted for using the equity method (note 5)
Other tangible and intangible assets, net
Other assets
Total assets
Liabilities and Equity
Current liabilities:
Accounts payable and accrued liabilities
Current portion of debt (note 6)
Deferred revenue and other current liabilities
Total current liabilities
Debt (note 6)
Deferred income tax liabilities (note 7)
Other liabilities
Total liabilities
Equity
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued
Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding
26,301,755 and 26,251,533 at December 31, 2017 and 2016, respectively
Series B common stock, $.01 par value. Authorized 18,750,000 shares; issued and outstanding 2,455,179
and 2,467,509 at December 31, 2017 and 2016, respectively
Series C common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding
152,563,229 and 153,019,547 at December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated other comprehensive earnings, net of taxes
Retained earnings (accumulated deficit)
Total equity
Commitments and contingencies (note 11)
Total liabilities and equity
See accompanying notes to consolidated financial statements.
IV-12
$
$
$
81,257
—
2,797
84,054
11,835,613
12,073
49
11,931,789
5,381
—
5,168
10,549
497,370
932,593
4,376
1,444,888
—
262
25
1,526
7,907,900
8,424
2,568,764
10,486,901
205,728
49,019
3,672
258,419
9,315,253
15,803
1,485
9,590,960
7,931
400,000
4,185
412,116
198,512
504,644
2,596
1,117,868
—
262
25
1,530
7,945,883
7,656
517,736
8,473,092
$
11,931,789
9,590,960
Table of Contents
Revenue:
Software sales
Service
Other
Total revenue
Operating costs and expenses
LIBERTY BROADBAND CORPORATION
Consolidated Statements of Operations
Years Ended December 31, 2017, 2016 and 2015
Operating, including stock-based compensation (note 9)
Selling, general and administrative, including stock-based compensation (note 9)
Research and development, including stock-based compensation (note 9)
Gain on legal settlement
Impairment of intangible assets
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense
Dividend and interest income
Share of earnings (losses) of affiliate (note 5)
Gain (loss) on dilution of investment in affiliate (note 5)
Realized and unrealized gains (losses) on financial instruments, net (note 4)
Other, net
Earnings (loss) from continuing operations before income taxes
Income tax benefit (expense)
Net earnings (loss) attributable to Liberty Broadband shareholders
Basic earnings (loss) from continuing operations attributable to Series A, Series B and Series C Liberty
Broadband shareholders per common share (note 3)
Diluted net earnings (loss) attributable to Series A, Series B and Series C Liberty Broadband shareholders
per common share (note 3)
2017
2016
2015
amounts in thousands,
except per share amounts
$
$
$
$
12,320
772
—
13,092
2,582
24,065
8,153
—
—
3,770
38,570
(25,478)
(19,570)
1,449
2,508,991
(17,872)
3,098
(18)
2,450,600
(416,933)
2,033,667
11.19
11.10
28,597
1,858
131
30,586
2,798
34,703
10,240
—
—
4,005
51,746
(21,160)
(14,956)
5,020
641,544
770,766
94,122
336
1,475,672
(558,369)
917,303
6.03
6.00
10,364
76,139
4,679
91,182
6,096
42,792
17,032
(60,450)
20,669
6,088
32,227
58,955
(7,424)
3,797
(120,962)
(7,198)
2,619
158
(70,055)
19,868
(50,187)
(0.49)
(0.49)
See accompanying notes to consolidated financial statements.
IV-13
Table of Contents
LIBERTY BROADBAND CORPORATION
Consolidated Statements of Comprehensive Earnings (Loss)
Years ended December 31, 2017, 2016 and 2015
Net earnings (loss)
Other comprehensive earnings (loss), net of taxes:
Unrealized holding gains (losses) arising during the period
Share of other comprehensive earnings (loss) of equity affiliate
Other
Other comprehensive earnings (loss), net of taxes
Comprehensive earnings (loss) attributable to Liberty Broadband shareholders
2017
2016
2015
amounts in thousands
$
2,033,667
917,303
(50,187)
—
768
—
768
2,034,435
$
(221)
811
(1,839)
(1,249)
916,054
(287)
1,274
—
987
(49,200)
See accompanying notes to consolidated financial statements.
IV-14
Table of Contents
LIBERTY BROADBAND CORPORATION
Consolidated Statements of Cash Flows
Years ended December 31, 2017, 2016 and 2015
2017
2016
amounts in thousands
2015
Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
$
2,033,667
917,303
Depreciation and amortization
Stock-based compensation
Impairment of intangible assets
Cash payments for stock-based compensation
Share of (earnings) losses of affiliate, net
(Gain) loss on dilution of investment in affiliate
Realized and unrealized (gains) losses on financial instruments, net
Deferred income tax expense (benefit)
Other, net
Changes in operating assets and liabilities:
Current and other assets
Payables and other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expended for property and equipment
Investments in equity investees
Purchases of short term investments and other marketable securities
Sales of short term investments and other marketable securities
Other investing activities, net
Net cash used in investing activities
Cash flows from financing activities:
Cash received from rights offering
Borrowings of debt
Repayments of debt
Cash received from issuance of Series C Liberty Broadband common stock
Proceeds (payments) from issuances of financial instruments
Proceeds (payments) from settlements of financial instruments
Other financing activities, net
Net cash provided by (used in) financing activities
Net increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
3,770
5,292
—
(525)
(2,508,991)
17,872
(3,098)
416,838
2,030
2,310
804
(30,031)
(70)
—
—
—
14
(56)
—
500,000
(600,000)
—
(149,368)
155,683
(699)
(94,384)
(124,471)
205,728
81,257
$
4,005
5,713
—
(591)
(641,544)
(770,766)
(94,122)
560,778
1,033
9,161
(2,868)
(11,898)
(267)
(5,000,000)
(155,444)
164,458
453
(4,990,800)
—
200,000
—
4,400,000
(47,888)
—
1,235
4,553,347
(449,351)
655,079
205,728
(50,187)
6,088
6,380
20,669
(1,268)
120,962
7,198
(2,619)
(24,964)
(1,440)
(1,238)
(44,292)
35,289
(731)
—
(18,032)
18,019
(1,735)
(2,479)
697,309
67,995
(40,000)
—
30,158
(182,192)
4,190
577,460
610,270
44,809
655,079
Supplemental disclosure to the consolidated statements of cash flows:
Cash paid for interest
Cash paid (received) for taxes
2017
Years ended December 31,
2016
amounts in thousands
2015
$
$
17,496
(1,787)
13,783
(9,410)
7,251
5,485
See accompanying notes to consolidated financial statements.
IV-15
Table of Contents
Balance at January 1, 2015
Net earnings (loss)
Other comprehensive earnings (loss)
Stock-based compensation
Issuance of common stock upon exercise of stock options
Excess tax benefits from stock-based compensation
Common stock issued pursuant to the rights offering
Other
Balance at December 31, 2015
Net earnings (loss)
Other comprehensive earnings (loss)
Stock-based compensation
Issuance of common stock upon exercise of stock options
Issuance of common stock
Other
Balance at December 31, 2016
Net earnings (loss)
Other comprehensive earnings (loss)
Stock-based compensation
Issuance of common stock upon exercise of stock options
Cumulative effect of accounting change at Charter
Non-cash settlement of financial instrument
Balance at December 31, 2017
LIBERTY BROADBAND CORPORATION
Consolidated Statement of Equity
Years ended December 31, 2017, 2016 and 2015
Preferred
Stock
Series A
Common stock
Series B
Series C
Additional
paid-in
capital
Accumulated
other
comprehensive
earnings
Retained
earnings
(accumulated
deficit)
amounts in thousands
$
$
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
261
—
—
—
1
—
—
—
262
—
—
—
—
—
—
262
—
—
—
—
—
—
262
25
—
—
—
—
—
—
—
25
—
—
—
—
—
—
25
—
—
—
—
—
—
25
572
—
—
—
1
—
173
—
746
—
—
—
1
783
—
1,530
—
—
—
1
—
(5)
1,526
2,835,373
—
—
5,200
138
1,217
697,136
(1,216)
3,537,848
—
—
5,362
3,529
4,399,217
(73)
7,945,883
—
—
5,358
2,456
—
(45,797)
7,907,900
See accompanying notes to consolidated financial statements.
7,918
—
987
—
—
—
—
—
8,905
—
(1,249)
—
—
—
—
7,656
—
768
—
—
—
—
8,424
(349,380)
(50,187)
—
—
—
—
—
—
(399,567)
917,303
—
—
—
—
—
517,736
2,033,667
—
—
—
17,361
—
2,568,764
Total
equity
2,494,769
(50,187)
987
5,200
140
1,217
697,309
(1,216)
3,148,219
917,303
(1,249)
5,362
3,530
4,400,000
(73)
8,473,092
2,033,667
768
5,358
2,457
17,361
(45,802)
10,486,901
IV-16
Table of Contents
(1) Basis of Presentation
During May 2014, the board of directors of Liberty Media Corporation and its subsidiaries (“Liberty”) authorized management to pursue a plan to
spin-off to its stockholders common stock of a wholly-owned subsidiary, Liberty Broadband Corporation (“Liberty Broadband” or the “Company”), and to
distribute subscription rights to acquire shares of Liberty Broadband’s common stock (the “Broadband Spin-Off”). At the time of the Broadband Spin-off,
Liberty Broadband was comprised of (i) Liberty’s former interest in Charter Communications, Inc. (“Legacy Charter”), (ii) Liberty’s former wholly-owned
subsidiary TruePosition, Inc. (“TruePosition”), (iii) Liberty’s former minority equity investment in Time Warner Cable, Inc. (“Time Warner Cable”),
(iv) certain deferred tax liabilities, as well as liabilities related to the Time Warner Cable written call options and (v) initial indebtedness, pursuant to margin
loans entered into prior to the completion of the Broadband Spin-Off. These financial statements refer to the combination of the aforementioned subsidiary,
investments, and financial instruments, as “Liberty Broadband,” “the Company,” “us,” “we” and “our” in the notes to the consolidated financial statements.
The Broadband Spin-Off was accounted for at historical cost due to the pro rata nature of the distribution to holders of Liberty common stock.
In the Broadband Spin-Off, record holders of Liberty Series A, Series B and Series C common stock received one-fourth of a share of the
corresponding series of Liberty Broadband common stock for each share of Liberty common stock held by them, with cash paid in lieu of fractional shares.
In addition, following the completion of the Broadband Spin-Off, on December 10, 2014, Liberty Broadband stockholders received a subscription right to
acquire one share of Series C Liberty Broadband common stock for every five shares of Liberty Broadband common stock. See note 8 for additional
information related to the rights offering.
Following the Broadband Spin-Off, Liberty and Liberty Broadband operate as separate, publicly traded companies, and neither has any stock
ownership, beneficial or otherwise, in the other. In connection with the Broadband Spin-Off, Liberty (for accounting purposes a related party of the
Company) and Liberty Broadband entered into certain agreements in order to govern certain of the ongoing relationships between the two companies after
the Broadband Spin-Off and to provide for an orderly transition. These agreements include a reorganization agreement, a services agreement, a facilities
sharing agreement and a tax sharing agreement.
The reorganization agreement provides for, among other things, the principal corporate transactions (including the internal restructuring) required to
effect the Broadband Spin-Off, certain conditions to the Broadband Spin-Off and provisions governing the relationship between Liberty Broadband and
Liberty with respect to and resulting from the Broadband Spin-Off. The tax sharing agreement provides for the allocation and indemnification of tax
liabilities and benefits between Liberty and Liberty Broadband and other agreements related to tax matters. Pursuant to the tax sharing agreement, Liberty
Broadband has agreed to indemnify Liberty, subject to certain limited exceptions, for losses and taxes resulting from the Broadband Spin-Off to the extent
such losses or taxes result primarily from, individually or in the aggregate, the breach of certain restrictive covenants made by Liberty Broadband (applicable
to actions or failures to act by Liberty Broadband and its subsidiaries following the completion of the Broadband Spin-Off). Pursuant to the services
agreement, Liberty provides Liberty Broadband with general and administrative services including legal, tax, accounting, treasury and investor relations
support. Under the facilities sharing agreement, Liberty Broadband shares office space with Liberty and related amenities at Liberty’s corporate
headquarters. Liberty Broadband will reimburse Liberty for direct, out-of-pocket expenses incurred by Liberty in providing these services which will be
negotiated semi-annually. Under these various agreements, approximately $3.2 million and $3.4 million were reimbursed to Liberty for the years ended
December 31, 2017 and 2016, respectively.
On May 18, 2016, Time Warner Cable merged with Charter (the “Time Warner Cable Merger”). In connection with the Time Warner Cable Merger,
Legacy Charter underwent a corporate reorganization, resulting in CCH I, LLC (“Charter”), a former subsidiary of Charter, becoming the new publicly
traded parent company. Also on May 18, 2016, the previously announced acquisition of Bright House Networks, LLC (“Bright House”) from
Advance/Newhouse
IV-17
Table of Contents
Partnership (“A/N”) by Charter (the “Bright House Transaction”) was completed. In connection with the Time Warner Cable Merger and Bright House
Transaction, Liberty Broadband entered into certain agreements with Legacy Charter, Charter (for accounting purposes a related party of the Company),
Liberty Interactive Corporation (“Liberty Interactive,” for accounting purposes a related party of the Company) and Time Warner Cable. As a result of the
Time Warner Cable Merger and Bright House Transaction (collectively, the “Transactions”), Liberty Broadband exchanged its shares of Time Warner Cable
for shares of Charter and purchased additional shares of Charter. As a result, and pursuant to proxy agreements entered into with Liberty Interactive and
A/N, Liberty Broadband controls 25.01% of the aggregate voting power of Charter. See note 5 for additional detail regarding these transactions and
corresponding agreements.
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States (“GAAP”) and represent a combination of the historical financial information of Skyhook, the Company’s interest in Charter, the Company’s former
minority equity investment in Time Warner Cable and certain deferred tax liabilities. All significant intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
(2) Description of Business
Skyhook Holding, Inc. (formerly known as TruePosition) was originally incorporated on November 24, 1992 to provide technology for locating
wireless phones and other mobile devices. TruePosition offered a passive network-based location system based on its patented U-TDOA technology (“U-
TDOA Service”) to provide E-9-1-1 services domestically and to enhance services in support of commercial applications and national security law
enforcement worldwide. In February 2014, TruePosition acquired 100% of the outstanding common shares of Skyhook Wireless, Inc., for approximately
$57.5 million in cash. Skyhook Wireless, Inc. was an alternative location services provider that offered a positioning system that used device-based
measurements, as opposed to TruePosition’s network-based technology.
In 2015, as a result of the loss of one of its major customers – a wireless carrier that accounted for 80% - 90% of TruePosition’s revenue – as well as
changes in the regulatory environment, TruePosition ceased making further investment in its U-TDOA Service. Thereafter, in May 2016, TruePosition and
Skyhook Wireless, Inc. combined operations in order to focus on the development and sale of Skyhook’s device-based location technology, and TruePosition
subsequently changed its name to Skyhook Holding, Inc. Skyhook Holding, Inc. and Skyhook Wireless, Inc. are referred to collectively herein as
“Skyhook.”
Today, Skyhook markets and sells two primary products: (1) a location determination service called the Precision Location Solution; and (2) a
location intelligence and data insights service called Geospatial Insights.
Skyhook’s Precision Location Solution works by collecting nearby radio signals (such as information from Wi-Fi access points, cell towers, IP
addresses and other radio beacons) that are observed by a mobile device. Skyhook’s Geospatial Insights product uses anonymized location data to analyze
foot traffic patterns and better understand the real-world behavior of consumers. Skyhook’s revenue is derived from the sale and integration of its Precision
Location Solution (including the licensing of software and data components that make up that solution) and the licensing of Geospatial Insights data. In
addition, Skyhook earns revenue through entering into licensing agreements with companies to utilize its underlying intellectual property (including patents).
Charter is the second largest cable operator in the United States and a leading broadband communications services company providing video,
Internet and voice services to approximately 27.2 million residential and business customers at December 31, 2017. In addition, Charter sells video and
online advertising inventory to local, regional and national advertising customers and fiber-delivered communications and managed information technology
(“IT”) solutions to large enterprise customers. Charter also owns and operates regional sports networks and local sports, news and community channels and
sells security and home management services in the residential marketplace. Charter’s core strategy is to deliver high quality products at highly competitive
prices, combined with outstanding service.
IV-18
Table of Contents
Also included in Liberty Broadband is a former investment in outstanding shares of Time Warner Cable, which was classified as available-for-sale
and carried at fair value based on quoted market prices until the second quarter of 2016 when Time Warner Cable merged with Charter. Additionally, the
Company historically had written call options and a cashless collar agreement on Time Warner Cable shares. See note 4 for information regarding the Time
Warner Cable written call options and cashless collar agreement.
(3) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash consists of cash deposits held in global financial institutions. Cash equivalents consist of highly liquid investments with original maturities of
three months or less at the time of acquisition. Cash that has restrictions upon its usage has been excluded from cash and cash equivalents.
Derivative Instruments and Hedging Activities
All of the Company’s derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. None of the
Company’s derivatives are currently designated as hedges, as a result, changes in the fair value of the derivative are recognized in earnings.
The fair value of certain of the Company’s derivative instruments are estimated using the Black Scholes Merton option-pricing model (“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 obtained volatility rates from pricing services based on the expected volatility of the
underlying security over the remaining term of the derivative instrument. A discount rate was 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. The
Company considered its own credit risk as well as the credit risk of its counterparties in estimating the discount rate. Management judgment was required in
estimating the Black-Scholes variables. See note 4 for further discussion of fair value of the Company’s derivative instruments. The Company had an
outstanding derivative instrument classified as an asset at December 31, 2016. See note 4 for further information.
Investment in Equity Method Affiliate
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 affiliate 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 determines the difference between the purchase price of the investee and the underlying equity which results in
an excess basis in the investment. This excess basis is allocated to the underlying assets and liabilities of the Company’s investee through a purchase
accounting exercise and is allocated within memo accounts used for equity accounting purposes. Depending on the applicable underlying assets, these
amounts are either amortized over the applicable useful lives or determined to be indefinite lived. Changes in the Company’s proportionate share of the
underlying equity of an equity method investee, which result from the issuance of additional equity securities by such equity investee, are recognized in the
statement of operations through the gain (loss) on dilution of investment in affiliate line item. We periodically evaluate our equity method investment to
determine if decreases in fair value below our cost basis are other than temporary. If a decline in fair value is determined to be other than temporary, we are
required to reflect such decline in our consolidated statement of operations. Other than temporary declines in fair value of our equity method investment
would be included in share of earnings (losses) of affiliate in our consolidated statement of operations.
IV-19
Table of Contents
The primary factors we consider in our determination of whether declines in fair value are other than temporary are the length of time that the fair
value of the investment is below our carrying value; the severity of the decline; 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 cost and
equity investments is based on the market prices of the investments at the balance sheet date. 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.
As Liberty Broadband does not control the decision making process or business management practices of our affiliate accounted for using the
equity method, Liberty Broadband relies on management of its affiliate to provide it with accurate financial information prepared in accordance with GAAP
that the Company uses in the application of the equity method. In addition, Liberty Broadband relies on the audit reports that are provided by the affiliate’s
independent auditors on the financial statements of such affiliate. The Company is not aware, however, of any errors in or possible misstatements of the
financial information provided by its equity affiliate that would have a material effect on Liberty Broadband’s consolidated financial statements. See note 5
for additional discussion regarding our investment in Charter and the Transactions that occurred during the second quarter of 2016.
Other tangible and intangible assets
Other tangible and intangible assets consist of long-lived assets, goodwill and other intangible assets. Intangible assets with definite useful lives and
long-lived assets, including property and equipment, are carried at cost and are amortized on a straight-line basis over their estimated useful lives of three to
five and a half years. The Company reviews the carrying value of long-lived assets and intangible assets with definite useful lives for impairment upon
triggering events. Goodwill is reviewed annually on a qualitative basis.
In January 2017, the FASB issued new accounting guidance to simplify the measurement of goodwill impairment. Under the new guidance, an
entity no longer performs a hypothetical purchase price allocation to measure goodwill impairment. Instead, a goodwill impairment is measured using the
difference between the carrying value and the fair value of the reporting unit. The Company early adopted this guidance during the fourth quarter of 2017
with no impact to our financial position.
There was no indication of impairment of long-lived assets during the years end December 31, 2017, 2016 or 2015, and no goodwill impairment
loss recorded during the years ended December 31, 2017 and 2016. In 2015, the impairment test resulted in a $20.7 million impairment loss related to
Skyhook’s goodwill on its legacy U-TDOA Service.
Foreign Currency Translation and Transaction Gains and Losses
The functional currency of the Company is the United States (“U.S.”) dollar. 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 (loss) as unrealized (based on the applicable
period end exchange rate) or realized upon settlement of the transactions.
IV-20
Table of Contents
Revenue Recognition
Skyhook earns revenue from the sale and integration of its Precision Location Solution (including the licensing of software and data components
that make up that solution) and the licensing of Geospatial Insights data. In addition, Skyhook earns revenue from licensing its intellectual property to other
enterprises. Prior to 2016, Skyhook also earned significant revenue from the sale of hardware and the licensing of associated software required to operate a
passive network overlay system for generating location records for wireless devices using U-TDOA technology, and from professional and support services
related thereto. These services were primarily sold to wireless carriers to provide E-9-1-1 services domestically and to enhance services in support of
commercial applications, national security and law enforcement worldwide.
Skyhook recognizes fees received from intellectual property licensing at the inception of a license term for perpetual licenses (or licenses with
terms comprising substantially all of the remaining life of the intellectual property) when collectability of the license fee is probable and there are no ongoing
performance obligations. Revenue recognition is deferred when collectability of the license fee is not considered probable, when the license term is less than
substantially all of the remaining life of the intellectual property, or when there are ongoing performance obligations which are not separate elements from
the license. In such circumstances, revenue may be recognized as the license fees are collected or over the license term or performance period as
appropriate.
Fees from the integration of Skyhook technology are accounted for consistent with the outstanding guidance for software revenue recognition.
Under those policies, for revenue derived from multiple-element arrangements, if vendor specific objective evidence (“VSOE”) exists for each of the
elements of the arrangement at the outset, the Company allocates the revenue to the various elements for recognition upon delivery of each element. If
VSOE is not present, the revenue is deferred until the earlier of establishing sufficient VSOE for allocating revenue for recognition or delivery of all of the
elements. If a multiple-element arrangement includes post-contract customer support (commonly referred to as maintenance), VSOE must exist for the
maintenance in order to allocate revenue to all of the elements of the arrangement. If VSOE does not exist for the maintenance, revenue for the entire
arrangement is recognized ratably over the contractual or expected term of the maintenance arrangement.
Revenue from the provision of location services and through the sale of data and revenue from tangible products that contain software components
and non-software components that function together to deliver the tangible products essential functionality are not under the scope of software revenue
recognition guidance and are instead subject to the guidance for multiple-element arrangements. Accordingly, for multiple-element arrangements entered
into or materially modified on or after January 1, 2011, the overall arrangement fee is allocated to each element (both delivered and undelivered items) based
on their relative selling prices, regardless of whether those selling prices are evidenced by VSOE or third-party evidence of selling price or are based on the
entity’s estimated selling price. The associated revenue for each element is recognized upon delivery assuming all other criteria for revenue recognition are
met.
In May 2014, the FASB issued new accounting guidance on revenue from contracts with customers. The new guidance requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also
requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including
significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued
additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the
identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existing revenue
recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This
guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has adopted this
guidance under the modified retrospective transition method as of January 1, 2018. Skyhook has also adopted this guidance under the modified retrospective
transition method as of January 1, 2018 and the adoption did not have a material impact on its financial position or results of operations. Additionally,
Charter, which is accounted for as an equity method investment,
IV-21
Table of Contents
has adopted the new guidance as of January 1, 2018 using the modified retrospective transition method and the adoption did not have a material impact on its
financial position or results of operations.
Research and Development Costs
Research and development costs are expensed as incurred.
Deferred Revenue and Deferred Costs
Deferred revenue represents billings in excess of revenue previously recognized. Deferred costs represent direct costs related to installation
services, hardware, and software, which, to the extent not previously recognized, are recognized as the related revenue is recognized. Skyhook recognized
$35.5 million of deferred revenue during December 2015, which was attributable to prepaid transaction fees, in connection with the expiration of its largest
legacy U-TDOA Service customer’s contract.
Stock-Based Compensation
As more fully described in note 9, Liberty Broadband has granted to its directors, employees and employees of certain of its subsidiaries options,
restricted stock and stock appreciation rights (“SARs”) to purchase shares of Liberty Broadband common stock (collectively, “Awards”). Liberty Broadband
measures the cost of employee services received in exchange for an Award of equity instruments (such as stock options and restricted stock) based on the
grant-date fair value of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting
period of the Award). Liberty Broadband measures the cost of employee services received in exchange for an Award of liability instruments (such as stock
appreciation rights that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting
date. Certain outstanding awards of Liberty were assumed by Liberty Broadband at the time of the Broadband Spin-Off.
Additionally, Skyhook sponsors long-term incentive plans (“LTIPs”) which provide for the granting of phantom stock units (“PSUs”), and phantom
stock appreciation rights (“PARs”) to employees, directors, and consultants of Skyhook. Skyhook measures the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of the award and recognizes that cost ratably over the period during which the
employee is required to provide service (usually the vesting period of the award). Skyhook measures the cost of employee services received in exchange for
awards of liability instruments (such as PSUs and PARs that will be settled in cash) based on the current fair value of the award, and remeasures the fair
value of the award at each reporting date. The consolidated statements of operations includes stock-based compensation related to Skyhook awards.
In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions,
including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early application permitted. The
Company adopted this guidance in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as
income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue
to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the consolidated
statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. Based on the Company’s
analysis, no cumulative effect adjustment to retained earnings was necessary for tax benefits that were not previously recognized and for adjustments to
compensation cost based on actual forfeitures. The presentation changes for excess tax benefits have been applied retrospectively in the consolidated
statements of cash flows, resulting in the reclassification of $1.2 million of excess tax benefits for the year ended December 31, 2015, from cash flows from
financing activities to cash flows from operating activities. There were no excess tax benefits reclassified for the year ended December 31, 2016.
IV-22
Table of Contents
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 that such net deferred tax assets will not be
realized. We consider all relevant factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings
experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as
assessing available tax planning strategies. 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. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing
agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes
could materially vary from these estimates.
When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period
the interest would begin accruing according to the relevant tax law. Such interest expense is included in interest expense in the accompanying consolidated
statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense)
in the accompanying consolidated statements of operations.
We recognize in our consolidated financial statements the impact of a tax position, if that position is more likely than not to be sustained upon an
examination, based on the technical merits of the position.
Certain Risks and Concentrations
The Skyhook business is subject to certain risks and concentrations including dependence on relationships with its customers. Skyhook had one
significant legacy U-TDOA Service customer whose contract expired on December 31, 2015. The loss of this customer had a material adverse effect on
Skyhook’s business which is expected to continue unless Skyhook is able to generate significant new business to replace the financial impact of this
customer. For the year ended December 31, 2015, this customer accounted for 85% of Skyhook’s total revenue. The Company’s largest customers, that
accounted for greater than 10% of revenue, aggregated 57% of total revenue for the years ended December 31, 2017 and 2016.
Contingent Liabilities
Periodically, we review the status of all significant outstanding matters to assess any potential financial exposure. When (i) it is probable that an
asset has been impaired or a liability has been incurred and (ii) the amount of the loss can be reasonably estimated, we record the estimated loss in our
consolidated statements of operations. We provide disclosure in the notes to the consolidated financial statements for loss contingencies that do not meet
both these conditions if there is a reasonable possibility that a loss may have been incurred that would be material to the financial statements. Significant
judgment is required to determine the probability that a liability has been incurred and whether such liability is reasonably estimable. We base accruals made
on the best information available at the time which can be highly subjective. The final outcome of these matters could vary significantly from the amounts
included in the accompanying consolidated financial statements.
IV-23
Table of Contents
Comprehensive Earnings (Loss)
Comprehensive earnings (loss) consists of net earnings (loss), cumulative foreign currency translation adjustments, unrealized gains and losses on
available-for-sale securities, net of tax and the Company’s share of the comprehensive earnings (loss) of our equity method affiliate.
Earnings per Share (EPS)
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.
The Company issued 85,761,332 common shares, which is the aggregate number of shares of Series A, Series B and Series C common stock
outstanding upon the completion of the Broadband Spin-Off on November 4, 2014. Additionally, following the completion of the Broadband Spin-Off,
Liberty Broadband distributed subscription rights, which were priced at a discount to the market value, to all holders of Liberty Broadband common stock
(see further discussion in note 8). The rights offering, because of the discount, is considered a stock dividend which requires retroactive treatment for prior
periods for the weighted average shares outstanding based on a factor applied determined by the fair value per share immediately prior to the rights exercise
and the theoretical fair value after the rights exercise. The number of shares issued upon completion of the Broadband Spin-Off, adjusted for the rights
factor, was used to determine both basic and diluted EPS for the period from January 1, 2014 through the date of the Broadband Spin-Off, as no Company
equity awards were outstanding prior to the Broadband Spin-Off. In addition, the Company issued 78,250,042 shares of Series C common stock in
connection with the Time Warner Cable Merger on May 18, 2016 (see further discussion in note 8). Basic EPS subsequent to the Broadband Spin-Off was
computed using the weighted average number of shares outstanding (“WASO”), adjusted for the rights factor, from the date of the completion of the
Broadband Spin-Off through January 9, 2015, the date on which the rights offering was fully subscribed. Basic EPS subsequent to January 9, 2015 was
computed using WASO. Diluted EPS subsequent to the Broadband Spin-Off was computed using the WASO from the date of the completion of the
Broadband Spin-Off through January 9, 2015, adjusted for the rights factor and potentially dilutive equity awards outstanding during the same period.
Subsequent to January 9, 2015, basic EPS was computed using the WASO during the period, and diluted EPS was computed using the WASO adjusted for
potentially dilutive equity awards outstanding during the period.
Basic WASO
Potentially dilutive shares
Diluted WASO
Years ended December 31,
2017
2016
2015
number of shares in thousands
181,772
1,374
183,146
152,103
749
152,852
102,504
494
102,998
Potential common shares excluded from diluted EPS because their inclusion would be antidilutive for the years ended December 31, 2017, 2016
and 2015 are approximately zero, 17 thousand, and 3 thousand, respectively.
Reclasses and adjustments
Certain prior period amounts have been reclassified for comparability with the current year presentation.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements and the reported
IV-24
Table of Contents
amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Company considers the application of the
equity method of accounting for its affiliates and accounting for income taxes to be its most significant estimates.
(4) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to
measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity
has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for
the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring
assets or liabilities measured at fair value that would be considered Level 3.
The Company’s assets and liabilities measured at fair value are as follows:
Description
Total
December 31, 2017
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
December 31, 2016
Quoted prices
in active
markets for
identical assets
(Level 1)
Significant
other
observable
inputs
(Level 2)
Total
Cash equivalents
Derivative instruments (1)
$
$
76,304
—
76,304
—
amounts in thousands
—
—
198,011
49,019
198,011
—
—
49,019
(1) As of December 31, 2016, the Company had an outstanding zero-strike call option on 704,908 shares of Liberty Broadband Series C common stock
which expired in March 2017. The Company prepaid a premium of $47.9 million in December 2016. Liberty Broadband exercised its option to settle the
contract in cash in March 2017 for cash proceeds of $50.0 million. The Company accounted for the zero-strike call option as a financial instrument asset
due to its settlement provisions. The Company entered into another zero-strike call option on 527,156 shares of Liberty Broadband Series C common
stock and prepaid a premium of $47.7 million in October 2017. Upon expiration of the contract in December 2017, the Company elected to physically
settle 527,156 shares of Liberty Broadband Series C common stock at a price of $90.54 per share.
The fair value of Level 2 derivative instruments were derived from a Black-Scholes model using observable market data as the significant inputs.
The inputs used in the model during the period outstanding (exclusive of the applicable trading price of Series C Liberty Broadband common stock and the
strike prices associated with the call options) were as follows:
Volatility
Interest rate
Dividend yield
Other Financial Instruments
21.1
1.0
0
Range
-
-
-
%
%
%
21.5
1.0
0
%
%
%
Other financial instruments not measured at fair value on a recurring basis include trade receivables, trade payables, accrued and other current
liabilities, current portion of debt and long-term debt. With the exception of long-term debt, the carrying amount approximates fair value due to the short
maturity of these instruments as reported on our consolidated balance sheets. The carrying value of our long-term debt bears interest at a variable rate and
therefore is also considered to approximate fair value.
IV-25
Table of Contents
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:
Time Warner Cable investment and financial instruments (1)(2)(3)
Derivative instruments (4)
Years ended December 31,
2017
2016
2015
(amounts in thousands)
$
$
—
3,098
3,098
92,990
1,132
94,122
2,619
—
2,619
(1) As of December 31, 2014, the Company had an outstanding written call option on 625,000 Time Warner Cable shares with a strike price of $92.02 per
share which expired in February 2015. Upon expiration, this written call option was rolled into a new written call option on 625,000 Time Warner Cable
shares with a strike price of $100.39 per share which the Company cash settled during June 2015 for $48.3 million. Additionally, as of December 31,
2014, the Company had another outstanding written call option on 625,000 Time Warner Cable shares with a strike price of $90.84 per share which the
Company cash settled during April 2015 for $36.7 million.
(2) On March 27, 2015, Liberty Broadband entered into a cashless collar agreement with a financial institution on 1.7 million Time Warner Cable shares
held by the Company with a put option strike price of $136.80 per share and a call option strike price of $161.62 per share. The collar was originally
scheduled to expire during March 2017. The Company unwound the agreement during July 2015 for $67.1 million cash paid to the counterparty. In
connection with this collar agreement, the Company also entered into a revolving loan agreement with an availability of $234 million, which was
terminated upon unwinding of the collar agreement during July 2015 (note 6).
(3) As discussed in note 5, Time Warner Cable merged with Charter on May 18, 2016. Therefore the Company no longer has an investment in Time Warner
Cable as of May 18, 2016, and the unrealized gain (loss) related to our investment in Time Warner Cable is recorded through this date. In connection
with the merger, the Company exchanged, in a tax-free transaction, its shares of Time Warner Cable for shares of Charter Class A common stock.
(4) As of December 31, 2016, the Company had an outstanding zero-strike call option on 704,908 shares of Liberty Broadband Series C common stock
which expired in March 2017. The Company had an unrealized gain on the option during 2016 primarily due to an increase in the market price of
Liberty Broadband Series C common stock during that period. In April 2017, the Company entered into another zero-strike call option on 600,242
shares of Liberty Broadband Series C common stock. The Company prepaid a premium of $50.0 million in April 2017. Upon expiration in June 2017,
the call option was rolled into a new zero-strike call option on 600,242 shares of Liberty Broadband Series C common stock. Liberty Broadband
exercised its option to settle the contract in cash in August 2017 for cash proceeds of $53.8 million. The Company realized gains on the options
outstanding and settled during the current year primarily due to an increase in the market price of Liberty Broadband Series C common stock during that
period.
(5) Investment in Charter Accounted for Using the Equity Method
Through a number of prior years’ transactions, Liberty Broadband has acquired an interest in Charter. The investment in Charter is accounted for as
an equity method affiliate based on our ownership interest and the board seats held by individuals appointed by Liberty Broadband. As of December 31,
2017, the carrying value of Liberty Broadband’s ownership in Charter was approximately $11,836 million. The market value of Liberty Broadband’s
ownership in Charter as of December 31, 2017 was approximately $18,166 million, which represented an approximate economic ownership of 22.7% of the
outstanding equity of Charter as of that date.
IV-26
Table of Contents
Pursuant to Proxy Agreements with Liberty Interactive and A/N, Liberty Broadband has an irrevocable proxy to vote certain shares of Charter
common stock owned beneficially or of record by Liberty Interactive and A/N following the closing of the Time Warner Cable Merger, for a five year term
subject to extension upon the mutual agreement of both parties, subject to certain limitations.
As a result of the A/N Proxy and the Liberty Interactive Proxy Agreement, Liberty Broadband controls 25.01% of the aggregate voting power of
Charter following the completion of the Time Warner Cable Merger and the Bright House Transaction and is Charter’s largest stockholder.
Additionally, so long as the A/N Proxy is in effect, if A/N proposes to transfer common units of Charter Communications Holdings, LLC (which
units are exchangeable into Charter shares and which will, under certain circumstances, result in the conversion of certain shares of Class B Common Stock
into Charter shares) or Charter shares, in each case, constituting either (i) shares representing the first 7.0% of the outstanding voting power of Charter held
by A/N or (ii) shares representing the last 7.0% of the outstanding voting power of New Charter held by A/N, Liberty Broadband will have a right of first
refusal (“ROFR”) to purchase all or a portion of any such securities A/N proposes to transfer. The purchase price per share for any securities sold to Liberty
Broadband pursuant to the ROFR will be the volume-weighted average price of Charter shares for the two trading day period before the notice of a proposed
sale by A/N, payable in cash. Certain transfers are permitted to affiliates of A/N, subject to the transferee entity entering into an agreement assuming the
transferor’s obligations under the A/N Proxy.
During the years ended December 31, 2017, 2016 and 2015, there was a dilution loss of $18 million, a dilution gain of $771 million, and a dilution
loss of $7 million, respectively, in the Company’s investment in Charter. The gain during 2016 is primarily due to the Time Warner Cable Merger. Even after
considering the exchange of Time Warner Cable shares held by Liberty Broadband to shares of Charter, Liberty Broadband’s interest in Charter was diluted
as a result of the conversion of outstanding Time Warner Cable shares held by third parties into shares of Charter. However, Liberty Broadband recognized a
gain during the period as Liberty Broadband’s investment basis in Charter was at a price per share below the new equity issued in the Time Warner Cable
Merger. This gain was partially offset by losses due to the issuance of Charter common stock from the exercise of warrants and stock options, held by
outside investors (employees and other third parties), at prices below Liberty Broadband’s investment basis per share during the year. The dilution losses
during the other periods presented are attributable to stock option exercises by employees and other third parties at prices below Liberty Broadband’s book
basis per share.
During the years ended December 31, 2017, 2016 and 2015, the Company recorded $768 thousand, $811 thousand and $1.3 million, respectively, of
its share of Charter’s other comprehensive earnings, net of income taxes. Charter records gains and losses related to the fair value of its interest rate swap
agreements which qualify as hedging activities in other comprehensive income. The pre-tax portion of Liberty Broadband’s share of Charter’s other
comprehensive earnings was $1.2 million, $1.3 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
IV-27
Table of Contents
The excess basis has increased to $2,975 million as of December 31, 2017. Such amount has been allocated within memo accounts used for equity
method accounting purposes as follows (amounts in millions):
Property and equipment
Customer relationships
Franchise fees
Trademarks
Goodwill
Debt
Deferred income tax liability
$
$
361
689
1,670
29
986
(98)
(662)
2,975
Upon acquisition, the Company ascribed remaining useful lives of 7 years and 13 years to property and equipment and customer relationships,
respectively, and indefinite lives to franchise fees, trademarks and goodwill. The excess basis of outstanding debt is amortized over the contractual period
using the effective interest rate method. The increase in excess basis for the year ended December 31, 2017, was primarily related to the impact of income
tax rate changes on the deferred tax liability recorded within the memo accounts for Charter, as well as Charter’s share buyback program. Included in our
share of earnings from Charter of $2,509 million and $642 million and losses of $121 million for the years ended December 31, 2017, 2016 and 2015,
respectively, are $277 million, $42 million and $52 million, respectively, of losses, net of taxes, due to the amortization of the excess basis of our investment
in Charter related to debt and intangible assets with identifiable useful lives. The excess basis amortization during the year ended December 31, 2015 was
offset by the write-off of the excess basis related to debt instruments which Charter repaid during the second quarter of 2015 prior to their contractual
maturity.
IV-28
Table of Contents
Charter Communications, Inc.
Summarized financial information for Charter is as follows:
Consolidated Balance Sheets
Current assets
Property and equipment, net
Goodwill
Intangible assets
Other assets
Total assets
Current liabilities
Deferred income taxes
Long-term debt
Other liabilities
Equity
Total liabilities and equity
Consolidated Statements of Operations
Revenue
Cost and expenses:
Operating costs and expenses (excluding depreciation and
amortization)
Depreciation and amortization
Other operating expenses, net
Operating income
Interest expense
Loss on extinguishment of debt
Other income (expense), net
Income tax (expense) benefit
Net earnings (loss)
Less: Net income attributable to noncontrolling interests
Net Income (loss) attributable to Charter shareholders
December 31,
2017
December 31,
2016
amounts in millions
2,555
33,888
29,554
79,270
1,356
146,623
11,090
17,314
68,186
2,502
47,531
146,623
3,300
32,963
29,509
81,924
1,371
149,067
9,572
26,665
59,719
2,745
50,366
149,067
$
$
$
$
Years ended December 31,
2017
2016
2015
amounts in millions
$
41,581
29,003
9,754
26,541
10,588
346
37,475
4,106
(3,090)
(40)
52
9,087
10,115
(220)
9,895
18,655
6,907
985
26,547
2,456
(2,499)
(111)
974
2,925
3,745
(223)
3,522
6,426
2,125
89
8,640
1,114
(1,306)
(128)
(11)
60
(271)
—
(271)
$
IV-29
Table of Contents
(6) Debt
Outstanding debt at December 31, 2017 and December 31, 2016 is summarized as follows:
December 31, 2017
December 31, 2016
amounts in thousands
500,000
—
—
500,000
—
400,000
200,000
600,000
2017 Margin Loans
2014 Margin Loans
2016 Margin Loans
$
$
Total
2014 Margin Loans
On October 30, 2014, in connection with and prior to the effectiveness of the Broadband Spin-Off, a wholly-owned special purpose subsidiary of
the Company ("BroadbandSPV") entered into two margin loan agreements (the "2014 Margin Loan Agreements") with each of the lenders party thereto. The
2014 Margin Loan Agreements permitted BroadbandSPV, subject to certain funding conditions, to borrow term loans up to an aggregate principal amount
equal to $400 million (the "2014 Margin Loans"), of which BroadbandSPV borrowed $320 million on October 31, 2014 and had $80 million available to be
drawn immediately following the Broadband Spin-Off. During November 2014, subsequent to the Broadband Spin-Off, Liberty Broadband borrowed an
additional $52 million to fund the exercise of the Legacy Charter warrants. During October 2015, Liberty Broadband borrowed an additional $28 million
pursuant to the 2014 Margin Loan Agreements. The maximum borrowing capacity of $400 million under the 2014 Margin Loan Agreements was
outstanding at December 31, 2016. The maturity date of the 2014 Margin Loans was October 30, 2017. Borrowings under the 2014 Margin Loan
Agreements bore interest at the three-month LIBOR rate plus 1.55% and had an unused commitment fee of 0.25% per annum based on the average daily
unused portion of the 2014 Margin Loans. Interest was payable quarterly in arrears beginning on December 31, 2014. On August 31, 2017, the outstanding
borrowings of $400 million were repaid, as discussed below.
2016 Margin Loans
On March 21, 2016, a wholly-owned special purpose subsidiary of the Company (“Cheetah 5”), entered into two margin loan agreements (the
“2016 Margin Loan Agreements” and together with the 2014 Margin Loan Agreements, the “Margin Loan Agreements”) with each of the lenders thereto.
The 2016 Margin Loan Agreements permitted Cheetah 5, subject to certain funding conditions, to borrow initial term loans up to an aggregate principal
amount equal to $200 million and delayed draw loans (the “Draw Loans”) up to an aggregate principal amount equal to $100 million, for an aggregate total
of $300 million (collectively the “2016 Margin Loans”). Cheetah 5 had borrowed $200 million as of December 31, 2016 and had $100 million available to
be drawn until September 21, 2017. The maturity date of the 2016 Margin Loans was March 21, 2018. Borrowings under the 2016 Margin Loans bore
interest at the applicable LIBOR rate plus 2.10% per annum and have an unused commitment fee of 0.5% per annum based on the average daily unused
portion of the Draw Loans. Interest was payable quarterly in arrears beginning on March 31, 2016. The proceeds of the 2016 Margin Loans were used for the
Company’s additional investment in Charter during May 2016 (note 5). On August 31, 2017, the outstanding borrowings of $200 million were repaid, as
discussed below.
2017 Margin Loan Facility
On August 31, 2017, a bankruptcy remote wholly owned subsidiary of the Company (“SPV”), entered into a multi-draw margin loan credit facility
(the “2017 Margin Loan Facility” and, the credit agreement governing such facility, the “2017 Margin Loan Agreement”) with Bank of America, N.A and
the lenders thereunder. SPV is permitted, subject to
IV-30
Table of Contents
certain funding conditions, to borrow term loans up to an aggregate principal amount equal to $1.0 billion. SPV will also have the ability from time to time
to request additional loans in an aggregate principal amount of up to $1.0 billion on an uncommitted basis subject to certain conditions. SPV had borrowed
$500 million as of December 31, 2017 and had $500 million available to be drawn until August 31, 2018. The maturity date of the loans under the 2017
Margin Loan Agreement is August 30, 2019 (except for any incremental loans incurred thereunder to the extent SPV and the incremental lenders agree to a
later maturity date). Accordingly, the debt is classified as noncurrent as of December 31, 2017. Borrowings under the 2017 Margin Loan Agreement bear
interest at the three-month LIBOR rate plus a per annum spread of 1.5%, unless it is unlawful for the applicable lender to fund or maintain loans based on
LIBOR or there are material restrictions on the applicable lender to do so, in which case borrowings under the 2017 Margin Loan Agreement will either (a)
bear interest at 0.5% plus the higher of (i) the federal funds rate plus ½ of 1%, (ii) the prime rate and (iii) LIBOR plus 1% for each day during such period or
(b) be prepaid. Borrowings outstanding under this margin loan bore interest at a rate of 3.19% per annum at December 31, 2017. Interest is payable quarterly
in arrears beginning on September 29, 2017. SPV used available cash and a portion of the proceeds of the loans under the 2017 Margin Loan Facility to
repay the Margin Loan Agreements. Borrowings may also be used for distribution as a dividend or a return of capital, for the purchase of margin stock and
for general corporate purposes.
The 2017 Margin Loan Agreement contains various affirmative and negative covenants that restrict the activities of SPV (and, in some cases, the
Company and its subsidiaries with respect to shares of Charter owned by the Company and its subsidiaries). The 2017 Margin Loan Agreement does not
include any financial covenants. The 2017 Margin Loan Agreement also contains restrictions related to additional indebtedness and events of default
customary for margin loans of this type.
SPV’s obligations under the 2017 Margin Loan Agreement are secured by first priority liens on a portion of the Company’s ownership interest in
Charter, sufficient for SPV to meet the loan to value requirements under the 2017 Margin Loan Agreement. The 2017 Margin Loan Agreement indicates that
no lender party shall have any voting rights with respect to the shares transferred, except to the extent that a lender party buys any shares in a sale or other
disposition made pursuant to the terms of the loan agreements. As of December 31, 2017, 6.8 million shares of Charter with a value of $2.3 billion were
pledged as collateral pursuant to the 2017 Margin Loan Agreement.
(7) Income Taxes
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax
Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to, (1) reducing the U.S. federal corporate tax rate
from 35 percent to 21 percent; (2) bonus depreciation that will allow for full expensing of qualified property; (3) creating a new limitation on deductible
interest expense; (4) eliminating the corporate alternative minimum tax (“AMT”) and changing how existing AMT credits can be realized; (5) changing rules
related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; and (6) limitations on the
deductibility of certain executive compensation. The SEC issued guidance on accounting for the tax effects of the Tax Act. The Company must reflect the
income tax effects of those aspects of the Tax Act for which the accounting is known. To the extent that a company’s accounting for certain income tax
effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements and the
Tax Act provides a measurement period that should not extend beyond one year from the Tax Act enactment date. If a company cannot determine a
provisional estimate to be included in the financial statements, it should continue to apply the tax laws that were in effect immediately before the enactment
of the Tax Act.
The corporate tax rate reduction was applied to our inventory of deferred tax assets and deferred tax liabilities, which resulted in the net tax benefit
in the period ending December 31, 2017. We have reported provisional amounts for the income tax effects of the Tax Act for which the accounting is
incomplete but a reasonable estimate could be determined. Based on a continued analysis of the estimates and further guidance and interpretations on the
application of the law, additional revisions may occur throughout the allowable measurement period.
IV-31
Table of Contents
Income tax benefit (expense) consists of:
Current:
Federal
State and local
Deferred:
Federal
State and local
Income tax benefit (expense)
Years ended December 31,
2017
2016
2015
amounts in thousands
$
$
(11)
(84)
(95)
(301,837)
(115,001)
(416,838)
(416,933)
1,556
853
2,409
(493,890)
(66,888)
(560,778)
(558,369)
(4,234)
(862)
(5,096)
23,512
1,452
24,964
19,868
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:
Computed expected tax benefit (expense)
State and local taxes, net of federal income taxes
Foreign taxes, net of foreign tax credit
Change in valuation allowance
Dividends received deduction
Change in tax rate - other
Change in tax rate - U.S. tax reform
Impairment of intangible assets not deductible for tax purposes
Derivative instrument
Other
Income tax (expense) benefit
Years ended December 31,
2017
2016
2014
amounts in thousands
(857,710)
(74,805)
—
(1,208)
—
—
515,773
—
1,084
(67)
(416,933)
(516,485)
(42,995)
(1,180)
683
931
45
—
—
396
236
(558,369)
24,519
1,786
(59)
612
752
(179)
—
(7,234)
—
(329)
19,868
$
$
For the year ended December 31, 2017 the significant reconciling items, as noted in the table above, are the result of the effect of the change in the
U.S. federal corporate tax rate from 35% to 21% on deferred taxes and the effect of state income taxes. In connection with the initial analysis of the impact
of the Tax Act, the Company has recorded a discrete net tax benefit of $516 million in the period ending December 31, 2017. This net benefit primarily
consists of a net benefit for the corporate rate reduction.
For the year ended December 31, 2016 the significant reconciling items, as noted in the table above, are the result of the effect of state income
taxes.
For the year ended December 31, 2015 the significant reconciling items, as noted in the table above, are the result of the impairment to non-
deductible goodwill related to Skyhook’s legacy U-TDOA Service.
IV-32
Table of Contents
The tax effects of temporary differences and tax attributes that give rise to significant portions of the deferred income tax assets and deferred
income tax liabilities are presented below:
Deferred tax assets:
Net operating loss and tax credit carryforwards
Accrued stock-based compensation
Deferred revenue
Other
Total deferred tax assets
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Investments
Intangible assets
Other
Total deferred tax liabilities
Net deferred tax asset (liability)
December 31,
2017
2016
amounts in thousands
$
$
49,555
4,275
1,805
64
55,699
(8,153)
47,546
(979,522)
(617)
—
(980,139)
(932,593)
23,017
4,812
1,721
2,073
31,623
(6,945)
24,678
(527,151)
(2,170)
(1)
(529,322)
(504,644)
The Company’s valuation allowance increased $1.2 million in 2017, which affected tax expense during the year ended December 31, 2017.
At December 31, 2017, the Company had a deferred tax liability on investments of $979.5 million due to its share of earnings in its equity
investment in Charter, which were partially offset by the application of the rate change of the Tax Act and, in the prior year, the result of the Transactions, as
discussed in note 5.
At December 31, 2017, Liberty Broadband had federal and state net operating losses (on a tax effected basis) and tax credit carryforwards for
income tax purposes aggregating approximately $49.6 million. These losses and credit carryforwards are expected to be utilized prior to expiration, except
for $8.2 million which based on current projections, may expire unused and accordingly are subject to a valuation allowance. The carryforwards that are
expected to be utilized will begin to expire in 2021.
As of December 31, 2017, the Company had not recorded tax reserves related to unrecognized tax benefits for uncertain tax positions.
As of December 31, 2017, the IRS has completed its examination of Liberty Broadband’s 2015 and 2016 tax years. Liberty Broadband’s 2017 tax
year is being examined as part of the IRS’s Compliance Assurance Process “CAP” program. Because Liberty Broadband’s ownership of Charter is less than
the required 80%, Charter is not consolidated with Liberty Broadband for federal income tax purposes.
(8) Stockholders' Equity
In the Broadband Spin-Off, record holders of Liberty Series A, Series B and Series C common stock received one-fourth of a share of the
corresponding series of Liberty Broadband common stock for each share of Liberty common stock held by them, with cash paid in lieu of fractional shares.
This resulted in the issuance of an aggregate 85,761,332 shares of Series A, Series B and Series C common stock.
IV-33
Table of Contents
In addition, following the completion of the Broadband Spin-Off, on December 10, 2014, stockholders received a subscription right to acquire one
share of Liberty Broadband Series C common stock for every five shares of Liberty Broadband common stock they held as of the rights record date at a per
share subscription price of $40.36, which was a 20% discount to the 20-trading day volume weighted average trading price of the Series C Liberty
Broadband common stock following the completion of the Broadband Spin-Off. The rights offering was fully subscribed on January 9, 2015, with
17,277,224 shares of Series C common stock issued to those rightsholders exercising basic and, as applicable, oversubscription privileges. The subscription
rights were issued to raise capital for general corporate purposes of Liberty Broadband.
In connection with the Time Warner Cable Merger in May 2016, Liberty Broadband funded its purchase of shares of Charter Class A common stock
using proceeds of $4.4 billion related to subscriptions for approximately 78.3 million newly issued shares of Liberty Broadband Series C common stock, par
value $0.01 per share (the “Series C Shares”), at a price per share of $56.23, which was determined based upon the fair value of Liberty Broadband’s net
assets on a sum-of-the parts basis at the time certain Amended and Restated Investment Agreements were executed. The purchasers of the Series C Shares
were Liberty Interactive through its Liberty Ventures Group (approximately 42.7 million shares) and certain other third party investors, which all invested on
substantially similar terms. One of the third party investors also held a position in Time Warner Cable and agreed to vote its Time Warner Cable shares in
favor of the Time Warner Cable Merger. Each of Legacy Charter and Liberty Broadband obtained stockholder approval during September 2015 for the
issuance of the Charter shares and the Series C Shares, respectively, in accordance with the rules and requirements of the Nasdaq Stock Market. The issuance
of the Series C Shares was not registered under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on the exemption from registration
provided by Section 4(a)(2) of the Securities Act and the rules and regulations of the Securities and Exchange Commission promulgated thereunder. As a
result of the issuance of the Series C Shares in connection with the Transactions, Liberty Interactive’s non-voting economic ownership in Liberty Broadband
was 23.5% as of December 31, 2016.
As discussed in note 4, the Company had an outstanding zero-strike call option on 704,908 Series C Shares at December 31, 2016, which expired in
March 2017. The Company prepaid a premium of $47.9 million in December 2016. Liberty Broadband exercised its option to settle the contract in cash in
March 2017 for cash proceeds of $50.0 million. The Company entered into another zero-strike call option on 527,156 shares of Liberty Broadband Series C
common stock and prepaid a premium of $47.7 million in October 2017. Upon expiration of the contract in December 2017, the Company physically settled
the contract by purchasing 527,156 shares of Liberty Broadband Series C common stock at a price of $90.54 per share. As of December 31, 2017, the
Company had no zero-strike call options outstanding. The Company accounted for the zero-strike call option as a financial instrument asset due to its
settlement provisions. Accordingly, changes in the fair value of the asset are included in realized and unrealized gains (losses) on financial instruments in the
accompanying statement of operations.
Preferred Stock
Liberty Broadband'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 Broadband's board of directors. As of December 31, 2017, no shares of preferred stock were issued.
Common Stock
Liberty Broadband's Series A common stock has one vote per share, Liberty Broadband's Series B common stock has ten votes per share and
Liberty Broadband’s Series C common stock has no votes per share (except as otherwise required by applicable law). Each share of the Series B common
stock is exchangeable at the option of the holder for one share of Series A common stock. All series of our common stock participate on an equal basis with
respect to dividends and distributions.
IV-34
Table of Contents
As of December 31, 2017, there were 404 thousand shares of Series A and 2.4 million shares of Series C common stock reserved for issuance under
exercise privileges of outstanding stock options.
(9) Stock-Based Compensation
Included in the accompanying consolidated statements of operations are the following amounts of stock-based compensation for the years ended
December 31, 2017, 2016 and 2015 (amounts in thousands).
Operating expense
Selling, general and administrative
Research and development
Liberty Broadband - Incentive Plans
2017
December 31,
2016
$
$
(2)
5,114
180
5,292
—
5,555
158
5,713
2015
7
5,978
395
6,380
Pursuant to the Liberty Broadband 2014 Omnibus Incentive Plan, as amended, the Company may grant Awards to be made in respect of a
maximum of 8.4 million shares of Liberty Broadband common stock. Awards generally vest over 1-5 years and have a term of 7-10 years. Liberty
Broadband issues new shares upon exercise of equity awards.
Liberty Broadband – Grants of Stock Options
During the years ended December 31, 2017, 2016 and 2015, Liberty Broadband granted 16 thousand, 17 thousand and 21 thousand options,
respectively, to purchase shares of Series C common stock to its non-employee directors with a weighted average grant-date fair value (“GDFV”) of $22.68,
$18.64 and $13.51 per share, respectively, which mainly cliff vest over a one year vesting period. There were no options to purchase shares of Series A
common stock granted during the period.
The Company has calculated the GDFV for all of its equity classified awards and any subsequent remeasurement of its liability classified awards
using the Black-Scholes Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. For grants made
in 2017, 2016 and 2015, the range of expected terms was 4.6 to 5.3 years. The volatility used in the calculation for Awards is based on the historical
volatility of Liberty Broadband common stock and the implied volatility of publicly traded Liberty Broadband options. For grants made in 2017, 2016 and
2015, the range of volatilities was 24.4% to 28.2%. The Company uses a zero dividend rate and the risk-free rate for Treasury Bonds with a term similar to
that of the subject option.
IV-35
Table of Contents
Liberty Broadband – Outstanding Awards
The following table presents the number and weighted average exercise price (“WAEP”) of Awards to purchase Liberty Broadband common stock
granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the
Awards.
Outstanding at January 1, 2017
Granted
Exercised
Forfeited/Cancelled
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Outstanding at January 1, 2017
Granted
Exercised
Forfeited/Cancelled
Outstanding at December 31, 2017
Exercisable at December 31, 2017
Series A
(in thousands)
$
454
— $
(50)
$
— $
404
$
402
$
Series C
(in thousands)
$
2,467
$
16
(95)
$
— $
$
$
2,388
866
WAEP
WAEP
32.47
—
26.85
—
33.16
33.08
42.45
85.34
27.08
—
43.35
34.34
Weighted
average
remaining
contractual
life
(in years)
Aggregate
intrinsic
value
(in millions)
2.0
2.0
$
$
21
21
Weighted
average
remaining
contractual
life
(in years)
Aggregate
intrinsic
value
(in millions)
5.2
2.1
$
$
100
44
The Company had no outstanding Series B options during 2017.
As of December 31, 2017, the total unrecognized compensation cost related to unvested Liberty Broadband Awards was approximately $10.0
million. Such amount will be recognized in the Company’s consolidated statements of operations over a weighted average period of approximately 1.5
years.
As of December 31, 2017, Liberty Broadband reserved 2.8 million shares of Series A and Series C common stock for issuance under exercise
privileges of outstanding stock Awards.
Liberty Broadband – Exercises
The aggregate intrinsic value of all options exercised during the years ended December 31, 2017, 2016 and 2015 was $8.1 million, $14.4 million
and $11.2 million, respectively.
Liberty Broadband – Restricted Shares
The aggregate fair value of all Series A and Series C restricted shares of Liberty Broadband common stock that vested during the years ended
December 31, 2017, 2016 and 2015 was $116 thousand, $674 thousand and $5.8 million, respectively.
IV-36
Table of Contents
As of December 31, 2017, the Company had approximately 24,000 unvested restricted shares of Series A and Series C Liberty Broadband common
stock held by certain directors, officers and employees of the Company with a weighted average GDFV of $13.43 per share.
Skyhook equity incentive plans
Long-Term Incentive Plans
Skyhook has a long-term incentive plan which provides for the granting of PARs and PSUs to employees, directors, and consultants of Skyhook
that is not significant to Liberty Broadband. As of December 31, 2017 and 2016, $1.2 million and $1.7 million, respectively, are included in other liabilities
for the fair value (Level 2) of the Company's LTIP obligations.
(10) Employee Benefit Plans
Prior to January 1, 2015, Skyhook participated in Liberty’s defined-contribution plan (the “Liberty 401(k) Plan”).
Employees of Skyhook participate in a separate defined-contribution plan administered by Skyhook (the “Skyhook 401(k) Plan”). The Skyhook
401(k) Plan provides for employees to make contributions by salary reductions for investment in several mutual funds and/or a self-directed brokerage
account pursuant to Section 401(k) of the Internal Revenue Code.
Pursuant to the existing Skyhook 401(k) Plan, Skyhook employees are eligible for 100% matching contributions for each dollar contributed up to
10%, subject to certain limitations. For the years ended December 31, 2017, 2016 and 2015, Skyhook contributed approximately $1.0 million, $0.8 million
and $1.1 million respectively.
(11) Commitments and Contingencies
Leases
Skyhook leases various properties under operating leases expiring at various times through 2021. The aggregate minimum annual lease payments
under the noncancelable operating leases as of December 31, 2017 are as follows (amounts in thousands):
2018
2019
2020
2021
$
$
445
497
548
11
1,501
Skyhook’s two principal facilities are under lease through December 2019 and January 2021, respectively. Total rental expense for the years ended
December 31, 2017, 2016 and 2015 was $1.1 million, $2.4 million and $3.7 million, respectively.
Litigation
On May 23, 2012, Skyhook (then known as TruePosition) filed a patent infringement lawsuit in the U.S. District Court for the District of Delaware
against Polaris Wireless, Inc. (“Polaris”), related to the sale by Polaris of systems used to locate mobile devices. In parallel with the lawsuit, at Polaris’s
request, the U.S. Patent and Trademark Office initiated an Inter Partes Review. Both the District Court and the Patent Trial and Appeal Board ruled
adversely to Skyhook and
IV-37
Table of Contents
those rulings were upheld on appeal. No further appeal was taken. During the pendency of the appeal, Polaris filed a motion in the District Court for an
award of approximately $3 million in attorneys’ fees and expenses incurred in defending the lawsuit. The matter was heard by the Court on October 16,
2015, wherein the court denied the Polaris motion.
On September 10, 2010, Skyhook filed a patent infringement lawsuit in the U.S. District Court for the District of Massachusetts against
Google, Inc. (“Google”). In March 2013, Skyhook amended its lawsuit to add additional claims. In total, at the time the case was to be tried, Skyhook
alleged that Google infringed on eight Skyhook patents involving location technology and sought an injunction and/or award of damages in an amount to be
determined at trial. The case had been scheduled to be tried before a jury commencing March 9, 2015. However, on March 5, 2015, the parties advised the
District Court that the case has been settled and thereby dismissed the action without costs and without prejudice to the right person, upon good cause shown
within 45 days, to reopen the action if settlement is not consummated. On March 27, 2015, the parties consummated a final settlement agreement and on
April 24, 2015, Google paid Skyhook settlement consideration of $90 million. In return for payment of the settlement consideration, Google received
dismissal of the action with prejudice, a license to the existing Skyhook patents and patent applications (and their continuations, divisionals, continuations-
in-part), a three-year covenant not to sue (subject to limited exceptions) and a mutual release of claims. The settlement amount of $90 million is recorded net
of approximately $29.5 million for legal fees in the statement of operations for the year ended December 31, 2015.
General Litigation
In the ordinary course of business, the Company and its consolidated subsidiaries are parties to legal proceedings and claims involving alleged
infringement of third-party intellectual property rights, defamation, and other claims. Although it is reasonably possible that the Company 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.
Off-Balance Sheet Arrangements
Liberty Broadband did not have any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the
Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources.
(12) Segment Information
Liberty Broadband identifies its reportable segments as (A) those consolidated companies that represent 10% or more of its consolidated annual
revenue, annual Adjusted OIBDA or total assets and (B) those equity method affiliates whose share of earnings or losses represent 10% or more of Liberty
Broadband’s annual pre-tax earnings (losses).
Liberty Broadband evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures
such as revenue, Adjusted OIBDA. In addition, Liberty Broadband reviews nonfinancial measures such as subscriber growth.
Liberty Broadband defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses
(excluding stock-based compensation). Liberty Broadband believes this measure is an important indicator of the operational strength and performance of its
businesses, including each business’s ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating
results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of
performance excludes depreciation and amortization, stock based compensation, separately reported litigation settlements and restructuring and impairment
charges that are included in the measurement of operating income
IV-38
Table of Contents
pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net earnings, cash flow
provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Liberty Broadband 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, 2017, Liberty Broadband has identified the following consolidated company and equity method investment as its
reportable segments:
·
·
Skyhook— a wholly owned subsidiary of the Company that provides the Precision Location Solution (a location determination service) and
Geospatial Insights product (a location intelligence and data insights service).
Charter—an equity method investment that is one of the largest providers of cable services in the United States, offering a variety of
entertainment, information and communications solutions to residential and commercial customers.
Liberty Broadband’s operating segments are strategic business units that offer different products and services. They are managed separately because
each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments that are also
consolidated companies are the same as those described in the Company’s summary of significant accounting policies in the Company’s annual financial
statements. For periods in which Liberty Broadband owned Charter shares and warrants, we have included amounts attributable to Charter in the tables
below. Although Liberty Broadband owns less than 100% of the outstanding shares of Charter, 100% of the Charter amounts are included in the schedule
below and subsequently eliminated in order to reconcile the account totals to the Liberty Broadband consolidated financial statements.
IV-39
Table of Contents
Performance Measures
Skyhook
Charter
Corporate and other
Eliminate equity method affiliate
Consolidated Liberty
Broadband
Other Information
Skyhook
Charter
Corporate and other
Eliminate equity method affiliate
Consolidated Liberty Broadband
$
Revenue by Geographic Area
United States
Other countries
2017
Years ended December 31,
2016
2015
Revenue
Adjusted
OIBDA
Revenue
Adjusted
OIBDA
Revenue
amounts in thousands
$
13,092
(9,496)
30,586
(2,681)
91,182
41,581,000
—
41,594,092
(41,581,000)
14,955,000
(6,920)
14,938,584
(14,955,000)
29,003,000
—
29,033,586
(29,003,000)
9,607,000
(8,761)
9,595,558
(9,607,000)
9,754,000
—
9,845,182
(9,754,000)
Adjusted
OIBDA
43,600
3,317,000
(11,958)
3,348,642
(3,317,000)
$
13,092
(16,416)
30,586
(11,442)
91,182
31,642
Total
assets
December 31, 2017
Investments
in affiliates
Capital
expenditures
Total
assets
December 31, 2016
Investments
in affiliates
Capital
expenditures
$
24,481
146,623,000
11,907,308
158,554,789
(146,623,000)
11,931,789
—
—
11,835,613
11,835,613
—
11,835,613
amounts in thousands
70
30,463
8,681,000
—
8,681,070
(8,681,000)
70
149,067,000
9,560,497
158,657,960
(149,067,000)
9,590,960
—
—
9,315,253
9,315,253
—
9,315,253
267
5,325,000
—
5,325,267
(5,325,000)
267
2017
Years ended December 31,
2016
amounts in thousands
27,806
2,780
30,586
10,315
2,777
13,092
2015
87,739
3,443
91,182
$
$
IV-40
Table of Contents
The following table provides a reconciliation of segment Adjusted OIBDA to Operating income (loss) and earnings (loss) from continuing
operations before income taxes:
Consolidated segment Adjusted OIBDA
Stock-based compensation
Depreciation and amortization
Gain on legal settlement
Impairment of intangible assets
Operating income (loss)
Interest expense
Dividend and interest income
Share of earnings (loss) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gain (loss) on dilution of investment in affiliate
Other, net
Earnings (loss) from continuing operations before income taxes
(13) Quarterly Financial Information (Unaudited)
Years ended December 31,
2017
2016
2015
amounts in thousands
$
$
(16,416)
(5,292)
(3,770)
—
—
(25,478)
(19,570)
1,449
2,508,991
3,098
(17,872)
(18)
2,450,600
(11,442)
(5,713)
(4,005)
—
—
(21,160)
(14,956)
5,020
641,544
94,122
770,766
336
1,475,672
31,642
(6,380)
(6,088)
60,450
(20,669)
58,955
(7,424)
3,797
(120,962)
2,619
(7,198)
158
(70,055)
st
1
Quarter
nd
2
Quarter
rd
3
Quarter
amounts in thousands
th
4
Quarter
2017:
Revenue
Operating income (loss)
Net earnings (loss) attributable to Liberty Broadband Corporation Series A, Series B and
Series C stockholders
Basic earnings (loss) attributable to Liberty Broadband Corporation Series A, Series B and
Series C stockholders per common share
Diluted earnings (loss) attributable to Liberty Broadband Corporation Series A, Series B and
Series C stockholders per common share
$
$
3,140
(6,362)
3,073
(7,333)
3,430
(5,787)
3,449
(5,996)
$
(14,445)
(2,977)
(9,864)
2,060,953
$
(0.08)
(0.02)
(0.05)
$
(0.08)
(0.02)
(0.05)
11.37
11.28
2016:
Revenue
Operating income (loss)
Net earnings (loss) attributable to Liberty Broadband Corporation Series A, Series B and
Series C stockholders
Basic earnings (loss) attributable to Liberty Broadband Corporation Series A, Series B and
Series C stockholders per common share
Diluted earnings (loss) attributable to Liberty Broadband Corporation Series A, Series B and
Series C stockholders per common share
$
$
3,831
(9,340)
2,966
(10,737)
20,616
6,624
3,173
(7,707)
$
(22,241)
890,154
3,789
45,601
$
(0.22)
$
(0.22)
6.31
6.28
0.02
0.02
0.25
0.25
st
1
Quarter
nd
2
Quarter
rd
3
Quarter
amounts in thousands
th
4
Quarter
IV-41
Table of Contents
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.
SIGNATURES
Date: March 1, 2018
Date: March 1, 2018
LIBERTY INTERACTIVE CORPORATION
By /s/Gregory B. Maffei
Gregory B. Maffei
Chief Executive Officer and President
By /s/Mark D. Carleton
Mark D. Carleton
Chief Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
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
John C. Malone
/s/Gregory B. Maffei
Gregory B. Maffei
/s/Mark D. Carleton
Mark D. Carleton
/s/Richard N. Barton
Richard N. Barton
/s/Michael A. George
Michael A. George
/s/M. Ian G. Gilchrist
M. Ian G. Gilchrist
/s/Evan D. Malone
Evan D. Malone
/s/David E. Rapley
David E. Rapley
/s/M. LaVoy Robison
M. LaVoy Robison
/s/Larry E. Romrell
Larry E. Romrell
Chairman of the Board and Director
Director, Chief Executive Officer
and President
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
Director
IV-42
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
March 1, 2018
Table of Contents
/s/Andrea L. Wong
Andrea L. Wong
/s/Mark Vadon
Mark Vadon
Fiona P. Dias
Director
Director
Director
March 1, 2018
March 1, 2018
IV-43
Exhibit 10.57
LIBERTY INTERACTIVE CORPORATION
Settlement Agreement
with respect to
Option Exchange Proposal
Dated: December 20, 2017
Reference is made to the proposal (the “Proposal”) separately presented to you, [ ● ], and incorporated herein by reference by
Liberty Interactive Corporation (the “Company”) with respect to the outstanding options, whether vested or unvested, to purchase shares
of Series A QVC Group common stock, par value $0.01 per share (“QVCA”)[,][and] shares of Series A Liberty Ventures common stock,
par value $0.01 per share (“LVNTA”)[, and shares of Series B Liberty Ventures common stock, par value $0.01 per share (“LVNTB”)]
held by you and granted under one or more of the Liberty Interactive Corporation 2010 Incentive Plan (as Amended and Restated
Effective November 7, 2011 and as further amended Effective August 5, 2013, the “2010 Plan”)[,][or] the Liberty Interactive Corporation
2012 Incentive Plan (as Amended and Restated as of March 31, 2015, the “2012[ Plan”) or the Liberty Interactive Corporation 2016
Omnibus Incentive Plan (the “2016] Plan” and together with the 2010 Plan[ and the 2012 Plan], the “Plans”) (each such option, an
“Eligible Option”). For purposes of the Proposal, Eligible Options do not include[, in the case of QVCA options or LVNTA options,] any
options with an exercise price that is greater than the closing price per QVCA or LVNTA share, as applicable, on The Nasdaq Global
Select Market on the New Option Grant Date (as defined below)[, or in the case of LVNTB options, any options with an exercise price
that is greater than the LVNTB Fair Market Value (as defined below)]. For your convenience, attached is a schedule showing, as of
December 26, 2017, all of your outstanding Eligible Options, including the exercise price, vesting schedule and expiration date thereof.
By executing this agreement, you accept the Proposal recognizing that you must do so with respect to all of your Eligible
Options. Notwithstanding any acceptance by you of the Proposal as contemplated hereby, you or the Company may elect not to
complete the transactions contemplated by the Proposal for any reason at any time prior to the New Option Grant Date (as
defined below) by delivering written notice (including by electronic mail) to the other.
By accepting the Proposal and executing this agreement, we agree that:
·
you will exercise, effective as of December 26, 2017 (the “New Option Grant Date”), each outstanding vested LVNTA [and
LVNTB] Eligible Option and receive a number of LVNTA [or LVNTB] shares[, as applicable,] equal to (x) an amount (less
any applicable withholding taxes) determined by the product of (1) the number of LVNTA [or LVNTB] shares subject to
such vested Eligible Option, multiplied by (2) the difference between[, in the case of a LVNTA Eligible Option, the closing
price per share of LVNTA on the Nasdaq Global Select Market on the New Option Grant Date, or, in the case of a LVNTB
Eligible Option, (A) if there is sufficient trading volume in shares of LVNTB (which shall mean 500 or more shares) on the
Nasdaq Global Select Market on the New Option Grant Date, the closing price per share of LVNTB on the Nasdaq Global
Select Market on the New Option Grant Date or (B) if there is insufficient trading volume in shares of LVNTB (which shall
mean fewer than 500 shares) on the Nasdaq Global Select Market on the New Option Grant Date,] the closing price per share
of LVNTA on the Nasdaq Global Select Market on the New Option Grant Date [multiplied by 1.0075 (such value per
LVNTB share, the “LVNTB Fair Market Value”),] and the exercise
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and are not
part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You should consult your
personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
price of the vested Eligible Option, divided by (y) [in the case of a LVNTA Eligible Option,] the closing price per share of
LVNTA on the Nasdaq Global Select Market on the New Option Grant Date[, or, in the case of a LVNTB Eligible Option,
the LVNTB Fair Market Value];
·
·
you will exercise, effective as of the New Option Grant Date, each outstanding vested QVCA Eligible Option and receive a
number of shares of QVCA equal to (x) an amount (less any applicable withholding taxes) determined by the product of (1)
the number of QVCA shares subject to such vested Eligible Option, multiplied by (2) the difference between the closing
price per share of QVCA on the Nasdaq Global Select Market on the New Option Grant Date and the exercise price of the
vested Eligible Option, divided by (y) the closing price per share of QVCA on the Nasdaq Global Select Market on the New
Option Grant Date;
for each vested Eligible Option so exercised, the Company will grant you a new option (the “Vested New Option”) on the
New Option Grant Date that will be fully vested when granted with substantially the same terms and conditions (including,
without limitation, the same number of shares and same series of common stock subject thereto and the same expiration date
thereof) as the vested Eligible Option exercised as contemplated above, except that the exercise price for the new option will
be[, in the case of a QVCA option or LVNTA option,] the closing price per share of QVCA or LVNTA, as applicable, on the
Nasdaq Global Select Market on the New Option Grant Date [or, in the case of a LVNTB option, the LVNTB Fair Market
Value];
·
for each unvested Eligible Option, the Company will accelerate the vesting of such Eligible Option and:
§
§
you will exercise, effective as of the New Option Grant Date, each outstanding unvested Eligible Option and receive
from the Company a number of restricted LVNTA [or LVNTB] shares (the “Restricted Shares”), which will have a
vesting schedule identical to that of the unvested Eligible Option so exercised, equal to (x) an amount (less any
applicable withholding taxes including any withholding taxes arising as a result of the filing by you of an election under
Internal Revenue Code section 83(b) with respect to such Restricted Shares) determined by the product of (1) the number
of LVNTA [or LVNTB] shares[, as applicable,] subject to such unvested Eligible Option multiplied by (2) the difference
between[, in the case of a LVNTA Eligible Option,] the closing price per share of LVNTA on the Nasdaq Global Select
Market on the New Option Grant Date[, or, in the case of a LVNTB Eligible Option, the LVNTB Fair Market Value,] and
the exercise price of the unvested Eligible Option, divided by (y) [in the case of a LVNTA Eligible Option,] the closing
price per share of LVNTA on the Nasdaq Global Select Market on the New Option Grant Date[, or, in the case of a
LVNTB Eligible Option, the LVNTB Fair Market Value] and further you will file an election under Internal Revenue
Code section 83(b) to include the value (as determined herein) of such Restricted Shares in your taxable income on the
date of receipt of such Restricted Shares; and
the Company will grant to you on the New Option Grant Date a new option (the “Unvested New Option” and, together
with the Vested New Option, the “New Options”) to acquire the same series of common stock, and with substantially the
same terms and conditions, including, without limitation, to the same vesting and expiration date, as the unvested
Eligible Option exercised as contemplated above, except that the number of LVNTA [or LVNTB] shares subject to such
Unvested New Option will be equal to the number of shares subject to the unvested Eligible Option exercised as
contemplated above minus the number
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and are not
part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You should consult your
personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-2-
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
of Restricted Shares received upon exercise of such unvested Eligible Option, and the exercise price of such new option
will be[, in the case of a LVNTA option,] the closing price per share of LVNTA on the Nasdaq Global Select Market on
the New Option Grant Date[, or, in the case of a LVNTB option, the LVNTB Fair Market Value].
·
The Company shall indemnify and hold you harmless from and against any and all losses, liabilities (including tax liabilities
other than taxes imposed on ordinary compensation income), costs, damages or expenses (including, without duplication,
reasonable fees and expenses of counsel, accountants, consultants and other experts) (“Losses”) incurred by, imposed on, or
attributed to you in connection with, arising out of or resulting from any claims, demands, actions, proceedings, audits or
investigations, in each case, relating to the transactions contemplated herein and initiated by a third party (“Indemnifiable
Claims”), other than any such Losses arising out of or resulting from your gross negligence or willful misconduct. Upon
your request, the Company shall advance to you any and all reasonable fees, costs and expenses incurred by you in
connection with investigating, defending, responding to or participating in (including any appeal), or preparing to defend or
participate in, any Indemnifiable Claim, subject to and contingent upon the receipt of an undertaking by you to repay any
amounts advanced by the Company to you hereunder if it is ultimately determined in a final judgment not subject to appeal
by a court of competent jurisdiction that you are not entitled to be indemnified pursuant hereto. The indemnification and
advancement of expenses provided herein is in addition to, and not in derogation of, any other rights you may have under
applicable law, the Company’s certificate of incorporation or bylaws, or pursuant to any contract, agreement or arrangement;
provided, however, that Losses will not be duplicated.
On the New Option Grant Date assuming that neither party has elected as provided herein not to complete the transactions
described in the Proposal and this agreement, the Eligible Options will be accelerated and exercised, the Restricted Shares issuable on the
exercise of unvested Eligible Options will be issued, and the New Options will be granted, in each case, at 5:00 p.m., New York City
time, on the New Option Grant Date. Each of the New Options to be granted as described above will be granted under the [2016 Plan]
[Liberty Interactive Corporation 2016 Omnibus Incentive Plan (the “2016 Plan”)], and will be subject to the terms and conditions of that
plan and a new stock option agreement. The new stock option agreement will contain terms and conditions substantially similar to the
stock option agreement governing the Eligible Options, except as otherwise described herein. The Restricted Shares issued in settlement
of the exercised unvested Eligible Options will be subject to a restricted stock agreement and will be granted under and governed by the
applicable plan under which the Eligible Options were granted. A copy of the 2010 Plan has been filed by the Company with the
Securities and Exchange Commission as Exhibit 10.7 the Company’s Quarterly Report on Form 10-Q for the quarterly period ending
September 30, 2011 filed on November 8, 2011 (File No. 001-33982), and a copy of the Amendment to the 2010 Plan has been filed by
the Company with the Securities and Exchange Commission as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for the
quarterly period ending September 30, 2013 filed on November 5, 2013. A copy of the 2012 Plan has been filed by the Company with
the Securities and Exchange Commission as Exhibit 10.4 the Company’s Quarterly Report on Form 10-Q for the quarterly period ending
March 31, 2015 filed on May 8, 2015 (File No. 001-33982). A copy of the 2016 Plan has been filed by the Company with the Securities
and Exchange Commission as Annex A to the Company’s Proxy Statement on Schedule 14A filed on July 8, 2016 (File No. 001-
33982). In addition, a summary of the material terms of the Plans can be obtained by contacting the Company or from the Liberty
Interactive Corporation Legal Department.
Additionally, the Company will provide you with a supplemental QVCA option grant and supplemental LVNTA option grant,
each of which will have a Black-Scholes value equal to the estimated amount of certain incremental tax liabilities that you will incur as a
result of your participation in the
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and are not
part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You should consult your
personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-3-
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
transactions contemplated herein with respect to your QVCA awards and your LVNTA [and LVNTB] awards, respectively, due to the
expected reduction under proposed tax reform legislation of the maximum individual tax rate for the 2018 tax year for U.S. federal
income tax purposes, as compared to such rate in effect for 2017.
To execute this agreement, you must check the box and sign below, and return this agreement to Kelly King, Assistant Vice
President, Compensation [separately provided], (by emailing a scanned or PDF copy or hand delivery) prior to 5:00 p.m. MTN,
December 21, 2017. In addition, completed and executed copies of the required 83(b) Elections must be sent to the Internal Revenue
Service as indicated on the form within 30 days of the New Option Grant Date. The Company will send you completed 83(b) Elections
for signature by you [and your spouse]. Please return the signed 83(b) Elections to Ms. King within five (5) days of receipt. The
Company will send a copy to the Internal Revenue Service.
Accepting the offer from the Company with respect to your Eligible Options involves a number of potential risks and
uncertainties, including, the potential risks and uncertainties set forth under the heading entitled “Risk Factors” in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2016 and the Company’s Quarterly Reports on Form 10-Q for 2017, each of
which has been filed with the SEC and highlights the material risks of investing in the Company and the QVCA[,][and] LVNTA [and
LVNTB] shares. You should carefully consider these risks and we encourage you to speak with your financial, legal and/or tax advisors
as necessary before deciding whether to accept the Proposal. You acknowledge that you (x) have received all the information you
consider necessary or appropriate for deciding whether to accept the Proposal, (y) have had an opportunity to ask questions and receive
answers from the Company regarding the terms and conditions of the Proposal and (z) can bear the economic risk of your investment and
have such knowledge and experience in financial or business matters that you are capable of evaluating the merits and risks of such
investment.
·
·
By entering into this agreement with respect to your Eligible Options, you are not waiving any rights you have or may have
under any agreement with the Company or any affiliate thereof or otherwise, except that, effective as of the exercise of the
Eligible Options, you release all of your rights under such Eligible Options other than those rights provided for herein,
including, without limitation, your right to receive the net proceeds of such exercise, as well as the grants of New Options
and supplemental options (as described above), and your rights of indemnification described herein.
Further, by entering into this agreement with respect to your Eligible Options, you are authorizing the Company to deduct the
applicable withholding taxes related to the transactions contemplated hereby.
*
*
*
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and are not
part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You should consult your
personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-4-
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
☐
described above and in discussions with the Company, and I agree to file the 83(b) Elections as described above.
Yes, I wish to accept the Proposal as to ALL, but not less than all, of my Eligible Options as more fully-
Intending to be legally bound hereby and in consideration of the promises
hereunder, the parties agree to the foregoing terms.
Employee Signature
Date
Employee Name (please print)
E-mail Address
Legal Name, if different (please print)
Liberty Interactive Corporation
By:
Its:
In addition, this document and any offer by the Company to exchange outstanding options constitute a private transaction between you and the Company and are not
part of, or subject to, any other offer the Company may make to any officer, director or employee with respect to outstanding incentive awards. You should consult your
personal outside advisor(s) if you have questions about your financial or tax situation as it relates to the Proposal.
-5-
This document constitutes part of a prospectus covering securities that have been registered under the Securities Act of 1933.
Schedule of Eligible Options
Series
of
Stock
Name
Grant
Date
Expiration
Date
Plan ID
Grant
Price
Eligible
Options
Outstanding
Eligible
Options
Vested
Eligible
Options
Unvested
Vesting
Schedule
SECTION 83(B) ELECTION FORM
_______________, 2017
Via Certified Mail, Return Receipt Requested
Internal Revenue Service
____________________
____________________
Re:
Election to Include in Taxable Income in Year of Transfer Pursuant to Section 83(b) of the Internal Revenue Code
The name, address and taxpayer identification number of the undersigned (the “Taxpayer”) are:
Name:
Address:
SSN:
Description of the property with respect to which the election is being made (the “Property”): _____ shares of Series A Liberty Ventures and ______
shares of Series B Liberty Ventures common stock of Liberty Interactive Corporation (the “Company”).
The date on which the Property was transferred is ____________, 2017 (the “Effective Date”). The taxable year to which this election relates is
calendar year 2017.
Nature of the restrictions to which the Property is subject: The Property is subject to transfer restrictions and forfeiture restrictions and vests based on
continued service over a period beginning on the Effective Date.
The fair market value at the time of transfer (determined without regard to any restriction other than a restriction which by its terms will never lapse) of
the Property with respect to which this election is being made is $__________.
The amount paid by the Taxpayer for the Property is $_____________.
A copy of this statement has been furnished to other persons as provided in Treasury Regulation section 1.83- 2(d).
This statement is executed on __________________, 2017.
TAXPAYER:
[Name]
SSN:
[Name] (Spouse)
SSN:
This statement must be filed with the Internal Revenue Service Center with which you filed your last U.S. federal income tax return within 30 days after
the Effective Date. This filing should be made by registered or certified mail, return receipt requested. You are also required to deliver a copy of this
statement to the Company. You should also retain a copy of this statement for your records.
A table of subsidiaries of Liberty Interactive 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.
As of December 31, 2017
Exhibit 21
Entity Name
1227844 Ontario Ltd.
Affiliate Distribution & Mktg., Inc.
Affiliate Investment, Inc.
Affiliate Relations Holdings, Inc.
AMI 2, Inc.
AST Sub, Inc.
Ballard Designs, Inc.
Broadband Holdco, LLC
California Voices, LLC (fka QVC Voices, LLC)
CDirect Mexico I, Inc.
CDirect Mexico II, Inc.
Celebrate Interactive LLC
CFF Operations, LLC
Cinmar, LLC
Contract Décor, Inc.
Cornerstone Brands, Inc.
Cornerstone Services, Inc.
Diamonique Canada Holdings, Inc.
DMS DE, Inc.
Domicile
Ontario
DE
DE
DE
DE
DE
GA
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
ER Development International, Inc. (dba QVC International Development)
ER Marks, Inc.
Evite, Inc.
Frontgate Marketing, Inc.
Garnet Hill, Inc.
GC Marks, Inc. (fka TATV, Inc.)
H.O.T. Home Order Television Belgium S.A.
H.O.T. Networks Holdings (Delaware) LLC
Home Shopping Espanol Servicios S. de R.L. de C.V.
Home Shopping Espanol (Mexico) S. de R.L. de C.V.
Home Shopping Network En Espanol, L.L.C.
Home Shopping Network En Espanol, L.P.
HSN Catalog Services, Inc.
HSN Catalog Services, Inc.
HSN Improvements, LLC
HSN Interactive LLC
HSN of Nevada LLC
HSN, Inc.
HSNI, LLC
IC Marks, Inc.
IM Experience, Inc.
Influence Marketing Corp (dba QVC @ theMall) [Unlimited Liability Corp.]
Influence Marketing Services, Inc.
Ingenious Designs LLC
PA
DE
DE
DE
NH
DE
Belgium
DE
Mexico
Mexico
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
PA
Nova Scotia
Ontario
DE
Innovative Retailing, Inc.
Liberty Interactive LLC
Liberty QVC Holding, LLC
Liberty USA Holdings, LLC
LIC Ventures Marginco
LV Bridge, LLC
NLG Merger Corp.
NSTBC, Inc.
QC Marks, Inc.
QDirect Ventures, Inc. (fka Qdirect, Inc.)
QExhibits, Inc.
QHealth, Inc.
QLocal, Inc. (fka QVC Local, Inc.)[dba QVC Productions; QVC Remote
Productions]
QVC (Barbados) International Finance SRL LLC
QVC Britain [English Unlimited Liability Company]
QVC Britain I Limited [English limited liability company]
QVC Britain III, Inc.
QVC Call Center GmbH & Co. KG
QVC Call Center Vërwaltungs-GmbH
QVC Cayman Holdings LLC
QVC Cayman, Ltd.
QVC Chesapeake, Inc.
QVC China Holdings Limited
QVC China Licensing, Inc.(fka AI 2, Inc.)
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
Barbados
UK
UK
DE
Germany
Germany
DE
Cayman
VA
Hong Kong
DE
QVC China, Inc.
QVC Delaware LLC
QVC Deutschland GP, Inc.
QVC eDistribution LLC & Co. KG (fka QVC eDistribution Inc. & Co. KG)
QVC eService LLC & Co. KG (fka QVC eService Inc. & Co. KG)
QVC France Holdings, S.à.r.l.
QVC France SAS
QVC Germany I S.à r.l. (fka QVC Germany I, LLC)
QVC Germany II S.à r.l. (fka QVC Germany II, LLC)
QVC Global DDGS, Inc.
QVC Global Holdings I, Inc.
QVC Global Holdings II, Inc.
QVC Grundstücksverwaltungs GmbH
QVC Handel S.à r.l. & Co. KG (fka QVC Handel LLC & Co. KG)
QVC HK Holdings, LLC
QVC Iberia, S.L.
QVC India, Ltd.
QVC Information and Technologies (Shenzhen) Co., Ltd
QVC International SCS (fka QVC International Ltd.)
QVC International Management GP LLC
QVC Italia S.r.l. [Italian limited liability company]
QVC Italy Holdings, LLC
QVC Japan Services, LLC (fka QVC Japan Services, Inc.)
QVC Japan, Inc.
DE
DE
DE
Germany
Germany
Luxembourg
France
Luxembourg
Luxembourg
DE
DE
DE
Germany
Germany
DE
Spain
DE
China
Luxembourg
DE
Italy
DE
DE
Japan
QVC Mexico II, Inc.
QVC Mexico III, Inc.
QVC Mexico, Inc.
QVC of Thailand, Inc.
QVC Ontario Holdings, LLC
QVC Ontario, LLC
QVC Pension Trustee Limited
QVC Poland Global Services sp. z.o.o.
QVC Properties, Ltd.
QVC Realty LLC (fka QVC Realty, Inc.)
QVC Rocky Mount, Inc.
QVC RS Naples, Inc.
QVC San Antonio, LLC (fka QVC San Antonio, Inc.)
QVC Satellite, Inc.
QVC (Shanghai) Management Co., Ltd.
QVC Shop International, Inc. (fka EZShop International, Inc.)
QVC St. Lucie, Inc.
QVC STT Holdings, LLC
QVC Suffolk, LLC (fka QVC Suffolk, Inc.) (fka CVN Distribution Co., Inc.;
C.O.M.B. Distribution Co.)
QVC Suisse Finance GmbH
QVC Suisse Holdings GmbH
QVC Trading (Shanghai) Co., Ltd.
QVC Trading (Shenzhen) Co., Ltd.
QVC UK (formerly QVC)
DE
DE
DE
DE
DE
DE
UK
Poland
UK
PA
NC
FL
TX
Japan
China
DE
FL
DE
VA
Switzerland
Switzerland
China
China
England-Wales
QVC UK Holdings Limited
QVC Vendor Development, Inc.
QVC, Inc.
QVC-QRT, Inc.
RQ Holdings Corp.
RCM6, LLC
RS Marks, Inc.
RS Mebane, Inc.
RS Myrtle Beach, Inc.
Savor North Carolina, Inc.
Send the Trend, Inc.
The Cornerstone Brands Group, Inc.
The Cornerstone Holdings Group, Inc.
TOBH, Inc.
TSO Operations, Inc.
TTA Operations, Inc.
Triple Z Logistics, Inc.
Ventana Television Holdings, Inc.
Ventana Television, Inc.
Ventures Holdco, LLC
zulily Australia Pty, Ltd.
zulily Canada, inc.
zulily Hong Kong Limited
zulily (Shenzhen) Commercial Consulting Co., Ltd.
zulily Ireland Limited
England-Wales
DE
DE
DE
Canada
Colorado
DE
NC
SC
NC
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
Australia
Britsh Columbia
Hong Kong
China
Ireland
zulily UK Ltd.
zulily, llc (f/k/a zulily, Inc.)
1227844 Ontario Ltd.
Affiliate Distribution & Mktg., Inc.
Affiliate Investment, Inc.
Affiliate Relations Holdings, Inc.
Alta Wind CL II, LLC
Alta Wind CL IV, LLC
AMI 2, Inc.
ASO Holdings Company LLC
BCY Holdings Inc.
Big Horn Alternative Energy, LLC
California Voices, LLC (fka QVC Voices, LLC)
CDirect Mexico I, Inc.
CDirect Mexico II, Inc.
Celebrate Interactive LLC
Centennial Rural Development, inc.
Cool Kicks Media, LLC
Diamonique Canada Holdings, Inc.
DMS DE, Inc.
ER Development International, Inc. (dba QVC International Development)
ER Marks, Inc.
Evite, Inc.
GC Marks, Inc. (fka TATV, Inc.)
IC Marks, Inc.
IM Experience, Inc.
UK
DE
Ontario
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
PA
DE
DE
DE
DE
PA
Influence Marketing Corp (dba QVC @ theMall) [Unlimited Liability Corp.]
Influence Marketing Services, Inc.
Innovative Retailing, Inc.
iQVC GmbH
Liberty Acorns, LLC
Liberty Alta IV, Inc.
Liberty Alta, Inc.
Liberty Alternative Energy, LLC
Liberty CDE Investments, Inc.
Liberty Clean Fuels 2, LLC
Liberty Clean Fuels, Inc.
Liberty Digital Commerce, LLC
Liberty Interactive Advertising, LLC (dba Liberty Advertising)
Liberty Interactive LLC
Liberty Israel Venture Fund II, LLC
Liberty Quid, LLC
Liberty QVC Holding, LLC
Liberty Solar Energy, LLC
Liberty USA Holdings, LLC
Liberty USVI Energy, Inc.
LIC Britco, LLC
LIC Israel Investment, LLC
LIC Sound, LLC
LIC Tree 2, LLC
LIC Tree, LLC
LIC Ventures Marginco
Nova Scotia
Ontario
DE
Germany
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
LMC Lockerz, LLC
LMC Social, LLC
LV Basket Marginco, LLC
LV Bridge, LLC
Monroe Fuels Company, LLC
NSTBC, Inc.
Provide Gifts, Inc.
QC Marks, Inc.
QDirect Ventures, Inc. (fka Qdirect, Inc.)
QExhibits, Inc.
QHealth, Inc.
QLocal, Inc. (fka QVC Local, Inc.)[dba QVC Productions; QVC Remote
Productions]
QVC Brazil Holdings II, S.à.r.l.
QVC Britain [English Unlimited Liability Company]
QVC Britain I Limited [English limited liability company]
QVC Britain I, LLC (fka QVC Britain I, Inc.)
QVC Britain II, LLC (fka QVC Britain II, Inc.)
QVC Britain III, Inc.
QVC Call Center GmbH & Co. KG
QVC Call Center Vërwaltungs-GmbH
QVC Cayman Holdings LLC
QVC Cayman, Ltd.
QVC Chesapeake, Inc.
QVC China Holdings Limited
QVC China Licensing, Inc.(fka AI 2, Inc.)
QVC China, Inc.
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
DE
Luxembourg
UK
UK
DE
DE
DE
Germany
Germany
DE
Cayman
VA
Hong Kong
DE
DE
QVC Delaware, Inc.
QVC Deutschland GP, Inc.
QVC Deutschland Holdings LLC
QVC eDistribution Inc. & Co. KG
QVC eProperty Management GmbH & Co. KG
QVC eService Inc. & Co. KG
QVC France Holdings, S.à.r.l.
QVC France SAS
QVC Germany I LLC (fka QVC Germany I, Inc.)
QVC Germany II LLC (fka QVC Germany II, Inc.)
QVC Global DDGS, Inc.
QVC Global Holdings I, Inc.
QVC Global Holdings II, Inc.
QVC Grundstücksverwaltungs GmbH
QVC GV Real Estate GmbH & Co. KG
QVC Handel LLC & Co. KG
QVC HK Holdings, LLC
QVC Iberia, S.L.
QVC India, Ltd.
QVC Information and Technologies (Shenzhen) Co., Ltd
QVC International Finance SRL LLC
QVC International Ltd. (fka QVC International LLC) (fka QVC International, Inc.)
QVC International Management GP LLC
QVC Italia S.r.l. [Italian limited liability company]
QVC Italy Holdings, LLC
QVC Japan Services, LLC (fka QVC Japan Services, Inc.)
DE
DE
DE
Germany
Germany
Germany
Luxembourg
France
DE
DE
DE
DE
DE
Germany
Germany
Germany
DE
Spain
DE
China
Barbados
Bermuda
DE
Italy
DE
DE
QVC Japan, Inc.
QVC Lux Holdings, LLC
QVC Mexico II, Inc.
QVC Mexico III, Inc.
QVC Mexico, Inc.
QVC of Thailand, Inc.
QVC Ontario Holdings, LLC
QVC Ontario, LLC
QVC Pension Trustee Limited
QVC Poland Global Services sp. z.o.o.
QVC Properties, Ltd.
QVC Realty, Inc.
QVC Rocky Mount, Inc.
QVC RS Naples, Inc.
QVC San Antonio, LLC (fka QVC San Antonio, Inc.)
QVC Satellite, Inc.
QVC Shop International, Inc. (fka EZShop International, Inc.)
QVC St. Lucie, Inc.
QVC STT Holdings, LLC
QVC Studio GmbH
QVC Suffolk, LLC (fka QVC Suffolk, Inc.) (fka CVN Distribution Co., Inc.;
C.O.M.B. Distribution Co.)
QVC UK (formerly QVC)
QVC UK Holdings Limited
QVC Vendor Development, Inc.
QVC, Inc.
QVC-QRT, Inc.
Japan
DE
DE
DE
DE
DE
DE
DE
UK
Poland
UK
PA
NC
FL
TX
Japan
DE
FL
DE
Germany
VA
England-Wales
England-Wales
DE
DE
DE
RCM6, LLC
RS Marks, Inc.
RS Mebane, Inc.
RS Myrtle Beach, Inc.
Savor North Carolina, Inc.
Send the Trend, Inc.
TOBH, Inc.
Triple Z Logistics, Inc.
zulily Canada, inc.
zulily Hong Kong Limited
zulily Ireland Limited
zulily UK Ltd.
zulily, llc (f/k/a zulily, Inc.)
Colorado
DE
NC
SC
NC
DE
DE
DE
Britsh Columbia
Hong Kong
Ireland
UK
DE
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
Liberty Interactive Corporation:
We consent to the incorporation by reference in the following registration statements of Liberty Interactive Corporation of our reports dated March 1, 2018,
with respect to the consolidated balance sheets of Liberty Interactive Corporation as of December 31, 2017 and 2016, and the related consolidated statements
of operations, comprehensive earnings (loss), cash flows, and equity for each of the years in the three-year period ended December 31, 2017, and the related
notes (collectively, the “consolidated financial statements”), and the effectiveness of internal control over financial reporting as of December 31, 2017,
which reports appear in the December 31, 2017 annual report on Form 10‑K of Liberty Interactive Corporation.
Our report dated March 1, 2018, on the effectiveness of internal control over financial reporting as of December 31, 2017, contains an explanatory paragraph
that states that Liberty Interactive Corporation acquired HSN, Inc. during 2017, and management excluded from its assessment of the effectiveness of
Liberty Interactive Corporation’s internal control over financial reporting as of December 31, 2017, HSN, Inc.’s internal control over financial reporting
associated with total assets of $3,011 million and total revenues of zero included in the consolidated financial statements of Liberty Interactive Corporation
and subsidiaries as of and for the year ended December 31, 2017. Our audit of internal control over financial reporting of Liberty Interactive Corporation
also excluded an evaluation of the internal control over financial reporting of HSN, Inc.
Description
Registration Statement No.
Description
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
333-134114
333-134115
333-142626
333-171192
333-171193
333-172512
333-176989
333-177840
333-177841
333-177842
333-184901
Liberty Interactive Corporation 2002 Nonemployee Director Incentive Plan (As
Amended and Restated Effective November 7, 2011), as amended
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Media 401(k) Savings Plan
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended
and restated as of December 17, 2015)
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
Denver, Colorado
March 1, 2018
333-184905
333-184904
333-184902
333-184903
333-183434
333-183433
333-183432
333‑183253
333-201010
333-202436
333-204879
333-207326
333-209872
333-210662
333-214681
333-222062
333-222344
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended
and restated as of December 17, 2015)
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended
and restated as of December 17, 2015)
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2002 Nonemployee Director Incentive Plan (As
Amended and Restated Effective November 7, 2011), as amended
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Media 401(k) Savings Plan
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
zulily, inc. 2009 Equity Incentive Plan and zulily, inc. 2013 Equity Plan
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2016 Omnibus Incentive Plan
Liberty Interactive Corporation 2016 Omnibus Incentive Plan
HSN, Inc. Second Amended and Restated 2008 Stock and Annual Incentive Plan and
HSN, Inc. 2017 Omnibus Incentive Plan
/s/ KPMG LLP
Consent of Independent Registered Public Accounting Firm
Exhibit 23.2
The Board of Directors
Liberty Broadband Corporation:
We consent to the incorporation by reference in the following registration statements of Liberty Interactive Corporation of our report dated February 9,
2018, with respect to the consolidated balance sheets of Liberty Broadband Corporation as of December 31, 2017 and 2016, and the related
consolidated statements of operations, comprehensive earnings (loss), cash flows, and equity for each of the years in the three-year period ended
December 31, 2017, and the related notes (collectively, the “consolidated financial statements”), which report appears in the December 31, 2017
annual report on Form 10-K of Liberty Interactive Corporation.
Description
S-8
Registration Statement No.
333-134114
Liberty Interactive Corporation 2002 Nonemployee Director Incentive Plan (As
Amended and Restated Effective November 7, 2011), as amended
Description
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
333-134115
333-142626
333-171192
333-171193
333-172512
333-176989
333-177840
333-177841
333-177842
333-184901
333-184905
333-184904
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Media 401(k) Savings Plan
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan
(amended and restated as of December 17, 2015)
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan
(amended and restated as of December 17, 2015)
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan
(amended and restated as of December 17, 2015)
S-8
S-8
S-8
S-8
S-8
Denver, Colorado
March 1, 2018
333-184902
333-184903
333-183434
333-222062
333-222344
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2016 Omnibus Incentive Plan
HSN, Inc. Second Amended and Restated 2008 Stock and Annual Incentive Plan
and HSN, Inc. 2017 Omnibus Incentive Plan
/s/ KPMG LLP
Consent of Independent Registered Certified Public Accounting Firm
We consent to the incorporation by reference in the following Registration Statements:
Registration Statement
S-8
Registration Statement No.
333-134114
Description
Liberty Interactive Corporation 2002 Nonemployee Director Incentive Plan (As
Amended and Restated Effective November 7, 2011), as amended
Exhibit 23.3
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
333-134115
333-142626
333-171192
333-171193
333-172512
333-176989
333-177840
333-177841
333-177842
333-184901
333-184905
333-184904
333-184902
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Media 401(k) Savings Plan
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended
and restated as of December 17, 2015)
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended
and restated as of December 17, 2015)
Liberty Interactive Corporation 2011 Nonemployee Director Incentive Plan (amended
and restated as of December 17, 2015)
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
S-8
333-184903
333-183434
333-183433
333-183432
333-183253
333-201010
333-202436
333-204879
333-207326
333-209872
333-214681
333-222062
333-222344
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2007 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2002 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2000 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Media 401(k) Savings Plan
Liberty Interactive Corporation 2010 Incentive Plan (As Amended and Restated
Effective November 7, 2011), as amended
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Zulily, Inc. 2009 Equity Incentive Plan and Zulily, Inc. 2013 Equity Plan
Liberty Interactive Corporation 2012 Incentive Plan (Amended and Restated as of
March 31, 2015)
Liberty Interactive Corporation 2016 Omnibus Incentive Plan
Liberty Incentive Corporation 2016 Omnibus Incentive Plan
HSN, Inc. Second Amended and Restated 2008 Stock and Annual Incentive Plan and
HSN, Inc. 2017 Omnibus Incentive Plan
of our report dated March 1, 2018, with respect to the consolidated balance sheet and related notes of HSN, Inc., included in this Annual Report (Form
10-K) of Liberty Interactive Corporation for the year ended December 31, 2017.
/s/ Ernst & Young LLP
Tampa, Florida
March 1, 2018
Exhibit 31.1
I, Gregory B. Maffei, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Interactive Corporation;
CERTIFICATION
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, 2018
/s/ GREGORY B. MAFFEI
Gregory B. Maffei
President and Chief Executive Officer
Exhibit 31.2
I, Mark D. Carleton, certify that:
1. I have reviewed this annual report on Form 10-K of Liberty Interactive Corporation;
CERTIFICATION
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, 2018
/s/ MARK D. CARLETON
Mark D. Carleton
Chief Financial Officer
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)
Exhibit 32
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 Interactive Corporation, a Delaware corporation (the "Company"), does hereby certify, to such officer's knowledge, that:
The Annual Report on Form 10-K for the year ended December 31, 2017 (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.
Date: March 1, 2018
Date: March 1, 2018
/s/ GREGORY B. MAFFEI
Gregory B. Maffei
President and Chief Executive Officer
/s/ MARK D. CARLETON
Mark D. Carleton
Chief Financial Officer
(Principal Financial Officer and 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
The information herein relates to Liberty Interactive Corporation and its controlled subsidiaries (collectively “Liberty,” the “Company,” “Consolidated
Liberty,” “us,” “we,” or “our” unless the context otherwise requires).
The following tables present our assets and liabilities as of December 31, 2017 and 2016 and revenue, expenses and cash flows for the three years
ended December 31, 2017, 2016 and 2015. The tables further present our assets, liabilities, revenue, expenses and cash flows that are attributed to the QVC
Group and the Ventures Group, respectively. The financial information in this Exhibit should be read in conjunction with our consolidated financial
statements for the year ended December 31, 2017 included in this Annual Report on Form 10-K.
Our QVC Group common stock is intended to reflect the separate performance of our QVC Group, which, subsequent to the reattribution described in
the following paragraph, is comprised of our consolidated subsidiaries, QVC, Inc. (“QVC”), zulily (defined below) (as of October 1, 2015), and HSN, Inc.
(“HSNi”) (as of December 29, 2017). Our Liberty Ventures common stock is intended to reflect the separate performance of our Ventures Group which,
consists of our online commerce businesses, Bodybuilding.com, LLC ("Bodybuilding") (through November 4, 2016), CommerceHub, Inc. (then, Commerce
Technologies, Inc.) (“CommerceHub”) (through July 22, 2016), Evite, Inc. (“Evite”), and Backcountry.com, Inc. ("Backcountry") (through June 30, 2015)
(collectively, the “Digital Commerce” businesses). The Ventures Group also holds ownership interests in FTD Companies, Inc. (“FTD”) and LendingTree,
Inc. (“LendingTree”), which we account for as equity method investments; an interest in Liberty Broadband Corporation (“Liberty Broadband”), which we
account for at fair value; and investments and related financial instruments in public companies such as Charter Communications, Inc. (“Charter”), ILG, Inc.
(“ILG”) and Time Warner Inc. (“Time Warner”), which are accounted for at their respective fair market values.
As discussed in note 2 to the accompanying consolidated financial statements, on October 3, 2014, the QVC Group (referred to as the “Interactive
Group” prior to the reattribution) attributed to the Ventures Group its Digital Commerce businesses. In connection with the reattribution, each holder of
Liberty Interactive common stock received 0.14217 of a share of the corresponding series of Liberty Ventures common stock for each share of Liberty
Interactive common stock held as of the record date, with cash paid in lieu of fractional shares. The distribution date for the dividend was on October 20,
2014, and the Liberty Interactive common stock began trading ex-dividend on October 15, 2014. The Interactive Group is referred to as the QVC Group
subsequent to the reattribution. The reattribution of the Digital Commerce businesses is presented on a prospective basis from the date of the reattribution in
Liberty’s consolidated financial statements, with October 1, 2014 used as a proxy for the date of the reattribution.
As discussed in note 6 of the accompanying consolidated financial statements, Liberty sold Backcountry on June 30, 2015. Backcountry is not
presented as a discontinued operation as the sale did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
As discussed in note 5 of the accompanying consolidated financial statements, on October 1, 2015, Liberty acquired all of the outstanding shares of
zulily, inc. (“zulily”) (now known as zulily, llc) for consideration of approximately $2.3 billion. zulily is an online retailer offering customers a fun and
entertaining shopping experience with a fresh selection of new product styles launched each day.
As discussed in note 6 of the accompanying consolidated financial statements, Liberty completed the split-off (the “Expedia Holdings Split-Off”) of
Liberty Expedia Holdings, Inc. (“Expedia Holdings”) on November 4, 2016. Expedia Holdings is comprised of, among other things, Liberty’s former
interest in Expedia, Inc. (“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding. The split-off of Liberty’s interest in Expedia represented
a strategic shift that had a major effect on Liberty’s operations, primarily due to one-time gains on transactions recognized as part of the Expedia Holdings
Split-Off by Expedia in 2015. Accordingly, Liberty’s interest in Expedia is presented as a discontinued operation. The disposition of Bodybuilding did not
have a major effect on Liberty’s historical results nor is it expected to have a major effect on Liberty’s future operations. The disposition of Bodybuilding did
not represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding is not presented as a discontinued operation.
As discussed in note 6 of the accompanying consolidated financial statements, Liberty completed the spin-off (the “CommerceHub Spin-Off”) of its
former wholly-owned subsidiary CommerceHub on July 22, 2016. CommerceHub is not presented as a discontinued operation as the CommerceHub Spin-
Off did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
As discussed in note 5 of the accompanying consolidated financial statements, on December 29, 2017, Liberty acquired the approximate remaining
62% of HSNi it did not already own in an all-stock transaction, making HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group.
HSNi has two operating segments: its televised shopping business (“HSN”), and its catalog retail business (“Cornerstone”). HSNi is an interactive multi-
channel retailer that markets and sells a wide range of third party and proprietary merchandise directly to consumers through various platforms including
(i) television home shopping programming broadcast on the HSN television networks; (ii) catalogs, consisting primarily of the Cornerstone portfolio of
leading print catalogs which includes Ballard Designs, Frontgate, Garnet Hill, Grandin Road and Improvements; (iii) websites, which consist primarily of
HSN.com, the five branded websites operated by Cornerstone and joymangano.com; (iv) mobile applications; (v) retail and outlet stores; and (vi) wholesale
distribution of certain proprietary products to other retailers.
As discussed in note 2 of the accompanying consolidated financial statements, on April 4, 2017, Liberty entered into an Agreement and Plan of
Reorganization (as amended, the “GCI Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”) with General
Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned
subsidiary of Liberty (“LI LLC”), whereby Liberty will acquire GCI through a reorganization in which certain Ventures Group assets and liabilities will be
contributed to GCI Liberty (as defined below) in exchange for a controlling interest in GCI Liberty. Liberty and LI LLC will contribute to GCI Liberty its
entire equity interest in Liberty Broadband and Charter, along with, subject to certain exceptions, Liberty’s entire equity interests in LendingTree, together
with the Evite operating business and certain other assets and liabilities, in exchange for (i) the issuance to LI LLC of a number of shares of new GCI Liberty
Class A Common Stock and a number of shares of new GCI Liberty Class B Common Stock equal to the number of outstanding shares of Series A Liberty
Ventures common stock and Series B Liberty Ventures common stock outstanding on the closing date of the Contribution, respectively, (ii) cash and (iii) the
assumption of certain liabilities by GCI Liberty (the “Contribution”).
Liberty will then effect a tax-free separation of its controlling interest in the combined company (which has since been renamed GCI Liberty, Inc.
(“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for
each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only
outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified
GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty
Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The
exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new
GCI Liberty Class A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65
(with no additional premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at
an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be
redeemable upon the 21st anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the
“Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI
LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75%
Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be
reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable
Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an
indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises
its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash
attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1 billion.
Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement
and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a
tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI
Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference
between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash
reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits attributable to such
1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange
right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including
taking into account the advice of its financial advisor. The Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of
customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock of Liberty, and
thus QVC Group common stock will cease to function as a tracking stock and will effectively become regular common stock, and Liberty will be renamed
Qurate Retail Group, Inc., with QVC, HSNi and zulily as wholly-owned subsidiaries.
Notwithstanding the following attribution of assets, liabilities, revenue, expenses and cash flows to the QVC Group and the Ventures Group, our
tracking stock structure does not affect the ownership or the respective legal title to our assets or responsibility for our liabilities. We and our subsidiaries are
each responsible for our respective liabilities. Holders of QVC Group common stock and Liberty Ventures common stock are holders of our common stock
and are subject to risks associated with an investment in our company and all of our businesses, assets and liabilities. The issuance of QVC Group common
stock and Liberty Ventures common stock does not affect the rights of our creditors or creditors of our subsidiaries.
SUMMARY ATTRIBUTED FINANCIAL DATA
QVC Group
Summary balance sheet data:
Current assets
Investments in affiliates, accounted for using the equity method
Intangible assets not subject to amortization, net
Total assets
Long-term debt, including current portion
Deferred tax liabilities
Attributed net assets
Summary operations data:
Revenue
Cost of sales
Operating expenses
Selling, general and administrative expenses (1)
Acquisition and restructuring charges
Depreciation and amortization
Operating income (loss)
Interest expense
Share of earnings (losses) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net
Other income (expense), net
Income tax benefit (expense)
Net earnings (loss)
Less net earnings (loss) attributable to noncontrolling interests
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
December 31, 2017
December 31, 2016
amounts in millions
$
$
$
$
$
$
$
3,582
40
10,982
17,237
6,703
994
6,819
2,642
224
9,325
14,357
6,375
1,116
4,860
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
10,381
(6,789)
(648)
(1,088)
(35)
(721)
1,100
(293)
38
—
409
(3)
3
1,254
46
1,208
10,219
(6,642)
(653)
(1,063)
—
(850)
1,011
(289)
42
2
—
42
(297)
511
38
473
9,169
(5,847)
(620)
(875)
—
(657)
1,170
(283)
55
42
—
(6)
(304)
674
34
640
(1) Includes stock-based compensation of $97 million, $75 million and $60 million for the years ended December 31, 2017, 2016 and 2015, respectively.
SUMMARY ATTRIBUTED FINANCIAL DATA (Continued)
Ventures Group
Summary balance sheet data:
Cash and cash equivalents
Investments in available-for-sale securities and other cost investments
Investments in affiliates, accounted for using the equity method
Investment in Liberty Broadband measured at fair value
Intangible assets not subject to amortization, net
Long-term debt, including current portion
Deferred tax liabilities
Attributed net assets (liabilities)
Summary operations data:
Revenue
Cost of sales
Operating expenses
Selling, general and administrative expenses (1)
Depreciation and amortization
Operating income (loss)
Interest expense
Share of earnings (losses) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net
Other, net
Income tax benefit (expense)
Earnings (loss) from continuing operations
December 31, 2017
December 31, 2016
amounts in millions
$
$
$
$
$
$
$
$
573
2,360
269
3,635
29
1,846
1,809
3,165
487
1,918
357
—
29
1,667
2,520
1,912
Years ended December 31,
2017
2016
2015
amounts in millions
$
23
—
(11)
(65)
(4)
(57)
(62)
(238)
618
1
10
961
1,233
428
(266)
(54)
(127)
(24)
(43)
(74)
(110)
1,173
9
89
(301)
743
820
(546)
(79)
(203)
(46)
(54)
(77)
(233)
72
110
20
119
(43)
Earnings (loss) from discontinued operations, net of taxes
Net earnings (loss)
Less net earnings (loss) attributable to noncontrolling interests
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
—
1,233
—
1,233
$
20
763
1
762
280
237
8
229
(1) Includes stock-based compensation of $26 million, $22 million and $67 million for the years ended December 31, 2017, 2016 and 2015, respectively.
BALANCE SHEET INFORMATION
December 31, 2017
(unaudited)
Assets
Current assets:
Cash and cash equivalents
Trade and other receivables, net
Inventory, net
Other current assets
Total current assets
Investments in available-for-sale securities and other cost investments (note 1)
Investments in affiliates, accounted for using the equity method (note 1)
Investment in Liberty Broadband measured at fair value (note 1)
Property and equipment, net
Intangible assets not subject to amortization
Intangible assets subject to amortization, net
Other assets, at cost, net of accumulated amortization
Total assets
Liabilities and Equity
Current liabilities:
Intergroup payable (receivable)
Accounts payable
Accrued liabilities
Current portion of debt (note 1)
Other current liabilities
Total current liabilities
Long-term debt (note 1)
Deferred income tax liabilities (note 3)
Other liabilities
Total liabilities
Equity/Attributed net assets (liabilities)
Noncontrolling interests in equity of subsidiaries
Total liabilities and equity
BALANCE SHEET INFORMATION
December 31, 2016
(unaudited)
Assets
Current assets:
Cash and cash equivalents
Trade and other receivables, net
Inventory, net
Other current assets
Total current assets
Investments in available-for-sale securities and other cost investments (note 1)
Investments in affiliates, accounted for using the equity method (note 1)
Investment in Liberty Broadband measured at fair value (note 1)
Property and equipment, net
Intangible assets not subject to amortization
Intangible assets subject to amortization, net
Other assets, at cost, net of accumulated amortization
Total assets
Liabilities and Equity
Current liabilities:
Intergroup payable (receivable)
Accounts payable
Accrued liabilities
Current portion of debt (note 1)
Other current liabilities
Total current liabilities
Long-term debt (note 1)
Deferred income tax liabilities (note 3)
Other liabilities
Total liabilities
Attributed (note 1)
QVC
Group
Ventures
Group
Consolidated
Liberty
amounts in millions
$
$
$
$
330
1,719
1,411
122
3,582
3
40
—
1,340
10,982
1,244
46
17,237
51
1,150
1,097
17
167
2,482
6,686
994
147
10,309
6,819
109
17,237
573
7
—
3
583
2,360
269
3,635
1
29
4
4
6,885
(51)
1
28
979
2
959
867
1,809
95
3,730
3,165
(10)
6,885
903
1,726
1,411
125
4,165
2,363
309
3,635
1,341
11,011
1,248
50
24,122
—
1,151
1,125
996
169
3,441
7,553
2,803
242
14,039
9,984
99
24,122
Attributed (note 1)
QVC
Group
Ventures
Group
Consolidated
Liberty
amounts in millions
$
$
$
338
1,270
968
66
2,642
4
224
—
1,131
9,325
1,001
30
14,357
113
789
684
14
160
1,760
6,361
1,116
161
9,398
487
38
—
2
527
1,918
357
3,161
—
29
4
2
5,998
(113)
1
22
862
2
774
805
2,520
(3)
4,096
825
1,308
968
68
3,169
1,922
581
3,161
1,131
9,354
1,005
32
20,355
—
790
706
876
162
2,534
7,166
3,636
158
13,494
Equity/Attributed net assets (liabilities)
Noncontrolling interests in equity of subsidiaries
Total liabilities and equity
4,860
99
14,357
$
1,912
(10)
5,998
6,772
89
20,355
STATEMENT OF OPERATIONS INFORMATION
Year ended December 31, 2017
(unaudited)
Attributed (note 1)
QVC
Group
Ventures
Group
Consolidated
Liberty
amounts in millions
$
10,381
Total revenue, net
Operating costs and expenses:
Cost of retail sales (exclusive of depreciation shown separately below)
Operating expense
Selling, general and administrative, including stock-based compensation (note 2)
Acquisition and restructuring charges
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense
Share of earnings (losses) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net
Other, net
Earnings (loss) from continuing operations before income taxes
Income tax benefit (expense) (note 3)
Net earnings (loss)
Less net earnings (loss) attributable to noncontrolling interests
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
STATEMENT OF OPERATIONS INFORMATION
Year ended December 31, 2016
(unaudited)
23
—
11
65
—
4
80
(57)
(62)
(238)
618
1
10
329
272
961
1,233
—
1,233
10,404
6,789
659
1,153
35
725
9,361
1,043
(355)
(200)
618
410
7
480
1,523
964
2,487
46
2,441
6,789
648
1,088
35
721
9,281
1,100
(293)
38
—
409
(3)
151
1,251
3
1,254
46
1,208
Attributed (note 1)
QVC
Group
Ventures
Group
Consolidated
Liberty
$
10,219
amounts in millions
428
10,647
6,642
653
1,063
850
9,208
1,011
(289)
42
2
—
42
(203)
808
(297)
511
—
511
38
473
266
54
127
24
471
(43)
(74)
(110)
1,173
9
89
1,087
1,044
(301)
743
20
763
1
762
6,908
707
1,190
874
9,679
968
(363)
(68)
1,175
9
131
884
1,852
(598)
1,254
20
1,274
39
1,235
Total revenue, net
Operating costs and expenses:
Cost of retail sales (exclusive of depreciation shown separately below)
Operating expense
Selling, general and administrative, including stock-based compensation (note 2)
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense
Share of earnings (losses) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net
Other, net
Earnings (loss) from continuing operations before income taxes
Income tax benefit (expense) (note 3)
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations, net of taxes
Net earnings (loss)
Less net earnings (loss) attributable to noncontrolling interests
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
STATEMENT OF OPERATIONS INFORMATION
Year ended December 31, 2015
(unaudited)
Total revenue, net
Operating costs and expenses:
Cost of retail sales (exclusive of depreciation shown separately below)
Operating expense
Selling, general and administrative, including stock-based compensation (note 2)
Attributed (note 1)
QVC
Group
Ventures
Group
Consolidated
Liberty
amounts in millions
$
9,169
5,847
620
875
820
546
79
203
9,989
6,393
699
1,078
Depreciation and amortization
Operating income (loss)
Other income (expense):
Interest expense
Share of earnings (losses) of affiliates, net
Realized and unrealized gains (losses) on financial instruments, net
Gains (losses) on transactions, net
Other, net
Earnings (loss) before income taxes
Income tax benefit (expense) (note 3)
Earnings (loss) from continuing operations
Earnings (loss) from discontinued operations, net of taxes
Net earnings (loss)
Less net earnings (loss) attributable to noncontrolling interests
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders
$
STATEMENT OF CASH FLOWS INFORMATION
Year ended December 31, 2017
(unaudited)
657
7,999
1,170
(283)
55
42
—
(6)
(192)
978
(304)
674
—
674
34
640
46
874
(54)
(77)
(233)
72
110
20
(108)
(162)
119
(43)
280
237
8
229
703
8,873
1,116
(360)
(178)
114
110
14
(300)
816
(185)
631
280
911
42
869
Attributed (note 1)
QVC Group
Ventures Group
Consolidated Liberty
amounts in millions
Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
1,254
1,233
Depreciation and amortization
Stock-based compensation
Share of (earnings) losses of affiliates, net
Cash receipts from returns on equity investments
Realized and unrealized (gains) losses on financial instruments, net
(Gains) losses on transactions, net
Deferred income tax expense (benefit)
Intergroup tax allocation
Intergroup tax payments
Other noncash charges (credits), net
Changes in operating assets and liabilities
Current and other assets
Payables and other liabilities
Net cash provided (used) by operating activities
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired
Cash proceeds from dispositions of investments
Investment in and loans to cost and equity investees
Capital expended for property and equipment
Other investing activities, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Borrowings of debt
Repayments of debt
Repurchases of QVC Group common stock
Withholding taxes on net share settlements of stock-based compensation
Other financing activities, net
Net cash provided (used) by financing activities
Effect of foreign currency exchange rates on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
721
97
(38)
28
—
(409)
(421)
266
(288)
7
(177)
182
1,222
22
2
—
(201)
(52)
(229)
2,469
(2,618)
(765)
(43)
(57)
(1,014)
13
(8)
338
330
STATEMENT OF CASH FLOWS INFORMATION
Year ended December 31, 2016
(unaudited)
4
26
238
1
(618)
(1)
(715)
(266)
288
3
34
43
270
—
1
(159)
(3)
(1)
(162)
—
(13)
—
(27)
18
(22)
—
86
487
573
2,487
725
123
200
29
(618)
(410)
(1,136)
—
—
10
(143)
225
1,492
22
3
(159)
(204)
(53)
(391)
2,469
(2,631)
(765)
(70)
(39)
(1,036)
13
78
825
903
Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings to net cash provided by operating activities:
$
(Earnings) loss from discontinued operations
Depreciation and amortization
Stock-based compensation
Cash payments for stock-based compensation
Noncash interest expense
Share of (earnings) losses of affiliates, net
Cash receipts from returns on equity investments
Realized and unrealized (gains) losses on financial instruments, net
(Gains) losses on transactions, net
(Gains) losses on extinguishment of debt
Deferred income tax expense (benefit)
Intergroup tax allocation
Intergroup tax payments
Other noncash charges (credits), net
Changes in operating assets and liabilities
Current and other assets
Payables and other liabilities
Attributed (note 1)
QVC Group
Ventures Group
amounts in millions
Consolidated
Liberty
511
—
850
75
—
3
(42)
28
(2)
—
(1)
(199)
360
(301)
(33)
92
(68)
763
(20)
24
22
(92)
9
110
3
(1,173)
(9)
7
672
(360)
301
(82)
44
(49)
1,274
(20)
874
97
(92)
12
68
31
(1,175)
(9)
6
473
—
—
(115)
136
(117)
Net cash provided (used) by operating activities
1,273
170
Cash flows from investing activities:
Cash proceeds from dispositions
Investment in and loans to cost and equity investees
Capital expended for property and equipment
Purchases of short term investments and other marketable securities
Sales of short term investments and other marketable securities
Investment in Liberty Broadband
Other investing activities, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Borrowings of debt
Repayments of debt
Repurchases of QVC Group common stock
Withholding taxes on net share settlements of stock-based compensation
Distribution from Liberty Expedia Holdings
Other financing activities, net
Net cash provided (used) by financing activities
Effect of foreign currency exchange rates on cash
Net cash provided (used) by discontinued operations:
Cash provided (used) by operating activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities
Change in available cash held by discontinued operations
Net cash provided (used) by discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
$
STATEMENT OF CASH FLOWS INFORMATION
Year ended December 31, 2015
(unaudited)
—
—
(206)
—
12
—
(44)
(238)
1,905
(2,178)
(799)
(15)
—
(16)
(1,103)
(20)
—
—
—
—
—
(88)
426
338
353
(86)
(27)
(264)
1,162
(2,400)
8
(1,254)
1,522
(2,320)
—
(1)
299
31
(469)
—
17
—
—
—
17
(1,536)
2,023
487
1,443
353
(86)
(233)
(264)
1,174
(2,400)
(36)
(1,492)
3,427
(4,498)
(799)
(16)
299
15
(1,572)
(20)
17
—
—
—
17
(1,624)
2,449
825
Cash flows from operating activities:
Net earnings (loss)
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Earnings) loss from discontinued operations
Depreciation and amortization
Stock-based compensation
Cash payments for stock-based compensation
Noncash interest expense
Share of losses (earnings) of affiliates, net
Cash receipts from return on equity investments
Realized and unrealized gains (losses) on financial instruments, net
(Gains) losses on transactions, net
(Gains) losses on extinguishment of debt
Deferred income tax (benefit) expense
Intergroup tax allocation
Intergroup tax payments
Other noncash charges (credits), net
Changes in operating assets and liabilities
Current and other assets
Payables and other current liabilities
Net cash provided (used) by operating activities
Cash flows from investing activities:
Cash paid for acquisitions, net of cash acquired
Cash proceeds from dispositions
Investments in and loans to cost and equity investees
Cash receipts from returns of equity investments
Capital expended for property and equipment
Purchases of short term and other marketable securities
Sales of short term investments and other marketable securities
Other investing activities, net
Net cash provided (used) by investing activities
Cash flows from financing activities:
Borrowings of debt
Repayments of debt
Repurchases of QVC Group common stock
Minimum withholding taxes on net share settlements of stock-based compensation
Other financing activities, net
Net cash provided (used) by financing activities
Effect of foreign currency rates on cash
Net cash provided (used) by discontinued operations:
Cash provided (used) by operating activities
Cash provided (used) by investing activities
Cash provided (used) by financing activities
Change in available cash held by discontinued operations
Net cash provided (used) by discontinued operations
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end period
Attributed (note 1)
QVC Group
Ventures Group
amounts in millions
Consolidated
Liberty
$
$
674
—
657
60
—
6
(55)
22
(42)
—
21
(122)
141
(101)
(14)
(245)
3
1,005
(824)
—
—
200
(218)
(184)
193
(76)
(909)
3,969
(3,244)
(785)
(25)
(4)
(89)
(3)
—
—
—
—
—
4
422
426
237
(280)
46
67
(16)
(1)
233
10
(72)
(110)
—
19
(141)
101
3
8
(47)
57
(20)
271
(120)
50
(40)
(1,186)
1,166
—
121
589
(567)
—
(5)
(50)
(33)
—
17
(23)
—
—
(6)
139
1,884
2,023
911
(280)
703
127
(16)
5
178
32
(114)
(110)
21
(103)
—
—
(11)
(237)
(44)
1,062
(844)
271
(120)
250
(258)
(1,370)
1,359
(76)
(788)
4,558
(3,811)
(785)
(30)
(54)
(122)
(3)
17
(23)
—
—
(6)
143
2,306
2,449
Notes to Attributed Financial Information
(unaudited)
(1) The QVC Group is comprised of our consolidated subsidiaries, QVC and zulily (as of October 1, 2015), and HSNi (as of December 29, 2017). As
discussed in note 5 of the accompanying consolidated financial statements, on December 29, 2017, Liberty acquired the approximate remaining 62% of
HSNi it did not already own in an all-stock transaction making HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group.
Accordingly, the accompanying attributed financial information for the QVC Group includes the assets, liabilities, revenue, expenses and cash flows of
QVC, HSNi and zulily. We have also attributed certain of our debt obligations (and related interest expense) to the QVC Group based upon a number of
factors, including the cash flow available to the QVC Group and its ability to pay debt service and our assessment of the optimal capitalization for the
QVC Group. In addition, we have allocated certain corporate general and administrative expenses between the QVC Group and the Ventures Group as
described in note 2 below.
The QVC Group
televised-shopping programs, Internet and mobile application
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 QVC Group.
is primarily comprised of our merchandise-focused
The Ventures Group consists of all of our businesses not included in the QVC Group including Evite and interests in Liberty Broadband, LendingTree
and FTD and available-for-sale securities Charter and ILG. Accordingly, the accompanying attributed financial information for the Ventures Group
includes these investments, as well as the assets, liabilities, revenue, expenses and cash flows of the Digital Commerce businesses. In addition, we have
attributed to the Ventures Group all of our senior exchangeable debentures (and related interest expense).
Any businesses that we may acquire in the future that we do not attribute to the QVC Group will be attributed to the Ventures Group.
As discussed in note 1 to the accompanying consolidated financial statements, on May 18, 2016, Liberty completed a $2.4 billion investment in Liberty
Broadband in connection with the merger of Charter and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty
Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company of the combined enterprises. Liberty, along with third
party investors, all of whom invested on the same terms as Liberty, purchased newly issued shares of Liberty Broadband Series C common stock at a per
share price of $56.23, which was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the parts basis at the time the
investment agreements were executed. Liberty's investment in Liberty Broadband was funded using cash on hand and is attributed to the Ventures
Group.
For information relating to investments in available for sale securities and other cost investments, investments in affiliates accounted for using the equity
method and debt, see notes 8, 9 and 11, respectively, of the accompanying consolidated financial statements.
(2) Cash compensation expense for our corporate employees will be allocated among the QVC Group and the Ventures Group based on the estimated
percentage of time spent providing services for each group. On a semi-annual basis estimated time spent will be determined through an interview
process and a review of personnel duties unless transactions significantly change the composition of companies and investments in either respective
group which would require a more timely reevaluation of estimated time spent. Other general and administrative expenses will be 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 QVC Group to the Ventures Group was determined to be $27 million, $38 million and $20 million for the years ended December 31,
2017, 2016 and 2015, respectively. We note that stock compensation related to each tracking stock group is determined based on actual options
outstanding for each respective tracking stock group.
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.
(3) We have accounted for income taxes for the QVC Group and the Ventures 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.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”).
The Tax Act makes broad and complex changes to the U.S. tax code. See note 12 to the accompanying consolidated financial statements for more
information regarding the impact of the Tax Act.
QVC Group
Income tax benefit (expense) consists of:
Current:
Federal
State and local
Foreign
Deferred:
Federal
State and local
Foreign
Income tax benefit (expense)
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
$
$
(312)
(18)
(88)
(418)
428
(7)
—
421
3
(403)
(20)
(73)
(496)
185
10
4
199
(297)
(331)
(20)
(75)
(426)
101
14
7
122
(304)
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:
Computed expected tax benefit (expense)
State and local income taxes, net of federal income taxes
Foreign taxes, net of foreign tax credits
Change in valuation allowance affecting tax expense
Dividends received deductions
Change in tax rate due to tax reform
Other change in tax rate
Consolidation of equity investment
Other, net
Income tax benefit (expense)
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
(438)
(13)
(32)
(105)
8
442
(10)
138
13
3
(283)
(4)
(9)
(15)
7
—
1
—
6
(297)
(343)
(12)
(5)
2
49
—
(4)
—
9
(304)
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:
Deferred tax assets:
Net operating and capital loss carryforwards
Foreign tax credit carryforwards
December 31,
2017
2016
amounts in millions
$
81
98
58
134
Accrued stock compensation
Other accrued liabilities
Other future deductible amounts
Deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Intangible assets
Other deferred tax liabilities
Deferred tax liabilities
Net deferred tax liabilities
44
19
184
426
(164)
262
1,186
70
1,256
994
$
45
117
131
485
(59)
426
1,537
5
1,542
1,116
The Company's deferred tax assets and liabilities are reported in the accompanying balance sheet information as follows:
Ventures Group
Income tax benefit (expense) consists of:
Current:
Federal
State and local
Foreign
Deferred:
Federal
State and local
Foreign
Income tax benefit (expense)
Years ended December 31,
2017
2016
2015
amounts in millions
$
$
$
$
251
(5)
—
246
838
(123)
—
715
961
363
8
—
371
(629)
(43)
—
(672)
(301)
143
(6)
1
138
(27)
7
1
(19)
119
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:
Computed expected tax benefit (expense)
State and local income taxes, net of federal income taxes
Change in valuation allowance affecting tax expense
Dividends received deductions
Alternative energy tax credits and incentives
Change in tax rate due to tax reform
Other change in tax rate
Other, net
Income tax benefit (expense)
Years ended December 31,
2017
2016
2015
amounts in millions
(366)
(95)
(22)
(13)
(1)
4
2
2
94
85
—
1,043
—
(74)
(8)
9
(301)
961
$
$
57
(3)
4
2
61
—
(3)
1
119
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:
Deferred tax assets:
Net operating and capital loss carryforwards
Accrued stock compensation
Other future deductible amounts
Deferred tax assets
Valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Investments
Intangible assets
Discount on exchangeable debentures
Deferred gain on debt retirements
Other deferred tax liabilities
Deferred tax liabilities
Net deferred tax liabilities
Intergroup payable (receivable)
December 31,
2017
2016
amounts in millions
$
$
79
7
6
92
(1)
91
874
2
981
43
—
1,900
1,809
65
11
14
90
(5)
85
1,069
3
1,404
129
—
2,605
2,520
The intergroup balances, at December 31, 2017 and 2016, are primarily a result of timing of tax benefits.
(4) The QVC Group Stock and the Liberty Ventures Stock have voting and conversion rights under our restated charter. Following is a summary of
those rights. Holders of Series A common stock of each group is 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, are 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 will vote as a single
class. In certain limited circumstances, the board may elect to seek the approval of the holders of only Series A and Series B QVC Group common
stock or the approval of the holders of only Series A and Series B Liberty Ventures common 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, the common stock related to one group may be converted into common stock of the same series that is related
to the other group.
1
Liberty Interactive Corporation
Reconciliation of Liberty Interactive Corporation ("LINT") Net Assets and
Net Earnings to Liberty Interactive LLC ("LINT LLC") Net Assets and Net Earnings
December 31, 2017
(unaudited)
amounts in millions
LINT Net Assets
Reconciling items:
zulily net assets
HSNi net assets (1)
Equity investment in HSNi held by LINT LLC (1)
LINT LLC Net Assets
LINT Net Earnings
Reconciling items:
zulily net (earnings) loss
HSNi net (earnings) loss (1)
Gain on HSNi transaction
LINT net (earnings) loss
Equity investment in HSNi held by LINT LLC (1)
LINT LLC Net Earnings
Exhibit 99.2
10,083
(1,474)
(1,928)
197
6,878
2,487
(65)
29
(410)
2
(15)
2,028
$
$
$
$
(1) On December 29, 2017, LINT acquired the approximate remaining 62% of HSNi it did not already own. LINT LLC continues to hold 38% of HSNi
and accounts for its ownership in HSNi as an equity method investment.