10-Q 1 qvc_10qx3312014.htm 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 333-184501
QVC, Inc.
(Exact name of Registrant as specified in its charter)

State of Delaware (State or other jurisdiction of incorporation or organization) | 23-2414041 (I.R.S. Employer Identification Number)
1200 Wilson Drive West Chester, Pennsylvania (Address of principal executive offices) | 19380 (Zip Code)

Registrant's telephone number, including area code: (484) 701-1000
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o | Accelerated filer o | Non-accelerated filer x (do not check if smaller reporting company) | Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
None of the voting stock of the registrant is held by a non-affiliate of the registrant. There is no publicly traded market for any class of voting stock of the registrant. There is one holder of record of our equity, Liberty QVC Holdings, LLC, an indirect wholly-owned subsidiary of Liberty Interactive Corporation.

QVC, Inc.
2014 QUARTERLY REPORT ON FORM 10‑Q
Table of Contents

| Part I | Page
Item 1 | Financial Statements (unaudited) | I-1
| Condensed Consolidated Balance Sheets | I-1
| Condensed Consolidated Statements of Operations | I-2
| Condensed Consolidated Statements of Comprehensive Income | I-3
| Condensed Consolidated Statements of Cash Flow | I-4
| Condensed Consolidated Statement of Equity | I-5
| Notes to the Unaudited Condensed Consolidated Financial Statements | I-6
Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | I-23
Item 3 | Quantitative and Qualitative Disclosures about Market Risk | I-31
Item 4 | Controls and Procedures | I-32
| Part II |
Item 6 | Exhibits | II-1
| Signatures | II-2
| Exhibit Index | II-3

Item 1. Financial Statements
QVC, Inc.
Condensed Consolidated Balance Sheets
(unaudited)

| March 31, |  | December 31, |
(in millions) | 2014 |  | 2013 |
Assets |  |
Current assets: |  |
Cash and cash equivalents | $ | 558 |  | 457 |
Restricted cash | 14 |  | 14 |
Accounts receivable, less allowance for doubtful accounts of $82 million at March 31, 2014 and $83 million at December 31, 2013 | 857 |  | 1,111 |
Inventories | 1,017 |  | 931 |
Deferred income taxes | 163 |  | 162 |
Prepaid expenses | 54 |  | 47 |
Total current assets | 2,663 |  | 2,722 |
Property and equipment, net of accumulated depreciation of $958 million at March 31, 2014 and $919 million at December 31, 2013 | 1,096 |  | 1,106 |
Cable and satellite television distribution rights, net | 586 |  | 624 |
Goodwill | 5,207 |  | 5,197 |
Other intangible assets, net | 3,296 |  | 3,336 |
Other noncurrent assets | 72 |  | 71 |
Total assets | $ | 12,920 |  | 13,056 |
Liabilities and equity |  |
Current liabilities: |  |
Current portion of debt and capital lease obligations | $ | 12 |  | 13 |
Accounts payable-trade | 541 |  | 494 |
Accrued liabilities | 781 |  | 960 |
Total current liabilities | 1,334 |  | 1,467 |
Long-term portion of debt and capital lease obligations | 3,998 |  | 3,800 |
Deferred compensation | 14 |  | 14 |
Deferred income taxes | 1,273 |  | 1,326 |
Other long-term liabilities | 140 |  | 108 |
Total liabilities | 6,759 |  | 6,715 |
Equity: |  |
QVC, Inc. stockholder's equity: |  |
Common stock, $0.01 par value | — |  | — |
Additional paid-in capital | 6,716 |  | 6,703 |
Accumulated deficit | (813 | ) | (620 | )
Accumulated other comprehensive income | 152 |  | 139 |
Total QVC, Inc. stockholder's equity | 6,055 |  | 6,222 |
Noncontrolling interest | 106 |  | 119 |
Total equity | 6,161 |  | 6,341 |
Total liabilities and equity | $ | 12,920 |  | 13,056 |

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

QVC, Inc.
Condensed Consolidated Statements of Operations
(unaudited)

| Three months ended March 31, |
(in millions) | 2014 |  | 2013 |
Net revenue | $ | 1,986 |  | 1,974 |
Cost of goods sold | 1,256 |  | 1,252 |
Gross profit | 730 |  | 722 |
Operating expenses: |  |
Operating | 178 |  | 173 |
Selling, general and administrative, including stock-based compensation | 148 |  | 155 |
Depreciation | 33 |  | 30 |
Amortization | 111 |  | 104 |
| 470 |  | 462 |
Operating income | 260 |  | 260 |
Other (expense) income: |  |
Equity in (losses) earnings of investee | (1 | ) | 1 |
Gains on financial instruments | — |  | 12 |
Interest expense, net | (62 | ) | (63 | )
Foreign currency loss | (1 | ) | (1 | )
Loss on extinguishment of debt | — |  | (41 | )
| (64 | ) | (92 | )
Income before income taxes | 196 |  | 168 |
Income tax expense | (74 | ) | (62 | )
Net income | 122 |  | 106 |
Less net income attributable to the noncontrolling interest | (9 | ) | (12 | )
Net income attributable to QVC, Inc. stockholder | $ | 113 |  | 94 |

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

QVC, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)

| Three months ended March 31, |
(in millions) | 2014 |  | 2013 |
Net income | $ | 122 |  | 106 |
Foreign currency translation adjustments | 16 |  | (91 | )
Total comprehensive income | 138 |  | 15 |
Comprehensive (income) loss attributable to noncontrolling interest | (12 | ) | 1 |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 126 |  | 16 |

See accompanying notes to condensed consolidated financial statements.
I-3

QVC, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)

| Three months ended March 31, |
(in millions) | 2014 |  | 2013 |
Operating activities: |  |
Net income | $ | 122 |  | 106 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |
Equity in losses (earnings) of investee | 1 |  | (1 | )
Deferred income taxes | (57 | ) | (22 | )
Foreign currency loss | 1 |  | 1 |
Depreciation | 33 |  | 30 |
Amortization | 111 |  | 104 |
Change in fair value of financial instruments and noncash interest | 2 |  | (10 | )
Loss on extinguishment of debt | — |  | 41 |
Stock-based compensation | 8 |  | 10 |
Change in other long-term liabilities | 34 |  | 4 |
Effects of changes in working capital items | 6 |  | (88 | )
Net cash provided by operating activities | 261 |  | 175 |
Investing activities: |  |
Capital expenditures, net | (29 | ) | (33 | )
Expenditures for cable and satellite television distribution rights, net | (8 | ) | (25 | )
Changes in other noncurrent assets | (2 | ) | (4 | )
Net cash used in investing activities | (39 | ) | (62 | )
Financing activities: |  |
Principal payments of debt and capital lease obligations | (1,188 | ) | (1,168 | )
Principal borrowings of debt from senior secured credit facility | 384 |  | 240 |
Proceeds from issuance of senior secured notes, net of original issue discount | 999 |  | 1,050 |
Payment of debt origination fees | (12 | ) | (14 | )
Payment of bond premium fees | — |  | (33 | )
Other financing activities | 7 |  | 4 |
Dividends paid to Liberty | (286 | ) | (244 | )
Dividends paid to noncontrolling interest | (25 | ) | (25 | )
Net cash used in financing activities | (121 | ) | (190 | )
Effect of foreign exchange rate changes on cash and cash equivalents | — |  | (24 | )
Net increase (decrease) in cash and cash equivalents | 101 |  | (101 | )
Cash and cash equivalents, beginning of period | 457 |  | 540 |
Cash and cash equivalents, end of period | $ | 558 |  | 439 |
Effects of changes in working capital items: |  |
Decrease in accounts receivable | $ | 256 |  | 274 |
Increase in inventories | (86 | ) | (36 | )
Increase in prepaid expenses | (6 | ) | (2 | )
Increase (decrease) in accounts payable‑trade | 49 |  | (129 | )
Decrease in accrued liabilities and other | (207 | ) | (195 | )
Effects of changes in working capital items | $ | 6 |  | (88 | )

See accompanying notes to condensed consolidated financial statements.
I-4

QVC, Inc.
Condensed Consolidated Statements of Equity
(unaudited)

| Common stock |  | Additional paid-in capital |  | Accumulated deficit |  | Accumulated other comprehensive income |  | Noncontrolling interest |  | Total equity |
(in millions, except share data) | Shares |  | Amount |
Balance, December 31, 2013 | 1 |  | $ | — |  | 6,703 |  | (620 | ) | 139 |  | 119 |  | 6,341 |
Net income | — |  | — |  | — |  | 113 |  | — |  | 9 |  | 122 |
Foreign currency translation adjustments | — |  | — |  | — |  | — |  | 13 |  | 3 |  | 16 |
Dividends paid to Liberty and noncontrolling interest | — |  | — |  | — |  | (286 | ) | — |  | (25 | ) | (311 | )
Impact of tax liability allocation and indemnification agreement with Liberty | — |  | — |  | — |  | (20 | ) | — |  | — |  | (20 | )
Minimum withholding taxes on net share settlements of stock-based compensation | — |  | — |  | (2 | ) | — |  | — |  | — |  | (2 | )
Excess tax benefit resulting from stock-based compensation | — |  | — |  | 7 |  | — |  | — |  | — |  | 7 |
Stock‑based compensation | — |  | — |  | 8 |  | — |  | — |  | — |  | 8 |
Balance, March 31, 2014 | 1 |  | $ | — |  | 6,716 |  | (813 | ) | 152 |  | 106 |  | 6,161 |

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

QVC, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
QVC, Inc. (unless otherwise indicated or required by the context, the terms "we," "our," "us," the "Company" and "QVC" refer to QVC, Inc. and its consolidated subsidiaries) 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 United States, QVC's live programming is distributed via its nationally televised shopping program 24 hours per day, 364 days per year ("QVC-U.S."). Internationally, QVC's program services are based in Japan ("QVC-Japan"), Germany ("QVC-Germany"), the United Kingdom ("QVC-U.K.") and Italy ("QVC-Italy"). QVC-Japan distributes live programming 24 hours per day, QVC-Germany distributes its program 24 hours per day with 17 hours of live programming and QVC-U.K. distributes its program 24 hours per day with 17 hours of live programming. QVC-Italy distributes programming live for 17 hours per day on satellite and digital terrestrial television and an additional seven hours per day of recorded programming on satellite and seven hours per day of general interest programming on digital terrestrial television.
The Company also has a joint venture with China Broadcasting Corporation, a limited liability company owned by China National Radio (''CNR''), with a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS distributes live programming for 15 hours per day and recorded programming for nine hours per day. This joint venture is accounted for as an equity method investment recorded as equity in (losses) earnings of investee in the condensed consolidated statements of operations.
Additionally, the Company has a venture with Mitsui & Co. LTD ("Mitsui") for a television and multimedia retailing service in Japan. QVC-Japan is owned 60% by the Company and 40% by Mitsui. The Company and Mitsui share in all profits and losses based on their respective ownership interests. During the three months ended March 31, 2014 and 2013, QVC-Japan paid dividends to Mitsui of $25 million and $25 million, respectively.
We are an indirect wholly owned subsidiary of Liberty Interactive Corporation ("Liberty") (Nasdaq: LINTA, LINTB, LVNTA and LVNTB), which owns interests in a broad range of digital commerce businesses. We are attributed to the Liberty Interactive tracking stock, which tracks the assets and liabilities of Liberty's Interactive Group (the "Interactive Group"). The Interactive Group does not represent a separate legal entity; rather, it represents those businesses, assets and liabilities that are attributed to that group. Liberty also attributes to its Interactive Group those businesses primarily focused on digital commerce and its approximate 38% ownership interest in HSN, Inc. ("HSN"), one of our two closest televised shopping competitors.
In October 2013, Liberty announced that its board has authorized management to pursue a plan to recapitalize (the "Recapitalization") its Liberty Interactive Group tracking stock into two new tracking stocks, one (currently the Liberty Interactive common stock) to be renamed the QVC Group common stock and the other to be designated as the Liberty Digital Commerce common stock. In the Recapitalization, record holders of Series A and Series B Liberty Interactive common stock would receive one share of the corresponding series of Liberty Digital Commerce common stock for each 10 shares of the renamed QVC Group common stock held by them as of the effective date. Liberty intends to attribute to the Liberty Digital Commerce Group its operating subsidiaries Provide Commerce, Inc.; Backcountry.com, Inc.; Bodybuilding.com, LLC; CommerceHub; Right Start and the Evite.com business along with cash and certain liabilities. The QVC Group, which is currently known as the Liberty Interactive Group, would have attributed to it the Company and Liberty’s approximate 38% interest in HSN, along with cash and certain liabilities.
On April 16, 2014, QVC announced plans to expand its global presence into France. Similar to its other markets, QVC plans to offer a highly immersive digital shopping experience, with strong integration across e-commerce, TV, mobile and social platforms, with the launch scheduled for the second quarter of 2015.
The condensed consolidated financial statements include the accounts of the Company and its majority‑owned subsidiaries. All significant intercompany accounts and transactions were eliminated in consolidation.
I-6

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
The accompanying (a) condensed consolidated balance sheet as of December 31, 2013, which has been derived from audited financial statements, and (b) interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the condensed consolidated financial statements and notes thereto contained in QVC's Annual Report on Form 10-K for the year ended December 31, 2013.
The preparation of financial statements in conformity with U.S. 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. Estimates include, but are not limited to, sales returns, uncollectible receivables, inventory obsolescence, depreciable lives of fixed assets, internally‑developed software, valuation of acquired intangible assets and goodwill, income taxes and stock‑based compensation.
Certain prior period amounts have been reclassified to conform with current period presentation.
(2) Cable and Satellite Television Distribution Rights, Net
Cable and satellite television distribution rights consisted of the following:

| March 31, |  | December 31, |
(in millions) | 2014 |  | 2013 |
Cable and satellite television distribution rights | $ | 2,335 |  | 2,324 |
Less accumulated amortization | (1,749 | ) | (1,700 | )
Cable and satellite television distribution rights, net | $ | 586 |  | 624 |

The Company recorded amortization expense of $47 million and $42 million for the three months ended March 31, 2014 and 2013, respectively, related to cable and satellite television distribution rights.
As of March 31, 2014, related amortization expense for each of the next five years ended December 31 was as follows (in millions):

Remainder of 2014 | $ | 132 |
2015 | 168 |
2016 | 163 |
2017 | 112 |
2018 | 6 |

(3) Goodwill
The changes in the carrying amount of goodwill were as follows:

(in millions) | QVC-U.S. |  | QVC-Japan |  | QVC-Germany |  | QVC-U.K. |  | QVC-Italy |  | Total |
Balance as of December 31, 2013 | $ | 4,190 |  | 288 |  | 348 |  | 216 |  | 155 |  | 5,197 |
Exchange rate fluctuations | — |  | 8 |  | 1 |  | 1 |  | — |  | 10 |
Balance as of March 31, 2014 | $ | 4,190 |  | 296 |  | 349 |  | 217 |  | 155 |  | 5,207 |

I-7

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(4) Other Intangible Assets, Net
Other intangible assets consisted of the following:

| March 31, |  | December 31, |
| 2014 |  | 2013 |
(in millions) | Gross cost |  | Accumulated amortization |  | Other intangible assets, net |  | Gross cost |  | Accumulated amortization |  | Other intangible assets, net |
Purchased and internally developed software | $ | 627 |  | (412 | ) | 215 |  | 615 |  | (393 | ) | 222 |
Affiliate and customer relationships | 2,450 |  | (1,846 | ) | 604 |  | 2,450 |  | (1,802 | ) | 648 |
Debt origination fees | 64 |  | (15 | ) | 49 |  | 51 |  | (13 | ) | 38 |
Trademarks (indefinite life) | 2,428 |  | — |  | 2,428 |  | 2,428 |  | — |  | 2,428 |
| $ | 5,569 |  | (2,273 | ) | 3,296 |  | 5,544 |  | (2,208 | ) | 3,336 |

The Company recorded amortization expense of $64 million and $62 million for the three months ended March 31, 2014 and 2013, respectively, related to other intangible assets.
As of March 31, 2014, the related amortization expense and interest expense for each of the next five years ended December 31 was as follows (in millions):

Remainder of 2014 | $ | 215 |
2015 | 265 |
2016 | 229 |
2017 | 130 |
2018 | 9 |

(5) Accrued Liabilities
Accrued liabilities consisted of the following:

| March 31, |  | December 31, |
(in millions) | 2014 |  | 2013 |
Accounts payable non-trade | $ | 202 |  | 323 |
Income taxes | 132 |  | 126 |
Accrued compensation and benefits | 87 |  | 98 |
Deferred revenue | 86 |  | 73 |
Allowance for sales returns | 76 |  | 108 |
Accrued interest | 71 |  | 58 |
Sales and other taxes | 44 |  | 79 |
Other | 83 |  | 95 |
| $ | 781 |  | 960 |

I-8

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(6) Long-Term Debt
Long-term debt consisted of the following:

| March 31, |  | December 31, |
(in millions) | 2014 |  | 2013 |
3.125% Senior Secured Notes due 2019, net of original issue discount | $ | 399 |  | — |
7.5% Senior Secured Notes due 2019, net of original issue discount | 761 |  | 761 |
7.375% Senior Secured Notes due 2020 | 500 |  | 500 |
5.125% Senior Secured Notes due 2022 | 500 |  | 500 |
4.375% Senior Secured Notes due 2023, net of original issue discount | 750 |  | 750 |
4.85% Senior Secured Notes due 2024, net of original issue discount | 600 |  | — |
5.95% Senior Secured Notes due 2043, net of original issue discount | 300 |  | 300 |
Senior secured credit facility | 124 |  | 922 |
Capital lease obligations | 76 |  | 80 |
Total debt | 4,010 |  | 3,813 |
Less current portion | (12 | ) | (13 | )
Long-term portion of debt and capital lease obligations | $ | 3,998 |  | 3,800 |

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 4.850% Senior Secured Notes due 2024 at an issue price of 99.927% (collectively, the “Notes”). The Notes are secured by a first-priority lien on the capital stock of QVC, which is the same collateral that secures QVC's existing secured indebtedness and certain future indebtedness. The net proceeds from the offerings were used to repay indebtedness under QVC’s senior secured credit facility and for working capital and other general corporate purposes. Interest is payable semi-annually.
Senior Secured Credit Facility
QVC had approximately $1.9 billion available under the terms of the senior secured credit facility at March 31, 2014. The interest rate on the senior secured credit facility was 1.9% at March 31, 2014.
Other Debt Related Information
QVC was in compliance with all of its debt covenants at March 31, 2014.
During the quarter, there were no significant changes to QVC's debt credit ratings.
The weighted average rate applicable to all of the outstanding debt (excluding capital leases) was 5.4% as of March 31, 2014.
I-9

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(7) Leases and Transponder Service Arrangements
Future minimum payments under noncancelable operating leases and capital transponder leases with initial terms of one year or more at March 31, 2014 consisted of the following:

(in millions) | Capital transponders |  | Operating leases |
Remainder of 2014 | $ | 11 |  | 14 |
2015 | 11 |  | 14 |
2016 | 11 |  | 12 |
2017 | 11 |  | 10 |
2018 | 12 |  | 9 |
Thereafter | 29 |  | 104 |
Total | $ | 85 |  | 163 |

The Company has entered into ten separate agreements with transponder suppliers to transmit its signals in the U.S., Germany and the U.K. at an aggregate monthly cost of $1 million. Depreciation expense related to the transponders was $3 million and $4 million for the three months ended March 31, 2014 and 2013, respectively. Total future minimum capital lease payments of $85 million include $9 million of imputed interest. The transponder service agreements for our U.S. transponders expire in 2019 through 2020. The transponder service agreements for our international transponders expire in December 2014 through 2022.
Expenses for operating leases, principally for data processing equipment and facilities and for satellite uplink service agreements, amounted to $7 million and $8 million for the three months ended March 31, 2014 and 2013, respectively.
(8) Income Taxes
The Company calculates its interim income tax provision by applying its best estimate of the annual expected effective tax rate to its ordinary year-to-date income or loss. The tax or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on the prior quarters is included in the tax expense for the current quarter.
For the three month period ended March 31, 2014, the Company recorded a tax provision of $74 million, which represented an effective tax rate of 37.8%. For the three month period ended March 31, 2013, the Company recorded a tax provision of $62 million, which represented an effective tax rate of 36.9%. These rates differ from the U.S. federal income tax rate of 35.0% due primarily to state tax expense.
QVC is party to ongoing discussions with the Internal Revenue Service under the Compliance Assurance Process audit program. The Company files Federal tax returns on a consolidated basis with its parent company, Liberty. The Company, or one of its subsidiaries, files income tax returns in various states and foreign jurisdictions. As of March 31, 2014, the Company, or one of its subsidiaries, was under examination in California, Minnesota, New Jersey, New York, the City of New York and Pennsylvania, as well as in Germany and the U.K.
The amounts of the tax-related balances due to Liberty at March 31, 2014 and December 31, 2013 were $72 million and $78 million, respectively, and were included in accrued liabilities in the accompanying condensed consolidated balance sheets.
I-10

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
The Company entered into a Tax Liability Allocation and Indemnification Agreement (the “Tax Agreement”) with Liberty. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with Liberty for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Liberty an amount equal to the tax liability, if any, that it would have if it were to file as a consolidated group separate and apart from Liberty, with exceptions for the treatment and timing of certain items, including but not limited to deferred intercompany transactions, credits, and net operating and capital losses. To the extent that the separate company tax expense is different from the payment terms of the Tax Agreement, the difference is recorded as either a dividend or capital contribution.
(9) Commitments and Contingencies
The Company has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible 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 the amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
Network and information systems, including the Internet and telecommunication systems, third party delivery services and other technologies are critical to our business activities. Substantially all our customer orders, fulfillment and delivery services are dependent upon the use of network and information systems, including the use of third party telecommunication and delivery service providers. If information systems including the Internet or telecommunication services are disrupted, or if the third party delivery services experience a disruption in their transportation delivery services, we could face a significant disruption in fulfilling our customer orders and shipment of our products. We have active disaster recovery programs in place to help mitigate risks associated with these critical business activities.
(10) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported or disclosed at fair value, U.S. 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's assets and liabilities measured or disclosed at fair value were as follows:

|  | Fair value measurements at March 31, 2014 using |
(in millions) | Total |  | Quoted prices in active markets for identical assets (Level 1) |  | Significant other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |
Current assets: |  |  |  |
Cash equivalents | $ | 457 |  | 457 |  | — |  | — |
Long-term liabilities: |  |  |  |
Debt (note 6) | 4,069 |  | — |  | 4,069 |  | — |

I-11

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)

|  | Fair value measurements at December 31, 2013 using |
(in millions) | Total |  | Quoted prices in active markets for identical assets (Level 1) |  | Significant other observable inputs (Level 2) |  | Significant unobservable inputs (Level 3) |
Current assets: |  |  |  |
Cash equivalents | $ | 342 |  | 342 |  | — |  | — |
Long-term liabilities: |  |  |  |  |  |  |  |
Debt (note 6) | 3,783 |  | — |  | 3,783 |  | — |

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 U.S. GAAP. Accordingly, the financial instruments are reported in the foregoing tables as Level 2 fair value instruments.
(11) Information about QVC's Operating Segments
Each of the Company's operating segments are retailers of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised-shopping programs as well as via the Internet and mobile applications in certain markets. The Company has operations in the United States, Japan, Germany, the United Kingdom and Italy. The Company has identified five reportable segments: the United States, Japan, Germany, the United Kingdom and Italy.
The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as net revenue, Adjusted OIBDA, gross margin, average sales price per unit, number of units shipped and revenue or sales per subscriber equivalent. The Company defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses (excluding stock-based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its segments, including the ability to service debt and fund capital expenditures. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking among our businesses and identify strategies to improve performance. This measure of performance excludes depreciation, amortization and stock-based compensation, that are included in the measurement of operating income pursuant to U.S. 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 U.S. GAAP.
Performance measures

| Three months ended March 31, |  | Three months ended March 31, |
| 2014 |  | 2013 |
(in millions) | Net revenue |  | Adjusted OIBDA |  | Net revenue |  | Adjusted OIBDA |
QVC-U.S. | $ | 1,305 |  | 301 |  | 1,297 |  | 291 |
QVC-Japan | 234 |  | 47 |  | 256 |  | 54 |
QVC-Germany | 250 |  | 39 |  | 250 |  | 43 |
QVC-U.K. | 165 |  | 27 |  | 140 |  | 19 |
QVC-Italy | 32 |  | (2 | ) | 31 |  | (3 | )
Consolidated QVC | $ | 1,986 |  | 412 |  | 1,974 |  | 404 |

Net revenue amounts by product category are not available from our general purpose financial statements.
I-12

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Other information

| Three months ended March 31, |  | Three months ended March 31, |
| 2014 |  | 2013 |
(in millions) | Depreciation |  | Amortization |  | Depreciation |  | Amortization |
QVC-U.S. | $ | 13 |  | 94 |  | 13 |  | 88 |
QVC-Japan | 5 |  | 2 |  | 3 |  | 2 |
QVC-Germany | 8 |  | 11 |  | 8 |  | 9 |
QVC-U.K. | 4 |  | 3 |  | 4 |  | 3 |
QVC-Italy | 3 |  | 1 |  | 2 |  | 2 |
Consolidated QVC | $ | 33 |  | 111 |  | 30 |  | 104 |

| March 31, |  | December 31, |
| 2014 |  | 2013 |
(in millions) | Total assets |  | Capital expenditures, net |  | Total assets |  | Capital expenditures, net |
QVC-U.S. | $ | 10,136 |  | 16 |  | 10,322 |  | 123 |
QVC-Japan | 741 |  | (2 | ) | 732 |  | 16 |
QVC-Germany | 1,137 |  | 4 |  | 1,109 |  | 28 |
QVC-U.K. | 624 |  | 2 |  | 613 |  | 16 |
QVC-Italy | 282 |  | 9 |  | 280 |  | 28 |
Consolidated QVC | $ | 12,920 |  | 29 |  | 13,056 |  | 211 |

Long-lived assets, net of accumulated depreciation, by geographic area were as follows:

| March 31, |  | December 31, |
(in millions) | 2014 |  | 2013 |
QVC-U.S. | $ | 439 |  | 448 |
QVC-Japan | 219 |  | 220 |
QVC-Germany | 240 |  | 244 |
QVC-U.K. | 127 |  | 129 |
QVC-Italy | 71 |  | 65 |
Consolidated QVC | $ | 1,096 |  | 1,106 |

I-13

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
The following table provides a reconciliation of Adjusted OIBDA to income before income taxes:

| Three months ended March 31, |
(in millions) | 2014 |  | 2013 |
Adjusted OIBDA | $ | 412 |  | 404 |
Stock‑based compensation | (8 | ) | (10 | )
Depreciation and amortization | (144 | ) | (134 | )
Equity in (losses) earnings of investee | (1 | ) | 1 |
Gains on financial instruments | — |  | 12 |
Interest expense, net | (62 | ) | (63 | )
Foreign currency loss | (1 | ) | (1 | )
Loss on extinguishment of debt | — |  | (41 | )
Income before income taxes | $ | 196 |  | 168 |

(12) Other Comprehensive Income
The change in the component of accumulated other comprehensive income, net of taxes ("AOCI"), is summarized as follows:

(in millions) | Foreign currency translation adjustments | AOCI
Balance at January 1, 2013 | $ | 186 |  | 186 |
Other comprehensive loss attributable to QVC, Inc. stockholder | (78 | ) | (78 | )
Balance at March 31, 2013 | 108 |  | 108 |
Balance at January 1, 2014 | $ | 139 |  | 139 |
Other comprehensive income attributable to QVC, Inc. stockholder | 13 |  | 13 |
Balance at March 31, 2014 | 152 |  | 152 |

The component of other comprehensive income is reflected in QVC's condensed consolidated statements of comprehensive income, net of taxes. The following table summarizes the tax effects related to the component of other comprehensive income:

(in millions) | Before-tax amount | Tax (expense) benefit | Net-of-tax amount
Three months ended March 31, 2014: |  |  |
Foreign currency translation adjustments | $ | 19 |  | (3 | ) | 16 |
Other comprehensive income (loss) | 19 |  | (3 | ) | 16 |
Three months ended March 31, 2013: |  |  |
Foreign currency translation adjustments | $ | (116 | ) | 25 |  | (91 | )
Other comprehensive (loss) income | (116 | ) | 25 |  | (91 | )

(13) Subsequent Events
QVC declared and paid dividends to Liberty in the amount of $50 million subsequent to March 31, 2014.
I-14

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(14) Guarantor/Non-guarantor Subsidiary Financial Information
The following information contains the condensed consolidating financial statements for the Company, the parent on a stand-alone basis (QVC, Inc.), the combined subsidiary guarantors (Affiliate Relations Holdings, Inc.; Affiliate Investment, Inc.; AMI 2, Inc.; ER Marks, Inc.; QVC International LLC; QVC Rocky Mount, Inc. and QVC San Antonio, LLC) and the combined non-guarantor subsidiaries pursuant to Rule 3-10 of Regulation S-X. Certain non-guarantor subsidiaries are majority-owned by QVC International LLC, which is a guarantor subsidiary.
These condensed consolidating financial statements have been prepared from the Company's financial information on the same basis of accounting as the Company's condensed consolidated financial statements. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, such as management fees, royalty revenue and expense and interest income and expense. Goodwill and other intangible assets have been allocated to the subsidiaries based on management’s estimates. Certain costs have been partially allocated to all of the subsidiaries of the Company.
The subsidiary guarantors are 100% owned by the Company. All guarantees are full and unconditional and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its U.S. subsidiaries, including the guarantors, by dividend or loan. The Company has not presented separate notes and other disclosures concerning the subsidiary guarantors as the Company has determined that such material information is available in the notes to the Company's condensed consolidated financial statements.
The Company adjusted the previously reported consolidating financial statements to correctly classify transactions among QVC Inc., the combined subsidiary guarantors and the combined non-guarantor subsidiaries.
The adjustments to the condensed consolidating statements of operations:

• | attributed net revenue of $54 million, cost of goods sold of $11 million and operating expenses of $8 million from QVC, Inc. to the combined non-guarantor subsidiaries for the three months ended March 31, 2013; and

• | recognized equal and offsetting increases in the equity in earnings of subsidiaries of QVC, Inc. with a corresponding elimination for the three months ended March 31, 2013.

The adjustments to the condensed consolidating statements of cash flows:

• | attributed net cash provided by operating activities of $37 million from QVC, Inc. to the combined non-guarantor subsidiaries primarily related to revenue net of cost of goods sold and operating expenses for the three months ended March 31, 2013;

• | attributed net cash provided by operating activities of $2 million from QVC, Inc. to the combined subsidiary guarantors for the three months ended March 31, 2013;

• | decreased net cash provided by the investing activities of $35 million of QVC, Inc., decreased net cash provided by the investing activities of $2 million of the combined subsidiary guarantors and increased net cash provided by the investing activities of $4 million of the combined non-guarantor subsidiaries, all with equal and offsetting eliminations, for the three months ended March 31, 2013; and

• | increased net cash provided by the financing activities of $74 million of QVC, Inc. and decreased net cash used in the financing activities of $41 million of the non-guarantor subsidiaries, all with equal and offsetting eliminations, for the three months ended March 31, 2013.

The adjustments had no impact to the Company's condensed consolidated balance sheets, condensed consolidated statements of operations, condensed consolidated statements of comprehensive income, condensed consolidated statements of changes in equity or condensed consolidated statements of cash flows for any current and previously reported period.
I-15

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating balance sheets

March 31, 2014 |
(in millions) | Parent issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Assets
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 47 |  | 218 |  | 293 |  | — |  | 558 |
Restricted cash | 11 |  | — |  | 3 |  | — |  | 14 |
Accounts receivable, net | 579 |  | — |  | 278 |  | — |  | 857 |
Inventories | 737 |  | — |  | 280 |  | — |  | 1,017 |
Deferred income taxes | 146 |  | — |  | 17 |  | — |  | 163 |
Prepaid expenses | 27 |  | — |  | 27 |  | — |  | 54 |
Total current assets | 1,547 |  | 218 |  | 898 |  | — |  | 2,663 |
Property and equipment, net | 259 |  | 66 |  | 771 |  | — |  | 1,096 |
Cable and satellite television distribution rights, net | — |  | 479 |  | 107 |  | — |  | 586 |
Goodwill | 4,169 |  | — |  | 1,038 |  | — |  | 5,207 |
Other intangible assets, net | 1,097 |  | 2,050 |  | 149 |  | — |  | 3,296 |
Other noncurrent assets | 10 |  | — |  | 62 |  | — |  | 72 |
Investments in subsidiaries | 4,853 |  | 1,526 |  | — |  | (6,379 | ) | — |
Total assets | $ | 11,935 |  | 4,339 |  | 3,025 |  | (6,379 | ) | 12,920 |
Liabilities and equity
Current liabilities: |  |  |  |  |
Current portion of debt and capital lease obligations | $ | 2 |  | — |  | 10 |  | — |  | 12 |
Accounts payable-trade | 287 |  | — |  | 254 |  | — |  | 541 |
Accrued liabilities | 249 |  | 106 |  | 426 |  | — |  | 781 |
Intercompany accounts payable (receivable) | 935 |  | (806 | ) | (129 | ) | — |  | — |
Total current liabilities | 1,473 |  | (700 | ) | 561 |  | — |  | 1,334 |
Long-term portion of debt and capital lease obligations | 3,945 |  | — |  | 53 |  | — |  | 3,998 |
Deferred compensation | 13 |  | — |  | 1 |  | — |  | 14 |
Deferred income taxes | 358 |  | 912 |  | 3 |  | — |  | 1,273 |
Other long-term liabilities | 91 |  | — |  | 49 |  | — |  | 140 |
Total liabilities | 5,880 |  | 212 |  | 667 |  | — |  | 6,759 |
Equity: |  |  |  |  |
QVC, Inc. stockholder's equity | 6,055 |  | 4,127 |  | 2,252 |  | (6,379 | ) | 6,055 |
Noncontrolling interest | — |  | — |  | 106 |  | — |  | 106 |
Total equity | 6,055 |  | 4,127 |  | 2,358 |  | (6,379 | ) | 6,161 |
Total liabilities and equity | $ | 11,935 |  | 4,339 |  | 3,025 |  | (6,379 | ) | 12,920 |

I-16

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating balance sheets

December 31, 2013 |
(in millions) | Parent issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Assets
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 78 |  | 133 |  | 246 |  | — |  | 457 |
Restricted cash | 11 |  | — |  | 3 |  | — |  | 14 |
Accounts receivable, net | 816 |  | — |  | 295 |  | — |  | 1,111 |
Inventories | 684 |  | — |  | 247 |  | — |  | 931 |
Deferred income taxes | 146 |  | — |  | 16 |  | — |  | 162 |
Prepaid expenses | 20 |  | — |  | 27 |  | — |  | 47 |
Total current assets | 1,755 |  | 133 |  | 834 |  | — |  | 2,722 |
Property and equipment, net | 265 |  | 67 |  | 774 |  | — |  | 1,106 |
Cable and satellite television distribution rights, net | — |  | 510 |  | 114 |  | — |  | 624 |
Goodwill | 4,169 |  | — |  | 1,028 |  | — |  | 5,197 |
Other intangible assets, net | 1,128 |  | 2,050 |  | 158 |  | — |  | 3,336 |
Other noncurrent assets | 8 |  | — |  | 63 |  | — |  | 71 |
Investments in subsidiaries | 4,894 |  | 1,628 |  | — |  | (6,522 | ) | — |
Total assets | $ | 12,219 |  | 4,388 |  | 2,971 |  | (6,522 | ) | 13,056 |
Liabilities and equity
Current liabilities: |  |  |  |  |
Current portion of debt and capital lease obligations | $ | 2 |  | — |  | 11 |  | — |  | 13 |
Accounts payable-trade | 336 |  | — |  | 158 |  | — |  | 494 |
Accrued liabilities | 393 |  | 96 |  | 471 |  | — |  | 960 |
Intercompany accounts payable (receivable) | 1,019 |  | (879 | ) | (140 | ) | — |  | — |
Total current liabilities | 1,750 |  | (783 | ) | 500 |  | — |  | 1,467 |
Long-term portion of debt and capital lease obligations | 3,745 |  | — |  | 55 |  | — |  | 3,800 |
Deferred compensation | 13 |  | — |  | 1 |  | — |  | 14 |
Deferred income taxes | 399 |  | 923 |  | 4 |  | — |  | 1,326 |
Other long-term liabilities | 90 |  | — |  | 18 |  | — |  | 108 |
Total liabilities | 5,997 |  | 140 |  | 578 |  | — |  | 6,715 |
Equity: |  |  |  |  |
QVC, Inc. stockholder's equity | 6,222 |  | 4,248 |  | 2,274 |  | (6,522 | ) | 6,222 |
Noncontrolling interest | — |  | — |  | 119 |  | — |  | 119 |
Total equity | 6,222 |  | 4,248 |  | 2,393 |  | (6,522 | ) | 6,341 |
Total liabilities and equity | $ | 12,219 |  | 4,388 |  | 2,971 |  | (6,522 | ) | 13,056 |

I-17

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating statements of operations

Three months ended March 31, 2014 |
(in millions) | Parent issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Net revenue | $ | 1,324 |  | 177 |  | 707 |  | (222 | ) | 1,986 |
Cost of goods sold | 842 |  | 24 |  | 447 |  | (57 | ) | 1,256 |
Gross profit | 482 |  | 153 |  | 260 |  | (165 | ) | 730 |
Operating expenses: |  |  |  |  |
Operating | 40 |  | 45 |  | 93 |  | — |  | 178 |
Selling, general and administrative, including stock-based compensation | 223 |  | 1 |  | 89 |  | (165 | ) | 148 |
Depreciation | 9 |  | 1 |  | 23 |  | — |  | 33 |
Amortization | 52 |  | 39 |  | 20 |  | — |  | 111 |
Intercompany management expense (income) | 20 |  | (3 | ) | (17 | ) | — |  | — |
| 344 |  | 83 |  | 208 |  | (165 | ) | 470 |
Operating income | 138 |  | 70 |  | 52 |  | — |  | 260 |
Other (expense) income: |  |  |  |  |
Equity in losses of investee | — |  | — |  | (1 | ) | — |  | (1 | )
Interest expense, net | (53 | ) | — |  | (9 | ) | — |  | (62 | )
Foreign currency (loss) gain | (2 | ) | — |  | 1 |  | — |  | (1 | )
Intercompany interest (expense) income | (5 | ) | 13 |  | (8 | ) | — |  | — |
| (60 | ) | 13 |  | (17 | ) | — |  | (64 | )
Income before income taxes | 78 |  | 83 |  | 35 |  | — |  | 196 |
Income tax benefit (expense) | 20 |  | (24 | ) | (70 | ) | — |  | (74 | )
Equity in earnings (losses) of subsidiaries, net of tax | 24 |  | (48 | ) | — |  | 24 |  | — |
Net income (loss) | 122 |  | 11 |  | (35 | ) | 24 |  | 122 |
Less net income attributable to the noncontrolling interest | (9 | ) | — |  | (9 | ) | 9 |  | (9 | )
Net income (loss) attributable to QVC, Inc. stockholder | $ | 113 |  | 11 |  | (44 | ) | 33 |  | 113 |

The increase in tax expense of the combined non-guarantor subsidiaries compared to the same period in the prior year was primarily due to an unfavorable tax audit settlement of one of our European subsidiaries. This also resulted in a tax benefit for QVC, Inc. as a result of the corresponding foreign tax credit in the U.S.
I-18

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating statements of operations - Adjusted

Three months ended March 31, 2013 |
(in millions) | Parent issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Net revenue | $ | 1,314 |  | 183 |  | 708 |  | (231 | ) | 1,974 |
Cost of goods sold | 843 |  | 25 |  | 445 |  | (61 | ) | 1,252 |
Gross profit | 471 |  | 158 |  | 263 |  | (170 | ) | 722 |
Operating expenses: |  |  |  |  |
Operating | 37 |  | 46 |  | 90 |  | — |  | 173 |
Selling, general and administrative, including stock-based compensation | 235 |  | — |  | 90 |  | (170 | ) | 155 |
Depreciation | 10 |  | 1 |  | 19 |  | — |  | 30 |
Amortization | 51 |  | 34 |  | 19 |  | — |  | 104 |
Intercompany management expense (income) | 17 |  | (4 | ) | (13 | ) | — |  | — |
| 350 |  | 77 |  | 205 |  | (170 | ) | 462 |
Operating income | 121 |  | 81 |  | 58 |  | — |  | 260 |
Other income (expense): |  |  |  |  |
Equity in earnings of investee | — |  | — |  | 1 |  | — |  | 1 |
Gains on financial instruments | 12 |  | — |  | — |  | — |  | 12 |
Interest expense, net | (62 | ) | — |  | (1 | ) | — |  | (63 | )
Foreign currency (loss) gain | (1 | ) | (1 | ) | 1 |  | — |  | (1 | )
Loss on extinguishment of debt | (41 | ) | — |  | — |  | — |  | (41 | )
Intercompany interest (expense) income | (3 | ) | 12 |  | (9 | ) | — |  | — |
| (95 | ) | 11 |  | (8 | ) | — |  | (92 | )
Income before income taxes | 26 |  | 92 |  | 50 |  | — |  | 168 |
Income tax expense | (10 | ) | (28 | ) | (24 | ) | — |  | (62 | )
Equity in earnings of subsidiaries, net of tax | 90 |  | 16 |  | — |  | (106 | ) | — |
Net income | 106 |  | 80 |  | 26 |  | (106 | ) | 106 |
Less net income attributable to the noncontrolling interest | (12 | ) | — |  | (12 | ) | 12 |  | (12 | )
Net income attributable to QVC, Inc. stockholder | $ | 94 |  | 80 |  | 14 |  | (94 | ) | 94 |

I-19

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating statements of comprehensive income

Three months ended March 31, 2014 |
(in millions) | Subsidiary issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Net income (loss) | $ | 122 |  | 11 |  | (35 | ) | 24 |  | 122 |
Foreign currency translation adjustments | 16 |  | — |  | 16 |  | (16 | ) | 16 |
Total comprehensive income (loss) | 138 |  | 11 |  | (19 | ) | 8 |  | 138 |
Comprehensive income attributable to noncontrolling interest | (12 | ) | — |  | (12 | ) | 12 |  | (12 | )
Comprehensive income (loss) attributable to QVC, Inc. stockholder | 126 |  | 11 |  | (31 | ) | 20 |  | 126 |

Condensed consolidating statements of comprehensive income - Adjusted

Three months ended March 31, 2013 |
(in millions) | Subsidiary issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Net income | $ | 106 |  | 80 |  | 26 |  | (106 | ) | 106 |
Foreign currency translation adjustments | (91 | ) | — |  | (91 | ) | 91 |  | (91 | )
Total comprehensive income (loss) | 15 |  | 80 |  | (65 | ) | (15 | ) | 15 |
Comprehensive income attributable to noncontrolling interest | 1 |  | — |  | 1 |  | (1 | ) | 1 |
Comprehensive income (loss) attributable to QVC, Inc. stockholder | 16 |  | 80 |  | (64 | ) | (16 | ) | 16 |

I-20

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating statements of cash flows

Three months ended March 31, 2014 |
(in millions) | Parent issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Operating activities: |  |  |  |  |  |  |  |  |  |
Net cash provided by operating activities | 107 |  | 98 |  | 56 |  | — |  | 261 |
Investing activities: |  |  |  |  |  |  |  |  |  |
Capital expenditures, net | (12 | ) | — |  | (17 | ) | — |  | (29 | )
Expenditures for cable and satellite television distribution rights, net | — |  | (8 | ) | — |  | — |  | (8 | )
Changes in other noncurrent assets | (2 | ) | — |  | — |  | — |  | (2 | )
Intercompany investing activities | 65 |  | 54 |  | — |  | (119 | ) | — |
Net cash provided by (used in) investing activities | 51 |  | 46 |  | (17 | ) | (119 | ) | (39 | )
Financing activities: |  |  |  |  |  |  |  |  |  |
Principal payments of debt and capital lease obligations | (1,186 | ) | — |  | (2 | ) | — |  | (1,188 | )
Principal borrowings of debt from senior secured credit facility | 384 |  | — |  | — |  | — |  | 384 |
Proceeds from issuance of senior secured notes, net of original issue discount | 999 |  | — |  | — |  | — |  | 999 |
Payment of debt origination fees | (12 | ) | — |  | — |  | — |  | (12 | )
Other financing activities | 7 |  | — |  | — |  | — |  | 7 |
Dividends paid to Liberty | (286 | ) | — |  | — |  | — |  | (286 | )
Dividends paid to noncontrolling interest | — |  | — |  | (25 | ) | — |  | (25 | )
Net short-term intercompany debt (repayments) borrowings | (84 | ) | 73 |  | 11 |  | — |  | — |
Intercompany financing activities | (11 | ) | (132 | ) | 24 |  | 119 |  | — |
Net cash (used in) provided by financing activities | (189 | ) | (59 | ) | 8 |  | 119 |  | (121 | )
Effect of foreign exchange rate changes on cash and cash equivalents | — |  | — |  | — |  | — |  | — |
Net (decrease) increase in cash and cash equivalents | (31 | ) | 85 |  | 47 |  | — |  | 101 |
Cash and cash equivalents, beginning of period | 78 |  | 133 |  | 246 |  | — |  | 457 |
Cash and cash equivalents, end of period | 47 |  | 218 |  | 293 |  | — |  | 558 |

I-21

QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed consolidating statements of cash flows - Adjusted

Three months ended March 31, 2013 |
(in millions) | Parent issuer- QVC, Inc. |  | Combined subsidiary guarantors |  | Combined non-guarantor subsidiaries |  | Eliminations |  | Consolidated- QVC, Inc. and subsidiaries |
Operating activities: |  |  |  |  |
Net cash provided by operating activities | 62 |  | 79 |  | 34 |  | — |  | 175 |
Investing activities: |  |  |  |  |
Capital expenditures, net | (12 | ) | — |  | (21 | ) | — |  | (33 | )
Expenditures for cable and satellite television distribution rights, net | — |  | (24 | ) | (1 | ) | — |  | (25 | )
Changes in other noncurrent assets | (1 | ) | — |  | (3 | ) | — |  | (4 | )
Intercompany investing activities | 212 |  | 104 |  | — |  | (316 | ) | — |
Net cash provided by (used in) investing activities | 199 |  | 80 |  | (25 | ) | (316 | ) | (62 | )
Financing activities: |  |  |  |  |  |  |  |  |  |
Principal payments of debt and capital lease obligations | (1,166 | ) | — |  | (2 | ) | — |  | (1,168 | )
Principal borrowings of debt from senior secured credit facility | 240 |  | — |  | — |  | — |  | 240 |
Proceeds from issuance of senior secured notes, net of original issue discount | 1,050 |  | — |  | — |  | — |  | 1,050 |
Payment of debt origination fees | (14 | ) | — |  | — |  | — |  | (14 | )
Payment of bond premium fees | (33 | ) | — |  | — |  | — |  | (33 | )
Other financing activities | 4 |  | — |  | — |  | — |  | 4 |
Dividends paid to Liberty | (244 | ) | — |  | — |  | — |  | (244 | )
Dividends paid to noncontrolling interest | — |  | — |  | (25 | ) | — |  | (25 | )
Net short-term intercompany debt (repayments) borrowings | (76 | ) | 84 |  | (8 | ) | — |  | — |
Intercompany financing activities | (94 | ) | (240 | ) | 18 |  | 316 |  | — |
Net cash used in financing activities | (333 | ) | (156 | ) | (17 | ) | 316 |  | (190 | )
Effect of foreign exchange rate changes on cash and cash equivalents | — |  | — |  | (24 | ) | — |  | (24 | )
Net (decrease) increase in cash and cash equivalents | (72 | ) | 3 |  | (32 | ) | — |  | (101 | )
Cash and cash equivalents, beginning of period | 75 |  | 165 |  | 300 |  | — |  | 540 |
Cash and cash equivalents, end of period | 3 |  | 168 |  | 268 |  | — |  | 439 |

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; Liberty’s proposed Recapitalization of its Liberty Interactive Group tracking stock into the QVC Group tracking stock and a new Liberty Digital Commerce tracking stock; new service offerings; revenue growth and subscriber trends; 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. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

• | customer demand for our products and services and our ability to adapt to changes in demand;

• | competitor responses to our products and services;

• | increased digital TV penetration and the impact on channel positioning of our programs;

• | the levels of online traffic on our 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 ability of suppliers and vendors to deliver products, equipment, software and services;

• | the outcome of any pending or threatened litigation;

• | availability of qualified personnel;

• | changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the FCC, and adverse outcomes from regulatory proceedings;

• | changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;

• | general economic and business conditions and industry trends;

• | consumer spending levels, including the availability and amount of individual consumer debt;

• | advertising spending levels;

• | changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand and IP television;

• | 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;

• | fluctuation in foreign currency exchange rates; and

• | Liberty's dependence on our cash flow for servicing its debt and for other purposes.

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For additional risk factors, please see Part I, Item I of our Annual Report on Form 10-K for the year ended December 31, 2013. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2013.
Overview
QVC, Inc. (unless otherwise indicated or required by the context, the terms "we," "our," "us," the "Company" and "QVC" refer to QVC, Inc. and its consolidated subsidiaries) 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 United States, QVC's live programming is distributed via its nationally televised shopping program 24 hours per day, 364 days per year ("QVC-U.S."). Internationally, QVC's program services are based in Japan ("QVC-Japan"), Germany ("QVC-Germany"), the United Kingdom ("QVC-U.K.") and Italy ("QVC-Italy"). QVC-Japan distributes live programming 24 hours per day, QVC-Germany distributes its program 24 hours per day with 17 hours of live programming and QVC-U.K. distributes its program 24 hours per day with 17 hours of live programming. QVC-Italy distributes programming live for 17 hours per day on satellite and digital terrestrial television and an additional seven hours per day of recorded programming on satellite and seven hours per day of general interest programming on digital terrestrial television.
The Company also has a joint venture with China Broadcasting Corporation, a limited liability company owned by China National Radio (''CNR''), with a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS distributes live programming for 15 hours per day and recorded programming for nine hours per day. This joint venture is accounted for as an equity method investment recorded as equity in (losses) earnings of investee in the condensed consolidated statements of operations.
Additionally, the Company has a venture with Mitsui & Co. LTD ("Mitsui") for a television and multimedia retailing service in Japan. QVC-Japan is owned 60% by the Company and 40% by Mitsui. The Company and Mitsui share in all profits and losses based on their respective ownership interests. During the three months ended March 31, 2014 and 2013, QVC-Japan paid dividends to Mitsui of $25 million and $25 million, respectively.
We are an indirect wholly owned subsidiary of Liberty Interactive Corporation ("Liberty") (Nasdaq: LINTA, LINTB, LVNTA and LVNTB), which owns interests in a broad range of digital commerce businesses. We are currently attributed to the Liberty Interactive tracking stock, which tracks the assets and liabilities of Liberty's Interactive Group (the "Interactive Group"). The Interactive Group does not represent a separate legal entity; rather, it represents those businesses, assets and liabilities that are attributed to that group. Liberty also attributes to its Interactive Group those businesses primarily focused on digital commerce and its approximate 38% ownership interest in HSN, Inc. ("HSN"), one of our two closest televised shopping competitors.
In October 2013, Liberty announced that its board has authorized management to pursue a plan to recapitalize (the "Recapitalization") its Liberty Interactive Group tracking stock into two new tracking stocks, one (currently the Liberty Interactive common stock) to be renamed the QVC Group common stock and the other to be designated as the Liberty Digital Commerce common stock. In the Recapitalization, record holders of Series A and Series B Liberty Interactive common stock would receive 1 share of the corresponding series of Liberty Digital Commerce common stock for each 10 shares of the renamed QVC Group common stock held by them as of the effective date. Liberty intends to attribute to the Liberty Digital Commerce Group its operating subsidiaries Provide Commerce, Inc.; Backcountry.com, Inc.; Bodybuilding.com, LLC; CommerceHub; Right Start and the Evite.com business along with cash and certain liabilities. The QVC Group, which is currently known as the Liberty Interactive Group, would have attributed to it the Company and Liberty’s approximate 38% interest in HSN, along with cash and certain liabilities.
On April 16, 2014, QVC announced plans to expand its global presence into France. Similar to its other markets, QVC plans to offer a highly immersive digital shopping experience, with strong integration across e-commerce, TV, mobile and social platforms, with the launch scheduled for the second quarter of 2015.
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Strategies and challenges of business units
QVC's goal 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. QVC's objective is to provide an integrated shopping experience that utilizes all forms of media including television, the Internet and mobile devices. In 2014, QVC intends 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 brand; (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 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.
QVC's future net revenue growth will primarily depend on international expansion, sales growth from e-commerce and mobile platforms, additions of new customers from households already receiving QVC's television programming and increased spending from existing customers. QVC's future net revenue may also be affected by (i) the willingness of cable television and direct-to-home satellite system operators to continue carrying QVC's programming service; (ii) QVC's 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.
The prolonged economic uncertainty in various regions of the world in which our subsidiaries and affiliates operate could adversely affect demand for our products and services since a substantial portion of our revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets continue to experience disruptions, including increased volatility and diminished liquidity and credit availability. The world has experienced a global macroeconomic downturn, and if economic and financial market conditions in the U.S. or other key markets, including Japan and Europe, remain uncertain, persist, or deteriorate further, our 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 ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments remain weak or decline further. Such weak economic conditions may also inhibit our expansion into new markets. We currently are unable to predict the extent of any of these potential adverse effects.
I-25

Results of Operations
QVC's operating results were as follows:

| Three months ended March 31, |
(in millions) | 2014 | 2013
Net revenue | $ | 1,986 |  | 1,974 |
Costs of goods sold | 1,256 |  | 1,252 |
Gross profit | 730 |  | 722 |
Operating expenses: |  |
Operating | 178 |  | 173 |
Selling, general and administrative, excluding stock-based compensation | 140 |  | 145 |
Adjusted OIBDA | 412 |  | 404 |
Stock-based compensation | 8 |  | 10 |
Depreciation | 33 |  | 30 |
Amortization | 111 |  | 104 |
Operating income | 260 |  | 260 |
Other (expense) income: |  |
Equity in (losses) earnings of investee | (1 | ) | 1 |
Gains on financial instruments | — |  | 12 |
Interest expense, net | (62 | ) | (63 | )
Foreign currency loss | (1 | ) | (1 | )
Loss on extinguishment of debt | — |  | (41 | )
| (64 | ) | (92 | )
Income before income taxes | 196 |  | 168 |
Income tax expense | (74 | ) | (62 | )
Net income | 122 |  | 106 |
Less net income attributable to the noncontrolling interest | (9 | ) | (12 | )
Net income attributable to QVC, Inc. stockholder | $ | 113 |  | 94 |

Net revenue
Net revenue was generated in the following geographical areas:

| Three months ended March 31, |
(in millions) | 2014 |  | 2013 |
QVC-U.S. | $ | 1,305 |  | 1,297 |
QVC-Japan | 234 |  | 256 |
QVC-Germany | 250 |  | 250 |
QVC-U.K. | 165 |  | 140 |
QVC-Italy | 32 |  | 31 |
Consolidated QVC | $ | 1,986 |  | 1,974 |

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QVC's consolidated net revenue increased 0.6% for the three months ended March 31, 2014 as compared to the corresponding period in the prior year. The increase in net revenue was primarily comprised of $24 million due to a 1.1% increase in the consolidated average selling price per unit ("ASP") and a decrease in estimated product returns in Germany of $12 million. These amounts were partially offset by a $20 million increase in estimated product returns in the U.S. The decrease in estimated product returns in Germany was primarily due to changes in prior period estimates based on actual experience, and to a lesser extent, lower return rates in all categories except electronics. The increase in the U.S. was primarily due to higher rates in electronics, home and accessories. Consolidated returns as a percent of gross product revenue was 20.1% compared to 19.9% in the prior year as a result of the above mentioned factors. Additionally, net revenue was negatively impacted by $6 million in unfavorable foreign currency rates due to declines in the value of the Japanese Yen, which was partially offset by favorable foreign currency rates in the other markets.
During the three months ended March 31, 2014 and 2013, 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.
The percentage increase (decrease) in net revenue for each of QVC's geographic areas in U.S. Dollars and in local currency was as follows:

| Three months ended March 31, |
| 2014 |
| U.S. Dollars |  | Local currency |
QVC-U.S. | 0.6 | % | 0.6 | %
QVC-Japan | (8.6 | )% | 1.6 | %
QVC-Germany | — | % | (3.9 | )%
QVC-U.K. | 17.9 | % | 10.3 | %
QVC-Italy | 3.2 | % | 2.5 | %

QVC-U.S.' net revenue growth was primarily due to a 1.2% increase in units shipped and a 0.6% increase in ASP, partially offset by the increase in estimated product returns as discussed in the above paragraph. QVC-U.S. experienced shipped sales growth in all categories except electronics. QVC-Japan's shipped sales in local currency improved primarily in the jewelry, home and beauty categories, partially offset by declines in accessories. QVC-Germany's shipped sales in local currency declined in all categories, partially offset by a decrease in estimated product returns as discussed in the above paragraph. QVC-U.K.'s shipped sales growth in local currency was primarily the result of increased sales in the home, beauty and accessories categories. QVC-Italy's shipped sales in local currency improved primarily in the beauty and accessories categories, partially offset by declines in home.
Gross profit
QVC's gross profit percentage was 36.8% and 36.6% for the three months ended March 31, 2014 and 2013, respectively. The increase in gross profit percentage was primarily due to higher product margins in the U.S. and the U.K.
Operating expenses
QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees, telecommunications expenses and production costs. Operating expenses increased $5 million or 2.9% for the three months ended March 31, 2014. The increase was primarily due to a $3 million increase in commissions expense as a result of higher programming distribution expenses in Japan.
Selling, general and administrative expenses (excluding stock-based compensation)
QVC's SG&A expenses include personnel, information technology, provision for doubtful accounts, credit card income and marketing and advertising expenses. Such expenses decreased $5 million, and as a percent of net revenue, from 7.3% to 7.0% for the three months ended March 31, 2014 due to a variety of factors.
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The variance was primarily due to a $9 million decrease in personnel expenses due to a decrease in the U.S. bonus expense and a prior year personnel tax accrual in Germany. This amount was offset by an increase of $5 million in U.S. marketing expenses primarily as a result of online campaigns.
Stock-based compensation
Stock-based compensation includes compensation related to options and restricted stock granted to certain officers and employees. QVC recorded $8 million and $10 million of stock-based compensation expense for the three months ended March 31, 2014 and 2013, respectively. Stock-based compensation expense remained relatively consistent for the three month period presented compared to the prior year.
Depreciation and amortization
Depreciation and amortization consisted of the following:

| Three months ended March 31, |
(in millions) | 2014 |  | 2013 |
Affiliate agreements | $ | 38 |  | 38 |
Customer relationships | 43 |  | 43 |
Acquisition related amortization | 81 |  | 81 |
Property and equipment | 33 |  | 30 |
Software amortization | 21 |  | 19 |
Channel placement amortization and related expenses | 9 |  | 4 |
Total depreciation and amortization | $ | 144 |  | 134 |

Equity in (losses) earnings of investee
The activity was associated with our joint venture in China that is accounted for as an equity method investment.
Gains on financial instruments
In 2009 and 2011, QVC entered into several interest rate swap arrangements to mitigate the interest rate risk associated with interest payments related to its variable rate debt. QVC assessed the effectiveness of its interest rate swaps using the hypothetical derivative method. QVC's elected interest terms did not effectively match the terms of the swap arrangements. As a result, the swaps did not qualify as cash flow hedges. Changes in fair value of these interest rate swaps were included in gains on financial instruments in the consolidated statements of operations. In March 2013, QVC's notional interest rate swaps of $3.1 billion expired.
Interest expense, net
Consolidated interest expense, net decreased 1.6% for the three months ended March 31, 2014 as compared to the corresponding period in the prior year.
Foreign currency loss
Certain loans between QVC and its subsidiaries are deemed to be short-term in nature, and accordingly, the translation of these loans is recorded on the statements of operations. The change in foreign currency loss was primarily due to variances in interest and operating payables balances between QVC and its international subsidiaries denominated in the currency of the subsidiary and the effects of currency exchange rate changes on those balances.
Loss on extinguishment of debt
During the first quarter of 2013, QVC purchased $355 million of its 7.125% Senior Secured Notes due 2017 and 7.5% Senior Secured Notes due 2019. The loss in prior year was primarily due to premiums paid for the tenders of these notes.
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Income taxes
QVC's effective tax rate was 37.8% and 36.9% for the three months ended March 31, 2014 and 2013, respectively. These rates differ from the U.S. federal income tax rate of 35.0% due primarily to state tax expense. We do not expect our effective tax rates to differ significantly in future periods.
Adjusted Operating Income before Depreciation and Amortization (Adjusted OIBDA)
QVC defines Adjusted OIBDA as net revenue less cost of goods sold, operating expenses and selling, general and administrative expenses (excluding stock-based compensation). QVC's chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate the businesses and make decisions about allocating resources among the businesses. QVC believes that this is an important indicator of the operational strength and performance of the businesses, including the ability to service debt and fund capital expenditures. In addition, this measure allows QVC to view operating results, perform analytical comparisons and perform benchmarking among its businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation, amortization and stock-based compensation that are included in the measurement of operating income pursuant to U.S. 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 U.S. GAAP.
The primary material limitations associated with the use of Adjusted OIBDA as compared to GAAP results are (i) it may not be comparable to similarly titled measures used by other companies in the industry, and (ii) it excludes financial information that some may consider important in evaluating QVC's performance. QVC compensates for these limitations by providing disclosure of the difference between Adjusted OIBDA and GAAP results, including providing a reconciliation of Adjusted OIBDA to GAAP results, to enable investors to perform their own analysis of QVC's operating results. Refer to note 11 to the accompanying condensed consolidated financial statements for a reconciliation of Adjusted OIBDA to Income before income taxes.
Seasonality
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 23% of its revenue in each of the first three quarters of the year and 32% of its revenue in the fourth quarter of the year.
Financial Position, Liquidity and Capital Resources
General
Historically, QVC's primary sources of cash have been cash provided by operating activities and borrowings. In general, QVC uses this cash to fund its operations, make capital purchases, make payments to Liberty, make interest payments and minimize QVC's outstanding senior secured credit facility balance.
As of March 31, 2014, substantially all of QVC's cash and cash equivalents were invested in AAA rated money market funds and time deposits with banks rated equal to or above A.
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 4.850% Senior Secured Notes due 2024 at an issue price of 99.927% (collectively, the “Notes”). The Notes are secured by a first-priority lien on the capital stock of QVC, which is the same collateral that secures QVC's existing secured indebtedness and certain future indebtedness. The net proceeds from the offering were used to repay indebtedness under QVC’s senior secured credit facility and for working capital and other general corporate purposes. Interest is payable semi-annually.
Senior Secured Credit Facility
QVC had approximately $1.9 billion available under the terms of the senior secured credit facility at March 31, 2014. The interest rate on the senior secured credit facility was 1.9% at March 31, 2014.
I-29

Other Debt Related Information
QVC was in compliance with all of its debt covenants at March 31, 2014.
During the quarter, there were no significant changes to QVC's debt credit ratings.
There are no restrictions under the debt agreements on QVC's ability to pay dividends or make other restricted payments if QVC is not in default on its senior secured notes or credit facility, and QVC's consolidated leverage ratio would be no greater than 3.25 to 1.0. As a result, Liberty will, in many instances, be permitted to rely on QVC's cash flow for servicing Liberty's debt and for other purposes, including payments of dividends on Liberty's capital stock, if declared, or to fund acquisitions or other operational requirements of Liberty and its subsidiaries. These events may deplete QVC's equity or require QVC to borrow under the senior secured credit facility, increasing QVC's leverage and decreasing liquidity. QVC has made significant distributions to Liberty in the past.
Additional Cash Flow Information
During the three months ended March 31, 2014, our primary uses of cash were $1,188 million of principal payments on debt and capital lease obligations, $286 million of dividends to Liberty, $29 million of capital expenditures and a $25 million dividend payment from QVC-Japan to Mitsui. These uses of cash were funded primarily with $999 million of net proceeds from the issuance of the 3.125% Senior Secured Notes due 2019 and 4.85% Senior Secured Notes due 2024, $384 million of principal borrowings from the senior secured credit facility and $261 million of cash provided by operating activities. As of March 31, 2014, our cash balance (excluding restricted cash) was $558 million.
During the three months ended March 31, 2013, our primary uses of cash were $1,168 million of principal payments on debt and capital lease obligations, $244 million of dividends to Liberty, $33 million of premiums paid for the tenders of QVC's existing 7.125% Senior Secured Notes due 2017 and 7.5% Senior Secured Notes due 2019, $33 million of capital expenditures, $25 million of cable and satellite television distribution rights expenditures and a $25 million dividend payment from QVC-Japan to Mitsui. These uses of cash were funded primarily with $1,050 million of net proceeds from the issuance of the 4.375% Senior Secured Notes Due 2023 and 5.95% Senior Secured Notes Due 2043, $240 million of principal borrowings from the senior secured credit facility and $175 million of cash provided by operating activities. As of March 31, 2013, our cash balance (excluding restricted cash) was $439 million.
The change in cash provided by operating activities for the three months ended March 31, 2014 compared to the previous year was primarily due to variances in accounts payable balances. The variances in this account were primarily due to timing of inventory receipts and related payments to vendors.
As of March 31, 2014, $284 million of the $558 million in cash was held by foreign subsidiaries. Cash in foreign subsidiaries is generally accessible, but certain tax consequences may reduce the net amount of cash we are able to utilize for U.S. purposes. QVC accrues taxes on the unremitted earnings of its international subsidiaries. Approximately one-half 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. We believe that we currently have appropriate legal structures in place to repatriate foreign cash as tax efficiently as possible and meet the business needs of QVC.
Other
Capital expenditures spending in 2014 is expected to be approximately $200 million, including $29 million already expended.
Refer to the chart under the "Off-balance Sheet Arrangements and Aggregate Contractual Obligations" section below for additional information concerning the amount and timing of expected future payments under QVC's contractual obligations at March 31, 2014.
QVC has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible QVC may incur losses upon the 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, that may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
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Off-balance Sheet Arrangements and Aggregate Contractual Obligations
Information concerning the amount and timing of required payments, both accrued and off-balance sheet, under our contractual obligations at March 31, 2014 is summarized below:

| Payments due by period |
(in millions) | Total |  | Less than 1 year |  | 2-3 years |  | 4-5 years |  | After 5 years |
Long-term debt (1) | $ | 3,943 |  | — |  | — |  | 124 |  | 3,819 |
Interest payments(2) | 2,031 |  | 162 |  | 443 |  | 441 |  | 985 |
Capital lease obligations (including imputed interest) | 85 |  | 11 |  | 22 |  | 23 |  | 29 |
Operating lease obligations | 163 |  | 14 |  | 26 |  | 19 |  | 104 |

(1) Amounts exclude capital lease obligations and the issue discounts on the 7.5%, 3.125%, 4.375%, 4.85% and 5.95% Senior Secured Notes.
(2) Amounts (i) are based on the terms of QVC's senior secured credit facility and senior secured notes, (ii) assumes the interest rates on the floating rate debt remain constant at the rates in effect as of March 31, 2014, (iii) assumes that our existing debt is repaid at maturity and (iv) excludes capital lease obligations.
Our purchase obligations did not materially change as of March 31, 2014.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
QVC is exposed to market risk in the normal course of business due to ongoing investing and financial activities and the conduct of operations by 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. QVC has established procedures and internal processes governing the management of market risks and the use of financial instruments to manage exposure to such risks.
Interest rate risk
QVC is exposed to changes in interest rates primarily as a result of borrowing activities. Over the long-term, QVC manages the exposure to interest rates by maintaining what QVC believes is an appropriate mix of fixed and variable rate debt. QVC believes this best protects itself from interest rate risk.
The table below summarizes the Company’s debt obligations, related interest rates and fair value of debt at March 31, 2014:

(in millions, except percentages) | 2014 |  | 2015 |  | 2016 |  | 2017 |  | 2018 |  | Thereafter |  | Total |  | Fair Value |
Fixed rate debt (1) | $ | — |  | — |  | — |  | — |  | — |  | 3,819 |  | 3,819 |  | 3,946 |
Weighted average interest rate on fixed rate debt | — | % | — | % | — | % | — | % | — | % | 5.6 | % | 5.6 | % | N/A |
Variable rate debt | $ | — |  | — |  | — |  | — |  | 124 |  | — |  | 124 |  | 124 |
Average interest rate on variable rate debt | — | % | — | % | — | % | — | % | 1.9 | % | — | % | 1.9 | % | N/A |

(1) Amounts exclude capital lease obligations and the issue discounts on the 7.5%, 3.125%, 4.375%, 4.85% and 5.95% Senior Secured Notes.
N/A - Not applicable.
I-31

Foreign currency exchange rate risk
QVC is exposed to foreign exchange rate fluctuations related to the monetary assets and liabilities and the financial results of its 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 translated at the average exchange rate for the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. Dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded in other comprehensive income as a separate component of stockholder's 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 transactions) or realized upon settlement of the transactions. Cash flows from operations in foreign countries are translated at the average rate for the period. Accordingly, QVC may experience economic loss and a negative impact on earnings and equity with respect to its holdings solely as a result of foreign currency exchange rate fluctuations. QVC's reported Adjusted OIBDA for the three months ended March 31, 2014 would have been impacted by approximately $1 million for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
The credit facility provides QVC with the ability to borrow in multiple currencies. This allows QVC to somewhat mitigate foreign currency exchange rate risks. As of March 31, 2014, QVC had borrowings of 5.5 billion Japanese Yen, equivalent to $54 million based on an exchange rate of 102.4 Japanese Yen per U.S. Dollar, outstanding under the credit facility. As of March 31, 2014, the foreign currency exchange exposure to these borrowings approximated $1 million for every 1% change in the Japanese Yen exchange rate per U.S. Dollar.
Item 4. Controls and Procedures
We maintain a comprehensive set of disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). As of March 31, 2014 (the Evaluation Date), an evaluation of the effectiveness of our disclosure controls and procedures was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report these disclosure controls and procedures were effective.
During the quarter ended on the Evaluation Date, there was no change in internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 6. Exhibits
(a) 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):

4.1 |  | 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 the Registrant's Registration Statement on Form S-4 (File No. 333-195586) as filed on April 30, 2014 (the "S-4"))*
4.2 |  | Form of the Registration Rights Agreement, dated as of March 18, 2014, by and among QVC, Inc., the guarantors named therein and the initial purchasers named therein (incorporated by reference to Exhibit 4.2 to the S-4)*
31.1 |  | Rule 13a-14(a)/15d-14(a) Certification*
31.2 |  | Rule 13a-14(a)/15d-14(a) Certification*
32.1 |  | Section 1350 Certification**
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.
**Furnished herewith.
II-1

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
QVC, Inc.

Date: May 9, 2014 | By:/s/ MICHAEL A. GEORGE
| Michael A. George
| President and Chief Executive Officer (Principal Executive Officer)
Date: May 9, 2014 | By:/s/ THADDEUS J. JASTRZEBSKI
| Thaddeus J. Jastrzebski
| Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

II-2

EXHIBIT INDEX
Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):

4.1 |  | 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 the Registrant's Registration Statement on Form S-4 (File No. 333-195586) as filed on April 30, 2014 (the "S-4"))*
4.2 |  | Form of the Registration Rights Agreement, dated as of March 18, 2014, by and among QVC, Inc., the guarantors named therein and the initial purchasers named therein (incorporated by reference to Exhibit 4.2 to the S-4)*
31.1 |  | Rule 13a-14(a)/15d-14(a) Certification*
31.2 |  | Rule 13a-14(a)/15d-14(a) Certification*
32.1 |  | Section 1350 Certification**
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.
**Furnished herewith.
II-3