QVC Group Inc (QVCGA) 2002 Q2 法說會逐字稿

Good day everyone and welcome to the Liberty Media Corporation conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Vice-President of investor relations, Mr. Mike Ericson. Please go ahead, sir.

Hello everyone, and welcome. During this presentation we may make certain forward-looking statements about business strategies, market potential, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to differ materially from such statements including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, and continued access to capital and terms acceptable to liberty. Please refer to the publicly filed documents of Liberty Media Corporation including the most recent Form 10-Q for additional information about Liberty Media, and about the risks and uncertainty related to our business.

Also joining us here today we have Liberty Media's president and CEO, Robert Bennett; EVP and COO, Gary Howard. We have the executive suite from Starz Encore here: John Sea, CEO; Mark Bowman, President and COO; and also Bill Myers, CFO; and then on the line we have Barb Bennett, Discovery Communications Treasurer.

So with that I'll turn things over to our president and CEO, Robert Bennett.

Thank you, Mike. Thank you all for joining us today to discuss our results for the quarter. We're quite pleased with way things are operating in most of our businesses.

I'd like to start with one housekeeping item: Presumably you all have noticed that we, along with presumably all the other public companies, did certify the accuracy of our Q as required under the new Sarbane and Foxley bill. In addition, we voluntarily certified past filings pursuant to the new SEC rules, even though Liberty was not included on a list of companies required to do so. We felt it was appropriate that we should do so.

First I'd like to start by addressing our GAAP financial statements, and then we can talk about some of the other businesses and a little bit more detail. With respect to the Q that we filed, I'd like to make a quick comment; for the six months ended June 30th from a consolidated GAAP point of view we recorded a loss of about $4.6 billion. This reflects $5.1 billion of write downs all in the second quarter that we have taken on several of our publicly traded investments. The major components of that were AOL which was $2.35 billion, News Corp at $1.39 billion, and Sprint PCS, $1.04 billion. These adjustments reflect the continued weakness overall in the stock market and in the media and wireless sector in particular. Just to make sure you understand, the accounting -- the charges generally represent recognition of losses that have been previously unrealized. Public cost method securities are reflected in our financial statements at fair value. However, changes in fair value are reflected in our equity section as a component of other comprehensive income unless decreases in the fair value below our cost bases are determined to be other than temporary. The charges incurred on these investments investments in the current year represent what we have determined to be other than temporary declines in value, and are adjustments from unrealized losses included in the equity to a realized loss in the statement of operations, and I should point out these losses are not cash losses. They're effectively a component of market to market of our public securities.

A full discussion of it -- of the accounting treatment for these investments and our accounting policies in general is provided in the Q. We encourage you to review the Q, and the purpose of this call is to provide supplemental information regarding the performance of our large, nonpublic assets.

Generally while the stock market continues to be under some pressure, particularly the media sector and the overall economic climate is uncertain, our large private assets continue to grow and create value at a very satisfactory pace. Discovery was able to record a 30% increase in cash flow during the year. Starz Encore cash flow increased 9%, or 23% if you exclude the impact of Adelphia situation, and QVC increased their cash flow 22% during the quarter. Top-line growth was also strong with Discovery, Starz, and QVC turning in top-line growth of 4%, 11%, and 14% respectively.

Let's start first with a little more detail on Starz Encore. Their operations continue to perform very well, however, operating cash flow took a little bit of a break from the double-digit growth we're used to as a result of the Adelphia bad debt reserve of approximately $10 million during the second quarter. Without that reserve, operating cash flow would have increased by $16 million or 23%.

Starz continues to benefit from the roll out of digital cable and continued growth of DBS. Total subscription units were up 24% over the last year. Starz now has distribution deals for all the major cable and satellite distributors. Their subscriber growth was spread across various product lines and various distribution channels. The Starz units grew by 7%, Encore units grew by 13%, Theme units grew by 36%. Cable units other than AT&T grew by 41%, DVS grew by 11%, and AT&T cable units grew by 21%.

During the quarter on the expense side, operating cost increased by 13%, the increase for the quarter was primarily due to increased programming expenses of 15% related to improved performance at the box office of movies that were shown during the quarter. As you probably know, the pricing in our programming contracts varies based on box office performance of the particular films, and we had a number of hits this quarter including The Grinch, The Mummy Returns, and Jurassic Park III. Nonprogramming expense increased by 8%, including the increase in bad debt reserve related to Adelphia. As of union 30th, Starz has reserved $12 million of his Adelphia pre-bankruptcy receivable. Of this amount approximately 10% was -- or $10 million was expensed in the second quarter.

And then on cash basis Starz reduced its outstanding debt by $60 million during the quarter or compared to June 30th of last year, and by $40 million compared to the end of March. In terms of other activity, other developments, Starz Encore has recently been selected by EchoStar to participate in the dish network's new low price programming package. It's a very compelling offer that for the first time includes premium movie channels in the entry-level package, so we're all excited about that.

In terms of our guidance for the year, we continue to believe assuming that, assuming continued expansion of distribution and maintenance of a product mix similar to the first half, we're expecting revenue growth of around 10%, and then net revenue growth combined with an upper single-digit increase in operating expenses should drive cash flow growth in the mid-teens.

Now looking at, over at Discovery communications, at the end of June, the Discovery communications networks combined to reach a total of more than 750 million subscribers in 155 countries. For the quarter the company generated top-line growth of 4% to $426 million, and consolidated cash flow growth of 38% to $88 million. I'd like to point out that Discovery was able to increase total revenues despite difficult year over year add revenue comparisons. Looking first at Discovery networks U.S.A. their domestic networks, they currently reach about 440 million combined subscribers. The U.S. networks experienced a 3% revenue increase and a 23% cash flow increase for the quarter due to increase in affiliate revenue and aggressive cost containment.

Net affiliate revenues increased by 11% on a 22% increase in aggregate subscribers. That revenue number is net of the EITF 109 reclassifications that came into effect at the first of the year representing 35 million principally of launch support for the quarter ended June 30th and 27 million for the second quarter of last year; excluding these reclassifications, gross affiliate revenue increased by 15%. Cash payments for launch support in the second quarter were 23 million, compared to 40 million last year. Discovery networks U.S. continued to show strong distribution growth, again with 22% aggregate subscriber growth. This was across all of their channels. Discovery channel was up 5% to $86 million. Learning channel up 7% to $84 million. Animal Planet was up 13% to $79 million. Travel Channel was up 19% to $66 million, and the new Discovery Health was up 42% to $37 million. The digital networks units were up 82% to now a combined total of over $76 million, and BBC America increased 37% to $24 million. So really very, very strong continuing subscriber growth at all those businesses. And those are very good omens for the underlying strength of these businesses.

As you know affiliate fees have already provided stability to the cable network financial model and the increased subscribers combined with gradual increase in subscription rates translates into a predictable and growing revenue stream. Further, as the ad market begins to stabilize advertisers should find that growing audience more and more attractive.

Looking at advertising, net advertising revenues were up 1% for the quarter primarily due to increases in sellout and audience delivery for the metered services s Expenses at the division were down $12 million or 6% due to cost controls. SG&A expenses decreased 6% and programming cost decreased 7%. I should point out that the decrease in the programming cost was principally in cutting the cost of post production services and editing costs where Discovery's been able to drive down rates for these services and reduce the level of such services required to put things on the air. So while the overall cost of programming expense decreased by 7% the actual programming content cost increased by 4%. So they're not sacrificing content in order to cut costs. Also on the expense side and in terms of Adelphia's effect, at the time of the filing, Discovery had receivables that were approximately equal to payables owed by Discovery, and in any event we believe that the effect on Discovery as a whole is relatively immaterial. Cash flow again for the Discovery domestic networks increased by 23% overall to $108 million in the quarter.

Just a minute on the up front market because advertising is important to their business. The up-front market in 2002 was very active and very positive for Discovery. Total volume was up 35% with positive CPM increases of single digits on average. DCI or Discovery had good growth in many product categories including financial services, automotive, computers and home products, and closed major deals with diverse product base including Sears, Mutual of Omaha, Revlon, and Proctor & Gamble. They also had a very successful kids up front with the combination of the Discovery kids NBC block and the Discovery kids digital channel gave Discovery a significant presence in the kids up front. They also closed the largest single deal in the 2002 cable up front with a $40 million one-year cross platform marketing partnership with Procter & Gamble. This deal includes integrated marketing initiatives for Procter & Gamble brands on several of Discovery's national television properties including the Discovery channel, learning channel, Animal Planet, travel channel, health channel, home and leisure and, Discovery kids and BBC America.

Looking next at the international networks, operating cash flow for Discovery networks international doubled from $7 million to $14 million due to increases in affiliate and advertising revenue. Overall revenue increased by 12% with an increase in net advertising revenue of 33% driven by ratings growth in Europe where audience delivery increased by 34%. Affiliate revenue, which is a short 60% of the mix increased by 8% driven by subscriber growth of 16%. Operating expenses increased by 4% due to increase investment in some of the newer networks.

Most of these networks are now beginning to generate positive EBITDA; overall the division reaches over 225 million cumulative subscribers which is an increase of 29 million or 16% over last year. These networks include Europe, Latin America, Asia, Home and Leisure, Italy and Africa and Animal Planet UK. We have another category called international ventures, which includes businesses in the BBC joint venture as well as Discovery investments in Germany and Japan which are included at Discovery's ownership level of 50%. The division experienced top-line growth of 13% for the quarter, but the cash flow deficit increased from $11 million to $12 million. The revenue increase was due to a 17% increase in affiliate revenue. The division now has more than 91 million cumulative subscribers, an increase of 35% over this time of last year. The increase in the operating cash flow deficit was principally due to continued investment in the developing networks in the launch of one new network Animal Planet Canada.

Next is their consumer products group, which includes the proceed proprietary retail business, compromised of a nationwide chain of 165 Discovery channel stores, the mail order catalogues, an online shopping site, a global licensing, and strategic partnerships business, and a supplemental education business reaching over 35 million students and 80 thousand classrooms around the country. Discovery continues to implement an integrated retail strategy that represents a more direct direct connection and a more tightly developed merchandise mix. The process of implementing this new strategy rerequires the discontinuation of low margin inventory and an introduction of higher margin more targeted inventory. Second-quarter results are in line with the anticipated revenue during this phase. The increase in the operating cash flow deficit $2 million was primarily due to the decrease in revenue during the transition phase.

Let me talk a minute about our expectations for the year as a whole, which looks roughly the same as the guidance we have given in the past. So assuming an improving domestic advertising market, assuming continued deterioration in Latin American situations, specifically Argentina, and continued improvement in international distribution and ad sales, and continued cost control efforts, we expect that the consolidated numbers for DCI, aggregate revenue, we expect to increase in the high single digits, and aggregated attributed cash flow to increase by approximately 40%. In the domestic networks division, we expect the domestic division to turn in revenue growth in the low to mid-single digits and cash flow in the mid- to high single digits. And the international networks division, we expect that group to increase revenue by the low to mid-teens and cash flow by 125 to 150%.

Now moving over to QVC, as most of you have already seen from the Comcast earnings release, QVC exceeded expectations again by generating top-line growth of 14% and cash flow growth of 22%. We can't add much more color than Comcast has already disclosed, but I'd like to emphasize the strong growth that QVC continues to experience year in and year out. Operating margins at QVC's domestic operations increased from 22% to 23.1% as the company realized operating efficiencies including improvements in QVC's customer service platform. Their operations in the UK, Germany and Japan, each generated double-digit operating cash flow growth, and their debt has decreased by $209 million as a result of repayments out of the free cash flow. The 2002 guidance remains unchanged as QVC expects revenue growth in the low double digits in 2002 and cash flow growth in the low to mid-teens excluding the results of Japan.

Now looking at Liberty's international assets, starting with Japan; our Japanese businesses, Lcom and JPC remain the key drivers of our nonpublic international assets ,combined the Japanese assets saw 30% revenue growth and cash flow improved from $6 million to $19 million or 217%. At jcom attributed revenue increased by 35% driven by a 33 increase in cable subscribers to 1.5 million, a 125% increase in telephony units to 250 thousand and an 82% increase in data units to just under 500 thousand. Household penetration increased to 25%, up 2.4%, so far this year. And services for household were at 1.37 per household. Cable television penetration increased by almost 2% year-to-date to reach 23%, and Internet penetrations currently at 7.5%, an increase of 1.5% year to date. Telephone penetration is at 9.5%. Jcom's revenue growth and improving revenues driven by scale efficiencies helped the company generate $15 million in attributed cash flow in the second quarter versus five million attributed cash flow in the prior year, an increase of $10 million or 200%. JPC's attributed revenue increased 21%, and our share of JPC's attributed revenue increased by three million in the quarter to four million. JPC now reaches nearly 35 million subscribers and owns or invests in 14 different channels in Japan. The increase at JPC was primarily due to 29% growth in their shopping channel revenue, combined with moderate revenue gains at the other channels as a result of subscriber growth. Subscribers grew by 31% at JPCs movie channel, 43% at the shopping channel, 27% at the golf network, and 49% at Discovery Japan, and 61% at the sports joint venture. Obviously, given these results we're quite pleased with the operating performance of these businesses. JPC continues to generate free cash flow and jcom is expected to in late 2003 or 2004.

Latin America is more troublesome. Revenue at the Latin American businesses decreased by 60% by the quarter, and cash flow decreased by 71%, a very large part of that is the effect of the exchange rate devaluation in Argentina. If you exclude that in Argentine Peso terms, revenue and cash flow would have decreased by 5% and 8% respectively. These results are due, once again, to the devaluation and also to the prolonged recession and the economic hardship in the country. Current government restrictions limit the ability for businesses to collect receivables or make payments to vendors or debt holders, and we expected these conditions may well continue throughout the year and possibly beyond. The good news in this was that our Puerto Rican business, where we are -- the cable company in Puerto Rico where we have a 13% increase in revenue and 6% increase in cash flow.

Quickly a couple of other assets, court TV continues to be a stellar performer; it's now reaching more than 72 million households, an increase of 22% over last year. Ad sales were up 50% for the second quarter. Court TVs .8 prime time rating for the year is 33% higher than last year. It's average household delivery of 526 thousand was 53% higher than last year. Revenue was up by 30%, and cash flow was about increased by six million to seven million for the quarter. We expect court TV revenue on the year to be up by about 20%, and it should be cash flow positive for the year. Also the game show network also doing very well with subscribers up 29% to 45 million, revenue up to 57% to 14 million due to 132% in affiliate revenue and about 28% increase in ad revenue. The game show network now reaches 45 million subscribers and is looking for additional launches on the cable side to help boost them over the 50 million mark.

Now looking at our corporate entity at our balance sheet and our current liquidity position; we ended the quarter with about 2.3 billion of corporate cash and $6.1 billion of corporate debt, including 3.1 of face value of exchangable debt for net debt of about $3.8 billion at the end of the quarter, a decrease of approximately 200 million from the end of the first quarter. The increase in corporate cash was due primarily due to proceeds from the sale of the investment in Telemundo and the sale of shares of Motorola stock, this is partially offset by purchases of Liberty common stock, the exercise of Motorola warrants, and our funding of Jupiter telecommunications.

Just a brief look at some of the credit metrics for the bond holders on the call. There's a few different ones that we looked at. The floor value of our hedge securities, in other words, taking the put side of our callers times the number of shares called, is about 2 1/2 times the face value of our straight debt; that's 7.4 billion of put value as against three billion of debt. The hedge securities excluding shares underlying the exchangables are currently in the money by 4.8 billion. Our exchangable debt, now the market value difference between the exchange price and the current stock price on the underlying securities, is about $2.1 billion, and the 3.1 billion face amount of exchangables now has a market value of about $1.8 billion. Our unrestricted public assets, ie, the public securities that are not covered by an exchange believe security plus our cash, covers our straight debt by a multiple of 6.5; the average life of our long-term fixed rate corporate debt is 24 years. We also have a total return swap that we've instituted on some of our bonds. We currently have directed the counter party to purchase various outstanding Liberty bonds. We have about 201 million that we've acquired in this manner, and we think this is a prudent strategy given the attractive interest rate arbitrage, and it also gives us the flexibility to retire the bonds if we choose.

Now, let me talk briefly about some announcements that we've made during the quarter. First is Casema; we've announced our agreement to acquire the Casema cable business from France telecom. This is about a million and half homes in the Netherlands. We believe it's an attractive acquisition. The valuation is about 9.5 times the projected 2002 EBITDA, Casema's operations are effectively contiguous with those of UPC. The network is substantially upgraded, and there's little or mow satellite competition. And so while we don't have immediate plans to merge this with UPC we believe that the companies can work together and arrive some synergies without being under common ownership. That transaction is subject to the normal approval processes, including regulatory approval, and we are in the process of going through seeking that approval. We also announced a small acquisition in Japan of some additional systems that are close to our Jcom assets. That was a pretty small acquisition. We have pending the Open TV acquisition; we're still working out some issues on that deal. Assuming that we can get them resolved, that should close in the very near future.

We announced a sale of part of our interest in indirectly in our Argentina cable business to a company called VLG acquisition group. This is a company led by Fred Viaira, who has been involved in those assets for a long time, and we think that he's in a very good position because of his knowledge and resources in the marketplace to represent our interest there. And then we also have the acquisition of Wink communications, which is expected to close in the very near future.

On the topic of buy back of Liberty shares, during the quarter, we purchased 24.8 million shares at an average cost of $10.92. We also sold puts on 6 million shares, of which four million remain outstanding at average strike price of $9. If you include the proceeds from the put sales, the average cost per share repurchased so far this year is $10.80. As you probably know, or can tell by this, we have not been aggressive in buying back the stock. This is partly due to a concern we have related to our agreement with the IRS. As you probably recall, we agreed to issue 500 million worth of stock as part of the ruling that we received from the IRS when we were spun off from AT&T in August. In May we updated you that we had obtain one year extensions from the IRS a regarding the stock issue deadlines. It remains unclear to us whether the IRS would require us to issue not only that 500 million worth but also anything else that we repurchased. So given the current stock market, given our current price we do plan to hold discussions with the IRS in the near future to clarify that point. But, in the meantime, that is a constraint on our ability to buy back shares. We'll update you in the future as we have additional news. That concludes the formal comments. At this time we'd be happy to take your questions.

Thank you. The question-and-answer session will be conducted electronically. To ask a question simply press the star followed by the one key on your telephone. We'll proceed in the order that you signal us and take as many as questions as time permits. Once again that's star one to ask a question, and we'll pause a second to assemble our roster. And we have a question from Phillip Olson son with UBS Warburg.

A couple of quick questions, actually. First on QVC, could you just walk through the terms of the put call agreement that you have with Comcast, and specifically under the pending transaction between Comcast and AT&T broadband would that constitute a change of control of Comcast under the terms of the agreement? And then separately, you disclose in the Q that one of your subsidiaries is in the fault, or not in compliance with the covenant in their credit facility. Could you just maybe update on what subsidiary it is, and what the current status of those discussions are?

Sure. On the first question, our deal with Comcast, you know, which has been in place for several years, provides that once a year, I believe in February, for a 60-day period, we have the right to go to Comcast and basically ask them to buy our interest at fair market value and an appraised market value. They then have the right to either buy our shares or to sell the whole company. So that's -- in its simplest form, that's how it works. Under certain conditions they can pay us in stock, under other conditions they can pay us with a note, depending on, you know, as a result of the transaction we would be less than 5% of their outstanding shares, they're required to pay us if we request a transaction with their stock. That comes up once a year, so far three of them have come and gone and we have two left, so next February and the following February we'll have the right to make that election. With respect to the AT&T transaction, that's not something that I can answer.

You're not sure if their transaction would trigger the change of control clause?

That's correct. It's not clear at the moment.

Okay. And the bank question?

The bank question, that relates to a company that we own about 60% of called DMX, which is in the business of distributing multiple channels of audio, both to consumers, via cable businesses and also directly to businesses. And they're a provider of pre recorded music. It's got a $94 million bank facility that has step downs in their debt to cash flow covenants, which it is not currently able to meet. So they are in discussions with the banks to try to seek relief on those covenants.

And there's no guarantee on that facility provided by Liberty?

No, none.

Thank you.

Our next question comes from Jessica Cohen with Merrill Lynch.

Hi, it's Jessica Reed. On Discovery domestic, the guidance of mid- to high single-digit cash flow growth for the full year implies a down second half; can you go through that?

I don't think it does. If you factor in -- the first quarter and the second quarter -- just a second, Jessica. Basically, year-to-date that revenues are flat. So that would imply growth in the second half of the year,.

And the cash flow? We've got -- at least our models, maybe we're wrong, but we've got 28% in the first quarter, 23 in the second, so to get to mid- to high single-digit cash flow, you'd have to be down.

Domestic so far is up 25% year-to-date.

Okay. To get to mid- to high single digits for the second half, --

Go ahead, Neil.

This is Neil. And we might defer to Barb Bennett who's on the treasurer as Discovery, but there are some marketing programs that they may implement. They also did some significant cost-cutting in the second half of last year which, when you take the year-over-year comparisons, you're not going to get as much as a jump from. But that's basically where they stand. They may be able to do a little bit better, but that's where we feel comfortable at this point.

This is barb. Neil is exactly right. The call from the timing, the first half of last year we -- or I should say the second half of last year we had a substantially more cost-cutting that had taken place, whereas this year there will not be as commensurate level; there will be more of an increase between perhaps the incremental marketing as well as just other costs just getting back into line and more of a normal cycle. So it's strictly on a comp first half revenue-wise, last year being stronger than first half of this year, and likewise, first half of cost being higher last year, then lower this year.

Okay. And one other question, there's been a lot of speculation about court TV that may be part of a tree restructuring. Could you comment at all on that? Doesn't this asset, essentially, wouldn't it do better under a vertically integrated company?

It's doing awfully well right now.

It sure is.

So we're perfectly happy to own it. If it makes sense in another transaction, that's something we're willing to consider, but at the moment it's not something that's being actively discussed. And we're obviously quite happy with its performance as is.

Okay. Thanks.

We'll move on to Christopher Dickson with UBS Warburg.

Could you update on what's going on in Europe? This quarter you acquired the Dutch cable operations. What's your current thinking both as it relates to opportunities with UPC, the UK, Germany, and obviously is there any thoughts to the European factory?

With respect to UPC has been announced. They have an agreement in principal with a group of bond holders, so that is now going through the process of documenting that and then, you know through the more formal process of actually instituting it. So that is in progress, but will probably take several months to complete. But, you know, I don't have an exact time frame, but over the next six months or so I would hope that that would be essentially completed. We know roughly the outline of what the deal's going to look like. On -- and so that's UPC and there for by extension UGC. Other European things, the German cable systems are back on the market as you know, and we are looking at that with some other players. So, you know, we may well be back looking at those, but on as part of a consortion and in a different price range. With respect to the UK, we continue to own our 25% equity interest in Telewest. We have a bond interest there. The company is having conversations with their banks, which is a required precondition to having discussions with the bond holders, but I believe they are heading down a path of sitting down and talking to the bond holders about some sort of restructure. In the relatively new future, we have resigned our positions on the board, and so we are not actively involved on the company side from that in that discussion. But I expect that we will be involved on the bond holder side because we are a significant bond holder. Also, at end of the day a restructuring will need the approval of the shareholders in all probability and so we'll have our rights there. So that's a process that is -- is just beginning I would say.

And the tracker?

The tracker, I think given some of the uncertainty about where we are, that's a little bit on hold. I don't know how receptive the market would be but probably the greater, you know, given the current market conditions the greater issue is probably we don't really at this point have a good idea what assets we're going to own. We've got the Casema deal under contract. We don't know how Telewest is going to come out. We don't know we're going to own in Germany. So I think for the time being we continue to study it. But it's probably not something that's imminent.

Thank you.

Our next question comes from Matthew Hergan with Jane Cowen Partners.

You answered my conception eventual question on your testimony. On your presentation before you used to break out the impact from the callers from the exchange believes on case 14 of the release. I think the impact of the exchange believes was probably about $2 billion by my calculation. Is that correct?

It's about $2.1 billion.

Thank you.

You're welcome.

We'll move on to Gloria Radive with Bear Stearns.

Two questions. One, given that all the asset value continue to decline and given your current corporate debt position, cash position, can you talk us to what your availability could be as far as borrowing and back to something you mentioned earlier? You were talking about the requirements by the government to I think raise some equity as part of the AT&T spin off, and then given the comments you made about the tracking stocks and not knowing what the market environment is, how else can you satisfy that?

Well, we can issue equity. We can acquire things. And we have a couple acquisitions on the table which we can use stock for although we haven't decided whether we will or not. Theoretically we can do a rights offering of some sort so there are a variety of ways we can meet that obligation.

And what was the amount again on the obligation?

$500 million.

And then the bank availability?

Yeah, the availability question is really a function of you know, we've got a couple of billion in cash. We also have a lot of built in value, you know, our caller positions, a lot of which we could get to relatively quickly. The constraints on that are a combination of being tax efficient and trying to do it in a way, trying to access the cash in a way where either we can shelter it from existing losses or where we can tap the cash in a tax-efficient way. The other is a bond rating question. You know, as you know, we believe that our investment grade rating is very important to us. Corporately, and I know the rating agencies and the button holders get some comfort from those collared positions so I don't have an exact number for you. But combined with the two billion in cash I would say there's a few more billion that are relatively easy to access.

Can I ask a quick follow-up. On the QVC put, is it tax-free if they wind up giving you cash, I know there's if it's less than 5% of the equity there's a decision that you can make. But is it tax-free either way?

No. It would be tax-free they'd have to use their stock.

Okay. Thank you.

You're welcome.

Our next question comes from Paul Kagan with Kagan Capital Management.

Hi. Just a ps to that last question before I ask mine. If you had to raise $500 million and you've got what sounds to me like at least four or five billion ready you really don't have to do anything, do you? You've got it available?

Well, we agreed -- we committed to the IRS as part of the ruling request that we would issue $500 million of stock.

Oh, I see.

So we have to meet that obligation.

Okay. The question I had was on the -- the company started out more or less as a holding company with growing positions in large companies. And you hedged that portfolio to prevent against the crash that we've had. And then you've also taken a much more aggressive stance towards being a operating company, or at least lending your expertise to an operating company like UGC. So my question is kind of two questions at once. The first one is how have you done on your hedging? How much money have you saved by doing that? And then given the two different kinds of sides you have to the company, what's your latest take on the philosophy of where you go with either of those halves?

Well, the -- I think the amount of money that we've saved through calling and other things is about $5 billion. So it's quite significant, particularly to our current market cap. I think, you know, I would challenge a little bit your starting assume assumption. I think the company has always been one where we view ourselves as being in the business of trying to create companies and trying to aggregate companies and trying to use our resources and our assets to acquire and grow businesses and then over time try to create scale and drive to scale in those businesses and, as a result, of that, many of those have turned into large positions. But pretty much, all of our large public positions started out with smaller businesses in which we were very actively engaged in the business, and that continues to be some of the things that we're working on. Whether that's the European strategy, or our continued involvement with Discovery, Liberty live wire, some of the smaller things like Wink and Liberty broadband, you know, these are situations where we're trying to use our assets and some amount of expertise to invest in businesses and grow them and then, you know we've ended up in these large positions as a result of that growth process and, as a result, of taking advantage of the scale opportunities and we ended up as a smaller shareholder in bigger companies. And that really continues to be the focus. We do have these large positions, we've collared them, some of them are principally financial in nature at this point like Sprint PCS and Motorola. Others because they're directly related to the businesses that we like such as AOL and News corp are ones that have a more strategic focus and things like USA I think is still quite strategic, so I don't think there's a simple answer to that question.

I think you did a good job. What you're saying is we're not to think of about you to think of operating German cable system.

No more than you are to think of us as operating Starz Encore, which is, in fact, operated by John Sea and Mark Bowman who do a very good job of it. But with significant new money investments, we very much intend to be very actively involved in the business, although it's proven to be the most successfully to put the businesses in the hands of stronger entrepreneurial management and let them operate them for us where we're involved in strategy and at the board level, not so much in the day to day operations of the businesses.

Okay, thanks.

And we'll move on to David Joyce with Guzman and company.

Thank you. What was the amount of the funding for jcom this quarter, and secondly, where do you see the penetration rates for that business on the various products by the end of this year and the end of next year?

The funding on jcom was a bit skewed. Hold on one second. We put about an 111 in to jcom during the quarter. Some amount of that is to pay down the debt. The business so far has been funded principally with very low cost debt that has been guaranteed by the partners. We're in the process of working on a refinancing to eliminate a large part of that and put in a nonrecourse facility, but so far the business has principally been funded by guaranteed loans and we have put very little cash in. As we move forward the refinancing, we've been converting some of that guaranteed debt into actual debt owed to us and paying down part of the guarantee. So that's a the amount of money we put in, but that's not the amount of money that the business consumed in the quarter. I'll get you that number in a moment. Hold on. Penetration rate that jcom has approximately doubled over the last five years. Obviously you're not going to have that same kind of growth for the next five, but I think we still pretty robust increases in penetration.

For all the various products, the telephony, Internet?

I think across all of the different businesses. I mean, Internet and telephone haven't been as broadly deployed as the video side of the business, but we're still seeing, you know, I think penetration rates approaching, you know, the mid-20s to 30% range.

But cable subscribers have grown by about 11%, Internet subscribers by 31%, and telephony subscribers by 50%, year-to-date, so I don't know if those can be directly extrapolated, but that's the type of pace we're on.

All right thank you.

Our next question comes from Mark Fife with Interest management.

Good afternoon. I wanted to ask you about the restructuring at UPC. The market in its collective wisdom is valuing the bonds and the Eucomba stock, given the upc equity evaluation it's about half of what the face value of the loan was worth, which means you should not have given up any of the equity. You ended up giving up above 30% of equity. My guess is you're going to say you think the securities are severely undervalued, but I just wanted to get your thoughts on that.

Yeah. You answered the question. And, you know, we wanted to get a deal done. So the combination of our view of value of the business and, you know, we were able to get to a point where that coincided with the bond holders view of the value of the business, and that's where we ended up.

Okay. Thank you.

We'll move on to Kathy Stiponeus with Prudential.

Thanks, a couple of questions. With respect to the your major privately held subsidiaries, QVC, Starz and Discovery, can you give us the outstanding -- I know how much debt was paid down in the quarter but can you give us the actual levels of debt at each of those subsidiaries? And then with respect to follow-up question on the UPC restructuring question. If I understand it correctly, it sounds like the bank debt that's out there is actually trading as if the deal doesn't look like it may get done. Is there any -- is there a scenario or circumstance under which you'd go willing to walk away from the deal? Thanks.

Well, we have an agreement in principal -- or UPC has an agreement in principal and UGC has an agreement in principal with the bond holders. Assuming that deal gets done, we're satisfied with it. If for some reason it doesn't get done then I guess we have to go back do the drawing board. I'm not sure what happens in that context. The banks are not having a lot of fun with their European cable investments, so I don't know what's exactly driving UPC's bank debt pricing. Whether that's more a liquidity issue that really just don't want to hold it any more, or whether it's some expectation of, you know, of problem with the deal. But as far as we know, you know, we're moving down the track with the deal that's been announced. On your debt question, Starz Encore has about $420 million of debt outstanding at the end of the quarter. Discovery communications 2 and a quarter billion, and QVC had $185 million; QVC is now effectively down to zero if you net out the cash.

And just can I ask a quick follow-up question with respect to Discovery civilization, what the investment by "New York Times," what is going to be the use of the proceeds? Thanks.

Barb? Well pay-down debt, I don't know if you want to elaborate on that, Barb.

Yeah, well, that's exactly what we did with that is paid down debt, and that was their payment to become a 50% noncontrolling partner in the entity.

Thank you.

Our next question comes from Anton Rodman with Needham and Company.

Yes, could you talk a little bit about your capital spending plans for your European cable properties? Capital spending has been pretty much under the gun among the U.S. cable operators. What is your expected level of capital spending for your European properties between Telewest and UPC and so forth?

You know, I think, well Telewest has given some public guidance as to what they expect to spend, but we're no longer on the board of Telewest, but I believe that's in the range of five to 600 million pounds. UPC, I think UPC is not giving guidance on that number so it wouldn't be appropriate for me to do so.

Are you planning on any wide-scale launches of cable telephony over the course of the next 18 months and UPC in particular?

Well, UPC has a telephony business going and I believe they continue to market it. So in terms of specific launches I can't answer the question that specifically.

Okay, thank you.

Thank you.

Our next question comes from Stuart Lynn with Lehman Brothers.

Hi, good afternoon. Maybe this is a question that Barbara could address. You talked about the CPM growth on average for DCI being up, single digits in the up front. Maybe you could compare the different mature networks as well as some of the developing domestic networks in terms of the performance in terms of up front and pricing.

Typically all of them did so increases in terms of the more developing networks given the larger distribution growths. They got a larger percentage increase up in that, but typically we don't comment on the individual network performance.

But for the most part even the more mature networks were able to see cpm increases.

Oh, absolutely.

Great, thanks so much.

And this needs to be the last question, please.

Okay, our final question comes from Marshall Levine with Dale Son Management.

This is regarding the European cable assets. I understand that the division of these companies was to build out what you're calling a triple play, and it does look to me like growth rates are substantial for Internet access and telephone. On the other hand, relative to the basic cable subscribers these numbers are quite small in an absolute sense. I'm wondering if you have a plan stated on how you're going to get the substantial growth in your top and bottom line from telephony, broadband access, or digital cable.?

It's a little bit hard to generalize,. Each market is somewhat different. Looking at Telewest, for example, they already have a very large telephony business and I think pretty high penetration of digital, so a lot of their growth will be driven by their Internet business. Some place like UPC is going to be a combination; I think Internet is probably the fastest-growing business, digital is -- there's a couple issues that are making digital difficult. One is you have to have content, the customers willing to pay for, and generally speaking, they get it reasonably attractive package now at a low cost, and so coming up with compelling digital content is something that takes time and effort and money. In addition, the cost of set-top boxes is still relatively high. So it's not clear, given the limited so far demand and supply of content, whether you can justify on incremental basis buying a number of boxes. To the extent that we have access to a large footprint, our hope is that we can be able -- will be able to use that to help push down the cost of boxes which makes it easier to drive the digital side, also to help drive the content side of things. But I think the near term push is a combination of just basic rates which in high penetrated markets is a reasonably good growth driver. But on top of that would be Internet businesses and telephony and then probably third is digital at the moment.

Digital as a last priority?

Until the cost of boxes comes down considerably.

Okay. Thank you.

Okay. That needs to wrap it up for today. If you have additional questions feel free to call us. I know Mike is to take your calls and try to answer your questions. Thank you very much for joining us today. Good-bye.

That concludes today's conference call. Thank you for your participation.